Shareholders’ Agreement in Costa Rica: How to Prevent Corporate Deadlock
Many companies are formed in an atmosphere of trust. As long as the partners remain in agreement, rules for addressing conflict may seem unnecessary. The problem arises when that trust deteriorates and the company discovers that it has no mechanism for making decisions, enabling a partner’s exit, or ensuring business continuity.
Corporate Documents and Shareholders’ Agreements: What Does Each Govern?
In Costa Rica, the Commercial Code requires the articles of incorporation to establish, among other matters, the company’s management structure, the powers of those who represent it, and the rules governing shareholders’ or members’ meetings.
However, the articles of incorporation do not always address in sufficient detail how the partners should act in specific circumstances. These rules may be supplemented by a shareholders’ agreement—also known as a private shareholders’ arrangement or an agreement among shareholders or members—through which all or some of the partners govern their internal relationships and undertake obligations concerning the exercise of their rights.
The distinction is fundamental. The corporate charter forms part of the company’s organizational framework; a shareholders’ agreement is, in principle, a contract among its signatories. Costa Rican law does not contain a comprehensive, specific regulatory framework for such agreements. Their validity is assessed under the principle of freedom of contract, provided that their terms do not conflict with the law, public policy, or the company’s own articles of incorporation.
Accordingly, a private agreement should not be drafted as though it could replace the formalities, decision-making authority, and voting thresholds established by commercial law or the corporate bylaws. Nor should it be assumed that a breach of the agreement automatically invalidates a corporate resolution. Rules intended to operate at the corporate level—such as voting thresholds, transfer restrictions, directors’ or managers’ authority, or the manner of representation—must be coordinated with the articles of incorporation and the applicable corporate formalities.
What Can a Well-Drafted Shareholders’ Agreement Provide For?
- Reserved matters. Identify decisions requiring a supermajority or the consent of specified partners, without disregarding the mandatory rules governing the company.
- Management and information rights. Establish mechanisms for appointing directors or managers, approving budgets, and obtaining regular access to financial and operational information.
- Transfer of ownership interests. Regulate rights of first refusal, tag-along and drag-along rights, and the conditions for admitting new partners, while aligning the agreement with the corporate bylaws and records.
- Conflict escalation. Establish a sequence: direct negotiation, intervention by a neutral third party, and, where appropriate, mediation, arbitration, or the agreed judicial forum.
- Exit mechanisms. Determine when a partner may buy or sell an ownership interest, how the procedure is triggered, and which method will be used to set the price.
- Consequences of breach. Provide for proportionate and enforceable remedies, avoiding ambiguous or excessive penalties that may lead to further litigation.
How Does Corporate Deadlock Arise in Costa Rica?
The Commercial Code makes the risk readily apparent. In a corporation (sociedad anónima), Article 169 requires at least one-half of the voting shares to be represented at an ordinary shareholders’ meeting on first call; resolutions require more than one-half of the votes present. For an extraordinary shareholders’ meeting, Article 170 requires, on first call, three-quarters of the voting shares to be represented and the affirmative vote of shares representing more than one-half of all outstanding shares, unless the articles of incorporation establish a higher threshold.
In a company with two shareholders, or two shareholder blocs each controlling fifty percent, these rules may make it impossible to approve decisions, amend the corporate charter, or renew the company’s governing body. The same risk arises when the articles of incorporation create reserved matters subject to supermajority approval without addressing what happens if that threshold is never reached.
The withdrawal right under Article 32 bis likewise does not provide a general exit from every dispute. It applies to specific statutory circumstances—such as an extension of the company’s term, relocation of its registered office abroad, conversion, or a merger that results in greater liability—not to every breakdown of trust among partners. This underscores the importance of contractually designing a path to resolve deadlock.
Effective Corporate Deadlock-Resolution Mechanisms
A sound agreement does not proceed immediately to a forced sale. The recommended approach is to create a sequence that distinguishes a temporary disagreement from a permanent deadlock:
- Escalation and cooling-off period. The dispute moves from operational representatives to the partners or executives with decision-making authority, with a short negotiation period followed by a cooling-off period. The matters that constitute a deadlock must be defined; otherwise, any minor disagreement could trigger an extreme exit mechanism.
- Mediation or expert determination. Mediation facilitates an agreement without imposing one. An independent expert may resolve technical issues—for example, an accounting formula or valuation—but should not replace the partners in making purely business decisions unless the scope of the expert’s mandate has been clearly agreed.
- Casting vote or independent director. Final decision-making authority for specifically defined matters may be assigned to a neutral person. It is not advisable to turn this into a general power: a third party with no financial exposure could ultimately determine the strategy of those who made the investment.
- Put and call options. A put option allows one partner to require the other to purchase that partner’s ownership interest; a call option allows one partner to require the other to sell. The agreement must specify the triggering event, price or valuation method, payment terms, security, and closing deadline.
- Russian roulette. One partner sets a price per ownership interest, and the other must choose either to buy at that price or to sell at the same price. Its symmetry encourages a reasonable offer, but the mechanism may be unfair where there is a significant disparity in liquidity or access to credit.
- Texas shoot-out or sealed-bid auction. Each partner submits a confidential bid to acquire the other’s ownership interest; the higher bidder purchases it. This mechanism can resolve a deadlock quickly, although it favors the party with greater financial capacity and requires precise rules governing deposits, financing, and closing.
Arbitration may also be useful in determining whether a deadlock event occurred, whether an option was properly exercised, or which remedy applies. However, an arbitral tribunal cannot invent the business decision that the partners failed to agree upon.
Tag-Along and Drag-Along Rights: Exit, Sale, and Deadlock Resolution
These provisions often appear alongside the mechanisms described above, but they serve a different purpose:
- Tag-along right. This protects the minority shareholder. If the controlling shareholder sells its shares to a third party, the minority shareholder may join the transaction and sell on the same terms and conditions, either in full or proportionately, as agreed. This prevents the minority shareholder from remaining in the company under a new controlling shareholder it did not choose. The agreement should define the percentage that triggers the right, the period for exercising it, and what happens if the buyer refuses to acquire the minority interest as well.
- Drag-along right. This facilitates the sale of one hundred percent of the company. If an offer meeting the agreed requirements is received and the majority decides to accept it, the majority may require the minority shareholders to sell on the same terms. This preserves the ability to complete a transaction that a buyer would not pursue by acquiring only a controlling interest. The agreement should specify who may trigger the drag-along right, the minimum ownership threshold, whether a minimum price applies, the representations that may be required from minority shareholders, and how liability to the buyer will be allocated.
A tag-along right does not require the controlling shareholder to sell and does not break a tie; it protects the minority shareholder when a sale occurs. A drag-along right may facilitate a sale of the entire company, but it does not replace a deadlock provision when no one has obtained an offer from a third party. Confusing these functions often results in incomplete agreements.
How the Costa Rican Corporate Form Shapes the Agreement
For a corporation (sociedad anónima), Article 138 of the Commercial Code allows the articles of incorporation to require authorization from the board of directors for a transfer of shares. Accordingly, tag-along or drag-along rights contained solely in a private agreement must be reviewed together with any restrictions in the corporate bylaws and the requirement to record the transfer in the shareholders’ registry.
For a limited liability company (sociedad de responsabilidad limitada), coordination is even more important. Membership interests may not be transferred by endorsement (Article 78). Under Article 85, a transfer to third parties requires the prior express consent of all members, unless the articles of organization permit approval by a majority representing no less than three-quarters of the capital. If the transfer is rejected, Article 86 grants the company or its members a fifteen-day option to acquire the membership interests on the same terms offered to the third party; if they do not exercise the option, the transfer is deemed accepted.
This means that a clause borrowed from a corporate template may fail if mechanically applied to a limited liability company. The agreement must anticipate the consents, options, and record entries required to implement the exit mechanism, so that it does not amount merely to an obligation to pay damages.
The Shareholders’ Agreement Must Set Out the Entire Procedure
It is not enough to state that, in the event of a dispute, one partner will buy out the other. The document must define what constitutes a deadlock, who declares it, how long negotiations will last, how value will be determined, who may finance the purchase, what security must be provided, when the shares or membership interests will be transferred, and what happens if a party defaults.
The mechanism must also be prevented from becoming a tool for expulsion. A seemingly neutral formula may produce an unequal outcome when one partner has more information, controls cash flow, or has greater financial resources. The appropriate method depends on the ownership structure, the type of legal entity, the business, and each partner’s role.
When Should a Shareholders’ Agreement Be Negotiated?
A shareholders’ agreement does not eliminate disagreements or guarantee that the business relationship will last forever. Its true value lies in transforming a potential personal conflict into a pre-agreed procedure. When the rules are negotiated while trust still exists, the partners can discuss difficult scenarios more objectively and balance their respective interests.
Prevention also requires periodic review of the agreement. The admission of investors, business growth, a generational transition, or a new financing structure may render the original rules insufficient.
In Costa Rica, this preventive approach requires more than a generic shareholders’ agreement: the agreement must be coordinated with the Commercial Code, the articles of incorporation, and the corporate charter. Doing so helps protect business continuity, reduce uncertainty, and provide a way forward before disagreement turns into deadlock.
Author: Diego Elizondo
For further information on this and other corporate law matters, please contact diego@glcabogados.com.
