In the hospitality and restaurant sectors, the success of a business often depends as much on the quality of the concept as on the solidity of the partnership. Whether opening a restaurant, taking over a family hotel, developing a chain, or welcoming a new investor, these projects involve strategic decisions, significant investments, and close collaboration among partners.
In this context, Bylaws (Articles of Association) and Shareholders’ Agreements are two essential legal tools. While bylaws set the company’s operational rules, the shareholders’ agreement anticipates partner relations, governance rules, and conflict management of the business project which is key in a sector where stability and trust between partners are essential.
When carefully designed those two instruments allow for a better organization of the company’s life, better protection of partners interests, better anticipation.
1. Bylaws: The Foundation of Corporate Organization
The bylaws are the company’s founding document. They set the essential rules for its operation and frame the relationship between partners and governance procedures.
In the hospitality and restauration sectors, where project often imply considerate amounts of investments and given the demands of day-to-day operation, careful drafting or the articles of association is particularly essential.
Accordingly, certain clauses require special attention in order to ensure the smooth functioning of the company and to prevent potential difficulties between partners.
First of all Management Clauses : In structures where the manager and partners are involved in daily operations, it is crucial to define the powers of the President, the partners, in particular through a board assembly, other bodies may also be provided for, in the articles of association, such as a management board that could be composed of several partners and would be responsible for making certain decisions or overseeing those taken by the president, whose powers may be defined in the articles.
In structures where the manager and certain partners are involved in day-to-day operation, for example in the management of a restaurant or a hotel, it is often advisable to frame certain strategic decisions, such as making significant investments, entering into loans, or opening a new establishment.
The bylaws must organize rules for quorum (the minimum number of partners or shares required to be present during a board meeting for a decision to be valid) to hold a majority of the voting rights and to prevent deadlocks.
Sensitive decisions may require a “reinforced majority” (e.g., 75% or unanimity). Especially when there effect might affet the company’s activity or structure, such as the admission of new partners through the acquisition of shares in the company.
Then, a special attention must be put on the transfer and transmission of shares. Rights of first refusal and preemptive rights make it possible to control the entry of new partners and prevent unwanted third parties from joining the capital.
Finally, the exclusion clauses: which areoften overlooked, these allow the company to force a partner to leave in cases of breach of duty, loss of trust, or behavior harmful to the business.
To sum it up, these clauses may be of use in a large number of situations such as a partner failure to comply with their obligations, a clear loss of trust between partners, a serious breach of commitments by one of the partners, or any situation detrimental to the company’s interests.
In the hospitality and restaurant sectors, where some partners may be directly involved in the operation of the establishment, these mechanisms notably make it possible to remove a partner who is no longer contributing to the project or whose behavior is harmful to the proper functioning of the business.
To be effective, exclusion clauses must also specify the procedure to be followed as well as the terms for the buyback of the shares or equity interests of the partner concerned.
2. Shareholders’ Agreement: Managing Relations and Anticipating Difficulties
The shareholders’ agreement is an essential complement to the articles of association. It is a contract that precisely defines the rights and obligations of the partners and organizes their relationships.
Unlike the articles of association, it is confidential: it is not filed with the registry and is known only to the signatories. It therefore makes it possible to include specific stipulations that are not intended to be made public.
In practice, the shareholders’ agreement helps regulate the partners involved in the business operations. It may provide that a partner holding management functions (for example as manager or establishment director) must retain these duties for a certain period. If they step down or no longer perform them, the agreement may require them to transfer all or part of their shares, under agreed terms and conditions.
It may also make certain decisions subject to a right of first refusal, such as entering into a loan above a specified amount, signing or terminating a commercial lease, or opening a new establishment.
The shareholders agreement helps structure capital transactions. It may provide for a right of first refusal allowing each partner to participate in capital increases in order to maintain their ownership stake. It may also require that a partner wishing to transfer their shares must first offer them to the other partners, who have a set period of time to acquire them under the same conditions before any sale to a third party.
It may further organise the allocation of rights between partners by granting certain partners enhanced voting rights, and others financial rights, particularly in relation to dividend distributions or the proceeds of a sale. For example, one partner may hold 51% of the share capital, 60% of the voting rights but only 40% of the dividends, while another, minority partner, may receive 60% of the dividends with only 40% of the voting rights.
The agreement also governs the movement of shares by setting in advance the conditions for transfers, in order to avoid deadlock situations, notably by providing a valuation method and a pricing mechanism, for example based on a predefined formula.
It also makes it possible to anticipate disputes. It may provide for mediation in the event of disagreement and organize an exit mechanism in case of deadlock, allowing a partner either to offer to buy out the other’s shares or to sell their own.
3. Synergy Between Bylaws and Agreements
A shareholders agreement only binds its signatories. Therefore, a partner who is not legally bind by it cannot be hold accountable by its obligations nor can these be opposed to him.
To promote efficiency, entering the capital may be conditioned upon signing the agreement. This ensures that any new partner is subject to the same rules.
In addition, some mechanisms must be reflected in the articles of association in order to be fully effective. Failing this, they will not be enforceable against the company or third parties. This is particularly the case for rules relating to the entry or exit of partners, as well as certain limitations of powers.
Importantly, a breach of agreement does not usually nullify a corporate decision if that decision is taken in adequacy with the bylaws. the remedy is typically limited to contractual damages. The defaulting partner incurs liability and may be ordered to compensate the other signatories.
Therefore, the bylaws and the agreement must be drafted in tandem to ensure legal security. The purpose is to identify the stipulations that must necessarily be included in the articles of association, and those that can remain within the purely contractual framework.
Moreover, non-compliance with the shareholders’ agreement does not result in the invalidity of the company’s decisions. A decision taken in accordance with the articles of association remains valid, even if it breaches the shareholders’ agreement. The sanction is purely contractual: the defaulting partner incurs liability and may be ordered to compensate the other signatories.
As a result, the drafting of the shareholders’ agreement must be closely aligned with the articles of association. The goal is to identify which stipulation must necessarily be included in the bylaws, and which can remain within the purely contractual framework of the agreement.
Drafting the articles of association and a shareholders’ agreement requires genuine coordination between the future signatories. In this respect, the involvement of a corporate lawyer is essential. It helps ensure consistency between the clauses, both internally and with the articles of association, secures the legal effectiveness of the mechanisms provided for, and clarifies their effects for each partner.
It also facilitates discussions and negotiations between the parties.
Finally, in the event of a dispute, the quality of the drafting of the agreement is decisive. Clear and well-structured wording makes interpretation easier and helps avoid uncertainty.