Breach of the shareholders’ Agreement

José DutilhManaging Partner, LeQuid, The J.Dutilh Law Firm For Social Impact

Shareholder’s agreements use to recognize the right of separation between partner and the company or the exclusion of the partner from the company. Then, how to implement the termination from the corporate relationship?

1. The right of separation

A right of partners, including partners without the right to vote (article 346 LSC and LME),
to disassociate.

Legal and statutory causes of separation

It may be exercised in the following legal cases:

  1. Replacement or substantial modification of the corporate purpose.
  2. Extension of the company, in case of fixed-term.
  3. Reactivation of the company, after being declared the dissolution and before liquidation.
  4. Creation, modification or early extinction of the obligation to carry out ancillary obligations, unless otherwise provided in the By-Laws.
  5. In companies with limited liability, the modification of the shares transmission regime.
  6. In cases of transformation or transfer of registered address, it is necessary to comply with Law 3/2009, of April 3th, on structural modifications. Thus, according to the article 15.2 of the Company Law, those partners who took personal responsibility for social debts without having voted in favor of the transformation agreement, will be automatically separated from the company.
  7. By transformation of the social type to other with more severe responsibility of the partners.
  8. It is possible to establish in the By-Laws of the company other causes of separation but it requires the consent of all partners (article 347), as well as the need to determine how to accredit the existence of the cause, how to exercise the right and the deadline for the exercise.
  • Separation procedure

It requires the publication in the BORM of the right separation agreements. However, when all shares are registered, the publication may be replaced by a written communication to the partners who have not voted in favor.

The right of separation shall be exercised in writing, within a month since the publication of the agreement or the receipt of the communication (article 348.2 of the LSC).

To register the agreement’s deed it is necessary that the Directors declare that any partner has exercised the right of separation within the period provided in the Law.

2. Right of exclusion

It is a corporate mechanism to protect the majority interest against breaches of certain partners.

  • Legal or statutory causes of exclusion (article 350 and 351 LSC)

The law differentiates between legal and statutory causes of exclusion which are:

  • Breach of an ancillary obligation.
  • When the partner, being Director too, violates the prohibition of competition.
  • Exclusion procedure

It needs a Board’s agreement in which there is a record of members’ identity who have voted in favor of the agreement (article 352 LSC).

In addition, in cases of exclusion of a partner with a participation equal to or over 25%, it is necessary a final judicial resolution when the partner is not satisfied with the exclusion reason and/or amount (except in cases in which the partner has been ordered to pay a compensation to the company).

Any partner that has voted in favor of the agreement may exercise the action of exclusion in name of the company within a month since the adoption of the agreement’s exclusion whether the company has not already done so.

The excluded partner may challenge the agreement through the challenge of social agreements procedure (articles 204 and following articles of LSC).

3. Separation and exclusion effects (articles 353-359 of the LSC)

It regulates three common effects of both causes

  • Loss of partner status
  • Separation: since the partner declares his/her separation from the company, having the partner a credit right against the company by the value of his/her holdings.
  • Exclusion: If it is caused by a sentence, the loss of the partner statue takes place since there is a final sentence. If it occurs by agreement of the General Meeting and the partner has attended, the loss of the partner statue takes place since the annual meeting. On the contrary, if he/she has not has attended, since the exclusion have been communicated appropriately.
  • Assessment and refund of company shares

In both cases, the effect of partial dissolution of the company is produced and it starts a partial liquidation process which is limited to the shares of the partner in question. The Law provides several possibilities (Article 353 LSC).

  1. Setting of the value through an agreement between the partner and the company
  2. If there is no agreement, the valuation is performed by an auditor of accounts other than the society appointed by the mercantile Registry of its registered office. The society shall pay to the Auditor with the amount to reimburse to the excluded partner.
  3. In cases of exclusion due to infringement by the partner a penalty should be set which shall deduce to the value determined in accordance with the above rules.

The auditor prepares a report in two months and the affected partner has the right to get in his residence the value of his/her shares within the two months since the report.

  • Reduction of the share capital or acquisition by the company of affected member’s shares. The Law provides two cases:
  • Authorization for share acquisition by the society, regardless its structure: The deed of acquisition shall be granted and it will not compulsory the insolvency proceeding of the excluded partners.