In the limited liability companies, In some cases, tensions or misunderstandings may arise between partners. This is especially common in small companies with few partners, usually united by family ties or friendship. What started out as an exciting common project can lead to a situation of conflict. This conflict hinders the running of the business and affects the partners personally. Therefore, today we would like to clarify whether a partner can be excluded from a Limited Company.
Often, the disagreement is between the shareholder(s) holding the majority of the capital and those holding a minority position. These are complicated scenarios, as the majority shareholders control the management of the company through the appointment of the administrative body and the adoption of resolutions at the general meeting. However, the minority shareholders, in turn, can exercise their rights to information, examination of accounting records, appointment of auditors..... And in some cases, they even proceed to challenge in court (and systematically) all the resolutions adopted at the General Meeting. In practice, this leads to a situation that is unsustainable in the long term.
It is in this scenario that one of the most frequently asked questions by majority shareholders arises: whether it is possible to exclude the minority shareholder. In this article we address this question.
Can a minority partner in a limited partnership be excluded?
The answer, as most of the time in law, is not simple, as it depends on several factors. The first thing to bear in mind is that in the Capital Companies Act (LSC) The grounds for exclusion of shareholders are limited and are regulated in Article 350. Thus, a shareholder may only be excluded in the following cases:
- Member who voluntarily breaches the obligation to provide ancillary services.
It should be borne in mind that the “ancillary services” are those expressly regulated in the Articles of Association. Failure to comply with any other obligation that the shareholders have assumed vis-à-vis the company, even if it is in writing, may not give rise to exclusion if it is not set out in the articles of association. Compliance or compensation may be demanded by legal action, but never to exclude the partner.
- Managing partner violating the non-competition prohibition.
In order for this ground for exclusion to apply, the shareholder must also be a director.
Although it may seem strange, a partner in a limited partnership can perfectly well compete with the partnership and manage or participate in other businesses with a similar or analogous object. However much this may be annoying or inconvenient to the interests of the company, it is not a cause for exclusion. It will only be a cause for exclusion if this partner is also a director, because only then does he or she have a duty of loyalty to the company.
- Managing partner who has been sentenced by a final judgment to compensate the company for damages caused by acts contrary to this law or to the Articles of Association or carried out without due diligence.
As in the previous case, the partner must also hold the status of director, and have been convicted by final judgment in the terms set out in the precept.
As can be seen, there are few legal grounds for excluding the minority shareholder. Moreover, if the latter does not have the status of director, they are reduced to just one: the non-fulfilment of ancillary obligations expressly agreed in the articles of association. And this is not very common.
In addition to these cases, it should be borne in mind that new grounds for exclusion may be included in the articles of association, or those previously included therein may be amended or deleted. However, this requires the unanimous consent of all the shareholders. Thus, if the corporate conflict breaks out without having any additional grounds for exclusion in the articles of association, it will no longer be possible to introduce them, and it will only be necessary to comply with the legal grounds mentioned above.
Procedure to exclude a partner from a limited liability company.
If there is a cause for exclusion - legal or statutory - the procedure to be followed to exclude the shareholder is as follows:
- It requires a resolution of the General Meeting adopted by a reinforced majority. In particular, the favourable vote of at least, two thirds of the votes corresponding to the units into which the share capital is divided.
- Except where the managing shareholder is ordered to pay compensation to the company, the exclusion of a shareholder with a holding equal to or greater than twenty-five per cent of the share capital shall require, in addition to the resolution of the general meeting, final judicial decision. This is provided that the shareholder is not satisfied with the agreed exclusion.
- Any shareholder who has voted in favour of the resolution shall be entitled to bring an action for exclusion on behalf of the company if the latter has not done so within one month from the date of adoption of the resolution for exclusion.
What happens to the shares of the excluded partner?
Finally, it should be borne in mind that the excluded shareholder's shares will either be redeemed or acquired by the company itself. The excluded shareholder is entitled to receive their fair value which, in the absence of an agreement, will be determined by an independent expert, following the procedure established by law or by the Articles of Association.
These are the cases and the procedure to be followed to exclude a shareholder. Given their restrictive nature and the complications that can arise throughout the process, it is important to be properly advised to ensure that everything is done in accordance with the law.
On the other hand, if there is no possibility of excluding the partner, then other legal alternatives will have to be sought to manage the conflict between partners and find an appropriate solution. At Martínez Sanz Abogados we are experts in company law and we have professionals with extensive experience in these matters. Ask us about your case and we will offer you solutions.
Laura Sánchez Sabater. Senior Lawyer. Castellón Office Manager.
