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Avoid blocking the company due to separation of partners

Business Law
Avoid blocking the company due to separation of partners
The blocking of the company occurs in those situations in which the disagreements in the General Meeting or the administrative body are of such an entity that it is impossible to adopt company resolutions. We are facing a conflictive situation, which undermines the normal operation of the company.

In any case, the blockade of the company entails its paralysis, which negatively affects the competitiveness of the firm. But, in the most extreme cases, it can be a legal cause for dissolution. This implies that if the company does not have mechanisms to avoid a possible blockage, it could reach the point of having to extinguish its legal personality.

When should the company be liquidated and dissolved because of the blockade?

In accordance with art. 363.1.d) of the Capital Companies Law (LSC), constitutes legal cause for dissolution of the company: 

<< [...] the paralysis of the corporate bodies so that their operation is impossible >>.

With this, the law does not refer to a mere discrepancy or difficulty in the management of the company. In fact, if the blocking occurred in the administrative body, the administrators could be separated, which is why it strictly refers to the blocking of the General Meeting.

In any case, if the company is paralyzed as ungovernable, its liquidation and dissolution must be requested. 

Thus, the blocking situation does not derive from mere disagreement, but from:

1.- The inability of the General Meeting and / or the Board of Directors to meet. Generally, such incapacity derives from a lack of a quorum.

2.- Or their inability to reach social agreements. Generally, this disability derives from the inability to obtain the due majorities.

In these situations, it is possible to adopt a dissolution agreement, although the most common will be to go to the judicial dissolution action. The result, in both cases, will be the same: the liquidation and dissolution of the company.

How to avoid blocking society?

There are different techniques that make it possible to avoid or alleviate the blockage of society. Many of them have to do with negotiation. For example, the escalation procedure is known as the delegation of the conflict to the representatives of each faction, and the status quo clause to the continuity of the company's operations as if the conflict had not emerged. These types of solutions can be introduced in the shareholders 'agreement and other shareholders' instruments, and it is common to support them in consultative bodies or mediation systems.

In this sense, the conflict resolution process can also be framed in an ADR. Thus, it is frequent to submit the controversy to conciliation, mediation or arbitration. And both the shareholders' agreement and the company's bylaws could force the partners to resort to these methods in the event of a blockade.

However, these mechanisms are usually not functional in the long term. Generally, the blockade manifests a conflict of interest, and although it may be saved on one or more occasions, it will reappear when the agreement to be adopted affects the interests of one of the factions in conflict.

Exclusion and separation: options to avoid the blockade of society

Two of the most effective options to avoid blocking society are exclusion and separation. Its objective is to force or allow dissident partners or factions to leave the partnership.

As a result, control of the company should remain in the hands of a single faction (or several, but acting on the same lines), which will lift the blockade.

The exclusion of partners

Both the LSC and the Bylaws offer ways to exclude dissident partners. The first establishes as causes of exclusion the breach of accessory obligations, the prohibition of competition or the firm sentence to compensate damages for acts contrary to the law or the Statutes or carried out without due diligence.

These causes of exclusion must be invoked at the General Meeting, which must approve the exclusion. This requires a reinforced majority of 2/3 of the share capital. In addition, if the partner represents more than 25% of the capital stock, a final judicial resolution will be required.

For their part, the Statutes can expand the causes of exclusion. This will require the consent of all partners, so it is a clause that should be introduced from the founding of the company.

We also find other mechanisms to force the exclusion of the partner, such as the capital increase. This is intended to dilute the minority partner's participation, but it should be noted that if the minority partner proves that the operation is arbitrary and unjustified, it could challenge the expansion agreement.

Another option, which also requires the consent of all partners, lies in the redemption of shares. Known as squeeze-out, this technique allows financial compensation for the partner's participation in exchange for leaving the company.

The right of separation

This right is also regulated in the LSC, admitting statutory expansion. In accordance with the LSC, a partner (including those without voting rights) can be separated when the corporate purpose is substantially modified, the company is extended or reactivated or the obligation to perform ancillary services is modified.

Separation is also possible before the transfer of domicile abroad and, in the SL, when there is no vote in favor of an agreement to modify the share transfer regime.

The LSC regulates a special case, which allows the partner to exercise their right of separation in the event of failure to distribute dividends. The minority shareholder is thus protected against pressure strategies by retaining capital.

Both in cases of exclusion and separation, the shares or participations of the outgoing partner must be valued. Subsequently, this value must be reimbursed, and only at this time will the separation or exclusion have full effect.

In addition to these techniques, there are other more complex strategies to avoid the blockage of society. All of them require a detailed study, so the best thing to do in this situation is for the company or its partners to seek the assistance of a lawyer specialized in Corporate Law.

Contact us, and our lawyers specializing in business law will study your specific case. We Have:

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