In the life cycle of a startup or company, relationships between partners can go through many phases. Sometimes, an irresistible buyout offer from a third party appears on the table, but a minority partner refuses to sell, blocking the transaction. Other times, a founding partner stops adding value, loses interest, or breaches their obligations, and the rest of the team needs them to leave the company.
Faced with these situations of deadlock or conflict, the question we receive most often in our firm is direct: can I force my partner to sell their shares and leave the company?
The short answer is: as a general rule, no. Unless you have planned for it in advance.
Below, we analyze what the law says and what legal tools you have at your disposal to protect the future of your company.
The general rule: company shares are the property of the partner
In Spain, as a general rule, the shares of a Limited Liability Company (Sociedad Limitada) are the property of their holders. This means that neither the Company nor the majority of partners can force a partner to transfer their shares simply because the majority decides so or because a personal or professional conflict has arisen.
If you have not regulated anything beyond standard bylaws when incorporating the company, you will find yourself in a legal dead end: the entrenched partner will keep their shares and their rights (such as collecting dividends or voting rights), even if they no longer work in the company or are blocking a multimillion-dollar sale (the dreaded hold-out problem).
However, this rule does not mean that a partner’s departure cannot be regulated. The law, the Corporate Bylaws, and the Shareholders’ Agreement allow establishing mechanisms that, if properly planned, facilitate the resolution of deadlock situations, lack of involvement in the project, or conflicts between partners.
The preventive solution: the Shareholders’ Agreement and the Bylaws
To prevent a single partner from holding the company hostage, the key is prevention. It is absolutely vital to have a well-drafted Shareholders’ Agreement and, where appropriate, to adapt the Corporate Bylaws.
The main clause and legal mechanism that allows forcing a partner to sell is the so-called “Drag Along Clause” (Right to Drag):
It is the star clause for M&A (mergers and acquisitions) operations and a non-negotiable requirement for any investor.
The Drag Along is the clause designed to protect the majority partners, establishing that if a third party makes a buyout offer for the entirety or a large majority of the company and under conditions previously established by all the partners—such as, for example, a specific valuation—provided the agreed conditions are met, the majority partners can “drag along” the minority partners, forcing them to sell their shares to the buyer under the same conditions.
- What is it for? It prevents a minority partner from frustrating the company’s exit by refusing to sell, ensuring the buyer that they will be able to acquire the desired percentage of the company.
Another common clause of special relevance that the Shareholders’ Agreement must consider is the one regarding the consequences derived from the early departure of the Founding Partner or any other partner subject to a commitment to remain in the company, when said departure occurs before the end of the agreed permanence period.
Early exit clause: Good Leaver / Bad Leaver (and Vesting)
What happens if the founding partner or any other partner subject to a commitment to remain in the company, for example, a profile such as a Working Partner, decides to voluntarily leave the company a month after its incorporation? They should not keep their percentage intact while the rest of the partners continue to dedicate their time, effort, and resources to developing the project. Precisely to avoid this type of situation, Shareholders’ Agreements usually incorporate mechanisms.
To avoid this type of situation, the Shareholders’ Agreement must include permanence clauses (vesting) linked to purchase options (call options) that regulate the consequences of the early voluntary departure of those partners whose permanence is essential to the company’s success. If a partner leaves the company (or is dismissed from their position), the rest of the partners or the company itself will have the right to force them to sell their shares. However, good leaver or bad leaver?
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Good Leaver: When the partner’s disassociation occurs for reasons beyond their control or due to force majeure (illness, dismissal declared unfair), they may be required to transfer their shares, but receiving their fair or market value in return.
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Bad Leaver: Conversely, if the disassociation occurs due to a breach of their obligations, a fair dismissal, or their voluntary abandonment of the company before fulfilling the committed permanence period, they can be forced to transfer their shares at a penalized price, which is usually set below their market value (for example, at nominal value).
Deadlock resolution clauses (Deadlock provisions)
In companies where capital is divided 50/50, a profound disagreement paralyzes the company. For these cases, mechanisms can be included where one partner offers to buy the other’s share at a specific price, and the other must accept to sell at that price, or buy it themselves at the same price. The final result is always that one of the two partners leaves the company.
Conclusion
The departure of a partner, the loss of involvement in the project, or conflicts between founders are more frequent situations than usually thought when incorporating a company. However, companies that have planned for these scenarios from the beginning through a Shareholders’ Agreement and well-designed Corporate Bylaws have effective tools to manage them without jeopardizing the continuity of the business.
Mechanismos such as permanence commitments, vesting and good/bad leaver clauses, restrictions on the transfer of shares, or statutory causes for exclusion allow protecting the project and aligning the interests of those who actively contribute to its development.
Ultimately, the best way to resolve a conflict between partners is to have regulated it before it arises.
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About Metricson
Metricson is a pioneer in legal services for innovative and technology companies. Since its inception in 2009, it has advised more than 1,400 companies from 14 different countries, including startups, investors, large corporations, universities, institutions and governments.
If you need help regarding any legal aspect of your company, do not hesitate to write to us at contacto@metricson.com. We look forward to talking to you!