When Can a Partner Leave a Company?

Leaving a company is not as simple as “just leaving.” Outside certain legal scenarios, the partner remains bound to the company. The main options are to sell or transfer their shares, or in specific cases, exercise the right of withdrawal as regulated under the Spanish Companies Act (Ley de Sociedades de Capital, LSC).

 

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Common Ways for a Partner to Exit

These mechanisms rely on mutual agreement between the departing partner and a third party (other partners, the company itself, or an external buyer). They do not constitute an enforceable unilateral right but result from negotiation.

Transfer of Shares or Equity

This is the most common route. A partner can transfer ownership of their portion of the company’s capital. Such transfers may be subject to significant restrictions in the bylaws, especially in closely held companies, which often include preemptive rights for other partners or the company itself.

Treasury Shares and Capital Reduction

If allowed by the bylaws or law, the company may acquire and cancel shares (treasury stock) or reimburse the partner via a reduction of share capital, enabling the partner’s exit without relying on an external buyer.

Dissolution and Liquidation of the Company

As a last resort, dissolution and liquidation terminate the company’s legal personality. This releases all partners, though it requires a legal or statutory cause and the corresponding agreement of the General Meeting or a judicial ruling.

Right of Withdrawal

The Companies Act provides specific causes for a partner to unilaterally withdraw and receive the value of their shares.

Legal Causes for Withdrawal

Article 346 LSC lists scenarios where a partner who did not vote in favor of a particular resolution may exercise this right:

• Substitution or substantial modification of the corporate purpose.

• Extension or reactivation of the company.

• Creation, modification, or early termination of the obligation to provide ancillary contributions, unless the bylaws specify otherwise.

• Modification of the rules for transferring shares (only for SL partners).

Right of Withdrawal Due to Lack of Dividend Distribution

Article 348 bis LSC establishes a fundamental protection mechanism for minority partners. Unless the bylaws state otherwise, this right is triggered if, after at least five fiscal years since the company’s registration, the following conditions are met:

1. The General Meeting does not approve the distribution of at least 25% of legally distributable profits from the previous fiscal year.
2. Profits were obtained in the previous three fiscal years.
3. The partner has recorded their objection in the meeting minutes regarding insufficient dividends.

This right does not arise if the total dividends distributed in the last five years amount to at least 25% of legally distributable profits for that period.

Statutory Causes for Withdrawal

Beyond legal causes, Article 347 LSC allows the bylaws to establish additional withdrawal causes. In this case, the bylaws must define:

• How to prove the existence of the cause.

• How and when the right may be exercised.

Notably, introducing, modifying, or removing these statutory causes requires the consent of all partners, offering strong protection to minority shareholders against changes in agreed exit rules.

Specific causes in company dissolution may also affect a partner’s exit.

Procedure to Exercise the Right of Withdrawal

Exercising this right follows a strict formal procedure:

1. Communication of the Resolution: Resolutions triggering the right of withdrawal must be published in the Official Gazette of the Commercial Registry (BORME). In limited liability companies, administrators may substitute this publication with written notice to each partner who did not vote in favor.

2. Exercise by the Partner: The partner must exercise their right in writing within one month from publication in BORME or receipt of the notice.

3. Valuation and Reimbursement: If no agreement on the fair value of shares exists, it will be determined by an independent expert appointed by the Commercial Registrar of the company’s registered office.

4. Registration: To have full effect against third parties, the deed documenting the agreement must be registered in the Commercial Registry. The deed must declare that no partner has exercised the withdrawal right, or if exercised, that the company has acquired the shares or reduced capital accordingly.

Risks and Practical Considerations

• Bylaw Restrictions: May limit causes and procedure for withdrawal.
• Liability for Previous Debts: The departing partner may remain liable for debts contracted before their exit becomes enforceable against third parties.
• Company Liquidity: The company must have sufficient cash to reimburse the share value, which could affect financial stability if not planned properly.
• Impact on Corporate Governance: The exit of one or more partners alters shareholding percentages and majority thresholds for decision-making, potentially affecting the internal balance of power.

For guidance on liquidation processes, it is advisable to consult the legal framework and key considerations for company liquidation.

What Happens When a Partner Leaves?

In a limited liability company, a partner’s exit generally follows these steps:

• Check the Bylaws: Bylaws typically regulate exit conditions, including restrictions on transferring shares.

• Sale or Transfer of Shares: The partner can sell to other partners or, if permitted, to third parties. Other partners have preemptive rights unless stated otherwise.

• Share Reimbursement: If there is no buyer or bylaws allow, the partner may request the company to return the value of their shares, which may involve a capital reduction.

• Valuation: The share value is determined according to stipulations (e.g., book or market value).

• Post-Exit Responsibilities: The departing partner is not liable for future debts but may remain responsible for debts contracted before the exit.

Are You a Partner and Want to Sell Your Share?

Exiting a company requires careful planning, legal knowledge, bylaws review, and negotiation with partners. The right of withdrawal, especially due to lack of dividend distribution, protects minority partners, but its exercise involves strict deadlines, formalities, and valuation procedures.

Need help with the process? Our corporate restructuring advisory services can guide you through legal processes including liquidation, mergers, and company spin-offs.