The modification of the corporate purpose and the partner’s right of separation

The modification of the corporate purpose and the partner’s right of separation

In the life of a Limited Company it is possible that, for different reasons or needs, it is decided to make a modification of the corporate purpose in order to change its content. 

In this situation and being necessary the corresponding statutory modification, we can find four scenarios: an extension, a modification, a decrease or a total substitution of the corporate purpose.  

It is important to consider the different possibilities mentioned above, since not all of them will allow the shareholder to exercise its right of separation from the company. 

Below, we share the most relevant aspects regarding the modification of the corporate purpose and its legal effects.

What is a modification of the corporate purpose and why is it made? 

At the time of incorporating a corporation, one of the main aspects to be considered is the corporate purpose. Therefore, it is indisputable how important it is to regulate the future activity to be developed by the company in question. 

The corporate purpose is the activity or activities that the company will carry out once it is incorporated in order to obtain a profit by developing them.  

In addition, the corporate purpose will serve to limit the scope of action of a company, in the understanding that, if a specific activity is not included, the company should not engage in it.

In general, it is advisable to use a corporate purpose that is as broad as possible to avoid later expenses derived from carrying out modifications to the corporate purpose. However, in the field of start-up companies and given that their initial main activity can often change, it is often necessary to carry out a modification of the object. 

In addition, it is quite common that, when applying for a loan or a public aid, as well as when carrying out actions before the tax office or banks, at the moment that it corresponds to present the documentation of the company, it is imperative that, in the section of the Articles of Association related to the corporate purpose, the main activity of the company is included, in an express and detailed way, the main activity of the company. 

It is even possible that, depending on the activity, there may be legal limitations to the delimitation of the corporate purpose, which must comply with certain requirements. 

For this reason, having a precisely described corporate purpose in the Articles of Incorporation is essential for the company to operate properly and with as few obstacles as possible.  

What is the right of separation of the partner?

It is perfectly possible for a partner of a commercial company to sell his shares to other partners or to a third party by means of a sale and purchase transaction. For this purpose and in exchange for a specific amount of money, the transfer of the shareholding in question is agreed. 

In addition to this option, there is the possibility that the shareholder may request the company to return the shares he/she no longer wishes to have, with the company acquiring these shares and delivering the corresponding economic value to the shareholder. In this case we are faced with the so-called separation of the partner. 

In order to be able to use the right of separation of the shareholder, we need to attend to the cases listed in article 346 of the Capital Company Law, among which are included the modification or substantial substitution of the corporate purpose, the extension of the company, the reactivation of the company or the creation, modification or early termination of the obligation to perform ancillary services, unless otherwise provided for in the bylaws.

It is also possible to exercise the right of separation in the event of non-distribution of dividends after the fifth fiscal year from the date of registration of the Company in the Commercial Register, provided that the general meeting did not resolve to distribute at least 25% of the dividends of the previous fiscal year. In any case, this right may be suppressed by the shareholders by means of the corresponding resolution, with the exception of the suppression of this right for those shareholders who have previously expressed their opposition. 

In addition, in limited liability companies, those partners who were not in favor of the agreement to modify the regime for the transfer of company shares will have the right to withdraw. Shareholders will also have the right to withdraw in the event of transformation of the company and transfer of domicile abroad in accordance with the provisions of the Structural Modifications Law. 

Finally, the Company’s bylaws may establish other causes of separation other than those provided for in the Capital Companies Act. In any case, the inclusion or deletion of these causes in the bylaws will require the consent of all the partners. 

Right of withdrawal of the shareholder due to a change in the corporate purpose of a limited liability company

Article 346.1.A of the LSC establishes that, in the event of a substantial modification of the corporate purpose and in the event that the shareholder has voted against, he/she may exercise his/her right to withdraw from the company.  

This special consideration is usually disregarded when carrying out a modification of the corporate purpose. The reason is that, by changing the activities traditionally carried out by a company, the effect derives in a situation that may affect the partner, who may wish to terminate its relationship with the company.

How is the partner’s right of separation exercised? 

The shareholder will have a period of one month to communicate the exercise of its right of separation from the date of receipt of the communication from the company notifying the corresponding agreement that gives rise to one of the cases of separation. 

For this purpose, it is usually necessary to estimate the valuation of the shares that the shareholder wishes to return to the company so that the corresponding economic amount associated with them can be paid. 

If there is disagreement between the company and the shareholder on the value of the shares, it will be necessary to proceed with the valuation by an expert appraiser to determine the fair value of the shares.

LETSLAW

In Letslaw we have a team of professionals specialized in advising our partners in matters related to their rights.  If you have any doubt, you can contact us to help you solve any question you may have.