What to do when faced with a problematic partner?

What to do when faced with a problematic partner?

In business partnerships, it is not unusual to face friction between partners that can jeopardise the running of the business. Sometimes these frictions come from a ‘problem partner’: someone whose actions, omissions or attitudes hinder management, generate internal conflicts or affect the trust and stability of the company. 

This article discusses how to prevent and resolve these situations from the perspective of commercial law, with special reference to the Spanish Companies Act (LSC) and the possibilities offered by a good shareholders’ agreement.

The importance of a shareholders’ agreement

The first step to minimize the consequences of a problematic partner is to anticipate the conflict. In addition to the company’s bylaws, the shareholders’ agreement is an effective tool for regulating internal relationships and establishing solutions in the event of disagreements. 

Although its effectiveness is limited to the signatories—it does not affect third parties—it can address specific scenarios more flexibly than the bylaws.

1. Dispute resolution clauses: including mediation or arbitration mechanisms can speed up conflict resolution and avoid long, costly court proceedings. If a tiered procedure (negotiation, mediation, and ultimately arbitration) is set out, the chances of reaching an amicable agreement increase.
2. Rights of exclusion or withdrawal: the shareholders’ agreement can precisely describe the conduct that permits the exclusion of a partner (serious breaches, acts of disloyalty, unfair competition, etc.), as well as the procedure for carrying out such exclusion. Similarly, it can regulate scenarios of voluntary withdrawal when a partner wishes to leave the company.
3. Exit clauses: these provisions facilitate the departure of a troublesome partner, either by requiring them to sell their shares or by allowing the remaining partners to offer to buy them out. They designate the buyers as well as valuation criteria and deadlines, thereby preventing deadlocks that could harm the continuity of the company.

Solutions to a partner’s problematic conduct

Even with a well-crafted shareholders’ agreement, difficult disputes may still arise. When dialogue and negotiation fail, commercial law and the LSC provide various instruments to safeguard the company’s interests.

Prior negotiation and mediation

Before resorting to more drastic measures, it is advisable to call partners’ meetings or board of directors’ meetings to address the issue. In many cases, the involvement of an external mediator specialized in corporate conflicts can pave the way for creative solutions that are less damaging to the company’s reputation.

Legal actions under the Capital Companies Act

1. Exclusion of partners: in limited liability companies, Articles 350 et seq. of the LSC cover exclusion on grounds set out in the bylaws or legally established (e.g., breach of obligations, serious infringements, etc.). While public limited companies (sociedades anónimas) have nuances, the principle is similar where permitted in the bylaws.
2. Partner withdrawal: the LSC (Articles 346 et seq.) regulates situations where a partner may withdraw (for example, non-distribution of dividends when certain requirements are met). Although it does not always address the issue of a problematic partner, it can be a pathway when their continued presence makes internal cooperation unworkable.
3. Challenging corporate resolutions: if the problematic partner manages to impose resolutions contrary to the law, the bylaws, or detrimental to the company, any legitimate partner may challenge them. This remedy protects the common interest and can halt harmful decisions.
4. Liability of directors: if the problematic partner also serves as a director and acts negligently or willfully, they can be held liable (Articles 236 et seq. of the LSC), both for damages to the company and to partners or third parties. This is intended not only to compensate for losses but also to deter conduct contrary to the company’s best interests.

Valuation of shares

In exclusion or withdrawal scenarios, the question arises as to how much the departing partner’s stake is worth. The LSC stipulates that, in the absence of agreement, an auditor appointed by the Mercantile Registry will determine the fair value. That is why it is very useful to have a valuation method agreed upon in the shareholders’ agreement (for example, EBITDA multiplied by a certain coefficient, adjusted book value, etc.).

Key aspects for an effective solution

• Clarity in bylaws and agreements: well-drafted clauses simplify conflict management. Defining grounds for exclusion or withdrawal and the method for valuing shares reduces uncertainty and speeds up the resolution process.
• Proportionality and prudence: it is important to assess the reputational impact of each measure. Forcing a partner out can be traumatic and lead to lengthy and costly litigation. Therefore, before initiating legal proceedings, exhausting negotiation options is recommended.
• Specialized advice: working with professionals (commercial lawyers, mediators, financial advisors) helps identify the best approach to protect the company’s interests and, if necessary, formally arrange the orderly exit of the problematic partner.
• Protection of the company’s best interests: every decision should be guided by preserving the business project. Sometimes, an agreement involving the sale of shares at a reasonable price is preferable to a long dispute that ends up harming the company’s continuity.

A problematic partner can jeopardize a company’s viability if the situation is not managed properly. Prevention through a detailed shareholders’ agreement and clear bylaws is the best strategy. When conflict is unavoidable, the Capital Companies Act provides mechanisms for excluding or withdrawing a partner, challenging detrimental resolutions, or seeking liability from directors.

Nevertheless, before resorting to drastic solutions, it is crucial to attempt negotiation or mediation in order to avoid damaging the company’s internal cohesion and reputation. Ultimately, the key is to protect the company’s best interests, maintain organizational stability, and safeguard relationships among those who support the business project.