Transfer of Social Participations in Limited Liability Companies

Transfer of Social Participations in Limited Liability Companies

Limited liability companies are the most common type of commercial company in Spain, as they are the most beneficial for small and medium-sized entrepreneurs, given that their liability is limited to their effective contribution.

Social participations are proportional parts of the share capital of a limited liability company and represent the contribution that members have deposited in the company, and therefore, their degree of participation in it. The percentage of participation in the company determines, in principle, the economic and political rights that the member will enjoy within the company.

There are three general ways to transfer participations: inter vivos, mortis causa, and forced transfer.

The transfer of social participations is not completely free; rather, the law establishes a series of limitations and requirements, which can sometimes be increased or decreased if so stipulated by the Articles of Association or even by a shareholders’ agreement.

As a general rule, the Capital Companies Act (Ley de Sociedades de Capital) establishes that only transfers between members, those made in favor of a spouse, descendants or ascendants, and finally, those made in favor of entities belonging to the same group as the transferor, will be free.

Each company has specific characteristics and intentions, hence, depending on them, it is advisable to regulate the exit clauses of the members accordingly.

A very important right of the members, and unavoidable in cases of transfer of participations, is the right of pre-emption.

This right, common to all members unless limited, implies that when a member of the company wishes to transfer their participations, the other members will have the opportunity to acquire those participations on equal terms.

The transferring member must notify the Board of Directors of their intention to sell the participations. They must specify the identity of the buyer, the number of participations in question, and the price. The other members will have a period (modifiable in the Articles of Association or the shareholders’ agreement) to express their desire to acquire the participations. They will acquire the participations preferentially, and under the same conditions stipulated between the transferring member and the third party. If several members wish to exercise this right, the participations will be distributed among them in proportion to their participation in the share capital.

Another way for the Company to protect itself is to draft clauses in the Articles of Association or in the shareholders’ agreement requiring approval by the shareholders’ meeting, subject to a reinforced majority, for any transfer of participations to persons outside the company.

There is freedom of agreements when formalizing these clauses; however, the law establishes this general limitation: “Statutory clauses that make the voluntary transfer of social participations by inter vivos acts practically free shall be void.”

On the other hand, clauses that prohibit the voluntary transfer of social participations by inter vivos acts will be valid as long as the Articles of Association grant the possibility of leaving the company at any time.

Mortis causa transfers occur when one of the members dies and their membership is transferred to their heirs. However, this possibility can be limited by the Articles of Association or the shareholders’ agreement.

The forced transfer of social participations is the process by which a member’s participations are transferred to another person due to mandatory circumstances beyond the will of the owning member. This situation can occur for various reasons, such as foreclosures, inheritances, matrimonial liquidations, among others.

Transfers of social participations that do not comply with the provisions of the law or, as the case may be, with those established in the Articles of Association will have no effect against the company, and therefore the buyer will not be recognized as a member.