The Exclusion of Shareholders in a Spanish Limited Liability Company: When It Is Possible and How It Must Be Carried Out

The Exclusion of Shareholders in a Spanish Limited Liability Company: When It Is Possible and How It Must Be Carried Out

The exclusion of shareholders in a Spanish limited liability company is an exceptional legal mechanism that allows the company to force the exit of one of its shareholders when there is a sufficient legal or statutory cause. It should not be confused with the shareholder’s right of withdrawal. In a withdrawal scenario, it is the shareholder who decides to leave the company in certain cases recognised by law or by the company’s articles of association. In an exclusion scenario, by contrast, it is the company itself that resolves to remove a shareholder due to conduct or circumstances that justify his or her forced departure.

In limited liability companies, this mechanism serves an internal protective function. A limited liability company usually has a more closed and personal nature than a public limited company. Its shareholders are not merely anonymous investors; rather, their conduct may directly affect the operation of the common business project. For this reason, when a shareholder breaches essential obligations, unlawfully competes with the company, or causes relevant damage, the legal system allows that shareholder to be excluded, provided that all legal safeguards are respected.

The Spanish Companies Act provides for three specific legal grounds for excluding a shareholder from a limited liability company. First, a shareholder may be excluded if he or she voluntarily breaches the obligation to perform ancillary obligations. These are obligations additional to the mere contribution of capital and are usually set out in the articles of association, such as providing certain services, refraining from competition, supplying goods, or complying with specific duties of cooperation. Secondly, a shareholder who is also a director may be excluded if he or she infringes the prohibition on competition. Thirdly, a shareholder-director may also be excluded if he or she has been ordered by a final court judgment to compensate the company for damage caused through acts contrary to the law, the articles of association, or carried out without due diligence. These legal grounds are established in Article 350 of the Spanish Companies Act.

In addition to these statutory grounds, the articles of association may establish other causes for exclusion. However, not every generic or ambiguous provision will be valid. The grounds must be sufficiently clear and specific, so that shareholders know in advance which behaviours or circumstances may lead to their forced exit. The law allows companies to introduce, amend, or remove statutory causes of exclusion, but it requires the unanimous consent of all shareholders. This requirement is logical, since introducing a new ground for exclusion directly affects the legal position of each shareholder and therefore cannot be imposed by an ordinary majority.

From a procedural perspective, exclusion does not occur automatically. The general shareholders’ meeting must adopt the relevant resolution. The minutes of the meeting, or an annex to them, must record the identity of the shareholders who voted in favour of the exclusion resolution. This formality is not merely technical: it makes it possible to verify who supported the decision and may become relevant if the matter is later brought before the courts.

There is also a special protection mechanism for shareholders holding a significant stake in the company. If the affected shareholder holds 25% or more of the share capital, the exclusion requires, in addition to the resolution of the general meeting, a final court decision, except in the specific case where the shareholder-director has been ordered to compensate the company. This judicial requirement applies where the affected shareholder does not agree with the exclusion. Its purpose is to prevent a majority from abusively removing a relevant shareholder without judicial control.

Once the exclusion resolution has been adopted, an essential issue arises: the value of the excluded shareholder’s shares. Exclusion does not mean that the shareholder loses his or her investment without compensation. As a general rule, the excluded shareholder is entitled to receive the fair value of his or her shares. If the company and the shareholder cannot agree on that value, or on who should carry out the valuation and how, the valuation will be performed by an independent expert appointed by the Commercial Registrar of the company’s registered office. This expert will issue a report that will serve as the basis for determining the amount to be reimbursed.

Once the value has been determined, the excluded shareholder is entitled to receive the corresponding payment. The law provides that, within two months from receipt of the valuation report, the affected shareholders may obtain the fair value of their shares at the company’s registered office. If that period elapses without payment, the directors must deposit the relevant amount with a credit institution located in the municipality of the company’s registered office.

Finally, the exclusion must be properly documented. If the shares are cancelled, the directors must execute a public deed of share capital reduction, stating the cancelled shares, the identity of the affected shareholder, the reason for the cancellation, the date of reimbursement or deposit, and the new share capital figure. If, instead, the company acquires the shares, the relevant public deed of acquisition must be executed.

In conclusion, the exclusion of shareholders in a Spanish limited liability company is possible, but it cannot be used as a mere pressure tool among shareholders or as an informal way to resolve internal disputes. It requires a legal or statutory ground, a resolution of the general shareholders’ meeting, compliance with the applicable majority and formal requirements, possible judicial control in certain cases, an objective valuation of the shares, and reimbursement of the excluded shareholder. Used properly, it protects the company against conduct that harms the common business project. Used improperly, it may lead to challenges, liability, and an even greater corporate conflict.