In what situations can we expel a partner?

The regulation on how and under what conditions we can expel a partner can be found in the Capital Companies Law (articles 346 to 359) and specifically in the company's bylaws. The exclusion of the partner requires the corresponding agreement of the general meeting, and in some cases, as we will see, it will require a firm judicial resolution.

The reasons for excluding a partner are different for SA (public limited company) than for SRL (private limited company).

Causes for exclusion in the SRL

1. Willful and culpable breach of the obligation to carry out ancillary services.
2. Violation of the prohibition of competition by the partner-administrator.
3. Conviction by final judgment of the partner-administrator to compensate the company for damages caused by acts contrary to the Law or the bylaws or carried out without due diligence (social action for liability).

The bylaws may incorporate other causes of exclusion specifically and precisely, either at their constitution or subsequently. However, the consent of all partners will be necessary, and it must always include causes that involve a breach of their duties or obligations to the company.

Causes for exclusion in the SA

The LSC establishes a single case of exclusion when the shareholder is in default in relation to the company, such as for the payment of outstanding contributions to the company.

With the 2011 reform of the LSC, it is admitted that the bylaws of the SA may establish other causes for exclusion, although they must be specific and precise, in the sense of non-compliance with social obligations, breach of duties of loyalty or confidentiality, or changes in the personal situation of the partners to whom relevance is assigned for the company.

Procedure

The exclusion of a partner requires an agreement of the general meeting:

For SRL, it requires a majority of votes representing at least two-thirds (2/3) of the share capital, unless the bylaws establish a higher majority. The partner to be excluded, although able to attend the General Meeting, cannot exercise the right to vote, and their shares are deducted from the share capital for the calculation of the necessary majority of votes. The vote is not secret.

For SA, it requires an ordinary majority of the votes of the shareholders, although unlike SRL, the prohibition on exercising the voting right of the partner to be excluded will only apply if provided for in the bylaws.

If the partner to be excluded has a stake equal to or greater than 25% of the share capital, the exclusion agreement alone is not sufficient. It must be complemented by a firm judicial resolution, which serves as a guarantee mechanism. Until this occurs, the partner retains all rights.

The additional requirement of a judicial resolution will not be required when the partner to be excluded is also an administrator and is sentenced to compensate the company for damages.

Effects

As a first consequence, the partner affected by the exclusion agreement loses their status as a partner and the rights attached to that condition.

The excluded partner has the right to receive the fair value of their shares (real value or market value determined by an independent expert or according to the average trading price of the last quarter). The company will acquire or redeem these shares through a reduction in share capital.

If the exclusion occurs by agreement of the general meeting, the loss of the partner's status takes place on the day of the meeting if the partner has attended, and otherwise from the date of receiving the notice of the agreement. If the exclusion is judicial, the effects occur from the finality of the judgment.

A responsibility is established for the excluded partner for the amount reimbursed concerning social debts subscribed before the reimbursement. This responsibility will remain in force for a period of 5 years.

Examples

• Having a partner who, without being employed in the company, engages in a parallel activity with the same purpose. It does not necessarily constitute unfair competition, but it can be established as incompatible in the bylaws.
• Exclusion of a partner when they have been criminally convicted by a final judgment, even if the company is not the injured party, in order to preserve the reputation of the entity.
• The possibility of excluding a partner due to the loss or change of certain personal situations, such as professional qualification or membership in a particular institution.
• It is not possible to establish causes contrary to public order, such as the seizure of their shares, or having acquired them through execution against a person who was previously a partner.

The exclusion of the partner should not be understood as a penalty but as a remedy to avoid harmful situations for the company resulting from changes in the personal situations of the partners or modifications in the trust between them, which can hinder the fulfillment of the social purpose.