Can I kick my partner out of the company?
Exclusion of Partners
Can a partner be fired from a company? Can the majority partners agree to the expulsion of a partner? And if that partner is also an administrator of the company?
On occasion, our clients have raised the possibility of kicking out a partner or even the partner who is also the administrator of the company. We analyze the exclusion of partners as the right of the company to fire, separate or expel one of its members.
There are also other relevant questions that we will try to analyze in this article:
Can the statutes of the company agree on any cause for exclusion to kick out the partner who does not comply with any of the agreed obligations?
The termination of a partner in a corporation is usually voluntary. However, the Law provides for the possibility that it is the company itself that expels a partner or a group of partners , even against their will. It is a rescission of the partnership contract by the partnership with respect to the partner who from then on will be forced to leave. It is what is called the “membership exclusion”, and is regulated in chapter III and chapter IV of the Capital Companies Law regulates the exclusion of partners.
Articles 350 et seq. of the Capital Companies Law regulate the legal and statutory causes for the exclusion of partners and the exclusion procedure. Article 353 and following, for their part, contemplate the system of valuation of the shares or shares of the partner.
Legal causes to kick out a partner
Article 350 LSC contemplates three cases that allow the limited liability company to agree to the exclusion of a partner:
- When the partner voluntarily fails to comply with the obligation to perform ancillary services.
Ancillary benefits are those obligations assumed by the partner towards the company. They can be of an economic nature, in which case the company is a creditor, so they form part of the company’s assets but not of the company’s capital. Or, obligations that imply the provision of a service that is useful for the activity of the company.
Ancillary benefits are regulated in the company’s bylaws and are regulated in chapter V of the Capital Companies Law, art. 86 et seq.
Exclusion or expulsion of the administrator when any of the following circumstances occur:
- That the administrator violates the prohibition of competition. In other words, when the prohibition to provide services for another competing company concurs, the administrator makes his position compatible with benefits for other companies.
- That the administrator had been sentenced in a judicial proceeding and by means of a sentence, to pay compensation for damages to the company, for committing infractions in compliance with the Capital Companies Law, acts contrary to the rules agreed in the bylaws, or behaviors without due diligence.
In this case, the sentence condemning the administrator is required to be firm. So, if the sentence of conviction has been appealed, and it is pending resolution by a higher court, the exclusion cannot be agreed until the last sentence has gained finality.
Statutory causes for the exclusion of partners
In the introduction, we wondered if the company can agree in its statutes causes of exclusion to kick out the partner who fails to comply with any of the obligations contemplated in its own internal rules.
The answer must be positive. Article 351 LSC provides that the company agrees to incorporate into its bylaws causes for the exclusion of partners and administrators. However, to make such a change in the bylaws, the unanimous consent of all partners is required. The same procedure and the same requirement will be required for the suppression of the causes of exclusion.
Opt-out procedure
Art. 352 LSC regulates the procedure that the company must follow to agree to the exclusion of the partner:
- First, the exclusion agreement must be adopted at the general meeting, making the majority game effective. The vote will not be secret, and the minutes of the meeting must state the identity of the partners who voted in favor of the exclusion.
- If the expelled partner were an administrator sentenced to pay compensation to the company by means of a final judgment, no other requirement or procedure will be required other than the aforementioned resolution of the general meeting.
- If the partner has a stake in the share capital equal to or greater than 25 percent, the company that has agreed to the exclusion must also request a final judgment through the courts. This requirement will not apply if the excluded partner is the convicted administrator referred to in point 2.
- Any partner who has voted in favor of the exclusion may go to court to request, on behalf of the company, the mandatory sentence that supports the decision adopted by the general meeting, if one month after the agreement, the company would not have initiated the legal proceedings.
Effects of partner exclusion
Finally we must mention the effects that occur with the exclusion of the partner:
- As a first consequence, the partner affected by the exclusion agreement loses its status as a partner and the rights attached to said condition.
- Excluded partner’s right to reimbursement of the company shares, understood as the perception of the fair value of the company shares or shares thereof. The valuation of the amount to be received by the partner, can in turn generate reasons for conflict. In case of final discrepancy on the valuation, the parties can go to court to settle their differences. We already saw in our previous article on “Partner Separation Right” the procedure provided for the quantification of the fair value of the company shares, and the different valuation methods, which would be equally applicable in case of exclusion of the partner Therefore, we refer to everything explained in this regard in that doctrinal article, as it is equally applicable to the object of this study. In fact the art. 353 LSC et seq. contemplate the same common regulation on the valuation of shares and shares both for the separation of the partner and for the exclusion.
- Liability of the reimbursed amount with respect to the corporate debts subscribed before the reimbursement. Said responsibility will remain in force for a period of 5 years.
José Luis Casajuana Ortiz
Socio de J. L. Casajuana y responsable del área internacional
06/02/2017
