Expulsión socio

How to get rid of an “unwanted” shareholder?

Let’s face it. It happens a lot – not only in emotional relationships but more often in business relationships and even more often in companies. Coexistence can never be easy.

So, what happens when the future of the company is affected by continuous disagreements between the shareholders?

At that point, the logical way to think is: there must be some way to eliminate “this guy” right? (“eliminate” from a “lawful” point of view, obviously) Can a shareholder be kicked out from a company? Can the majority shareholders agree to the removal of another shareholder? How does the shareholder’s right of separation work?

Let’s start with: how to get rid of an unwanted shareholder?

Introduction: the Capital Company Act offers several alternatives to removing a shareholder from the company. However, none of these alternatives are simple and of course, none are automatic nor immediate. But, despite these limitations, there are available alternatives which can provide legal security.

Additionally, one should also consider that there are other suitable ways to get rid of an unwanted shareholder, including available statutory means which can regulate reasons for removal. The alternatives are designed for the cases in which the unwanted shareholder has a minority status. So, in companies with equally split share capital, these alternatives will not be useful. In these cases, the most serious consequence will be the deadlock of the company and if there is no solution to the deadlock there will be a compulsory dissolution of the company.

Legal Mechanisms:

Article 350 of the Capital Company Act (LSC) sets out the reasons for which a shareholder can be removed. Attached is the link to the regulation in the Capital Company Act (LSC)

Therefore, in Limited Companies (SL), a shareholder may be removed in the following scenarios:

  1. When a shareholder intentionally fails to perform their accessory services. In other words, when the shareholder does not comply with the additional obligations (to give something, to do or not to do something…) that they had agreed on with the company. For example, the shareholder’s duty to support the company, or to offer legal advice. This link will provide a deeper understanding of the concept of accessory services:
  2. When the shareholder is a director and engages in unfair competition towards their own company. For example, the shareholder establishing another company with the same aims and objectives.
  3. When the managing shareholder has been convicted with a final judgment, but not for any conviction, only when s/he is convicted to “compensate the company for damages caused by acts contrary to the law or the statutes.”

With regards to the procedure to follow, the following should be remembered:

  • Firstly, a General Board Meeting will be required in order to agree on the removal of the shareholder.
  • Secondly, the removsl of the shareholder must then be agreed by the majority or at least 2/3 of the share capital. This is one of the cases referred to in Article. 199 LSC, for which requires a reinforced majority.
  • Notwithstanding the above, the procedure differs when the shareholder to be removed holds a share in the company of more than 25%. In these cases, a final judicial decision will additionally be required.

Special consideration to “deadlock situations”:

In this regard, it is important to highlight the Ruling of the Provincial Court of Barcelona on the 8th October 2013, as it includes (within situations of unfair competition) incredibly relevant aspects on the issue.

In this case, it is not controversial that there is conflict between the two shareholders, each of owning 50% of the share capital. (…) In the context of this unresolvable conflict and social paralysis, when estimating the price of their stocks, it is not necessary to prosecute the shareholder who caused the conflict nor determine responsibilities. That is why we cannot accept the appellant’s claims, which question the plaintiff’s locus standi for having acted in bad faith, causing the deadlock situation. Even if that situation had been intentionally pursued and responded to an actor’s strategy, it is evident that the company cannot remain active after four years without account approval and after the impossibility of adopting any agreement has been expressed as absolute. (…)

Statutory Mechanisms in order to remove a shareholder:

The Articles of Association may establish specific reasons for the removal of a shareholder. Article 351 LSC provides as follows:

Consequently, the company may remove a shareholder for failing to comply with the duties and obligations laid out in the statutes. Just as an example, some of these duties and obligations may be the following:

  • Fulfilling the agreed accessory services. It should be remembered that the shareholder may have agreed with the company the fulfilment of certain additional obligations. For example, appearing as a guarantor on a loan granted by the company.
  • Effectively making the financial contributions, corresponding to their shares in the company.

Therefore, this type of removal is set up as the company’s defence mechanism. Thus, if a shareholder carries out acts contrary to the articles of association, s/he may be removed from the company.

Other (legal) Ways:

We have seen the possibility of removing a shareholder on the basis of legal and statutory reasons. But, what happens when there is no legal reason based on Article 350? What can be done if the statues do not establish reasons to remove shareholders? Are there other mechanisms which effectively remove the shareholder from the company?

Well, among the various alternative mechanisms, let’s consider the following:

Capital Increase

In the first place, capital increase is the most used mechanism to try to eliminate the shareholder from the company. The desired objective of this approach is to achieve this so-called dilution effect.

Let’s explain: in the capital increase, each shareholder has the preferential right to acquire the new shares issued by the company. However, the minority shareholder may not subscribe to them for many reasons, such as, a lack of money if the capital increase is significant. In this case, the shareholder would be losing their percentage of the share capital and so their presence in the company would become less and less. So, the scenario would be moving towards the disappearance of the shareholder or to the point where their shares have been diluted.

Notwithstanding the above, the capital increase is not exempt from possible challenges by the minority shareholders.

Attention: Criminal Consequences of an “instrumental” capital increase to remove a shareholder.

Consequently, the minority shareholders could argue that the capital increase agreement is unjustified and arbitrary. They would argue that the purpose of the capital increase is to dilute their shares. Or, they would bring up arguments such as the Abuse of Majority Rights and lack of information or even argue above the damage caused to the social interest of the company. With that said, this type of abusive capital increase agreement could constitute a crime (Article. 291 Criminal Code).

With regard to the process of capital increase, it must follow the provisions of Article 296 LSC. Therefore, there must be an agreement from the General Board of Shareholders and a vote shall be required with at least two thirds in favour of the corresponding shares into which the share capital is divided.

However, reinforced majorities could be established in the Articles of Association. In any event, the shares of the shareholder, who may be removed from the company, must be deducted from the calculation.

Squeeze Out – The Ideal Way to Separate

What is Squeeze Out?

A UAM professor, Cándido Paz Ares defines it precisely as:

  • Squeeze Out in Large Company Groups
    • This is the set of corporate transactions or operations initiated by the majority shareholder in order to remove minority shareholders from the company. Experience shows that the natural habitat of the figure is in groups of companies as they frequently use it to refine the subsidiaries of external shareholders and put themselves in a position to plan their business strategy exclusively according to the interest of the group.
  • Squeeze Out in Listed Companies
    • But these methods are also frequently used by listed companies that are in the process of returning to origin (RTO) – or going private – after a take-over bid, an LBO (Leveraged Buyout) or a similar operation.
  • Squeeze Out in the Unlisted Companies (both large and small)
    • Sometimes, we even find that this method is used within unlisted companies of all sizes – large, medium and small – in order to tackle intercorporate conflicts or to prevent the risk of them happening in the future.
    • The objective of Squeeze-Out is always the same: to have all the capital concentrated into a single place and it always uses the same instrument: the “expropriation” of the minority shareholders, which is done through a forced replacement of their shares for a cash compensation. Needless to say, this is the root of all the problems. If the “forced replacement” of their participation rights were voluntary, each of the minority shareholders would agree with the cash compensation and there would be no objection.
  • Squeeze Out Objective
    • As mentioned above, the objective of this process is the centralisation of all of capital into a single place but how is this done?
    • Well, with the autonomous will of the parties agreeing to a partnership agreement. If several shareholders agree, that one can expropriate others in certain circumstances, then the agreement is legal. Therefore, it is legal to expropriate the interests of the minorities by forcibly replacing their shares with cash compensation.
    • With respect to the process of Squeeze Out, Spanish Law does not provide a specific approach. Regardless, there are different ways to handle this corporate operation.
  • How to implement Squeeze Out?
    • One of the most used methods is the reduction of through the forced amortisation of the shares (Article 338 LSC). With this approach, if only the minority shareholders are amortized, it does not equally affect all the shareholders equally.
    • In addition, this approach is viable as the consent of the minority shareholders, whose shares are to be amortised, is not required. The Law allows the operation to be carried out with the majority vote of the general board and of the shareholders affected (the so-called double majority).
  • Consent of all the Shareholders (unless otherwise agreed by the Shareholders)
    • However, this approach is not entirely perfect. It has a large drawback for Limited Companies because, as stated in Article 329 LSC, it requires the consent of all shareholders – both the shareholders affected by the capital reduction and those who are not. Therefore, it will be impossible to implement this approach in Limited Companies.
    • It should be noted that the amortisation of minority shareholders’ shares is subject to financial compensation. However, compensation according to the fair value or real value of the amortised shares.
  • Dissolution of the Company and Assignment of Assets and Liabilities.
    • Another of the alternatives used involves the dissolution of the company and the assignment of assets and liabilities to the majority shareholder, which is viable due to Article 81 and following of the Law of Structural Modifications of Mercantile Companies.
    • Therefore, in order to implement this alternative, the majority shareholder must financially compensate the other affected shareholders.


In conclusion, there are many legal, statutory, and other alternatives mechanisms that will allow the removal of an unwanted shareholder.

With respect to the alternative mechanisms, particularly two of the approaches are considered the most effective for the removal of minority members: the approach of capital increase and the reduction of capital through the amortisation of shares.

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