Mandatory transfer of shares or partnership participations

The mandatory transfer of shares or participations should be taken into consideration more rigorously than is usually done. 

Concept and system: 

The transfer of shares or participations is a very relevant issue in the evolution of companies. For that reason, it is one of the issues that cannot be avoided in any Shareholders’ Agreement. 

Sometimes, however, there are situations that cause the Partners or Shareholders to change forcibly. This happens as a consequence of judicial procedures in which there are seizures, executions of guarantees, etc. And this implies the imposition to the partners of third parties not previously chosen as part of the capital of the company. 

Forced transmission is treated differently in SL (Sociedades Limitadas, Limited Partnerships) than in and SA (Sociedades Anónimas. Limited Companies). Since the regulation of SLs is much more protectionist with partners than SAs is  with shareholders. 

Compulsory transmission in the SL:

The compulsory transfer in the SL is included in Article 109 of the Corporations Act. Specifically: 

• The company will be notified immediately of the seizure of the participations. The notification will be made by the judge or the administrative authority that has decreed it. The person who carried out the seizure and the enlisted shares will be recorded  . 
• The Company shall record the lien in the register of members’ book and notify it to all members. A copy of that notification shall be attached to this communication. 
• Once the auction has taken place, the auction and the awarding of the seized participations will be suspended. 
• A literal copy of the auction minutes or the award agreement will be sent to the company. 
• The company will send a copy to all partners within 5 days. 
• The auction or award will be firm after one month. 
• As long as the award is not firm, the partners may subrogate themselves in the position of the auctioneer (or creditor). 
• The company may be subrogated to that position if the bylaws so provide. 
• To make such subrogation possible: 
  • All the conditions of the auction must be accepted.  
  • The amount of the auction and the costs incurred must be fully recorded.
• If the subrogation is exercised by several partners, the shares will be distributed in proportion to their participation in the capital. 

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Mortis causa transfer of shares and participations

The mortis causa transfer of share and participations is a controversial and (unfortunately) recurrent issue Is the status of partner of a company inherited, or do the partners have the right to keep the shares or holdings?

Compulsory transmission in the SA: 

The compulsory transfer in the SA is included in Article 125 of the Corporations Act: 

• Statutory restrictions on compulsory acquisitions will only be applicable if they are set out in the Articles of Association. 
• In order to refuse the registration of the compulsory transfer in the register of registered shares it will be necessary: 
  • To introduce an acquirer of the shares or offering to acquire the Company itself. 

• • The value of the shares will be their fair value at the time of the request for registration. 
  • Fair value shall be understood to be that determined by an independent expert. This expert must be different from the company’s auditor and will be appointed by the company’s directors. 
  • Only restrictions on the free transferability of registered shares will be valid on nominative shares. 

Consequently, the freedom to establish restrictions on the transferability of shares is not absolute. The autonomy of will is therefore subject to the following limits: 

• It can only fall on registered shares. And so are invalid the restrictions on: 
  •  Bearer shares; 
  •  Shares admitted to trading on the stock exchange. 
• The Bylaws must quote exactly which registered shares are affected by the restriction.  
• The restrictions that make the share non-transferable are null and void. 
• Clauses that are not eligible for registration:  
  • Require the transmission of a number, which is different from the one offered for sale;  
  • Prevent the shareholder from obtaining the real or reasonable value of its shares. 
• If the transfer is conditional on the authorization of the Company, the bylaws must establish the grounds for denying it. 

The mention of the Supreme Court ruling of May 29, 2012 must be added to this. It states that: 

“Statutory restrictions on the free transferability of shares must respect the imperative requirements of the principle of enforcement. (Regime of universal patrimonial responsibility – art. 1911 CC-). Therefore, it cannot be left to the discretion of the other partners or of the company to replace the price already obtained with a lower price provided for by the statutes. So to the detriment of the creditors, part of the value of the assets that are covered by executed debt could remain for the unjustified benefit of the Partners. Nor can the exercise of the right of withdrawal be detrimental to the auctioneer”.  

If this article has been of interest, we also suggest you to read the following article published on our website: Loyalty Shares