When can a partner leave a company?

Do you know how the right of separation of a partner works? In this practical post, we explain everything a partner needs to know to leave a limited liability company.

 

How to leave a limited liability company?

Except for certain specific cases that we will discuss, there is no right for a partner to separate and leave the company. In fact, if a partner wishes to leave the business, the only option they have is to sell their shares or participations in the company.
However, the partner wishing to leave the limited liability company cannot force the other partners to buy their share of the company capital, so if they do not find an external buyer and the other partners do not wish to take on their shares or participations, they will remain tied to the company.

However, the law provides another way for a partner to leave a company, through the exercise of the right of separation.

The sale or transfer of shares or participations

In addition to selling shares or participations, they can be donated, exchanged, paid as part of a settlement, etc., to change the ownership structure of the company.
Thus, the transferring partner loses their status as a partner, and the incoming or acquiring partner gains it.

It should be noted that the remaining partners who wish to continue with the business may have a right of first refusal to prevent outsiders from entering the company, but they are not obliged to buy them.

What happens if a partner wants to sell their share? The option to sell shares or participations to leave the company is not always easy, especially in small companies that are not publicly traded.

 

Separation of partners in a limited liability company

Only in certain cases stipulated by law is the partner granted a true right of separation, reimbursing them for the capital they contributed. These situations are the following:

• Substitution or substantial modification of the company’s purpose, i.e., cases where the company’s activity changes.

• Extension or reactivation of the company.

• The creation, modification, or extinction of the obligation for partners to make additional contributions.

As a specific cause for limited liability companies, partners will also have the right to separate from the company if they did not vote in favor of the agreement to modify the transfer regime for social participations.
The Law 3/2009, of April 3, regarding structural modifications of business corporations, also recognizes a right of separation for partners in cases of company transformation or relocation of its headquarters abroad.

Additionally, in 2011, a new cause of separation was introduced through article 348 bis of the Capital Companies Law for failure to distribute dividends.

Also, through the company’s bylaws, new causes for separation can be introduced, specifying the cause, the procedure for exercising the right of separation, and the deadline for exercising it.

 

Right of separation: failure to distribute dividends

First, it is important to refer to the possibility of renunciation granted by the law (“unless otherwise specified in the bylaws,” article 348 bis of the LSC). This means that the right of a partner to separate can be removed or modified through the bylaws with the consent of all the partners.
At the General Meeting, this right can be exercised for the first time during the sixth fiscal year since the company’s registration in the Commercial Register.

Another requirement for a partner to exercise their right of separation due to lack of dividend distribution is that it must be recorded in the meeting minutes that there were no sufficient dividends.

Furthermore, the partner will have the right to separate if the general meeting did not agree to distribute at least 25% of the general profits obtained during the previous fiscal year that are legally distributable, as long as profits have been made in the last 3 years.

However, even when the previous situation occurs, the right of separation will not arise if the total dividends distributed in the last 5 years amount to at least 25% of the legally distributable profits during that period.

The deadline for exercising the right of separation is 1 month from the date of the ordinary General Meeting. In any case, the exercise of the right of separation does not prevent the challenge of social agreements or the exercise of liability actions.

The list of partners who cannot separate from the company can be found in the following post: lack of dividends and companies excluded from the right of separation

 

Requirements for the right of separation of a partner

Of course, to exercise the right of separation, it is necessary that the partner has voted against the agreements that generate the right of separation.
The deadline to exercise it is one month from the publication date of the agreement in the BORME.

Now, in the case of limited liability or public companies where all shares are nominative, the publication in the BORME may be replaced by a written communication of the agreement to all partners, and in these cases, the deadline is counted from the date of this written notification.

In order to ensure the one-month deadline is respected for the partners to separate from the company, the deed documenting the agreement generating the right of separation must contain a statement from the administrators confirming that no partner has exercised the right of separation within the established deadline or that the company, with prior authorization from the general meeting, has acquired the participations or shares of the separated partners, or reduced the capital.

 

Effects of exercising the partner’s right of separation

The exercise of the right of separation by a partner causes the company to reimburse or settle the fair value of their shares, thus severing the partner’s relationship with the company.
The company, as the purchaser of the shares from the separating partner, may hold them in treasury stock, with certain limitations; or amortize them, reducing capital.

The problem, in practice, is determining the value of the shares or participations of the separating partner. If the parties cannot agree, the law stipulates that the shares will be valued by an independent expert appointed by the Commercial Register of the company’s registered office, at the request of the company or any of the partners owning the shares or participations to be valued.

In summary, the options available to a partner who wants to leave the company are more theoretical than practical. Finding a buyer who will pay a reasonable price can be nearly impossible in the case of small companies that are not publicly traded. And a partner cannot separate from a capital company unless there is a legal or statutory cause for separation. The possibility of a pure and simple renunciation, without the consent of the other partners, to the status of a partner, which would be a third way out of the company, is not regulated in the Capital Companies Law or even in the Civil Code.

Are you a partner and want to sell your share? For more information, you can contact our experts in company dissolution.

In conclusion:

 

What happens when a partner leaves the company?

In a limited liability company, if a partner wants to leave, the process generally follows these steps:

1. Check the bylaws: The company bylaws typically regulate exit conditions, including restrictions on transferring shares.
2. Sale or transfer of shares:
   • The partner may sell their shares to other partners or, if the bylaws don’t prohibit it, to third parties.
   • The remaining partners have a right of first refusal, unless the bylaws say otherwise.
3. Reimbursement of shares: If there is no buyer or if the bylaws allow, the partner may ask the company to return the value of their shares, which may involve a reduction of capital.
4. Valuation: The value of the shares is determined according to what is stipulated (e.g., accounting or market value).
5. Post-departure responsibilities: The departing partner is not responsible for future debts, but they may still be liable for those incurred before leaving.