Corporate deadlock and liquidation of companies in Spain
Published on 23rd Sep 2022
Two recent cases examine whether, given the impossibility to liquidate a company due to a corporate deadlock, a court can invalidate certain resolutions at the request of one shareholder.
In the course of commercial transactions, it is common to find companies with a share capital that is controlled by two equal shareholders, that is, each of the shareholders holds half of the share capital and voting rights. If, as a result of a conflict between the shareholders, the functioning of the corporate bodies becomes irregular so that it prevents the company from achieving its corporate purpose, known as corporate deadlock, the company incurs legal grounds for dissolution in accordance with Article 363.1 d) of the Spanish Capital Companies Law ("LSC").
Ruling number 879/2022 issued by the Provincial Court of La Coruña on 1 April and ruling number 1048/2021 issued by the Commercial Court number 13 of Madrid on 23 March analyse whether, in the event of a dissolution, the courts can invalidate, upon the request of one of the affected shareholders, the resolutions adopted at the general meeting rejecting: (i) the liquidation operations report; (ii) the final liquidation balance sheet; and (iii) the proposal of distribution of the resulting company assets, and, thus, approve the liquidation of the company in cases where one of the shareholders is obstructive, in a manner contrary to good faith and corporate loyalty.
Challenging negative corporate resolutions
At the company's general shareholders' meeting, resolutions are adopted on each of the items on the agenda, regardless of the direction of the vote cast by the shareholders. If the proposal for an item is accepted, it is deemed to be a positive resolution; if the proposal is rejected, it is a negative resolution.
In the past, there had been debate on whether negative resolutions could be challenged. It was considered that, when the majority required to approve a proposal was not reached, the resolution on that proposal was non-existent and, therefore, could not be challenged. This interpretation meant that it would be impossible to request judicial remedies to adopt a rejected proposal.
However, ruling no. 2735/2015 issued by the Civil Chamber of the Spanish Supreme Court on 2 June 2015 recognised that negative corporate resolutions are indeed corporate resolutions. In other words, when the proposed resolution is rejected at a general meeting, there is no absence of resolution, but rather an expression of the will of the shareholders not to approve such resolution. This means that negative corporate resolutions can indeed be challenged.
The grounds on which a negative resolution can be challenged are related to the defence of legally protected interests. Thus, any negative resolution that has produced legal effects or any resolution that is deemed to have had irregularities when adopted (in the sense that if such defect or irregularity had not arisen there would have been a positive resolution) can be challenged.
Liquidation of a deadlocked company
The irregular functioning of corporate bodies, known as corporate deadlock, leads to the company being subject to legal dissolution in accordance with article 363.1 d) of the LSC. After the shareholders have agreed on the dissolution of the company or after its dissolution has been judicially declared at the request of any of its shareholders (Articles 364 and 361 of the LSC, respectively), the liquidation process begins (Articles 383 et seq. of the LSC).
It may seem counter-intuitive that once the company's liquidation process has begun, the corporate deadlock situation may persist. However, according to Article 390.1 of the LSC, the liquidator must submit three items: (i) the liquidation operations report; (ii) the final liquidation balance sheet; and (iii) the proposal of distribution of the resulting company assets for approval at the general meeting of the deadlocked company. In other words, one of the shareholders with 50% voting rights may reject the resolutions that need to be approved to liquidate the company and, thus, once again, the company may be paralysed.
The rejection of the resolutions does not, in itself, constitute an abusive exercise of voting rights. But if the rejection is unjustified and systematic, solely for the purpose of preventing the company's extinction and thus preventing the other shareholder from being able to collect the liquidation quota, that would amount to conduct that violates the legally protected rights of the other shareholder. For this reason, the shareholder harmed by the deadlock needs the protection of being able to challenge company resolutions.
Consequently, if the sole aim of the shareholder who is voting against is to unjustifiably block the liquidation of the company, the judicial authorities may withdraw the negative resolution, since rights must be exercised in good faith and in accordance with the principle of loyalty which is expected of all shareholders towards the company itself and the other shareholders.
However, as a consequence of the annulment of the negative resolution, the judicial protection of the injured party would not come to an end, as the approval of the resolutions required by law for the liquidation of the company would still not be accepted by the other shareholder. The courts have therefore opted, in addition to annulling the negative resolution, to declare the resolutions relating to the three documents necessary to liquidate the company approved.
Osborne Clarke comment
By means of the judicial approval of the resolutions proposed at the general meeting, the defect of the obstructing shareholder is eliminated and the positive content of the resolution is made effective, confirming the company's will and achieving effective protection for the disadvantaged shareholder.