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In this article, we shall provide a general outline of the recent Resolution of the General Directorate of Registers and Notaries (Dirección General de Registro y Notariado – DGRN) of 4th December 2017, regarding the statutory modification of the company share transfer system for limited liability companies, in the context of establishing drag along rights.
II. Drag along rights.
A drag along clause consists of, when receiving an offer for the purchase of the majority or all of the shares of a company, one or various shareholders who are prepared to accept said offer, are entitled to and have powers to oblige the rest of the shareholders to also sell their shares to an interested third party under the same terms and conditions.
This type of clause is not expressly envisaged in our legal system, although such clauses may be included both in shareholders’ agreements (with internal effects) as well as in the company bylaws («erga omnes» effect), protected under the principal of freedom of statutory will ex article 28 of the Capital Companies Act.
In summary, the drag along right acts as a protection mechanism for the majority shareholder to prevent abuse on the part of minority shareholders via obstructionist behaviour which may compromise the positive outcome of the efficient transfer of controlling interests.
III. The General Meeting Quorum
In this case, registration is refused for a deed bringing into public the company decisions to modify bylaws in respect of the system for transferring shares in a limited liability company agreed by the majority of the shareholders in the General Meeting.
The refusal of registration by the Commercial Registry upholds that establishing a drag along right in the company bylaws requires the unanimous agreement of all of the shareholders, otherwise it may imply the exclusion of those shareholders who are forced to fulfill said right (articles 291 and 351 of the Capital Companies Act), rather than the enhanced majority necessary for the bylaw modification as set forth in article 199.a of the same act.
Nevertheless, in said Resolution, the DGRN adds a relative clarification: the consent of all of the shareholders does not necessarily have to be expressed in the form of an agreement unanimously adopted by the general meeting in which all shareholders were either present or represented, however, a majority agreement shall be sufficient, providing that all the other shareholders give their consent thereto individually in the same general meeting or subsequently (pursuant to article 207.2 of the Commercial Registry Regulation).
Thus the general meeting may adopt an agreement to modify the bylaws along the lines of adding a drag along right via an enhanced majority, although for registration at the Commercial Registry it shall be necessary for the rest of the shareholders to give their consent in the general meeting itself or subsequently.
Carla Villavicencio Goula
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26th of January 2018