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The resolution of the General Directorate of Registries and Notaries (Dirección General de Registros y Notariado  – “DGRN”) dated 31st July 2018 settled the matter concerning the legality of drag-along and tag-along clauses, by pointing out the limits to the free will of the partners (shareholders) regarding establishing restrictions upon the free disposal of membership interests (shares) in a limited liability company.

In substance, the tag-along clause which was intended for registration at the Commercial Registry established that if the holders of one class of membership interests (shares) were to decide to transfer all or a part thereof to a third party, and where this would represent more than 50% of capital, the rest of the partners would have a tag-along right to transfer to the purchaser of the membership interests under the same terms and conditions as the seller.

The drag-along clause established that if, once 5 years had lapsed since the incorporation of the company, a partner or even a third party were to offer to buy the totality of the membership interests, the seller may obligate the rest of the company partners to transfer their membership interests to the assignor under the same terms and conditions.

The registrar of the Commercial Registry rejected the registration of both of the above clauses, for the following reasons:

  • They contain no provision in the event that the buyer does not want to purchase all of the membership interests (shares) or for cases where the rest of the partners do not wish to participate in the tag-along right. Likewise, there is no provision for what may happen if the partner promoting the transfer operation withdraws from it.

Therefore, the basis of the qualification was not the illegality of the provision, but rather the consideration that said dispositions were deficient in their drafting, since they did not foresee certain sets of facts.

The DGRN decided to overturn the decision of the registrar of the Commercial Registry and allow the registration of the drag-along and tag-along clauses, based upon the following arguments:

1) As a general consideration, the limited liability company has an eminently “closed” character,  thus with the exception of “inter vivos” transfers between partners or cases involving acquisition on the part of the spouse, ascendant or descendant of the partner or companies belonging to the same group of companies as the transferor, the transfer shall be restricted by the terms of the company bylaws. However, the bylaws may not allow the practice of free transfer of company membership interests under any circumstances. And if the bylaws do not provide for anything in this regard, articles 107 and 108 of the Spanish Capital Companies Act (Ley de Sociedades de Capital – LSC) shall apply on a supplementary basis.

2) In view of the supplementary principle of the LSC in this matter, the partners are entitled to establish alternative limitations on the transfer of membership interests (shares), provided that the partner is assured of a reasonable possibility of transfer or the possibility of exiting the company in order to avoid the partner being a prisoner of his membership interests. Otherwise, this would constitute a violation of article 348 of the Civil Code and of the general principle of negotiability of goods.

3) Statutory restrictions on the transfer of company membership interests (shares) that do not violate the aforementioned principles and respect legal prohibitions must be understood as lawful.

In conclusion, the DGRN declares that the registrar may examine the legality of the statutory precepts that provide for restrictions on the free transfer of membership interests (shares), but he may not enter into discussion regarding the opportunity thereof, given that within this framework, the partners are free to establish the rules they consider appropriate for maintaining the closed character that defines limited liability companies.

Eduardo Vilá

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11th of October, 2018

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