Prevention and Resolution of Deadlock in Limited Liability Companies

In Spain, limited liability companies (S.R.L.) are the most common business structure. However, these companies can face legal challenges and deadlocked situations that impact their proper functioning. Understanding these situations is crucial for making informed decisions and protecting investments.

Deadlock can occur in the General Meeting or the board of directors but between the two the most concerning and usual deadlock happens in the General Meeting. Specifically, deadlocked situations can arise in companies where two partners hold 50% of the voting share capital. This situation can lead to company paralysis due to the inability to make decisions, potentially resulting in judicial dissolution as stipulated by Spanish law.

Mechanisms to Prevent Corporate Deadlock

Partners should include mechanisms in the corporate bylaws and shareholder agreements to avert or resolve conflicts. These documents can address the following:

• Clearly defining specific causes that can trigger a deadlocked situation
• Including clauses or specific mechanisms in the bylaws or shareholder agreements to resolve deadlocks, such as:
  • Forced sale of the non-compliant partner’s shares
  • Implementation of a secret bidding system before a Notary
  • Involvement of an independent third party to mediate the conflict
• Establishing penalties for partners who abusively provoke deadlocked situations contrary to principles of good faith.

Implementing these measures can significantly contribute to preventing undesirable corporate situations and resolving them for the benefit of one or both parties.

Mechanisms to Resolve Corporate Deadlock

Once a deadlock occurs, obtaining sound legal advice is crucial to negotiating the disputed corporate agreements.
As a last resort, the company can undergo judicial dissolution if there is a paralysis of the corporate bodies, making it impossible for the company to function, as indicated by Article 363.1(d) of the Spanish Capital Companies Act.

Conclusion

Preventive mechanisms in the corporate bylaws and shareholder agreements prevent and resolve deadlocks in S.R.L. in Spain. These mechanisms help address conflicts before they materialize, protecting investments and ensuring the company’s proper functioning. In the case of a deadlock, appropriate legal advice is vital for negotiating agreements and, if necessary, judicially dissolving the company to avoid complete paralysis.

If you need additional information regarding the corporate deadlock in Spain,