Many shareholders have, at some point, suffered the effects of problems arising at the time of selling their company. In some cases, the way partners of the said company choose to act can seriously affect stockholders. The reason is simple: there is no existing standard legislation for societies transactions.

Although partners all share good intentions at the time of constitution, internal discrepancies usually appear along the way. Discrepancies are in fact common, especially when shareholders' economic interests start to diverge. As a result, we can regularly observe the following situations:

1. - The majority partner has found a buyer interested only in his part of shares. The offer made would then not cover the purchase of the holding of the minority partner. In this case, the minority partner must:

•  Maintain his participation and risk to lose all control he had within the society or over the distribution of dividends. This could happen following the arrival of a new partner with a different control policy.

•  Have to accept a lower offer for his part of participation.

2. - The majority partner receives an offer for the purchase of his participation, but the buyer is interested solely in acquiring 100% of shares. In this case, the success of the operation will depend on the minority partner, who has the right to refuse selling his participation, or to demand an excessively high price.

As we already mentioned, there is currently no legislation that can be used to solve these types of conflicts between partners. To protect their interests, partners must then think of including special clauses in the partners agreement document, in the statutes of the company, or in the transaction contract. These clauses can be:

•  Drag Along: rights of the majority shareholders to force minority partners to sell in a situation where the offer made would fulfil established conditions – usually of price - previously agreed. In few words it is the right for a partner to force the others to sell their holding.

•  Tag Along: rights that allow minority stockholders to sell their titles at the same price and under the same conditions stated in the offer made to the controlling party. In brief, it is the right for minority partners to have their participations also acquired by the third party.

Capital-risk companies regularly use these types of clauses to regulate the sale of shares in the different managerial projects they take part in. This way they can avoid future discrepancies. In addition, we advise business people and private investors who hold or intend to acquire participation in a business, to rely on such type of clauses in order to avoid possible future risks .

Claudio Brugueras Ripol
Lawyer, Corporate & Finance Dept.
AGM Abogados, SPAIN