How to prevent the paralysis of corporate bodies in Spain

The paralysis of corporate bodies, and of the General Council in particular, is common in Spain given the high number of small and medium-sized companies composed of two partners with each owning 50% of the company’s capital.

When does the paralysis of corporate bodies occur?

The paralysis of corporate bodies takes place when its operations become impossible to carry out; that is, when the necessary majority is continuously not reached when trying to adopt agreements in the Council or Board it becomes considered a legal cause for the dissolution of the capital company, based on what is established in article 361.d Capital Companies Law (LSC).

It occurs for example when it becomes difficult or impossible to adopt basic agreements to keep the company running, such as the approval of annual accounts or social management.

Requirements for there to be cause for dissolution due to the paralysis of corporate bodies:

  • The paralysis should be permanent and insurmountable, that is, the company is unable to function. This does not entail a temporary or passing paralysis
  • It is not enough for there to be occasional incidents or provisional problems, but the concurrent circumstances must show that this is not a particular event, and that the situation will presumably continue over time
  • It must be noted that the presence of obstacles or difficulties that, by their lasting nature, allow us to assert with confidence that the paralysis of the corporate bodies constitutes a structural hazard with little to no possible solution
  • It must produce a collapse in the life of the company, rendering its normal operations impossible, in a permanent and definitive way
  • It is necessary that the situation has become clear, and that it shows the impossible nature of validly constituting the board or adopting agreements.

How can we avoid/resolve the paralysis of corporate bodies?

The bodies can produce the so-called parasocial pacts, which foresee the solutions that will be applicable in these paralyzing situations. Certain statutory clauses can even be approved for this purpose.

By way of example and as preventive mechanisms (facing) the paralysis of social bodies, there are, among others, the following:

  • Distinguished vote of the chairman of the board of directors or a particular director
  • Appointment of an independent director
  • Regulation in the bylaws on the possibility of the partner from the company to separate

In terms of the unblocking mechanisms and once the paralysis of the corporate bodies has occurred, it is worth mentioning the call & put option. This entails granting the option that one of the partners acquires the powers of the other, as according to previously agreed terms. In cases where there is a permanent blockage, the parting of one of the partners would be the most viable option.

Lara Gutiérrez

This article is not considered as legal advice

José María Mesa

With both a Business Administration degree and a Law degree, José María Mesa specializes in company law, civil-commercial contracts and mergers and acquisitions. For any further enquiries please Contact us