Breach of covenant partners you allow the exclusion?

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Can exclude the partner who breaks a shareholder agreement?

The movements in or out in the capital of the company because of breaches of covenant partners can be structured on options for the purchase or sale: Purchase options are set to acquire the shares of the defaulting partner or put options for the partner who has fulfilled may leave the company with the least possible adverse.

The question that arises is whether it can provide for the exclusion of the defaulting partner directly, without having established a mechanism through options.

The guiding principle is the freedom of agreements, provided that it complies with current legislation. And in this respect, Article 347 of the Corporations Act the right of withdrawal is regulated:


Article 347 Statutory grounds for separation

  1. The statutes may provide various other causes of separation to those provided in this Act. In this case will determine how must demonstrate the existence of the cause, how to exercise the right of withdrawal and the deadline for its exercise.

  2. For incorporation statutes, modification or deletion of these causes separation consent of all partners will be necessary.

It allows for causes of different legal separation but to join the statutes unanimity is required.

Also, in the definition, should determine how the cause is credited, forms and deadline.


The Corporations Act provides in Article 351 statutory grounds for excluding partners:

Article 351 Statutory causes of exclusion from membership

In limited liability companies, with the consent of all partners, statutes may join specific causes of exclusion or modification or deletion that might include them in advance.


Namely, as in the case of separation, provided that the agreement is adopted by unanimity, can establish grounds for exclusion as to be in serious breach of a covenant partner. Also keep in mind that Article 207 the Mercantile Registry Regulations requires that the causes are certain specific and precise and indubitable manner consisting of consent for the adoption of the exclusion clause by all partners: this can be done by deed or by signing all partners in the minutes of the social agreement.

To determine the default, effective solution is a declaration by arbitration award.

The next question that choosing the most appropriate mechanism arises: Articular separation or exclusion of shareholders by buying or selling options, or by statutory causes.

To choose one or the other way, should be noted that the Law of Corporations in his article 357, in order to protect creditors of the company, provides that in cases of separation or exclusion of shareholders with social capital reduction, they have the right to oppose (Arts. 333 and 334 the LSC) plus, there several liability regime outgoing partner with society in the face of creditors who have seen diminished their right.

Thus, if it is an exclusion of a partner defaulting, it may be more appropriate statutory via, so it can continue responding to the amount of the refund perceived by creditors to. But if there is a separation of a partner who is leaving because he has been harmed their interests in society, does not seem the best solution also continue to respond to the amount that would have been returned.

The harmony between the partners is essential for the functioning of a society and facilitate the departure (removal or separation) partner disagree is highly recommended. Thus, establish both mechanisms (by buying or selling options besides establishing arrangements for the removal or expulsion in the covenant partners) is the option that gives more possibilities, leaving the door open to its realization under the circumstances that occur in the future.


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