The right of first refusal of shareholders in a limited liability company

Let's take a closer look at the right of first refusal, a fundamental mechanism in limited liability companies. Find out how it works and what aspects are key to its application in this article.

Preemptive right of acquisition of shareholders in the transfer of shares

Among the rights recognized to the partners of a limited liability company, the right of first refusal in the transfer of shares stands out, which gives certain partners priority over other partners or third parties for the acquisition of shares. This right allows the corporate structure to be maintained and prevents third parties from entering the company's share capital. 

That is why it is very common to include a clause in a company's articles of association regulating the requirements and procedure for the shareholders' right of first refusal. However, Royal Legislative Decree 1/2010, of July 2, which approves the revised text of the Capital Companies Act (“LSC”), regulates a supplementary regime for those cases in which the articles of association do not include anything in this regard. 

Before addressing the right of first refusal, it is essential to understand the ways in which shares can be transferred and to answer the following questions: Is the transfer of shares completely free? Are there any limitations or restrictions? To do so, we must refer to the provisions of the LSC.

Free transfer of shares by inter vivos acts

In general terms, a transfer is considered free when a partner can voluntarily transfer or assign their shares inter vivos without the need for prior authorization from the company or the activation of the right of first refusal by the other partners. Unless the articles of association provide otherwise, the LSC includes as cases of free transfer of shares the transfer made in favor of partners, direct family members (spouse, ascendants, or descendants), or companies in the same group.

Right of first refusal subject to the Articles of Association or the supplementary regime

Except in cases of freely transferable shares, the transfer of shares is subject to the rules established in the articles of association or, failing that, to the supplementary regime contained in the LSC.

This supplementary regime is established in Article 107 of the LSC, which stipulates that any shareholder who wishes to transfer their shares to a third party must notify the company's administrative body in writing. This notification must specify the number and characteristics of the shares to be transferred, the identity of the purchaser, the price, and the terms and conditions of the transaction.

Once this notification has been made, the company may, by resolution of the general meeting, authorize or refuse the transfer. However, if the company does not authorize the transfer of the shares to a third party, it must inform the transferring partner of the identity of one or more partners or third parties who are willing to acquire all of the shares under the same conditions. Such notification is not necessary if the transferor attended the general meeting where the resolution was adopted, and the partners attending the general meeting have preference in the acquisition. If several shareholders wish to acquire the shares being transferred, they shall be distributed pro rata, according to their share in the share capital.

However, in the event that there are no purchasers, the company may acquire the shares, provided that such acquisition has been authorized by the general meeting and is made from profits or freely available reserves, all in accordance with the provisions of Article 140 of the LSC.

It should be noted that the price, form of payment, and conditions of the transfer shall be those established by the transferring partner and communicated to the company, and in the event that the transfer is not carried out by means of a sale or is made free of charge, the parties must agree on the price and, failing that, determine it according to the fair value of the shares, which shall be set by an independent expert, other than the company's auditor, appointed by the directors.

Finally, the transfer must be formalized in a public deed and carried out within one month of the company communicating the identity of the purchaser, and if within three months the company has not presented a purchaser, the partner may freely transfer their shares.

Therefore, if a partner decides to transfer the shares they hold to a third party, unless the articles of association regulate a specific procedure, they have a legal obligation to notify the administrative body in order to follow the procedure analyzed above, not as a mere courtesy or voluntary preference, but as a legal mandate that protects the company's shareholding structure. In this sense, the right of first refusal not only strengthens the stability of the corporate group, but also balances the individual interests of each partner with the preservation of order within the company.

Can this right be limited or eliminated?

With reference to the above, the LSC allows a company's articles of association to limit the right of first refusal. However, Article 108 of the LSC sets out a series of limits that must be taken into account when drafting the provisions of the articles of association. This article establishes that clauses shall be null and void if they:

1. make the voluntary transfer of shares inter vivos practically unrestricted, given that restrictive clauses that constitute a legal restriction must always be established, or be subject to the supplementary regime;
2. oblige a partner to transfer a number of shares other than those that they actually need to transfer; 
3. prohibit the voluntary transfer of shares by inter vivos acts without granting shareholders the right to withdraw from the company at any time, unless a time limit of no more than five years from the date of incorporation or from the formalization of the capital increase is established.

In summary, although there is freedom to regulate the right of first refusal and the transfer of shares in general, this regulation must be carried out in accordance with the limitations established in the LSC.

Can some partners have priority over others in the acquisition of shares?

As a general rule, all shares confer the same rights on shareholders. However, apart from the supplementary legal regime and taking into account at all times the prohibited statutory clauses, there is freedom to establish a statutory regime of restrictions, which will prevail over or complement the supplementary regime, provided that it does not imply a practically free transfer or an absolute prohibition without the right of separation of the shareholders.

The freedom of statutory regulation allows for the establishment of shares with a special regime different from that provided for in the LSC and even the design of specific differences in certain aspects, which gives the company flexibility when implementing strategies adapted to different groups of shareholders, who may be differentiated by class, allowing, in these cases, provide as a typical restriction clause an exclusive right of first refusal for shareholders holding shares of one class over shareholders holding shares of another class, strengthening the position of shareholders with preferential rights.

Conclusion: An unbreakable right or a matter of statutes?

The right of first refusal is a key tool for preserving corporate stability, granting its beneficiaries priority in the acquisition of shares before they are transferred to third parties, but at all times complying with the provisions of the articles of association and, subsidiarily, the LSC. 

Likewise, the possibility that the articles of association may establish a right of first refusal for some shareholders over others allows certain shareholders to be granted a dominant position in the acquisition of shares, meaning that the right of first refusal not only protects the stability of the company, but can also be a strategic tool for protecting the participation of certain groups of shareholders.

Therefore, before relying on the existence of this right, it is advisable to carefully review the articles of association and the LSC and understand under what conditions it actually operates. 

You can contact our expert lawyers here for the best possible advice.

María Soucheiron and Diego Gómez

Lawyers in the commercial and corporate area