Designing the exit of a shareholder as an essential element of the business

In the two previous instalments of this series, we addressed bylaws as a legal design tool for the business and the shareholders’ agreement as a governance and economic-balance tool. Both articles shared a common premise: corporate law is not only a mechanism for protection against conflict, but a design tool serving the business project.

Within this framework, the regulation of the shareholder exit cannot be left behind. Despite its practical importance, it remains one of the main unresolved issues in most corporate structures.

In practice, the exit is probably the scenario that generates the greatest conflict in the life of a company. Not because it necessarily implies the failure of the project, but because it is often not anticipated. Shareholders devote time and resources to defining how they enter, how they invest and how they govern the company, but rarely regulate how they may leave it. When the moment arrives (because of disagreements, changed circumstances or simply because a shareholder wants to step away), the absence of clear rules turns what should be an orderly transition into a corporate dispute with economic, operational and reputational consequences.

Shareholder exit as an inherent contingency of the business project

The share capital structure of a company is not static. Shareholders’ personal and professional circumstances change, their economic expectations evolve and their view of the business may diverge over time. Death, incapacity, retirement, the entry of a competitor or a simple strategic disagreement are common scenarios which, if not regulated, may lead to institutional deadlocks, disputes over share valuation and prolonged court proceedings.

Anticipating the exit is therefore not an exercise in distrust; it is an act of responsibility and professionalisation of the business project, consistent with the principle of freedom of contract (article 1255 of the Spanish Civil Code) and with the possibilities offered by the Spanish Companies Act. In closely held companies or companies with balanced shareholdings, this should also be coordinated with contractual mechanisms for resolving corporate deadlocks.

Key elements in designing the exit

Designing the exit means establishing, either in the bylaws or through a shareholders’ agreement, a set of rules that answer the following questions.

A. Type of exit

Not all exits arise from the same cause or should receive the same treatment. At a minimum, it is useful to distinguish between:

• Voluntary exit: the shareholder wishes to leave the project.
• Forced exit or exclusion: the remaining shareholders consider that one shareholder’s continued presence is harmful to the company, for example due to a serious breach of corporate obligations or conduct contrary to the corporate interest.
• Exit by legal cause: death, supervening incapacity or insolvency of the shareholder.

Each scenario requires different mechanisms in terms of entitlement, procedure and economic consequences.

B. Valuation of shares

This is undoubtedly the most conflict-prone point in practice. In the absence of an agreed criterion, the determination of the fair value of the shares is subject to discussion and often to litigation. It is therefore advisable to consider objective share valuation criteria from the initial design of the company.

There are several possible options: book value, enterprise value with or without discounts for illiquidity and size, EBITDA multiples, discounted cash flow or valuation by an independent expert appointed by the parties or by the Commercial Registry (article 353 of the Spanish Companies Act). What matters is that the criterion is defined in advance and is reasonable and applicable to all parties.

A common example: in a company owned by an industrial shareholder and a financial shareholder, it may be agreed that the valuation will be carried out using EBITDA multiples for the last three financial years, with an adjustment mechanism if there is a dispute over the accounting figures.

It should be borne in mind that article 353 of the Spanish Companies Act provides that, in the absence of agreement, valuation is to be carried out by an independent expert appointed by the Commercial Registry, taking the fair value of the shares as the reference. The case law of the First Chamber of the Spanish Supreme Court has consolidated an approach that requires looking at the value of the company as a productive unit, without automatically equating it with mere book value or liquidation value.

C. Implementation procedure

An effective design does not only define when the exit takes place and at what price, but also how it is implemented. This includes:

• notice and exercise periods;
• pre-emption rights in favour of the remaining shareholders;
• payment terms for the price (single payment, deferred payment with security, etc.);
• dispute-resolution mechanisms (prior mandatory mediation or arbitration) to avoid a direct resort to ordinary courts.

D. Differentiated economic consequences: good leaver and bad leaver

Especially in companies with managing shareholders or investment structures, it is common to distinguish the economic consequences of the exit depending on its cause. A shareholder leaving the project for justified reasons (good leaver) will usually receive the full value of its shareholding, while a shareholder leaving because of a breach or in an unjustified early manner (bad leaver) may see the acquisition price reduced, usually to nominal or book value.

These clauses, common in shareholders’ agreements linked to investment transactions and founder vesting plans, must be carefully calibrated so that they are proportionate and enforceable.

The legal framework and its limits: why the law is not enough

The Spanish Companies Act regulates withdrawal (articles 346 to 349) and exclusion of shareholders (articles 350 to 352), but it does so through a minimum regime which, in many cases, is insufficient for the needs of the business project.

The legal grounds for withdrawal are limited to specific cases (replacement or substantial amendment of the corporate purpose, transfer of the registered office abroad, amendment of the transfer regime for shares, among others), which do not cover most situations arising in practice. Similarly, exclusion requires a resolution of the general meeting and, if the affected shareholder does not accept it, the challenge moves the dispute to court (article 352 of the Spanish Companies Act). In practice, this turns many exclusion processes into lengthy and costly litigation.

Accordingly, contractual design through statutory grounds for withdrawal and exclusion and complementary mechanisms in the shareholders’ agreement is not only advisable, but almost essential to provide the business with an operational and effective exit framework. The effectiveness of those agreements should also be assessed in light of good faith and the shareholders’ consistency with what they have agreed, as reflected in the case law on shareholders’ agreements and good faith.

In this respect, the Directorate General for Legal Certainty and Public Faith has repeatedly accepted the validity of statutory grounds for withdrawal and exclusion (articles 348 and 351 of the Spanish Companies Act), provided that they respond to a legitimate interest and that the procedure safeguards the rights of the affected shareholder.

The exit as part of the overall design

When designing a company, we are allocating power (who decides), risk (who is liable) and economic return (who receives what and how much). The exit is the fourth coordinate of that design: who leaves, when, under what conditions and with what consequences.

A well-designed exit mechanism has a threefold protective function:

• It protects the exiting shareholder by ensuring a fair procedure and a reasonable valuation of its shareholding.
• It protects the remaining shareholders by preventing the exit from destabilising the company’s governance or financing.
• It protects the business by ensuring operational continuity regardless of changes in the share capital structure.

Three scenarios where exit design is decisive

The importance of the above can be illustrated by three common practical situations:

(i) Family business with generational succession

Two siblings inherit a limited liability company in equal shares. One wants to continue the business; the other would prefer to liquidate its shareholding. If the bylaws do not provide an exit mechanism with defined valuation criteria, the only route is agreement (which is difficult when positions are opposed) or, failing that, judicial dissolution due to paralysis of the corporate bodies (article 363.1.d of the Spanish Companies Act). A well-designed exit mechanism would have allowed the situation to be resolved through a compulsory sale at an agreed market value.

(ii) Startup with a departing co-founder

Three shareholders found a company to develop a digital platform. After two years, one of them leaves the project. Without vesting clauses or a bad leaver provision, that shareholder retains 33% of the share capital without contributing to the business, while keeping full political and economic rights. The remaining shareholders are forced to negotiate from a weakened position to recover effective control of the company.

(iii) 50/50 company with strategic disagreement

Two industrial shareholders disagree on profit distribution policy: one wants to reinvest and the other wants to distribute dividends. Without corporate deadlock mechanisms (such as a compulsory buy-sell mechanism or arbitration), the company becomes paralysed.

Practical checklist for designing shareholder exit

Before incorporating a company or reviewing its corporate documentation, it is useful to verify whether at least the following matters have been regulated:

• which events allow the voluntary exit of a shareholder;
• which causes justify exclusion or forced exit;
• whether specific rules exist for death, incapacity, retirement or insolvency;
• which valuation criteria for shares will apply;
• whether an independent expert must intervene and how that expert is appointed;
• which notice, acceptance and implementation periods apply;
• which pre-emption rights the remaining shareholders have;
• how the price will be paid and what security will exist;
• which economic consequences apply to a good leaver and to a bad leaver;
• which mediation, arbitration or deadlock mechanisms are triggered in case of conflict.

Conclusion

If corporate practice shows anything, it is that the most serious conflicts do not necessarily arise in the worst businesses, but in those that failed to anticipate change. A profitable project can destroy value if its shareholders do not have an orderly path to separate when their paths diverge. In this respect, careful configuration of exit scenarios ensures that the business structure continues to function, even when people and circumstances change.

Shareholder exit should therefore be understood as an essential part of corporate design and should be coordinated from the outset with the bylaws, the shareholders’ agreement and, where relevant, the documentation of small-market M&A transactions.