How to Resolve a Shareholder Dispute in a Spanish SL Without Destroying the Company

Problems and disputes between shareholders are a normal part of any company’s life. Not every difference of opinion justifies going to court, nor does it mean that the company has ceased to be viable. However, there are situations in which the conflict reaches such an intensity that the company stops functioning normally. Annual accounts cannot be approved, essential resolutions cannot be passed, directors are unable to manage day-to-day affairs, and every decision requires a consensus that never comes.

In these circumstances we are no longer dealing with a simple dispute between shareholders, but with a genuine corporate deadlock — a situation that the Spanish Companies Act expressly recognises as a legal ground for dissolution.

This is a relatively common situation in small and medium-sized enterprises, particularly when the share capital is split fifty-fifty and both shareholders also hold the position of director. What initially may have appeared to be a mechanism of mutual control can, on occasion, become an obstacle to the very functioning of the company.

When does a genuine corporate deadlock exist?

Not every disagreement between shareholders allows a petition for the judicial dissolution of a company.

The courts have consistently required that the paralysis of the corporate bodies be real, permanent, and structural in nature, such that it prevents the normal functioning of the company and the adoption of resolutions that are indispensable for the conduct of its business.

In practice, some of the indicators that typically reveal this situation include the impossibility of approving the annual accounts, the failure to pass resolutions on the management of the company, repeated disagreements regarding the accounting treatment of income and expenditure, the inability to validly convene the general meeting, and the paralysis of decisions that are essential for the company to meet its tax, employment, and commercial obligations. These elements appear repeatedly in case law and constitute an important starting point for establishing that the company has ceased to be operational.

It is therefore not sufficient to demonstrate a poor personal relationship between the shareholders. What is decisive is showing that the conflict has affected the functioning of the company and has prevented its corporate bodies from fulfilling the functions assigned to them by law.

Before going to court, the corporate route must be exhausted

The procedural requirement under Articles 365 and 366

One of the most common mistakes is to assume that, once the conflict has been established, a claim seeking judicial dissolution can be filed directly. The Spanish Companies Act does not permit this.

Articles 365 and 366 establish a prior procedure that constitutes a genuine procedural requirement. Where a legal ground for dissolution exists, the directors must convene the general meeting so that the shareholders may decide whether to agree to dissolution or to adopt measures that will eliminate the deadlock. Only if the meeting is not convened, cannot be held, or, once held, refuses dissolution or fails to pass any resolution at all, may the matter be referred to the courts. Failure to follow these steps may result in the claim being dismissed, as the courts may consider that the mechanisms available under company law have not first been exhausted.

The consequences of failing to promote dissolution

This aspect is particularly significant because directors also have a statutory duty to promote dissolution when a legal ground for it exists. Inaction may even give rise to personal liability for the company’s debts incurred thereafter.

Can a joint director convene the general meeting alone?

One of the issues that has generated the most litigation in recent years concerns companies managed by joint directors (administradores mancomunados).

The traditional position of the DGSJFP

Traditionally, the Directorate-General for Legal Certainty and Public Faith (Dirección General de Seguridad Jurídica y Fe Pública) had held that the convening of the general meeting must be carried out jointly by all joint directors, except in the exceptional cases expressly provided for by law. This was stated, amongst other occasions, in its Resolutions of 11 July 2013 and 12 February 2020, on the grounds that allowing one director alone to convene the meeting would undermine the very basis of the joint management system.

The change of approach: Supreme Court Judgment 424/2019

However, this interpretation has been qualified by the courts.

Supreme Court Judgment (First Chamber) No. 424/2019, of 16 July (Appeal No. 3784/2016) draws a clear distinction between powers of representation vis-à-vis third parties and the internal management functions of the company. The convening of the general meeting falls within the second category and, accordingly, its validity must be assessed having regard to the specific circumstances of each case.

The Supreme Court recalls that the joint management structure can itself give rise to deadlock situations where the unanimity required for management prevents even the convening of the general meeting. Precisely for this reason, it accepts the validity of meetings convened by some of the directors where the others subsequently demonstrate their approval by means of unequivocal conduct — as occurs when all of them attend the meeting without raising any objection to its being held or to the agenda.

Beyond the specific outcome of that case, the judgment highlights a particularly important principle: company law cannot be used as a tool to artificially perpetuate deadlock situations that make it impossible for the company to function.

Evidence of the deadlock is decisive

In judicial dissolution proceedings it is not enough to assert that a dispute between shareholders exists; it is necessary to demonstrate that the deadlock is genuinely affecting corporate life and decision-making.

In this regard, particular importance attaches to notices of general meetings, minutes recording disagreements, communications between shareholders, the failure to approve the annual accounts, and any document capable of demonstrating that the company’s essential decisions cannot be adopted as a direct consequence of the existing conflict.

Negotiation remains the best solution

Although the law provides mechanisms to bring these situations to an end, experience shows that litigation should always be a last resort.

Judicial dissolution proceedings typically drag on for years, and in the meantime the company continues to bear the consequences of the conflict between its shareholders.

For this reason, wherever possible, it is advisable to explore negotiated solutions, such as the purchase and sale of shareholdings, the withdrawal of one of the shareholders, amendment of the management structure, or the incorporation of dispute resolution mechanisms into the company’s articles of association.

That said, when the conflict has become a permanent state of affairs that prevents the company from functioning and compromises its ability to fulfil its legal obligations, judicial dissolution ceases to be an exceptional measure and becomes the instrument that the legal system places at the shareholders’ disposal to prevent the dispute from causing even greater harm to the company itself, its creditors, and those who manage it. When faced with a genuine deadlock, having a commercial lawyer involved from the outset makes it easier to find a negotiated way out before the matter reaches the courts.