«There is nothing that war has achieved that we could not have achieved without it», said the British author Havelock Ellis years ago. This phrase, which refers to armed conflict in its most literal sense, also applies to certain disputes that arise within companies, especially when a partner dispute breaks out. In these situations, having the advice of a commercial lawyer specialising in shareholder disputes is vital.
It is common for companies to face certain disagreements between shareholders throughout their existence. However, to understand how to dissolve a company with a blocking shareholder, what matters legally is not so much the personal friction between partners but the functional impact on the business.
If this tension ultimately prevents the company from adopting basic resolutions needed for its normal operation, we are facing paralysis of the corporate bodies, and art. 363.1.d) of the Spanish Companies Act («LSC») comes into play.
This ground for dissolving a limited or public limited company sanctions the objective impossibility of the company operating, in the broadest sense of the term. Spanish case law has repeatedly addressed shareholder disputes, paralysis of corporate bodies and grounds for dissolution by disagreement.
The problem of equally-owned companies is one of the most common before the Spanish courts. Below, we analyse how case law resolves these «technical tie» situations.
A clear example is the judgment of the Provincial Court of Barcelona (Section 15), no. 349/2013 of 8 October (ECLI:ES:APB:2013:11247). In that case, the partner dispute arose from a corporate deadlock situation, where each of the two partners held 50% of the share capital, which made decision-making within the company impossible.
After analysing the facts, the judgment found a prolonged deadlock situation lasting at least the last four financial years, during which even the annual accounts had not been approved. The judgment also notes that a merely occasional paralysis is not enough to invoke the ground for dissolution set out in art. 363.1.d) of the LSC; it must be a permanent and definitive paralysis for the continuation of the company, such as the impossibility of approving the management report and accounts prepared by the directors. The truly relevant point is the objective situation of paralysis and the impossibility of adopting resolutions, regardless of the underlying reason why each group of partners refuses to adopt the company resolutions.
The answer is yes. The judgment of the Provincial Court of Tenerife, no. 325/2017 of 20 September (ECLI:ES:APTF:2017:2188), ordered the dissolution of a limited liability company because of paralysis of the corporate bodies due to total disagreement between the two groups of partners, who each held half of the share capital.
This situation had prevented general meetings from being held and any resolution from being adopted. Moreover, continued operation of the company with positive results does not eliminate the ground for dissolution set out in art. 363.1.d) of the LSC. Finally, the judgment ordered the judicial appointment of a liquidator, since the appointment could not fall on either of the two joint directors of the company, whose dispute caused the paralysis.
In a similar sense, the order of the Provincial Court of León (Section 1), no. 9/2023 of 20 January (ECLI:ES:APLE:2023:335A), ordered the dissolution of a company in which two groups of partners each held 50% of the share capital. In that case, it was established that the disagreements between partners had existed since the company’s incorporation and could not be regarded as occasional, sporadic or temporary, but were instead persistent over time and prevented the adoption of any company resolution.
Lastly, we can also mention the judgment of the Provincial Court of the Balearic Islands (Section 5), no. 265/2016 of 26 September (ECLI:ES:APIB:2016:1776). In that case, again, dissolution was ordered under art. 363.1.d) of the LSC, because a permanent confrontation was established between the only two partners, each holding 50% of the share capital. The Court ordered the opening of liquidation proceedings and the judicial appointment of a liquidator.
Not every dispute or lack of agreement justifies closing the company. The Provincial Court of Barcelona (Section 15), in its judgment no. 291/2018 of 27 April (ECLI:ES:APB:2018:3119), ruled in the opposite direction and refused to dissolve a deadlocked limited company because there was an effective «governance key» in place: the usufructuary (the father of both partners), who held voting rights over a significant block of shares and could therefore break the deadlock.
In this case, the Provincial Court of Barcelona explained that company dissolution is not a preventive measure and cannot be based on hypothetical deadlocks; if a mechanism is in place that can reasonably unlock the Shareholders’ Meeting, there is no «permanent and insurmountable» paralysis. The Court stressed that the outcome of future votes cannot be anticipated nor can the exercise of a valid power of attorney be prejudged, because a dissolution request under art. 363.1.d) of the LSC must correspond to a real and insurmountable deadlock that makes the company’s operation impossible. In other words, the deadlock must be insurmountable, clear and definitive.
In short, for a ground for dissolution under art. 363.1.d) of the LSC to succeed on the basis of paralysis of the company, very strict requirements must be met. There must be a real, permanent and absolute paralysis; mere hypotheses about future disagreements or deadlocks that do not exist on the face of the share capital distribution are not enough to order the dissolution of the company.