Investment approach
50/50 deadlock in an SL: shoot-out, drag-along and what the law allows
In an SL with 50/50 shares no decision passes without the other partner. The law offers few ways out, and shoot-out and drag-along clauses in the articles or in a pacto work under different rules.
In an SL with 50/50 shares, a decision on general matters does not pass if the partners vote differently: an ordinary decision needs a majority of the votes cast (art. 198 Ley de Sociedades de Capital), and an amendment to the articles needs more than half of all votes (art. 199). A deadlock is a situation in which neither side can carry a decision and there is no way to leave the company. Below are the instruments known to Spanish law and what the Registro Mercantil (commercial registry) accepts and what it does not. These are general mechanisms, not the structure of a specific project.
What ways out of a deadlock does the law itself provide?
The Ley de Sociedades de Capital (LSC) does not contain the words drag-along, tag-along or shoot-out. It provides four ways out.
| Way out | What the LSC says | Limitation |
|---|---|---|
| Sale of the shares to a third party | If the articles are silent, a sale needs the company's consent. The selling partner does not vote, their shares are deducted (art. 107, art. 190) and the other partner decides | A refusal is valid only if buyers are named for the whole holding at the stated price (art. 107.2.c) |
| Right of withdrawal (separation) | The law grants it in a narrow list of cases (art. 346) | New grounds are added to the articles with the consent of all partners (art. 347.2) |
| Expulsion of a partner | Only on statutory grounds: failure to perform ancillary obligations, breach of the non-competition ban, a court judgment ordering a managing partner to compensate the company for damage (art. 350) | For a holding of 25% or more, without the consent of the partner being expelled a court decision is also needed (art. 352.2) |
| Dissolution of the company | Paralysis of the company's bodies that makes it impossible to operate is a ground (art. 363.1.d) | The directors call a meeting within two months, then the matter goes to court (art. 365, 366) |
Dissolution is the heaviest instrument. Directors who miss these deadlines are jointly liable for the company's later debts (art. 367).
What do the articles allow and what does the Registro Mercantil register?
The articles may contain any condition that does not contradict the law or the type of company (art. 28 LSC). But in a 50/50 company any amendment to the articles needs the consent of both sides, and new obligations on partners need the consent of each partner affected (art. 291).
On drag-along, the registry itself has taken a position. The Resolución of the DGRN (the registry directorate) of 4 December 2017 held that such clauses are admissible if the circumstances of their application are described clearly and precisely in the articles, but upheld the Barcelona registrar's refusal to register a clause adopted by majority (BOE-A-2017-15582). Registration needs the consent of every partner, even if given separately from the vote. I found no later rulings on this point in open sources. How the registrar sees it today has to be checked by a query to the specific Registro.
On the shoot-out (also called a "Texas" clause or Russian roulette) there are no direct rulings of the DGSJFP or the Tribunal Supremo in the sources I checked; whether there is practice on your question is for the abogado to check. One partner names a price, and the other must either buy their shares at that price or sell their own. The legal questions are these: whether the mechanism breaches art. 108.2 LSC, which makes void clauses obliging a partner to sell a different number of shares from the number offered; how the price is valued; and how a partner without the cash to buy is protected.
Arrangements left in the pacto de socios (shareholders' agreement) bind the signatories but not the company (art. 29). Such a term has to be enforced through a court or arbitration, not through the registry.
How does a shoot-out work in numbers?
Worked example, not a forecast. Two partners hold 50% each, and one names a price of 10 M€ for 100% of the company. The other chooses: buy the 50% for 5 M€ or sell their own 50% for 5 M€. The second partner does not have 5 M€ in cash, so is forced to sell. The winner is the one with access to capital, not the one who valued the property better. That is why such clauses usually set a time limit to decide, proof of financing and an independent valuation, and which of these conditions the registry will accept is for the abogado to decide.
What should you ask the abogado and in the project contract?
- How the votes are divided: in an SL the articles can depart from the "one share, one vote" rule (art. 188.1 LSC) and from dividing dividends in proportion to capital (art. 275), so 50% of the capital does not always mean 50% of the votes.
- Whether there is a clause for a deadlock in the articles or only in the pacto, and who the parties are.
- Who appoints the independent valuer and by what method the price is calculated.
- What happens to obligations to the bank and contractors during the deadlock.
- Where to go in a dispute: court, arbitration, mediation.
- What the investor receives under the project contract if the project stops: investor exit from a project.
Who are these mechanisms not suited to?
They do not suit parties with different access to capital: a shoot-out favours the richer one. They also do not suit anyone who needs liquidity by a set date: dissolution goes through a court, and the timing is set by the procedure, not by agreement. The articles and the pacto do not replace each other, so a single provision in one document rarely settles the matter.
The form in which the project is held and the order of exit are set by the contract for the specific project. The basic forms of joint ownership are described in the article on joint investment, and a list of questions for the contract is in the article on questions for the lawyer.
Questions and answers
Can the other SL partner be forced to vote?
No. If the votes are tied, an ordinary decision is not adopted. The way out is sought through a sale of the shares, withdrawal of a partner, expulsion on statutory grounds, dissolution, or a mechanism agreed in advance.
Does a drag-along clause work in an SL?
The registry accepts it in the articles if the conditions are described clearly and it was introduced with the consent of all partners (Resolución of the DGRN of 4.12.2017). In a 50/50 company this means the consent of both sides.
What is tag-along and where is it set out?
It is the right of a minority partner to join the majority partner's sale on the same terms. The LSC does not name it; it is set out in the articles or in the pacto de socios, and the form determines whether it binds the buyer.
What happens if the articles of a 50/50 SL have no deadlock clause?
The remedies of the law remain: a sale of shares under art. 107 LSC, withdrawal on statutory grounds, and dissolution for paralysis of the company's bodies (art. 363.1.d), which, without agreement, goes through the courts. That is slow, so the exit mechanism is usually discussed with the abogado before the articles and the pacto are signed.
