Authorization clause: when buying equity does not make you a partner

3 Jun 2024

The authorization clause allows a commercial company to decide whether or not to admit as a partner anyone who wishes to acquire (or even has acquired) shares or participations in its capital stock. When put in this way, it is a clause that can generate some surprise, since the holding of capital seems to grant without any doubt the condition of partner, but the truth is that it does not always have to be so and, in fact, there are cases in which it can be convenient that it is not so, as in the case of a family company.

What is the authorization clause?

Also known as "plácet", this clause is part of the set of restrictions on the transferability of shares and participations, whose main objective is to maintain the capital stock in the hands of the business family, which is why it is one of the most common contents of a family protocol. Its function is, therefore, to allow control over who is going to join this capital, beyond the fact that they may or may not acquire part of it.

It may not make no difference who becomes a member

The natural basis of the relationship between a commercial company and the persons that comprise it is the contribution of capital. From this point of view, therefore, the contribution of this capital, at the time of incorporation or with its subsequent purchase, would be sufficient in principle to become a shareholder. In fact, any person can become a shareholder of any listed company by purchasing its shares through a secondary market such as the stock exchange. The operation is simple and clear: by buying the stock, one automatically becomes a shareholder.

However, it is perhaps necessary to point out a difference that is not only terminological, but also legal: the difference between being a partner and being a shareholder. The status of shareholder is held by those who have capital in a public limited company, which is the model par excellence of an open company, i.e. a company designed so that participants can come and go, to the extent that only this type of company can become listed. On the other hand, the status of partner is granted to those who have their capital in a limited liability company, which is just the opposite, since it is the paradigm of a closed company. For this reason, together with other reasons, it is most common for a family business to be organized precisely as a limited liability company.

The condition of shareholder is acquired, as we said, with the simple purchase of capital. That of partner, on the other hand, requires a receptive act on the part of the company, consisting of the inscription in the Register Book of Partners. And although this act is generally a mere formality, once it has been confirmed that the acquisition has been made in a valid manner, depending on the way in which the transfer of capital is regulated, it may have greater significance when there is an authorization clause.

The existence of this clause is based on an essential premise, which makes a lot of sense in the family business: the company is not indifferent to who holds the status of partner. Hence, the intention is to convert what could be a formality, the registration in the Register of Shareholders, into a real determining factor on which may depend, in the end, whether or not one becomes a full shareholder of the capital and, therefore, of the company.

Need for legal certaninty in its application

While it is perfectly valid for a company to have this authorization clause, as provided for in Article 123.2 of the Mercantile Registry Regulations, it is necessary for it to comply with a couple of requirements that provide it with the necessary legal certainty. Above all to avoid two effects that are neither proper nor desirable: on the one hand, that the clause could lead to refusals to admit shareholders for discriminatory reasons; on the other hand, that it could end up becoming an arbitrary way of preventing transfers of share capital.

The first requirement is that the clause be included in the articles of association. In this way, any third party interested in acquiring shares will already know that this restriction exists. Therefore, it is not enough that the clause is included in the family protocol, but it must also be included in the bylaws and duly registered in the Commercial Registry.

The second requirement is that, in its content, the clause must include the exact conditions that the future shareholder must meet, as well as the reasons for which access could be denied, as expressly required by Article 123.3 of the Capital Companies Act. They should be as clear and concise as possible, avoiding the risk of contradictory interpretations and, therefore, possible disputes that could end up in court. In the case of family companies, it is clear that the basic condition for obtaining authorization will be precisely the condition of being a member of the entrepreneurial family.

As can be seen, both requirements seek to ensure the greatest legal certainty of the clause, allowing it to fulfill its proper purpose, but without giving rise to arbitrariness.

The mechanism for authorization

The authorization for the entry of a new shareholder must be granted by the company itself, so that its administrators, insofar as they are the ones who represent it, are the ones who must process and resolve any request in this respect. It is possible that this competence is attributed to the general meeting, although it will be necessary for this to be expressly stated in the bylaws, which can be incorporated into the clause itself.

Leaving the matter in the hands of the administrative body makes it possible to speed up the procedure, and it is not necessary to convene the meeting when, given that the authorization clause is well drafted and structured, the resolution of any request should be practically automated. After all, it is a decision that is not discretionary, whether it is left in the hands of the administrators or whether it is made at a general meeting, since it will be constrained by the conditions, both positive and negative, contained in the clause itself. It could also be interesting, in those family companies that have specific, ad hoc governing bodies, such as a Family Council or a Family Assembly, to entrust them to decide on the issue, even though they must also do so within the margins that the clause itself grants for this purpose.

To set the process in motion, it is sufficient for the transferring shareholder to inform the company - through its administrative body - of the identity of the future acquirer, as would be done for the exercise of a preferential acquisition right, although with the particularity that the response can only be the granting or refusal of the authorization, without offering the other shareholders the possibility of being subrogated to the position of the acquirer.

A very little used resource

Despite the usefulness it may have for the protection of the unity of the capital, for the maintenance of the ownership of a family business, the truth is that authorization clauses are very rare in Spain. This is not the case in other neighboring countries, since they do have a long tradition in Germany, Italy or Switzerland. This may be due to a large extent to the lack of knowledge of this resource, perhaps because we generally assimilate, as an automatism, that the acquisition of securities entails the condition of partner without there being anything to discuss or object to. Or it may also be due to the fear that, with this type of clause, the transfer of securities may be too complicated, although this can be resolved by establishing in such cases a right of separation in favor of the partner to whom a transfer has been refused, because the company does not accept that it could be concluded with the proposed acquirer. This solution was expressly admitted by the Directorate General of Registries and Notaries in its Resolution of May 20, 2016.

It is a solution that is also applicable to corporations. Even when the essence of this type of company is to facilitate (and perhaps even encourage) the movement in its capital stock, nothing prevents its bylaws from incorporating an authorization clause, in those cases in which the company understands that the identity of the shareholder is not indifferent to it.

Depending on the legal form of the company and, in particular, on the interests to be protected through this authorization clause, it will have to be configured in one way or another. Our family business lawyers are used to work in this type of issues and, therefore, they can find the formula that best suits each case.