Mergers and Acquisitions newspaper New
The recent Resolution of the General Directorate of Registries and Notaries (DGRN), dated December 4, 2017, is relevant as it resolves in favour of the possibility of registering the so-called Drag-Along clauses or drag clauses into the Companies Registry, therefore, including them in the Articles of Association. This possibility was already being backed up by the DGRN and accepted by the company registrars, but now the DGRN, with this resolution, highlights relevant aspects to be taken into account.
The Drag-Along or drag clause consists on an agreement between partners to enable one or more of these, so that in the event of receiving an offer from a third party to acquire most or all of the Share Capital (usually the total capital), the offer recipient (s) will be able to oblige the other partners to transfer their stock or social shares, following the same terms and conditions offered. The inclusion of these clauses in the Articles is justified on the basis of Art. 188.3 of the Trade Registry Regulations (RRM), which establishes:
“The Association Articles Clauses which impose on the partner the obligation to transfer their shares to the other partners or to third parties shall be subscribed in the Trade Registry when the circumstances are clearly and accurately expressed in The Articles.”
The basic requirements for understanding there is a clarity and accuracy compliance are as follows (must be recorded in the Articles of Association):
- previously established manner and periods of exercise of the law;
- minimum applicable price for forced transfer;
- minimum percentage of the share capital that can force all other partners to sell;
- priority or not of this right of dragging in regards to the right of preferential acquisition by the members;
- and, as highlighted by the resolution from the 4th of December, the consent of all partners.
In particular, the DGRN Resolution from the 4th of December 2017 was delivered in relation to the following drag clause:
“Where one or more shareholders, individually or jointly, equal or represent more than 65% of the share capital, are willing to accept an offer of purchase of all the Capital Shares of which they are entitled, and that offer is conditional upon the purchase of a number of shares greater than the number of shares held by such partners, they shall be entitled to require and oblige all other partners, as well, to transfer their shares to the Third Party Stakeholder, on the basis of each partner’s participation in the Share Capital, with the social participations of their ownership which are necessary to cover the offer of the third party, provided that the price offered is the highest value of the following three: (…) Exercising the right to drag, the remaining members shall be obliged to sell their shares to the third party, in the terms indicated (…).”
While we do not see the full content of the clause submitted for registration for this case, we see it complies with the general guidelines. However, the most relevant part of this Resolution concerns the need for approval by all partners of the inclusion of the Drag-Along Clause, understanding that their establishment implies the creation of an individual obligation by each partner, as a cause of statutory exclusión.
In this sense, the DGRN recalls that the principal protection of the partners in the modification of the share transfer system is the right of separation of the members (Art. 346.2 LSC). However, it is evident that the Drag-Along is an obligation of the members and, therefore, the individual consent of each one of them applies (art. 292 LSC), without being sufficient the safeguard of the right of separation. As a result, it is required to have a unanimous approval by the General Board, or if unanimity by the General Board is lacking, it may be supplemented with the subsequent individual consent of those members who have not approved the Drag-Along Clause during the Board Meeting (Art. 207.2 of the rules of the Trade Registry). The fact that the DGRN clarifies that it is necessary to have the consent of all the partners it’s because it qualifies the Drag Clause not as a mere clause of restriction of transfer of Share Capital or Stocks, but as a cause of exclusion, regulated in the Art. 207.2 RRM as follows:
“In order to register the introduction into the Articles of Association of a new cause of exclusion or the modification or deletion of any existing statutory causes, it will be necessary to have a public deed as evidence of consent by all partners or to have as a result an Express Consent in the form of an Act of the Relevant Association Agreement, which must be signed by such members.”
This precision stated out by the DGRN is relevant, as it makes clear that: (i) to include a Drag-Along all the partners must accept it and (ii) that its formalization can be made through a General Board Meeting with the presence of all the partners and, in case when not all have attended, the consent of those who did not approve the agreement may then be collected afterwards.
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