About the inscription on the Mercantile Registry of the “drag along” clause yet again
The freedom of the shareholders to negotiate, derived from the autonomy of the will of the company contract, allows the creation of clauses and rights more or less atypical, in relation to the provisions of the Law on Corporations (hereinafter,”LSC”). One of these clauses is the so-called “drag along” clause.
Configured as a mechanism to protect the majority shareholders, it avoids the obstructionist techniques of the minority shareholders, resulting in the effective transfer of control positions over the company being acquired. Thus, when a buyer is interested in acquiring, not only the shares of the share capital intended to be sold, but all or part of the remaining share capital that is not related to the transaction, the use of the “drag along” clause would allow, as a carryforward mechanism, to oblige the remainder or part of the rest of the shareholders to transfer their shares or holdings.
Possibly the most outstanding note of this figure is its atipicity. Not regulated, but not banished from our Legal System, the scientific doctrine is peaceful in its adaptation to our Company Law, although it is not without nuances, after years of hesitation. It could be said that its “gateway” to our Law is article 188.3 of the Mercantile Registry Regulations (hereinafter, “RRM”). This provision provides for the inscription of statutory rules requiring the shareholder to sell his shares, inside or outside the company, under “circumstances clearly and precisely expressed in the articles of association”. Given its registrable nature, it seems reasonable to draw the logical consequence, ex-ante, of its legal validity, given the function of registry control to qualify “the validity of the dispositive acts contained in public deeds” (Articles 6 of the RRM and 18 of the Mortgage Law). Since it is only in the form of a notarial deed that a registration of a statutory amendment relating to a “drag-along right” (according to Article 94.1., 1st and 2nd of the RRM) can be applied for, it is clear that it is only at the discretion of the Registrar that the validity and registration of such clauses can be decided upon.
The key, once again, is to clarify the disparity of registration criteria in this regard. For this reason, the recent Resolution of the Directorate General of Registries and Notaries’ Offices (hereinafter “DGRN”) of 4 December 2017 (Official State Gazette of 27 December 2017) dismissing the appeal and confirming the Registrar’s decision not to include a “drag along” clause in the framework of a statutory reform, which does not require unanimity of all partners for approval, is particularly interesting. The Resolution is interesting because it rejects a criterion that, although sufficiently well-armed in its arguments, conflicts with the protection of the most basic subjective right of any shareholder: that of avoiding depriving him or her of a right that previously existed in its patrimonial sphere. Let’s see how it evolves.
Faced with the modification of the statutes of a limited company, by means of a public deed of public transfer of the recorded agreements, the Registrar’s qualification was negative, with correctable defects, because the unanimous agreement of all the share capital for the statutory reform regarding the “drag along” right was not required. In view of this, the appellant makes an interesting plea in favour of majorities, for the better protection of companies’ control change operations and in response to abuses by minority shareholders. It is curious that neither the appellant nor the DGRN should make any reference to article 200.1 of the Spanish Corporations Law (LSC), which expressly prohibits the requirement of unanimity for the adoption of resolutions at the general meeting of the limited company. It would have been an interesting argument, since certainly the precept is emphatic and without apparent exclusions. In any case, its wording cannot serve as a lex specialis for deciding on a particular case: the need for individual acceptance of the shareholder in everything that could harm him/her (according to section 291 of the LSC).
However, their argument cannot be sustained. Just as the tyranny of the majority cannot infringe the rights of minority shareholders, minorities cannot subjugate the rest of the share capital. However, from a detailed analysis it can be seen that this does not happen in the assumption that brings us here. There is in no way an abuse of the minority, but simply a defence of its subjective right that had been recognized. This is, of course, the right of preferential acquisition, a personal and patrimonial right, probably the most individual of all the rights that can be conferred to a shareholder in the articles of association. This right is a counterpoint to the “drag-along” right.
Probably aware of this, those responsible for the drafting of the statutory clause under discussion, in paragraph 3, foresaw the prevalence of the preferential acquisition right over the “drag-along right”. However, it is insufficient in so far as the most minority shareholder of all cannot be excluded from deciding on its shareholding or on its own preferential acquisition right.
Consequently, this pleasantly protectionist line inaugurated by the DGRN should be welcomed, guaranteed with the autonomy of the will and victorious against the rigidity of the RRM (already expressed by the Resolution of the DGRN of 20 May 2016 (Official State Gazette of 9 June 2016), following the inscription of a “tag along” clause) and in the tone of previous demonstrations, even in the jurisdictional sphere. (Judgment of the Provincial Court of the Balearic Islands No. 232/2010, of 15 June, declaring the nullity of a surprisingly registered statutory clause, whereby any selling partner could only sell all its shares).
Written by José Ignacio Bernardo, Lawyer, Corporate Law Department