6 grounds for expelling a partner/shareholder from a Mexican company.

Generally, partners decide to incorporate a company based on the trust among them. If a good relationship among the partners  does exist, it would be easier for a company to meet its short, medium and long-term goals.

It may happen that, as in any relationship, confidence deteriorates,  resulting in a group of partners willing to expel a partner from a company.

Though, unlike other types of relationships, the process to expel a partner is not automatic and cannot be materialized for any reasons. The present post will address the grounds to expel a partner from a Mexican entity, in accordance with the general corporations and partnerships law (“GCPL”).

Grounds for expulsion

The grounds to expel a partner will differ depending on the type of corporation. For example, in non-stock companies (sociedades de personas) where the partners are the most important attribute of the corporation, the expulsion grounds are clearly defined  by the law.

On the other hand, when it comes to stock corporations,  the shareholders’ contributions are what really matter. Hence, the grounds for expulsion shall be agreed by the shareholders and established in the company’s articles of incorporation and amendments thereto.

In a general partnership (sociedad en nombre colectivo), which is a typical example of non-stock corporations, the partners are entitled to expel a partner, for the following grounds:

First. If the partner is engaged in the same type of business that the company, or if it is part of other companies that have the same corporate purpose, unless otherwise agreed by  the other partners,

Second. If the partner uses the company’s full powers of representation or capital for its own business,

Third. If the partner breaches the company’s bylaws.

Fourth. If the partner commits fraud or malicious acts against the company.

Fifth. If the partner faces a commercial insolvency proceeding, interdiction or is disabled to do business.

The grounds above listed are also applicable for limited partnerships (sociedades en comandita simple) and for stock partnerships (sociedades en comandita por acciones). However, for the latter companies the five grounds above will apply only with respect to general partners, namely, those that are absolutely, jointly and severally liable for the partnership’s business.

Except for the first and fifth grounds, all the remaining grounds listed above apply to expel a partner in limited liability companies (sociedades de responsabilidad limitada).

Grounds for expulsion in a limited liability stock corporation (sociedad anónima)

Before June 13, 2014, the GCPL did not contemplate grounds to expel a shareholder from limited liability stock corporations.

A collegiate court decided that the grounds for expulsing a partner that apply to non-stock partnerships were incompatible with limited liability stock corporations. This is so because the said grounds counterpose the conservation principle of limited liability stock corporations.

In addition, according to the court, limited liability stock companies have administration and surveillance bodies as well as a decision making democratic regime that will allow them to avoid that the shareholders incur in grounds for expulsion in the first place, and if so happens, punish the shareholders without the need to expel them from the company (decision number  I.7º. C. 161 C).

Nevertheless, because of a GCPL reform that came into effect on June 14, 2014, now the shareholders are allowed to include in a company’s bylaws the provisions that establish grounds for expelling shareholders.

Of course, the shareholders’ meeting will be able to amend the company’s bylaws to add grounds for expulsion or cancel them totally or partially.

What happens if no provisions regarding grounds for expulsions are contemplated in the bylaws of a limited liability stock corporation? Shall the grounds for expulsion for general partnerships apply?

In my opinion, they do not apply. This is so because if lawmakers would have wanted general partnerships’ grounds for expulsion apply to limited liability stock corporations, lawmakers would have established so in the GCPL, as they did for example, with limited partnerships.

Finally, there is a sixth ground for expulsion in limited liability stock corporations, which is expelling a defaulter shareholder.

Indeed, once the term for paying the shares expires, the company may: (ii) require payment by filing a claim before a court, or (ii) sell the shares. If after a month of having the payment become due, no claim has been filed, or the shares sale was not possible, then the shares shall be cancelled, and the relevant capital stock must be reduced.

This will result in the expulsion of a defaulter shareholder.

What happens after that a shareholder is expelled from a company? What happens if the partner is expulsed unlawfully? These points will be developed in a coming post.