The shareholder’s right to withdrawal in Spain for non distribution of dividends

Article 93 a) of the Spanish Companies Law (LSC in Spanish) expressly recognizes the shareholders’ entitlement to participate in company profit-sharing. Nevertheless, it is not an automatic entitlement, since, in principle, the General Shareholders’ Meeting decides each year whether the profit yielded shall be destined to establish or increase voluntary reserves or whether it shall be distributed among the shareholders.

The decision whether or not to engage in profit-sharing within a company tends to be one of the most common sources of disagreement in company activity.

Law 25/2011 incorporates new article 348 bis to the LSC which recognises that shareholders of unlisted public limited companies, limited liability companies and limited partnerships have the right to withdraw in the event of non-distribution of minimum dividends (a third of profits yielded in the period for which the financial statements have been approved). The effect of this new provision shall be seen in the first few months of 2012, when the 2011 financial statement is being approved.

The right to withdraw is recognised from the company’s fifth accounting period on as of the date of entry into the Trade Registry and must be implemented within one month from the date the Regular Shareholders’ Meeting is held. Legitimacy to enforce this right corresponds to the shareholder that voted in favour of the distribution agreement.

When enforcing the legitimate right to withdrawal, the company shall be bound to provide the shareholder with a refund of the fair value of the latter’s company shares or stocks. If an agreement is not reached on the value thereof, said value shall be determined by a financial statement auditor appointed by the Trade Registry upon request of the company.

Although the new provision does not set down the basis for calculation of distributable profits, we can conclude that said profits are those resulting from the company’s regular activity, which is why extraordinary profit or loss shall not be included, nor shall be any surplus recognised in the statements or any restructuring operating reserves.

Nevertheless, the new article 348 bis of the LSC may give rise to various uncertainties, among which it is worth highlighting the following:

Can one lawfully deny the right to withdrawal to a dissenting shareholder when the company is undergoing a difficult financial situation?

This issue is raised whenever the company operation could be endangered if profit-sharing were conducted.  The minority shareholder must act in good faith. In some cases, the company may choose not to recognise the right to withdrawal and it shall then be the shareholder who must bring matters against the company and the latter must defend the fact of prioritising the company’s best interest in the face of the latter’s abusive conduct towards the minority shareholder.

Can the articles of association repeal the rule set forth by said article?

This provision should, in all cases, be unanimously approved by the shareholders, yet without stating that the company shall never distribute dividends, since this would be in breach one of the fundamental principles of a company. Said provision could set out a minimum dividend to be distributed, yet lower than a third of the profits yielded in the company’s accounting period, the financial statements of which are approved.

In addition, it could determine non-enforcement of said provision in specific cases of severe illiquidity or when financing investment projects.

If in doubt, it is advisable to prevent conflict due to non-distribution of dividends by means of the following:

  • Review of the company purpose in the articles of association to adapt it to the company activity insofar as possible. The company profit to be distributed shall be determined from the contents of the company purpose.
  • Introducing articles of association provisions clearly specifying any potential allocation of profit or loss for the shareholders, regardless of whether they are majority or minority shareholders.
  • Resorting to arbitration and, therefore, the arbitrator shall be the one in charge of determining the amount allocated to profit-sharing.

The main aim of the new provision herein is to ensure greater protection to minority shareholders or stockholders, although it is clear that certain issues arise thereof, which directly affect the company operation and may even pose particularly severe issues that may have been prevented by means of other measures, while observing the company’s best interest as a priority over any individual minority shareholders’ interest.

This article is not considered as legal advice

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