A Shareholders’ Right to Withdrawal Due to a Lack of Dividend Distribution

The shareholders’ right to withdrawal due to a failure to distribute dividends is contemplated in article 348 bis of the Consolidated Text of the Law on Capital Companies of 2011, through Law 25/2011, 1st August, on the Partial Reform of the Law on Capital Companies and the Incorporation of Directive 2007/36/CEE. Its purpose is to grant minority shareholders of a company the opportunity to separate themselves from that company under certain conditions when these minority shareholders do not receive dividend distribution.

The addition of this law into the Spanish legal system has been the subject of numerous jurisprudential, doctrinal, and legislative debates, and, after only a few months of validity, it was subject to consecutive suspensions. In January 2017, it finally entered into force, but in December 2018 it was reformed with the aim of clarifying certain controversial aspects, which are listed below:

The passing of five years from the company´s registration the Commercial Register

A shareholders’ right of withdrawal takes effect from the sixth year of the company’s registration in the Commercial Register as long as the remaining requirements are met. In order for the shareholder to exercise their right, the repeated refusal of dividend distributions for five consecutive years is not necessary. Rejection during the previous financial year is sufficient, provided that they have made profits over the last three years.

The percentage required for the exercise of this right

The shareholder may exercise the right of withdrawal provided that the annual meeting has not complied with the distribution as dividends of at least twenty-five per cent of the earnings obtained during the previous financial year that are legally distributable, provided earnings have been made during the last three financial years.

The concept of legally distributable earnings is understood as the surplus once losses from the previous fiscal year are deducted, as well as the amounts allocated to legal reserves and taxes.

Shareholders’ objection to insufficient dividend distribution

After the reform, the exercise of this right is conditional solely upon the shareholders’ objection in the minutes due to insufficient dividend distribution, and it is not conditioned upon their vote regarding the proposed dividend distribution.

The possibility of the removal or statutory modification of this right

The reform includes the option to remove or amend, through statutory means, the shareholders’ right to withdrawal due to a failure to distribute dividends, provided that this is consented to by all shareholders. Any opposing shareholders will not be able to prevent the removal or amendment of the article, but they will be granted the right to withdraw.

Cases of shareholders’ right to withdraw due to a failure to distribute dividends

Article 348 bis only applies to unlisted companies. The reform increases the list of cases in which said Article’s application does not apply; for example, companies filing for bankruptcy, sports corporations, etc.

In conclusion, the withdrawal of a shareholder due to a failure to distribute dividends art.348 bis TRLOSC requires, among others, the following:

• At least 5 fiscal years must have passed since the company’s registration in the Commercial Register
• Profit must have been generated over the last three years, and the dividends distributed during the last fiscal year up until the year the right is exercised must have been less than 25% of the earnings obtained
• The shareholder who wishes to exercise their right to withdrawal must have expressed, in the relevant minutes, their objection due to insufficient dividend distribution
• Exercise of the right to withdrawal must take place within a month of the general meeting
• There cannot exist a situation in which the law does not apply (for example, listed companies, companies filing for bankruptcy, sports corporations, etc.)

The reform of article 348 bis strengthens the requirements necessary for the re-establishment of balance between the company and the minority shareholder. It protects the viability and economic stability of the company while establishing shareholders’ right to withdrawal due to a lack of dividend distribution.

Saphira Mouzayek

For further information regarding the shareholders’ rights in Spain,