On 29 December 2018 a new wording of article 348.bis of the Spanish Companies Act (RD 1/2010 of 2 July 2010) came into force, initially introduced by law 25/2011 of 1 August 2011. This provision empowers the minority shareholder of a company to exercise the right of separation in case of failure of distribution of dividends or insufficient distribution of the same.
Requirements for exercising the right of separation
1.- No express waiver on the side of the shareholders to the exercise of this right of separation in the bylaws,
2.- The right of separation can only be exercised after the fifth year since the registration of the company in the Commercial Register,
3.- It will be necessary for the minority shareholder to have formally recorded in the minutes of the meeting his/her protest in relation to the insufficiency of approved dividends,
4.- When the general meeting does not approve the distribution of at least 25% of the profits obtained during the previous financial year, as long as they are legally distributable, that means, that during the three previous years the result for the financial year has been positive.
In this sense, previously a higher distribution percentage was contemplated in the law, more specifically, a third of the operating profits. Currently, however, although the percentage of distribution has been reduced, it is applied to the distributable profits in their entirety, and not on the basis of the profits inherent to the exploitation of the corporate purpose.
We must stress here that the concept of the previous wording of the article has been qualified by the Provincial Court of Barcelona in Judgement 81/2015 of 26 March, under which it was interpreted that the proper result of the exploitation of the corporate object, concept not defined in the General Accounting Plan, encompasses the profit that a company obtain with its ordinary or functional activity, which is what constitutes its corporate purpose. Therefore, extraordinary profits (not derived from ordinary activity) and capital gains are excluded.
In contrast, legally distributable profits include a broader interpretation of the term, in the sense that it includes the maximum that can be allocated and distributed as dividends to the shareholders. Therefore, the result of the financial year includes the operating result but also the financial result, so that in this concept, extraordinary results and capital gains are included (ICAC Resolution of 5 March 2019).
It must be pointed out that this article will also apply to groups of companies, taking into account the result that is included in the consolidated annual accounts.
The affected shareholder may exercise the right of separation within one month from the date of the General Meeting by means of a written communication addressed to the company.
The effects that the exercise of the right of separation has in cases of non-distribution of dividends are the general effects established in the Spanish Companies Act. Firstly, the shareholder and the company carry out a consensual valuation of the shares and, secondly, in the absence of an agreement on the value of the shares. In addition, an auditor of accounts, a different one from the company’s is appointed by the Commercial Register at the request of any of the shareholders, in order to value the shares.
The right of separation may not be exercised by the minority shareholder when the dividends distributed during the previous 5 years are more than 25% of the profits of the last 3 financial years.
This new amendment is more flexible than the previous one since it allows for the removal or modification of the right of separation through the bylaws. On the other hand, it extends the rights of the minority shareholder in the sense that, even reducing the percentage of profits to be distributed (from one third provided for in the previous wording to one quarter at present), this percentage is applied to the final result net of taxes and not to the profits derived from the ordinary activity of the company, being, eventually, a higher result.
The purpose of this provision is to protect the minority shareholder’s right to the dividend against possible abuse by the majority of the shareholders. In this sense, it is not allowed to exercise the right of separation in case of not distributing dividends in a single fiscal year, but this right is excluded if the distributed dividends do meet a minimum established during a particular period of time.
In this article, we have highlighted the main features of the new wording of article 348.bis of the Spanish Companies Act. If you have any doubts, you can use the contact area of our website to consult with our Commercial-Corporate department. We will be delighted to assist you.