Relief for family owned companies after the restriction of shareholders’ right to withdraw for non-payment of dividends

The new wording of the controversial article 348 bis of the Spanish Companies Act (Ley de Sociedades de Capital) on the shareholder's withdrawal right for non-payment of dividends is in force as of 30 December 2018.

The new wording of article 348 bis of the Spanish Companies Act (the "LSC") intends to balance the minority shareholders' right to participate in social benefits and to preserve the financial sustainability of capital companies.

Main changes

In this sense, the new article 348 bis of the LSC modifies the following relevant aspects of the withdrawal right for non-payment of dividends with respect to its previous wording:

• The withdrawal right becomes a dispositive right, under the scope of the principle of the parties' free will set forth in article 28 of the LSC. Thus, it can be modified or removed in bylaws with the unanimous consent of all company shareholders in a general shareholders' meeting, unless the shareholder who has not voted in favour of the resolution regarding the modification or removal of said right in the bylaws is granted the right to withdraw from the company.
• The company is required to obtain benefits during the previous three years, as opposed to the previous drafting that required only obtaining benefits in the previous year. That way, if an outbreak of a year with losses occurs, that would require restarting the computation of the three-year period.
• The minimum percentage of profits to be distributed is reduced from one third to twenty-five percent, moderating the impact of the dividend distribution of the company's cash. Moreover, an additional caution is introduced to meet the weighted average percentage of the last five years, so that the dividend distribution may be lower in the years in which there are greater investment needs. The combination of reducing the minimum percentage of profits to be distributed and fulfilling a weighted average results in a considerable softening of this provision, given that the withdrawal right does not necessarily arise every fiscal year in which there is no dividend distribution, and the amount to be distributed will be lower.
• The "exploitation benefits of the corporate purpose" reference is eliminated, and "benefits" are now mentioned, thus clarifying one of the main interpretation uncertainties from the previous wording of article 348 bis of the LSC and allowing the minority shareholders to participate in the total annual result, including extraordinary or exceptional results.
• It is established that the fifth fiscal year counted from the company's registration in the Commercial Registry should have elapsed, preventing the possibility to claim the right at the beginning of the fifth fiscal year with respect to the accounts of the fourth fiscal year.
• Specific regulations are established for the dominant companies in relation to the consolidated results attributed to such companies: the parent company shareholder will have the right to withdraw when the parent company is obliged to prepare consolidated accounts if the general shareholders' meeting does not agree on the distribution as a dividend of at least twenty-five percent of the consolidated positive results attributed to the parent company of the previous year, provided they are legally distributable and that consolidated positive results attributed to the parent company during the previous three years are obtained.
• The withdrawal right of article 348 bis does not apply to the shareholders of listed companies and companies admitted to trading in a multilateral trading system, such as the Alternative Stock Market (MAB), Sports Companies, as well as companies in an insolvency situation, which have communicated the negotiations set forth in the Insolvency Law or that have reached a non-cancellable refinancing agreement as set forth in the insolvency legislation.

Requirements for the exercise of the withdrawal right for non-payment of dividends

In accordance with the new wording of article 348 bis of the LSC, shareholders will be allowed to withdraw from the company for non-payment of dividends:

• unless otherwise provided in the bylaws;
• after the fifth year from the company's registration in the Commercial Registry;
• if the general shareholders' meeting does not agree on the distribution as a dividend of at least twenty five percent of the profits obtained during the previous fiscal year that are legally distributable, provided that benefits have been obtained during the three previous years; and
• the protest for the insufficiency of the dividends is recognised in the ordinary general shareholders' meeting minutes, and the term of one month from the date on which said general shareholders' meeting is held has not elapsed.