Spanish Supreme Court rules on mandatory distribution of dividends

One of the essential areas of corporate conflict regarding the distribution of dividends is the balance of rights between majority and minority shareholders. In this respect, the Supreme Court's criteria from its ruling of 11 January 2023 (9/2023) could have a significant practical impact.

The facts

The subject of this ruling is a limited company whose shares are divided between two shareholders. One of them holds 51% of the share capital (the majority shareholder ), while the other holds 49% (the minority shareholder). 

The minority shareholder challenged, among other things, the resolutions approved by the general meeting that decided to allocate the results of 2014 and 2015 to the voluntary reserves. The minority shareholder requested that the profits of both fiscal years (a total of €372,900) be fully distributed between both shareholders in proportion to their share in the share capital. The challenge was based on the contention  that the resolutions were adopted by abuse of the majority within the context of Article 204 of the Companies Act.

The Commercial Court dismissed the challenge. At the same time, the Provincial Court partially upheld the appeal. It ordered the mandatory distribution of at least 75% of the results for 2014 and 2015.

Legal bases

The Supreme Court upheld the judgment of the Provincial Court, and from its explanation of the legal grounds for its decision, the following can be highlighted:

Imposed in an abusive manner by the majority

The Supreme Court considered that, by depriving the minority shareholder of the logical economic return from the profits generated by the company, without any reasonable justification, the contested resolutions concerning the non-payment of dividends were adopted by the majority over the minority. 

The High Court examined the existence of the three cumulative conditions required to find abuse and summarised them as follows: the agreement must not meet a reasonable need of the company; it must have been adopted by the majority in its own interest; and it must cause unfair prejudice to the other shareholders. 

The extrapolation of these criteria to other cases will depend on the particular circumstances of each case. Where, as in this case, the majority shareholder receives an economic benefit from the company through the director's remuneration or another form of financing, it will be easier to prove abuse. Similarly, the company's cash and investment needs will be considered as a possible and reasonable need to rationalise the withholding of dividends through reserves.

Independence of Article 348.bis

The Supreme Court confirms that the shareholders have the right to exit due to failing to pay dividends under Article 348. bis of the Companies Act. This right is separate from the possibility of challenging the non-payment agreement as abusive. The legislator has expressly established this independent right in the current wording of this article.

The Supreme Court's interpretation does not limit the defence mechanisms of minority shareholders in the absence of distribution. However, in the interplay between these two possibilities, it remains to be clarified whether the fact that the minimum dividend provided for in article 348.bis (currently 25% of the profits) is distributed also prevents this agreement from being considered abusive due to the inadequacy of the distributed dividend. 

This controversial issue has given rise to different rulings, sometimes by the same court. Thus, we find judgments where the legislator's definition of a minimum reference dividend in the above provision means that what conforms to it cannot be considered abusive. To support this thesis, we could add the confirmation of the Supreme Court's decision 38/2022 of 25 January, which states that article 348. bis does not protect the shareholder's right to exit but rather the right to the dividend. Therefore, if this provision explicitly covers the dividend, its observance will imply its adequate protection without any reproach in the form of a challenge to the resolution. However, other judgments consider that the right to the distribution of dividends covers the total amount of the profits. Again, the circumstances of the case, such as the company's needs or repeated failure to distribute, must be considered to determine whether the amount distributed is sufficient.

Determination of the amount of the dividend by courts

Finally, the Supreme Court ruled on the possibility that courts could directly determine the amount of the dividend to be distributed in cases where it upholds challenges to resolutions approving the non-distribution of profits. In its ruling, the court consolidated the option that allows a judge a margin of discretion when determining the percentage of distribution. This was on the basis that the upholding of a challenge to the resolution to allocate profits to voluntary reserves means that the other legal alternative, the distribution of dividends, is understood to have been approved, in addition to the need to avoid persistent abuse. This conclusion is not uncontroversial and, however much it may be mitigated, implies replacing the will of the shareholders with a judicial decision. In this particular case, the Supreme Court upheld the decision of the Provincial Court, which opted to set the dividend to be distributed at 75% of the profit because this was done in the only distribution of dividends agreement for 2011, which had already been approved. The question is whether a single agreement sets a precedent and whether the shareholders wanted to establish a criterion for the future with this one.

Practical perspective

The Supreme Court reiterated some considerations made in its ruling 418/2005 of 26 May on the compulsory distribution of dividends and thus establishes case law. However, that ruling predates the current Companies Code and Article 348bis.

In any case, greater legal certainty in this area would be desirable. Commercial companies are living entities that work on business plans and projections, and they need clear rules whose monitoring guarantees the stability of the decisions taken by their bodies. Uncertainty as to what percentage of profits they may or may not allocate to their reserves casts doubt on the projects and risks they may wish to undertake with these reserves, especially if the possibility of the courts forcing them to distribute these reserves years later becomes widespread, thus turning the protection of minority shareholders into a tyranny of the minority.

For the time being, one measure protecting against this uncertainty would be establishing internal criteria for the distribution and appropriateness of dividends between companies, either in the articles of association or in shareholders' agreements, so that no current or future shareholder can claim their interests have been harmed since they are already aware of the criteria.