The right of separation due to a failure to distribute dividends as set out in art. 348 bis Capital Companies Act (CCA). The impact on M&A processes related to highly leveraged (unlisted) companies

Can the entry into force of the right of separation due to the non-distribution of dividends as set out in art. 348 bis CCA damage the contractual, corporate and guarantees structure designed to protect investors and/or financers?

In recent weeks there have been many publications in the press warning of the legal and economic-financial difficulties of the resurrected right of separation of the shareholder set out in art. 348 bis of the Capital Companies Act (“CCA”) following the expiry of its suspension period on 31 December 2016. The said article recognises the shareholder to separate from the company (and demand their liquidation share in the company) when the general meeting does not resolve to distribute as dividend of at least one third of the company´s profits from operating the corporate purpose obtained during the previous financial year. This right may be exercised once the company reaches its fifth financial year of the registration of the company at the Commercial Registry. This issue is particularly relevant in relation to its exercise by minority shareholders who are not aligned with the management or business strategy, insofar as the wording of the article seems to presume that the lack of dividend distribution is of itself a situation of oppression or abuse by the capital majority.

Beyond the debate that has arisen as to its wording and the requirements to fulfil the exercise of such a right, in this article we want to draw attention to certain warnings to be taken into account in M&A operations involving highly financed non-listed companies, for the purposes of the valuation of capital input, category of return of the investment and in knowledge of the corporate environment.

In the legal and financial level, entering into a financing or refinancing agreement carries over obligations on the company (as financed and as distributor of the dividend) and on the shareholders (as guarantors and as recipients of the dividend) by restricting the distribution of dividends in order to favour or ensure repayment of the debt.

Furthermore, in the legal-corporate sphere, the analysis of the shareholder structure, statutory provisions, shareholders´ agreements (arising on many occasions due to granting of financing) and resolutions of the General Meeting gain more importance, as well as reviewing of precedents in matters of  corporate behaviour (minutes relating to gatherings of the General Meeting and Board of Directors).

Could the entry into force of art. 348 bis CCA damage that contractual, corporate and guarantees structure?

As a first approximation, in case of  previous contracts existing in which the minority has waived their right to request dividends as is the case of a financing agreement with restrictions to its distribution during a certain period of time, the exercise of this right of separation would mean going against their own actions and even be branded as bad faith.

However, pending future resolutions on this matter by the General Directorate of Registries and Notaries and judicial bodies that are likely to “flourish”, actions to strengthen the investor and/or lending financial institutions should be explored in situations of the exercise of this right to collect by the minority, with the following two issues being of particular importance.

On the one hand, the debate around the possibility of transferring restrictions on the exercise of the right of separation laid out in art. 348 bis CCA to the company statutes is reopened through the incorporation within the statutes of exclusions to their application when there are grounds of company interest or compliance with obligations to third parties that justify it. In this way, what was agreed in the internal company sphere (mainly through shareholder agreements) and with the financial institution (through entering into financing contracts and the corresponding security package) would also become known and recognised by third parties thanks to its registration and publication. In this sense, although the majority of scholars agrees that we are dealing with an unwaiverable and therefore non-adjustable right, there are others that support the possibility of a personal waiver by the shareholders based upon, amongst other arguments, the legal requirements of unanimity for the statutory modification, the absence of an express provision prohibiting such a modification, the consideration of the right as an exclusive personal interest and the absence of harm of the interest of others.

Secondly, shareholders´ agreements and other kinds of agreements for the waiver by the minority shareholders should be reviewed since the exercise of the right of separation in breach of such agreements could be compensated (or penalised) with the compensation applicable  in the contractual-private sphere (notwithstanding that judges can moderate these penalties).

It is unknown whether it is due to the political ups and downs of 2016 or even as a measure of support or endorsement for the proclaimed upturn of the Spanish economy after years of crisis, but the truth is that there has been no further extension to the suspension of the application of art. 348 bis CCS agreed in May 2015. Will the multitude of reflections and comments published through various channels serve to jog the memory of the legislator and boost a legislative improvement of that article?