How to deal with a drought of dividends – LeQuid, Spain
The lack of dividend distribution is one of the main factors of conflict as it invalidates the main reason why partners decided to invest in the society. Majority partners occasionally take advantage of their position to approve abusive agreements on matters of dividend distribution. As a consequence, it is a common practice among capital societies to not distribute dividends over successive years, withholding remuneration from minority partners.
- Right of withdrawal
Act 25/2011 of 2 August, reforming the Capital Companies Act, introduced article 348 (2) in the Capital Companies Act, which aims to provide protection against the absence of dividend distribution by regulating the right of withdrawal for this reason. This consists of the minority partner’s option to leave the company in the event that minimum dividends are not distributed, while within their reach. In the event this right is exercised, the majority partners have to repurchase the shares of the minority partner and let them leave the company.
This possibility gave great power to minority partners so there was a danger that they could make use of the right of withdrawal disproportionately or abusively. As a consequence, in June 2012 the article’s application was suspended (with Act 1/2012 of June 22) and this has been extended up to 31 December 2016 (with Royal Decree Act 11/2014 of 5 September)
- Current situation
At present, there does not yet exist any clear solution provided in the regulations as exercising the right of withdrawal remains suspended. However, suspension does not affect the right of withdrawal exercised in the term of the article’s validity, that is, from 2 August 2011 to 22 June 2012..
But this is not the only way for minority partners to defend themselves. In such cases, it is possible to resort to case law doctrine regarding the abuse of rights. Furthermore, Act 31/2014, of 3 December, regarding the Improvement of Corporate Governance, has specifically provided this doctrine among the reasons for challenging company agreements as a result of the abusive imposition of an agreement by considering it as damaging to company interests.
- Actions to carry out
The way for minority partners to act in these cases is to challenge the agreement to not distribute dividends due to abuse of rights by applying art. 7.2 of the Civil Code, and art. 404.1 of the Capital Companies Act.
The basis that supports minority partners in such cases is the absence of an accredited cause justifying the agreement to not distribute dividends, thereby damaging company interests. That is, the majority approves in its own interest and against the interests of the rest (art. 204.1 LSC)[1].
For the agreement to be justified, the majority’s arguments have to pursue the interests of the shareholders as a whole (from a contractual point of view) and the company (from an institutional point of view). Therefore, if they damage the minority they are considered abusive (Supreme Court Ruling 07/12/2011).
The following circumstances determine that the agreement can be considered abusive:
– It does not respond to the company’s reasonable needs.
– It is adopted in the majority’s own interest.
– It gives rise to unjustified damage to partners’ interests (dissidents, those who voted against or did not vote by not attending the meeting or for having no vote).
- Legitimisation and term
As regards legitimising a challenge, 1% of equity (individual or joint) is required.
The term of expiry for challenging the agreement is one year as from approval of the agreement (art. 205.1 LSC). Nevertheless, within stock market-listed companies, the term is shortened to three months (art. 495.2 [c]) LSC).
- Conclusion
In conclusion, unless there exists a legal or statutory restriction, the majority cannot refuse to distribute dividends except when there is a sufficiently justified cause, bearing in mind the company’s situation. Otherwise the agreement may be considered abusive and can be challenged.
[1]In this respect, the Expert Committee’s report says that this represents an extension of the concept of company interests. It states that our case law has been reluctant to include these cases even though it is true that, on occasions, conflict has been solved by channeling it through abuse of rights. This doctrine has been applied, particularly, in reiterated agreements to not distribute dividends whose purpose damages minority interests (SAP Valencia 7th, 15 September 1997).