21 July 2017

Shareholders' right of separation due to the lack of distribution of dividends: practical issues

On 2 October 2011, Article 348 bis of the Spanish Companies’ Act (hereinafter, “LSC”) was enacted by means of Law 25/2011, dated 1 August, by virtue of which the Spanish Companies’ Act was partially amended. Said Article 348 bis LSC sets out a new circumstance under which shareholders of non-listed companies could exercise the right of separation as a result of the non-distribution of dividends by the company. Further to the new content of Article 348 bis LSC, from the fifth anniversary of the company’s incorporation and registration with the relevant Commercial Registry, the shareholders who voted in favor of the distribution of dividends shall hold a right of separation in the event that the General Shareholders’ Meeting of the company does not approve to distribute at least one third of the profits allowed to be distributed by Law and obtained by the company during the last financial year closed as a result of the carrying out of the activities relating to its corporate purpose.

However, such provision has been applicable for only 9 months since its enactment. Due to the serious economic crisis underwent by Spain since 2012, Article 348 bis LSC was suspended to application by virtue of (i) Law 1/2012, which suspended its enforceability until 31 December 2014; and (ii) Royal Decree-Law 11/2014, which extended this suspension until 31 December 2016, which was subsequently confirmed by Law 9/2015.

To our knowledge, and further to the recovery of the Spanish economy, no additional rulings envisaging new suspensions of Article 348 bis LSC are expected. As such, said provision shall be applicable to the General Shareholders’ Meeting resolutions whereby the allocation of the profits obtained from the activity of the company is approved, as of 1 January 2017. 

The possibility to limit the right of separation of the shareholders through the by-laws of the company 

One of the most extensively discussed issues regarding the right of separation of the shareholders is whether it is possible, to condition or even suppress it by means of a resolution unanimously approved by the General Shareholders’ Meeting to amend the by-laws of the Company. Such hypothesis is based on an analogous application of Article 347 LSC, according to which “the by-laws might set out other causes triggering the shareholders’ right of separation than those set out by the LSC”.

It is our understanding however that Article 348 bis LSC is a provision of imperative nature, non-voidable and irrevocable by the shareholders, given it sets out a legal cause of separation protected by article 346 LSC, whereas the causes of separation set out by Article 347 LSC are of statutory nature.

In addition, in accordance to the wording of Article 347 LSC, it is evidenced that the lawmaker avoided including therein references such us “unless otherwise provided in the by-laws of the company”. However, Section 1 (d) of Article 346 LSC sets forth a legal cause of separation which does include such reference. The argument herein envisaged is reinforced by the fact that both the draft of the new Article 348 bis LSC proposed by the General Codification Commission (Comisión General de Codificación) and the amendment to it proposed by Convergencia y Unió Parliamentary Group, intended to include said reference; however, these proposals did not succeed in the parliamentary process. Therefore, in light of the above, we strongly believe that no amendments to the provisions set out in the by-laws in order to suppress or limit the shareholders’ right of separation would be effectively accepted.

The possibility to limit the right of separation of the shareholders by means of a shareholders’ agreement

Notwithstanding the above and as an alternative to the tightness established by the Spanish corporate law and its application to the by-laws of Spanish companies, entering into a shareholders’ agreement should be a valid, licit and advisable option to such effects. The shareholders’ agreements should contain (i) a dividends’ distribution policy in accordance with the business plan of the company; and (ii) be subscribed by the minority shareholders, in order for them to renounce or limit the exercise of their right of separation set forth in Article 348 bis LSC.

However, in this respect it must reminded that, as set out in Article 29 LSC (relating to the non-enforceability against the company of reserved matters agreed among its shareholders’) and settled case-law, the shareholders’ agreements are not enforceable against the company. Therefore, in the event of suppressing or limiting the minority shareholders’ right of separation by entering into a shareholders’ agreement, the only action subject to claim in this regard would be a breach by the minority shareholders of the undertakings to which they are bound further to the execution of the shareholders’ agreement provided they intend to exercise their right of separation.

Particular issues concerning the financing agreements

The application of Article 348 bis LSC will undoubtedly entail legal conflicts between the company and its minority shareholders. In particular, that should be the case in the context of financing or refinancing agreements. Such agreements typically foresee clauses seeking the preservation of the solvency and liquidity of the debtor by preventing the company from transferring resources to its shareholders. For that matter, such scenario should be foreseen in the financing agreements to be subscribed and shall basically consist in (i) reflecting in their wording that the exercise of the right of separation by the minority shareholder will not entail an early termination of the financing agreement; (ii) allowing a minimum distribution of dividends which prevents the exercise of the right of separation; or (iii) adopting individual commitments by virtue of which the shareholders undertake not to exercise the right of separation due to lack of distribution of dividends during the term of the financing agreement.

The financing agreements already in place containing covenants such as those above represent a more troublesome scenario. In this case, the exercise of the right of separation by a shareholder could trigger an early termination clause.


On the basis of the preceding analysis, the end of the suspension terms set out by the subsequent rules aforementioned and, thus, the re-entry into force of Article 348 bis LSC, shall encourage innumerable issues and potential conflicts between shareholders or between them and the company.
As before mentioned, it is our belief that it would not be possible to suppress or limit the right of separation via an amendment of the by-laws of the company. Therefore, we recommend that such suppression or limitation is made through shareholders’ agreements or in the framework of financing agreements approved with the adoption of individual commitments by the minority shareholders in relation to the exercise of their right of separation due to the lack of distribution of dividends.

In addition to the above, the practical application of Article 348 bis LSC will not be exempt from other conflicts, since the Law does not provide, for example, what should be understood as profits obtained by the company as a result of the carrying out of the activities relating to its corporate purpose. In this respect, we understand that any extraordinary or atypical profits obtained by the company during the relevant financial year should be excluded from this definition, although only the Courts and Judges may define such term in the future.


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