Article 348 bis of the Capital Companies Act once again effective on 1 January 2017
The partial reform of the Capital Companies Act (CCL) dated 2011 established the shareholders' right of separation when, if a number of requirements have been met, the company does not pay out a minimum dividend. This provision, introduced by article 348 bis CCL, was the subject of controversy which, combined with the difficult financial situation of Spanish businesses at the time, led to its application being suspended until 31 December 2014 by Law 1/2012 (22 June) on the Simplification of Mergers and Demergers of Capital Companies. That suspension was renewed by Royal Decree-Law 11/2014 (5 September) of Urgent Measures in Insolvency Cases. While making changes to insolvency procedures, the legislature included in the First Final Provision a further suspension of the application of article 348 bis CCL until 31 December 2016. In the absence of a new extension, the article's provisions have once again been applicable since 1 January 2017.
The article in question recognises the right of separation, expressly excluded for listed companies, of a shareholder who has voted in favour of the distribution of company profits in those cases where the general meeting does not resolve to distribute as a dividend at least one-third of the company's profits obtained from engaging in its business in the financial year prior to them being lawfully distributable. To that effect, it is established that the said right may be exercised once five years have passed since the company's registration in the Company Registry and within one month of the shareholders' annual general meeting.
Until now, Spain's legal system did not recognise a shareholder's periodic right "to the dividend". Only the right to participate in profit distributions was established, included in the shareholder's minimum rights set down in article 93 CCL. In any event, that latter right is established more as an "abstract" right, given that it materialises at the time when the general meeting decides to allocate a part of the profits to a distribution among members by a resolution approving the annual accounts and the application of the profits of the financial year.
Therefore, the reasoning behind the law is to prevent abuse by the majority, avoiding the commonplace situations where majority shareholders systematically deny the distribution of dividends when profits allow it and there are no financial reasons not to distribute them. The legislation thereby seeks to guarantee a partial periodic distribution or, as an alternative, to offer an escape from a situation that previously has had to be solved by the courts.
Notwithstanding the above, despite the legislature's aim being to avoid abuse by the majority, the drafting of that article has given rise to a series of doubts over interpretation, and it has been heavily criticised for its lack of detail and the legal uncertainty it generates. That being so, some commentators consider that this law is contrary to freedom of enterprise and that, in the context of an economic downturn, it could be prejudicial for a company to grant a right that could run contrary to undertakings with third parties (for example, a refinancing conditional upon the complete reinvestment of the profits).
Furthermore, the problem presented by this law in practice is that it appears to presuppose that any absence of distribution is per se a situation of abuse by the majority. Therefore, of the main arguments put forward by critics of this law, it is worth emphasising that it does not make the shareholder's right of separation conditional upon certain requirements which effectively ensure that there is an abuse (for example, prolongation of the failure to distribute dividends).
In that regard, there will be times when retaining the generated profits as part of the corporate assets would be best for the company's future, yet article 348 bis CCL will entail a cash outflow of little benefit leading to an eventual lack of cash. That is, although the law does not oblige the distribution of dividends, not doing so may have a greater financial cost for companies in that this right of separation involves the right to receive the reasonable value or the market value of its shares from the company. For that reason, some commentators believe that this article undermines the majority in a company when taking decisions, given that the profit motive of a minority shareholder is given priority over the company's best interests.
Another problematic issue is the concept of "profits from engaging in company business". The accounting concept of operating profits is those profits obtained before discounting financial expenditure and taxes. However, this is not the concept set down in article 348 bis, for two reasons: (i) it would involve calculating the dividends on profits that are not distributable when the law expressly requires that they are, and (ii) because the justification of the amendment states that the concept is taken from the CCL and not from the accounting rules. Therefore, in the absence of an accounting concept, the problem is trying to define the concept established by the law. This issue was examined in detail in the judgment dated 26 March 2015 of the Barcelona Provincial Appeal Court, which concluded that the term "profits from engaging in company business'' sought to exclude extraordinary or atypical profits. Thus, in order for certain profits to be excluded from the calculation, they must not come from the typical activity of the company and, further, they must be a significant amount and not recurrent.
What is more, there is no consensus of opinion as to whether the right of separation can be made conditional or even excluded by a clause in the company's Articles. On the one hand, some commentators deny that possibility, referring to the mandatory nature of the law in question. In their opinion, in general the statutory cases of separation are a matter of public order and, therefore, pursuant to the Civil Code which excludes the waiver of rights when such waiver is contrary to public order the right of separation cannot be waived beforehand in the company's Articles of Association. However, based on the general principle of freedom to contract, others consider that a clause in the Articles of Association may limit this right of separation, save where there is prejudice to third parties (not present in this case) or there is breach of public order, which would only arise if the articles excluded the entire distribution of dividends. In addition, these commentators argue that the legislature has expressly provided that the dividend distribution system is determined by the Articles of Association, through the statutory reserve, as follows from article 348 bis itself, which establishes a percentage of the profits that are "lawfully distributable", and from article 273 of the same Law, which requires for the distribution that "the reserves stipulated by law or the Articles of Association are covered." In any event, it is an issue that may cause problems until it is clarified in the registries or by the Directorate General of Registries and Notaries. Similarly, thought has been given to clauses outside the Articles of Association, by way of a shareholders' agreement. For some commentators, as it does not concern a case of ius imperativium applicable to all companies but rather to a case of ius cogens, the shareholders' agreement in this matter would be lawful provided the shareholder were not completely excluded from the profits. In any case, it must be borne in mind that according to the case law of the Supreme Court, a shareholders' agreement is not enforceable against the company even when signed by all shareholders. Therefore, it is not possible to challenge a company resolution that contravenes the agreement.
In any event, and regardless of whether the right can be limited by clause or agreement, there are alternative solutions for a company when the payment of a dividend would entail a risk to debt repayment or to the company's existence. One such alternative is that the shareholders' meeting may determine the time of payment of the dividend. Thus, in order to avoid immediate liquidity problems, it seems it is possible to agree by majority the deferral of payment of the dividend until such time as the company's cash position allows it.
There is also the possibility that the company may object that the right is being exercised abusively if it prejudices the corporate interest. It must be taken into account that article 217 CCL establishes "fostering the long-term profitability and sustainability of the company" as corporate management objectives. Therefore, if the dividend distribution pursuant to 348 bis is contrary to the company's long-term profitability or compromises its sustainability, the exercise of the right of separation may be considered abusive.
Finally, and bearing everything above in mind, it appears that the legislature needs to bring together the interests of the company and those of shareholders in its planned reforms, thereby avoiding a rigid and objective application of the cases provided for in the current drafting of the article concerned. For that reason, an improvement to its wording would be beneficial for both the company and for its shareholders, particularly minority shareholders.