From the corporate year ending on 31.12.2016 onwards minority shareholders will have the right to leave the company with a fair compensation if no dividends are declared.

Right to redeem the shares for a fair compensation if no dividends are paid

Law 25/2011 amended the Spanish Capital Companies Act (hereinafter "LSC") to include a new article 348 bis which allows minority shareholders, under certain conditions, to withdraw from the company should the company not distribute at least one third of the profits made from ordinary business that year.

Article 348 bis

1. From the fifth corporate year to count from the registration of the Company at the Companies' Registry (Registro Mercantil), any shareholder who has voted in favor of distributing dividends will have the rights to withdraw from the Company should the General Shareholders Meeting not agree to distribute at least one third of the legally distributable profits obtained by carrying out the company's ordinary corporate purpose during the previous corporate year.

2. The shareholders' right of withdrawal can be exercised within the month following the date on which the General Shareholders' Meeting was held.

3. This article is not applicable to listed companies.

Until this article was enacted in 2011, the majority of scholars believed that, save in few and exceptional cases, shareholders did not have a right to a dividend and that, if dividends were not declared, he had the option of "voting with his feet" by selling his shares and leaving the company. The logic behind this being that reinvestment of profits had likely increased the value of his investment and the enterprise value, and therefore he would be compensated for the non-declared dividends by means of a higher consideration for his shares. However, this "feet vote" option was not really feasible in non-listed public companies or private companies where there is no real market for the sale of the shares (of if there is, it is not liquid enough to assure that the price for the shares will be a fair market price).

That is probably the reason why article 348 bis gives shareholders a right of withdrawal from the company in exchange for fair compensation, and is applicable only to non-listed companies.

The remarkable thing about article 348 bis is that it entered into force on October 2, 2011 and then on June 22, 2012 it was suspended. The suspension was initially declared until December 31, 2014 (by means of Act 1/2012) and then further until 31, December 2016 by means of Royal Decree Law 11/2012. So article 348 bis which was originally enacted in December 2011 has only been in force for a mere six months and will be in force again, if no new piece of legislation prevents it, in less than two weeks' time.

Requirements for article 348 bis to apply

Despite the short period of time during which it was in force there exist a number of court rulings which have applied and interpreted article 348 bis. These court rulings help to solve some interpretative doubts which may arise about the requirements to effectively obtain a right of withdrawal from the company. Such requirements are:

1. That the company has been registered at the Companies' Registry for at least five corporate years.

The article applies to all companies and not just, as it might seem by its wording, to companies newly incorporated after its entry into force. Rather it means that the company must have been registered and in existence for at least five corporate years, regardless of whether it was incorporated before or after the article's entry into force.

For companies incorporated before 2011, those five years have already elapsed. At the time Law 38/2011 was enacted there were some doubts as to this, but Ruling of Mercantile Court No 2 of Palma de Mallorca of July 30, 2014 (among others) has made clear that one has to count five years from the date of the initial registration of the company, not from the date article 348 bis entered/enters into force.

It must also be noted that the requirement refers to corporate years, i.e. corporate exercises and not calendar years. This means that if, for whatever reason, the company has had two corporate exercises in one calendar year, the term for the application of article 348 bis may be less than five calendar years.

Article 348 bis applies as from the fifth corporate year. This means that it really applies to the end of year accounts for the fifth corporate exercise which are drafted and approved at some point during the sixth corporate year. So for companies which have been registered for five years (or more) on December 31, 2016, article 348 bis applies to the accounts closed on 31.12.2016 which will be approved in 2017.

Note that for article 348 bis to be applicable, there is no need for the company to have had profits during those five corporate years. That is, corporate exercises in which no dividends were distributed because there was no profit with which to do so, are also counted as part of the five year term. Accordingly, shareholders of a company which has been registered for longer than five corporate years, but makes a profit for the very first time in 2016, will also benefit from the right conferred to them by article 348 bis.

2. That the minority shareholder who wishes to withdraw from the company has voted in favor of distributing dividends.

This means that he must have voted either in favor of the distribution or against the reinvestment in reserves, as whether a positive or negative vote will be required depends on how the proposal for the corporate resolution is drafted. In any case, a dissenting vote must be recorded. Shareholders who did not attend the meeting or failed to oppose the will of the majority which carried the vote will not be entitled to have the company buy their shares at a fair value.

However, in accordance to the Ruling issued by Mercantile Court Nº 2 of Palma de Mallorca on July 30, 2014, shareholders unfairly or illegally deprived of their vote will indeed be entitled to exercise their right. Although according to the Ruling issued by Mercantile Court No. 1 of Barcelona, shareholders legally deprived of their vote because they are late in their share disbursements, those who abstained from voting, those who cast a block vote of holders of non-voting shares will not benefit from article 348 bis.

It is worth noting that non-voting shares become voting shares if their right to a minimum dividend is not respected (Cfr. Articles 99.3 and 100.2 LSC).

3. That the General Shareholders Meeting does not approve a resolution distributing at least one third of the company's ordinary profit obtained in the previous exercise.

By referring to "ordinary profit" article 348 bis seeks to exclude from the obligation to distribute, any profits obtained from extraordinary circumstances such as profits made by the sale of assets or by other means which are not in the company's ordinary course of business. Therefore, in order to prevent the existence of a right of withdrawal from the company by obtaining fair compensation, what needs to be distributed is not one third of all profits, but just one third of the profit made in ordinary business. The Ruling of the Provincial Court of Barcelona of March 26, 2015 identifies at length what is and what is not "ordinary profit" for these purposes.

We agree with the Ruling issued by Mercantil Court 12 of Madrid on December 15, 2016 which interprets "ordinary profit" to be that which remains after taxes are paid and all other legal obligations have been complied with, since article 348 bis only refers to legally distributable profits. This is also why the Ruling by the Provincial Court of Tenerife of December 2, 2015 declared that there was no right of withdrawal when existing profits were destined to set-off losses from previous exercises, because the law requires that those losses are compensated before dividends are payable. However, that same ruling is very strict in the application of article 348 bis and in that specific case found in favour of the dissenting shareholder because the corporate resolution did not specifically say that the profit was to be applied to set-off losses but used a different wording stating that those were to be applied to "reserves".

It is worth noting that once a resolution approving the distribution of one third of ordinary profits has been passed, the shareholders' right under article 348 bis is "de-activated", even if the payment of those dividends is paid in instalments during the corporate year (for example, in monthly payments to each shareholder in proportion to their stake in the company). This is expressly allowed by the Provincial Court of Guipuzcoa in its ruling of November 18, 2014. The means of payment, according to that ruling "cannot in the least be taken into consideration when ascertaining whether article 348 bis has been complied with, since once the resolution has been passed, its manner of execution is irrelevant".

How to exercise the right of withdrawal if the conditions for it have been met.

The right of withdrawal can be exercised within one month of the date on which the General Shareholders Meeting which resolved not to distribute dividends was held. This right is exercised by means of a written notice sent to the company. It's not necessary to obtain proof of receipt from the company or that it accepts it (Cfr. Ruling of the Mercantile Court No. 1 of San Sebastian of March 30 2015).

The withdrawal procedure and effects are the same as those set out in the LSC for all cases in which a right of withdrawal or exclusion is foreseen: the shares must be given a market value which is arrived at by mutual agreement by the parties or, failing that, by an auditor (other than the company`s auditor) appointed for these purposes by the Company's' Registrar. The shareholder shall then receive from the company this fair market value for his shares and such shares will then be written-off (amortised) by the company.

To whom does this article concern? Can it be applied "retroactively"?

At the time of the enactment of art. 348 bis (which is generally believed to be of imperative application by nearly all scholars, with the notable exception of Professor Alfaro who defends it may be eliminated by the company if all shareholders unanimously opt to do so) there were concerns regarding its possible impact on (i) shareholders agreements limiting or eliminating the distribution of dividends and/or (ii) financing agreements with covenants excluding any leakage to the shareholders until the debt was entirely repaid.

In both cases the minority shareholder's right of withdrawal set out in article 348 bis implies an inevitable leakage by means of the repayment of shares.

It is important to bear in mind that both the Ruling from the Mercantile Court of Palma de Mallorca mentioned above as well as that of the Provincial Court of La Coruña of March 21, 2014 apply article 348 bis to annual accounts which were drafted and approved after article 348 bis had entered into force, but refer to a corporate exercise ended before article 348 bis had entered into force. Accordingly, we consider that the revived article 348 bis will apply to all exercises ending on or before 31.12.2016, but which have their accounts drafted and approved after that date.