The minimum mandatory dividend: article 348 bis of the Spanish Corporate Enterprises Act
Article 348 bis of the Corporate Enterprises Act entered once again into force on January 1st, 2017. Its reactivation implies the possibility for companies’ shareholders to request the distribution of, at least, one third of the legally distributable profits arising from the company’s main business activities and, if this distribution is not agreed upon, they shall have the right to exit from the company, transferring their shares at a price determined by an external expert appointed by the companies registrar (article 353).
This new precept is configured as an important tool conceded to minority shareholders and, most of all, to those who enter into conflict with the company or with the controlling shareholder.
The introduction of this precept in the Corporate Enterprises Act can imply a radical change in the scope of the relationships between a company and its minority partners, and can entail a high level of litigation in family companies, and companies with possible conflicts in function of their shareholders structure.
And the modification consists in a drastic change in the general principle of the right to dividend previously conditioned to prior approval by the General Meeting as the governing body of the company, now introducing the possibility for a minority shareholder to force the distribution of dividends.
The hearthquake caused by this precept was such that only eight months after it entered into force, the legislator suspended its effects, first until December 31, 2014, and then, until December 31, 2016.
These successive adjournments highlight the inappropriateness of the enforcement of this precept, due to the special situation the Spanish business world was going through, and its high level of debts, as well as some clear shortcomings and deficiencies in the new regulation. It was much hoped that these defaults would be solved before its permanent entry into force but it didn’t occur that way.
This legislative improvisation and precipitation have been much criticized by the mercantile doctrine, that has even considered the definitive derogation of the precept as the most reasonable measure, wondering that, even if the primary intention of the legislator was to avoid a possible abuse from the majority shareholders, the contrary situation could occur when the minority shareholders use this right of separation abusively, controlling the decision on the distribution of dividends in the company.
In this sense, this question should been raised in the future Commercial Code so that it can be properly addressed by the advisory bodies, and submitted to public information and go through the corresponding legal debate, so that the final regulation is the most appropriate one, thus avoiding any legal uncertainty.
A quick analysis of the article shows that, so that the minority shareholder can exercise his right to exit, some conditions much meet, whose interpretation is not pacifist:
1.- The company must be at least in its fifth tax year from the date of its registration on the Companies Register.
Barcelona’s Provincial Court in a judgement 26-3-2016 has said that this requisite refers to non-distributed profits from the fifth year, so that the decision of non-distribution must be taken in the sixth year.
2.- That the shareholder who would have voted in favor of distributing the corporate dividends shall have the right to exit in the event that the general meeting does not agree to distribute at least one third of the legally distributable profits arising from the company’s main business activities during the previous financial year.
In the referred decision from the Provincial Court this requisite seems to be more flexible, considering it sufficient that the shareholder unequivocally shows his position in favor of the dividends distribution, mentioning it expressly in the minutes of the Meeting.
3.- The General Meeting does not agree on the dividends distribution of at least one third of the profits arising from the company’s main business activity during the last financial year and that it is legally distributable.
The referred decision has also softened this requisite, adopting an accounting criteria and concluding that in order to exclude an income from the final amount of the profits resulting from the company’s main business activity, it must be an income far away from the typical activity of the company, of a significant amount, and assimilating it to an extraordinary income as defined by the General Accounting Plan.
As a conclusion, article 348 aims at – though in a very inconvenient way – abolishing the customs of some groups of control within companies who do not distribute dividends, sometimes because they obtain gains from the Company in other ways such as wages as employees or directors, or contractors.
We hope that the current legislator, conscious of the imperfection of the regulation, will carry out a reform, favoring as more reasonable a despotic empire from the majority, but judicially controlled through article 7.2 from the Civil Code, than a minority abuse.
Written by Juan José Garcia, Partner