A new scenario under the Corporate Enterprises Law
Article 348 bis of the Spanish Corporate Enterprises Law (Ley de Sociedades de Capital) establishes that shareholders who have voted in favor of distributing dividends have the right to exit the company if the shareholders’ meeting does not agree to distribute at least one-third of operating profits obtained in the preceding year. This article, which originally entered into force on October 2, 2011, has been consecutively suspended in recent years until becoming effective again on January 1, 2017.
From the outset, article 348 bis has been somewhat controversial, mostly because even though it was intended to protect non-controlling shareholders from majority shareholders’ efforts to keep them from obtaining any economic returns from the company, the rule could actually engender the opposite situation, in which minority shareholders use this right of exit abusively, economically destabilizing the company by either strong-arming the distribution of dividends despite insufficient liquidity or forcing the reimbursement of contributions to exiting shareholders.
To avoid such a situation and to remedy the potential for differing interpretations that arises from certain aspects of its wording, last November a non-executive bill to modify this article came before the Spanish Congress.
Barring any changes the bill may undergo during its passage through parliament, the proposed modifications include the following:
- a company could use its bylaws to limit application of article 348 bis
- a company would have to post profits for three consecutive years in order for shareholders to enjoy the “right to dividends”
- a company would only have to distribute one-fourth of profits, not one-third, to preclude the right of exit
- the reference to “operating profits” (which could be understood in a number of ways) would be replaced by the more clear “profit for the year”
- the wording would clearly state that shareholders cannot exercise the right of exit until at least five years have elapsed since the company’s registration at the Commercial Registry; and
- the article would not apply to companies undergoing insolvency proceedings.
Given that this proposed legislative modification would have a substantial impact on companies, it is one that warrants close monitoring in the future.
Garrigues Corporate/Commercial Department
