Shareholder separation right due to non-distribution of profits

Executive Summary

The Provincial Court of Barcelona has issued a landmark judgment clarifying the exercise of a shareholder’s right of separation due to failure to distribute dividends, regulated under Article 348 bis of the Spanish Capital Companies Act (LSC). The ruling emphasizes that this right does not arise automatically upon the mere failure to distribute; rather, it requires a proactive stance from the minority shareholder during the General Meeting, materialized through a formal protest.

Legal Framework: Article 348 bis of the LSC

The right of separation serves as an essential protection mechanism for minority shareholders. To exercise this right, the following requirements must be met:

The company must have been registered for more than five years.

The shareholder must record their objection to the insufficiency of dividends in the minutes of the meeting.

The general meeting fails to agree on the distribution of at least 25% of the legally distributable profits obtained during the previous financial year.

There must have been profits in the three preceding financial years.

Precedent Condition: The right of separation will not arise if the total dividends distributed over the last five years equal at least 25% of the legally distributable profits recorded during that period.

The Case Analyzed by the Provincial Court of Barcelona

The dispute arose after seven financial years without dividends in a corporation (sociedad anónima) that allocated all profits to voluntary reserves. The shareholder, holding 25% of the capital, voted against the proposal and, through legal counsel, formally recorded their protest and a reservation of legal actions in a notarial minute. Although the Mercantile Registry initially denied the appointment of an expert due to a perceived lack of “formal protest,” the General Directorate upheld the shareholder’s appeal, confirming that the dissent was duly documented.

On appeal, the Provincial Court overturned the first-instance judgment and upheld the right of separation. The Chamber validated the share valuation performed by the independent expert and based its decision on two pillars: the sufficiency of the protest made during the meeting to avoid any “surprise factor,” and the prohibition of the company reformulating its accounts opportunistically to reduce distributable profit once the right had been exercised.

Supreme Court Doctrine

The interpretation by the Supreme Court has been fundamental in providing flexibility to the literal wording of the law. According to judgment number 663/2020, of 10 December (ES:TS:2020:4108) exercising this right does not strictly require a favorable vote for a specific distribution proposal (which often does not even appear on the agenda). The determining factor is that the shareholder manifests a clear intent for the results to be applied to dividends by voting against alternative allocations, such as voluntary reserves.

For the High Court, the requirement is satisfied when the shareholder expresses dissent regarding the retention of profits during the meeting. This is not a matter of empty formalism; the attending shareholder must show a position in favor of a distribution that reaches at least the legal minimum. It is mandatory that this intent be recorded authentically in the notarial minutes for the right to be effective. Furthermore, case law specifies that even if a shareholder votes in favor of a partial distribution, they may still exercise separation if they state for the record that the amount is insufficient, thereby preventing the agreement from becoming binding through mere acquiescence.

Practical Implications

This ruling reinforces the necessity of a preventive legal strategy in corporate governance for both shareholders and companies. For the shareholder, it is vital to ensure impeccable documentary traceability by confirming that their protest is formally recorded in the minutes to effectively enable an exit. Conversely, for the company, a policy of systematic profit retention during growth cycles creates a real risk of forced decapitalization, as the entity may be compelled to reimburse the outgoing shareholder’s stake at fair value. Ultimately, the rigorous drafting of meeting minutes stands as an effective tool to mitigate litigation and protect corporate assets.

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