Limits to the shareholder’s right of withdrawal in the event of non-distribution of dividends

The Supreme Court establishes the limits to the use of Article 348 bis of the Capital Companies Act, on the right of the shareholder to withdraw from the company due to non-distribution of dividends.

Article 348 bis of the Capital Companies Act (hereinafter, LSC) regulates the shareholder’s right of separation in the event of non-distribution of dividends. This article has generated, over the last few years, a strong doctrinal and jurisprudential debate, and the latest pronouncements of the Supreme Court seek to clarify the raison d’être of the aforementioned article, as well as to establish limits to its use. The literal wording of the controversial precept demands certain requirements for the exercise of the shareholder’s right of separation:

• The company must have been registered in the Mercantile Register for five years.
• The general meeting has not resolved to distribute as a dividend at least twenty-five per cent of the profits obtained during the previous year, which are legally distributable, and provided that profits have been obtained during the three previous years. However, even if the above circumstance occurs, the right of separation shall not arise if the total of the dividends distributed during the last five years equals at least twenty-five per cent of the legally distributable profits recorded in that period.
• The profits must be legally distributable.
• The shareholder must have voted in favour of the distribution of dividends.
• That he/she communicates his/her wish to withdraw within one month of the date of the General Meeting.

Although this precept includes a series of exceptions:

• In the case of listed companies or companies whose shares are admitted to trading in a multilateral trading system.
• When the company is in insolvency proceedings.
• When, under insolvency legislation, the company has notified the court having jurisdiction to declare its insolvency of the commencement of negotiations to reach a refinancing agreement, or to obtain adherence to an early agreement proposal, or when the court has been notified of the commencement of negotiations to reach an out-of-court payment agreement.
• When the company has reached a refinancing agreement that satisfies the conditions of non-cancellability set out in insolvency legislation.
• In the case of sports limited companies.

The Supreme Court, in Ruling number 38/2022 of 25 January 2022, analyses whether or not the right established in article 348 bis of the LSC can be exercised in the case of a shareholder of a limited company who, in view of the defendant company’s refusal to distribute dividends at a first meeting (due to the negative results obtained in the financial year), refuses to receive the dividends approved at a subsequent meeting, held very close to the first one. The shareholder who had voted against the refusal to distribute dividends at the first meeting notified the company of his intention to withdraw from the company, exercising his right to withdraw on the basis of article 348 bis of the LSC, when the latter had already convened the second meeting at which the distribution of dividends was proposed.

In this respect, the High Court considers that, in the case analysed, the action taken by the shareholder showed that his real intention was not to obtain the dividend, but to withdraw from the company. In any event, having been able to obtain what he allegedly sought (the dividend distribution) with little time to spare, he refused to receive it, since his real interest was the liquidation of his shareholding in the company. Therefore, the exercise of the right of separation claimed and complained of by the shareholder is abusive, and the appeal is therefore dismissed.

“In general, if the directors call a new general meeting, with the proposal to distribute dividends in accordance with the legal terms, before the shareholder has exercised the right of withdrawal, the subsequent exercise of this right may be abusive. And in this case, the shareholder’s actions clearly showed that his real intention was not to obtain the dividend, but to withdraw from the company, in any case, since having been able to obtain what he supposedly intended – the distributable profit – with little time to spare, he refused to receive it, since his real intention was to liquidate his shareholding in the company. This is not protected by art. 348 bis LSC”.

In summary, the bases or limits to the use of article 348 bis LSC that the Supreme Court intends to establish with this Ruling can be summarised as follows:

• The purpose of Article 348 bis of the LSC is not to protect the shareholder’s right of withdrawal but his right to a dividend.
• The exercise of the shareholder’s right of withdrawal must be exercised in accordance with the requirements of good faith, like any other right (Article 7.1 of the Civil Code) and without abuse of rights (Article 7.2 of the Civil Code).

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