Removal from the articles of association of a company of the right of separation of shareholders due to the lack of distribution of dividends

Analysis of Article 348 bis, paragraph 2, of the LSC with regard to the possibility for shareholders to remove the cause for separation due to lack of distribution of dividends

Just over a year ago, Law 11/2018 of 28 December was published in the Official State Gazette, amending, among other provisions, Article 348 bis of the LSC.

The amendment of that article implied, among other things, the possibility for shareholders to remove or amend the right of separation of the shareholder in the event of failure to distribute dividends by providing for it in the corresponding Articles of Association of the company (Article 348a(2) of the LSC). For companies already in existence prior to the amendment, the consent of all shareholders will be required, unless the right to separate from the company is recognised for a shareholder who has not voted in favour of the agreement.

The doubts raised by this provision, and which the legislator has not resolved, is whether the cause for separation by abolishing the right of separation for non-payment of dividends is a legal cause for separation, and therefore, similar to those provided for in Article 346 of the LSC, or on the contrary, or statutory, and therefore the provisions of Article 347 of the LSC are applicable. In this sense, if it is understood that it is a legal cause for separation (article 346 LSC), for the approval of the suppression in the articles of association of the legal cause for separation due to the lack of distribution of dividends, unanimity would not be required provided that the dissenting shareholder was given the option to exercise the right of separation to be exercised in accordance with article 348 of the LSC (“the right of separation shall be exercised in writing within one month from the publication of the agreement or from the receipt of the communication”). If the contract were to be understood as a statutory ground for separation (Article 347 LSC), unanimity would be required as to the form and time limit for the exercise of the right of separation.

In the Resolution of 24 October 2019, the Directorate General for the Registry and Notaries addressed and resolved this issue, in the appeal filed by a public limited company against the negative classification by the Registrar in the registration of the amendment of the Articles of Association, which removes the right in the event of non-distribution of dividends provided for in Article 348 bis and 4 of the LSC.

Let us focus on the facts of the resolution, on the appellant’s letter of the DGRN resolution:

1. The Board was legally convened
2. 100% of the members attend
3. Agreements are taken by majority
4. A new article is introduced in the statutes, in which the non distribution of dividends is deleted as a cause for separation, in accordance with the new wording given to Article 348a of the LSC
5. Shareholders who have voted against the amendment are recognised as having the right to withdraw from the company in accordance with Article 348a.2 of the LSC; it is also approved by a majority
6. They are duly notified
7. The administrator states in the deed that the right of separation has not been exercised

The Registrar qualifies the registration negatively for two reasons: (i) the exercise of the right of separation by the dissenting partners is not on the agenda, and (ii) this provision is not duly regulated (notification, term, form of exercise, price, if any, etc.). In this sense, the Registrar understands that this is a statutory cause for separation in accordance with Article 347 of the LSC, and, consequently, according to the agenda of the meeting (not to record separately the exercise of the right of separation by dissenting partners), such amendment was either unanimously agreed or could not be registered.

The company appeals on the grounds that the right of separation of Article 348a(2) is a legal cause, like those of Article 346 of the LSC, and therefore it is only necessary to include the item on the agenda consisting of the amendment of the Articles of Association without the need to introduce the right of separation of the dissenting shareholder, and that it is legally regulated and is an essential requirement for the valid approval of the amendments to both Article 346 and 348a(2), when unanimity is not reached. To assimilate the legal cause for separation of Article 348a.2 LSC to a cause for separation of Article 347 LSC would imply that unanimous regulation would be required as to the form and term of the exercise of the right of separation, and therefore Article 348a.2 LSC would not apply in practice, since the dissenting shareholder of the suppression of the right of separation in case of lack of distribution of dividends will not vote in favour of the regulation of the exercise of the right of separation in that case.

The DGRN upholds the appeal and revokes the mark, confirming the criterion maintained by the appellant. In other words, the right of separation which arises from the abolition of the “ius separationis” for non-distribution of dividends, is based on a legal precept “and this circumstance has the consequence that such recognition does not require a specific mention on the agenda of the meeting” and also for that reason it is not necessary to determine the conditions for the exercise of the right “since it is clearly fixed in the period of its exercise and – precisely because that recognition has a legal basis – the other aspects of its legal regime are accommodated in the general rules on the right of separation“.