It is known that the decision to distribute dividends lies within the competences of the General Partners or Shareholders Meeting, as provided for in articles 93, 160 a) and 273.1 of the Spanish Companies Act (SCA).
In situations where the General Meeting decides not to distribute dividends despite the existence of profits, article 348 bis of the SCA grants the dissenting membership interests holder (hereinafter “Partner”) the right to withdraw from the company.
However, we must ask ourselves whether this is the only remedy available to the minority partner who wishes to obtain a share of the company’s profits, or whether we can consider the possibility of a corporate action aimed at forcing the company to distribute a dividend in such cases.
There are many cases in which the majority partner imposes his will on the minority partner, in particular with regards to the distribution of dividends, with a view to forcing the latter to leave the company. Such conduct may be reprehensible and be interpreted as an abusive imposition by the majority, within the meaning of Article 204 SCA, and therefore constitutes the basis for a claim in order to annul the resolution of the partners Meeting, in this case, to allocate the profits obtained by the company to reserves instead of distributing them by means of a dividend.
However, if the claim were to be successful, the ruling would determine the nullity of the decision adopted by the partners Meeting, which would entail the holding of a new meeting at which the same matter would be debated. Reality shows that if the ownership of membership interests does not change, nor the point of view of the partners or majority partners, it is foreseeable that the new decision will be identical to the previous one, which would force a new action to challenge the decision, and so on, therefore falling into a ‘’loop dynamic’’ and, consequently, a lack of effective protection of the legitimate rights of the minority.
The only way to break with this loop would be for the judge to issue a decision whereby, upon assessing that there is an abuse of the majority, the judge would at the same time order the distribution of dividends, without the need for the Partners Meeting to issue a prior decision. In this regard, we could object to an alleged misrepresentation of the will of the General Meeting as well as an infringement of the articles of the SCA insofar as it would be invading the fields of the competences legally reserved for the latter. On the other hand, we may ask ourselves whether the corporate action of article 204 of the SCA is applicable when there is no damage or detriment to the corporate interest, but rather to the partner.
The ruling of the Supreme Court of 11th January 2023 (Ruling 9/2023. Rec. 3319/2019) provides answers for these questions, based mainly on the principles of loyalty of the majority partners to the minority, and effective protection. The case in question involved two partners, where one of them (the majority partner) was the sole director as well as the majority partner of the company where the undistributed profits would end up. In addition, for a time the minority partner was co-director of the company together with the majority partner, receiving remuneration for the services rendered. The majority partner made use of his control of the Meeting in order to terminate the minority partner at a given moment, and from that moment onwards, made use of the majority of votes in order to allocate profits to reserves, and pump its profits into financing the parent company (controlled by the majority partner). The company had also signed a refinancing agreement whereby, together with other companies in the group, it undertook not to distribute dividends while the agreement was in force, given that the company in question was liable for a guarantee facility of Euro 415,000. The minority partner challenged the Partners Meetings at which it was decided to allocate the profits to reserves in two consecutive financial years (2015 and 2016), and requested that the company be ordered to redistribute the dividends obtained in those two years in full.
The Commercial Court No. 2 of La Coruña issued a judgement on 29th December 2017 dismissing the claim in its entirety. However, the Provincial Court of La Coruña upheld the appeal in part, considering that
‘’the contested agreements are abusive because, even without causing damage to the company, they are adopted for the benefit of the majority partner – to whom the reserves that GSS Atlantico accumulates flow by way of financing, without guarantees or any pressure for restitution…”.
This argument, which will be accepted by the Supreme Court Judgement, clears up the doubt as to whether the corporate action would apply to a case such as the one described above, to confirm that the so-called ‘’corporate interest’’ is not limited to the safeguarding of the company’s assets, but to the interest of the partners. This argument is linked to the necessary recognition of the duty of loyalty of the majority partner towards the minority partner, in the sense that the dividend distribution policy that the company had followed until the termination of the minority partner director should continue to be followed. The situation of control of the majority partner over the company and the minority partner, turned the latter into a prisoner of the company, insofar as he had no access to the profits, neither through dividends nor through remuneration as director, nor could the investment be advantageously converted into cash.
The Supreme court emphasises that although the company signed an agreement not to distribute dividends, this is a minor fact, since the reason for this agreement was to ensure a guarantee facility of up to Euro 415,000, while in 2015 and 2016 the reserves covered this liability five times over. Therefore, the decision not to distribute dividends did not respond to a “reasonable need” of the company. The Supreme Court relativises the agreement not to distribute a dividend in order to strip the obligation of its strict effect, and to subject it to the purpose for which it was intended; thus, if the reserves more than covered the mentioned liability, the decision not to distribute cannot be considered balanced, but rather a demonstration of the abusive nature of the agreement.
Another debatable issue is whether the court can impose the distribution of dividends on the company. The appellant argued that the Court of First Instance had misrepresented the General Meeting and that a dividend cannot under any circumstances be distributed without the consent expressed in the General Partners Meeting. However, the Supreme Court confirms the Court of Appeal‘s opinion, in the sense that if the judgement determined the nullity of the resolution not to distribute a dividend, this decision entails the approval of the other legal alternative, i.e. the distribution of the dividend. If it had been limited to declaring the resolution of the General Meeting to be null and void, the minority partner would not have been effectively protected, insofar as the legitimate satisfaction of the rights recognised by the court for minority partners would be subject to the approval of the General Meeting, which is controlled by the majority partner. In other words, the right would be recognised, but it would not be enforced because the Meeting would not recognise it.
Finally, the judgement confirms the decision of the Court of Appeal not to distribute 100% of the profits, but only 75% thereof, and this is because it refers to the last distribution, which took place in 2012, in the same proportion. Therefore, the court not only issues a ruling that involves a decision reserved for the General Meeting of partners according to CCA, but also modulates the amount of the dividend to be distributed, as it deems that when upholding the challenge to the corporate resolutions leaves no margin of discretion to the partners meeting in order to adopt the appropriate resolution, nothing prevents the court from declaring it, and from then on it will take effect.
Eduardo Vilá
Vilá Abogados
For more information, please contact:
17th of March 2023
