It is well known that not distributing dividends, in the terms and conditions set forth in Artcle 348 bis of the Spanish Companies’ Act (SCA) entitles the partner to exercise his/her right to withdrawal from the company. The same right applies to cases of insufficient distribution of dividends.
But that is not the only remedy available to the dissenting partner, since the first paragraph, second subparagraph of said article 348 bis states that the exercise of such right to withdrawal must be understood to be without prejudice to the right to exercise the actions to challenge corporate resolutions and liability that may be applicable.
Thus, the minority partner or block of minority partners who find themselves in a situation where the general partners’ meeting has decided not to distribute dividends, can choose between exercising their right of withdrawal or challenging the decision of the meeting. In the first case, the effect of exercising the right of withdrawal may have a perverse effect, which is to serve primarily the interests of the majority partners or block that, with their strategy of not distributing dividends, intended to get rid of the “uncomfortable” partners. On the other hand, it is quite possible that the minority partner has no interest whatsoever in leaving the company for various reasons, including the fact that the value of the company is rising or is expected to rise, his sole objective being to obtain a return on his investment by participating in the profits obtained by the company, which is a reasonable aspiration of the partner in a capitalist company.
Therefore, the alternative route for the partner is to challenge the decision for abuse of the company majority, via Article 204 of the LSC, whose prosperability is subject to the concurrence of several circumstances, perhaps the fundamental one, although not the only one, being that the company presents healthy accounts that allow the distribution of dividends.
The Supreme Court ruling of the 11th of January 2023 established that, although the approval of the accounts and the decision to distribute a dividend is within the competence of the partners’ general meeting, such decision cannot constitute an abusive act of the majority to the detriment of a minority that expects to receive a return on its investment when the circumstances and economic conditions of the company allow it. And, in accordance with this principle, the Supreme Court ordered the revocation of the decision not to distribute a dividend adopted by the general meeting and, going further, decreed the percentage of the dividend distribution to be made, without this being subject to the subsequent formal approval of the general meeting itself.
This ruling establishes the doctrine that the decision not to distribute dividends, when it is an abusive act by the majority, may not only be subject to annulment, but that the court may even order its distribution, without the shareholders’ meeting having to intervene in it. This is not considered by the Supreme Court as an impersonation of the meeting, but as a means to achieve an effective protection of the rights of minority shareholders, since otherwise, a mere declaratory judgment of nullity of the decision would not result in the distribution of the dividend and thus rendering the judgement useless, insofar as the majority would vote again against the distribution, as it did previously.
This doctrine is gaining traction in the Provincial Courts. One of the latest rulings, the decision of the Madrid Provincial Court, on the 8th of November 2024, dealt with the legality of the decision of the general meeting (supported by a large majority of partners) not to distribute a dividend, in the context of a company that presented an indisputably healthy financial situation, but whose decision was taken shortly after the Covid-19 incident, with the company arguing that the measure was justified for that reason and the convenience of accumulating reserves in view of another similar eventuality.
The Court starts from the basis of the legitimate right of the shareholder to challenge a decision that harms the interests of the company to the benefit of some partners, based on Article 204 of the LSC. It then refers on several occasions to the aforementioned Supreme Court ruling of the 11th of January 2023 to point out that the decisions of the partners’ meeting regarding the application of the positive results obtained to reserves must respond to a “reasonable need”. Thus, the legality of the decision of the partners’ meeting will not be based solely on a pure sum of the votes of the partners, but on its reasonableness, which must also be accredited. The nexus between the decision and its legality is its reasonableness, for which it is necessary to analyse the financial situation of the company but also the circumstances in which it finds itself at the time the decision is taken. The Court analyses in detail, to conclude that the decision of the meeting in this case did not meet the condition of reasonableness that would justify allocating the profits obtained in full to reserves, given that the company was in a situation that allowed it to face any uncertainty.
In essence, what the doctrine established by the Supreme Court sustains is the need not to deprive the minority of the right to obtain a “logical economic return on the profits achieved by the company, without there being a reasonable need to justify it”.
Hence, to determine the reasonableness of the general meeting’s decision, it is necessary to examine the facts and circumstances under which the decision was adopted, going beyond just considering the company’s present financial situation, although this may be the most determining factor.
In contrast with the Supreme Court ruling, the Provincial Court of Madrid simply ruled that the decision of the general meeting was null and void, without any other pronouncement, given that there was no further requests in the claim. The question arises as to what the ruling would have been if the plaintiff had requested the distribution of a dividend consistent with and proportionate to the profits obtained and the financial situation of the company. Furthermore, if we are to follow the viewpoint of the Supreme Court, it cannot be ruled out that, in addition to declaring the decision null and void, it would have ordered the distribution of the dividends.
Eduardo Vilá
Vilá Abogados
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11th April 2025
