Article 348.bis of the Companies Act: Real issues and reforms

A year after entering into force, and following its suspension owing to implementation issues, article 348.bis prompts a reform proposal that aims to clarify its ambiguity and limit its weight.

Article 348.bis of the Spanish Companies Law (Ley de Sociedades de Capital, the “LSC“) sets forth that “on or after the fifth year from the date of the company’s registration with the Commercial Registry, a shareholder voting in favour of distribution of profits will be entitled to withdraw from the company if the general meeting does not resolve to distribute at least one third of the profits arising from the pursuit of the corporate purpose, obtained during the prior financial year and legally distributable”.

When actually trying to apply this article, its wording has caused many a doubt. Judgement 81/2015, of 26 March, issued by Section 15 of the Provincial Court of Barcelona, already specified the criterion to define “operating profit” and agreed that the exceptional result should be excluded from such concept, as explained in our previous Newsletter.

The Directorate General for Register Offices and Notaries has examined this issue. It considers that neither the financial profits nor the dividends that a company receives from its subsidiaries should be excluded from the operating profit, which arises from the company’s main business. The Directorate also points out that each Registrar has the capability and autonomy to decide, case by case, if the circumstances allowing the right of withdrawal take place.

Regardless of the article’s wording, reality has confirmed that applying it as prepared could cause an asset imbalance; therefore, should the company lack the funds to distribute dividends, the minority shareholders would have the power to force it into bankruptcy, or to implement the withdrawal of a shareholder, as the case may be. These issues support the statement of reasons of a proposal, submitted by Grupo Popular on 1 December 2017, aiming to modify article 348.bis of the LSC and which we analyse below.

• First, the proposed amendment replaces “on or after the fifth year” for “after the fifth year has ended”; therefore, the fifth-year results are the first to be subject to a dividend distribution, and no the fourth-year results which are approved the following year.

• Another concern arising from the original text is that the right of withdrawal is granted to the shareholder “voting in favour of the distribution of profit”. The problem arises due to the standard procedure of setting out an agreement to apply the financial year’s result which may or may not include a distribution of the dividends. If said agreement does not take into account an adequate distribution of the dividends, the shareholder wishing to withdraw would vote against himself; therefore, they would not be able to vote in favour of a specific agreement implying the distribution of profit. The new wording being proposed follows this line of thought and sets forth that a shareholder may exercise the right of withdrawal if “they have requested the inclusion, in the meeting’s minutes, of their complaint about the lack or inadequate amount of accepted dividends”.

• The reform also contains a change in the minimum profit amount to be distributed. If said statutory initiative were approved it would amount to a quarter, and not a third, of the profits. Also, for the right of withdrawal to exist, the company would have had to obtain profits during the previous 3 years, in addition to the dividends being distributed being less than a quarter of the total profit registered in said period; thus limiting the cases it could be applied to.

• Any allusions to the operating profits have been eliminated from calculations; therefore, according to the statement of reasons any extraordinary or exceptional profit would be understood as included, opposing other judgments which excluded them based on the current text.

• The reform would also allow this right to be eliminated or amended by modifying the bylaws, provided that this resolution were unanimously approved or, if not approved, that it grant the right of withdrawal to those shareholders voting against it; this addresses another of the doctrine’s concerns. This should be taken into account, in particular, in the bylaws of new companies; however, for existing companies, in which there is a minority requesting the distribution of dividends, the elimination of this right forewarns of the possibility of shareholders exercising the right of withdrawal in order to avoid a repeat situation in the future.

• Finally, the reform adds other legal exemptions that can be applied to this right. Listed companies join companies whose shares are listed on stock exchanges in a multilateral stock exchange system, as well as companies filing for bankruptcy or negotiating a refinancing agreement, against the background of bankruptcy proceedings, or companies that have been successful in reaching such an agreement.

In summary, the proposal can be valued positively since it explains many of the issues that were causing much of the judicial insecurity arising from the current text. There seems to be an urge to limit the application of this right, based on changing the calculation method and on considering a scenario where there is stronger demand for profit. However, the fear expressed in the statement of reasons about the possibility of an asset imbalance taking place, as result of applying article 348.bis, is still very much true. Maybe an additional exemption could have been included to cover these other cases.