COVID-19 Spain / Shareholders’ right of withdrawal due to dividends withholding.

The Spanish government response to the impact of COVID-19 on the field of Company Law. Royal Decree Law 8/2020 of March 17^th, on extraordinary and urgent measures to address the economic and social impact of COVID-19. Shareholders’ right of withdrawal due to dividends withholding.

" The suspension of the exercise of shareholders’ right of withdrawal during the state of alarm due to COVID-19 is foreseen in art. 40.8 RDL 8/ 2020. Evidently, for a suspension to take place is necessary that an enforceable right exists. Among the grounds on which Spanish Law acknowledges shareholders their right of withdrawal is that of the withholding of dividends distribution under the conditions stated in art. 348 bis of the Spanish Companies Act. It could be the case that before the declaration of the state of alarm directors may have established in the company’s proposal of application of the results that a distribution of dividends was to take place. Now out of RDL 8/2020 directors are allowed to replace their original proposal of application of the results due to the sanitary crises (see art. 40.6 bis RDL 8/ 2020). 

It is arguable whether in the event that due to the state of alarm the original proposal for the application of the results of the previous financial year is altered - in the sense that a company that had planned to distribute dividends decides to retain them – the birth of minority shareholders’ right of withdrawal supervenes due to the lack of distribution of dividends if the resolution approving annual accounts on this regard is passed. A literal interpretation of art. 348 bis of the Spanish Corporation Act may indeed lead us to understand that this should be the case if the prerequisites for its application are met.

When framing minority shareholders right of withdrawal on grounds of benefits withholding the Spanish legislator opted for legal certainty. Out of the literacy of the rule no open formulas are set for on this regard. Thereto the right of withdrawal granted to minority shareholders due to the lack of distribution of dividends is subject to the concurrence of temporary and quantitative criteria in the distribution of profits that, in our case, might concur at the time accounts were formulated before the COVID-19 crises.

Nevertheless, from a material perspective minority shareholders rights of withdrawal due to the withholding of benefits constitutes a last resort formula that should only be recognized in those cases where the conditions of the corporate contract happen to be substantially altered by the majority and, consequently, so are the legitimate expectations of shareholders upon joining the company. In the specific case that we are now presenting, the decision not to distribute profits that could come out due to the replacement of the original proposal might be justified on the preservation of the firm itself, in the view of the negative economic impact that will foreseeably result out of the sanitary crisis. It is understandable that given the stark change of the economic scenario, and beyond a literal interpretation of article 348 bis Corporation Act, the emergence of minority shareholders rights of withdrawal due to the lack of distribution of dividends may decline in certain cases. " 

Ignacio Moralejo

Coordinador de DADE

22nd April 2020