The right of separation of the minority partner is protected by the Spanish legislation

Article 348 bis of Capital Companies Act (hereinafter CCA) regarding the right of separation in the event of lack of dividend distribution was recovered last January.

This article was approved on 2 October 2011 and suspended from 24 June 2012 until December 31, 2016.

How does the right of separation work in this case?

The minority partner of any unlisted company may claim this article to exercise the right of separation, extending its application to all capital companies.

The requirements are the following: 

(I) the member who wants the separation must have voted in favour of profit sharing,

(ii) the General Meeting has not agreed a minimum for the distribution of dividends of one-third of the profits resulting from the exercise of the company’s object during the previous year and 

(iii) the company must have been registered at the Companies House for at least more than 5 years (starting on the first year regardless it was incomplete).

In relation to benefits, they should not be no recurring and must be legally distributed, as per the company’s by-laws and the Law (article 273 LSC).

When the Company refuses to distribute the dividends arises the right of the minority partner to claim this provision and to demand the consideration of the right of separation. The Company is, therefore, obliged to acquire such shares.

This article may become a serious headache for many companies and family businesses, specifically for those with liquidity problems. They may face liquidity problems when paying both dividends and the liquidation fee in the event of the separation of the partner of the Company.

It is appropriate for companies to consider the possible effect of this regulation on their treasury. It is therefore necessary to study the consequences of the exercise of this right by the partners in each company, examining the value of the shares, as the case may be, as well as the clauses set forth in the bylaws for this assumption.

As a measure to alleviate this unexpected Company's insolvency, it is feasible to reduce distributable social benefits legally, thereby reducing the Company's liquidity impact.

However, the reduction of results should be supported by accounting regulations and ultimately by the criterion of prudence. In the event of taking such measure, the extra-taxable tax adjustments should be taken into consideration so that they do not exceed those allowed by the Corporate Tax Law.

The goal of this article is the defence of the right of the minority partner against the abuses of main shareholders, without considering a specific financial and equity status of the Company at that time.

I wonder what it is more unfair, either an agreement of the majority of the partners refusing the distribution of dividends or the right of the minority partner to demand the distribution of a third of the profits which may strike hard the company’s liquidity.