More legal uncertainty: Supreme Court imposes dividend of 75% of profit after considering it “abusive” to allocate all of it to reserves

When the Supreme Court adds to the lack of confidence in Spanish politicsSpain's Supreme Court

In a “revolutionary” ruling dated 11 January 2023, and “as well-intentioned as it is erroneous, and with serious consequences”, the Supreme Court has not limited itself to declaring the nullity, as abusive, of the resolution challenged by the minority shareholder of a company – not to distribute dividends – but also considers – as an effect of the ruling – a corporate resolution in the opposite direction to the one annulled, without articles 204 and subsequent articles of the LSC (Capital Companies Act) providing legal support for this. The LSC provides express legal support for this interpretation.

In accordance with the recent ruling of 11 January 2023, – which ratifies the ruling of Commercial Court no. 2 of La Coruña in 2017 – the Supreme Court concludes that, as an effect of upholding the challenge to the resolution to apply the result – consisting of allocating the profits obtained in the financial year entirely to voluntary reserves – not only should the aforementioned corporate resolution be declared null and void – on the grounds that it is considered abusive in application of the second paragraph of Art. 204.1 LSC-, but also for the commercial court to impose on the company the distribution of said profits in a specific percentage.

As José Carlos González Vázquez, of CECA Magán Abogados, explains: “this doctrine is as well-intentioned as it is erroneous and has serious practical consequences. Basically, it implies “inventing” a legal regime for the right to dividends that is not included in the LSC. Let me explain. The result is the same as what we would have if a legal rule were to be enacted stating the following:

“Unless otherwise provided for in the articles of association, capital companies shall be obliged to distribute the entire distributable profit for the financial year, after complying with the relevant legal or statutory requirements, unless there is a reasonable justification in accordance with the company’s interests”.

Thus, there are obviously only two alternatives (in the absence of an express statutory rule): to distribute 100% or to justify the non-distribution or partial distribution in accordance with the company’s interests.
Is that what we want, what seems fairer to us? Then amend the LSC to introduce this supplementary rule (or any other of similar content) but, until that happens, I do not consider it justified for the commercial judge to impose a specific distribution of dividends when considering the challenge of the abusive agreement of non-distribution”.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.