ADMINISTRATIVE LAW DIVISION
One of the issues that most frequently gives rise to disputes within capital companies is the distribution of dividends. Does a shareholder have an effective right to receive profits? Can the majority decide indefinitely not to distribute them? When does the accumulation of profits cease to be legitimate and become abusive?
The Spanish Capital Companies Act (Ley de Sociedades de Capital, hereinafter “LSC”) provides some answers, but it has ultimately been case law that has shaped the boundaries of this delicate balance between the company’s interest and the protection of minority shareholders.
The starting point is Article 93 of the LSC, which recognises as one of the essential rights of shareholders the right to participate in the distribution of company profits. However, this right does not automatically translate into the annual receipt of dividends, as its effectiveness depends on the resolutions adopted by the general shareholders’ meeting. Indeed, pursuant to Article 160 of the LSC, it is for the general meeting to approve the annual accounts and resolve on the allocation of profits, including deciding whether profits are to be distributed as dividends or allocated to reserves. Dividend distribution is therefore not automatic, but rather the result of a corporate decision.
Is there a legal obligation to distribute dividends? The LSC does not establish a mandatory minimum percentage of profits to be distributed.
Traditionally, companies have enjoyed broad discretion to decide whether to reinvest profits or distribute them among shareholders, taking into account their financial needs, expansion plans or economic situation. However, this discretion is not unlimited. It is restricted by Article 348 bis of the LSC, which seeks to prevent situations in which the majority repeatedly blocks dividend distribution to the detriment of minority shareholders. This provision grants shareholders a right of withdrawal where, having recorded their objection in the minutes, the general meeting fails to agree to distribute as dividends at least 25% of the profits of the previous financial year, provided that:
-The profits are legally distributable; and
-The company has generated profits during the previous three financial years.
This right operates as a pressure mechanism against repeated decisions not to distribute dividends.
Nevertheless, the law provides for a significant exception: the right of withdrawal does not arise if the total dividends distributed over the previous five years amount to at least 25% of the legally distributable profits for that period.
In practice, many companies have opted to set dividend distributions at this 25% threshold, not due to a direct legal obligation, but in order to avoid triggering the right of withdrawal.
The absence of a clear statutory rule on the percentage of profits to be distributed has shifted the conflict to the courts. So-called “lower court case law” (Provincial Courts) has produced divergent responses.
On the one hand, there are judgments that do not consider the accumulation of profits to be abusive, particularly where the company demonstrates economic, financial or strategic reasons justifying the retention of earnings.
On the other hand, some decisions uphold challenges to profit allocation resolutions on the grounds that the accumulation of profits constitutes an abuse of majority power to the detriment of minority shareholders. In such cases, the courts have adopted different approaches:
-Limiting themselves to declaring the resolution null and void, on the basis that they cannot replace the corporate will;
-Ordering the company to submit a reasonable dividend distribution proposal to a new general meeting;
-Or, in certain cases, directly ordering the distribution of profits.
The Supreme Court has reinforced the idea that profit retention resolutions may be contrary to the company’s interest when adopted systematically and without objective justification, with the sole purpose of harming minority shareholders.
The key factor is not so much the specific percentage of undistributed profits, but rather the reasonableness of the decision, the company’s financial situation and the existence—or absence—of unjustified harm to certain shareholders.
In conclusion, dividend distribution is neither an automatic obligation nor a decision immune from judicial scrutiny. Legislation and case law seek to preserve a delicate balance between corporate autonomy and shareholder protection, avoiding both abuse by the majority and the substitution of corporate decision-making by the courts. It should not be overlooked that allowing courts to determine the amount to be distributed would undermine the general meeting’s own powers, as the body competent to decide on profit allocation. In this context, a clear, consistent and well-justified dividend policy remains the most effective tool for preventing corporate disputes and unnecessary litigation.
