It is common in private limited companies (those whose shares are not traded on regulated or secondary markets, even where they take the form of a public limited company due to the absence of a market or restrictions on transfer set out in their articles of association) for their founders to establish them within a relationship of trust that goes beyond the level of due diligence expected from any investor.
As a result, we relatively often encounter situations in which, after many years of involvement in the business of a limited company (SL or SA), no dividends or returns have ever been received.
Initially, this is due to the necessary caution regarding cash flow for the company’s financing needs, and later because remuneration is increasingly directed towards those shareholders involved in management, or simply because, almost automatically, the company’s accountants or advisers allocate profits to voluntary reserves.
What can I do if I have never received a dividend, even though the company has been generating profits consistently?
In this scenario, the shareholder would have the right to request the distribution of ordinary dividends when the Annual Accounts are approved by the General Meeting.
There is also the well-known right of withdrawal for failure to distribute dividends under Article 348 bis of the Spanish Companies Act (Ley de Sociedades de Capital), which entitles the shareholder to request compulsory withdrawal (forcing the company to purchase or redeem their shares through repayment), with valuation carried out by an independent expert appointed by the Commercial Registry of the company’s registered office if no agreement is reached regarding the value of the withdrawing shareholder’s shares.
However, what often happens in an environment already marked by distrust among shareholders is that either a token dividend is distributed merely to comply with the legal minimum distribution requirement (25% of the annual profit among all shareholders over five-year periods and where there have been profits for three consecutive financial years), or the company is burdened with excessive expenses, resulting in minimal profits or even losses that interrupt the aforementioned three-year cycle.
In such cases, there is often a significant disparity between the returns received by managing shareholders and those obtained by investor shareholders, with the remuneration of the former through salaries and benefits steadily increasing (even where the annual maximum remuneration approved by the General Meeting under Article 217 of the Companies Act is complied with), always to the detriment of the purely investment shareholder who receives no dividend whatsoever.
For all these reasons, we always recommend that shareholders obtain specialist corporate law advice to protect their interests before making the investment, through the necessary Shareholders’ Agreement (a shareholders’ side agreement) establishing protection mechanisms, control and supervision procedures, as well as provisions to compel approval by the shareholders at the General Meeting of a minimum dividend, together with a specific statutory withdrawal right containing objective criteria and a clear valuation mechanism for the shares at the time the right is exercised.
Where the shareholder already finds themselves “held hostage” within the company, we always recommend carrying out a detailed review together with the accounting experts in our team in order to validate the expenses and remuneration included by the directors in the Annual Accounts, so as to rule out any unlawful conduct or, at the very least, any form of disguised dividend distribution to the detriment of certain shareholders.
Jesús Rubiño Gómez
Partner in charge of the Corporate and M&A Department