Spain: The Suspended Right Of Separation For Shareholders In The Event Of A Lack Of Distribution Of Dividends (Art. 348 Bis, LOC) Is In Force Again

Article 348 bis of the Law on Corporations (LOC) establishing the right of separation for shareholders in the event of a lack of distributions in the form of dividends of at least one third of the profits from company operations came in force once again last Sunday, 1 January 2017, after more than four and a half years in suspension.

The precise wording of the provision is as follows:

"Article 348 bis. Right of separation in the event of lack of distribution of dividends.

1. Commencing in the fifth financial year from the entry in the Commercial Registry of a company, any shareholder that had voted in favour of distribution of corporate profits shall have the right of separation in the event that the general shareholder's meeting does not agree to the distribution as dividends of at least one third of the profits from operations related to the corporate object obtained during the previous financial year that are legitimately distributable.

2. The period for the exercise of the right of separation shall be one month from the date on which the ordinary general shareholders' meeting is held.

3. The terms of this article shall not apply to listed companies."

The controversial provision, which was introduced on 2 October 2011 under Law 25/2011 of 1 August, was in force for only eight and a half months before its enforcement was temporarily suspended from 24 June 2012 to 31 December 2016.

The purpose of the regulation was to avoid the abuse that majority shareholders exercised in certain companies by refusing to share dividends. Lawmakers understood that doctrinally the systematic refusal to share dividends could involve a violation of the abstract right of shareholders to share in corporate profits.

However, the broad terms under which article 348 bis was drafted quickly led to lawmakers suspending its effect (a most decidedly unorthodox legislative technique) to avoid pernicious effects on the financial status of companies and the increase in corporate conflict that the automatic application of its wording was creating.


1. Lack of distribution of one third of the profits

The factual basis of the right of separation is the lack of distribution in the form of dividends of one third of the profits from operations related to the corporate object for the previous financial year that are legally distributable.

The rule stipulates that the shareholder will be able to exercise its right of separation "in the event that the general shareholder's meeting does not agree to the distribution as dividends" of one third of "the profits from operations related to the corporate object", an indeterminate legal concept that has been interpreted in the barely existing case law as ordinary profits (with extraordinary ones discounted) after taxes and satisfaction of legal obligations.

2. Vote in favour of profit distribution

Pursuant to article 348 bis of the LOC, a shareholder that voted in favour of distribution of corporate profits is entitled to exercise the right of separation. Bearing in mind that, in accordance with our commercial legislation, where the proposal for the application of results is presented by the administrative board, which in turn submits it for vote at the general shareholders' meeting, it may be more precise to state that those shareholders that vote against the proposal to not share profits or to share less than one third of the profits as dividends are the ones that are entitled.

Seen in this way, it is understood that those shareholders that abstain from voting will not have any right of separation.

There are further questions regarding whether shareholders are entitled to exercise the right if they do not attend the general shareholders' meeting where it is not agreed to distribute one third of the profits. Although a literal interpretation (confirmed by some ruling of the first instance) would indicate that shareholders that do not attend do not have the right of separation, an end result approach would lead to the understanding that they should have it, given that they were unable to address the matter of distribution.

3. The passing of five financial years from the entry in the Commercial Registry

The ruling stipulates that the right of separation exists commencing with the fifth financial year following the entry of the company in the Commercial Registry. The unfortunate wording of the precept gave rise to the question of whether the right of separation could be exercised starting at the commencement of the fifth financial year – in other words, after four financial years have passed – or five financial years from its entry. Although the verbiage of the rule is confusing, legal doctrine and small amount of existing case law interprets it as five corporate financial years having had to pass in order to invoke the right of separation.

With this time frame, the lawmakers appear to comprehend the characteristics of newly created companies, whose principal objective is, and must be, their existence, and considering any rule to be valid that would remove funds crucially important for their future from their net worth is out of the question.

In any case, setting limits of a strictly time-related nature for these purposes does not appear to be the wisest decision. The pace of growth and the investment necessities of a company depend on a variety of factors, such as the industry in which the company operates, the initial investment of the founders, the time for the business to mature until it can generate a profit and, above all, the "uncertainty" of business itself.


The right of separation due to lack of distribution of dividends entails the obligation of the company either to reduce capital to proceed with the redemption of stock or shares of the shareholder that separates, or to purchase them at their reasonable value.

If there is no agreement between the company and the shareholder regarding the reasonable value of the shares or stock, or regarding the person or persons that shall value them and the procedure to obtain such valuation, they shall be valued by an auditor outside of the company designated by the Commercial Registry for the corporate domicile upon request of the company or any of its shareholders owning shares or stock subject to valuation.


The time period for the exercise of the right of separation due to lack of distribution of dividends is one month from the date on which the ordinary general shareholder's meeting is held.

Hence, it differs from the general time period established for the other situations in which the right of separation can be exercised, which is one month from the publication of the agreement in the Official Gazette of the Commercial Registry (BORME) or from the receipt by the shareholder of the written communication advising the adoption of the agreement.


Article 348 bis of the LOC extends the right of separation due to lack of distribution of profits to shareholders of any capital companies, whether public corporations, joint stock companies or partnerships limited by shares.

However, the rule does not apply to quoted companies.


The new entry in force of the right of separation due to lack of sharing of dividends will affect both company results in annual reports, which must plan for this contingency, and contractual relations.

In this regard, it will be appropriate to analyse how limitations and restrictions on the sharing of dividends – which are included frequently in financing contracts and shareholders' agreements – are compatible with restored article 348 bis of the LOC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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