– Entry into force of Article 348 Bis of the Companies’ Law (“Ley de Sociedades de Capital”) –

On 31 December 2016, the suspension of the application of the provisions of article 348 bis of the Companies’ Law (“Ley de Sociedades de Capital”) came to an end, in accordance with what is established in the transitional provision of such legal body, which was amended by the final provision of Law 9/2015, of May 25, about urgent measures in insolvency matters and the final provision of the Royal Decree 11/2014, of 5 September, about urgent measures in insolvency matters.

This means that the content of this article has entered into force and with full effect on January 1, 2017.

This article provides for a right of separation for the shareholders (expressly not applicable to listed companies) in the case of a failure to distribute dividends by the company under certain circumstances, namely:

(i) the general shareholders’ meeting does not agree on a distribution of dividends of at least one third of the profits inherent to the operation of the corporate purpose obtained during the previous year,

(ii) the shareholder who claims the right of separation has voted in favor of the distribution of dividends

(iii) the company has been registered in the Commercial Registry for at least five (5) years and

(iv) the profits are legally subject to distribution.

The shareholder, in order to be able to exercise its right to separation, shall give a notice in writing (by registered letter or by electronic means which enable to verify the sending) to the company. Such notice shall include a representation by the separating shareholder where such separation will is ascertained due to the absence of profit distribution in the terms described above. Such notice shall be sent in the term of one month since the date the general shareholders‘ meeting has taken place. The validity of the exercise of the separation right does not depend on the company’s acceptance of the notice or any action from the company whatsoever.

Such right of separation entails the right of such shareholder to receive the value of its shares, at a fair value. If the company and the shareolder fail to agree what the fair value of the shares is (or if they fail to agree on who and how the valuation needs to be carried out), the shares will be valued by an independent expert appointed by the Commercial Registry of the place where the corporate domicile of the company is located. The independent valuation can be requested by the company or by the separating shareholder.

Under this provision, the legislator intends to solve a potential abusive situation whereby a minoritary shareholder is prevented from receiving dividends by the majority of shareholders. Previously, the only action such minority shareholders could deliver was, either fighting to preven an abusive exercise of their rights by the majority, or proceed to the sale of their shares (which did not necessarily enabled the minority shareholders to receive either the fair value of their shares (provided it is not easy to find a purchaser for a inority stake in a non-listed company) or the proceeds of non distributed profits)

The main issue arising from this new article is based on the absolute and complete right of separation which does not foresee the capability of the company itself to assume the payment of the shares of the exiting shareholder and in the event of a conflict with a minoriry shareholder, the company may be forced (after it fifth year) to sistematically distribute a third of its profit even if such proceeds are needed to fund the company’s viability or a different destination of the profits subject to the operating strategy thereof.

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