1. Introduction

The Spanish legislator's intent to protect minority shareholders is evident in various provisions, including the controversial and doctrinally debated Article 348 bis of the Consolidated Text of the Capital Companies Law (hereinafter referred to as the "LSC" -EDL 2010/112805-), which states:

"Article 348 bis. Right to withdraw in case of failure to distribute dividends.

1. From the fifth financial year following registration in the Commercial Register, a shareholder who voted in favor of distributing the social benefits shall have the right to withdraw if the general meeting did not resolve to distribute as dividends, at least, one-third of the profits from the previous financial year that are legally distributable.
2. The period for exercising the right of withdrawal shall be one month from the date of the ordinary general meeting of shareholders.
3. The provisions of this article shall not apply to listed companies."

What seemed like a promising opportunity to support minority shareholders—note that the article does not explicitly refer to special protection of this "collective," but the legislator's intention appears clear—has ended up creating a focal point of issues regarding the legal nature of the provision and its (mis)guided drafting included in the law.

In addition to the uncertainties arising from the interpretation of the term "profits from the operation of the corporate purpose" and the difficulty in determining whether the provision is mandatory or discretionary, one of the main hurdles that have arisen concerns the classification of the resulting credit under insolvency law arising from the exercise of the withdrawal right. Scientific doctrine and case law rely on the concept of shareholder to clarify this issue and pose the following question: When does a shareholder cease to hold such a status?

From this conceptual tree arise two branches that differ in time: the theory of reception, which understands that the departure from the company takes place when it receives such a request; and the theory of reimbursement, which considers economic transfer of the value of the shares or stocks necessary for the effective departure.

2. Protection of minority shareholders and the history of the "offended" Article 348 bis

Unlike civil or purely personalist companies, in capital companies, the status of shareholder is obtained through the acquisition of social shares or stocks whose ownership grants rights and obligations recognized by law, company bylaws, or binding parasocial agreements among the signing shareholders.

"These fundamental minimum rights of the shareholder are as follows: three of an economic - asset nature (right to participate in profits, right to participate in the liquidation quota, and preemptive subscription right) and two rights of a political - personal nature (right to attend and vote at General Meetings) [in addition to] other rights derived from the voting right (right to information and right to challenge social agreements), or from the mere status of shareholder (right to transfer shares and right to withdraw under certain conditions)."[1]

In addition to these legal instruments directly linked to the status of shareholder as such, the intention of the commercial legislator to conduct a policy in dubio pro minority is notably recognized (and, it could be said, supported), creating special legal mechanisms so that these shareholders can have their rights satisfied and configuring a legal system whose principle should deter any abusive conduct and promote the social interest over the particular interest and the majority.

From the patrimonial right to participate in social benefits ex art. 93.a) of the LSC -EDL 2010/112805- arises Article 348 bis, whose purpose is two-fold: (i) to guarantee, provided economic and accounting conditions enable it, the distribution of dividends to minority shareholders who wish so (ii) under the social penalty of having to redeem these social shares or stocks.

The legislator considered it necessary to include a specific article that would allow shareholders to exercise their right to withdraw in the context of non-distribution of dividends, considering that, prior to 348 bis, case law resolved these disputes through Article 7 of the Civil Code -EDL 1889/1- to prevent actions constituting abuse of right.

Since participation in social profits is an essential but conditional right of the shareholder - it must (i) meet economic and accounting requirements; (ii) be adopted via a favorable resolution of the General Meeting, and (iii) be aligned with the social interest - the Provincial Court of Madrid in its Judgment number 117/2016 -EDJ 2016/119550- considers that "one cannot speak of a shareholder's right 'to the dividend,' that is, to be given their aliquot part of the profit earned since the right to the dividend is, therefore, contingent, conditioned by the existence of profits and a valid distribution agreement."

In the present case, the minority shareholders requested the annulment of the social agreement adopted by the majority, which allocated the entirety of the profits earned in 2010 to voluntary reserves. The litigious society had made profits in the years 2007 to 2010, with a share capital of two million euros, voluntary reserves of €9,577,616.74, and a net worth of €12,616,170.66 at the end of 2009. Subsequently, in 2010, it made profits of €1,033,481.59, and it was agreed to fully allocate this amount to voluntary reserves by a resolution passed with the votes in favor of the majority and against by the minority shareholders.

In light of the evidence of the case, the Court noted that there was "no sufficient objective justification for the insistence of the social majority on refusing to distribute dividends derived from the 2010 exercise, when significant profits had been consistently earned in all previous years, the situation persisted at the end of that year, and the company's financial position as reflected in the accounts was quite solid."

The Court understands that the blockage to distribution is unjustified and constitutes an abuse of right under Article 7 of the Civil Code -EDL 1889/1-.

This legislative need to expressly regulate the minority shareholder's right to participate in social profits has resulted in the inclusion of Article 348 bis in the LSC -EDL 2010/112805-. It appears that the amendment is aimed at "closed" companies whose transmission regime is more limited both legally and practically, since the main financial detriment of the shareholder's departure is the obligation for the company itself to acquire its shares if there is no third-party buyer.

In any case, it is evident that the practical effectiveness of the provision has been deficient since its inception, and evidence of this is the difficulty the norm has encountered in being truly applied and influencing commercial transactions. Therefore, this article speaks of the "offended" 348 bis -EDL 2010/112805- whose history can be highlighted in the following milestones:

(i) Birth: Article 348 bis is included in the LSC -EDL 2010/112805- through Law 25/2011 of August 1 -EDL 2011/152628-, partial reform of the Capital Companies Law, and enters into force on October 1 of the same year.

(ii) First suspension: doubts about its relevance foresee a short life for the rule, and the legislator confirms this by suspending its application shortly after its entry into force.

On June 24, 2012, a day after the publication in the Official State Gazette of Law 1/2012, of June 22 -EDL 2012/114833-, on simplification of the information and documentation obligations for mergers and divisions of capital companies, the transitional provision added by Article 1.4 of the mentioned Law suspends, until December 31, 2014, the application of the provisions of Article 348 bis -EDL 2010/112805-.

(iii) Second suspension: it seems that the legislator, in the midst of an economic crisis, continued to question the economic - social effects that Article 348 bis -EDL 2010/112805- could have, thus, with somewhat tarnished legislative technique, extended the suspension period shortly before December 31, 2014, when it should have come into force.

Thus, the first final provision of Royal Decree-law 11/2014, of September 5 -EDL 2014/137807-, on urgent measures in insolvency matters, amended the transitional provision included two years earlier to suspend until December 31, 2016, the application of the provisions of Article 348 bis -EDL 2010/112805-.

Note the concern shown when amending the LSC -EDL 2010/112805- through a Royal Decree-law on "urgent measures in insolvency matters."

Subsequently, given that the legal instrument used was of an urgent nature and lacked the rank of a law, Law 9/2015, of May 25 -EDL 2015/75516-, on urgent measures in insolvency matters, was published, confirming the suspension of the article until December 31, 2016.

(iv) Entry into force - January 1, 2017:

And finally, after more than five years of shadowy existence, Article 348 bis of the LSC -EDL 2010/112805- enters into force on January 1, 2017.

(v) Bill:

Continuing with the instability of the rule, on December 1, 2017, the Popular Parliamentary Group in the Congress of Deputies presented Bill 122/000151 -EDL 2017/243368-[2] requesting the suspension by decree-law of the current Article 348 bis and proposing a new wording "in order to prevent the increase in litigation due to the lack of clarity of the article."

This proposition seemed to reflect the latent concern in the business sector, despite the fact that it remained anecdotal as recently, on September 11, 2018, the legislative process concluded with the withdrawal of the proposition.

In any case, despite the withdrawal of the proposition, it is interesting to include in this study a comparative text of the current rule and the proposal to appreciate the main controversial elements of the article (modifications included in italics):

"1. After the fifth year counted from the registration in the Commercial Register of the company, the shareholder who has recorded in the minutes his protest over the insufficiency of the recognized dividends or their absence shall have the right to withdraw in the event that the general meeting did not resolve to distribute as dividends, at least, one-fourth of the profits obtained during the previous financial year that are legally distributable, provided that profits have been made during the three previous financial years and the total dividends distributed during the last five years are less than one-fourth of the total profits recorded in that period.

The provisions of the preceding paragraph shall be without prejudice to the exercise of actions to challenge social agreements and liability actions that may be appropriate and unless otherwise provided by the bylaws.

2. For the deletion or modification of the withdrawal cause referred to in the preceding paragraph, the consent of all shareholders shall be required, unless the right to withdraw from the company is recognized to the shareholder who did not vote in favor of such agreement.
3. The period for the exercise of the withdrawal right shall be one month from the date of the ordinary general meeting of shareholders.
4. The provisions of this article shall not apply in the following cases:

a) When dealing with listed companies or companies whose shares are admitted to trading on a multilateral trading system.

b) When the company is in bankruptcy.

c) When, under insolvency legislation, the company has informed the competent court for the declaration of its bankruptcy of the initiation of negotiations to reach a refinancing agreement or to obtain adhesions to an early proposal for a settlement, or when negotiations have been communicated to that court to reach an extrajudicial payment agreement.

d) When the company has reached a refinancing agreement that meets the conditions of non-rescindability established in insolvency legislation."

As can be seen, the proposed amendments (in addition to attempting to clarify aspects of legislative technique) revolve around three main contentious issues:

- Definition of profits from the operation of the corporate purpose.

- Legal nature of the provision regarding its consideration as a mandatory or discretionary rule.

- Aspects in insolvency proceedings.

3. What is meant by the benefits derived from the exploitation of the corporate object?

In general terms, the wording of the Companies Act -EDL 2010/112805- refers to the concept of (a) profits or (b) distributable profits, with the former broadly reflecting the positive results obtained by a company in a fiscal year and the distributable ones being those that can have such consideration once negative results from other years have been covered and the corresponding legal or statutory reserves have been established.

However, the wording added by Law 25/2011 -EDL 2011/152628- is novel and not aligned with the legislative technique of the Companies Act -EDL 2010/112805-, which only has a similar precedent included in Article 128 regarding the rules for liquidation of usufruct when referring to the "benefits derived from the exploitation of the company."

The question is: which benefits are not understood as derived from the exploitation of the corporate object and must therefore be excluded from the scope of application of Article 348 bis -EDL 2010/112805-?

The Directorate General of Registries and Notaries (“DGRN”), in its first and necessary interpretation of the article under study, has issued two resolutions dated November 28, 2017 – appeals against decisions filed by the Mercantile Registrar of Seville and Cadiz – upholding the arguments put forward by the Provincial Court of Barcelona in its Judgment 81/2015 of March 26, 2015 -EDJ 2015/128110- in interpreting that the legislator has sought to exclude extraordinary benefits from those derived from the exploitation of the corporate object.

The Provincial Court of Barcelona bases its argument on the definition of extraordinary or exceptional income included in the General Accounting Plan of 1990 -EDL 1990/15621- and 2007 -EDL 2007/194098-, respectively, with extraordinary income being those that "(i) fall outside the ordinary and typical activities of the company and (ii) are not expected to occur frequently," and exceptional being those benefits and income of exceptional nature and significant amount, [including] precedents of those credits that were once written off due to definitive insolvencies."

In conclusion, the Provincial Court indicates that revenues outside the typical business activity whose amount is significant and not recurring will not be considered as derived from the exploitation of the corporate object and therefore should not be taken into account for the purposes of Article 348 bis -EDL 2010/112805-.

It is important to clarify that these requirements are cumulative and necessary, with the income needing to be (i) outside the typical activity and non-recurring and (ii) of significant amount to be considered extraordinary.

4. Article 348 bis: Mandatory or discretionary?

The wording proposed by the legislator raises doubts about the legal nature of the rule regarding its binding effect on the parties involved. That is, is the agreement not to apply Article 348 bis -EDL 2010/112805- valid?

Legal doctrine debates whether it is mandatory or discretionary, drawing on the foundations of commercial law and general corporate theory to provide consistent arguments.

Those in favor of prioritizing the autonomy of the shareholders[3] consider Article 28 of the Companies Act -EDL 2010/112805- makes 348 bis a discretionary provision by stating that "[i]n the articles of incorporation and in the bylaws, all agreements and conditions that the founding partners deem appropriate may be included, provided they do not conflict with laws or contradict the principles underlying the chosen corporate type."

The same approach was taken in the legislative proposal by proposing the possibility of suspending or modifying this cause of separation in case of unanimous consent of all shareholders.

In any case, despite the doctrinal disputes about the viability of expressly stating the discretionary nature in the corporate bylaws and the competence of the Mercantile Registrar to analyze its registration, little controversy arises in recognizing the practical possibility of suppressing the right via a shareholder agreement.

In other words, shareholders could enter into a private agreement waiving the right to exercise the separation action in case of non-distribution of dividends, and Article 348 bis -EDL 2010/112805- would be annulled de iure. This parasocial agreement, which should be signed unanimously, would be valid as long as it does not violate the social interest, and its wording protects the rights of minority shareholders who accept the waiver of exercising any separation action due to non-distribution of dividends.

5. The classification of the credit in the insolvency proceeding: and when do I get paid?

The exercise of the shareholder's separation right under Article 348 bis -EDL 2010/112805- results in (i) the loss of status as a shareholder by the interested party and (ii) the reimbursement of the value of the social shares or stocks that must be acquired by a third party or by the company.

The derivative acquisition or redemption of social shares or stocks could result in the insolvency of the company and the impossibility of regularly meeting its due obligations, thus entering into a bankruptcy situation.

Already in the insolvency proceeding, the question that heads this section arises: when do I get paid? The 3rd section of the Insolvency Law (hereinafter, "LCon" -EDL 2003/29207-) classifies credits as privileged, ordinary, and subordinated based on their origin and legal nature.

Jurisprudence and doctrine debate whether the credit arising from the exercise of the separation right should be considered ordinary, subordinated, or even extra-concursal, analyzing for this purpose the status socii or the moment when the shareholder ceases to hold such status. Two main theories are considered in this regard: the reimbursement theory, which understands the actual receipt of money for the social shares or stocks as the point at which the separation action takes effect, and the receipt theory, which considers the shareholder no longer holds such status at the moment the company – via its directors – receives the separation notice.

Supporters of the reimbursement theory argue that the resulting credit would be subordinated because the shareholder is a person specially related to the bankrupt under Articles 92. 5º and 93 LCon -EDL 2003/29207- and those in favor of the receipt theory argue that the shareholder no longer holds such status at the time of the declaration of bankruptcy, and therefore, the credit should be considered ordinary.

Likewise, part of the doctrine positioned in the reimbursement theory argues that the satisfaction of this credit should take place "after the payment of all credits of third parties that maintain ties with the company," understanding that "the settlement of the share that corresponds to the shareholder in the social patrimony is a matter that is outside the insolvency procedure and as a stage that must occur after the satisfaction of the creditors" [4].

That is, since the shareholder remains one at the time of the declaration of bankruptcy and the credit arises from the reimbursement of their social shares or stocks, this doctrinal view considers the debt as extra-concursal, being the most subordinate right of all and ranking behind preferred shares in the payment order – a financial instrument analyzed in previous years whose name refers to its subordination and that are only "preferred" in the order of precedence to shares or participations –.

Contrary to what is stated, minor jurisprudence adopts the receipt theory. Thus, the Judgment of the Provincial Court of A Coruña (4th Section) number 12/2018 of January 15 - EDJ 2018/2405- analyzes an appeal in which the reimbursement credit of EUR 1,263,654.70 for the exercise of the separation right under Article 348 bis -EDL 2010/112805- was considered in the first instance as subordinated and conditional due to the shareholder being a person specially related to the bankrupt (and conditional due to the pending of another judicial valuation proceeding of the shares).

However, the court of second instance declares that "[t]he separation or exclusion entails the loss of the legal status of the shareholders who have freely decided to abandon it" and interprets that "in no way does the law condition the receipt of reimbursement, in the case of exercising the separation right, to the prior liquidation of the credits of the social creditors for debts prior to the exercise of such right, but offers other protection mechanisms."

Regarding these protective mechanisms, the Court concludes that Article 357 of the Companies Act -EDL 2010/112805- on the protection of creditors is sufficient ad cautelam measure to guarantee the exit of the shareholder while maintaining their liability towards the creditors.

The Provincial Court bases its arguments on what was stated by the First Chamber of the Supreme Court in its Judgment 32/2006 of January 23 -EDJ 2006/2819- which indicates that the exercise of separation is a unilateral right of the shareholder that takes effect when the company receives the notice in form and within the deadline; stating that there is no "right of remorse" and that the payment or reimbursement of the share is not a prerequisite for the status socii.

Therefore, the Court concludes that the outgoing shareholder is not a person specially related to the bankrupt and is the holder "of a credit for reimbursement under Article 356 of the Companies Act -EDL 2010/112805-, which has already been legally quantified, although its amount is pending dispute, and not a credit right to participate in the social benefits via Article 93 a) LSC, which are not compatible".

Furthermore, even following the reimbursement theory and considering that the shareholder holds such status until the actual payment of their shares, the Court interprets that the credit should not be subordinated since Article 92.5º of the Companies Act -EDL 2010/112805- includes in the ranking order as subordinated those credits from a person specially related whose origin is loans or acts of similar purpose and "it would be an extensive interpretation, and, therefore, unsustainable, to consider that the contribution that the shareholder makes to the social capital constitutes a form of financing to the company and that it should be assimilated to an operation of loan for the analyzed purposes. When making the contribution to the social capital, the shareholder knows that this is a guarantee amount, to which they are not entitled to reimbursement, as opposed to what happens in the event that it were a loan, without prejudice to what results from the liquidation operations, once the company is dissolved, which constitutes a very different legal situation" .

In conclusion, the Court maintains that the credit is ordinary because the outgoing shareholder is not a person specially related and confirms that, if that were the case, the liquidation credit would also not be subordinated for not meeting the objective requirements of Article 92.5º LCon -EDL 2003/29207-.

6. Conclusions

The legislator enables different mechanisms to protect, especially, the rights of minority shareholders, with Article 348 bis of the LSC -EDL 2010/112805- being a controversial escape route for those shareholders who find the exercise of separation from the company as a solution to the non-distribution of dividends.

The wording of the article has been widely criticized by doctrine and the scarce jurisprudence does not resolve its main difficulties. This has been echoed by the legislator, who is afraid of his own creation by suspending the effective application of it for almost 5 years.

Doubts about its terminology and legal nature distance the precept from the initial objective of supporting the minority shareholder, whose right may go unsatisfied if the company is obligated to initiate the bankruptcy of creditors as a consequence of the exercise of separation.

It seems that the legislator, aware of the source of litigation it has created, is trying to remedy the problem by proposing different wordings, but we are in a somewhat turbulent time for His Excellency to implement new measures in the Congress of Deputies and / or Senate. In the meantime, the minority shareholder continues to ask the same question, and to me, when do they pay me?