Distribution of dividends

The company in which you hold shares usually has profits. However, until now, majority partners have always wanted to allocate them to reserves, as they obtain income from the company through other means.

Well, know that if, when approving the annual accounts, the partners decide not to distribute dividends, this may be considered an abuse of the majority. See how to act.

Distribution of dividends

The law allows a partner to challenge a Board agreement if it is imposed abusively by the majority; that is, if it does not respond to a reasonable need of the company and is adopted by the majority for their benefit and to the detriment of the other partners.

Well, the agreement not to distribute dividends when the company has profits can be challenged for this reason:

• In a capital company, it is reasonable for partners to obtain a return on their investment through dividends.

• Therefore, it is the company that must justify that there is a reasonable need not to distribute dividends despite having profits. In other words: if the partners decide to financially strengthen the company by applying the result to reserves, they must justify it objectively and reasonably.

For example, in the partners' meeting of an SL, it was agreed to allocate the profits of a fiscal year to voluntary reserves, but a minority partner challenged it. Well, the courts ruled in their favor and forced the company to distribute those profits. To this effect, it was taken into account that the SL had a capital of 18,000 euros, reserves of 475,000 euros, and a net worth of 700,000. That is, the company did not demonstrate, in this case, a reasonable need to continue accumulating reserves.

How should you act?

It is irrelevant if in previous years you did not oppose the profits being allocated to reserves, as you can oppose at the time you deem appropriate. To this end, keep in mind that:

• If the fiscal year closes on December 31, the administrator has until the next March 31 to prepare the annual accounts and propose what will be the destination of the profits. Therefore, speak with the partners beforehand and try to convince them that this year dividends should be distributed.

• If it is not possible, at the partners' meeting where it is proposed to allocate the profits to reserves, vote against it. If the agreement is finally approved, analyze both the approved accounts and those of previous years. In the event that the company's economic situation is sound and there is no need to allocate the profits to reserves, consider challenging the agreement as abusive (you must do so within one year from the date of its adoption).

• If the court considers such an agreement abusive, it will annul it and require the administrator to call another meeting in which the distribution of profits is agreed. Exceptionally, the court may annul the agreement and replace it with another to require the distribution of dividends without the need to hold another shareholders' meeting. This usually occurs when there is conflict between the partners and it is considered that there will really be no collaboration on the part of the company to hold a new meeting.

Deadline for payment and interest

It may also happen that the company does agree to distribute dividends and, therefore, you do not have to challenge any agreement in this regard. However, once the distribution has been agreed upon, what is the deadline for the company to pay the dividends to the partners?

Well, first of all, the meeting can set in the distribution agreement itself when the dividends will be paid to the partners and the method of payment (for example, immediate payment, installment, by transfer, etc.). However, in the event that the meeting has not decided anything about when the dividend should be paid, the law establishes that the partner may demand payment from the day after the meeting agreement in which the distribution was agreed.

However, in both cases, the law sets a limit: the company must fully pay the dividend within a maximum period of twelve months from the day after the date of the agreement in which the distribution was approved.

Finally, it should be noted that if the dividend is not paid from the moment it is due, legal interest for default accrues (that is, due to the company's delay in fulfilling its payment obligation). In this regard, see what the courts have concluded in a specific case:

• A partner sued an S. L claiming payment of the dividends that had been agreed upon, plus the corresponding interest. However, the company argued in its defense that, since the meeting where the distribution was agreed took place on May 3,2018, the company had a period of 12 months from that date to pay it. For this reason, the debt would not generate interest in favor of the partner until May 3,2019.

• However, the courts did not consider it that way and ordered the SL to pay interest from the date of the meeting.

In short, unless a different deadline has been agreed upon, legal interest begins to accrue from the date of the meeting in which the distribution of dividends was agreed, because the 12-month period established by law is a maximum limit for payment and not a postponement of it.

Partners can challenge the agreement not to distribute dividends (if there are profits) when the company does not justify the existence of a reasonable need not to distribute them.