After several years of being blocked, on January 1, 2017, article 348 bis in Royal Legislative Decree 1/2010, of July 2, was reinstated, which approved the revised text of the Law of Corporations Act (LCA).
Article 384 attributes a special right of separation for the Partner in the absence of company profit-sharing, reinforcing the individual right of the Partner to the profits in joint stock companies. This right of the Partner is only applicable to unlisted companies and comes into force only from the fifth financial year from the inscription by the company in the Companies Register. The deadline to exercise the right of separation is one month from the date on which the Ordinary General Meeting of Shareholders was held.
It should be recalled that article 348 bis was originally introduced in the reform of the LCA through Law 25/2011, of August 1, regarding the exercise of certain rights of shareholders of unlisted companies, and was in force for a short period of nine months. The expectation was that, before January 1, 2017, the Commercial Code would be approved, and that the right of the shareholder to a share of the profits. The consequences of non-compliance in the event of failure to share the profits, when mandatory by law, would be regulated by the same Commercial Code.
Article 93 of the LCA recognizes the right of the Partner to a share of the company profits, although at the same time, article 273 LCA attributes the power to the General Meeting to decide how the yearly profits are shared out, in accordance with the approved balance sheet. Therefore, the Partner is entitled to a share of the company profits provided this is approved by the General Meeting. However, the Partner did not have the right to demand anything from the company, since it was the responsibility of the General Meeting to decide whether or not to share profits. Once the resolution of the General Meeting on how to share profits was passed, the member had the power to claim his/her right to a share of the company profits.
This general rule favoured the majority Partner because it is usually agreed to reinvest the profits to the detriment of the minority partner. In many of these cases, the majority shareholders already benefitted from the good performance of the company, through remuneration, tied contracts or other means. For this reason, the only ones affected by the reinvestment agreement were the minority partners.
The new entry into force of article 384 bis of the LCA implies a reinforcement of the right of the minority partner to a share in the profits, allowing him/her the rights of separation when the company does not distribute at least a third of the profits obtained by the company, thus obliging the company to pay him/her the corresponding settlement fee.
Article 384 bis endeavours to solve a clearly abusive situation for the minority partner in the case when he/she is deprived of company profits by the majority of shareholders. Until 384 bis, the only course of action was either to litigate on the grounds of abuse of law, or for minority partners to proceed with the sale of their titles, which did not always result in a profit, and was a problem compounded by the difficulty of finding a buyer willing to acquire a minority share in a non-listed company.
Article 348 bis LCA allows the minority partner to force the company to share the profits, either through the dividend or through the amortization to the partner who votes in favour of sharing the profits. This possible abusive exercise of rights by the minority partners was the reason for the suspension of article 348 bis LCA during the most severe years in times of crisis, and was an attempt to ensure the viability of companies in serious financial difficulties because they could neither share profits or reimburse minority partners.
It should also be noted that the majority’s repeated refusal to share profits can be as abusive as that of the minority to require a third of the profits from the company or, as the case may be, the acquisition of their minority participation. In both cases, all companies that, for example, have entered into financing agreements with third parties, can be put in a difficult situation. In these cases, it is possible to contravene the agreement with the creditors, since either the share of profits, or the acquisition of the minority interest, will materialize through the outflow of the company’s own funds, which may lead to a breach of the said contracts of financing and the consequent bankruptcy.
It is still to be seen therefore, how article 348 bis will affect companies and how the courts will act before possible lawsuits.
