Right of partners to participate in company profits and their limitations

Article 93 of the Capital Companies Act (LSC) establishes the rights held by any of the partners by the mere fact of being one. Specifically, section “a” of the aforementioned article provides that:

Article 93 Rights of the partner:

“In the terms established in this law, and except in cases where provided for, the partner will have, at least, the following rights:

1. 1. a) To participate in the distribution of corporate profits and in the assets resulting from the liquidation.”

From the provisions of the LSC it is clear that every partner has the right to participate in the dividends that the company has generated. As a general rule, the partners, and provided that the bylaws of the company do not provide any other criteria, will receive the dividend percentage based on the participation they have in said company.

The body empowered to decide whether or not to agree to distribute dividends is the general meeting, which will also be the body in charge of determining the time and method of payment of said dividends , with the maximum term for their full payment being twelve months from the time the general meeting agrees on their distribution.

Dividends can be distributed as long as the limits established by the LSC are not breached. These limits have an imperative character, their existence has as main objective to protect society from a possible decapitalization.

In addition to the limitations provided by the LSC, which we will explain below, the company’s bylaws also play an important role when it comes to distributing dividends. Since they can establish different limitations to those established by law, said limitations established in the bylaws must comply, as a minimum, with what is established in the law, in addition to being fulfilled in order to demand a share of the company’s profits.

Therefore, to proceed with the distribution of dividends from a company, the provisions of the LSC must be taken into account, unless the bylaws do not provide otherwise:

• In the event that the company has ended its financial year with positive results, and intends to distribute dividends. The art. 274 LSC establishes the obligation of the company to allocate at least 10% of the profits obtained to the legal reserve. The establishment of this obligation by the LSC has the purpose of covering against possible unforeseen losses that may occur in subsequent years.

This obligation will be in force until the company stores at least 20% of the share capital in the legal reserve item. Once this threshold is exceeded, the company may distribute dividends without the need to allocate 10% of the profits to the legal reserve.

• In the event that the company that has obtained a profit in the current year, but has carried losses from previous years, the profits obtained must be used to correct the losses of previous years.

This compensation for the losses that the company must carry out, will be agreed when the losses make the net worth less than the amount of the share capital. Therefore, if the net worth is less than the share capital, dividends cannot be distributed.

As previously indicated, the distribution of dividends among the partners can only be agreed by the general meeting or by the administrators, these must be governed by a series of conditions:

• The company must prepare an accounting statement establishing that it has sufficient liquidity to distribute dividends.
• The amount to be distributed as dividends may not exceed the results obtained since the end of the last financial year, deducting from them the losses of previous financial years and the mandatory reserves, the estimate of the amount to be paid must also be taken into account. pay for corporate tax.

It should be noted that in the event that the dividends or amounts on account of dividends have been distributed among the partners in contravention of the provisions of the LSC, they must return the amounts received in addition to the corresponding legal interest, as long as the company manages to prove that the partners were aware of the irregular distribution or that due to the circumstances of the distribution, it could not be ignored by the partners.

On the other hand, the fact of not distributing dividends in the first five years from the registration of the company in the Mercantile Registry, may lead, unless otherwise provided in the bylaws, to that the partner exercises his right of separation.

In order for the shareholder to have the right of separation recognized, they must record their protest due to insufficient dividends in the minutes, as long as the general meeting has not agreed on the distribution as Dividends of at least 25% of the profits of the previous year that are legally distributable, provided that profits have been obtained in the three previous years.

Noting that the right of withdrawal will not arise, even if the above is fulfilled, if the total dividends distributed in the first five years are equivalent to at least 25% of the legally distributable profits of said period.

The previously explained, included in Art. 348 bis of the LSC, does not include a right for the shareholder to obtain a minimum benefit or force the company to distribute dividends, but that grants the power to the partner that when the explained conditions have been met, he can separate from the company.

Alba Sacido
Member of the Commercial Law Department

07/12/2019