The Capital Companies Law regulates the application of the result at the end of each year, establishing a series of limits and conditions for the distribution of dividends. The decision as to whether to distribute dividends corresponds to the general meeting.
The Capital Companies Law regulates the application of the result at the end of each fiscal year, establishing a series of limits and conditions to proceed with the distribution of dividends. The decision of whether to distribute dividends corresponds to the general meeting.
The distribution of dividends and shares is always a conflictive issue between partners, as any issue related to profits and their distribution in the business world. In this circular we will analyze how this aspect is regulated and which are the most problematic circumstances in practice.
Articles 273 et seq. of the Capital Companies Act (LSC) regulate the application of the result at the end of each financial year, establishing a series of limits and conditions to proceed with the distribution of dividends. The decision as to whether to distribute dividends corresponds to the general meeting.
The first rule is that, obviously, to be able to distribute dividends and shares, there must be profits, i.e., the result of the accounts for the year must be a positive balance and the net worth must be higher than the share capital figure.
A few further limits must be added to this rule. On the one hand, even if there were profits in the current year, they cannot be distributed if there were losses from previous years which would cause the value of the company’s net assets to be less than the amount of the share capital. In such a case, the profits for the year must be used to offset past losses. In addition, the company’s reserves must be covered – these represent at least 10% of the capital stock.
Once the profits to be distributed have been determined, the next step would be to define the amount to be received by each partner or shareholder. The rule establishes that in the case of a limited liability company, dividends – in the absence of any rule to the contrary in the bylaws – will be distributed in proportion to the shareholding in the capital stock. In the case of corporations, common stock will be distributed in proportion to the paid-in capital.
The time and form of payment is normally agreed upon in the distribution agreement, establishing rules in the absence of an agreement, the rule stipulating that payment is made at the registered office as from the day following the date of the agreement and at the latest within the following twelve months. With the prohibition of cash payments more than 1,000 euros, this rule of payment on the spot has become quite obsolete, except for the delivery of a check.
Normally, the position of the shareholders is more favorable to the distribution of dividends and less cautious than that of the corporate management. This can be explained by the fact that a year may have had the appearance of being profitable and productive, but that, nevertheless, in view of the legal rules explained above, the distribution of profits does not correspond, or not in as large an amount as expected. However, the rules cannot be disregarded, since in addition to being designed for a balanced operation of the company, there are consequences in the event of a poor distribution of profits.
Thus, the law also provides for the possibility of restitution of dividends. If these are distributed incorrectly and in contravention of the law, they must be returned by the partners with the corresponding legal interest. To claim restitution, there must be a kind of “bad faith” on the part of the shareholders who received these dividends, i.e., that they were aware of the irregularity of the distribution, or that they could not rationally be unaware of it.
For more information, please consult with Tax consulting.
