In our last post on the court challenge of so-called “negative resolutions” based on the grounds indicated in article 204.1 TRLSC, we concluded that, although it is possible that the majority shareholder’s refusal to adopt a corporate resolution proposed by the directors or by the minority shareholder may be considered abusive, in practice it is impossible to challenge such “negative resolutions” because the Madrid Provincial Court considered it impossible for the court to supplant the will of the general meeting and impose its criteria on a matter that is uniquely attributed to the competence of the general meeting. This reasoning was absolutely ineffective, since once the negative resolution was annulled as abusive, the aggrieved minority shareholder was doomed to a repetition of the cycle: in other words, a new shareholders’ meeting would be called, with the same result as the previous one.

The Madrid Provincial Court, however, opened up an alternative logical line and declared that it would be feasible to bring an action for nullity of the abusive vote, based on articles 6.2 and 7. of the Civil Court (exercise of rights in accordance with good faith, prohibition of abuse of rights, and absolute nullity of any business that contravenes mandatory or prohibitive rules); whereby the previous post suggested that in forensic practice it would be appropriate to objectively and subjectively accumulate court actions for nullity of abusive voting, and for the proclamation of the result of the meeting, this time without the calculation of the decisive and abusive vote.

Notwithstanding the above, the recent ruling of the Supreme Court of 11 January 2023 corrects the Madrid Provincial Court in its aforementioned reluctance to supplant the company’s will; In the case of a challenge to a (positive) resolution of abusive hoarding of profits in two consecutive financial years, the company is condemned to distribute dividends for seventy-five percent of said profits, this fraction having been established in a reasoned manner by the court, and, in short, thereby supplanting the will of the ordinary general shareholders’ meeting.

The Supreme Court gets a little tangled in its “ratio decidendi” when it states that the judicial body does not supplant the shareholders, since the 75% percentage had not been established discretionally but was due to the fact that the Provincial Court of La Coruña had understood that “in view of the circumstances of that company and its background, it constituted an abuse of the majority to allocate more than 25% of the profits made to voluntary reserves”; a rhetorical exercise that fails to disguise the judicial discretion that existed behind the setting of the maximum allocation of those reserves. In words of the Supreme Court:

And, although it might appear that the court ruling, in agreeing to distribute 75% of the profits from both years as dividends, is supplanting the will of the shareholders, as it seems to make use of a margin of discretion that the shareholders’ meeting would have as to what proportion of the profits should be allocated to dividends, in reality there is no such supplanting.

In response to the minority’s claim that it was inappropriate to allocate the profits to voluntary reserves and that, on the contrary, they should be allocated in full to dividends, the Court understands that, in view of the circumstances of this company and its history, it was an abuse by the majority to allocate more than 25% of the profits achieved in the 2014 and 2015 financial years to voluntary reserves. For this reason, it is reasonable to understand that if it was only appropriate to allocate 25% to voluntary reserves, the appropriate resolution was to allocate the remainder to the distribution of dividends, which is what the ruling states.

In cases such as the present one, the effective judicial protection of the minority shareholder would be negatively affected if the ruling negatively affected, if the court’s pronouncement were limited to upholding the challenge and annulling the resolution. It would be up to the shareholders’ meeting, controlled by the majority shareholder, to legitimately satisfy the rights of the minority shareholder, as recognised by the judgment. Where the upholding of the challenge to the corporate resolutions leaves no discretion to the shareholders’ meeting to adopt the appropriate resolution, there is no objection to the court declaring it to be so and thereafter taking effect.

Leave a Reply

Your email address will not be published. Required fields are marked *