The rights of minority shareholders in a Spanish limited liability company (SL)

A recent judgment of the Spanish Supreme Court concerning shareholders’ right to information in limited liability companies in Spain (appeal no. 1290/2020, decision date 29/05/2024, ruling no. 762/2024, Cendoj ID 28079110012024100752) gives us the opportunity to summarise the rights of minority shareholders in a limited liability company (hereinafter, an SL), as established by Royal Legislative Decree 1/2010 of 2 July, approving the consolidated text of the Spanish Companies Act (hereinafter, the LSC).

We will first address the rights that a shareholder holds simply by virtue of participating in the share capital of an SL, regardless of the percentage of share capital held, and then we will also look at the rights of minority shareholders according to the stake they hold in the company’s share capital.

I.- Individual rights of each shareholder

Right to request the convening of the ordinary general meeting (art. 169 LSC)

The law establishes that the general meeting must be convened at least once a year in order to approve the annual accounts and the management of the company, and it must be held within the first six months of the start of the new financial year.

If the directors fail to convene it, any shareholder may apply to the Court Clerk (Judicial Secretary) or to the Commercial Registrar of the company’s registered office to request that it be convened. This right also extends to other general meetings that may be provided for in the articles of association.

Right to attend and vote at general meetings (arts. 179 and 202 LSC)

In an SL, unlike in a public limited company, a shareholder’s participation in general meetings cannot be limited by the articles of association, for example by requiring a minimum number of shares.

On the other hand, it is also possible in an SL to provide for different classes of shares that, for example, confer more than one voting right, or shares without voting rights (arts. 94 and 98 et seq. LSC). In these cases, the principle that must always be respected is equal treatment of shareholders who are in the same circumstances (art. 97 LSC).

Right to obtain documentation and information on the matters included on the agenda prior to and during the general meeting (arts. 196 and 272 LSC)

This is the right that has been interpreted by the Supreme Court in the above-mentioned judgment for the purposes of the possible challenge of corporate resolutions.

On this point, the Supreme Court has drawn a distinction between useful or relevant information, which must be provided, and essential information, the absence of which prevents the shareholder from deliberating and voting properly and, therefore, if the resolution is approved by the majority, makes it possible to challenge the resolution.

It is important to remember that the shareholder may request whatever information he or she deems appropriate in advance of the general meeting and in writing, as well as verbally during the meeting itself. Therefore, it is advisable—especially in order to create evidence of the request—to send a written request prior to the meeting, since during the meeting it will be chaired by the president, who is usually an expression of the majority, and it is therefore not always easy for a minority shareholder to have their statements formally recorded.

Right to the distribution of profits in proportion to the share capital holding (arts. 93 and 275 LSC)

Similarly to what has already been seen in relation to voting rights, the law also allows the articles of association to provide for a preferential distribution of dividends in favour of certain classes of shares.

Likewise, in the case of the creation of non-voting shares, their holders will be entitled to receive a minimum annual dividend.

Right to a liquidation quota (arts. 93, 101 and 392 LSC)

The law also allows certain privileges to be established when liquidating the company. In addition, in the case of non-voting shares, their holders will be entitled to reimbursement of their value before any amount is distributed to the remaining shares.

Pre-emptive right to subscribe or acquire new shares (art. 304 LSC)

In the event of a capital increase through the issuance of new shares, the law grants each shareholder a pre-emptive right to subscribe to the new shares in proportion to the stake held in the share capital. The purpose of this rule is to prevent a minority shareholder from having their stake diluted as a result of decisions taken by the other shareholders.

However, this right exists only in the case of capital increases funded by cash contributions, which leaves room for the majority to attempt to dilute an “uncomfortable” minority shareholder, for example through a capital increase by offsetting a credit held by the majority shareholder against the company.

That said, according to case law, such capital increases may be challenged by the minority shareholder through an action for annulment of the corporate resolution if they can demonstrate that there has been an abuse of rights under article 7 of the Civil Code, because the capital increase lacked a real and lawful cause justified by the company’s situation.

Right to transfer shares in accordance with the articles of association and the law (arts. 107 and 108 LSC)

With regard to the transfer of shares, the law does not allow transfers to be completely free, as if they were bearer shares, nor does it allow the articles of association to prohibit the transfer of shares or to establish restrictions so severe that they have the same effect. That said, it is possible to prohibit transfers for a maximum period of five years from incorporation or from a capital increase, or for a longer period provided that shareholders are granted a right of withdrawal from the company.

On the other hand, clauses granting minority shareholders the right to sell their shares when a majority shareholder intends to transfer all or part of theirs (tag-along rights) are quite common, as are clauses requiring minority shareholders to transfer their shares under certain conditions when a third party wishes to take control of the company (drag-along rights).

These clauses are normally included in shareholders’ agreements, but they are also permitted at the level of the articles of association, provided that the pre-emption right established by article 107.2 LSC for shareholders is respected.

Right of withdrawal from the company, including in cases of non-distribution of profits (arts. 346, 347 and 348 bis LSC)

Shareholders may withdraw from the company if they did not vote in favour of a resolution, or even if they have no voting rights, in the following cases:

a) Replacement or substantial modification of the corporate purpose. In this respect, the prevailing doctrine holds that a formal amendment of the corporate purpose is required. In the case of de facto changes, the shareholder will not have a right of withdrawal, but may have other remedies to protect their rights, such as an action for liability against the directors.

b) Extension of the duration of the company.

c) Reactivation of the company.

d) Creation, modification or early termination of the obligation to perform ancillary obligations.

e) Modification of the regime governing the transfer of shares.

f) Failure to distribute at least 25% of the distributable profits obtained during the previous three financial years. This last right is subject to the limitations provided for in article 348 bis LSC.

In addition to the statutory grounds for withdrawal, the articles of association may provide for other grounds, determining how the existence of the ground for withdrawal is to be evidenced, how the right is to be exercised and the time limit for its exercise.

In companies subject to mandatory audit, the right to request the appointment of a statutory auditor (art. 265.1 LSC), when:

The General Meeting has not appointed an auditor before the end of the financial year to be audited, or the appointed person does not accept the appointment or is unable to perform their duties.

Companies exempt from the obligation to audit their accounts are those which, for two consecutive financial years, meet at least two of the following conditions:

a) Total assets not exceeding EUR 2,800,000.

b) Net turnover not exceeding EUR 5,700,000.

c) Average number of employees not exceeding 50.

The request must be submitted to the Commercial Registrar of the company’s registered office, and the shareholder must provide evidence of their shareholding in the company’s share capital (arts. 350 et seq. of the Commercial Registry Regulations).

II.- Shareholders holding less than 5% of the share capital

Right to challenge corporate resolutions (of the General Meeting and the Board of Directors) when they hold at least 1% of the share capital (arts. 206 and 251 LSC)

The time limit to challenge a resolution is one year from the date on which the resolution was adopted. If the resolution has been registered with the Commercial Registry, the limitation period is calculated from the date on which the registration becomes enforceable against third parties. In the case of resolutions contrary to public policy, the action for annulment is neither time-barred nor subject to any limitation period.

III.- Shareholders holding at least 5% of the share capital

Right to prevent the waiver or settlement of a corporate liability action (art. 238 LSC)

Right to bring a liability action against the directors (art. 239 LSC)

Directors are usually an expression of the majority that controls the company, or they are the majority shareholders themselves who also hold the position of director. Therefore, majority shareholders do not always have an interest in holding the directors liable. The authority to bring, waive or settle a liability action against the directors lies in the first instance with the General Meeting. For this reason, the law grants a qualified minority both the power to oppose, at the General Meeting, a resolution waiving or settling the action, and the power to bring the liability action if the General Meeting fails to act or decides not to proceed with the action, or even without waiting for the position and/or decision of the General Meeting, if the directors’ liability arises from a breach of the duty of loyalty.

Right to request the presence of a notary at the General Meeting to record the minutes (art. 203 LSC)

This is an important right because the chairman of the General Meeting, who is usually an expression of the majority, is the one who conducts the sessions and approves the minutes of the meeting and therefore, for example, decides on speaking turns and interventions during the meeting. The presence of a notary may serve to discourage possible abuses against minority shareholders by the chairman of the meeting.

Minority shareholders must address the request to the directors, and once the request has been made, the presence of the notary is mandatory, under penalty of nullity of the resolutions adopted at the meeting.

The notary will record the list of attendees at the meeting, who acts as chairman and, where applicable, as secretary, and finally everything that takes place during the meeting, including the statements made by minority shareholders. The notarial deed does not require approval, and the notary’s fees will be borne by the company, not by the shareholder who requested the notary’s presence.

Right to request the directors to convene the General Meeting (art. 168 LSC)

The minority’s request must be made by notarial means, and if the directors fail to convene the meeting within two months following the request, the minority may apply either to the Court Clerk (Judicial Secretary) or to the Commercial Registry of the company’s registered office for the meeting to be convened.

Right to request the appointment of an auditor for companies not subject to mandatory audit (art. 265.2 LSC)

The request must be submitted to the Commercial Registrar of the company’s registered office within three months following the end of the financial year to be audited. Therefore, in most cases, this will be no later than 31 March of the year following the year to be audited (art. 359 of the Commercial Registry Regulations).

In theory, this can be a very effective right, especially if the minority is considering a possible liability action against the directors and has not been able to access the company’s information. In addition, the auditor’s fees are borne by the company. However, it must be borne in mind that the auditor cannot replace a professional accountant and review the entire accounting records; their task is limited to auditing the accounts.

On the other hand, it very often happens that the company flatly refuses to allow the auditor access to its accounting records, which in practice makes it impossible to carry out the engagement.

Right to examine at the registered office the documents supporting and underlying the annual accounts (art. 272 LSC)

This right may be limited by the articles of association. However, it is not very common to see such a limitation.

The law allows this right to be exercised even through a professional appointed by the minority, which makes this right one of the most effective tools to truly examine and, where appropriate, challenge the directors’ management of the company.

IV.- Shareholders holding at least 25% of the share capital

Right to obtain documentation and information without the possibility of refusal by the directors (art. 196.3 LSC)

When shareholders submit a written or oral request for information regarding one of the matters included on the agenda of a general meeting, the directors may refuse to provide the information if they consider that its disclosure could harm the company’s interest. This possibility is excluded when the request is made by shareholders holding at least 25% of the share capital.

An agreement of the General Meeting alone is not sufficient to exclude a shareholder who holds at least 25% of the share capital and does not agree with the exclusion. In such cases, a final court judgment is required (art. 352 LSC).

The grounds for exclusion are divided into statutory grounds, that is, those provided for by law (voluntary breach of the obligation to perform ancillary obligations, a shareholder-director who breaches the prohibition on competition, or who has been convicted by a final judgment to compensate the company for acts contrary to the law or the articles of association, or carried out without due diligence), and those that may be included in the articles of association with the consent of all shareholders.

The power to exclude a shareholder lies with the General Meeting. However, except in the case of exclusion of a shareholder due to a conviction ordering them to compensate the company, if the shareholder holding at least 25% of the share capital objects, in addition to the exclusion resolution adopted by the General Meeting, a final court judgment will be required.