Is it mandatory to pay dividends?
In principle, and unless such an obligation is provided for in the articles of incorporation, we would say yes, without further ado. However, following the recent Supreme Court ruling of January 11, 2023, which has established new case law, the answer would require a detailed analysis of the situation of the company in question.
The typical scenario involves a company with one or more majority shareholders and, in contrast, one or more minority shareholders. On one side of the table are the majority shareholders, who hold control of the company and, therefore, are responsible for its management and representation—a role for which they receive a specific, and generally substantial, compensation. These majority shareholders, therefore, are not particularly interested in distributing dividends. On the other side of the table are the minority shareholder(s), who do not manage the company and who normally do not even work at
in the company itself, so its interest in paying dividends will be significant.
Well, the company’s annual Ordinary General Meeting—at which the annual financial statements are approved and a decision is made on the allocation of profits— will unfold in a manner that is relatively comfortable for the majority shareholders and considerably uncomfortable for the minority shareholders, who year after year will see the profits allocated to reserves—after, of course, the compensation for the managing majority shareholders has been deducted.
In principle, the majority shareholders would not be acting against the company’s interests; in fact, one might even think the opposite is true, since the profits remain within the company to fund new projects, project an image of financial stability, and so on. Minority shareholders, on the other hand, would be deprived of their right to share in the company’s profits, as provided for in Article 93(a) of the Capital Companies Act.
Could such an agreement not to distribute dividends be considered unfair?
The answer is yes. There is established case law holding that if the agreement not to distribute dividends is systematic, the company is financially sound, and no difficult financial situations are foreseen in which reserves might be necessary, repeatedly failing to distribute dividends may constitute an abusive agreement that serves no reasonable purpose other than to oppress minority shareholders.
How much in dividends must the company distribute?
The resolution regarding the allocation of net income is adopted by the General Meeting, which may decide to allocate the amount to retained earnings (rather than distribute dividends), to distribute a portion of the profit, or to distribute the entire profit.
Now, what happens if the minority partner or partners in our hypothetical scenario decide—in addition to challenging the agreement not to distribute dividends on the grounds that it is abusive—to request a specific distribution, for example, 75% of the profits?
In my opinion, this is where we find the new development introduced by the Supreme Court’s ruling of January 11, 2023, since that ruling, affirming the Provincial Court’s decision, holds that the annulment of the resolution not to distribute dividends must be followed by an order requiring the company to distribute the retained earnings, since otherwise an incomplete resolution would be adopted and the continuation of the abuse could not be effectively prevented, leaving the minority shareholder once again compelled to go to court.
Summary of Concepts:
- The distribution of dividends is not mandatory, unless provided for in the company’s articles of incorporation.
- A systematic agreement not to distribute dividends may be considered abusive and unreasonable, thereby oppressing minority shareholders.
- The Supreme Court’s January 2023 ruling establishes that the annulment of an agreement not to distribute dividends must be followed by an order requiring the company to distribute the retained earnings, in order to prevent the abuse from continuing and to protect the rights of minority shareholders.
