Dividend lock-up: Minority shareholders have a say

Lenders under Spanish law financing transactions should be concerned about the existence of minority shareholders of their borrowers (save for the case where the company in question is listed, or in a pre-insolvency scenario or in an insolvency proceeding), if and when a dividend lock-up provision applies to the transaction at hand.

Spanish law on capital companies recognizes the right of shareholders to separate from the company, if the shareholders’ meeting does not pass a decision (as from the fifth fiscal year following its incorporation, so project financings count with this relief period) to distribute a dividend of, at least, twenty-five per cent of the benefit (the part of it which is legally distributable) obtained in the past fiscal year and provided that benefits have been obtained during the last three fiscal years. Also, this right of separation arises only if the aggregate dividend distributed during the past five years has not amounted to, at least, twenty-five per cent of the benefit legally distributable within that period of time and it does only in favor of those shareholders voting against the resolution constraining the dividend distribution.

The separation right already existed under Spanish law, but this recent legal development has expressly recognized the possibility to have it amended through the bylaws, giving now the opportunity to lenders and borrowers to deal with it with a “clean cut” by the time the finance documents are entered into and in cases where minority shareholders are being left aside the negotiation and execution of a financing transaction.

This right of separation may cause significant trouble in cases where the cash leakage that it entails may put the borrower on the edge of an (pre)insolvency scenario or simply because its exercise would distort the scheme of hierarchy applicable among the lenders and equity investors. Not tackling this situation may give shareholders an appealing exit window from the borrower. However, there are several ways in which lenders may deal with it:

1. The safest way would be the amendment of the borrower’s bylaws either to eliminate such right or restrain its exercise during the lifespan of the financing agreement. Spanish law on capital companies sets out that this separation right may be amended or even deactivated by means of the bylaws. However, this solution may not be at hand if not all the shareholders vote in favor of such an amendment.
2. Another route is to include the dividend lock-up provision in the shares pledge, so that all shareholders assume it vis-à-vis the lenders, if there is a shares pledge and all shareholders grant it.
3. In addition to any of the above, the lenders may require the borrower to get a resolution passed by the shareholders’ meeting in which the dividend lock-up provision would be reproduced. By doing so, if the right of separation is exercised then the borrower itself or the other shareholders could litigate against the shareholder exercising such right (provided that such shareholder did not vote against the resolution), on the basis of the breach of good faith and the doctrine of self-action (Venire contra factum proprium non valet) and the legitimate expectations created by the borrower and the shareholders.