The distribution of dividends is one of the most relevant and controversial business decisions that can be taken by the directors of any type of company. Dividends are the returns earned by the partners for their capital investment and they could be likened to the interest received due to a bank loan, which has a principal or capital, and interest or dividends.
The procedure for the approval of dividends involves approving the year´s results in the General Meeting, taking into account that such a distribution is not mandatory. The distribution is subject to a number of legal and statutory requisites and should follow the process described below:
1.- The first point is concerning the capitalization of the company, for which the company should comply with the so called “Balance Sheet Test”.
2.- The second point is concerning the Legal Reserve, that comprises two requirements:
- The first one quantitative, being equivalent to 10% of the year´s results up until the limit of 20% of the company´s issued capital.
- In addition, the non-distributable reserve equivalent to the commercial fund recorded in the balance, being able to use the free reserves that the company had provided.
3 – After checking the solvency of the company for distribution among the shareholders, one should take into account the type of company. For an S.L. (Spanish limited company), proportional methods will be used, while in the case of an S.A. (Anonymous Company), the distribution will be proportional, but in relation to the invested capital.
Spanish Law allows management to decide the distribution of the Interim dividend that will affect all the partners or part of them (they will receive their dividend at the Annual General Meeting, plus the legal interest). To carry out this distribution, a simple agreement from management is needed, having to prepare a balance sheet in which the company demonstrates sufficient liquidity.
On the 31st of December 2014, a modification of the Company Act will enter into force. This modification ensures the right to dividends as long as several legal conditions are met. In addition, the shareholder may have the right of withdrawal as a shareholder, receiving the market prize of the shares.