Impacts of the Covid-19 crisis on dividend repatriation structures

The spread of the Covid-19 pandemic has had tragic effects on the health of citizens in Spain. In order to combat the pandemic, since 14 March, restrictions on the mobility of people, security measures and the suspension of certain activities have been established, leading to difficulties in the supply chain, delays in the fulfilment of contractual obligations and, ultimately, the closure of establishments.

All these circumstances have had unprecedented negative economic consequences in Spain, which in many cases have had an impact on the companies' equity in the period between the end of fiscal year 2019 and the formulation and approval of the financial statements for that year.

Effect on dividend repatriation structures.

This impact on the companies' equity could have a direct effect in the context of profit repatriation structures with respect to interim dividends already agreed and/or paid during fiscal year 2019 with a charge to that year.

The Spanish Companies Act limits the distribution of dividends charged to the profit for the year, or to unrestricted reserves, in cases where the value of the equity is not, or as a result of the distribution, is not less than the share capital.

Thus, if as a result of adverse performance of the Company's business activities the profit at year-end is insufficient to cover the interim dividend agreed upon, the amount recorded as an interim dividend in excess of the profit for the year would be reclassified to reserves, and the question could arise as to whether the excess interim dividend paid by the Company should be refunded (even if the payment was not made in cash but as a compensation of accounts payable/ receivable).

Directors' liability and bankruptcy implications.

If the company has suffered a financial decline by virtue of which the distribution of the dividend could give rise to an equity imbalance or to the insolvency of the company, the failure to initiate the process of restitution, if appropriate, or to adopt measures aimed at eliminating its impact, could give rise to the liability of the company's directors for any damage caused to the company, to the shareholders themselves or to third parties.

Likewise, the distribution of dividends could be subject to clawback provisions in the context of bankruptcy proceeding if it is adopted within the period of two years prior to the declaration of bankruptcy and proves to be detrimental to the active mass.

Limitations on the use of temporary layoffs based on Article 22 of Royal Decree Law 8/2020

In addition, the social measures approved in defence of employment also have an impact on the distribution of dividends in respect of companies that take advantage of temporary layoff proceedings based on Article 22 of Royal Decree Law 8/2020.

In this regard, companies that use public resources allocated to the aforementioned temporary layoff proceedings may not distribute dividends unless they previously pay the amount corresponding to the exemption applied to social security contributions.

This limitation refers to the dividends corresponding to the tax year in which the temporary layoff proceedings are applied, and will affect companies that had more than fifty employees on 29 February 2020.