Spain: Corrections to the share capital of a limited liability company

New decision of the DGRN
In June 2019, the General Directorate of Registries and Notaries’ Offices (“DGRN”) confirmed the decision of a commercial register refusing to register a shareholders resolution. This resolution had provided for the cancellation and invalidation of a capital increase carried out shortly before and already entered in the commercial register.

The shareholders’ meeting of a limited liability company had unanimously decided to cancel and suspend a capital increase that had previously been duly carried out and entered in the commercial register by offsetting receivables. The shareholders justified this by stating that the capital increase would damage the minority shareholders because their share in the share capital would be diluted by the capital increase.

The commercial register refused to register this resolution. It stressed that the shareholders’ meeting could not change a capital increase already entered in the commercial register without a corresponding shareholders’ resolution to reduce the capital being passed. The company could not adjust the capital decrease without complying with the statutory provisions on capital reduction (e.g. the shareholders’ right of objection).

The company appealed against this decision. In addition to the minority protection, it claimed that these were doubtful receivables, the collection of which was uncertain.

Confirmation of decision by the DGRN

The DGRN rejected the objection.

In its explanatory memorandum, the DGRN essentially referred to earlier decisions. Accordingly, it has already been clarified that all changes in capital (whether increases or reductions) can only have an effect vis-à-vis third parties if a corresponding shareholder resolution has been passed. Besides that, such a resolution would have to provide for a capital increase or reduction in compliance with the statutory requirements. Finally, the resolution must be duly entered in the commercial register.

A mere resolution to cancel and repeal the last registered capital increase was therefore not sufficient to correct the share capital. Nor is it a question of the reasons on which such a resolution is based.

The decision deals with a hot topic. For reasons of creditor protection, the decision appears in any case justifiable. For third parties concluding contracts with a company, the amount of the company’s share capital is an important factor. Business partners must be able to rely on the fact that the capital can only be modified if the legal requirements for the capital increase or reduction have been fully complied with.

Author: Axel Roth