Capital increases are useful tools in the life of limited companies. Among other things, they enable the admission of new shareholders and new financing, strengthen the company’s solvency, or restore the balance sheet to health in the event of accumulated losses that may jeopardise the company’s viability and even lead to its dissolution.
However, the creation of new shares may entail a change in the ownership structure depending on who subscribes to the increase, as the increase may also be regarded as a means of diluting the interests of minority shareholders.
The Supreme Court has already ruled in several recent judgements on the possibility of challenging company resolutions that may be prejudicial when imposed abusively by the majority. In particular, Supreme Court Judgment 1763/2025 of 2 December addressed, for the first time, the challenge to a capital increase resolution on these grounds.
At the Commercial Law Department of Belzuz Abogados, S.L.P. in Madrid, as experts in company law, we believe it is essential to seek appropriate legal advice both when undertaking corporate transactions of this magnitude and when analysing their potential impact on the rights of minority shareholders.
In this article, we will analyse the legislation applicable to such cases and discuss the recent case law of the Supreme Court on the matter to clarify the best course of action in the face of a potentially abusive capital increase.
Applicable legislation
Article 204.1 of the Spanish Companies Act (LSC), in its current version in force since 24 December 2014, provides that company resolutions are open to challenge if they contravene the law, conflict with the articles of association or the rules of procedure of the general meeting, or harm the company’s interests for the benefit of one or more shareholders or third parties.
It is further specified that the company’s interests are also deemed to be prejudiced where the resolution, even if it does not cause damage to the company’s assets, is imposed in an abusive manner by the majority. A resolution is deemed to be imposed in an abusive manner when, without responding to a reasonable need of the company, it is adopted by the majority in their own interest and to the unjustified detriment of the other shareholders.
Supreme Court Ruling 176/2025 analyses the application of this provision to a capital increase approved by the majority of shareholders in a limited company, in which it was decided to increase the capital by setting off a debt that the majority shareholder and sole director of the company held against it, thereby precluding the possibility of the minority shareholder preventing dilution of their shareholding. It should be noted that, in capital increases by way of debt set-off, the company’s shareholders are not protected by a right of pre-emption or preferential subscription; this right does, however, apply in the case of capital increases through new contributions to the company, whether in cash or otherwise.
Previous case law
There are currently few Supreme Court rulings interpreting the new wording of Article 204(1) of the Companies Act.
The first of these, contained in Supreme Court Judgment 3/2023 of 10 January, relates to a case in which no harm to the company’s interests was found in a scenario where the company’s general meeting approved a capital increase to comply with a refinancing agreement involving the conversion of debts into shares. In this case, the High Court found that there was a need to comply with the refinancing agreement to prevent the company from becoming liable to be wound up due to losses. In other words, although minority shareholders were deprived of their right of pre-emption in relation to the capital increase, there was an economic and financial necessity that justified the capital increase by way of debt-for-equity swap.
In contrast to this first judgement, in the case analysed in Supreme Court Judgment 9/2023 of 11 January, the Court found that no such corporate interest existed in a resolution adopted at a general meeting in which it was agreed to allocate the profits for the financial year to voluntary reserves rather than to the distribution of dividends. This conclusion is based on the pre-existing existence of substantial reserves on the company’s balance sheet; consequently, the refusal to distribute dividends would not appear to be intended to strengthen the company’s balance sheet but rather to deprive the minority shareholder of a share in the company’s financial returns, given that the majority shareholder, in his capacity as a director, did receive such returns as his position was remunerated.
In short, it is essential to examine the details of each case to assess whether or not the company’s interests are at stake and to conclude whether a resolution adopted by the majority is prejudicial to those interests.
The legal principle established by Supreme Court Judgment 1763/2025
Supreme Court Judgment 1763/2025 first reviews the three requirements that must be met for there to be a breach of the company’s interests as described in paragraph 2 of Article 204.1 of the Companies Act (LSC):
– That the resolution of the general meeting does not respond to a reasonable need of the company
– The resolution in question must have been adopted by a majority acting in their own interests
– It must cause unjustified harm to the other shareholders.
It is essential that all three of these requirements are cumulatively met in a given set of facts for the harm to the company’s interests in question to be established.
This is the doctrine applied by the Supreme Court to the case examined in the judgment. The facts of the case are as follows. The general meeting of a limited company approved, by a majority, a resolution to increase the share capital through the creation of new shares in settlement of debts. That resolution was approved with the favourable votes of two majority shareholders (father and daughter), who represented approximately 70 per cent of the share capital, to the detriment of a minority shareholder who held approximately 30 per cent of the shares. As a result of the resolution, a debt held by one of the majority shareholders was set off against the acquisition of shares. Subsequently, the majority shareholder who benefited from the resolution came to hold a stake of over 97 per cent, considerably reducing the minority shareholder’s stake; the latter had no opportunity to exercise a right of pre-emption as the method chosen for the capital increase was by set-off of debts.
The Supreme Court ruled that, whilst it is true that the company had a reasonable need to increase its capital given its financial situation—as it might even have been liable to dissolution due to losses—it must also be borne in mind that it was not strictly necessary for the capital increase to be carried out specifically by way of debt set-off.
The final reasoning is that the capital increase resolution is detrimental because the sole reason the majority shareholders chose to impose the debt-for-equity swap method was precisely to exclude the minority shareholder’s right of pre-emption in order to prevent their dilution. Had a capital increase by way of capital contribution been chosen, the company’s need for capitalisation would still have been met, but without discriminating against the minority shareholder.
It is therefore concluded that the need for a capital increase by way of debt set-off does not respond to a reasonable need of the company and is declared null and void.
Corollary
It is essential to carefully examine all the corporate and economic implications when deciding to propose and agree on a capital increase, and particularly so if the method of debt set-off is chosen. This method remains valid, but its planning and execution must be approached with the utmost care in cases where the position of minority shareholders—who may be deprived of their right of pre-emption—could be affected.
At Belzuz Abogados, S.L.P., with over 65 years’ experience and a presence in Spain and Portugal, our Commercial Law Department specialises in all types of corporate transactions, and we are able to assist both companies needing to structure such transactions securely and in enforcing the rights of minority shareholders. For specialist enquiries, please contact us via the channels set out on our website.