Diluted through a capital increase: how to stop it

The case, in five lines

What is brought

Action to set aside the capital increase resolution (articles 204 to 208 LSC), as contrary to law where it breaches the requirements for a debt-for-equity set-off or for removing the pre-emption right, and as harmful to the corporate interest because the majority imposed it abusively. Where appropriate it is accompanied by an application to suspend the resolution as an interim measure and to enter a caution of the claim on the register.

Before which court

The commercial section of the Tribunal de Instancia (the first-instance court) for the place of the company's registered office, through ordinary proceedings. Any appeal goes to the Audiencia Provincial (the provincial appeal court).

Deadline

One year, a strict time bar (article 205 LSC), counted from the date of the meeting that passed the resolution or, if the resolution is registered, from the date the registration becomes enforceable against third parties. A request to open prior negotiations suspends the time bar on the terms of article 7 of LO 1/2025. The period to exercise the pre-emption right runs separately: no less than one month from the notice in the Boletín Oficial del Registro Mercantil (the Companies Register Gazette) or from dispatch of the written notice to each shareholder (article 305 LSC).

Who can bring it

Shareholders who already held that status before the resolution and hold, alone or together, at least one per cent of the capital, as well as the directors and third parties with a legitimate interest (article 206 LSC). The claim is brought against the company, and the majority shareholder may intervene at his own expense to defend the resolution. To seek suspension as an interim measure in a company with no securities admitted to trading, which covers almost every limited company, at least five per cent is required.

Financial risk

If the claim is dismissed you may be ordered to pay costs and the dilution becomes entrenched. Interim suspension requires you to lodge security to answer for the harm it causes the company if you ultimately lose, and the case needs an expert valuation. If the defect relied on can be cured, the company may ask for time to correct it and take that ground away from you.

Three ways to dilute you, and each is attacked differently

A capital increase is an amendment of the articles: article 296 LSC requires the general meeting to pass it with the requirements for such an amendment, and in a limited company article 199 calls for a favourable vote of more than half of the votes attached to the shares into which the capital is divided. Whoever holds 60 % can pass it alone. What he cannot do is choose the route without consequences, because each form of increase carries its own regime for protecting shareholders.

There are three patterns we see again and again. The first is a cash increase that respects the pre-emption right under article 304 LSC, but at par value and at a moment when you cannot or will not put in money. The second is a cash increase that removes that right in favour of the majority shareholder or a friendly third party. The third, now the most common, is an increase by setting off the majority shareholder's own loans or by a non-cash contribution, where there is no pre-emption right at all because article 304 grants it only in increases funded by cash contributions.

Knowing which one you face tells you what ground you have. In the second and third there are specific legal requirements whose breach makes the resolution contrary to law, which is simpler to prove than abuse. In the first, and in any of them when the requirements are met on paper, the battleground is abuse of the majority under article 204.1 LSC. The general rules on challenges, such as the screening of formal defects or the replacement of the resolution by another, are explained in our guide on resolutions passed without you; here we go to what is specific to the increase.

If they remove your pre-emption right, the law demands two thirds and a real price

Article 308 LSC allows the meeting to remove the pre-emption right in whole or in part only where the company's interest so requires, and in a limited company article 199.b) demands for this a favourable vote of at least two thirds of the votes attached to the shares. If you hold more than a third of the capital, removal does not pass without you. That figure explains why so many majority holders with 60 % or 65 % avoid this route and prefer to capitalise their loans.

When removal is put to the vote, article 308.2 sets three conditions of validity. A directors' report that specifies the value of the shares and justifies in detail the proposal, the consideration and to whom the new shares will be allotted. A notice of meeting that states the proposal to remove the right, the issue price and the shareholders' right to examine the report and ask for it free of charge. And that the par value plus any premium matches the real value attributed to the shares in that report. In a public limited company, an independent expert appointed by the Registro Mercantil (the Companies Register) must also report on the fair value of the shares.

The third condition is the one that decides most cases. If the report attributes a real value of twelve euros to each share and the increase is made at one, the resolution breaches article 308.2.c) head on. And if the report sets an artificially low value so that it matches par, the fight moves to the expert evidence: proving that the real value is different turns a formally correct report into the proof of the breach.

Capitalising the majority's loan: no pre-emption, but not unchecked

A debt-for-equity set-off is the favourite route to dilution because it carries no pre-emption right and a majority of more than half of the capital is enough. The Dirección General de Seguridad Jurídica y Fe Pública (the Directorate General for Legal Certainty and Public Faith) has repeatedly held that the registrar cannot refuse to register it merely because it dilutes a shareholder: if the shareholder considers the resolution abusive, the route is a court challenge. Waiting for the Register to stop it wastes time that is running against you.

That does not mean it has no requirements. Article 301 LSC requires, in a limited company, that the debts be fully liquid and payable, and that when the meeting is called a report of the board be made available to shareholders on the nature and features of the debts, the identity of the contributors, the number of shares and the amount of the increase, stating expressly that those figures agree with the accounts. A loan that has not fallen due, is not in the books, or whose amount does not match the bank statements makes the resolution contrary to law.

Even if everything adds up on paper, the set-off can be abusive. The Tribunal Supremo (the Supreme Court), in a judgment of late 2025, held abusive and void an increase by setting off the majority shareholder's loan that left him controlling almost all the capital: the company did have liquidity problems, but there was an alternative, a cash increase the minority shareholder had proposed, that met the same need and let him keep his percentage. Moreover, where the debt belongs to the very shareholder who votes, we argue that he is in the conflict of interest covered by article 190.3 LSC: if his vote was decisive, it is for the company to prove that the resolution accords with the corporate interest.

Increasing at par: when respecting your pre-emption right is not enough

A cash increase with a pre-emption right looks unassailable: you can take up the shares due to you in proportion to those you already hold and keep your percentage. But if the shares are issued at par when each one is worth far more, you are put to a choice: pay in a sum you may not have, into a company that does not need it, or stay out and watch the majority shareholder buy shares at a fraction of their value. It is political and economic dilution at once.

In a limited company the law does not require a share premium when the pre-emption right is respected, so the attack goes through article 204.1 LSC: a resolution is imposed abusively when, without answering a reasonable need of the company, it is passed by the majority in its own interest and to the unjustified detriment of the other shareholders. The three elements are proved together. Surplus cash, the lack of any investment plan, the absence of a premium when net equity far exceeds the capital, and the knowledge that you could not pay in are the facts that give them substance.

The increase itself has its own clock. Article 305 LSC gives, for taking up the new shares, the period set in the resolution, which cannot be less than one month from the notice in the Boletín Oficial del Registro Mercantil or, in a limited company, from dispatch of the written notice to each shareholder. If you can pay in, taking up your shares with an express reservation of your challenge keeps your percentage while you litigate. If you cannot, article 306 lets you transfer that right to those who may freely acquire shares, and article 307 offers the shares not taken up, in a second round, to the shareholders who exercised their pre-emption right.

The meeting is where the claim is built

Article 287 LSC requires the notice of meeting to state clearly the points to be amended and the right of every shareholder to examine the full text of the proposal at the registered office and to ask for it free of charge, and articles 301 and 308 add the report specific to each form of increase. The first step is to ask in writing for those documents and, under article 196, for whatever reports or explanations you need on the loan, the cash position and where the money will go. A refusal or an evasive answer, in writing, is already evidence.

If you hold at least five per cent of the capital of a limited company, article 203 LSC lets you demand, five days before the meeting, that the directors call a notary to attend. In that case the resolutions are effective only if they appear in the notarial minutes, and what you say at the meeting is recorded by a public officer and not by the secretary the majority appoints.

At the meeting you must vote against, ask for your reasoned objection to be minuted and, above all, put forward a concrete alternative: a cash increase with pre-emption and with the premium that follows from the real value, or a loan on market terms. The Supreme Court's approach weighs the existence of a less harmful route that the majority rejected, and that route must have been put on the table. In addition, article 206.5 LSC bars anyone who could have objected to formal defects at the proper time and stayed silent from relying on them later.

After the meeting: the year, the negotiation and the suspension

Article 205 LSC sets a one-year time bar running from the adoption of the resolution at the meeting and, if it is registered, from the date the registration becomes enforceable against third parties. In an increase, registration arrives months later, with the deed of execution, and that can lengthen the period. We always count from the meeting: the registration rule is a lifeline, not a calendar. Only resolutions contrary to public policy escape the time bar, and a dilution, however serious, rarely fits there.

A challenge is heard in ordinary proceedings, so the requirement of article 5 of LO 1/2025 applies: before suing you must turn to an appropriate means of dispute resolution on the same subject matter, for example a proposal to negotiate between lawyers. Article 7 makes that request suspend the time bar from the date the attempt to deliver it is recorded, but the count resumes if the first meeting does not take place or no written reply arrives within thirty calendar days. The useful exception is in article 5.3: interim measures sought before the claim do not require that prior step.

Suspension of the challenged resolution is a specific interim measure under article 727.10 LEC, available only to those holding at least five per cent of the capital in a company with no securities admitted to trading. You must show a good arguable case and the risk that, while the case lasts, the new majority will remove directors, pass further resolutions or transfer shares, and you must lodge security. Article 728 refuses the measure where it would alter situations accepted for a long time, so waiting works against you. Without five per cent, the tool is a caution of the claim entered at the Companies Register. If you win, article 208 LSC orders the cancellation of the registered increase and of any later entries that contradict the judgment.

How we run the case, step by step

1. 1

   We read the notice and the reports before the meeting

   We identify the form of the increase, check whether the notice complies with article 287 LSC and whether the reports under articles 301 or 308 are available to you, and work out what majority is needed and whether your percentage blocks it.

2. 2

   We prepare your intervention at the meeting

   We request in writing the information under article 196, demand notarial minutes if you hold five per cent, and draft your vote against, your reasoned objection and the alternative proposal that must be recorded in the minutes.

3. 3

   We open negotiations and assess suspension

   As soon as the meeting is over we send the company a proposal to negotiate on the same subject matter as the future case, which suspends the time bar; if the new majority threatens to act, we seek interim suspension before suing, which does not require that prior step.

4. 4

   We decide what to do with your pre-emption right

   Within the period under article 305 LSC we decide whether you take up shares with an express reservation, and if so whether you also bid for the shares others do not take up (article 307), or whether you transfer the right, so that nothing you do can be read as accepting the resolution.

5. 5

   We commission the expert report on value and need

   The expert we work with values the shares before and after the increase, quantifies the value shifted to the majority shareholder and analyses the cash position and the financing alternatives, which is what gives substance to the article 204.1 LSC test.

6. 6

   We sue within the year and take the judgment to the Register

   We file the claim against the company before the commercial section of the Tribunal de Instancia for the registered office, seek the entry of a caution on the register and, once the judgment is final, the cancellation of the registered increase and of any later contradictory entries.

The law that applies

• Art. 199 LSC. In a limited company, increasing or reducing the capital requires a favourable vote of more than half of the votes attached to the shares, and removing or limiting the pre-emption right requires at least two thirds. BOE-A-2010-10544
• Art. 204 LSC. Resolutions contrary to the law, the articles or the meeting regulations, and those harming the corporate interest, may be challenged. There is harm even without loss to the company's assets where the majority imposes the resolution abusively: without reasonable need, in its own interest and to the unjustified detriment of the other shareholders. BOE-A-2010-10544
• Art. 205 LSC. The action lapses after one year, unless the resolution offends public policy. Time runs from adoption at the meeting, from receipt of the minutes if it was adopted in writing or, if the resolution was registered, from the date the registration became enforceable against third parties. BOE-A-2010-10544
• Art. 301 LSC. In a limited company, the debts set off must be fully liquid and payable. When the meeting is called, a directors' report on the debts, the contributors and the increase must be made available to shareholders, stating that it agrees with the accounts; in a public limited company, an auditor's certificate is also needed. BOE-A-2010-10544
• Arts. 304 y 305 LSC. In increases funded by cash contributions, each shareholder is entitled to take up shares in proportion to the par value of those already held. In a limited company it is exercised within the period set in the resolution, which cannot be less than one month from the notice in the BORME (the Companies Register Gazette) or from dispatch of the written notice to each shareholder. BOE-A-2010-10544
• Art. 308 LSC. The meeting may remove the pre-emption right only where the corporate interest so requires, with a directors' report valuing the shares and justifying the proposal, a mention in the notice of meeting, and an issue price (par plus premium) matching the real value; in a public limited company, with an independent expert's report. BOE-A-2010-10544
• Art. 727 LEC. Lists the specific interim measures. Measure 10 is the suspension of challenged company resolutions, where the claimants hold at least 1 or 5 per cent of the capital, depending on whether or not the company has securities admitted to trading on an official secondary market. BOE-A-2000-323
• Art. 5 LO 1/2025. Requires, as a condition for admitting civil declaratory claims, prior recourse to an appropriate means of dispute resolution on the same subject matter. It is not needed to seek interim measures before the claim or preliminary inquiries. BOE-A-2025-76

Each article checked against the consolidated text published in the BOE (the Spanish official gazette).

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