The information contained in this Newsletter is of a general nature and does not constitute legal advice


April 2009

COMMERCIAL LAW

NEW LAW ON STRUCTURAL MODIFICATIONS OF COMMERCIAL COMPANIES

KEY INNOVATIONS

· The rules applicable to corporate restructuring transactions of the different types of commercial companies are unified (More Information)

· The rules for challenging a merger are amended, and leveraged buy-outs and merger of 90%-owned companies are now regulated under the  new Law (More Information)

· Subdiarization of industry is regulated as a new form of spin-off, subject to the provisions applicable thereto (More Information)

· Cross-border mergers and international transfers of a corporation’s registered office are regulated for the first time (More Information)

· The quantitative (10% for listed companies and 20 % for unlisted companies) and temporal limitations (5 years) for the acquisition of treasury stock by public limited companies (sociedades anónimas) are extended (More Information)

· Preemptive rights are abolished in the case of non-monetary contributions, and in certain cases, the requirement of an independent expert’s report is eliminated in these types of transactions (More Information)

· Preemptive rights of the holders of convertible debentures are eliminated, and the ability to exclude preemptive rights of the shareholders in the issuance of convertible debentures is expressly provided for (More Information)

· There is an express provision for the principle of equal treatment of shareholders (More Information)

· The Law will enter into force three months from the publication thereof in the Official Gazette (BOE), except for provisions relating to intra-EC cross-border mergers, which entered into effect on April 5, 2009 (More Information)

 

INDEX

1. Domestic structural modifications  (More Information)

1.1 Transformation (More Information)

1.2 Merger (More Information)

1.3 Spin-offs (More Information)

1.4 En bloc transfer of assets and liabilities (More Information)

2. International mergers and transfers of registered office (More Information)

2.1 International Mergers (More Information)

2.1.1 Intra-EC cross-border mergers vs. internal mergers (More Information)

2.2 International transfer of registered office (More Information)

2.2.1 Transfer abroad of the registered office of a Spanish company (More Information)

2.2.2 Transfer of the registered office of a foreign company to Spanish territory (More Information)

2.2.3 Legal rules for the transfer (More Information)

3. Amendment of the Spanish Public Limited Companies Law (More Information)


The new Law 3/2009, of April 3, on structural modifications of commercial companies (Ley sobre modificaciones estructurales de las sociedades mercantiles -LME-), published in the Official Gazette (Boletín Oficial del Estado -BOE-) on April 4, 2009, entails a profound reform of our legal system in various areas of corporate Law. The objectives of the LME are the following:

(i) To implement into the Spanish legal system Directive 2005/56/EC regarding cross-border mergers of limited liability companies;

(ii) To amend the Spanish Public Limited Companies Law (Ley de Sociedades Anónimas -LSA-) by incorporating Directives 2006/68/EC on formation of public limited liability companies and the maintenance and alteration of their capital and 2007/63/EC on the requirement of an independent expert’s report on the occasion of merger or division of public limited liability companies, together with certain optional clauses contained in Directives 78/855/EEC and 82/891/EEC regarding merger and spin-off of public limited companies,

(iii) To conform the rules on preemptive rights to subscribe convertible debentures to the December 18, 2008 Judgment of the Court of Justice of the European Communities; and

(iv) To harmonize, unify and expand the rules on structural modifications to the different types of commercial companies, as well as to authorize the Government to restate the laws governing limited liability companies within a single legal text.

The LME will enter into force within three months of the publication thereof in the BOE, except for the provisions relating to intra-EC cross-border mergers, which entered into force on the day following publication thereof. As regards transitional rules, the LME will apply to proposed structural modifications that have not yet been approved by the participating company (ies) prior to its entry into force.

Given the broad scope of the LME, set forth below is a very brief summary of the key innovations made to the rules on commercial companies, grouped into three areas:

1. Domestic structural modifications.

2. International mergers and transfers of registered office.

3. Amendment of the Spanish Public Limited Companies Law.


1. DOMESTIC STRUCTURAL MODIFICATIONS

1.1 Transformation

- The instances of possible transformation are expanded and the rules applicable to the transformation of the different types of companies are unified.

- The requirement to prepare a transformation balance sheet closed as of the day prior to the date of adoption of the resolution is relaxed, so that now any balance sheet closed within six months prior to the date of adoption of the transformation resolution may be used.

- An obligation is established to make available to the shareholders (unless otherwise agreed by all of them): (i) a substantiating report of the directors, (ii) the transformation balance sheet, together with an auditor’s report when the company is required to audit its financial statements, and (iii) the proposed bylaws of the resulting company.

- Publication of the transformation resolution can be replaced by individual written notice to shareholders, creditors and holders of special rights in the company.

- A right of separation is recognized for shareholders that did not vote in favor of the transformation, which will be granted automatically when such shareholders become personally liable for the company’s debts and do not adhere the transformation resolution within a period of one month.

- Shareholders that become personally liable shall be liable for all corporate debts, and those that limit their liability will be personally liable for the existing debts for a period of 5 years unless creditors express consent.

- Obligations for the full disbursement of share capital are established when so required by the type of corporate entity, and for the redemption of securities when issuance thereof by the resulting company is not permitted.

- The period to challenge the transformation is reduced to 3 months.

1.2 Merger

- There is an extension of the content of the common merger plan, which must also now include: (i) the bylaws of the resulting company, (ii) a statement regarding the effect of the merger on industry contributions and supplemental social-welfare benefits, (iii) a valuation of the assets and liabilities being transmitted, (iv) the date of the financial statements used to determine the terms of the merger (although the exchange ratio will continue to be set based on the fair value of the assets and liabilities of the companies participating in the merger), and (v) the possible consequences of the merger on employment, on gender in the management bodies and on the corporate social responsibility.

- With respect to the auditors, there is regulation of the rules for liability of the independent expert that issues the report on the merger plan, which shall have no liability if it shows that it applied diligence and the standards inherent to the activity with which it was entrusted.

- An independent expert report on the common merger plan will not be necessary when so agreed by all of the shareholders of the participating companies. This exemption does not include instances in which any of the companies has incurred debt during the prior three years in order to acquire control or essential assets of other company participating in the merger.

- The rules regarding the common merger plan, the balance sheet and information regarding the merger will not apply in the event of unanimous consent of the General Shareholders’ Meeting, provided that the merged companies and the resulting company are not public limited companies (sociedades anónimas) or joint-stock companies (sociedades comanditarias por acciones).

- As in the case of transformation, publication of the resolution may be replaced by individual written notice to the shareholders and creditors of the company.

- The period for challenge is reduced from 6 to 3 months, with the establishment of rules for the validating effect of the registration of the merger with the Commercial Registry (CR) pursuant to which actions to challenge a merger that has already been registered and that has been carried out pursuant to the provisions of the LME will turn into a claim for damages.

- When so provided by the bylaws or by resolution of the General Shareholders’ Meeting of the participating companies, shareholder disputes regarding the exchange ratio will be resolved by an independent expert appointed by the CR at the request of the objecting shareholder who will determine the appropriate compensation, if any.

- Mergers between two or more companies when one of them has incurred debt during the immediately preceding three years in order to acquire control or essential assets of the other company participating in the merger (Leveraged Buy-Outs, or LBOs) are regulated with the following noteworthy aspects: (i) the rules may be applicable to transactions other than LBOs, and (ii) there is an expansion of the degree of information to be supplied in the merger plan and the reports of the directors and of the independent expert, who surprisingly (as this is clearly a legal and not a financial issue) must make a pronouncement on the existence or non-existence of financial assistance.

- For simplified mergers, there is regulation of the rules for the absorption of 90%-owned companies, with the dispensation of the need for preparation of reports by directors and experts when the shareholders of the absorbed company are offered as an alternative the repurchase of their shares or equity interests at the fair value thereof.

- In addition, for direct simplified mergers as well as the absorption of 90%-owned companies, the requirement for a resolution of the shareholders of the absorbing company is eliminated (except when requested by the holders of 1% of the share capital), the directors being authorized to increase share capital by the amount necessary to cover the exchange if so provided in the plan.

- Indirect simplified mergers are considered equivalent to the absorption of companies, although in these cases an independent expert’s report is required, as well as an increase in capital of the absorbing company, if applicable. Furthermore, if the transaction causes a decrease in the net assets of companies not participating in the merger, but that hold a stake in the absorbing company or the absorbed company, the absorbing company must compensate such companies for the reasonable value of their stakes.

- The termination of a wholly-owned subsidiary by means of an en bloc transfer of its assets and liabilities to the parent company is treated similarly to a merger.

1.3 Spin-offs

- Legal rules: the LME generally refers to the rules on mergers.

- In addition to total and partial spin-offs, segregation or subsidiarization of industry (transaction consisting in the en bloc transfer by universal succession of one or more parts of the company’s assets, each of which qualifies as an economic unit, to one or more companies, and in consideration the segregated company -and not its shareholders- receives  shares of the beneficiary companies ) is recognized as a new form of spin-off.

- Where applicable, the rules on spin-offs will also apply to transactions by which a company makes an en bloc transfer of its assets and liabilities to another newly-created company, receiving in exchange all of the shares of the beneficiary company.

1.4 En bloc transfer of assets and liabilities

- The concept of the “en bloc transfer of assets and liabilities” as a method of liquidation of companies is dropped to in favor of an instrument for the transfer of companies by means of compensation other than shares of the transferor.

- In the case of a plural en bloc transfer (to various beneficiaries), each portion of the assets/liabilities transferred must entail an economic unit.

- Documentation requirements: (i) the transfer plan, which must include identification of the transferor and the transferee, the date of effect for accounting purposes, a valuation of the assets and liabilities for distribution thereof among the transferees, the consideration to be given, and the effects on employment, (ii) a report of the directors, and (iii) the public deed.

- Similar to the rules on spin-offs, the transferees and the shareholders of the transferor (if wound up) have joint and several liability up to the net amount received, and the transferor company, if not wound up, has such liability for the full amount of the obligation.

- There is a provision for the same challenge rules as in the case of mergers.

2. INTERNATIONAL MERGERS AND TRANSFERS OF REGISTERED OFFICE

2.1 International Mergers

- The regulation of international mergers contained in the LME distinguishes between (i) non-EC mergers, and (ii) intra-EC mergers.

- Non-EC mergers (i.e., mergers with the participation of at least one Spanish company and one non-EC company) will be governed by the provisions of the respective personal laws.

- Intra-EC cross-border mergers will be governed by the provisions of Title II of Chapter II of the LME (and the express provisions of Chapter I referring thereto), and on a supplemental basis by the provisions of the LME governing mergers generally.

- Intra-EC cross-border merger is understood as a merger between:

· Limited liability companies (sociedades de capital) organized in accordance with the legislation of a State forming part of the European Economic Area (“EEA”),

· Whose registered office, central administration or principal center of activity is located within the EEA,

· When there is participation by at least two companies subject to the legislation of different member States, and one of them is subject to Spanish legislation.

- The limited liability companies subject to Spanish legislation that can participate in cross-border mergers are public limited companies (sociedades anónimas), joint-stock companies (sociedades comanditarias por acciones) and private limited liability companies (sociedades de responsabilidad limitada).

- Mergers with the participation of cooperatives (sociedades cooperativas) or whose purpose is collective investment and that meet the characteristics set forth in the regulation, are expressly excluded from these rules.

- The treatment of intra-EC cross-border mergers is completed with the introduction of a new «Title IV» regarding «provisions applicable to intra-EC cross-border mergers of limited liability companies» in Law 31/2006, of October 18, on employees involvement at public limited companies and European cooperatives (“Law 31/2006”).

2.1.1 Intra-EC cross-border mergers vs. internal mergers

The specific regulation on intra-EC cross-border mergers contained in the LME has some particularities with respect to the rules set forth therein for internal mergers (i.e., mergers between Spanish companies), including the following noteworthy provisions:

- It is provided that the fact that the legislation of at least one of the affected States allows for cash compensation, which forms a part of the exchange ratio, that exceeds 10% of the par value or, in the absence thereof, the book value of the shares being exchanged, will not be an obstacle for an intra-EC cross-border merger.

- The common merger plan must contain the following statements, in addition to the statements generally required for merger plans (see 1.2 supra):

· the advantages attributed to the experts who study the merger plan, as well as to the members of the administrative, management, monitoring or control bodies of the companies that are merging; and

· if applicable, information regarding the procedures for determining the terms for involvement of employees in the definition of their rights of participation in the resulting company.

In addition, certain economic figures must appear (see paragraph 1 of Article 49.1 of the LME). Unlike the case with certain internal mergers, such information may not be omitted.

- The report of the management or administrative bodies must be prepared pursuant to the provisions of the general rules for the report of the directors regarding the merger plan, although there is a particularity regarding the addressees of the report and the time at which it must be made available.

The directors must include in the report the opinion of the employee representatives regarding the report, if they receive it in time.

The report must always be prepared, as opposed to what happens in certain instances of internal mergers in which no report is required at all (simplified mergers).

- As regards the resolution of the shareholders regarding the common merger plan, there are no significant differences with respect to the rules for domestic mergers apart from:

· The possibility of making the merger subject to the express ratification of the provisions provided for the participation of the employees in the resulting company, and

· The right of separation held by the shareholders of a Spanish company who vote against the merger plan, when the company resulting from the merger has its registered office in another member State.

- Rules are provided for controlling the validity of the merger procedure by the Spanish commercial registrars. The scope of control will depend on whether or not the company resulting from the merger is Spanish (see Articles 64 and 65 of the LME).

- Article 16 of Directive 2005/56/EC is implemented into the Spanish legal system with respect to the participation of employees in the resulting company by means of (i) the inclusion of a general provision (Article 67 of the LME), and (ii) the modification of Law 31/2006 (see 2.1 supra).

2.2 International transfer of registered office

- Two cases are distinguished: (i) the transfer of the registered offices of Spanish commercial companies abroad, and (ii) the transfer into Spanish territory of the registered offices of companies organized pursuant to the law of other States.

- Both instances will be governed by the provisions of international treaties and conventions in force in Spain and the provisions of Articles 92 to 103 of the LME, without prejudice to the provisions for the European public limited company.

2.2.1 Transfer abroad of the registered office of a Spanish company

- Directly covers Spanish commercial companies organized in accordance with Spanish law.

- May only be performed if the State of destination allows for the legal personality of the company to be maintained.

- For companies in liquidation or those that are in insolvency proceedings, the registered office may not be transferred abroad.

2.2.2 Transfer of the registered office of a foreign company to Spanish territory

- The transfer of a registered office to Spain will not affect the legal personality of the company. However, it must comply with the requirements of Spanish legislation for the incorporation of the type of company in question, unless otherwise provided by the international treaties or conventions to which Spain is a party.

- Companies that intend to transfer their registered office to Spain from a State that is not a part of the EEA must show with an independent expert’s report that their net assets cover the amount of share capital required by Spanish law.

2.2.3 Legal rules for the transfer

- Chapter II of Title V of the LME (Articles 95 to 103), under the heading «legal rules for transfer», contemplates the rules applicable to a Spanish commercial company that transfers its registered office abroad. These rules do not contain any reference to the rules applicable to the transfer to Spain of the registered office of a foreign company, which we understand that, outside of possible international treaties or conventions that might exist, must be established by the legal system applicable to the company that transfers its registered office to Spanish territory. Specifically, it governs:

(i) the content, deposit with the CR, and rules for publication of the transfer plan, which must be signed by the directors of the company;

(ii) the requirement of a report signed by the directors of the company explaining and providing a rationale for the transfer plan and the consequences thereof for shareholders, creditors and employees;

(iii) the required approval of the transfer by the General Shareholders’ Meeting;

(iv) the rules for calling the shareholders’ meeting – which must be called a minimum of two months prior to the date for the holding thereof – and of the right to receive information;

(v) the shareholders’ right of separation, which, although already expressly recognized by the Spanish LSA and Spanish Private Limited Liability Companies Law (Ley de Sociedades de Responsabilidad Limitada -LSRL-), is now set forth in a more restricted manner, as the rule requires that the shareholder voted against the resolution (while under the prior rules any shareholder or partner that did not vote in favor of the resolution and, in the case of public limited companies (sociedades anónimas), even the holders of non-voting shares, were expressly granted this right); and

(vi) the right of objection of creditors whose credits were due prior to the date of publication of the transfer.

- The effectiveness of the transfer of the registered office is subject to registration of the company with the Registry of the new registered office.

3. AMENDMENT OF THE SPANISH PUBLIC LIMITED COMPANIES LAW

The LME makes various amendments to the LSA that, although in some instances are merely for clarification, in others entail an authentic change to the rules applicable until now. The following are worthy of mention:

(i) Derivative acquisition of treasury stock (Articles 75 to 79 of the LSA)

- Authorization by the General Shareholders’ Meeting is maintained as a requirement for the acquisition of a company’s own shares, although the maximum duration thereof is expanded from eighteen months to five years.

- The limit on treasury stock for unlisted companies is raised from 10% to 20% of subscribed capital, and from 5% to 10% for listed companies.

- The acquisition for no consideration of the company’s own partially paid-up shares will no longer be null and void.

- The obligation to dispose within three years those shares of the company that are acquired as a result of a judicial award to satisfy a claim of the company vis-à-vis such shares is eliminated.

(ii) Non-monetary contributions (Articles 38 to 38 quáter and 158 of the LSA)

- The preemptive subscription right of the shareholders in capital increases with non-monetary contributions is eliminated.

- There is still a requirement for non-monetary contributions to be subject to a report of an independent expert. The expert must assign a specific value to the contribution, which will be the maximum value to be consigned thereto in the public deed.

- There is an exception from the requirement of an independent expert’s report for contributions consisting of (a) securities quoted on official secondary markets or money market instruments (which will be valued at the average weighted price for the prior quarter); and (b) assets whose reasonable value has been determined by an independent expert not appointed by the parties, within the six months preceding the contribution.

- In these two instances, a report of the directors with content analogous to that required for experts will be necessary. However, the directors must request the appointment of an expert to issue a report when the securities meeting the standards indicated above have been affected by exceptional circumstances. In the second instance, if the directors have not requested the appointment of experts when required to do so, a shareholder or shareholders representing at least 5% of the share capital may make such request.

- There is the introduction of rules for liability of the expert to the company, its shareholders or creditors for damages caused by the valuation made by the expert, unless the expert demonstrates diligence and the suitability of its actions to the rules regulating the expert’s duty (lex artis). The statute of limitation of actions to claim such liability is of four years from the date of the report.

(iii) Preemptive rights in the issuance of convertible debentures (Article 158 and 293 of the LSA)

Spanish law has been adapted to Second Directive 77/91/EEC after the December 18, 2008 Judgment of the Court of Justice of the European Communities, which introduced the following modifications:

- The preemptive right of the holders of convertible debentures is eliminated in instances of capital increases as well as the issuance of convertible debentures.

- There is express recognition of the ability to totally or partially eliminate this right in the issuance of new convertible debentures by resolution of the General Shareholders’ Meeting if so required in the interests of the company, provided that certain conditions are respected.

(iv) Called-up share capital (Article 42 of the LSA)

- From the new text, one deduces that the bylaws must provide for the form and the maximum period for the payment of called-up share capital, with the requirement to notify the shareholders either personally or through an announcement in the Commercial Registry Official Gazette (Boletín Oficial del Registro Mercantil -BORME-) of the requirement for such payment. At least one month must pass between the sending of the notice or, if applicable, the announcement, and the payment.

(v) Principle of equal treatment (Article 50 bis of the LSA)

- It is expressly recognized the principle of equal treatment, pursuant to which the company must give equal treatment to all shareholders in identical circumstances.

(vi) Special instances for the holding of a General Shareholders’ Meeting (Article 103.1 of the LSA)

- Three instances are added:

(i) the suppression or limitation of the preemptive right to subscribe new shares (which already applied due to the interplay of references contained in Articles 159 and 144 of the LSA);

(ii) the en bloc transfer of assets and liabilities; and

(iii) the transfer of the registered office abroad (see 2.2.1 supra).

(vii) Financial assistance

- During the commencement of parliamentary proceedings, there was a disappearance of the text of the amendment to the current Article 81 of the LSA, pursuant to which it was proposed to allow financial assistance upon the terms set forth in Directive 77/91/EEC (i.e., transaction on “fair market terms,” prior approval by the General Shareholders’ Meeting, etc.).

- The only reference to the financial assistance rules inserted into the LME is in Article 35, which governs the content of the report to be issued by an independent expert in the case of a merger preceded by a LBO (see 1.2 supra), but fails to provide the effects of the declaration of existence of financial assistance.

The information contained in this Newsletter is of a general nature and does not constitute legal advice