April 2015
corporate & commercial LAW
AMENDMENTS introduced by LAW 5/2015 of 27 april on
promoting CORPORATE financing IN THE AREA OF debt
issuANCES
Law 5/2015 of 27 April on the promoting corporate financing (Ley 5/2015, de 27 de abril, de Fomento de la Financiación Empresarial) (Law 5/2015) was published in the Official State Gazette (BOE) on 28 April 2015. This law amends the Securities Market Law (Ley del Mercado de Valores) (the “LMV”) and the Companies Law (Ley de Sociedades de Capital) (the “LSC”). It also repeals Law 211/1964 of 24 December (“Law 211/1964”) which regulated the issuance of debt securities by issuers other than capital companies, setting up a more modern and flexible legal framework for debt issuances aimed at improving the Spanish companies’ access to debt capital markets. This law entered into force the day after its publication in Spain's Official State Gazette.
The main novelties of this new regime are the following:
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Private limited liability companies (sociedades limitadas, “SLs”) can issue and guarantee standard debt securities’ issuances capped at twice their own funds (recursos propios).
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The quantitative limit on debt issuances by non-listed public limited liability companies (sociedades anónimas, “SAs”) is removed.
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The management body is authorised to approve standard debt securities issuances which do not yield part of the profits, unless stated otherwise in the issuer’s articles of association.
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The requirement for the public deed of issuance (where necessary) to be duly registered as a condition precedent for closing is removed.
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It is clarified that it is unnecessary to appoint a commissioner and set up a syndicate of bondholders in debt issuances governed by foreign law and aimed at international markets.
Law 5/2015 has also introduced amendments to other matters, such as small and medium companies’ bank financing, financial credit establishments, securitisations, and crowdfunding platforms.
The most significant changes in relation to the securitisations regime are summarised in another newsletter prepared today and that can be accessed by clicking here. In addition, the most significant changes in relation to the financial credit establishments’ regime and to crowdfunding are also summarised in another newsletter also prepared and that can be accessed by clicking here.
The main amendments introduced by Law 5/2015 to the debt issuance legal regime are further described in the following sections:
1. SPANISH SLs WILL BE ALLOWED TO ISSUE AND GUARANTEE standard DEBT SECURITIES
Spanish SLs will be allowed to issue and guarantee standard debt securities. SLs had to convert into SAs to act as issuers or guarantors in debt issuances, with the consequences on time and costs this conversion implied.
The power of an SL to issue debt securities is capped at twice the company’s own funds, unless the issuance is guaranteed by a mortgage, a pledge of securities, a public guarantee or a joint and several guarantee by credit entities (in which case this limit does not apply).
The reference to “own funds” (recursos propios) must be interpreted as equivalent to the “net equity” (patrimonio neto or fondos propios) of the issuer (the accounting concept commonly used under Spanish corporate law).
Another significant amendment introduced by Law 5/2015 is the extension of the legal regime set out in the LSC for the valuation of non-monetary contributions in SAs to SLs that have issued debt and currently have outstanding debt securities. The wording of article 401.2 of the LSC suggests that this extension would not apply to SLs that only have guaranteed debt issuances.
SLs cannot issue or guarantee bonds convertible into shares of an SL (participaciones sociales). However, SLs will be allowed to issue bonds exchangeable into shares (acciones) of other companies and to guarantee bonds convertible into shares to be issued by an SA.
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2. the limit ON THE AMOUNT OF debt issuANCES FORMERLY APPLICABLE TO non-listed Sas is REMOVED
Law 5/2015 has definitively and universally removed the limit on the amount of the debt issuances by SAs.
Before the new law entered into force, the amount of debt available to an SA was capped at the amount of its share capital plus its reserves, as per its last approved balance sheet, except when specific guarantees were granted or the issuer fell within one of the exceptions to the limit established in the applicable law.
This limit was not applicable, among others, in the following cases: when the issuer was a listed company or a credit entity; when the issuance fell within the scope of the first additional provision of Law 10/2014 of 26 June on the organization, supervision and solvency of credit entities (Ley 10/2014, de 26 de junio, de ordenación, supervisión y solvencia de entidades de crédito) –or its predecessor, the second additional provision of Law 13/1985 of 25 May– when the issuer was a public civil works’ concessionaire and certain requirements were met, or when the issuance qualified for the exemption set out in the former article 30.quater of the LMV.
Law 5/2015 has not simultaneously repealed article 411 of the LSC, which requires consent from the syndicate of bondholders to reduce the share capital or the amount of the issuer’s reserves when the proportion between the sum of these items and the amount of the outstanding debt is reduced as a consequence. We highlight this because the issuances that fall within the scope of the first additional provision of Law 10/2014 of 26 June on the organization, supervision and solvency of credit entities are exempt from this restriction and the provision benefits all the issuances of debt securities to be listed on official secondary markets, multilateral trading facilities and other organized markets. Therefore, article 411 of the LSC continues to apply to marginal cases only.
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3. the management body IS AUTHORISED to approve issuANCEs of standard debt securities, unless STATED otherwise IN the ISSUER’S articles of association
Unless stated otherwise in the issuer’s articles of association, the management body is authorised to approve the issuance and admission to trading of standard debt securities which do not yield part of the profits, as well as to grant guarantees or security interests in favour of standard debt securities of other companies.
This measure, which ends an unjustified discrimination of capital market’s debt financing against bank financing, gives flexibility to the debt issuance procedure, particularly for listed companies or companies with a very disperse share capital, as an extraordinary shareholders’ meeting (with all its implications, especially, in terms of time) does not need to be called when the management body has not been delegated with those powers already.
The general shareholders’ meeting continues to have the power to issue bonds convertible into shares (acciones) or securities that yield part of the profits.
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4. the exceptions to the granting AND registration of the public deed of issuANCE are ITEMISED
Although the LSC maintains the general principle of a public deed being granted for debt issuances by Spanish companies and the traditional deed’s registration pursuant to the Commercial Registry Regulations (Reglamento del Registro Mercantil) goes unmodified, Law 5/2015 lists the circumstances provided for in the former articles 30.ter and 30.quater of the LMV when compliance with these requirements is exempted.
It will no longer be necessary to grant and register a public deed of issuance with the commercial registry in the following situations:
(i) when the securities are to be admitted to trading on Spanish official secondary markets (such as the AIAF market of Fixed Income Securities) or are subject to a public offering that requires a prospectus (folleto informativo) subject to approval and registration by the Spanish National Securities and Market Commission (CNMV); or
(ii) when the securities are to be admitted to trading on a Spanish multilateral trading facility (such as the MARF).
In conclusion, although the requirement to grant and register a public deed of issuance remains in force, it will continue to apply only to issuances carried out by Spanish companies on international markets, when the securities are not admitted to trading on official secondary markets or multilateral trading facilities established in Spain, and when they will not be subject to a public offering in Spain.
Along the same lines, issuances of bonds convertible into shares of the issuer or shares of a company of its group will not be eligible for the exceptions to the commercial registry’s granting and registration requirement for public deeds.
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5. new formalities and minimum requirements of the public deed of issuANCE (where necessary)
In the situations where the granting of a public deed of issuance is necessary, Law 5/2015 introduces in the LSC the minimum information that the deed must contain.
In addition, there are two significant amendments in relation to the guarantees and security interests of the issuance:
(i) when the issuance is guaranteed by a third party, the guarantors must be a party to the public deed, along with the issuer and the commissioner representing the bondholders, where applicable (with all that this entails when the guarantors are foreign companies, specifically in terms of collecting the powers of attorney); and
(ii) when the issuance is secured, the public deed must specify the collateral. In addition, the date of registration and the registry where the security interest has been registered or the depositary entity of the collateral and the date of the creation of the pledge must also be specified.
When the security interests are subject to registration (as in the case of mortgages or pledges without displacement), a question arises since, in general, on the date of granting the public deed of issuance, the registration of the security interests with the corresponding public registry will not have taken place and, therefore, no registration details can be recorded in the public deed.
This highlights the practical problem of coordinating the granting of the public deed of issuance and its filing with the commercial registry within the legal timeframe, with the registration of the security interests and the inclusion of the information required in the public deed of issuance under the new article 407.2 of the LSC.
A potential solution to the problem would be to grant the public deed of issuance on the closing date before the registration of the security interests with the corresponding registry. The registration of the securities with the registry and the details would be evidenced afterwards by including them in the public deed by notarial proceedings (diligencia) or by disclosing the duly registered documents creating the security to the commercial registry.
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6. the REQUIREMENT to have the public deed OF ISSUANCE (where necessary) DULY registered as a condition precedent for CLOSING IS removed
Where the granting and registration of the public deed of issuance is still necessary, the requirement for the public deed to be registered with the commercial registry as a condition precedent for closing is removed.
This measure will provide more flexibility to the issuance of debt procedures and will enable the shortening of the settlement period between the date of fixing the terms and conditions and the disbursement date (i.e. T+3) of the issuances of debt securities by Spanish companies on international markets.
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7. Substantial changes are introduced to the LEGAL REGIME of the commissioner and the bondholders’ syndicate
Law 5/2015 introduces substantial changes to theregulations of the commissioner and the bondholders’ syndicate by amending the LSC and the LMV.
Several aspects of the substantive regulations are amended. It is expressly stated that the commissioner must be a natural or legal person with recognised expertise in legal or economic matters, which enhances the professionalism of the role and is in line with the laws of neighbouring countries. In addition, the regulations of the bondholders’ syndicate are widened by establishing rules on the call for the meeting, assistance, right to vote, approval of resolutions and the challenge of resolutions.In addition, the obligation of the commissioner to call the first meeting of the syndicate to approve its management, confirm him or her in his or her position and approve the regulations of the syndicate, is removed.
Following the consolidated practice in the past few years, a lasting controversy comes to an end: whether it is necessary to appoint a commissioner and form a syndicate of bondholders in debt issuances abroad. The new article 403 of the LSC expertly states in line with the registrar’s practice and the majority opinion of the scholars, that the appointment of a commissioner and the formation of a syndicate of bondholders is necessary only when a specific applicable law requires it. In this regard, pursuant to the amended LMV, the appointment of a commissioner and the formation of a syndicate of bondholders will only be necessary in debt issuances that comply with the following three requirements (jointly):
(i) when they qualify as public offerings for subscription;
(ii) when their terms and conditions are governed by Spanish law or by the law of a State other than an EU member or an OECD country; and
(iii) when the issuance takes place within the Spanish territory or the securities are admitted to trading on an official Spanish secondary market or a multilateral trading facility established in Spain.
Thus, it is not necessary to set up a syndicate of bondholders and appoint a commissioner, among others, in debt issuances by Spanish companies when they do not qualify as public offerings pursuant to article 30.bis.1 of the LMV, or are governed by the law of a country of the OECD (typically UK or US law).
Naturally, the above does not imply that Spanish issuers qualifying for the exception cannot voluntarily opt to set up a syndicate of bondholders and appoint a commissioner, as has been done before in many previous cases where it did not cause legal conflicts.
Finally, Law 5/2015 has repealed the former article 428.1 of the LSC, which granted the commissioner extensive powers in certain circumstances (i.e. attending the meeting of the Board of Directors of the issuer with a right to speak but not vote or examining the issuer’s books). Recent legal amendments had already in practice restricted these powers.
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8. a conflict of laws rule for debt issuANCES by spanish companies abroad is introduced in the LSC
The LSC is amended to expressly establish that Spanish companies can issue debt securities abroad (a possibility that was fully accepted before the entry into force of Law 5/2015) and it regulates some aspects of these issues.
In particular, determining which law applies to the different aspects of a debt issuance carried out “abroad” (a concept which is fairly unclear) by a Spanish company will be governed by the following:
(i) Spanish law (lex societatis) will determine the power, the competent body and the conditions for approval of the issuance’s resolution;
(ii) the foreign law to which the issuance is subject (lex contractus) will determine the rights of the bondholders against the issuer (i.e.the contractual matters of the issuance), the forms of collective organisation and the securities’ redemption and cancellation regime; and
(iii) in the case of convertible bonds, the foreign law to which the issuance is subject will determine the content of the conversion right (within the limits set out by Spanish law) and Spanish law will determine the conversion value, the limits for the conversion and the exclusion of the pre-emption right rules.
Unfortunately, the conflict of laws rule in article 405 of the LSC does not solve the problem of the applicable law regarding the aspects related to the title of the security’s issuance. This is particularly important in issuances carried out in foreign countries where the dematerialization of the title of the security is not as clear as in Spain, and where the securities are initially represented by global notes deposited with a common depositary of the corresponding clearing house. The law could have regulated which law governs the aspects related to the title in bond issuances.
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9. article 410 of the companies law relating to the ranking of the debt issues is expressly REPEALED
Law 5/2015 expressly repeals article 410 of the LSC, which provided for a ranking of the credits from several debt issues based on the date of issue (i.e. the first in time had priority over the later ones), as well as the ranking regime between bondholders and the rest of the creditors.
The derogation of this article clarifies the uncertainties among scholars regarding the ranking of debt issues and confirms the broadest interpretation, which is that the ranking regime of the LSC has been displaced by the Insolvency Law (Ley Concursal).
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10. the requirement THAT the issuANCE MUST BE PUBLISHED IN THE BORME (official gazette of the commercial registry) IS removed
Law 5/2015 has definitively and universally removed the requirement to publish the announcement of the issuance in the BORME (Official Gazette of the Commercial Registry), with all its implications in terms of saving costs and formalities.
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11. the issuance of debt securities by issuers other than corporations is regulated by referral to the lsc
With the repeal of Law 211/1964, Law 5/2015 has brought to an end the historic duality of the regime governing debt securities issuances by issuers other than corporations. These issuers (including cooperatives, public sector business enterprises, public corporate bodies, among others) will therefore need to adapt their future debt issuances to the LSC and the provisions of the LMV will continue to apply when the securities are commercialised or admitted to trading on Spanish markets.
The above implies, among others, that these entities will need to set up a syndicate of bondholders (which was unnecessary previously) and appoint a commissioner when required (see section 7 of this newsletter).
Unfortunately, the law has not repealed the limit on debt issuances by entities previously benefiting from said law, and the traditional limit remains under the fifth additional provision of Law 5/2015; the limit is the capital disbursed (capital desembolsado) for companies other than corporations, or the valuation of the entity’s assets for associations and other legal persons.
Notwithstanding the above, the issuances carried out pursuant to Law 211/1964 will continue to be governed by that law upon their cancellation.
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