Introduction
When to disclose related party transactions
Audit committee's report
Distribution of dividends and other similar returns
Other requirements
Law 5/2021 of 12 April 2021, which amended the Corporate Enterprises Act (LSC) and other financial regulations, transposed Directive 2017/828 into Spanish law. According to its explanatory memorandum, this new regulation aims to improve the long-term financing received by listed companies through capital markets, as well as to increase transparency. Among other things, the law regulates the remuneration of directors and transactions between the company and its related parties.
The reform has given rise to many questions, especially regarding the regime of related party transactions provided for in Chapter VII(2) of Title XIV of the LSC. In order to clarify some of the issues raised, on 15 November 2021 the National Securities Market Commission (CNMV) published a Q&A. The CNMV has pointed out, however, that this is a non-binding document. Therefore, it is expected to be updated soon, in light of the numerous questions raised due to its complexity.
The paper provides criteria relating to the corporate governance requirements of:
- the transitional application of the new related party transactions reporting and approval regime;
- the aggregate of individual transactions entered into with the same related party;
- determining the persons linked to directors;
- the individual reporting thresholds;
- the relevant aggregates of related party transactions;
- the time at which related party transactions must be disclosed;
- the audit committee's report; and
- the distribution of dividends and other returns on similar contributions.
A previous article focused on the first three requirements (for further details please see "Related party transactions: corporate governance requirements with regard to transitional regimes, aggregation criteria and persons linked to directors").
This article focuses on the final five requirements.
When to disclose related party transactions
Article 529(21) of the LSC contains the term "conclude" to state that transactions must be publicly announced "at the time of their conclusion at the latest" in order to apply the appropriate calculation criteria (article 529(23)), which must include all transactions that have been "concluded" with the same counterparty within 12 months. In this case, the question arises as to how to determine when the conclusion took place.
According to the CNMV's criteria:
the conclusion should be understood as to have taken place when both parties firmly agree on all terms and conditions contained within the agreement, without prejudice to the existence of certain conditions precedent.
However, the CNMV distinguishes two types of transactions:
- those that must be approved by the general shareholders' meeting or the board of directors and that are conditioned to such approval; and
- those in which, following the mandatory approval by the corresponding entity, the parties sign the agreement and undertake to execute it.
In the first scenario, the agreement would be concluded at the time of approval by the relevant corporate body, while in the second scenario, "conclusion" is understood as the act of signing the agreement, which equally determines its entry into force.
The criterion that should applied for the aggregation of such operations includes the time that they were concluded in accordance with the above scenairos, and not the time of their execution.
In relation to the deadline for their disclosure, the CNMV stated that, given that the regulation does not set a specific deadline, the information should be submitted immediately after the meeting is held. As to how it must be reported, the CNMV held that, when approved by the general meeting, if the prior agreement is final and contains all relevant terms and conditions, the disclosure requirement will be deemed fulfilled with the meeting notice, provided that it contains in its agenda the proposal for approval by the general meeting. This includes the audit committee's report and the subsequent submission of the agreements that were reached during the meeting, in accordance with the provisions of article 525 of the LSC.
Conversely, if a final agreement has not been reached on all terms and conditions prior to the approval by the general meeting, the special disclosure regime foreseen for all related party transactions above the established thresholds would apply, irrespective of the body that is approving them.
According to the CNMV, the board may decide to exclude certain information contained in the audit committee's report if it considers that it could seriously harm the company's interests. In this case, the notice must expressly state that the board has decided to omit certain information for this reason. However, the requirement to provide any necessary information to enable shareholders to assess the fairness and reasonableness of the transaction is maintained.
Distribution of dividends and other similar returns
Neither the payment of dividends nor the reduction of capital with the return of contributions are included in the definition of "related party transactions" and, therefore, they should not be subject to the specific requirements of Chapter VII(2) of the LSC (its specific regulation already provides for equivalent requirements). For this reason, the CNMV clarified that they should not be computed for the purposes of the aggregation established by section 1 of article 529(23) LSC.
The CNMV recalled that the LSC already provides for a regime of approval and transparency in the distribution of dividends and that, in addition, it is a corporate transaction that affects all shareholders in relation to the number of shares that they hold.
Order EHA/3050/2004
The CNMV has clarified that Order EHA/3050/2004, which details the information on related party transactions that must be provided by companies issuing securities that are allowed to trade on official secondary markets, is not applicable to matters that clash with legal provisions enacted after its publication. Therefore, a lex posterior derogat anterior standard is used, which practically voids the order.
LSC Chapter VII(2) of Title XIV
The question has arisen as to whether a listed company under the control, joint control or significant influence of a state, regional or local public sector entity is subject to the regime provided for in Chapter VII(2) of Title XIV LSC, as regards the transactions that it carries out with other public sector entities.
As has already been discussed, for the purposes of determining the concept of "related parties", article 529(20) of the LSC refers to International Accounting Standard (IAS) 24. However, the section on government-related entities (paragraphs 25 to 27 of IAS 24) foresees certain exemptions from disclosure from the general regime and, instead, outlines the disclosure requirements for transactions carried out by a listed company that is under the control, joint control or significant influence of a state public sector entity.
According to the CNMV, these paragraphs are not intended to exclude transactions that are carried out by a listed entity that is under the control, joint control or significant influence of another public sector entity from the rest of the public sector entities. It is understood that such transactions are related party transactions because, although they are exempt from providing certain information, they are required to provide alternative disclosures. Therefore, transactions that listed public entities carry out with other public sector companies, being considered related party transactions, are not excluded from the scope of the regulation.
Once the above has been settled, in order to determine the disclosure and approval obligations for these transactions, Chapter VII(2) of Title XIV of the LSC must be considered. In addition, the 12th additional provision of the LSC should be considered, as it sets out two exceptions:
- when aggregating transactions are carried out by listed state-owned companies with the same related party; and
- the exemption of the disclosure obligations deriving from articles 529(21) and 529(22) of the LSC.
LSC articles 529(21) and 529(22)
The above also raises the question as to whether the exemption foreseen in section 3 of the 12th additional provision of the LSC, which is applicable to the disclosure and approval regime (provided for in articles 529(21) and 529(22)), is extended to related party transactions that are carried out by a listed company with a related public sector entity, if the remaining conditions are met.
The 12th additional provision regulates, in its three sections, special provisions expressly aimed at those listed entities within the public sector.
Specifically, section 3 states that transactions carried out by public sector entities under normal market conditions with a related party awardee, following a public competitive tender procedure, shall not be subject to the disclosure and approval regime applicable to transactions with related parties foreseen in articles 529(21) and 529(22) of the LSC.
According to the CNMV, this makes sense, as the tender procedure will already include measures related to approval and disclosure.
The CNMV has stated that including an awardee within this exemption if it were a listed company would not be reasonable:
This would imply that when a listed company carries out a related party transaction with any public sector entity, whether or not it is listed ... it would not need to comply with the approval requirements established in article 529 (22) of the LSC, and, for example, it could be carried out without convening the general shareholders' meeting for its approval, if the transaction surpassed the threshold of 10% of the company's assets, or without the Audit Committee´s Report.
The CNMV also pointed out that a listed company could avoid its obligation to provide additional necessary information to assess whether the transaction is fair and reasonable from the point of view of the company and shareholders that are not related parties.
For further information on this topic please contact Alexa Flórez at CMS Albiñana & Suarez de Lezo by telephone (+34 91 451 9300) or email ([email protected]). The CMS Albiñana & Suarez de Lezo website can be accessed at www.cms.law.