Guarantees and collateral for acquisition financings in Spain

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Provided that there is no prohibited financial assistance (see question 15), no restrictions apply to the granting of downstream guarantees. Based on recent case law, upstream and cross-stream guarantees require a corporate benefit to be received by the guarantor. When referring to downstream guarantees, such corporate benefit may rely on the guarantor benefiting from its subsidiaries’ value increase or on the guarantor receiving dividends. However, when referring to upstream or cross-stream guarantees, as this benefit is not that clear, the parties would normally agree on a consideration to be paid to the guarantor.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

Under Spanish corporate law, Spanish companies shall not provide financial assistance to facilitate the acquisition of their own shares or the shares in their respective parent companies and, in case of private limited liability companies, also to facilitate the acquisition of shares in other group companies. Any financial assistance provided in breach of a prohibition is null and void. For these purposes, the term ‘financial assistance’ is understood to cover any kind of financial assistance, for example by means of issuance of a guarantee or granting of a loan, among others.

Within acquisition finance transactions, Spanish companies would normally guarantee or secure the payment obligations arising from any tranches of the acquisition facility or any additional facilities to the extent that they are granted to finance purposes other than the acquisition price and related costs and expenses, such as the refinancing of pre-existing indebtedness of the target or target group (to the extent that indebtedness does not qualify as acquisition debt), working capital requirements, future investments etc.

In spite of the above, in general, with reference to leveraged mergers and other corporate transactions (eg, share capital reductions, segregations or dividends distributions), the Spanish legal community understands that Spanish corporate legislation applicable to such corporate processes sufficiently protects all interests that are ultimately protected by the financial assistance prohibition (mainly those of minority shareholders, creditors and employees), either by means of regulating information or objection rights for creditors etc, as applicable and that the risk of the corporate transactions being challenged is relatively low.

In particular, section 35 of Law No. 3/2009 of 3 April 2009 on structural modifications of companies regulates merger processes involving a company having received financing (within the preceding three years) to acquire the shares or assets of another company also involved in the merger process, and establishes certain requirements to be met, which may dilute the risk of breaching the rules on prohibited financial assistance.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

The most common types of security are in rem security interests such as:

• mortgages over real estate;
• possessory pledges over shares and credit rights or bank accounts;
• chattel mortgage;
• non-possessory pledges; and
• personal guarantees.

It should be noted that mortgages over real estate are rare in acquisition finance deals owing to their exorbitant cost, because they will attract an ad valorem stamp duty. Promissory mortgages are used in some cases as an alternative.

Spanish law does not recognise nor regulate floating and fixed charges (except for certain mortgages over real estate (see question 10)) nor blanket liens. A security agreement is usually required in relation to each type of asset subject to security.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Each type of security is subject to a specific body of law:

• the Mortgage Act for real estate mortgages;
• the Chattel Mortgage and Non-Possessory Pledge Act for these types of security; and
• the Civil Code for other pledges (pledges over bank accounts, receivables or shares).

As a general rule, agreements of creation of security interests shall be executed before a public notary (except for agreements for the creation of financial pledges, where a private document, in principle, suffices). When referring to security over bank accounts, in order for it to qualify as financial collateral, the beneficiary must hold control over the moneys deposited in it, in the sense of their consent being mandatory for carrying out any action over such moneys. Additionally, mortgages over real estate must be registered with the property registry and chattel mortgages, and non-possessory pledges must be registered with the movable assets registry.

When referring to a pledge over receivables, a notice to the relevant debtor is not mandatory for the perfection of the security, although such notice will be required before enforcement of the same.

Additionally, with reference to a pledge over a public limited liability company’s shares represented by share certificates, such share certificates (duly endorsed in favour of the pledgee) must be delivered to the pledgee or to a third party acting as a custodian of the collateral (eg, the security agent). In such a case, or where a pledge is in the form of shares in a private company, it is standard market practice to annotate the creation of the pledge in the shareholders’ registry of the issuing company, with the secretary of the board of directors certifying that the annotation has been made. The creation of the pledge must also be annotated in the ownership title.

Likewise, with reference to a pledge over a public limited liability company’s shares represented by book entries, the pledge must be recorded in the special registry kept by the relevant entity in charge of bookkeeping entries for the relevant shares that are participating in the Spanish clearing and settlement system. This entity certifies the registration of the pledge.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

No. It is not required to keep the security in force. However, pledges over future receivables are usually updated on a periodic basis to include the proper identification of any receivables subject to the pledge by means of the execution of an additional notarial document.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

No ‘works council’ or similar consents are required under Spanish law.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Lenders tend to appoint an agent for the Spanish security, which would hold the Spanish security in its own name and on behalf of the other secured parties. However, when referring to security subject to registration with a public registry, all lenders would usually appear as beneficiaries of that security.

Under Spanish law, assignment of the secured obligations involves a proportional subrogation of the new lender into the existing security covering the same. Documentation of that assignment will normally include a reference to that subrogation, and when referring to a security subject to registration with the appropriate public registry (either the property registry or the movable assets registry) that documentation must be filed with the competent registry in order for the latter to reflect the assignment and to register the new lender as the new beneficiary under the security (provided that, as described in question 10, the assignee qualifies as a potential beneficiary of the relevant security).

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

Such protection is not typical in Spanish structures.

Describe the fraudulent transfer laws in your jurisdiction.

Spanish law punishes any transactions made with a fraudulent purpose or intention. In particular, asset stripping is punished by the Spanish Criminal Code and may entail severe penalties (such as imprisonment), together with any penalty that may arise from an asset stripping leading to, or in the context of, an insolvency situation, which may also entail additional penalties as per the Spanish Insolvency Act. Likewise, it must be noted that, within an insolvency judicial proceeding, any transaction carried out within the two years preceding the declaration of insolvency that damages the insolvency’s estate can be clawed back, regardless of whether it has been executed with fraudulent intent. If it is evidenced that as a result of a fraudulent transaction an asset stripping took place, severe liabilities may be imposed on the parties to the relevant transaction (mainly economic penalties and prohibition to manage companies in the future).