Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
The most common way to structure an acquisition or disposal of privately owned companies, businesses or assets in Spain is through the direct sale and purchase of the shares of the companies that own the target business. A direct sale of the business through an asset deal is rarely the chosen route for a private acquisition. It is mainly used as an alternative when only some and not all of the target business is transferred, to ring fence hidden or contingent liabilities of any business outside the perimeter of the transaction or as an alternative to financial assistance constrains.
The process of acquiring a company, business or assets will be influenced by the issues and number of parties involved, as well as whether the transaction involves a bilateral negotiation or an auction process with multiple potential buyers.
A bilateral deal typically involves the following:
- a non-disclosure agreement, sometimes embedded in the memorandum of understanding (MOU) or letter of intent (LOI);
- an MOU or LOI including the main terms of the transaction on a non-binding basis and, generally, granting exclusivity to negotiate the deal during a certain period of time;
- a share and purchase agreement (SPA) and supplementary documentation (eg, transitional services agreements (TSAs), service level agreements (SLAs) and corporate documents for the replacement of management bodies); and
- a closing deed, generally done at a Spanish notary public, recording the SPA in a public deed (to comply with compulsory formalities for a valid transfer of shares or as standard market practice in other circumstances).
Auction processes soliciting the interest of several buyers typically involve:
- drafting a teaser that includes basic business and financial information on the target business, as well as an information memorandum marketing the company, business or assets;
- completing a vendor due diligence, and drafting a SPA and other sale documents (approximately eight to 12 weeks);
- ‘round one’ expressions of interest from potential buyers who will then be permitted to perform a due diligence (approximately three to four weeks);
- ‘round two’ due diligence over target companies and binding offers by potential buyers with mark ups of the transaction documentation (approximately six to eight weeks); and
- negotiating transaction documentation with one or several bidders until definitive terms are agreed on with one party (up to two weeks).
Each phase of the process could take more time for larger, more international target companies, businesses or assets (ie, involving assets in several jurisdictions): three or four months often elapse between distribution of an information memorandum and finalisation of definitive transaction documents. Owing to a lack of competitive tension in the process, bilateral transactions can take longer to complete.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
In Spain, the terms agreed on by the parties in the contract govern private acquisitions and disposals. Although the Civil Code and Commercial Code include several provisions governing the sale and purchase of goods and assets (including shares), these provisions can be replaced by the parties contracting on the main terms of the sale and purchase. This option is most commonly applied in Spain’s private M&A practice.
Although Spanish law governs most sales of Spanish companies, the law of an overseas jurisdiction can govern acquisitions. However, legal formalities that apply to a transfer of shares and assets and liabilities that are subject to local law must be complied with.
The legal formalities for transfers of shares in Spain vary depending on whether the transfer is of quotas or a Spanish limited liability company (SL), or a transfer of shares of limited liability by shares companies (SAs).
Both the quotas of a SL and the shares of a SA are hereinafter defined as ‘shares’.Formalities involved in SL and SA transfers of sharesSL corporate law transfer formalities
When the Spanish company is a SL, the share transfer agreement must be notarised at a Spanish notary public and recorded in the SL shareholders’ book.SA corporate law transfer formalities
When the Spanish company is an unlisted SA, the formalities involved depend on whether the certificates representing the shares have been issued, and whether the shares are issued as registered (the most common case) or bearer shares.Non-issued certificates
The share transfer agreement (for registered and bearer shares) must be made in writing, usually notarised at a Spanish notary public. If shares are registered, the transfer must be recorded in the SA shareholders’ book.Issued certificates: registered shares
There are two ways to transfer the shares, which are:
- carry out the transfer as described for non-issued certificates above; or
- the transferor endorses unconditionally all the issued certificates representing the shares in favour of the acquirer. The transfer must be recorded in the SA shareholders’ registry book. Although transfers made through endorsement do not have to be notarised, it is a common practice we recommend following.
The transferor must deliver the share certificates to the acquirer (regardless of whether they are endorsed).Issued certificates: bearer shares
The share transfer agreement must be formalised at a notary public, a stock broker or a credit entity (eg, banks). The transferor must deliver the share certificates to the acquirer.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Under the Spanish Civil Code, the Commercial Code and the Spanish Companies Act, approved under Royal Decree Law 1/2010, of 2 July (LSC) governing both SLs and SAs, acquiring legal title over shares in a SL or in a SA means that the buyer (shareholder) acquires all rights attached to the shares.
These rights would include the right to:
- sell, encumber and dispose of the property of the shares;
- attend and vote in the general shareholders’ meeting pro rata to his or her share capital;
- obtain information on the company’s business and activities (except any information that is restricted to the directors by law);
- certain supermajority thresholds for important matters (depending on the subject matter, thresholds in SLs are 50.01 per cent and 66.66 per cent of the total issued voting stock and in SAs are 50 per cent (first call ) and 25 per cent of the total issued voting stock, plus two-thirds of the attending voting stock in the second call);
- pro rata dividend payments and other economic rights; and
- pro rata shares of any liquidation or winding-up payments.
Even if the transaction documentation makes no reference to them, under the Civil Code, title covenants are obligatory under law; specifically, Chapter IV of the Civil Code provides protection for the buyer in connection with full legal title over the ownership of the shares; and any hidden or latent defects over the shares.
However, as the statutory regime established in the Civil Code has become obsolete under standard M&A practice, it is common practice in Spain for the buyer to seek additional protection from the seller through broader business representations and warranties, and unqualified title to shares or assets.
The parties may waive statutory protection for the buyer under the Civil Code, which can be replaced with broader representations and warranties. Under standard M&A practice, these are typically negotiated in a SPA. In these cases, the set of representations and warranties would be the sole remedy for the buyer in the event of a breach of title covenants or business warranties.
Title over the shares is automatically transferred from the seller to the buyer once the formalities for transfer of shares in a SL and SA have been fulfilled.
The transfer of title to assets subject to Spanish law is a more cumbersome process. Depending on the type of assets, it requires notifications to be given, consents from third parties to be obtained and registrations to be made.
Under Spanish law, there is no distinction between legal and beneficial title in property. A person registered as holding the legal title to a share in a company bears all political and economic rights. However, a shareholder’s rights may be transferred to a third party that would benefit from these rights through several means, including by granting a proxy for voting rights, a pledge of shares (assigning the political and economic rights to the pledgee) or through an usufruct of the shares where the economic rights (eg, dividends) are transferred to a third party.
Interest in other assets, including real estate, can be held in the same way.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Buyers will typically prefer that all sellers sign the transaction documentation that the sellers agree to be bound by.
Minority shareholders may be required to sell their shares under ‘drag-along’ provisions in a company’s articles of association or a shareholders’ agreement that requires the transfer of title to their shares if established conditions are met. Under Spanish law, provisions that are not registered in the company’s by-laws or the Commercial Registry will not apply to bona fide third parties. When included in a shareholders’ agreement, these provisions would apply to the signatories of the agreement and would entitle the non-breaching party to seek indemnification on damages for a breach of contract (specific performance would not be an available remedy if a bona fide third party acquired the shares and if it was not aware that the acquisition was in breach of the shareholders’ agreement provisions).
Under Spanish law, no squeeze out is recognised in private companies. The squeeze out of minorities is available only for publicly listed companies when two thresholds are attained after launching a takeover bid for all the securities of the target company: the offeror has acquired more than 90 per cent of the target’s voting rights; and the bid has been accepted by at least 90 per cent of the voting rights to which it has been directed.Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
Under Spanish contract law, buyers can generally choose the assets or liabilities they want to acquire in transactions structured as a business or asset sale.
When the assets and liabilities constitute an entire business as a going concern, important labour and tax implications must be considered.
Structuring a transaction as a business or asset sale with the aim of avoiding responsibilities to employees engaged in the target business is not permitted. Article 44 of the Spanish Workers’ Statute Act, as amended, applies to acquisitions of businesses in Spain: it requires contracts of employment to be automatically transferred to the buyer of a business, and that employee benefits must be respected (transfer of undertaking protection of employment).
Similarly, under Spanish tax law (article 42.1.c of Law 58/2003), the sale of assets as a going concern would entail the buyers’ joint and several liability for any outstanding tax liabilities of the transferred assets and business arising before the transfer date. In addition to any remedies in contract to indemnify and compensate the buyer for any of these tax liabilities, under Spanish law, the tax authorities may also issue a tax certificate that discloses any pending tax liabilities. This means that the buyer’s joint and several liability will be limited to these tax issues.
Depending on the type of assets or liabilities transferred, the transfer may require customary third-party consents. For example, a landlord’s consent may be required to assign a lease, or a counterparty’s consent may be needed for the assignment or novation of a contract (see question 7). Under Spanish law, transfers of debts are always subject to the creditor’s previous consent, while transfers of credit rights need to be notified only to the obligee or debtor (except if stated otherwise in the contract).Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
In an SL, selling shareholders are subject to ‘pre-emptive’ rights of the other shareholders in the company. Pre-emptive rights require a shareholder to offer his or her shares to other shareholders before they can be sold to a third party. Such right is a right of first refusal, and the selling shareholder must give the other shareholders the right to match the terms of a sale that have been negotiated with a third party.
In an SA, these pre-emptive rights do not apply to a Spanish SA company, meaning that selling shareholders can freely transfer their shares. However, these rights and other share transfer restrictions, including tag-along or drag-along rights, may be agreed on and registered in the company’s by-laws. In this case, these restrictions would apply to an SA (which is also a possibility in an SL).
Exchange control and foreign investments are liberalised in Spain (except for specific sectors, including activities related to national defence and security, airline carriers, gambling, TV and radio). This means that they are generally free from restrictions, but must be notified to the appropriate authority (the State Secretary for Trade or the Bank of Spain). These reporting obligations are imposed for statistical and tax purposes, and to prevent infringements of law. Failure to comply with these reporting obligations may result in monetary fines.
Non-residents include individuals domiciled abroad or whose principal residence is abroad; legal companies with registered offices abroad; and permanent establishments and branches of Spanish-resident individuals or companies abroad.Foreign investments in Spanish entities
Foreign investments in Spanish companies must be notified to the State Secretary for Trade within one month of the investment.
As an exception, when investments proceed from a tax haven and exceed 50 per cent of the Spanish company’s share capital, an earlier declaration is required.Reporting obligations for all foreign transactions and balances of financial assets and liabilities
Spanish residents (individuals or entities) must inform the Bank of Spain of any transaction made with non-residents or any asset or liability in countries other than Spain. Information regarding creditor and debtor positions must be provided monthly, quarterly or yearly, depending on the volume of the resident’s transactions made in the previous year, and the balance of assets and liabilities as of December of the previous year.Payments or transfers of funds
Residents must provide information to their bank when making or receiving payments or transfers of funds to or from a non-resident. Collections, payments and transfers of amounts under €50,000 are exempt from this requirement.Merger control
Acquisitions of companies and businesses in Spain may be subject to merger control requirements established in Spanish and EU law.
Transactions that meet the thresholds set out in the EU Merger Regulation are considered to have an ‘EU dimension’, and must be notified to and authorised by the European Commission. Transactions that do not meet the EU thresholds, but that still meet the thresholds established in Law 15/2007 of 3 July for the Defence of Competition (LDC), must be notified to and authorised by the National Commission for Markets and Competition (CNMC). Unlike other areas of Spanish competition law, the regional authorities have no jurisdiction over merger control. A transaction must be notified under the LDC if:
- a share of 30 per cent or more of the Spanish market or a market within Spain is acquired or increased (market share threshold) as a result of the transaction, except where the total annual turnover of the target in Spain does not exceed €10 million, and none of the undertakings involved has an individual or joint market share in an affected market of 50 per cent or more, either in Spain or a market within Spain (the ‘de minimis exception’); or
- the aggregate annual turnover of all the parties in Spain exceeds €240 million, or at least two of the parties in the concentration had a Spanish turnover in excess of €60 million (turnover threshold).
If a notification is required, the transaction must not be carried out before clearance unless a waiver is obtained, which is available only in exceptional circumstances. Fines for failing to notify or closing before clearance can be up to 5 per cent of annual turnover and have been imposed in a number of cases.
The test for clearance - whether the transaction hinders the maintenance of effective competition in any of the national market or any market within Spain - is long-established, but the CNMC occasionally challenges transactions applying novel theories of harm, which can make the process less predictable.
In general, Spain does not subject the acquisition of companies, businesses or assets to national industry considerations. However, if the transaction is prohibited or cleared with the CNMC’s commitments or conditions, the government has the power to overrule the CNMC to allow the transaction to go ahead or to vary commitments based on an open set of public interest criteria. However, this is rare, as there has been only one precedent since the possibility was introduced in 2007, which was in the Antena 3/La Sexta concentration in 2012.
There are no particular industries where the merger control clearance of a transaction requires consent from specific regulators or governmental bodies other than the CNMC.
Are any other third-party consents commonly required?
The requirement to obtain third-party consents will depend on the law governing the transfer of the assets and liabilities. Regarding the acquisition of a business, for the assets and liabilities governed by Spanish law to be transferred, the agreement of the counterparties to contractual arrangements is required to transfer the seller’s obligations to the buyer. Counterparty consent may be required to assign the benefits of contractual arrangements.
A landlord’s consent to transfer Spanish leasehold property and the consent or waiver of a lender’s rights to transfer loans governed by Spanish law are normally required in relation to the acquisition of a company, business or assets. Where security has been granted under Spanish law over a company’s assets or business, releases through a notary public deed and registration in public registries (eg, for mortgage over real estate) are normally required.
Under Spanish law, the general shareholders’ meeting must authorise any acquisition or transfer of a ‘relevant’ or ‘essential’ asset. This applies to SL and SA companies under the requirements established in article 160.1 f) of the LSC. This article guarantees that the general meeting has authority to deliberate and resolve ‘the acquisition, disposal or the contribution to another company of essential assets’. There is ambiguity in the law surrounding when an asset is considered as ‘essential’, although there is an assumption established in the LSC where an asset is considered ‘essential’ when the transaction value exceeds 25 per cent of the company’s assets, which is proven in the company’s most recently approved balance sheet. To avoid any uncertainties surrounding the need to obtain the general shareholders’ meeting’s prior authorisation, in Spain it is standard practice in M&A deals to provide for this authorisation in almost all transactions of relatively high value and importance.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
As a general rule, transfers of shares in SL or SA companies do not trigger any stamp duty or transfer taxes. However, transfer tax applies when the company’s assets are composed mainly of real estate located in Spain; this applies only if it could be concluded that the transfer of shares is an indirect transfer of real estate assets aimed at circumventing or avoiding the transfer tax that would have been triggered if the real estate asset had been sold directly. See question 31.
The transfer of a business as a whole does not trigger transfer tax. However, if the transfer includes real estate assets that are not taxable under (value added tax) VAT, transfer tax will normally be triggered. See question 31.