On December 29, 2018, the Official State Gazette published Law 11/2018, of December 28, 2018 amending the Commercial Code, the revised Capital Companies Law approved by Legislative Royal Decree 1/2010, of July 2, 2010 and Audit Law 22/2015, of July 20, 2015, as regards non-financial information and diversity, which entered into force the day after the date of its publication.

This Law stems from Royal Decree-Law 18/2017 of November 24, with important new additions, and brings into Spanish law Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information.

The final provisions of this law also affect other matters, by introducing amendments to the legislation on collective investment vehicles, payment services and services to support entrepreneurs and their internationalization, which fall outside this Commentary.

1. Scope of application: broadened to take in a greater number of companies

Law 11/2018 has significantly increased the number of companies required to file the non-financial information statement, in comparison with Royal Decree-Law 18/2007, which only applied to public-interest entities meeting a number of requirements. Now, qualifying as a public-interest entity is only one of the requirements that could lead to these new obligations. The rules, which will be phased in increasingly, are as follows:

1.1. From the entry into force of Law 11/2018

Companies will be required to file the non-financial information statement, individually or on a consolidated basis, if they meet the following requirements:

a) The average number of workers employed by the company or the group, as applicable, during the year is greater than 500.

b) They are either deemed to be public-interest entities in accordance with the audit legislation, or meet, for two consecutive years, at each of their year-end dates, at least two of the following tests:

(i) Total asset items must amount to more than €20,000,000.

(ii) Annual net revenues must exceed €40,000,000.

(iii) The average number of workers employed during the year must be greater than 250.

According to the transitional provision of Law 11/2018, the amendments it introduces will be applicable in the fiscal years beginning on or after January 1, 2018, and the two fiscal years to be taken for the purposes mentioned above will be that beginning on or after January 1, 2018 and the immediately preceding year.

As happened with Royal Decree-Law 18/2017, certain specific provisions are set out for the first two years following the formation of a group or a company, and in the case of subsidiaries, if the information had been included in the consolidated management report of another company.

1.2. After three years have elapsed from the entry into force of Law 11/2018

The transitional provision in Law 11/2018 states that once three years have elapsed from its entry into force, the obligation to submit the non-financial statement will apply to all companies with more than 250 workers that either are deemed to be public-interest entities in accordance with the audit legislation (excluding entities that are classified as small and medium-sized in accordance with Directive 34/2013), or meet, for two consecutive years, at each of their year-end dates, at least one of the following tests:

(i) Total asset items must amount to more than €20,000,000.

(ii) Annual net revenues must exceed €40,000,000.

2. Content of the non-financial information statement: greater details and removal of exceptions

Law 11/2018 is more specific about the content of the non-financial information statement to be included in the management report. Notably the following elements, which are described in more detail:

  • The group’s business model: business environment, organization and structure, markets in which it operates, its objectives and strategies, and the main factors and trends that may have a bearing on its future outlook.
  • Policies: due diligence procedures.
  • The outcome of those policies: relevant non-financial key performance indicators allowing for monitoring and evaluation of progress and facilitating comparability between companies and sectors, in accordance with the national, European and international benchmark frameworks used for each matter.
  • Risks: explanation of the procedures used to detect and assess the risks according to the benchmark frameworks for each matter. Information about the identified impacts should also be included, offering details thereof, in particular regarding the main risks in the short, medium and long term.
  • Non-financial key performance indicators: particular use must be made of standard non-financial key performance indicators that can be applied across the board and that comply with the European Commission’s guidance in this respect and with the Global Reporting Initiative’s standards. The national, European or international framework used for each matter must be disclosed in the report.

Additionally, as a new requirement with respect to Royal Decree-Law 18/2017, Law 11/2018 has now detailed the significant information that the non-financial information statement must include on: (i) environmental matters, (ii) social and employee-related matters (taking in factors such as the pay gap and the implementation of policies promoting disconnection from work), (iii) respect for human rights, (iv) anti-corruption and bribery matters, and (v) society (taking in the company’s sustainable development commitments, subcontractors and suppliers, consumers, and tax information).

Lastly, the new law has removed the option for companies to omit information in exceptional cases where in the due justified opinion of the managing body, the disclosure of such information would be seriously prejudicial to the company’s commercial position.

3. Separate report option, separate item on the agenda for the shareholders’ meeting, verification and publication on the website

Law 11/2018, like Royal Decree-Law 18/2017 before it, allows the non-financial statement to be issued in a separate report, if it is expressly mentioned that the information forms part of the management report, it includes the information required in the Law and is subject to the same approval, filing and publication rules as the management report.

Where the Law has added new requirements is in relation to approval, verification and publication of the report:

  • It will be mandatory for the report on non-financial information to be submitted as a separate item on the agenda for its approval at the shareholders’ meetings of companies.
  • The information included in this non-financial statement must be verified by an independent assurance services provider.
  • Without limitation to the disclosure requirements applicable to the consolidated non-financial statements envisaged in the Law, this report must be made available to the public free of charge and must be easily accessible on the company’s website within six months after the fiscal year-end date and for a period of five years.”

4. Broader definition of diversity for the selection of directors

Another new addition in Law 11/2018 is the rewriting of subarticle 2 of article 529 bis of the Capital Companies Law to ensure that the selection procedures for company directors facilitate diversity in relation to age, disability and training as well as gender, experience and knowledge. In this same article a requirement has been also been added to facilitate the selection of female directors in a number that will strike a balance between male and female board members.

5. Addition to the non-delegable powers of the board

In a new letter j) added to article 529 ter of the Capital Companies Law, Law 11/2018 has included among the nondelegable powers of boards of listed companies supervision of the process for preparing and presenting financial information and the management report which must include, where applicable, the required non-financial information.

6. Broadening of the contents of the annual corporate governance report on the diversity policy

The Law provides greater details on the information to be included on the diversity policy, in relation to the leadership team and special committees as well as the board. In particular, it goes beyond what had been included in the royal decree-law to specify that companies must report whether information was furnished to the shareholders on the criteria and the diversity goals sought in the election and renewal of the members of the board, of the leadership team and of the special committees created within them.

7. Additional provisions on the Government Corporate Social Responsibility Commission (CERSE)

The Law requires the Government Corporate Social Responsibility Commission (CERSE) to prepare an annual report on the information issued in the non-financial information statements, which must be submitted to the Upper House of the Spanish Parliament.

It also requires the government to obtain a report from the CERSE on any legislative project related to corporate social responsibility.

Lastly, it needs to be recalled that Royal Decree-Law 20/2018, of December 7, 2018, on urgent measures to foster economic competitiveness in the industrial and trading sectors in Spain included, in additional provision one, the obligation for companies with workers who have taken partial retirement with the simultaneous conclusion of a hand-over contract to include, among the non-financial information contained in the management report envisaged in article 262.1 of the Capital Companies Law, all the measures they have adopted in the context of fair transition to a low-carbon economy.

This royal decree-law was submitted for a debate and vote on amendments to the decree-law as a whole at the Lower House of the Spanish Parliament in a session held on December 20, 2018, in which it was resolved to validate it and for it to continue the process as a Bill of Law.