Spain’s Companies Act Amendments Include New Corporate Governance Rules

Royal Legislative Decree 1/2010 (Real Decreto Legislativo 1/2010, de 2 de julio, por el que se aprueba el texto refundido de la Ley de Sociedades de Capital (“the LSC” or “the Companies Act”)) harmonized and restated in a consolidated text the previous regulations on public limited companies (sociedades anónimas) and private limited companies (sociedades limitadas), provisions in the Commercial Code related to limited partnerships with share capital (sociedades comanditarias por acciones), and provisions in Title X of the Securities Exchange Act related to listed companies.

A year later, the LSC has been amended and corrected several times. The most important amendment is the recent Law 25/2011 (Ley 25/2011, de 1 de agosto, de reforma parcial de la Ley de Sociedades de Capital y de incorporación de la Directiva 2007/36/CE, del parlamento Europeo y del Consejo de 11 de Julio, sobre el ejercicio de determinados derechos de los accionistas de las sociedades cotizadas (the “25/2011 Act”)), which not only amends technical errors and cross references and eliminates unjustified differences between public and private limited companies, but also aims to reduce administrative and functioning costs of stock corporations and introduces into national legislation Directive 2007/36/EC of the European Parliament and of the Council of July 11, 2007, on the exercise of certain rights of shareholders in listed companies (the “Directive 2007/36/EC”).

This article discusses the major changes made under the amendment and briefly introduces the minor changes.

We have classified the new regulation by subject, instead of citing subjects in the order in which they appear in the Companies Act, explaining first the changes for public limited companies and private limited companies, and then those for listed companies.

Public Limited Companies and Private Limited Companies

Legal Publicity

Regarding the form of the notice of general meetings, regulated in Article 173 LSC, the amendment has introduced the possibility for public and private limited companies to avoid publishing the calling of general meetings in the Official Bulletin of the Commercial Registry (Boletín Oficial del Registro Mercantil, “the BORME”) and for unlisted public limited companies to establish in their bylaws the calling of general meetings by notifying each shareholder individually. Consequently, the regulation on how to convene general meetings is now the following:

• Unlisted public limited companies and private limited companies that have not regulated the calling of general meetings in their bylaws must call general meetings by publishing them in the BORME and in a newspaper. However, if such companies have a website (and the commercial registry has been informed of the website), the announcement in a newspaper becomes voluntary, and it is mandatory to publish the announcement only on the website and in the BORME.

• Unlisted public limited companies with registered shares and private limited companies have the option to establish in their bylaws that general meetings can be called by publishing an announcement on the website or by giving individual notifications.

• Unlisted public limited companies with bearer shares must call general meetings by publishing an announcement at least in the BORME. It is not clear from Article 173 whether unlisted public limited companies must also publish the announcement on the website, or whether they just have to notify shareholders individually.

From a practical standpoint, from now on, companies may save more than 50 percent of the cost of making announcements.

Although the Companies Act made several references to companies’ corporate websites, it did not regulate them. With the reform, under Article 11 bis LSC, the agreement to create the website must be adopted by the general meeting, but the agreement to eliminate or move it may be adopted by the governing body, unless otherwise stated in the bylaws. Both agreements have to be registered with the commercial registry or notified to all shareholders. However, it does not define the website’s content. A proper approach to limited companies’ corporate websites could be the regulation applicable to listed companies’ websites.

In line with the purpose of the reform to introduce changes that reduce costs, and due to the derogation of Article 289 LSC and the modification of Article 369 LSC, the 25/2011 Act eliminated, for public limited companies, the obligation to publish on the website or in a newspaper the corporate resolutions to change the corporate name, transfer the registered office abroad, substitute or modify the company’s corporate purpose and winding-up.

Governing of the Company

Another important addition, inserted with the amendment of Article 23 e) LSC, is the extension to public limited companies of the possibility to establish in their bylaws different ways to organize the governing of the company, which was already possible for private limited companies.

The new wording of Article 212 bis LSC introduces the regulation on natural person representatives of director-legal entities. Under this article, if a legal entity is appointed director of a company, a natural person has to be named to represent it. The revocation of this natural person will not be effective until the person substituting him or her is appointed. It has to be noted that the draft of the reform proposed granting natural person representatives of director-legal entities the same rights and responsibilities they would have if they were directors in their own names, without prejudice to the joint and several responsibility of the legal entity represented. However, this proposal was not included in the final text.

Concerning the board of directors, the new wording of Article 246 LSC expressly establishes that it can be convened not only by the chairman or the person acting on the chairman’s behalf (i.e., the deputy chairman), but also by one-third of the directors, if the chairman does not call it, without justified cause, within one month from when the chairman is required to do so. However, this measure was already possible for non-listed companies with regulation in their bylaws, and a generally admitted practice for listed companies, as a good governance recommendation (which, in fact, establish in their bylaws the convening of the board of directors by two or three independent directors).

Right of Information

With the amendment of Article 197 LSC, regarding shareholders’ right of information when a general meeting is convened, now the bylaws of public limited companies can reduce the required minimum legal percentage of share capital from 25 percent to 5 percent, so that directors cannot refuse to provide the information requested by shareholders representing this percentage.

Right of Separation

The reform’s main development relating to unlisted companies is a new right of separation from a company when the company decides not to distribute dividends. This new right radically changes the position of minority shareholders when faced with a policy of reinvestment of profits that they do not agree with. It is provided in Article 348 bis and is granted to shareholders of private limited companies and unlisted public limited companies who voted in favor of distributing dividends, when a minimum of one-third of the legally distributable operating profits is not distributed. This new individual right of separation implies that, under the specific circumstances, shareholders are allowed to leave the company and recover the value of their investment in line with the procedure established in LSC (which states that their holding will be redeemed at a fair value). Many questions have arisen on the interpretation of this article.

Minor Changes

The reform also introduces minor changes regarding, mainly, the causes for winding-up and the appointment of liquidators, and others that correct technical errors.

Listed Companies

The reform not only incorporates Directive 2007/36/EC by introducing, in Title XIV of the Companies Act, a new section regulating general meetings of listed companies, but also puts in order existing recommendations and minor regulations, raising them to the level of the Act. The main points of this new regime are discussed below.

Article 515 LSC addresses the possibility to reduce to 15 days the notice to call extraordinary general meetings. However, two requirements make it difficult for companies to use this reduced term: 1) all shareholders must have the opportunity to vote electronically; and 2) the decision to use this possibility must have been expressly adopted at the previous general meeting by at least two-thirds of the share capital with voting rights. It is important to note that, for instance, in 2009, the average attendance at general meetings of listed companies was slightly below 75 percent (according to the “Corporate Governance Report of listed companies” published by the Spanish Securities and Exchange Commission (Comisión Nacional del Mercado de Valores, “the CNMV”).

Under the new Article 516 LSC, applicable to non-listed companies for the calling of general meetings, and consistent with the aim of reducing operational costs, the call for a listed company’s general meeting must be published: 1) in the BORME or in a newspaper with wide circulation in Spain; 2) on the website of the CNMV; and 3) on the company’s website. This article introduces the possibility to decide between the BORME or a newspaper, but existing regulations and transparency recommendations were already imposing the publication of the announcement on the websites of the CNMV and the listed company.

Section 1 of Article 519 LSC limits, for listed companies, the right of shareholders representing at least 5 percent of the share capital to put items on the agenda for general meetings. Unlike unlisted companies, in listed companies, the introduction of additional agenda items is subject to justification, and this right can be exercised only in ordinary general meetings (and, although the Directive 2007/36/EC establishes that this right has to be granted without prejudice to different time frames and modalities currently in use across the European Community, in Spain, the legislator has considered only ordinary general meetings, because Spanish law already allowed shareholders representing at least 5 percent of the share capital to request directors to convene extraordinary general meetings, expressing the items on the agenda). Section 2 of the same article introduces the new right of shareholders representing at least 5 percent of the share capital to submit justified proposals to include items on the agendas of both ordinary and extraordinary general meetings.

Regarding shareholders’ rights of information when a general meeting is convened, Article 520 LSC adds, to the existing right to request an explanation of the information disclosed to the public on the CNMV’s website, the right to request an explanation of the auditor’s report. Additionally, the right to information when a general meeting is convened is modulated, as directors are not obliged to answer shareholders’ questions if the information is clearly and directly available in a Q&A questionnaire on the company’s website.

Shareholder Representation

Article 522 LSC states that bylaws’ clauses limiting shareholders’ rights to be represented by anyone in general meetings are void (i.e., only four of the 35 companies included in the Ibex 35 (the main Spanish stock market index, weighted by capitalization, of the top 35 companies listed on the secondary market) have that restrictive clauses in their bylaws). Also, Section 3 of this article introduces the new shareholder obligation to notify the company of the appointment of the shareholder’s representative. Note that the Spanish legislator has incorporated the wording of the Directive 2007/36/EC without taking into account that the obligation to notify the company of the appointment or removal of the representative does not exist in Spain. It has to be pointed out that the Directive 2007/36/EC does not set this notification requirement, but states that, if the case may be, companies shall offer to their shareholders at least one effective method of notification by electronic means.

Exercise of Voting Rights

Article 524 LSC introduces a specific rule on the relationship between financial intermediaries and their clients for the purpose of exercising voting rights. This article has not overtly included the type of financial intermediaries known as “foreign global trustees”, who act as fiduciary owners for ultimate investors, included in the Directive 2007/36/EC as “a natural or legal person who is recognized as a shareholder by the applicable law acts in the course of a business on behalf of another natural or legal person (the client)”. Although Article 524 LSC mentions the representatives of ultimate investors, foreign global trustees are the formal owners of the shares (with the capacity to exercise voting rights). However, the Unified Code of Good Corporate Governance (2006) (the “Unified Code”) recommends listed companies to permit foreign global trustees to vote differently according to the instructions they receive from their clients. Following the Unified Code recommendations (Recommendation 6), several listed companies have already implemented tools to permit split votes, so financial intermediaries acting as nominees on behalf of different clients can issue their votes according to their instructions.

Finally, Articles 523 and 526 LSC introduce an exhaustive list of cases in which conflict of interest may exist and the obligation of the representative, and of the person who publicly requests the representation, to inform the represented person of any conflict of interest that may happen before or after the appointment, and to abstain from voting unless he or she has received precise instructions on how to vote, in a conflict of interest situation.

Ana María Gamazo Martín is a Partner and Anna Fàbrega Rodríguez-Roda is a Junior Associate with Cuatrecasas, Gonçalves Pereira, Barcelona. The authors may be contacted at anamaria.gamazo@cuatrecasas.com and anna.fabrega@cuatrecasas.com.