Shareholders Agreements are commonly used in Spain, for the same reasons than in other countries: the provide a more flexible and detailed frame to regulate the relationships between the shareholders of a company, allowing a smoother governance of the company and avoiding dead lock situations.
Clauses commonly used in Spanish Shareholders’ Agreement are those related to the appointment of directors and their compensation, financing of the company, transfer of shares (drag along and tag along rights), anti-dilution, etc. However, the Spanish Capital Companies’ Act (Ley de Sociedades de Capital) includes some provisions that are aimed to protect the interests of the minority shareholders, but in practice could lead to situations where such minority shareholders could make an abusive use of their rights.
One of these clauses is article 190 of LSC, regarding conflict of interest among shareholders. This clause provides that agreements that could grant a right or cancel an obligation to a shareholder or provide him any kind of financial assistance, including granting a guarantee in his favor, should be approved by the Shareholders’ Meeting, and the affected shareholder could not vote the resolution approving such agreement. There are some discussions regarding what type of agreements are included in this prohibition: agreements directly related to the rights or obligations of the shareholders, or commercial agreements between the company and the shareholder, being this second option more accepted.
This implies that if a Spanish company has, for example, a supply, distribution, financing, services or any other kind of agreement with one of its shareholders (no matters if the shareholder is Spanish or foreign, a company or an individual, majority or minority shareholder), such agreement should be approved by the Shareholders’ Meeting, but without the votes of the affected shareholder. Such votes are not counted in order to calculate the necessary majority to approve the agreement. In practice, this means that a majority shareholder should relay on the votes of the minority in order to have its agreements with the company approved. And sometimes, if the relationships between the shareholders have become tense for whatever reason, maybe that the voting shareholders issue their vote against the agreement, even though it is not damaging for the company.
If the majority shareholder disregards the prohibition of voting included in article 190 of the LSC and approves the agreement, the Law provides no direct penalty for such cases, but there will be a presumption that the agreement is damaging for the company, and thus, if the minority shareholder(s) challenge in Court the resolution of the Shareholders’ Meeting which has approved the agreement, the majority shareholder will have to prove that it is not damaging for the company.
In other cases where there is a conflict of interest, but different from the above described situations (granting a right or canceling an obligation to a shareholder or providing any kind of financial assistance), the affected shareholder is allowed to vote, but if his votes have been decisive for adopting the resolution, it can be challenged in Court by the other shareholders, being the challenging shareholders obliged to prove if the resolution is damaging for the company.
In order to determine if an agreement is damaging for the company, it is necessary to refer to market conditions: and if the prices and conditions of such agreement are the same than would have been agreed between independent parties, the agreement, even imposed by the majority shareholder, cannot be considered unfair and therefore cancelled by the Court.
Another provision included in the LSC that shareholders in a joint venture should take into account is ubsection f) to article 160, which has been added through the reform of the LSC in force since December 2014.
Article 160 refers to the resolutions that should be approved necessarily by the Shareholders’ Meeting and not by the Board of Directors, and subsection f) includes the acquisition, transfer or contribution to another company of core or “essential” assets. It is presumed that an asset is core when its value exceeds 25% of the value of the assets included in the last approved balance sheet.
That is, the Board of Directors should first ascertain if an asset is core or not, and in case it is, then the decision should be approved by the Shareholders Meeting, applying the prohibition to vote if the transaction involves any of the shareholders.
The presumption that an asset is core if its value exceeds 25% of the balance sheet assets, does not exclude that other assets could be considered as core. This is especially applicable to intangible assets like IP or goodwill, which could have no value shown in the companies’ balance sheet, but could be “core” for its activity. In this cases, it would be much more difficult for a shareholder to challenge in Court the transaction made by the Board of Directors.
A remedy for these situations is provided by article 161 of the LSC, which allows the Shareholders’ Meeting to provide instructions –in advance- to the Board of Directors, or to submit to the approval of the Shareholders Meeting the adoption of certain management decisions.
Another provision of the LSC that is necessary to take into account when drafting the Shareholders’ Agreement is article 348 bis (which will be in force in December 2016), which provides that from the fifth year from the entrance of the company into the Companies’ Registry (which takes place few weeks after the incorporation), a shareholder of a non-listed company can separate from the company if it does not distribute a dividend of at least 1/3 of the profits (obtained from the ordinary activities) that can be legally distributed, provided that shareholder has voted in favor of the distribution of dividends. It should be noted that the term does not refer to five years from the obtaining of profits, or from the compensation of losses carried forward, but just from the incorporation moment. And this article does not exclude circumstances when it is necessary for the company to carry out investments or to make provisions for future losses or obligations, the minority shareholders could exercise its rights in an abusive manner.
The consequence of the separation is that the company –or the other shareholders- are obliged to purchase the shares of the separating shareholder, at the price agreed by the parties or, if there is no agreement, at the price calculated by an auditor appointed the registrar. There may be many reasons for a company not distributing profits, especially during its first five years of existence; therefore, in order to prevent abuses by the minority shareholders, it becomes essential to agree on the policy of distribution of profits in the Shareholders’ Agreement.
The conclusion is that the new Capital Companies Act provides a very complete set of rules aimed to protect the minority shareholders, whose interests, prior to the reforms that have been approved in the past years, were mostly subject to the majority’s decisions. But now it is also necessary to protect the interests of the majority shareholders from abuses by the minority, taking into account that sometimes minority shareholders may exercise its rights without taking into account the interests of the company itself.
Barcelona, May 2016.