Spain: Corporate Acquisitions And Mergers In Spain

Acquisitions

Company's acquisitions are normally carried out either by means of a shares deal (purchase of shares) or an assets deal (purchase of assets). The main features of these alternatives are described below.

Purchase of Assets

The purchase of assets as an alternative to the purchase of shares for the purposes of acquiring a business may be based on different advantages that this kind of operation offers to both the seller and the purchaser, inter alia, the seller's tax costs may be reduced, and the purchaser's risk may be limited with respect to contingent liabilities of the target company.

The sale of assets can reduce the seller's tax costs in several ways:

(a) In principle, any accrued tax losses or tax credits (for investments, job creation, etc.) will remain with the selling company.

(b) As a general rule, gains from the sale of fixed assets at a price higher that their book value may benefit from a tax deduction of 14.5% (applicable in the case of gains incorporated in the taxable base of the 2007 tax year, to obtain an effective tax rate of 18%), provided that profits are reinvested in fixed assets (which may include shares subject to certain conditions) within a certain period of time. As from January 1^st, 2008, the percentage of the deduction is 12%, since the general tax rate is stated in 30%.

Purchase of Shares

As a rule, shares are freely transferable as from the moment the company is registered at the Companies Registry. However, the Company's bylaws or the shareholders agreements in place, as the case many be, may contain restrictions on the freedom of transfer of shares.

The shares purchase may be recorded by a Notary Public. If they are registered shares (those on which the name of the holder appears), they may likewise be transferred by delivery of the certificate of title and, in addition, the transfer must be recorded in the stub-book held by the company. Shares represented by book entries are transferred through an accounting procedure in accordance with the rules of the Spanish Securities Market Law (24/1988 of 28 July).

As concerns to listed companies, the purchase of their shares must be executed at the stock exchange and through a securities firm or agency. This purchase is not subject to any restrictions provided that the shares acquired do not provide the purchaser with a "significant stake" as defined by RD 1066/2007 or do not exceed any of the thresholds provided therein.

Any buyer seeking to purchase an number of shares which represents a "significant stake" of the share capital of a quoted company or which exceeds any of the thresholds provided for in RD 1066/2007, must make a tender offer subject to Royal Decree 1066/2007. The National Stock Exchange Commission (CNMV) ensures and protects the interests of the investor in such cases and for that purposes it has the following functions and powers:

Applications for authorization to carry out a tender offer must be presented to the CNMV, which reviews the documents submitted to it and authorizes or refuses the offer within 20 working days. It also decides whether the offer will be implemented following the acceptance period, and consequently, the release of the cash or securities offered in exchange.

Changes to the terms and conditions of the offer, its withdrawal due to special circumstances, and the authorization of competing offers are also matters which must be submitted to the CNMV for approval. The CNMV may notify the Antitrust Authorities of an offer for its approval it deems it appropriate.

From the taxation point of view, one of the advantages of a shares deal is the absence of taxation on share purchases due to the provisions of the Securities Market Law, which, in principle, declares the purchase of shares exempt from transfer tax and value added tax. There are two exceptions to this general exemption rule:

(a) Transfer tax does apply (at a rate of 7% per cent, in most of the Autonomous Communities) when a purchaser directly or indirectly acquires a controlling participation (50% or more) in a company which has more than half of its assets represented by real estate or by shares representing a participation of 50% or more in another company which has more than 50% of its assets represented by real estate.

(b) Transfer tax also applies to the purchase of shares which the seller received in consideration for the contribution of a real estate asset to a company, when the time period between the contribution of the real estate asset and the subsequent sale of the relevant shares is less than three years.

Mergers

Merger by Absorption and Merger by Incorporation

The Joint Stock Companies Law (19/1989 of 22 December), lays down the general legal framework for mergers and acquisitions in Spain. The Corporate Income Tax Law (RDL 4/2004 of 5 March) regulates two different types of mergers: merger by absorption and merger by incorporation.

A merger by absorption is defined as an operation whereby one or more companies are wound up without going into liquidation, and whereby all their assets and liabilities are transferred to the acquiring company in exchange for issuing to the shareholders of the company or companies being acquired of shares in the acquiring company. The Law provides for the possibility of a cash payment not exceeding 10% of the nominal value of the shares.

The Law also regulates the possibility of a merger by the incorporation of a new company. In this case, one or more companies will be wound up without going into liquidation and will transfer, to a newly formed company, all their assets and liabilities in exchange for issuing shares in the new company to their shareholders.

Procedure

The Joint Stock Companies Law requires the management bodies of the merging companies to draw up a 'merger project' which includes, at least, the following items:

(a) company name, registered office and data recorded at the Mercantile Registry with respect to the merging companies and, where appropriate, the new company;

(b) the share exchange ratio, which is calculated on the basis of the real value of the companies' assets and the anticipated consideration, respectively;

(c) the conditions relating to the allotment of shares in the acquiring company and the date from which the acquired shares entitle the holders to participate in profits and any special conditions affecting their entitlement;

(d) the date from which the activities of any company being acquired will be treated, for accounting purposes, as those of the acquiring company;

(e) the rights conferred by the acquiring company on the holders of shares to which any special rights are attached and on the holders of securities other than shares, or the proposed measures concerning them; and

(f) any special benefits conferred on the independent adviser and members of the merging companies' management.

A draft 'merger project' must be submitted to examination and opinion by the boards of directors of the companies participating in the merger and by independent experts. The directors must prepare a report explaining and justifying the merger project from both a legal and economic points of view.

In the expert's merger report, they must state whether or not the proposed share exchange ratio is fair and reasonable and must explain the method used to calculate such share exchange ratio. The experts will also indicate whether the aggregate assets of the merging companies equate to the capital of the new company.

The merger balance sheet can be prepared by using the last approved annual balance sheet as a reference, provided that it was drawn up within the six months prior to the date of the meeting at which the resolution approving the merger is passed.

Should the annual balance sheet not comply with this requirement, the board must produce a balance sheet drawn up as at the first day of the third month prior to the date of the merger project, following the same methods and criteria used for the presentation of the last annual balance sheet. In both cases, the values contained in the last balance sheet may be modified to reflect major modifications in actual value which are not shown in book entries.

When a specific merger balance sheet is prepared and also when the balance sheet of the last fiscal year is considered to be the merger balance sheet, the values contained in the last balance sheet can be modified in the light of any substantial changes in the real value of the assets which are not reflected in the accounting records.

The merger balance sheet must be submitted to the examination of the company's auditors. The merger must be approved by the general meeting of shareholders of each of the merging companies.

All shareholders shall be entitled to inspect in advance, at the company's registered office, at least the following documents: (i) the 'merger project' and the annual report and accounts of the merging companies for the preceding three financial years, (ii) the reports of the management bodies of each of the merging companies, (iii) the expert's report concerning the merger, (iv) the notarial deed of incorporation in the case of a new company or the modification of the existing deed in the case of merger by absorption, (v) the bylaws of the two merging companies, and (vi) a list of the directors of each company.

In order for each of the merging companies to validly take a decision on the merger, the Joint Stock Companies Law reduces the required quorum for attendance to 50% of the subscribed voting capital for the first call of the shareholders' meeting, and to 25% of such capital at the second call. The new deed (in the case of a merger by incorporation), or the modified deed (in the case of a merger by absorption), must be registered at the Companies Registry. Both deeds will include the balance sheet of the company which results from the merger.

The traditional Spanish opposition procedure is for the benefit of the creditors of any of the merging companies that may decide to oppose the merger. The Joint Stock Companies Law provides for a period of one month for the exercise of the right of objection by creditors, and stipulates that the holders of loan stock may exercise rights of objection on the same conditions as the rest of the creditors if the merger has not been approved by the assembly of loan stockholders.

The merger of any companies into a new company will entail the extinction of those companies and the transfer of all their respective assets to the new entity, which will acquire all the rights and obligations of the disappearing companies. Therefore, the previous winding up of the merging companies is not necessary in order to carry out the transfer.

Demergers

Under the Joint Stock Companies Law and the Corporate Income Tax Law, two types of demerger are provided for: (a) demerger by acquisition; and (b) demerger by incorporation of a new company.

Generally speaking, demergers involve a restructuring of existing companies, whereby a company transfers to other companies all or part of its assets and liabilities, without being wound up (or after being wound up, but without going into liquidation).

The company which is the subject of the demerger, in exchange for its allotment of shares to shareholders of the company being divided, will receive shares in the new companies and a cash payment not exceeding 10% of the nominal value of the shares allotted. The procedure is very similar to the procedure for mergers described above.

Foreign Investment Rules

Since Spain joined the EU, there has been a gradual liberalization of the rules governing foreign investments in Spain. The last step of this liberalization process was the enactment on 23 April 1999 of Royal Decree 664/1999, and Order of 28 May 2001. The new regime establishes a system according to which, and as a general rule, foreign investments are declared once the investment is made.

The following transactions (among others) are considered foreign investments fro the purposes of the relevant legal regime: (i) participations of any kind in Spanish companies, (ii) the incorporation of company branches in Spain, and (iii) the holding of participations in funds or the acquisition of real estate in Spain.

By way of exception to the post-investment declaration general rule, the Royal Decree requires that investments proceeding from tax havens are declared before they are made, if certain legal conditions are met. This prior declaration rule relating to funds proceeding from tax havens does not apply in the case of investments in quoted securities and investments by means of participations in funds registered at the Registry of Funds of the National Stock Exchange Commission.

Spain maintains exchange control regulations which apply to all currency inflows and outflows. Foreign investments which have been channelled through an authorized Spanish bank (Entidad delegada) and declared to the Ministry of Economy and Finance will be permitted to be transferred abroad. There are no quantitative limits on repatriation of foreign capital invested, capital gains obtained, or dividends legally distributed.

Restricted Sectors

In spite of the liberalization introduced by Royal Decree 664/1999, there are still sectors where foreign investment is limited. The following sectors (among others) are subject to special regimes:

Gambling

Foreign participation in companies carrying out gambling activities cannot exceed a given percentage. In any case, foreign participation of any percentage requires prior administrative authorization.

Radio

The General Telecommunications Law 11/1998 of 24 April 1998, limited foreign participation to 25% in companies which are awarded a radio station. However, such restriction has been removed by the New General Telecomunications Law, Law 32/ 2003.

Air Transportation

The Air Navigation Law 48/1960 of 21 July 1960 stipulates that three-quarters of both the capital and the directors of any company exploiting this type of service must be Spanish.

Also limited are activities directly related to national defence: inter alia, those activities concerned with the exploitation of minerals of strategic interest and manufacturing of weapons.

Banks and Credit Institutions

In order to acquire a participation exceeding 15% in the capital of a bank or credit institution, authorization is required from the Spanish Central Bank (Banco de España).

Conduct Of Company Directors In The Context Of A Merger Or Acquisition

Joint Stock Companies Law requires that directors should behave as efficient business-people and as loyal representatives of their companies. It imposes them a duty not to disclose confidential information which the directors may have obtained as a consequence of their position in the company.

In the context of an acquisition of a company by its managers (MBO) where a director is an interested party, there is clearly a conflict of interest. This conflict is resolved by the Spanish Joint Stock Companies Law, which provides that: 'directors will be liable vis-à-vis the company, the shareholders and the creditors for any damage caused by acts which contravene the law or which are exercised without the required care in all circumstances throughout the fulfilment of their duties'.

Furthermore: 'all members of the board who executed the act or voted in favour of the resolution causing the damage will be jointly and severally liable, with the exception of those who prove that they were not aware of its existence or, being aware, did everything possible to avoid any damage or, at the very least, opposed it.'

In practice, under the Spanish Law, shareholders may bring actions against directors in cases of intentional acts, abuse of power or gross negligence, and negligence.

Financial Audits And Due Diligence

Financial Audits

The Companies Law establishes an obligation on companies to appoint an auditor for a minimum initial period of three and up to nine years. This appointment is annually renewable. The auditor is required to audit the company accounts. However, as a rule, companies which meet two of the three following conditions:

(a) have assets of less than aprox. 2,85m €; (b) have an annual turnover of less than aprox. 5,7 m € ; or (c) have less than 50 employees during the financial year, do not need to have their accounts audited.

The result of the audit must be registered with the Mercantile Registry, which is a public registry and, therefore, any interested third party may have access to it.

Due Diligence

The purchaser of a company acquires all the assets and liabilities of any nature existing in its financial statements at the time of the acquisition. The statute of limitations for tax debts is, as a rule, four years from the moment the tax obligation arises. The four-year period may be interrupted when the Ministry of Economy and Finance makes a claim on the taxpayer.

Labour obligations corresponding to the period preceding the acquisition and outstanding obligations to the Ministry of Social Security for contributions due prior to the acquisition are borne by the new owner of the company.

In order to restrict or asses these risks and liabilities prior to the acquisition, it is worth having an examination of the target company done by experienced legal advisors who carry out a due diligence or legal audit of the company.

Under this procedure, an authorized person would go to the registered office of the company to be purchased, or have access to a real or virtual data room and would be permitted to examine whatever documentation is relevant to the deal. Included in such an audit would be a checking to verify that all documentation which is required to be publicly registered has in fact been registered.

This legal audit should cover, in principle, the following points/documentation:

(a) corporate matters:

(i) Public Deed of Incorporation (Escritura), bylaws and amendments thereto;

(ii) mercantile registration;

(iii) powers of attorney;

(iv) internal documentation of the company including the minutes of the meetings of the shareholders and of the board of directors;

(b) assets:

(i) existence, title and transferability of the assets:

(ii) mortgages, charges or encumbrances on such assets;

(c) employment/labour aspects:

(i) labour contracts (written or verbal)—permanent and temporary staff;

(ii) collective bargaining agreements—early retirement obligations; pensions;

(iii) adjustright workers committee or shop stewards;

(iv) degree of labour conflict and rate of absenteeism;

(v) social security payments and salary deductions;

(vi) labour law suits;

(d) tax aspects:

(i) corporate tax:

(ii) local property taxes;

(iii) VAT and any other applicable taxes;

(e) administrative authorizations, licences and permits from all governmental authorities;

(f) operating documents/contracts, such as work contracts, loans, supply contracts, insurance contracts, manufacturing and licence agreements, leases, assignments, distribution or agency contracts; and

(g) status of legal actions, if any, as plaintiff or defendant.

Once the seller and the prospective purchaser are satisfied on any questions arising from the due diligence process, the sale and purchase agreement can be negotiated and concluded in the normal way. The main terms of such agreements in Spain are unlikely to differ fundamentally from those found in similar agreements in Anglo-Saxon jurisdictions. The agreement may thus be expected to contain all normal warranties, indemnities and non-competition undertakings as well as any conditions precedent which must be satisfied before completion takes place.

However, given that the Spanish Civil Code provides some legal protection to a purchaser in cases of latent or hidden liabilities, the warranties may be less extensive than in countries where caveat emptor is the rule.

Taxation Of Mergers And Acquisitions

Participating companies involved in a merger, demerger, contribution in kind or an exchange of shares will be subject to the various existing taxes applicable to such operations, when not voluntarily complying with what the Corporate Income Tax Law calls the special regime (régimen especial) for mergers.

Ordinary Regime: Taxation Affecting Companies

Corporation Tax

The Corporate Income Tax Law establishes the general regime for taxation of mergers. It is a definitive incorporation of the EU directives. It states that the difference between the real value and the current net book value resulting from any restatement for accounting purposes of the companies' assets and rights to be transferred, is considered to be a capital gain.

Any such capital gain will be included in the taxable bases of the merging companies.

Tax on Property Transfer and Stamp Duties

Tax on Property Transfer

Operations which may be subject to this tax include incorporation, increase or reduction of capital, mergers, transformation and winding up of companies.

Stamp Duties

Transactions subject to assessment are those involving notarial documents that are recordable within a Public Registry.

Urban Property Capital Gains Tax

This is tax on capital gains realized as a result of the transfer of urban real estate.

Value Added Tax

This applies to various operations carried out by the companies.

Taxation Affecting the Shareholders of the Merging Companies

Direct taxation may be incurred by the shareholders of the merging company (personal income tax in the case of individual shareholders or corporation tax in the case of companies) on the gains eventually realized as a result of the exchange of shares; the differences between the real value of the shares received and the value of the shares transferred are considered capital gains for this purpose.

Taxation Under the Special Taxation Regime (articles 83 et seq., Corporate Income Tax Law)

The Law, however, provides for a special beneficial taxation regime stating that capital gains accrued by the transferor, resulting from the accounting restatement of the company's assets and rights, which is necessary to proceed to their transfer at a given price, are not included in the taxable base for corporate tax purposes whenever they result from:

(a) transfer by Spanish residents of assets and rights which are located in Spanish territory. If the acquiring company is not a resident entity, only those capital gains pursuant to the transfer of assets which are tied to a permanent establishment in Spain will be exempt;

(b) transfer by Spanish resident entities of permanent establishments located in the territory of states outside the EU, when the transferees are Spanish resident entities;

(c) transfer by non-resident companies of permanent establishments in Spain. If the acquiring company is not a Spanish resident entity, only those capital gains arising from a transfer of assets tied to a permanent establishment in Spain will be exempt; or

(d) transfers by resident companies of permanent establishments in EU territory, when the transferees are EU resident companies.

The companies involved are exempt from tax on property transfer and stamp duties, urban property capital gains tax and value added tax.

On the other hand, shareholders of the merging company will not incur direct taxation (personal income tax in the case of individual shareholders or corporation tax in the case of companies) on the gains ultimately realized as a result of the exchange of shares.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.