Improved Governance and Transparency In Spanish Company Law

Spanish legislation aimed at improving transparency and corporate governance became effective on July 19. Law 26/2003 aims to instill public confidence in financial markets following the corporate scandals of recent years and the resulting focus on corporate governance. Law 26/2003 addresses the following governance matters: shareholder agreements, substantive and disclosure rules of corporate governance, shareholders meetings and duties of directors.

Law 26/2003 imposes notification and disclosure obligations with respect to shareholder agreements, which it defines as agreements which control the exercise of voting rights or which restrict or condition the transferability of shares. The parties entering into, modifying or extending a shareholders agreement have an obligation to notify immediately the Spanish securities regulator Comision Nacional del Mercado de Valores (CNMV) and the subject company of such agreement, modification or extension. The parties will need to file the agreement with the mercantile registry (Registro Mercantil) and the company will need to disclose such an agreement as a material development (hecho relevante).

Law 26/2003 moreover renders unenforceable any shareholder agreements as to which the disclosure and notification requirements have not been met in addition to imposing the customary sanctions for breach of company law. Law 26/2003 provides the CNMV authority to waive the notification and disclosure obligation in cases where such disclosure could cause serious harm to the subject company. The disclosure obligations in respect of shareholder agreements under Law 26/2003 apply to agreements between shareholders of listed companies as well as shareholders of a company which controls a listed company.

Law 26/2003 requires that listed companies have rules governing their shareholders meetings and the functioning of their board of directors. These rules must be communicated to the CNMV and filed with the mercantile registry.

Law 26/2003 also imposes an obligation on listed companies to file annually with the CNMV a report on corporate governance which discloses:

• shareholdings by officers and directors and other related parties, existence of shareholder agreements and holdings of its own shares by the company;
• a description of the board of directors, including compensation, relation with significant shareholders, relations among directors, description of the rules governing the board and proceedings to nominate, elect or remove directors;
• transactions between the company and its officers, directors and other related parties;
• a system for control of risks;
• rules relating to the governance of shareholders’ meetings;
• disclosure of degree of adherence to recommended rules of corporate governance, including explanations with respect to deviations from the recommendations.

Law 26/2003 specifies the duties owed by directors to the company and addresses specific matters such as conflicts of interest and confidentiality.

• Law 26/2003 reaffirms a director’s duty to undertake his functions with the diligence of an orderly businessman and a loyal representative and requires directors to inform themselves diligently on developments in the company.
• Directors must comply with applicable law and their company’s bylaws, being faithful to the company’s interests.
• Directors’ duty of loyalty is specified in detail.
• Directors cannot use the name of their company nor their position as directors to promote their own interest or those of related parties.
• Directors and related parties cannot benefit from corporate opportunities unless the company has consented to such transaction without the influence of the director.
• Directors must disclose any conflicts of interest and abstain from participating in transactions in which they are conflicted. Conflicts must be disclosed in the annual governance report.
• Directors must disclose ownership interests and management roles in other companies with the same, similar or complementary objects and the realization for themselves or others of any activities which constitute these objects.
• Directors owe a duty of confidentiality which continues beyond their term as directors, subject to exceptions for disclosure as permitted or required by law or appropriate regulatory authority.
• Directors are liable to the company, the shareholders and the company’s creditors for damages resulting from acts or omissions contrary to law or the company’s bylaws or in breach of their duties as directors.
• Directors are jointly and severally liable for harmful contracts approved by the board, unless a director was not aware of such harmful contract and did not support its adoption, or unless a director opposed such harmful contract or took all convenient measures to mitigate damages. It is not a defense that the harmful contract was ratified or approved by the shareholders’ meeting.

Directors are prohibited from exercising shareholders’ votes by proxy in circumstances where there is a conflict of interest; in the nomination, selection or deselection of such director; in any action directed against the director; or in the approval or ratification of transactions between the director or related parties and the company. Law 26/2003 allows companies to provide in their bylaws for postal, electronic or other remote method of voting at shareholders’ meetings so long as the identity of the shareholder can be established.

Shareholders have the right to obtain information as follows:

• Prior to the shareholders’ meeting, shareholders may request information relating to agenda items or other public information filed with the CNMV up to the seventh day before the meeting. The directors are required to furnish such information before the shareholders’ meeting.
• During the shareholders’ meeting, shareholders may request orally information regarding agenda items, and the directors are required to answer these questions at the meeting or, if this is not feasible, in writing within seven days.
• The President of the board may decline to provide information if the information is prejudicial to the interests of the company, unless the request for information is supported by at least 25 percent of the shareholders.

Generally, the new law gives listed companies a 12-month period to adjust to the new requirements. Listed companies will be required to file their first annual report on governance in respect of the 2004 financial year. In addition, there will be a three-year transitional period from July 19, 2003 to notify shareholder agreements which affect more than 5 percent of the company’s capital or voting rights and were entered into prior to July 19, 2003, except in the event of a takeover offer of the subject company, in which case the notification requirements become immediately applicable.

Law 26/2003 adds Spain to the growing list of jurisdictions which are seeking to restore confidence in financial markets by improving the standards of corporate governance. The new law seeks to encourage greater shareholder involvement by facilitating access to information and voting mechanisms at shareholder meetings. The new law creates greater scrutiny over shareholder agreements and thereby enhances transparency of corporate control. Finally, the new law clearly defines directors’ duties and standards of conduct and will increase the market’s awareness of each company’s governance practices through the mechanism of an annual governance report. These changes will undoubtedly help promote a culture of good corporate governance in Spanish-listed companies.

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