Contributed By Allen & Overy LLP
M&A activity came to a near standstill in the first half of 2020 as the COVID-19 pandemic spread rapidly around the globe (with no exception in Spain), and this depressed both deal value and volume for the year as a whole. However, an extraordinarily strong recovery in deal activity began back in July and continued through the rest of the year. Although there are good reasons to believe this recovery in deals can be sustained, all market players remain cautious.
Private equity (PE) houses – still holding record levels of unspent cash – played a particularly active role in the turnaround of the M&A market in the final quarter of 2020. Partly as a result of this, competition in auction processes started to increase, and it is likely that PE activity will continue this year as corporates look to raise cash from carve-out transactions and PE funds take advantage of this window to exit portfolio positions. There has not yet been a big uptick in distressed M&A.
Sellers are even more focused than ever on execution risk. A purchaser able to offer an unconditional deal will put itself at an enormous advantage at present, hell or high water commitments are at an all-time high, reverse break fees are making a comeback, and pre-closing termination rights linked to material adverse change or material breach of warranty are scarcer than ever.
An increase in public M&A activity is expected as a result of the low stock prices from the COVID-19 pandemic, although, as explained in 3.2 Significant Changes to Takeover Law, a legal protection regarding pricing in voluntary takeover bids has become applicable precisely as a consequence of the COVID-19 pandemic.
New foreign direct investment rules which were approved in 2020 (see 2.3 Restrictions on Foreign Investments) will still be a key area of focus for investors when assessing M&A transactions in 2021.
The key industries driving M&A activity in Spain over the last year were banking, energy (with a focus on renewable energy), infrastructure, telecoms and health.
In private M&A transactions, the main technique for acquiring a company in Spain is entering into a share purchase agreement (SPA) with the shareholders of the Spanish target (the Target). The SPA will set out the terms under which the acquisition of the Target will take place. The share transfers are notarised although there is no requirement to register the transfer with a public registry.
Other acquisition techniques include a merger involving a Spanish entity as Target, a demerger or a spin-off. The purchaser can also acquire the relevant assets directly from a Spanish entity. In this scenario, subject to the compliance of a statutory proceeding, the assets and liabilities comprising the business unit are automatically transferred to the purchaser as a matter of universal succession principle. Assets can also be transferred individually, although, in such case, it may be necessary to seek counterparties’ approval to effect the transfer to the purchaser.
For listed companies, shares can be acquired on the stock exchange, through block trades, equity swaps or by way of private bilateral transactions.
The primary regulators for M&A activity in Spain are:
However, specific industry regulators may be added to this list depending on the sector in which the Target operates.
The foreign direct investment (FDI) regime has been changed in the wake of the COVID-19 pandemic. While previously there was a free regime where restrictions applied only to certain specific sectors (eg, defence), new regulations have created further restrictions and included stricter requirements, as well as widening the definition of the types of FDIs that require prior authorisation. Although these restrictions have been introduced in the COVID-19 context, they are not restricted to the pandemic in their application but will apply thereafter unless and until they are lifted or amended by law.
FDIs take place where an investment is made in a restricted sector by a foreign investor through the, direct or indirect, acquisition of 10% or more of the share capital of a Target or where, as a result of the transaction, the foreign investor controls the Target.
Foreign Investors and Restricted Sectors
Subject to the exceptions explained below, investments in Spanish companies (amounting to, at least, EUR1 million) fall within the FDI restrictions and a prior authorisation is required if the investor qualifies as a “foreign investor”; and the investment is in a “restricted sector”.
Additional FDI restrictions might be established by the Spanish government in other sectors not referred to above if it deems the relevant transaction may affect public security, public order or public health.
An authorisation will also be required, irrespective of the sector in which the Target operates, if the investment is made by a foreign investor that also:
The Spanish Council of Minister has a six-calendar month deadline to review and approve the transaction.
In addition, as a temporary regime, until 30 June 2021, investments by EU and EFTA investors in the aforementioned restricted sectors will be subject to prior authorisation where the investor either (i) acquires, directly or indirectly, 10% or more of the share capital or (ii) controls:
Finally, certain sectoral regulations may foresee additional restrictions on both foreign and domestic investments (eg, in media, aviation or national defence).
The CNMC undertakes merger control and investigations of mergers not caught by the EU Merger Regulation based primarily on alternative turnover and market share thresholds. Merger control filing is required if either:
However, as de minimis exception – applicable only to the market share threshold, not to the turnover threshold– no notification is required where market share threshold is met but the following two cumulative conditions are also met:
If the transaction is subject to the merger control rules, the investor must obtain clearance before completing the transaction and fines can be levied in case of “gun jumping”. CNMC scrupulously monitors practices that could lead to “gun-jumping”. The CNMC has a one calendar-month deadline to review and approve the transaction in “phase I” and a two calendar month deadline to review and approve (or prohibit) the transaction in “phase II”, if the transaction threatens to impede effective competition in Spain or a part of it.
If the merger control proceeding ends with a prohibition decision or with a decision subject to conditions or commitments, the Spanish Ministry of Economic Affairs can decide to defer the transaction to the Council of Ministry for the assessment of the transaction on public interest grounds other than competition.
In a share deal scenario, to the extent that, regardless of the transfer of shares, the relevant Target (together with its liabilities) remains fully existent, as far as the employees are concerned, their situation will remain the same since their employing entity will not change. Thus, provided that the share deal is not accompanied by restructuring measures that change the terms and conditions of employment, the share deal per se will not imply an amendment of the employees’ labour terms and conditions since the company (ie their employer) remains existing to all effects.
As a general basis, a share deal triggers an information obligation towards employees’ representatives (eg, works council). Hence, under Article 64 of the Spanish Workers’ Statute, there is the duty to inform the employees' representatives of the same matters as the shareholders and in the same conditions. This obligation, in practice, is met by providing such representatives with a brief description of the transaction before it is made public.
A share deal will not trigger any consultation obligation with employees representatives, unless it is accompanied by collective restructuring measures. In such latter case, a consultation obligation with employees’ representatives on the collective restructuring measures to implement, but not on the share deal per se, should be complied with prior to the implementation of the measures.
In an asset deal scenario, if the transaction qualifies as a transfer of undertakings or TUPE under Article 44 of the Spanish Workers’ Statute, the relevant employees would transfer automatically (ie without the need to seek for their consent) to the purchaser on the same terms and conditions of employment (including length of service and supplementary protection schemes). In order for the TUPE provisions to be applicable, the assets transferred should qualify as a self-standing business unit (ie an autonomous independent economic unit which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary).
In practice, asset deals involving a universal transmission of assets and liabilities usually trigger TUPE provisions in relation to the relevant employees. However, a case-by-case assessment needs to be carried out in asset deals which do not involve a global transmission of assets and liabilities in order to determine if the assets transferred qualify as an autonomous independent economic unit which retains its identity, and therefore whether the TUPE provisions apply. Such assessment would involve an analysis on whether the assets, contracts, employees, etc. transferred constitute a self-standing business unit. Unlike in TUPE scenarios where Target business’ employees shall only be informed of the transaction, if the TUPE provisions are not applicable to the transfer of assets, the transfer of the relevant employees will require the individual consent of each them.
In addition, to the FDI regime described in 2.3 Restrictions on Foreign Investments, investments made by any non-Spanish investor in activities related to National Defence (such as, production and commercialisation of weapons, ammunitions, explosives and war material), require prior authorisation of the Government.
Nonetheless, if the investment is in a listed company, authorisation will only be required when the investment either exceeds 5% of the listed company’s share capital or, even if it is equal to or below 5%, it enables the investor to be directly or indirectly part of the management body of the Target.
The most significant change is the new regime affecting foreign direct investment (see 2.3 Restrictions on Foreign Investments).
The Spanish Parliament has just approved a Law, which amends the Spanish Companies Act and the Securities Market Act and transposes to Spanish law the Directive (EU) 2017/828 as regards the encouragement of long-term shareholder engagement of listed companies. This new law sets out:
For voluntary delisting, in order to avoid a mandatory delisting takeover bid, the bidder is required to have reached, at least, 75% of the voting rights of the Target in the initial voluntary bid.
In addition, because of the COVID-19 pandemic, the CNMV has recognised the applicability of Section 137.2 of the Securities Market Act to voluntary bids. This implies that, for a period of two years bidders will not be entitled to launch voluntary bids at any price – instead, the bidder will always need to provide an independent expert report and to justify the equitable nature of the price
Spanish law allows a bidder to build a stake in the Target through purchases of shares before launching an offer. However, the purchase of shares is not neutral and impacts on the terms and conditions of the potential offer, namely:
Target shares purchases can also be made during the takeover process. If the purchase of Target shares takes place after the offer announcement (ie during the acceptance period but outside the offer), it will have the following consequences:
General disclosure rules require persons with significant stakes in Spanish listed companies to inform the issuer, the stock markets (Bolsas de Valores) and the CNMV if:
Purchases of Target shares during the acceptance period (outside the offer) by the bidder or its concert parties must be disclosed to the CNMV on the same day, including details of the price paid or agreed to be paid.
After the offer announcement (ie the Target is “put into play”), the general disclosure obligations for trading in Target shares are modified. In such circumstances, shareholders must disclose all acquisitions or disposal that cause their aggregate holding to reach or pass through 1% of the Target’s share capital and all persons holding an interest of 3% or more must disclose all dealings in Target shares, regardless of volume.
See 4.1 Principal Stakebuilding Strategies.
Dealings in derivatives is allowed in Spain. Special rules and limitations may be applicable in case of short selling and transactions on treasury shares by a Spanish listed company through “over-the-counter” (OTC) equity derivative instruments. Investor acquiring derivatives where the underlying assets are shares of a listed company (equity swaps) must:
In general terms, the volume and price of all OTC transactions traded on a trading venue is disclosed to the public. In addition, OTC derivatives dealers and intermediaries must disclose the applicable fees for these transactions related to the specific trading venue.
Regarding short selling, net short position in relation to listed shares in the Spanish Stock Exchanges must be notified to the CNMV of any position that reaches or falls below 0.2% of the share capital and of every 0.1% increment after that. The net short position is disclosed to the public when it reaches 0.5% of the share capital, and subsequently any 0.1% increment.
Finally, although transactions on treasury shares are subject to stringent reporting obligations, there have been many doubts as to whether they apply to equity derivative transactions in own shares and whether those shares should be regarded as “interposed party arrangements”. The consequences of derivative transactions being identified as interposed party arrangements impact disclosure obligations and their treatment as treasury stock. On 22 May 2020, the CNMV issued a public statement clarifying the criteria used for reporting treasury shares transactions when the issuer has entered into equity swaps or other financial instruments. It sets out that the duty of reporting treasury of shares transactions is solely applicable to transactions executed by the issuer (directly, indirectly or through a proxy) over its own shares, and does not cover financial instruments entered into by the company where its own shares are the underlying shares.
In the event of a takeover bid, the bidder shall disclose the purpose of the acquisition and its plans for the Target in the offer document.
As a general rule, a deal has to be disclosed to the public as soon as it constitutes inside information according to Market Abuse Regulation (MAR) and unless the issuer may have grounds, on its own responsibility, to delay disclosure to the public of inside information provided that all of the conditions set out by MAR are met. Article 7 of MAR defines “inside information” as information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments. In respect of the negotiation process, the obligation to disclose will depend on the seriousness of the potential offer, the concretion of its principal elements, the security on the confidentiality of the process and the lack of leaks to the market.
Regarding takeover bids, in the event of a mandatory offer, any person who reaches “control” of a listed company must inform the market immediately through an inside information communication. In case of voluntary offer, as soon as the bidder takes the decision to launch the takeover bid – which can only happen if it has ensured its ability to pay, in full, the consideration of the offer – it must immediately inform the market.
Although a bidder may have more flexibility in case of a voluntary offer as they may decide when to approve the internal decision to launch the takeover bid, market practice on timing of disclosure does not differ, as such, from legal requirements (see 5.1 Requirement to Disclose a Deal).
For listed companies, the Spanish takeover bid regulation (TOR) does not specifically regulate due diligence but there is a specific provision that allows it. Due diligence can be conducted prior to making a takeover bid if the board of directors of the Target agrees and it is common practice. During the due diligence, the Target must ensure equality of information among competing bidders, if it is the case and the application of the MAR provisions regarding the prohibition of unlawful use of inside information. The scope of due diligence has not been significantly impacted by the pandemic.
Standstills granted by significant shareholders (ie, irrevocable undertakings not to tender) are not rare when the intention of the bidder is not to obtain full control and/or there are arrangements in place between the bidder and the significant shareholder for the post-offer period.
Exclusivity is usually demanded from significant shareholders entering into irrevocable undertakings – however it is also not rare for the shareholder to have “ways out” in case of filing of a competing bid. Exclusivity by the Target is not common, given the existence of the neutrality rule mentioned in 9.2 Directors' Use of Defensive Measures. However, lately mechanisms to show Targets’ support of a friendly bid are being strengthened.
In a friendly process, it is not unusual that the bidder enters into an agreement with the Target’s reference shareholders relating to the tender offer terms and conditions. This agreement would also document the reference shareholders’ undertaking to tender their shares in the Target through the offer. In this regard, see 6.11 Irrevocable Commitments.
There have been some recent precedents where the bidder has also reached agreements with the Target.
The procedure to make a takeover bid usually takes two to three months and is as follows.
A person is required to make a mandatory offer if that person acquires control of a listed company. A person acquires control whether it:
The acquisition of control may be achieved either by a direct or indirect acquisition of shares or other securities which confer 30% of the voting rights, or by means of agreements with other securities holders whether express or tacit and oral or written, that aim to acquire control of the Target.
The TOR provides certain exemptions to the obligation to make a mandatory offer, some of which apply automatically but others require express approval from the CNMV.
Offer consideration can be cash, securities (whether they are securities issued by the bidder or not) listed on an EU regulated market or a combination of both. The offer must include an alternative cash consideration when the bidder or a person acting in concert:
If the securities are to be issued by the bidder, the alternative cash consideration is not mandatory whenever all or part of the bidder share capital is listed, and the bidder expressly agrees to apply for admission of the new securities to trading within three months from the publication of the outcome of the offer.
Mandatory offers can only be made conditional upon antitrust clearance. Conditions related to obtaining regulatory authorisations are particularly relevant. Under the TOR, the CNMV is not supposed to authorise a bid if any regulatory authorisation is pending (except for antitrust). However, it is becoming more common for the CNMV to approve offers when some minor regulatory authorisations, which are not deemed relevant in the context, are still pending.
Voluntary bids can only be subject to the following conditions:
In voluntary offers is not uncommon to see minimum acceptance conditions for price and squeeze-out reasons:
In periods where Section 137.2 of the LMV is not applicable, in a voluntary offer the bidder can offer the price it considers appropriate. However, if the price does not meet the requirements of “equitable price” and as a result of the offer, the bidder exceeds the 30% of the voting rights, but the offer is not accepted by a 50% or more of the addressees (excluding those acceptances obtained through irrevocable undertakings), then the bidder is obliged to make a mandatory offer afterwards without being able to invoke any exemption. Therefore, bidders usually fix this minimum 50% threshold as an acceptance condition.
While Section 137.2 of the LMV remains applicable, this exception is no longer applicable, since no voluntary offer can be made at a price which is not considered “equitable”.
After an offer addressed to all the Target shares (whether mandatory or voluntary), the bidder can acquire all remaining shares for an equitable price if both the following thresholds are met:
Bidder’s obligations under the offer must be secured.
All or partial cash offers have to be secured with a first demand bank guarantee or with a cash deposit in a credit institution securing the payment vis-à-vis the market members or Spanish clearance and settlement system and vis-à-vis the acceptors (cash deposit is not allowed by CNMV in practice).
Exchange offers, when the consideration consists of securities already issued, require a certificate of legitimacy to prove the existence of the securities and their earmarking for the outcome of the offer. In case of securities to be issued, a rule for action is established: directors of the bidder must “act in a manner that is not contradictory to the decision to launch the bid”. As an exception, when the CNMV considers there bidder is not serious about making the offer it will require the bidder to provide guarantees to cover the liabilities that might arise if the securities are not finally issued as anticipated.
In the context of a voluntary offer, the bidder might seek to enter into various arrangements with the Target’s reference shareholders, including tender commitments of different scope and intensity (eg, a hard or irrevocable commitment to accept the tender event in the event of a counter-offer, softer commitments, etc).
The Target is permitted to offer a break fee to a bidder. The break-up fee must be subject to four cumulative conditions:
The bidder can also request support from the Target’s board of directors, formally or informally, bearing in mind that directors are bound at all times by their duties to act in the Target’s corporate interest when assessing the offer and sharing their views on it with the shareholders.
The bidder can secure additional governance rights by entering into agreements with other significant shareholders. Other than that, the bidder will be legally entitled to proportional representation in the Board (subject to certain conditions), although this right derives from and depends upon its shareholding.
Shareholders generally have the right to designate as proxy-holder an individual or a legal entity to represent them at a shareholders’ meeting and vote on their behalf.
Shareholders may grant proxies to another person, whether or not a shareholder of the company, for the purposes of being represented at the general shareholders’ meeting. In practice, proxy forms are made available by the listed company or by the intermediary financial entity (tarjetas de asistencia, delegación y voto a distancia).
Under the Spanish Companies Act in public proxy requests in public limited liability companies (solicitudes públicas de representación) the proxy must include the agenda of the meeting and a request for instructions for the exercise of voting rights. The proxy-holder shall be entitled to vote differently when no known circumstances arise and there is a risk for the shareholder’s interests to be jeopardised.
After an offer addressed to all the Target shares (whether mandatory or voluntary), the bidder can acquire all remaining shares for an equitable price if both the following thresholds are met:
The most common mechanisms to buy the shares that have not tendered following a successful tender offer, provided that the bidder has acquired sufficient control, are the launch of a subsequent delisting bid or the approval of the delisting of the Company through the simplified procedure permitted under Section 11.d of TOR. This requires having been announced in the prospectus, the price being justified as equivalent to the desilting price, a shareholders delisting resolution and the placing of a sustained market purchase order at the initial offer price. As noted, a recent legislative amendment requires that the bidder acquires 75% of the share capital of Target as a consequence of the bid in order to have this simplified delisting procedure available. Note that none of these procedures guarantees the squeeze-out of all minority shareholders.
A bidder may seek to obtain from reference shareholders commitments to tender or vote and irrevocable commitments are accepted. The nature and strength of these undertakings are variable and will very much depend on the negotiating position of the parties involved.
As explained in 5.1 Requirement to Disclose a Deal, in the event of a mandatory offer, any person who reaches “control” of a listed company (see 6.2 Mandatory Offer Threshold) must inform the market immediately through an inside information communication. In case of voluntary offer, as soon as the bidder takes the decision to launch the takeover bid – which can only happen if it has ensured its ability to pay, in full, the consideration of the offer – it must immediately inform the market.
The TOR sets out that if the consideration offered by the bidder includes securities of any kind, the offer prospectus must set out information concerning those securities. Such information must be equivalent to that required for a prospectus made for an offer of securities to the public. Alternatively, the bidder may opt to incorporate by reference a prospectus in force.
The bidder needs to provide an audited copy of its financial statements and, where appropriate, of its group, corresponding, at least, to the last financial year closed or approved. The TOR does not explicitly provide the form under which financial statements need to be prepared.
The offer documents shall include a summary of the most relevant provisions of the transaction documents. Although it was not customary some years ago, in recent years it is becoming practice for the CNMV to publish all attachments to the prospectuses online.
As a matter of principle, directors have to comply with the following duties:
Duty of Diligence
As per duty of diligence:
Duty of Loyalty
Directors shall perform their duties with the loyalty of a loyal representative, acting in good faith and in the company’s best interest. In particular, the loyalty duty obliges the directors to:
It is not uncommon for boards of directors to establish special or ad hoc committees in business combinations. One of the reasons may be that under Spanish law, a director who has a relevant conflict of interest in connection with the business combination is not allowed to deliberate or vote on the underlying resolutions (see 8.5 Conflicts of Interest).
Under Spanish law, if a board of directors is considering taking a strategic and business decision, the directors are deemed to meet the standard of diligence when the directors act in good faith, without personal interest in the matter subject to decision, on an informed basis and following an adequate decision-making process.
In a public takeover bid, it is not unusual for the Target and/or bidder to request a fairness opinion or valuation opinion from a third independent party to assess the price offered in the bid.
The Spanish Companies Act addresses the duty of avoidance of conflict of interest situations within the duty of loyalty. In particular, such duty obliges the director to refrain from:
The directors shall inform the rest of directors and, as the case may be, to the board of directors or, in case of a sole director, to the general shareholders meeting, any situation of conflict, direct or indirect, that the directors or related parties may have with the corporate interest.
There is no legal concept of “hostile” tender offers in Spanish legislation. The TOR does not prevent a bidder from launching an offer due to not having the support of the Target or its shareholders. All tenders, friendly or hostile, are legally feasible and accepted in the practice even though the ratio of success of hostile bids is very low.
A Target shall not take action to frustrate an offer without shareholders’ approval – this is, from the offer announcement until the offer completes (ie publication of the offer’s results) or lapses, the board of directors, management and companies within the Target’s group must seek approval from the Target’s shareholders before taking any action that may thwart the offer. This provision applies regardless of the directors’ fiduciary duties (see 8.1 Principal Directors' Duties).
In particular, they may not (without such approval):
Notwithstanding the restrictions in 9.2 Directors' Use of Defensive Measures, from the offer announcement until the offer completes (ie, publication of the offer’s results) or lapses, the board can, among others:
Before the offer announcement, the board of directors can carry out any action in the ordinary course of business.
Under Spanish law it is possible to set a maximum limit to voting rights in the company’s bylaws. However this limit will become unenforceable if a bidder reaches 70% of the voting rights of the Target.
Directors will be subject to the neutrality rule explained in 9.2 Directors' Use of Defensive Measures. The board of directors has at all times the duty to act in the corporate interest of the company as a whole.
In relation to takeover bids, within ten calendar days of the start of the acceptance period, the Target’s board of directors must issue a detailed and reasoned report on the offer, detailing, among other things:
This report only has the nature of a recommendation. As noted above, the directors’ ability to prevent a takeover bid is limited by the neutrality rule.
Litigation in connection with M&A deals occurs in Spain. However, in many cases these type of disputes do not become public because they are settled through confidential arbitration proceedings. Some others are solved through civil proceedings before regular Courts of justice. It is worth mentioning that mediation, as an alternative dispute resolution method, is not very common in Spain.
M&A disputes are most often brought after closing, when the purchaser starts running the business and becomes aware of certain mismatch between reality and the representations and warranties provided by the seller(s). The typical disputes involve misrepresentations or claims arising out of breach of warranties, but also indemnities. It is also common that disputes arise following third party claims.
Parties have tried to walk away from a deal as a result of the COVID-19 pandemic. However, most of them have not ended in dispute, since they have been usually solved through negotiation.
Shareholder activism is a growing trend in Spain. Although the existence of a controlling shareholder in a majority of the Spanish listed companies may disincentive activism, the increasing presence of foreign institutional investors in the share capital of Spanish listed companies has made that board of directors and management especially sensitive to shareholders engagement. In addition, recent amendment of the Spanish Companies Act affecting listed companies seek to enhance shareholders’ participation in the general meetings and the long-term engagement in the company. Activism is especially visible during proxy season and during specific campaigns in the context of takeover bids.
Except in very specific cases, activists in Spain seek for certain seats in the Board of Directors of the company, for example, rather than to foster a corporate transaction. During the proxy season, if a transaction requires the approval of the general shareholders’ meeting activists may launch a specific campaign requesting additional information from the Board of Directors or proposing certain amendments to the shareholders‘ resolution or even the rejection of the transaction by the general meeting.
In general terms, the pandemic has caused a significant reduction in the level of new campaign activity. In addition, regarding activism agenda, concerns and issues related to directors’ remuneration or ESG have increased.
Interference with completion by activism is more frequent in the context of a takeover bid and there have been recent cases in which institutional investors or activist funds have demanded an increase in the price of the offer or have addressed the Spanish supervisor claiming the existence of issues in the price bid qualifying as equitable price or in relation to conflicts of interests related to the expert supporting the price calculation.