Shareholders’ Rights: Trends and Developments in Spain
In Spain, the main law governing the rights of shareholders of companies is the Capital Companies Law, as enacted by Royal Legislative Decree 1/2020, of 2 July (Ley de Sociedades de Capital – LSC). The most recent development affecting shareholders’ rights is the enactment of Law 5/2021, of 12 April (Law 5/2021), which implements Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (Directive 2007/36) into Spanish law.
In addition to Law 5/2021, in June 2020 the Good Governance Code of Listed Companies (the “Code”) was further amended, including new recommendations that have affected shareholders’ rights. The Code is a piece of soft law that was approved by a resolution of the National Securities Exchange Commission (Comisión Nacional del Mercado de Valores) and must be followed by companies whose shares are listed on any of the Spanish stock exchanges.
Finally, a new piece of legislation has been drafted (the “Draft”) that will affect shareholders’ rights (and obligations), mainly connected with the incorporation of limited liability companies.
As laid out in Directive 2007/36, the main purpose of Law 5/2021 was to boost investment in capital companies on a long-term basis and reinforce the mechanisms available to engage shareholders and managers in the long-term strategy of capital companies. For this purpose, the legislation included amendments to the LSC that are directing trends affecting shareholders' rights, as follows.
The latest amendment of the Code boosts the measures being used to close the gender gap, recommending that at least 30% of the members of boards of directors must be women before 31 December 2022, and at least 40% after 1 January 2022. This measure will undoubtedly promote the expertise, diversity and professionalism of the managing bodies of Spanish listed companies.
Shareholders’ Identification Rights
Companies have long held the right to identify their shareholders in Spain (and shareholders have always been interested in being recognised as such), and Law 5/2021 has reinforced such right by enabling companies to identify not only the formal shareholders but also their ultimate beneficiaries. This is relevant considering the new legislation on foreign direct investment, which has had a remarkable impact on M&A transactions, and the well-known know-your-client requirements for market players pursuant to the money laundering regulation.
Law 5/2021 expressly maintains the Spanish system currently in force for registering securities but has included new mechanisms that enable companies to identify the decision makers in terms of exercising voting powers.
In this respect, Spanish companies whose shares are admitted to trading on a regulated market situated or operating within an EU member state must not forget that the mechanisms put in place to identify shareholders and ultimate beneficiaries, and to transmit information to them through any intermediaries, must comply with the rules laid out by Regulation (EU) 2018/1212 of 3 September 2018 laying down minimum requirements implementing the provisions of Directive 2007/36/EC. Spanish companies whose shares are listed as such have been working to put mechanisms in place to effectively use the formats and templates provided by Regulation (EU) 2018/1212, which is focused on providing common formats of data and message structures in transmissions to enable efficient and reliable processing and interoperability between intermediaries, the relevant company (as issuer of the relevant shares) and its shareholders, thus ensuring the efficient functioning of EU capital markets for shares.
The Spanish Securities Market Law (Ley del Mercado de Valores – LMV), as approved by Royal Legislative Decree 4/2015 of October 23, has been amended to include a regulation on proxy advisers.
A proxy adviser is defined under the LMV as a legal entity that professionally and commercially analyses the information that listed companies are legally obliged to publish and, where appropriate, other types of information, to advise investors on the exercise of their voting rights through the provision of analysis, voting advice or recommendations.
The regulation affects proxy advisers if they:
Proxy advisers are now obliged to publish the code of conduct that they apply (or the reason for not applying such, in a clear and reasoned way) and a report containing certain information related to their investigations, their advice and the voting recommendations that they issue.
Proxy advisers must also notify their clients without delay of any conflict of interest, real or potential, or any business relationship that may influence the preparation of their investigations, advice or voting recommendations, and the measures adopted to eliminate, mitigate or manage conflicts (real and potential).
Holding General Shareholders' Meetings Through Telematic Means
Law 5/2021 permits capital companies to hold general shareholders’ meetings exclusively by telematic means without the physical attendance of the shareholders or their representatives if this is expressly provided for in the by-laws and set forth by the managing body in the meeting call.
In any case, the holding of a meeting by telematic means will be subject to the following conditions:
The following is also required for listed companies:
These provisions of Law 5/2021 were anticipated by the June 2020 amendment of the Code, which expressly encouraged listed companies to set forth the necessary measures to permit shareholders to take part in general shareholders’ meetings through telematic means.
Directors’ Remuneration: “Say on Pay”
Following the trend across all EU jurisdictions, Law 5/2015 has reinforced the “say on pay” system, which introduced into Spanish corporate legislation in 2014 following certain case law from the Supreme Court and the enactment of Law 31/2014 of 3 December.
Law 5/2021 expressly sets forth the duty of Spanish capital companies whose shares are listed to adjust their approved remuneration policy to the statutory remuneration system. In this regard, there is now an express obligation that the remuneration policy establishes the maximum amount of annual remuneration to be paid to all directors in their capacity as such, as well as the criteria for its distribution in response to the functions and responsibilities attributed to each of them. Although already embedded in the Spanish corporate culture and management, these principles have been boosted significantly by Law 5/2021, as have the tools available for shareholders of capital companies to check that the directors are setting the remuneration system correctly.
One of the main novelties introduced by the Law is the need to submit the remuneration policy for approval by the general shareholders' meeting before the end date of the last year of application of the previous one. The general shareholders' meeting shall then be capable of ensuring the new policy applies from the date of approval and for the following three years.
Law 5/2021 also establishes the obligation to include in the remuneration policy the amount of the directors' annual fixed remuneration for the performance of their executive functions, and the need for the remuneration policy to comply with a full set of specific principles and contents listed in Article 529 of the LSC. Such principles and contents include the need to:
Related Party Transactions
The applicable regime on related party transactions has been further developed by Law 5/2021, with the following amendments having a particular impact on Spanish capital companies and the control that shareholders can exercise over decisions.
The following generally applies for all capital companies.
The concept of “related party transactions” is further developed for capital companies whose shares are listed on a Spanish stock exchange, to include transactions carried out by the company or its subsidiaries with directors, shareholders holding 10% or more of the voting rights or who are represented on the company's board of directors, and any other persons that should be considered related parties under International Accounting Standards.
The following transactions are expressly excluded from related party transactions for these purposes:
The competence of the general shareholders' meeting to approve related party transactions is reserved for transactions whose amount or value is equal to or greater than 10% of the total assets of the company according to the latest annual balance sheet.
The shareholder with which the related party transaction will be performed will be deprived of the right to vote, except in cases in which the resolution proposal has been approved by the board of directors without being voted against by the majority of independent directors. The power to approve remaining related party transactions will lie with the board of directors, except in certain specific cases where such powers may be delegated by it.
In any case, whether the general shareholders' meeting or the board of directors is competent for the approval of related party transactions carried out by listed companies, a prior report certifying that the transaction is fair and reasonable from the perspective of the company is required from the audit committee. The approval of related party transactions that have been delegated will not require a prior report from the audit committee. However, the board of directors must establish an internal information and periodic control procedure in relation to such transactions, in which the audit committee must intervene and which will verify the fairness and transparency of said operations and, where appropriate, their compliance with the legal criteria set out under the LSC that permit the delegation of the powers to approve these transactions.
Listed companies must publicly announce the related operations of the company or of the entities of its group that they carry out and that reach or exceed 5% of the total assets or 2.5% of the annual turnover, no later than the time of their completion.
Loyalty Shares or Double Loyalty Voting Rights
Law 5/2021 also introduces to corporate law the concept of "loyalty shares”, allowing listed companies to include this right in their by-laws, in line with the existing possibility to do so in other EU member states.
The by-laws of listed companies can set forth the possibility of granting double voting rights to the shares held by a shareholder continuously for a period of two years. This mechanism can be used to encourage shareholders to maintain their investment in the listed company in the long term and reduce short-term pressures on the business management.
One important point to be considered by companies and investors is that, for the purposes of calculating whether or not a certain package of shares exceeds the minimum ownership period to achieve the double voting right, the shares allocated no disbursement by the shareholder under a relevant capital increase will be considered to have the same seniority as those that provided the corresponding shareholder with the right to acquire them.
The following thresholds must be met in order for the general shareholders’ meeting to validly agree on the inclusion of the possibility of achieving double voting rights:
The double vote for loyalty will be terminated as a result of the assignment or transfer, directly or indirectly, by the shareholder of the number of shares, or part of them, with which the double vote is associated, even free of charge, and from the date of transfer.
New Fast-Track for Incorporating Companies
The Draft is focused on closing the gap between the Spanish legal market and other markets in terms of establishing new companies and setting up businesses swiftly.
In this respect, the Draft aims to eliminate the requirement for EUR3,000 minimum share capital for limited liability companies, in order to lower incorporation costs and expand the options of founding partners regarding the share capital they want to subscribe based on their needs and preferences. This approach brings Spain into line with several other countries that do not require a minimum amount of capital to create a limited liability company, including the USA, Japan, China, Canada, India, Mexico, Russia, South Africa, the UK and ten of the 27 EU member states.
The Draft includes two specific rules for limited liability companies whose share capital is less than EUR3,000, with the purpose of safeguarding creditors' interests:
The Draft also includes a complete amendment of the fast-track electronic system to constitute limited liability companies in Spain, including the obligation for notaries and intermediaries who advise and participate in the creation of limited liability companies to inform the founders of the advantages of using the Entrepreneur Service Points (PAE) and the Information Center and Business Creation Network (CIRCE) for the constitution of companies and the performance of other procedures linked to the start of their activities. The terms in which this obligation will be exercised will be determined by regulation, although minimum information obligations will be established when the Draft is finally enacted.
Whether this new fast-track system will be enacted as foreseen has yet to be determined, but it is indeed a relevant piece of legislation that would help to dynamise the Spanish legal market.
It is yet to be seen how many of the above trends will be effectively applied in the legal market but, in any case, it seems that Spanish companies and Spanish legal firms must be on the lookout.