Legal news applicable to unlisted companies following the publication of the Draft Law to amend the Capital Companies Law

by Esther Pérez
On 7 September 2020, the Congress of Deputies published the Draft Law amending the Capital Companies Law and other financial regulations, regarding the promotion of long-term shareholder involvement in listed companies. The purpose of this Law is to transpose into Spanish law the Directive 2017/828 of the European Parliament and of the Council of 17 May 2017 which amends the Directive 2007/36 regarding the promotion of the long-term involvement of shareholders in listed companies. However, this Draft Law includes two important amendments for non-listed companies, which are:
  1. Extension of the list of people related to the directors.
  2. Establishment of a special approval regime for related intra-group transactions subject to conflicts of interest.

The deadline for amendments was 24 September 2020, so these proposals may be modified until they are approved in early 2021, when the amendments submitted will finally be approved or not.

1. Extension of the list of people related to the directors

This amendment seeks to correct the difference between the definition contained in IFRS 24 and that provided in section 231.1(d) of the Companies Act. The difference between both regulations is that the latter left out companies or entities in which the director has a relevant participation or holds a key position. Therefore, it was essential to include as a person related to the director those companies or entities in which the director has an interest that gives him/her a significant influence.

Likewise, the partners represented by the director on the management body are included as people related to the director, since in these cases one would be facing a conflict of interest on behalf of others which, until now, part of the doctrine understood could be included in a generic way in Article 228 (e) of the Capital Companies Law. This director must refrain from voting in matters in which the partner (whom he or she represents in the management body) has an interest that may be in conflict with the company.

Therefore, section (d) is amended and section (e) of Article 231.1 of the Capital Companies Law is introduced with the following wording:

«Article 231.1 People related to the directors.

1. For the purposes of the foregoing Articles, they shall be considered as persons related to the directors:
  1. The manager’s partner or persons with a similar relationship of affection.
  2. The ascendants, descendants, and brothers of the manager or of the manager’s partner.
  3. The partners of the ascendants, of the descendants and of the brothers of the manager.
  4. The companies or entities in which the director holds directly or indirectly, including through an intermediary, a participation that gives him/her a significant influence, or in which he/she holds a position in the management body or in the top management of the company. For these purposes, it is assumed that any holding equal to or greater than 10% of the share capital or of the voting rights, or by virtue of which it has been able to obtain, in fact or in law, representation on the company’s management body, grants significant influence.
  5. The partners represented by the director on the management body»

In conclusion, it is included as people related to the directors: (i) the companies or entities in which the director has a significant influence and (ii) the partner represented by the director in the management body.

2. Establishment of a special approval regime for related intra-group transactions subject to conflicts of interest

The Directive also enables national legislators to derogate from the general rules on intra-group related party transactions where national law provides adequate protection for the interests of the company, the subsidiary and its shareholders who are not related parties, including minority shareholders. This qualification extends to both downstream transactions (because of the subsidiary’s involvement in the parent company’s related party transactions) and upstream transactions (the subsidiary’s transactions with the parent company).

In this way, two aspects are regulated:

  1. The distribution of powers between the general meeting and the management body in the case of intra-group related transactions. Although it is permitted to delegate the approval of these transactions to delegated bodies of the management body or to the senior management in the case of transactions carried out in the ordinary course, concluded under market conditions.
  2. The general rule regarding attendance and exercise of the voting right in situations of conflict of interest is maintained (with the developments mentioned in paragraph 1 above) and new exceptions are included. These consist of allowing the participation of directors who are related to and represent the parent company on the management body of the subsidiary regarding the approval of related-party transactions concluded between the subsidiary and the parent company. Likewise, and if the agreement is challenged, a rule of reversal of the burden of proof is established.

The text of the new Article 231 bis of the Capital Companies Law is included, which reads as follows:

«Article 231 bis. Intra-group transactions.

  1. The approval of the transactions that the company enters into with its parent company or other group companies subject to a conflict of interest shall be the responsibility of the general meeting when the business or transaction in which it consists, by its nature, is legally reserved for the competence of this body and, in any case, when the amount or value of the transaction or the total amount of the set of transactions provided for in an agreement or framework contract is greater than 10% of the total assets of the company.
  2. The approval of the rest of the transactions carried out by the company with its parent company or other companies of the group subject to conflict of interest, will correspond to the management body. However, the provisions of Articles 228.c) and 230, the approval may be made with the participation of the directors who are related to and represent the parent company, in which case, if the decision or vote of such directors is decisive for the approval, it shall be up to the company and, if applicable, to the directors affected by the conflict of interest, to prove that the agreement is in accordance with the corporate interest in the event that it is contested and that they used the due diligence and loyalty in the event that their responsibility is required.
  3. The approval of intra-group transactions subject to a conflict of interest may be delegated by the management body to subsidiary bodies or members of senior management provided that the transactions are entered into in the ordinary course of business, including those resulting from the execution of an agreement or framework contract, and concluded under market conditions. The management body must implement an internal procedure for the regular assessment of compliance with the above requirements»

In conclusion, 2 matters are regulated: (i) the distribution of powers between the general meeting and the management body in the event of intra-group related-party transactions and (ii) specific rules on the participation and exercise of the vote of the directors representing the parent company in the management body of the subsidiary.

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