Spain: Legal Highlights Of Doing Business In Spain By A Foreign Investor - Part 3 of 17

Last Updated: 3 July 1995

e) Directors.

The management of the company limited by shares may be entrusted either to one or various Directors, who can act jointly or separately. Should such management be entrusted collectively to more than two persons, either individuals or legal entities, a Board of Directors shall be formed (in the case of a Board the minimum number of directors is three).

It is not necessary to be a shareholder in order to be a Director, nor is it, in broad terms, necessary to be a resident in Spain or of Spanish nationality.

The directors represent the company. They shall be empowered to carry out any and all acts included in the corporate object. Any limitation shall be deemed void vis-a-vis third parties. The company shall be bound by acts entered into by the Directors with third parties even if the act in question was not included in the registered corporate object provided that the third parties acted in good faith and without gross negligence. The directors shall be liable to the company, the shareholders and the company's creditors for any damage they may cause, for any actions that are contrary to the law or the Articles of Association or for those actions carried out without the diligence with which they are required to perform their job. All the members of the Board that carried out or passed an unlawful action or resolution shall be jointly and severally liable, except those that prove that did not participate in the approval and implementation of the action or resolution and further ignored its existence, or that being aware of it, did all that was in their power to prevent the damage or at least opposed it explicitly.

f) Accounts.
The Company's accounts must be audited and consolidated under certain circumstances.

f.1) An audit is not required whenever the company concerned is allowed to draw up an abbreviated balance sheet and this is the case if during two consecutive years at least two of the following circumstances apply: (i) assets do not exceed 300,000,000 pesetas, (ii) annual revenue is less than 600,000,000 pesetas, (iii) the average number of employees does not exceed 50 during the accounting year(16).

f.2) The consolidation of accounts is not required either if: (a) the group of companies concerned does not exceed any two of the limits provided in the Restated Text for preparing an abbreviated profit and loss account: (i) assets do not exceed 1,200,000,000 pesetas, (ii) annual revenue is less than 2,400,000,000 pesetas, (iii) the average number of employees does not exceed 250 during the accounting year(17), provided that any of the companies of the group has not issued securities which are listed on the stock market; or (b) the Spanish parent belongs in turn to a company established in any of the EC countries if the latter wholly owns the former's equity or if owning 90% or more the minority shareholders agree to waive the consolidation of accounts; the foregoing is subject to certain requirements(18).

g) Special requirements.
The incorporation must be advertised in the Commercial Register Official Bulletin; an independent expert's report and the filing of such report at the Commercial Register is required for contributions in kind; any acquisitions of assets for consideration within two years following incorporation require reports from the directors and an independent expert and must be approved by the shareholders; any proposed capital increases must be preceded by a report of the directors; the capital increase(s) must be advertised in the Commercial Register Official Bulletin.

h) Mergers and divisions.
h.1) Mergers.
h.1.1) Types of merger and effects.
There are essentially two types of merger: (i) where the merged companies form a new company to which, after the winding up of the former companies, their assets and undertakings are transferred as a whole, and (ii) where an existing company acquires the assets and undertakings of one or more companies which then are wound up (19). The main effects are:

i) all of the assets and liabilities of the transferor(s) are transferred as a whole to the transferee;
ii) the transferor(s) is/are then wound up (i.e., dissolved or extinguished without being liquidated since the shareholders of the transferor(s) become shareholders of the transferee);
iii) as a consequence of the capital increase that will take place in the transferee after the transfer of the assets and liabilities of the transferor(s), the shareholders of the transferor(s) will participate in the transferee receiving a number of shares which is proportional to their respective participations in the assets which are transferred to the transferee.
iv) the transferee is the lawful successor to all of the property, rights and obligations of the transferor(s). Accordingly, the transferee is subrogated to all of the rights and obligations of the transferor(s). For example, vis-a-vis their employees, the principle being the continuity of the employment contracts(20). Therefore all relevant rights, namely seniority, must be recognised by the new employer, i.e., the transferee.

h.1.2) Procedure.
The directors of the companies involved in the merger -both the transferee and the transferor(s)- are required to prepare a merger project. The directors of these companies must refrain from carrying out any kind of act or concluding any contract that could jeopardise the approval of the merger project or substantially modify the share exchange ratio. The merger project will be void should it not be approved by the general meetings of the shareholders of the companies involved in the merger within six months of the date thereof(21).

The merger project should contain at least the following information:

i) the name and registered office of the companies involved in the merger including their registration data at the Commercial Register;
ii) the share exchange ratio which will be established on the basis of the "real value" of the companies' assets. There may be supplementary compensations in cash to round up figures (maximum 10%).
iii) the procedure for the exchange of the shares of the companies to be wound up; the date as from which the new shares shall participate in the company's profits and any relevant peculiarities with regard to this right;
iv) rights to be given in the transferee to holders of shares belonging to special classes, if any, or to those that have "special rights" other than shares in the companies to be wound up;
v) the date as from which the operations of the companies to be wound up shall be deemed made for accounting purposes for the account of the transferee;
vi)any remuneration or other privileges to be given by the transferee to the independent experts participating in the merger project and to the directors of the companies involved in the merger.

The merger requires two main reports:
i) one or more independent experts must be brought in by the directors of the companies involved in the merger to examine the merger project and the assets to be transferred by the companies to be wound up. The expert(s) should issue separate reports unless the Commercial Registrar, upon request of the directors of all the companies involved in the merger, designates one or more experts allowing him/them to elaborate one single report only. Special reference should be made in the report to whether or not the share exchange ratio is justified;

ii) the directors of each one of the companies involved in the merger must draw up written reports explaining and justifying the merger project and setting out the legal and economic grounds for it, with special reference to the share exchange ratio.

The directors are required to file the merger project at the Commercial Register having jurisdiction over each of the companies involved in the merger. After the Registrar examines the merger project and finds it legally acceptable, it is published in the Commercial Register Official Bulletin. The general meetings of the shareholders may not be convened prior to the effective filing of the merger project.

Adequate information has to be provided to the shareholders, as follows:

i) The notice convening the general meetings of the shareholders shall inform the shareholders, bondholders and holders of rights other than shares, and employees as well, of their right to examine at the Company's premises the merger project and other related documents: the independent expert(s) report(s) on the merger project; the directors' reports on the merger project; the accounts and management reports for the last three financial years, along with the relevant auditors' reports if required; the balance sheets for the merger of each one of the companies involved in the merger should they differ from the latest balance sheet approved by the shareholders general meeting together with the auditors' report if required; the draft amendments to the articles of association of the transferee; current articles of association of the companies involved in the merger; full names and age if individuals and the corporate name if companies and in both cases nationality and domicile of the directors of the companies involved in the merger and the date of their appointments; as applicable the same data concerning the proposed directors after the merger;

ii) The directors of the transferor(s) must inform the shareholders general meeting of the respective companies and the directors of the transferee, so that these may advise their shareholders, about any "important" change in the transferor(s)' assets or liabilities between the date the merger project was drawn up and the date of the general meeting at which the merger is to be discussed. The same information must be given by the directors of the transferee to the directors of the transferor(s) so that they may advise their shareholders.

(16) Articles 181 and 203 of the Restated Text, as amended from June 1st, 1995.
(17) Article 190 of the Restated Text, as amended from June 1st, 1995.
(18) Article 43 of the Code of Commerce, as amended by Law 18/1989.
(19) Article 233 of the Restated Text.
(20) Article 44 of the Workers Statute.
(21) Article 234 of the Restated Text.

The content of this article is intended to provide a general guide to the subject matter.
Specialist advice should be sought about your specific circumstance.
For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain)
Fax: 010 341 576 6716, or enter text search "L. C. Rodrigo Abogados" and "Business Monitor".

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