This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
Recent reports indicate that Spain is starting to turn the corner in terms of national economic recovery. As prospects brighten, our Madrid team highlights some key differences in transaction procedures under Spanish law which can trip up unwary UK companies and investors project managing a cross border transaction.
As in the UK, any buyer contemplating an acquisition in Spain will need to consider competition law, tax, employment regulations and other issues from the outset of the transaction. As negotiations progress and the parties prepare for completion, they will also need to comply with a number of Spanish procedures, which will be unfamiliar to those used to the English system. We explain some typical issues relating to the notarization process, loans from overseas lenders and company incorporations.
Role of the Spanish notary
One of the more significant differences UK buyers will encounter when completing Spanish share transactions is the role played by the Spanish notary. Under Spanish law, the sale and purchase of shares in private limited companies (sociedades de responsabilidad limitada) ("S.L.") must always be completed before a notary public. For any public limited company (sociedades anónimas) ("S.A.") (other than a company with a stock exchange listing) notarization of share transfers will usually be best practice, although not compulsory.
The notary's role is to verify that the transaction is validly entered into by basically checking the identity of the parties, reviewing the ownership of the shares and ensuring that the documents are properly signed in his presence. By doing this the notary "gives public faith" of the share transfer. The process gives the buyer a greater level of protection (for instance, against an unlawful transfer of the same shares by the seller), and it will be easier for the buyer to prove that it is the lawful owner of the shares in order to exercise its rights as a shareholder in the company or if it decides to exit the company in the future.
The parties will need to take a number of steps before they are ready to enter into a share transaction before a notary public. These action points will need to be factored into the transaction timetable. Please click here for a summary of the preliminary steps involved in the notarization process.
Loans to Spanish residents of €3,000,000 or more
Spanish resident borrowers (whether corporate or individual) will need to obtain a financial transaction number ("NOF") from the Bank of Spain (Banco de España) for loans and credit transactions of €3,000,000 or more provided by a non-resident lender. Without obtaining the NOF, the lender will not be able to make the funds available to the borrower. The NOF will be granted automatically when the relevant official form is submitted (this is normally carried out by Spanish lawyers on their client's behalf). However, more time may be needed where the financing comes from a tax haven, since the Bank of Spain is entitled to request from borrowers as many details as it finds convenient and to make any necessary checks.
If the foreign investment is to be made through a newly formed Spanish company, time will need to be allowed for the incorporation process to take place, again before a notary. In addition, the incorporation of the company (as well as other corporate acts, such as the appointment/dismissal of directors, increase/decrease of share capital and any amendment of the by-laws) will need to be registered with the Commercial Registry (a process which can take up to a maximum of 15 business days from the filing of the incorporation deed with the Commercial Registry).
Under Spanish law, a company will only acquire legal capacity for a company of its kind (usually either a S.A. or S.L.) as from the company's registration with the Commercial Registry. However, if time is short, it will be possible for a new company which has been incorporated but not yet registered to acquire shares as part of an M&A transaction, as long as this is envisaged within the company's corporate purpose. This is because the directors are entitled to develop the company's business activities within the scope of the company's corporate purpose as from the time of incorporation. During the time between incorporation and registration, the shareholders will be liable for the directors' activities up to the amount they have undertaken to contribute; the company would also be liable with its own assets. Once the company has been registered, it will become bound by contracts signed and actions taken by the directors before registration.
In conclusion, when completing a Spanish M&A transaction, the parties will need to comply with a number of formal requirements under local law. These will need to be taken into account well in advance and coordinated with local lawyers. Such formalities, if planned for from the beginning of the transaction, are not generally seen as burdensome; indeed some, such as the intervention of a notary public, provide the parties with additional legal comfort when entering into a transaction, compared with the procedures typically used in common law jurisdictions.
Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Olswang Corporate Quarterly Spring 2014 publication.