Spanish Company Law: A Comprehensive Guide to Business Structures and Governance

Posted on May 13, 2024 in Law & Jurisprudence

SPECIAL COMPANIES

Professional Companies

Professional companies provide professional services. The corporate name includes the word “professional” (S.A.P. or S.L.P.) and the objective or subjective name of all or part of the partners. Any corporate form can be used. The company’s purpose is to render a professional activity. Professional and non-professional partners can coexist, but most of the share capital belongs to professional shareholders (recorded in the Commercial Registry). Positions can’t be transferred except with the unanimous agreement of all professional partners. If a partner dies, martis causa bylaws can limit the transfer of their position to the payment of a liquidation quota to inheritors. If a partner wants to leave, shares can be redeemed with the payment of a liquidation quota. The company is liable for all debts with all assets. Professionals (partners or not) are jointly and severally liable for debts related to professional activity. Each partner participates in benefits on a pro rata basis to their stake, but an agreement can include other criteria.

Governmental Entities

Governmental entities, “empresa pública”, are owned and controlled by the government. Article 128.2 of the Spanish Constitution recognizes “government initiative in economic activity”. Section 38 recognizes freedom of enterprise within the framework of a market economy. Public and private companies coexist in the Spanish economy without privileges over the other. EU law recognizes that entities can be governmental or private. Three types of entities are distinguished by the regulation of entrepreneurial assets of public administration:

Government entrepreneurial entities (EPE)
State government companies (SME)
Entities of public law, linked to public administration whose revenues come from the market of at least 50%.

EPEs are governed by private law (sometimes public law), with their own legal personality, assets, and autonomy in management. They are financed with market revenues except for those who meet the requirements to be declared a personified own means (“medio propio”). Created by specific rules, they have bylaws and employees, not public officers. SMEs are equity companies where an entity of the state public sector holds more than 50% of the share capital, or the company is controlled by the General Administration of the State (Section 42 of the Commercial Code). Created by the Council of Ministers or as a result of a court ruling, they are regulated by Act 33/2003 ECA. They are governed by private law, but public law applies in certain cases.

Companies Under Formation

Companies under formation are pending to be recorded with the Commercial Registry. They have seven key features:

Liability for acts: Individuals representing a company not yet recorded in the Commercial Registry are liable for such acts except if a prior contract ensures validity.
Administrative activities: The administration carries out indispensable activities for company registration.
Shareholders’ liability: Liability is limited to the commitment of contribution.
Company liability: After being recorded with the Commercial Registry, the company is liable for acts during formation.
Disappearance of joint liability: The joint and several liability of shareholders, administrators, and attorneys disappears upon registration with the Commercial Registry.
Gap in assets and share capital: After covering all liabilities during formation, if company assets are less than the share capital, the difference is covered by shareholders.
Nullity of companies:
1. Recorded with the Commercial Registry
2. Legal personality
3. Declaration of company nullity
Reasons to request nullity: absence of two consenting share/quota holders in incorporation, unfit founders, incorporation deed doesn’t include contributions of each share/quota holder, bylaws don’t set forth the corporate name or share capital or it’s illegal, in SLs when capital is not fully paid up, and in SAs when share capital is not equal to €60,000. Nullity is declared by court decision but doesn’t affect the company’s liabilities towards third parties. However, it initiates a liquidation process.

PERSONALIST COMPANIES

Partnerships

A partnership is a “sociedad colectiva” of two or more individuals who carry out economic activity jointly, contributing capital, labor, or both, and sharing profits and losses. It is influenced by the partners’ personalities. Key features include:

Intuitu personae agreement used with parties who have a relationship.
Collective management is the right to participate in the management of the company and decision-making operations.
Unlimited joint and several liability of all partners for debts (personal assets if the company can’t meet debts).
The corporate name has to include some or all surnames of the partners.
Incorporation requirements: The company is formalized in a public deed before a notary public and recorded in the Commercial Registry.
Obligation of partners to participate in benefits in proportion to the capital contributed. An industrial partner is prohibited from carrying out any business activity, and a capital partner can carry out business activity if it doesn’t compete with the company’s objective (if there is no objective, it requires company authority).
Distribution of profit and loss in proportion to the agreement, and if not, required on a pro rata basis.
Information right (entitled to review accountancy and reclaim).
Partners must exercise management of the partnership.
Representation of the partnership: Only authorized partners can act on behalf of the partnership. This continues when an authorized partner uses their signature on their own behalf, and the partner is liable.
Obligation of liability and managers: The relationship vis-à-vis with third parties is governed by mandatory rules, irrespective of agreements for partners.
Transfer of units requires the agreement of partners.
Amendments to the deed require the agreement of all partners and must be recorded with the Commercial Registry.
A change in corporate form requires consent from all partners and a public deed recorded in the Commercial Registry.
Effects: Maintenance of legal entity and unlimited liability of partners prior to transformation except if otherwise agreed with creditors.

Limited Partnerships

A limited partnership is an intuitu personae company governed by the Commercial Code in Spain. It has two types of partners:

General partners (“socio colectivo”): Their liability is unlimited and personal (responsible with their own assets). Their role is to hold management and representation authority, participating in business decisions.
Limited partners (“comanditarios”): Their liability is limited to the capital contributed, safeguarding personal assets. Their role is to contribute capital without involvement in management or business decision-making.

Key features include:

The corporate name should include the name of collective partners plus “sociedad en comandita”.
Incorporation requirements: Company contract, formalized in a public deed before a notary public and registered in the Commercial Registry.
Internal legal relationship: For general partners, it’s the same as a partnership. For limited partners, liability is limited to the capital contributed.
Distribution of profit and loss: Limited partners take part of the profits on a pro rata basis and lose up to the limit of their contribution.
Information rights are in accordance with agreements.
External legal relationship: Only authorized partners can act on behalf of the company.
Transformation requires consent from all partners and a public deed recorded in the Commercial Registry.

Cooperative Bodies

Cooperative bodies have the following components:

Assembly of partners
Steering committee
Controller: Reviews documents and annual accounts, controlling powers defined by bylaws, number of controllers less than the steering committee, elected by the general assembly of partners (1/3 experts), approves/reviews accounts (except if an auditor is appointed).
Committee of appellation (voluntary): Reviews and saves appellations against sanctions imposed on partners, members, and operations included in bylaws (3 members = partners). If there is a conflict, there is a challenge.

GENERAL MEETING OF SHAREHOLDERS (GMS)

The GMS is a body of creation, expression, and control (referring to unlisted companies). It is a necessary, discontinuous activity, internal and non-liable, which has various functions.

Kinds of GMS

GMS can be categorized by the topic to be discussed (ordinary or extraordinary) or from the attendee standpoint (universal, general, particular).

GMS Call

The GMS is called by administrators or liquidators. The administration calls it when obliged by law or deems it necessary. Shareholders holding more than 5% can request a GMS (called within one month with the requested agenda). The court can call a GMS if it’s not called in accordance with the ECA/bylaws, so any shareholder can request intervention from a mercantile judge. The judge’s decision is final, and the company bears the costs. The announcement of the GMS/Q is published in the Commercial Registry’s official gate and a local newspaper or municipality newspaper for SLs. It is considered duly held even without a formal call if the following conditions are met unanimously: attendance of all capital, decision to hold the meeting, and approval of the agenda. This is advantageous for small companies because they don’t face the cost of formally calling a GMS.

GMS Quorum

The GMS quorum is the share capital that must be present at a meeting for it to be held validly. Validity is held when the following quorum attends: 1st calling: 25% of capital with entitlement to vote; 2nd calling: no minimum quorum. If the purpose includes issuing debentures, increasing or reducing capital, amending bylaws, considering transformation, merger, spin-off, inter alia, the quorum is elevated to 50% for the 1st call and 25% for the 2nd call (2/3 vote in favor). Bylaws authority can increase quorums in the 1st or 2nd callings, introduce other topics with reinforced quorums/majority, and adjust the percentage required to adopt resolutions. Bylaws can’t decrease quorums below legal requirements, exclude any topic from reinforced quorums/majorities, or request a higher quorum for the 2nd calling.

Attendance Rules

General rule: Owners of shares/quotas are entitled to attend meetings.

Special provision for SAs: Bylaws in SAs may require all shares to hold a minimum number of shares to attend meetings, with the conditions that they don’t exceed 1 per mil of capital and the bylaws allow the aggregation of stakes from multiple shareholders to meet the minimum requirement.

GMS Attendance

Attendees

In SAs, bylaws require “anticipated legitimation”. For nominative shares, this is up to 5 days from the recording of shareholder status. For bearer shares (not registered in the name of the shareholder), it’s up to 5 days upon deposit in the company’s registered office. Administrators are mandatory attendees; non-attendance doesn’t void the meeting but may incur liability. Bylaws can authorize other interested individuals (senior managers). The chairman’s authority can authorize the attendance of any attendee except in SLs (prohibited by law). However, the meeting can revoke such authorization.

Representatives

Representatives allow shareholders to choose entities they trust to act on their behalf. Notary public attendance is permitted. The commissioner of the syndicate of bondholders can attend in SAs. Attendees vote on behalf of the shares they represent, regardless of ownership. Bylaws may limit maximum votes, especially in quoted companies.

Representation Types

Standard: Written, specific to each meeting
General/familiar: In favor of them
Public: In favor of administrators, share depositaries on behalf of at least 3 shareholders. This is beneficial when shareholders prefer to delegate voting rights to professionals or when they wish to consolidate their voting power with other shareholders for strategic reasons.

Proxy Requirements

Proxies must include the agenda and voting instructions. A lack of instructions allows the representative to vote as they deem fit. The mere attendance of a shareholder revokes proxy representation.

GMS Challenge

Agreements subject to challenge are:

Null and void agreements: Contradict law or public order
Voidable agreements: Contradict the company’s bylaws, but an agreement superseded by another agreement is not challengeable.

Non-challengeable resolutions include:

Breach of procedural requirements (excluding the form and term of the call)
Lack of information by the company (except when necessary for shareholders’ reasonable voting)
Attendance of ineligible individuals (unless essential for body formation)
Count of invalid votes (unless necessary for a majority)

Who Can Challenge (Active Legal Standing)

Shareholders representing 1% of share capital
For resolutions breaching public order: any shareholder, even if qualifying after the resolution
Administrators or third parties
Actions brought against the company, which will appoint a representative
Shareholders voting in favor of the resolution are entitled to support it at their expense.

Who Can Be Challenged (Passive Legal Standing)

Always the company and the foregoing without prejudice to the liability of administrators for their acts.

When to Challenge

Null and void agreements: 1 year if contrary to law or public order
Voidable agreements: 40 calendar days

Terms start from the adoption of the resolution or from the recording of the agreement if recordable with the Commercial Registry. Before the 1st instance judge of the registered office, the procedure is an ordinary trial or injunction reliefs (legal remedies to mitigate harm): provision caveat in the Commercial Registry and suspension of challenged agreements when the challenger holds 5% or 1% in quotas SAs.

DUTY OF DILIGENCE

Administrators must act as ordered entrepreneurships and have discretion (business judgment rule) but still act as ordinary entrepreneurs. They must dedicate themselves appropriately to manage and control the company. Administrators have the right and duty to request necessary information deemed fit.

Compliance Standard

Administrators must adhere to a specific level of diligence when carrying out their duties. This is met when they:

Act in good faith
Avoid personal interest
Have sufficient information for decisions
Follow proper procedure

If administrators don’t perform well, it doesn’t necessarily mean they have breached their duty. But if they do, they are liable.

DUTY OF LOYALTY

Administrators have a duty to act as a loyal representative and an obligation to prioritize the company’s benefit and interest in case of conflict (acts breaching corporate interest are prohibited). As established by the ECA:

Limitation of power: Administrators must use authority for the purposes granted, not other purposes.
Confidentiality obligation: Maintain the secrecy of all information, reports, background details, even after leaving office unless permitted by law.
Conflict of interest abstention: Administrators must abstain from participating in deliberation and voting where they have a direct or indirect conflict of interest, except for resolutions affecting their capacity as a director.
Perform under responsibility with freedom of criteria and judgment.
Adopt measures to avoid incurring situations where their interests conflict with corporate interests and duties.

ECA Specific Prohibitions

: restriction on transaction w/company (except ordinary transactions), limitations using comp’s name/ status to influence (using it to undulify influence), prohibition on misuse of corporate assets & info for private purposes, obtain advantages or remuneration from 3rd parties other than its group, effective competition. carrying out activities on own account that involve effective competition or potential, create permanent conflict w/interests of comp so regulation apply to admins, they are obliged to communicate this situations & GMS can waive conflicts of interest.