Transferring Business Ownership: Sale, Lease, and Inheritance

Posted on Dec 4, 2024 in Law & Jurisprudence

Sale of Company:

The typical inter vivos business transfer involves a trading company. The sale and purchase agreement, intended to be mutually beneficial, serves as a model for resolving issues common to all inter vivos company dispositions. Spanish law doesn’t regulate business sale agreements, making them atypical contracts. Legal doctrine considers them special purchases due to their subject matter. This complexity extends to the entire contract structure. The bargaining type is determined by the object being transferred: the company. A sale of business exists only when transferring a functioning set of operational elements. Transferring disjointed elements or a disorganized operation doesn’t constitute a business sale. The legal title binding the employer to the business isn’t mere property right, but the complex nature of the company—ownership rather than simple property. The purchaser acquires ownership of each element and the factual, legal, and economic connections uniting them. Another key aspect is the commercial nature of the contract (Article 2 CCo). Formality isn’t essential (Article 51 CCo), but written form with an inventory is recommended for legal certainty. The contract’s obligational content is complex. It’s perfected by consensus with a single delivery contract, but the company transfer involves multiple modes (traditori) subject to different legal regimes depending on the asset type. Intangibles like customers and organization are also transferred. The assets to be delivered are determined by economic and legal criteria (Article 1346.8 CC), including tools necessary for operation. The seller must deliver all tangible and intangible elements for normal business continuation. Spanish law requires consent (traditio) or delivery for sale completion. This involves multiple individual transfers of each element.

Elements of the contract:

• Real property: Transferred by deed and registration.
• Movable property: Transferred by physical delivery, provision, or symbolic handover.
• Intangible property (patents, brands): By authentic evidence entered in the Spanish Office of Patents and Trademarks.
• Local business lettings: Assignment or sublease of premises, with notification to the lessor within one month.
• Assignments:
  • Credit incorporated in securities (promissory notes, checks, bills of exchange): Transmitted according to each class’s rules.
    • Bearer title: By receiving the title.
    • Order title (bill of exchange): Endorsement.
    • Nominative title: Delivery and notification of assignment to the debtor.
  • Credit not incorporated in securities: Requires a transfer agreement and notification to the debtor.
• Contracts in progress: Existing contracts (insurance, banking) can be transferred by agreement between seller and purchaser, or automatically in special cases.
• Debts: Transferred with express creditor consent, requiring an agreement. Transmittable debts are contractual or tort-based, not fraudulent or culpable ones.
• Fact relationships, operating procedures, and organizational structure: Impose obligations on the transferor.
• Ledgers: The transferor must maintain them for six years and make them available to the purchaser.

Special cases:

• Labor debts: Donor and purchaser are jointly and severally liable.
• Tax debts: The buyer is subsidiarily liable with company assets.

Obligations of Seller:

• Obligation to do: Communicate necessary knowledge and information (know-how) on technical procedures, marketing, and distribution to the purchaser, including technical assistance.
• Obligation not to do: Non-competition, based on good faith and prohibition of abuse of rights. This is temporary until the business consolidates. If no agreement exists, the duration is court-determined, with compensation for goodwill loss and lost profit expectations. The seller is liable for defects or eviction affecting normal operation or heritage value.

Leasing Company:

Leasing is a common market entry method, operating through a leased business organization. This makes the company a use-value and exploitation asset, and an exchange value title in the lettings market, transferring ownership to the tenant. Business leasing isn’t regulated by positive law or commercial usage. It’s governed by the parties’ agreement and, lacking that, by ordinary tenancy legislation (CC Article 42 et seq.). However, the Urban Leases Act (LAU) doesn’t apply; it has no residual character, and business leasing isn’t equivalent to leases for use other than housing under the LAU. Civil law doesn’t regulate productive thing leasing, creating theoretical problems. The company’s diverse elements and the legal/business object’s desegregation (especially the physical headquarters) pose challenges. The LAU can negatively impact business continuity by allowing landlords to recover premises and suspending forced extensions, devaluing transfer rights. Law 18/89, adapting commercial law to EC Directives, allows rent increases in cases of company conversion, merger, or division, aiming to preserve lease continuity.

Business leasing concept:

A legal transaction transferring holding from one company to another for a price and time. It’s a limited inter vivos transfer, granting temporary use or enjoyment of the holding company. As an unregulated, atypical contract, it should align with the business purpose and structure, with lease covenants not denaturing the lease. The price must be certain and fixed-term, subject to automatic renewal.

Differences between leasing company and commercial premises lease:

The LAU excludes business leasing. Commercial premises leases are subject to the LAU in the absence of agreement, affording special protection. Business leases, lacking agreement, are governed by civil law on the lease of things. They also differ in object and purpose. Commercial premises leases focus on building use for business. Business leasing focuses on continued operation of a leased company as a complex asset organization. If the contract’s purpose is establishing a new business, it’s a commercial premises lease; it’s a business lease only when the tenant receives a functioning business.

Principle informing firm lease:

• Lease of productive thing:
  • The lessee must operate the company.
  • The lessee can dispose of parts or consumables, implicitly transmitted. The fungibility of elements and regeneration capacity make CC Articles 1545 and 1561 (excluding consumables and requiring return of the thing as received) inapplicable. Instead, equivalent provision of consumed property and return of the company in a living state apply.
• Principle of conservation or continuity of the company.
• Duty of cooperation, information, and technical assistance from landlord to tenant.

Obligational content of the lease:

Governed by civil laws, applied flexibly. The landlord must deliver the company, allowing the tenant to dispose of expendable elements and requiring active and passive landlord behavior. The lease’s temporality requires the landlord to make necessary repairs and address flaws or incidents. The lessee must maintain and restore the company, providing equivalent property for consumed items and refraining from competition.

Security interests on the Company:

No uniform security right exists. The employer can offer real rights to company elements as debt security. A mortgage on goodwill, though not taxed jointly with the global business, can affect a significant company asset, allowing continued exploitation. This extends to premises use rights and fixed assets. Unless otherwise agreed, it extends to intellectual/industrial property and machinery. This security interest’s value is diminished by the elimination of forced lease extensions.

Usufruct of Company:

Has little relevance, occurring mainly in dower usufruct.

Transmission Mortis Causa:

Occurs with or without a will (testate or intestate succession). Problems include:

• Management during the period between the holder’s death and the heir(s) taking charge: A factor, manager (agent), executor, or judicial administrator can manage. The heir can also manage the inheritance.
• Maintaining economic unity and continuity with multiple heirs: Assigning the company to one heir, with others receiving cash compensation (permitted under Article 1056 CC). If there are several heirs, an incidental community exists, considered an irregular society until it’s constituted as a registered partnership.