Exemption of intragroup transactions following Act 5/2021 of 12 April
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
ANALYSIS
Corporate & Commercial
Exemption of intragroup
transactions following Act
5/2021 of 12 April
The concept of related party transactions,
the general elements of the exemption
or authorisation rules and the new rules
on exemption or authorisation of intragroup related
party transactions (Art. 231 bis LSC) are analysed
FERNANDO MARÍN DE LA BÁRCENA
Reader (Associate Professor) of Corporate & Commercial Law, Universidad Complutense de Madrid
Academic Counsel, Gómez-Acebo & Pombo
1. Introduction
Spanish legal scholars are divided between The amendment of the Companies Act (“LSC”)
those who deny and those who affirm the by Act 5/2021 has therefore not sought to pro-
legitimacy of pursuing the group’s interest at vide a comprehensive regulation of intragroup
the sacrifice of subsidiary companies through transactions, including material control or
the application of the doctrine of “compensa- comprising substantive or substantive control,
tory advantages”, vaguely recognised in our but rather, within the framework of the rules
law by the Judgment of the Supreme Court governing directors’ duty of loyalty (as an
of 11 December 2015. At the time, we argued addendum to Art. 231 LSC), simply introduces
that, in the current state of affairs, the safest for the first time in our legal system a body
solution for operators was to adopt Group of rules for the authorisation of intragroup
Regulations to properly channel contracting transactions, specifically designed to pro-
within the group, an instrument of corporate tect the position of external shareholders of
governance that today seems to us to be companies (controlling or controlled) within
essential. groups (horizontal or vertical). If there are no
June 2021 1external shareholders, there is no conflict of ropean Parliament and of the Council of 17
interest and, therefore, there is no need for May 2017 amending Directive 2007/36/EC
any exemption (Art. 529 vicies (2)(a) LSC). as regards the encouragement of long-term
shareholder engagement, which has its own
In accordance with the new regulation, the objectives and is not susceptible of extended
directors appointed by the controlling compa- application (Art. 529 vicies LSC).
ny in its controlled companies, despite being
related to the parent company (Art. 230(1) In the general part, the reference to related
(e) LSC), may participate in the approval of transactions must be deduced from the rules
related party transactions (“subject to conflict governing directors’ duty of loyalty in the
of interest”), the approval of which falls to the event of a (direct or indirect) conflict of in-
governing body of said controlled companies. terest, where the prohibition on carrying out
By the application of the general rules, this transactions with the company (Art. 229(1)
prevents such decisions from remaining in the (a) LSC) extends to carrying out transactions
hands of the representatives of the external whose beneficiaries are persons related to
shareholders in the governing body because the directors (Art. 230(2) LSC). Consequent-
only they would offer the independence ly, related party transactions are those be-
required by law to exempt a related party tween the company and its directors or be-
transaction (Art. 230(2) LSC). On the other tween the company and persons related to
hand, if their decision or vote was decisive in the directors (listed in Art. 231 LSC), when
approving the transaction, rules are provided the director or related party is in a situation
for the shifting of the burden of proof in lit- of direct or indirect conflict of interest with
igation that could (potentially) be initiated the company. The scope to be given to the
by external shareholders indirectly harmed concept of “indirect” conflict of interest (dis-
by this type of conduct, whether to challenge cussed by our legal scholars) is fundamental
resolutions or to hold directors liable, so that in all this regulation, as well as the applica-
their position is significantly strengthened. tion in financial terms and in accordance
with its purpose of the rule describing the
Prior to analysing the new legal regime, the connections or associations of related par-
interpretation of which on some points has ties.
not been evident to us, we have considered
it appropriate to devote a couple of sec- To the above, it can be added that these are
tions to recalling the concept of related party transactions carried out in the sphere of com-
transactions and the bases of the general pany management and not company transac-
procedure to exempt these transactions, as tions. This is deduced from the same provision
we believe that this serves as a basis for a that prohibits them and leaves out “ordinary
better understanding of the specific rules to transactions, carried out under standard con-
exempt intragroup transactions. ditions for clients and of scarce significance”
(Art. 229(1)(a) LSC). It can also be deduced
2. Concept of related party transaction from the central role of the governing body
in the procedure for exempting or author-
The Companies Act only offers a concept of ising these transactions: only when there is
related party transactions in the regulation a high risk of harm to assets (value of more
of listed companies, resulting from the trans- than ten percent of the company’s assets) will
position of Directive (EU) 2017/828 of the Eu- the general meeting intervene. Finally, the
2 June 2021harmlessness of the transaction is analysed As far as the rules on the conferring of
by reference to “company assets” and it is powers are concerned, the intervention of
required that the transactions be approved the general meeting is only required either
“under market conditions”. because of the special nature of the deci-
sion to be taken (external remuneration,
Capital transactions or transfsers of assets in prohibition of competition, financial assis-
the context of amendments to the articles of tance to shareholders - not intra-group) or
association or structural changes involving because of the extraordinary value of the
the intervention of the general meeting, transaction (ten percent of the company’s
where the assignment of assets occurs pre- assets).
cisely as an effect of such a resolution of the
shareholders, are not related transactions. In these cases, two types of rules are ac-
It is possible that in the negotiation of this tivated to protect minorities from the de-
type of transaction (e.g. the premium to cisions of the majority. The prohibition
be paid in a capital increase through the on voting will only apply to transactions
offsetting of claims or through cash contri- between the company and the director -
butions), a duty of abstention may arise for shareholder (Art. 190(1)(e) LSC and Judg-
directors who are in a situation of (direct or ment of the Supreme Court of 2 February
indirect) conflict of interest. However, such 2017) and not to transactions between the
a duty does not exist in the procedural part company and parties related to the direc-
of the transaction, since it would otherwise tors, unless the related party is a share-
not be possible to carry it out (e.g. drafting holder and the transaction consists of pro-
of reports, convening of meetings, etc.). viding financial assistance (Art. 190(1)(d)
LSC). Challenges to exemption or authori-
The related party transaction par excellence sation resolutions passed with the majority
would be the approval of the remuneration support of shareholders involved in a con-
of directors with executive functions, but flict of interest (e.g. the shareholders rep-
it also falls outside this scope because it resented by the director on the body) will
comes under the company’s own regulations be resolved by shifting the burden of proof
(Arts. 217, 249(3) LSC). regarding harm to the company’s best in-
terest under the terms of Art. 190(3) LSC.
3. General exemption or authorisation pro-
cedure In all other cases, given that these are
transactions carried out within the frame-
The general procedure for the authorisa- work of the management of the com-
tion of related party transactions is com- pany, the competent body is the body
posed of rules on the allocation of pow- in charge of that management, pro -
ers between the different bodies of the vided that the independence of the di-
company and rules that seek to ensure rectors granting the authorisation can
that said transactions are harmless for the be guaranteed. If such independence
company’s assets, that they are carried out is not guaranteed, the general meet-
under market conditions and that the ex- ing must be called upon to authorise
emption procedure itself is transparent. the transaction.
June 2021 3The authorisation or release from the obliga- principal. The first line of Art. 231 bis(4)
tions arising from the duty of loyalty pursu- LSC therefore provides that transactions
ant to Art. 230 is a non-delegable power of between the company and its controlled
the board of directors (Art. 249 bis(c) LSC), companies (or simply “investees” as es-
which means that they must be decided tablished in Art. 529 vicies(3) LSC) are
jointly in any other form of pluralistic organ- not considered to be subject to a con-
isation of the governing body ( joint and sev- flict of interest, because the conflict lies
eral directors, joint directors). with the directors in their capacity as
representatives of the parent company
Transactions carried out without complying in the governing body of the controlled
with the exemption procedure shall be void for companies.
violation of the law, which shall render them
unenforceable, unless ratified at the general As we shall see, one of the main develop-
meeting of the company, without prejudice ments in this special scheme to exempt
to the liability of the directors and, where intragroup transactions is the exemption
applicable, of related parties, in accordance of the representatives of the parent com-
with the general rules of tort liability (Art. pany from their duty to abstain in the
1902 of the Civil Code). controlled company.
4. Special features of the authorisation or 4.1.1. Transactions within the remit of
exemption of intragroup transactions the general meeting
4.1. The exemption in the controlled company The intervention of the con-
trolled company’s general meet-
The risk of private profit extraction in ing will be necessary for those
groups will normally be at the expense transactions carried out with its
of the subsidiaries and in the interest controlling company or other
of the parent company or other compa- group companies (normally sis-
nies in the group (“upstream” transac- ters) which are of an extraordi-
tions). For this reason, mechanisms for nary nature, either for qualitative
the protection of external shareholders reasons, such as management
are established in the corporate organi- decisions which are a “natural”
sation of the controlled company where matter of the general meeting
the very presence of directors appoint- (intragroup financial assistance
ed by the controlling company implies is not, as can be deduced from
the existence of such a risk (Art. 231 bis(1) Art. 162 LSC), or for quantitative
to (3) and 231(1)(e) LSC). reasons, as the amount or val-
ue of the transaction (or of the
The directors of the controlling company total of all the transactions pro-
in their capacity as such do not have a vided for in a framework agree-
conflict of interest in their decisions re- ment or contract) exceeds the
garding controlled companies (or invest- threshold of ten per cent of the
ees), since, in relation to those decisions, company’s total assets (Art. 231
they are managing the assets of their bis(1) LSC).
4 June 2021Normally, the powers of the gen- case of joint and several or joint
eral meeting will be determined directors, by consensus.
by the value of the transaction,
to be calculated on the basis of Directors who are connected to
the individual balance sheet (not and represent the controlling
the consolidated balance sheet), company may participate in de-
given that the aim is to protect cision-making (simple organisa-
the external shareholders of the tional structure) or vote on resolu-
company in question (against tions (board of directors) aimed
the rule provided for listed com- at approving the transaction. In
panies under Art. 529 tervicies(2) exchange for this derogation of
LSC). In addition, the aggrega- a protective rule of a preventive
tion formulas provided for listed nature (the prohibition on voting
companies should be applied in in Art. 228(c) LSC), a protective
order to avoid circumvention of rule is established that operates
the rule (arg. Art. 529 tervicies(1) a posteriori. This is the shift of
LSC). the burden of proof of harm to
the company’s best interest in
In the event that the exemption the event of a challenge or of the
resolution is passed at the gen- unlawfulness of conduct in the
eral meeting, the controlling event of liability claims for harm
company with which the trans- to the company’s estate, if the
action is carried out may vote on vote of these directors was deci-
the approval-authorisation res- sive for the approval of the trans-
olution, since the prohibition on action or decision (Art. 231 bis(2)
voting on exemption resolutions LSC).
applies only to the shareholder
who is also a director and not to Unlike what is generally the case
the shareholder affected, except for exemption resolutions, the
in financial assistance resolu- approval or exemption of intra-
tions that cannot be traced back group transactions entered into
to the group’s internal financing in the ordinary course of business
policy, which is outside the remit and concluded under market con-
of the general meeting (Art. 190.1 ditions may be delegated to di-
d) LSC in connection with Art. rectors with executive functions
162 LSC). or to the company’s senior man-
agement, who must decide on
4.1.2. Transactions within the remit of them under their responsibility
the governing body and without the cover of the com-
pany’s business judgment rule
The exemption of ordinary intra- (Art. 226(2) LSC). In this case, an
group transactions is a matter for internal procedure must be im-
the governing body which, as a plemented to periodically assess
general rule, must take the deci- whether the transactions can be
sion in plenary session or, in the considered ordinary transactions
June 2021 5and whether they have been con- must also be approved by the competent
cluded under market conditions body of the controlling company as per
(Art. 231 bis(3) LSC). the nature or value of the transaction
(Art. 231 bis(4) LSC).
4.2. Exemption in the controlling company
(“downstream” transactions) This is a logical and sensible rule, although
it raises some problems of application.
As noted in the previous section, the in- The concept of “relevant shareholder”
tragroup transaction exemption rules and the “rules on related party transac-
are designed to protect the interests of tions” are only recognised by law in the
external shareholders of group companies sphere of listed companies, so it could be
against the risks of extraction of private thought that this provision only applies by
profits for the benefit of the controlling reference to listed controlled companies
company and to the detriment of the to protect the external shareholders of
controlled company. unlisted controlling companies (Art. 529
vicies(3) LSC is already applicable to
However, it is possible that the direction listed controlling companies, in broader
of such unlawful profit extraction is re- terms).
versed and it is the controlled company
that seeks to benefit at the expense of In our opinion, if the aim is to have a
the controlling company (“downstream” complete system in the area of closely
transactions). The lawmaker has consid- held companies, this solution should not
ered that there will be a high risk of this be imposed. The references to closely
happening when in the controlled compa- held companies should be adapted and
ny (beneficiary) a “relevant shareholder it should be understood that the trans-
is a party with whom the company could action should (also) be exempted in the
not carry out the transaction directly controlling company (with external part-
without applying the rules on related ners) when any of the parties listed in
party transactions”. In this case, in order Art. 529 vicies(1) LSC has a shareholding
to protect the external shareholders of in the controlling company that is not
the controlling company, the transaction insignificant (3% or more).
Disclaimer: This paper is provided for general information purposes only and nothing expressed herein should be construed as legal advice or
recommendation.
June 2021 6You can also read
