General Overview

What legislation governs M&A activity in your jurisdiction?

The legal framework of M&A activity in Spain is made up of mainly:

1. The provisions on general agreements, purchase agreements and assignment of receivables and payables in the Civil Code and the Commercial Code.
2. The provisions contained in both the Public Companies (sociedades anónimas) and the Private Limited Liability Companies (sociedades de responsabilidad limitada) Laws, as well as the Regulation of the Commercial Registry.
3. The provisions on takeover bids in the Securities Market Law and the Royal Decree on Takeover Bids, applying to listed companies.
4. The provisions on merger control in the Defence of Competition Law, as well as those contained in the EU Merger Control Regulation.

Several other laws and regulations might apply to, and have an impact on, specific M&A transactions. For example, mergers, demergers, asset purchases or specific business combinations, can be affected by the rules contained in the Statute of Workers or in the Bankruptcy Law. In addition, specific sector regulations should also be considered if the companies taking part in the transaction operate in a regulated sector.

What impact have recent legislative changes had on the nature and amount of M&A activity?

The most important recent legislative changes affecting M&A in Spain were brought about by Law 6/2007 of April 12, amending the Securities Market Law with regard to takeover bids and transparency obligations for issuers, and Royal Decree 1066/2007 of July 27, which develops the core rules on takeover bids set out in the Securities Market Law (as amended by Law 6/2007).

Through Law 6/2007 and Royal Decree 1066/2007, Spain has implemented two Directives: (i) Directive 2004/25/EC of the European Parliament and the Council of April 21 2004 on takeover bids, and (ii) Directive 2004/19/EC of the European Parliament and the Council of December 15 2004 on transparency. The purpose of these new regimes is to promote an efficient market of business control while also protecting the rights of the minority shareholders of listed companies.

The new takeover bid regulation moves from a mandatory ex-ante takeover bid system, where the bidder was obliged to file a takeover bid before gaining control of a listed company, to a new ex-post bid system, where the bidder is obliged to file a takeover bid as a consequence of the bidder having gained control over the listed company.

Generally speaking, the main changes introduced by Law 6/2007 and Royal Decree 1066/2007 can be summarised as follows:

1. The acquisition of 30% or more of voting rights in a listed company triggers the obligation to launch a takeover bid for 100% of the share capital of the target company at an equitable price, which is in principle equal to at least the highest price paid by the bidder in the 12 months before the announcement of the bid. It must be authorised by the National Securities Market Commission (Comisión Nacional del Mercado de Valores, the CNMV).
2. The passivity rule for directors of the target company has been modified so that directors must obtain prior authorisation from the general shareholders' meeting before taking any defensive action against a bid (except for the search for alternative bids – white knights – which is expressly permitted). However, under the so-called reciprocity rule, this prohibition shall not apply when the bidder is not subject to similar restrictions.
3. The general shareholders' meetings of target companies can decide whether or not to apply breakthrough rules – that is, the neutralisation of certain defensive measures approved by the target company before a takeover bid. Again, by virtue of the reciprocity rule, a target company deciding to apply the breakthrough rules could choose not to apply them to a specific bidder that has not adopted equivalent breakthrough rules.
4. New squeeze-out and sell-out rights are introduced to enable bidders that have launched a takeover bid, hold more than 90% of the voting rights in the target company, and have also reached at least a 90% level of acceptance among the recipients of the bid, to attain 100% of the target company for an equitable price, and conversely, to enable minority shareholders to exit the company in the same circumstances.

In our view, the new Spanish regulation on takeover bids provides potential bidders with interesting new possibilities for gaining control of listed companies. It opens the door to different strategies in the context of takeover bids. Given that the new rules came into force on August 13 2007, it is still too soon to pass opinion on their impact on the amount of M&A transactions of this kind. So far, only six takeover bids have been authorised by the CNMV since August 13 2007, some of which were prepared under the former takeover bid regulation.

What have been the most significant M&A transactions in your jurisdiction over the past year?

According to reports by independent financial advisers, the volume of M&A transactions carried out in Spain, or with the participation of a Spanish company as the target, seller or purchaser during 2007 amounted to around €290.4 billion ($445.5 billion) representing an increase of about 53% in comparison with 2006. This made Spain the third most active country in M&A after the US and the UK. 2007 was a record-breaking year for the M&A activity, shattering all previous deal volume records.

While cross-border transactions have significantly increased in number and in volume, domestic transactions have slightly reduced in volume. The total volume of cross-border transactions increased by 91.7% in 2007, amounting to €216.6 billion. Domestic transactions added up to a total of €73.8 billion, nearly 4.2% less than in 2006.

The highest volume of M&A transactions has occurred in the banking and financial services sector, followed by the utility sector.

The largest transactions in Spain in the past year were the takeover bid by Enel SpA and Acciona, SA of Endesa, SA, after the agreement entered into with EON on April 2007; and the takeover bid launched by Imperial Tobacco Group for the Spanish tobacco supplier Altadis, SA.

As for cross-border deals where a Spanish company acted as purchaser, the following should be mentioned: (i) the takeover bid launched by Royal Bank of Scotland, Fortis and Banco Santander, for ABN Amro (the transaction value was €67.4 billion ($103 billion), the largest ever financial services deal), which outmanoeuvred Barclays; and (ii) the takeover bid launched by Sacyr Vallehermoso, SA for the French construction group Eiffage, SA which encountered certain difficulties with the Autorité des Marchés Financiers, the supervisory body in France.

Facing 2008, the level of transactions achieved in 2006 and 2007 seems to be totally out of reach. This is mainly due to the global financial struggles and to the greater difficulties in obtaining banking finance, particularly for companies in the real estate sector. However, special attention should be paid in 2008, to companies in the Spanish energy sector that, according to the press, could well be the target of possible takeover bids during this year.

How, and to what extent, is foreign involvement in M&A transactions in Spain regulated or restricted?

As a general rule, M&A transactions with foreign involvement are not subject to further material restrictions in Spain.

Some sectors traditionally subject to restrictions, such as energy, transport, insurance, finance and telecommunications (not including television) have been totally or partially deregulated. The government keeps certain supervisory and/or veto powers to secure general public interest in these strategic sectors, but these powers apply regardless of whether or not there is a foreign involvement in the transaction.

However, there are still sectors, such as those related to national defence or explosives, where foreign involvement is restricted, on the basis of national interests.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

Concerning private M&A transactions, there are no specific disclosure requirements other than those resulting from the corporate procedures for mergers and demergers established by the Company Laws. Pursuant to those procedures, which generally involve a resolution by the shareholders of the relevant companies, certain information on the projected transaction must be made available to their shareholders, employees and creditors.

In a public takeover bid for a listed company the bidder is obliged to file a prospectus with the CNMV, including extensive information on the following areas:

1. Information about the bidder and the target company, including: group structure of the bidder, a list of securities in the target company held by the bidder or its group, any agreements in force between the members of the board of the target company and the bidder and any advantages proposed by the bidder to these members, and accounting and financial information of the bidder and its group.
2. Information about the securities affected by the offer, the consideration offered, the maximum number of securities to which the offer is extended, and the type and number of the guarantees granted by the bidder to ensure completion of the transaction.
3. Information about the formal aspects of the offer: term and formalities for the acceptance and expenses arising from the acceptance or settlement of the offer.
4. Information about the purpose of the acquisition and future intentions of the bidder in relation to the business, employees, assets and indebtedness of the target company, including whether or not the bidder intends to exercise the squeeze-out right.
5. Other information, including details of any required regulatory or merger control authorisations or clearances in relation to the transaction.

The prospectus must also include any further information that the CNMV considers appropriate. The prospectus must be filed with the CNMV and a substantial summary must be published in official gazettes and in the general press.

In addition to the above, a listed company involved in an M&A transaction or a business combination, must also disclose its involvement to the public by means of a relevant fact notice when it is likely to have a material effect on the quotation of the company's shares. Listed companies are also obliged to disclose the structure of their shareholding and corporate governance. Likewise, shareholders' agreements concerning listed companies must be publicly disclosed.

Lastly, the new takeover bid regulation has established an obligation for a target company to guarantee equal treatment in terms of information among bidders or potential bidders. The target company, when specifically required to do so by bidder or potential bidder, is obliged to disclose to them any information that has been made available to another bidder or potential bidder. The target company is not obliged to provide information to any bidder, but it may be forced to do so if it provides information to a friendly bidder or potential bidder, and another bidder asks for the same information.

To what extent do the current disclosure requirements achieve market transparency?

The various disclosure requirements applicable to or related to Spanish listed companies (basically, takeover bids and public offer prospectuses, relevant facts affecting the company's quotation, significant shareholdings, corporate governance, related-party transactions, and annual, half-year and quarter financial information) result in a high degree of market transparency, comparable to that of the other principal EU countries. This is especially true after the implementation in 2007 of the European directive of transparency, which contributes to the harmonisation of transparency regulation across the EU.

How significant an issue is prospectus liability in a typical M&A transaction?

In a takeover bid, the CNMV analyses the prospectus. Only after it has decided that the prospectus complies with law will it authorise the bid. The bidder's directors could be liable if the information included in the prospectus is false, inaccurate or incomplete.

This directors' liability mainly takes the form of administrative and/or civil liability. The administrative liability is based on the provisions of the Spanish Securities Market Law. Directors that incur this type of liability may face a monetary penalty and may also be disqualified from the office of director. Civil liability is regulated by the Spanish Public Companies Law and the Civil Code and may lead to compensation for court-assessed damages.

Additionally, it is feasible to sue a company for inaccuracy of the information contained in the prospectus. However, Spain has no great experience of lawsuits based on takeover prospectus liability.

How have recent M&A transactions and/or current legislation dealt with the issue of material adverse change clauses?

In contrast with what is common practice in finance, material adverse change (MAC) clauses are not commonly used in M&A transactions. It is only in private equity practice that a trend is emerging of incorporating MAC clauses in agreements.

The Spanish Civil Code does not regulate how unforeseen circumstances influence contractual relationships. The Spanish Supreme Court has drawn up the rebus sic stantibus doctrine, which entitles a party to terminate an agreement if extraordinary circumstances change the object or purpose of the contractual relationship. However, this doctrine is strictly and narrowly applied by the courts and is mostly intended for long-term contractual relationships.

Lastly, takeover bids regulations do not permit MAC clauses to be included in mandatory public tender offers.

What are the key unresolved issues in Spain?

Recent experience has shown that there is some uncertainty among the market players concerning the non-public information that listed companies can or cannot provide to third parties. This concern regards information that could be provided during the negotiation or preparation of acquisitions or financing transactions, especially within the framework of due diligence processes carried out by the potential purchasers of significant holdings, assets or businesses. The new takeover bid regulation has dispelled some of these doubts. Under the new rules, the target company is not obliged to provide information to bidders or potential bidders, although it may be forced to do so if it provides information to a bona fide bidder or potential bidder. However, some questions are still unanswered:

1. It is not completely clear whether the delivery by the target company of inside information (that is, information which is not only confidential, but also which, if made public, would alter the quotation of the shares) to potential bidders is permitted, or if it should be restricted under the insider trading and market abuse Spanish regulation.
2. It will be difficult to determine whether a potential bidder acts in good faith (with the purpose of launching a takeover bid) or if its bid is a mere strategy to gain access to confidential information of the target company.
3. In the context of a management buy-out takeover bid, it seems unfeasible for the target company to provide potential bidders with the same information available for the managers-bidders, as the latter have access to absolutely all the information of the company. Therefore, it is not clear what the target company ought to do in these cases in order to guarantee equal treatment among bidders.

In relation to mergers and demergers, the new Spanish General Chart of Accounts (Plan General Contable), which came in force on January 1 2008, has introduced some uncertainties regarding the date of accountancy effects of mergers and demergers. According to the new General Chart of Accounts, the accountancy effects of mergers take place at the time of the merger. In contrast, the Public Limited Companies Act allows the date of effects of mergers and spin-offs to be brought back to January 1 of the year of the merger/spin-off. This contradiction currently remains unresolved.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction?

The Securities Market Law and Royal Decree 1066/2007 lay down the legal framework that governs takeovers bids in Spain.

The main regulatory body supervising takeover bids is the CNMV. If the takeover meets merger control thresholds, the National Competition commission must also be involved. Likewise, if the target company operates in a regulated sector (for example in insurance or energy), the involvement of the competent independent authority is required.

What are the various methods by which a takeover can be achieved?

A takeover can be achieved by means of a takeover bid, a merger or demerger, an assignment, or a purchase of assets. A takeover can also result from a bankruptcy procedure.

How differently are hostile and voluntary takeover bids treated?

The new takeover regulations make no distinction between friendly and hostile bids. However, in the context of a hostile takeover bid, special attention should be given to the passivity rule that applies to the directors of the target company.

Nevertheless, what the new takeover bid regulation treats differently are mandatory and voluntary takeover bids. The main differences between them are the following:

1. In the framework of mandatory takeovers bids, the price offered shall be an equitable one, subject to the CNMV's approval. In a voluntary takeover bid the bidder can freely determine the price.
2. Mandatory takeovers bids must be filed for 100% of the share capital of the target company, whereas voluntary takeover bids can be launched for a lower percentage of the total share capital.
3. The effectiveness of voluntary takeovers bids can be subject to the fulfilment of almost any kind of condition. In contrast, a mandatory takeover bid can only be subject to clearance from the antitrust authorities.
4. Lastly, the events under which a bidder of a voluntary takeover bid is entitled to withdraw its offer are less restrictive than in the case of mandatory takeover bids.

What penalties are imposed for parties who violate takeover regulations (or equivalent)?

Sanctions for not complying with the regulations on takeover bids include the following:

1. The voting and ancillary rights attached to all the shares held directly or indirectly by the infringing party in the target company may not be exercised.
2. Any resolutions of the target company based on a majority of votes including the shares whose rights have been suspended shall be deemed void.
3. Monetary and other fines.
4. In the case of senior managers or directors, disqualification from holding office.

What are the thresholds for disclosing bids and offers?

Under the new ex-post bid system introduced by Law 6/2007 and Royal Decree 1066/2007, apart from a few exceptions contained in the transitory provisions, only one threshold triggers the obligation to file a mandatory takeover bid for 100% of the share capital of the target company. This threshold is set at 30% of the voting rights in a listed company, and is triggered when somebody reaches or exceeds this percentage of the voting rights by any of the following means:

1. An acquisition of shares or other securities that confer, directly or indirectly, voting rights in the target company.
2. Entering into a shareholders' agreement or acting in concert with other shareholders.
3. Indirect or subsequent acquisition of control (for example, merger with a listed company, takeover of a company that directly or indirectly holds a stake in the target company, or share capital reduction).

A mandatory takeover bid is also triggered if someone reaching a percentage of voting rights lower than the 30% threshold appoints a number of directors representing more than half of the board members within the 24 months of the date of the acquisition of this percentage.

Competition/Antitrust

What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction?

A new Spanish Law on the Defence of Competition (Ley de Defensa de la Competencia) (LDC) came into force on September 1 2007. Royal Decree 261/2008 of February 22 2008, approves the Regulation for the Defence of Competition that develops the LDC.

The most relevant changes affecting M&A introduced by the new LDC are the following:

• Formal independence of the competition authority (the National Competition Comission) (NCC) from government.
• The modification of the market share notification threshold from 25 to 30% (see below).
• The introduction of a simplified procedure in cases where the transaction is not likely to raise serious competition concerns.
• The possibility to lift the suspension of the transaction at any time during the procedure.
• The introduction of a list of criteria under which the Cabinet may authorise certain transactions on the grounds of general interest (see below).
• The possibility of first and second-phase clearance based on negotiated remedies.

How are the competition/antitrust regulations enforced in your jurisdiction?

M&A transactions qualifying as concentrations and exceeding the relevant thresholds must be notified to, and authorised by, the NCC or, if it is the case, the Council of Ministers.

The merger control procedure is divided into two phases. In the first phase, the Investigation Directorate of the NCC analyses the transaction and submits a report and a draft decision to the Council of the NCC. If it does not raise serious competition concerns the Council of the NCC will authorise the concentration, with or without remedies, which the parties may have offered. Conversely, if the concentration raises serious competition concerns then a second phase is initiated. During this phase, the Investigation Directorate issues a statement of objections identifying the main concerns. The notifying parties as well as any third party with a legitimate interest may submit allegations to the statement of objections. A hearing may take place before the Council and the NCC decides whether to prohibit the concentration, or to authorise it with or without remedies and/or conditions. The Cabinet is entitled to re-examine the concentrations that have been prohibited or subjected to commitments or conditions on the basis of grounds of public interest listed by the LDC.

When a concentration takes place in a regulated market (in particular, in the energy and telecommunications sector), the Investigation Directorate must request, in the context of the first phase, a non-binding report on the effect that the concentration may have on the market from the relevant sector's regulatory body.

How do legislation and regulation approach the issue of "abuse of dominant position"?

Under Spanish competition rules, the substantive test for assessing the anti-competitive effects of a concentration is not whether it creates or strengthens a dominant position, but rather whether it results in a substantial lessening of competition (SLC). Although in most cases both tests lead to similar outcomes, the SLC test can be considered more comprehensive than the dominance test, as some transactions might substantially decrease competition without necessarily creating or strengthening a single or collective dominant position.

To what extent are parties to an M&A transaction subject to prior notification requirements?

Notification of an M&A transaction to the Investigation Directorate of the NCC is mandatory when it constitutes a concentration and meets certain turnover or market share thresholds (see below).

Transactions are regarded as concentrations when they bring about a lasting change in the control structure of the companies concerned by means of the merger of two or more previously independent companies, the acquisition of control over the whole or parts of one or more companies, or the creation of a joint venture.

A lasting change in the control structure of a company is said to arise when the transaction confers the possibility of exercising a decisive influence over the activities of the company.

Concentrations, as defined above and not falling within the exclusive jurisdiction of the European Commission, must be notified to the NCC if they meet either of the following two thresholds:

1. As a consequence of the transaction, a share of at least 30% of the national market for a certain product or service, or of a defined geographic market within the national market, is acquired or increased.
2. The combined aggregate turnover of the parties in Spain in the previous financial year exceeded €240 million ($368 million), provided that at least two of the companies involved in the transaction each achieved a turnover in Spain of €60 million.

Author biographies

Vicente Conde PEREZ LLORCA Vicente Conde is partner and head of the capital markets team. He is a specialist in corporate law and the stock market, and advises national and foreign clients on all types of corporate transactions relating to shares, finance and the stock market in particular. His experience and knowledge in this field have enabled him to take part in some of the biggest transactions in Spain in recent years. Conde's experience includes high-profile international takeovers, IPOs, block trades, issuing of convertible bonds, and mergers and acquisitions in banking, finance and real estate. Conde has a Law degree from the Autonomous University of Madrid and a postgraduate degree in European Law from the Université Libre in Brussels, Belgium. As a specialist in corporate law and the stock market, he regularly speaks at seminars and conferences and has published a wide range of articles on the subject of his practice. Oriol Armengol PEREZ LLORCA Partner and head of the EU and competition department at Perez-Llorca, Oriol Armengol has wide experience in advising on competition law. He has acted in administrative proceedings before the Spanish and EU competition authorities, and before the regulatory bodies of various sectors in Spain. He regularly advises companies on mergers, and his team has been involved in some of the largest corporate transactions in the Spanish market. His recent work includes mergers in the transport, energy, and food and beverage sectors. Armengol graduated in law from the Autonomous University of Barcelona in 1992, and in 1993 went on to complete a Master's in European Studies at the Institute of European Studies in Barcelona. He studied at the University of Liège in Belgium, graduating with a Master's in European Law in 1994. Armengol teaches competition and EU law at the Carlos III University in Madrid and frequently speaks at professional conferences and seminars. He has published extensively, and regularly contributes to legal periodicals.