General overview

What legislation governs M&A activity in your jurisdiction?

The legal framework for M&A activity in Spain consists mainly of:

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 both in the public companies (sociedades anónimas) and in 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; and
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.

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

The most important recent regulatory developments affecting M&A in Spain have been brought about by Law 25/2005 of November 24 on private equity firms, Law 19/2005 of November 14 on the Societas Europea, Royal Decree 432/2003 of April 11 on public takeover bids, Law 26/2003 of July 17 on transparency of listed companies and Law 22/2003 of July 9 on bankruptcy. These each impact the M&A regulatory framework differently and are explained below. Generally speaking, and although it is probably a little too early to tell, these changes have not had a direct noticeable impact on the nature and amount of M&A activity in Spain.

Through Law 25/2005 of November 24 on private equity firms, the Spanish government intends to provide greater flexibility and modernity to the private equity firms system to promote investment in this sector. The authorization of private equity firms will no longer be carried out by both the Ministry of Economy and the National Securities Market Commission (the Comisión Nacional del Mercado de Valores or CNMV), but rather by the CNMV exclusively. The time required to obtain the authorization has been reduced.

Law 19/2005 of November 14 on the Societas Europea modifies the Company Law and the Securities Market Law. In particular, it has simplified the procedure applicable to mergers with wholly-owned subsidiaries, extending this procedure to reverse mergers and mergers between sister companies. Contrary to the general mergers regime, mergers subject to this simplified procedure are exempt from directors' and independent experts' reports on the transaction.

Royal Decree 432/2003 (which modifies Royal Decree 1197/1991) July 26 on public takeover bids (the Takeover Bids Regulation) focuses reform on: (i) establishing new mandatory bid triggers; (ii) permitting bids subject to conditions relating to decisions by the target companies' governing bodies; and (iii) making the process of competitive bids more flexible by allowing all competing bidders to improve their offers. The Takeover Bids Regulation should shortly be adapted to the European directive on takeover bids.

Law 26/2003 on transparency of listed companies has introduced measures concerning corporate governance and the disclosure of corporate governance information to investors. Listed companies must approve internal regulations for their board of directors and must prepare an annual report on corporate governance. Also, the reform of the Securities Market law obliges listed companies to disclose any shareholder agreement or other agreements that could regulate voting rights or limit the transfer of their shares.

Another recent legislative development worth mentioning is Royal Decree-Law 5/2005 of March 11 on urgent reforms to encourage productivity and improve public procurement, which implements, among others, Directive 2003/71 of the European Parliament and of the Council of November 4 2003 on the prospectus to be published when securities are offered to the public, and Directive 2002/47 of the European Parliament and of the Council of June 6 2002 on financial collateral arrangements.

In 2005, the volume of M&A transactions carried out in Spain or with the participation of a Spanish company was $44.2 billion, the highest since 1999. Investment during 2005 was 87% higher than in 2004, but the number of transactions decreased by 5%.

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

The biggest volume of M&A transactions has occurred in the telecommunications sector, followed by real estate, the financial and insurance sectors and utilities (electricity, water and gas).

In the past two years, more than 20 takeover bids have been carried out in Spain.

The biggest transactions last year included the takeover bid launched by Telefónica over the British telecom operator O2, the acquisition of the French real estate company Gecina by the Spanish sector leader Metrovacesa, the acquisition of Cesky Telecom by Telefónica, the acquisition of the telephone company Auna by ONO, and the acquisition of the travel services company Amadeus by Wam Acquisition.

Reference should also be made to the acquisition of the airport retail operator Aldeasa, by Autogrill and Altadis and to the acquisition of the textile group Cortefiel by a consortium of private equity funds (PAI Partners, CVC and Permira), in which, for the first time in Spain, the competitive tender offer regulation enacted in 2003 was applied.

Special attention will be paid during this year to the takeover bid launched by Gas Natural over Endesa in September 2005 and the subsequent takeover bid launched by E.ON in February 2006 for the same company.

International transactions have prevailed over domestic transactions - only three out of the 10 most significant transactions that took place in 2005 were domestic transactions.

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

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

Some specific sectors traditionally subject to restrictions, such as energy, transport, insurance, finance and telecommunications (not including television) have been, totally or partially, deregulated for European companies and to a lesser extent for non-European companies. 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 there is 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 interest.

Due diligence

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

In a public takeover bid for a listed company the offeror is obliged to file a prospectus including extensive information on:

• offeror and target: target company, offeror, individuals responsible for the prospectus, group structure of the offeror, a list of securities in the target company held by the offeror or its group, any agreements in force between the members of the board of the target company and the offeror and any advantages proposed by the offeror to such members, and accounting and financial information of the offeror and its group;
• securities and consideration: securities affected by the offer, consideration, maximum number of securities to which the offer is extended, and type and amount of the guarantees granted by the offeror to ensure completion of the transaction;
• formal aspects: term and formalities for the acceptance of the offer, and expenses arising from the acceptance or settlement of the offer; and
• other information: purpose of the acquisition, effects of merger control regulations on the transaction.

The prospectus should 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 any way in a M&A transaction or a business combination, must disclose such involvement to the public by means of a so-called 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. Lastly, shareholders' agreements concerning listed companies must be publicly disclosed.

As for 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 Companies 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 shareholders, employees and creditors.

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

The various disclosure requirements applicable 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 other EU countries.

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

In a takeover bid, the CNMV analyses the prospectus and only after it has decided whether the prospectus complies with law or not will it authorize the bid. The offeror's directors could be liable if any representation made by the directors is inaccurate or if any erroneous information is included in the prospectus.

This directors' liability appears mainly in 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 face a monetary penalty and could also be disqualified from the office of director. Civil liability is regulated by the Spanish Public Companies Law and the Civil Code and could lead to compensation for court-assessed damages.

It is also feasible to sue a company for inaccuracy of the information contained in the prospectus. However, the Spanish courts have not experienced large 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 to what is common practice in finance, material adverse change (MAC) clauses are not commonly used in M&A transactions. Only in private equity practice is a trend 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 elaborated 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, the Takeover Bids Regulation does not permit MAC clauses to be included in a public tender offer.

What are the key unresolved issues in your jurisdiction?

As explained below, the Takeover Bids Regulation requires a public tender offer to be launched when a certain number of directors is appointed in the target company, even if the relevant triggering shareholding thresholds are not reached. This requirement is not clearly defined and gives rise to legal uncertainty.

Another issue that has arisen since the recent amendment of the Spanish Securities Market Law is the new obligation for listed companies to make public and deposit with the Commercial Registry any agreements between shareholders that might contain provisions regarding the transfer of shares and voting rights. The wording of certain transitional provisions in respect of agreements between shareholders that effectively control more than 25% of the share capital of a listed company has led to doubts as to whether these agreements trigger an obligation to launch a takeover bid.

Takeovers

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

The main regulatory body is the CNMV. If the takeover meets merger control thresholds, the Competition Service must also be involved. Likewise, if the target company operates in a regulated sector (for example, 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 merger or demerger, takeover bid, assignment or purchase of assets. A takeover can also result from a bankruptcy procedure.

How differently are hostile and voluntary takeover bids treated?

Takeover regulation makes 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.

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

Sanctions for not complying with the Takeover Bids Regulation include, among others:

1. the political rights of the shares acquired in violation of takeover regulations 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 are deemed void;
3. monetary and other fines; and
4. in the case of senior managers or directors, disqualification from holding the office of director.

What are the thresholds for disclosing bids and offers?

The Takeover Bids Regulation is based on a system of thresholds that make it compulsory to launch a takeover bid before acquisition of control over the target company:

• the acquisition of shares representing 25% or more of the capital of the target company triggers the obligation to launch a bid for shares representing at least 10% of the capital of that target company;
• the acquisition of shares representing 6% or more of the capital of the target company during any 12-month period, when the acquirer already holds a stake between 25% and 50% of the capital, triggers the obligation to launch a bid for at least 10% of the capital of the target company; and
• the acquisition of shares representing 50% or more of the capital of the target company triggers the obligation to launch a bid for 100% of its capital.

Also, to avoid transactions that involve the acquisition of a stake below the thresholds of 25% and 50% mentioned above but that lead to a similar gain of control, the last reform of the Takeover Bids Regulation introduces additional cases of mandatory bids. These new cases are designed for acquisitions where the percentage thresholds are not met but a certain degree of control is gained through appointing directors of the target company.

Competition/Antitrust

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

On March 10 2006 the Minister of Economy presented a draft bill of the new antitrust law. The new legislation will provide for a single authority (the National Competition Commission – the NCC) instead of the two-body system with a Competition Service and a Competition Court. It is expected that this new system will shorten the sometimes lengthy procedures established in the current law.

The most significant aspects of the draft bill in the context of M&A are the introduction of a simplified procedure, in cases where is not predicted that the transaction will raise serious competition concerns, and of a list of criteria under which the Cabinet may evaluate the transactions for general interest purposes.

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

Under the new legal framework, competition law will be enforced by the NCC as well as the corresponding regional authorities and commercial courts. The NCC defends public interest (that is, the protection of an effective competition in the market) and the procedure is governed by administrative law, while the courts apply the legislation in private litigation in the context of commercial law.

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

Under Spanish competition rules, the substantive test for assessing the anticompetitive 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 (an SLC). Although both tests lead to similar outcomes in most cases, the SLC test could be considered more comprehensive than the dominance test because some transactions substantially lessen 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?

An M&A transaction must be notified to theNCC when it constitutes a concentration and it meets certain thresholds.

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 deemed to arise where 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:

• as a consequence of the transaction, a share of at least 25% of the national market for a certain product or service, or of a defined geographic market within the national market, is acquired or increased (this threshold will probably be increased to 30% under the new law); or
• the combined aggregate turnover of the parties in Spain in the previous financial year exceeded €240 million, provided that each of at least two of the companies involved in the transaction achieved a turnover in Spain of €60 million.

Author biographies

Vicente Conde Perez-Llorca Vicente Conde joined Perez-Llorca in September 2005 as a partner. He is responsible for the capital markets team. Conde provides legal advice to national and international clients across Europe and the Americas on all branches of corporate law. His expertise in the area of capital markets has provided him the opportunity to collaborate on some of the most significant transactions in Spain in recent years. Conde's experience and most recent transactions include, among others, high-profile international takeovers, IPOs, block trades, issuing of convertible bonds, and mergers and acquisitions in the banking, finance and real estate sectors. Conde is a regular speaker and lecturer in seminars and conferences as an expert in corporate and capital markets law and has published a great variety of articles and works related to his practice area. His works include Listing on the Spanish Stock Exchange and Main Regulatory Developments in Spanish Equity Capital Markets. Oriol Armengol Perez-Llorca Partner and head of the competition and EU department at Perez-Llorca, Oriol Armengol has vast experience in advising on competition law matters. He acts in administrative proceedings before the Spanish and EU competition authorities, as well as before the regulatory bodies of different sectors in Spain. He regularly advises companies on mergers and his team has been involved in some of the most significant corporate transactions in the Spanish market. Recent work includes mergers in the energy, retail and food and beverage sectors. Armengol graduated in law from the University Autónoma of Barcelona in 1992 and in 1993 went on to study a Masters in European Studies at the Institute of European Studies in Barcelona before studying at the University of Liège in Belgium, graduating with a Masters in European Law in 1994. Armengol teaches competition and EU law at Carlos III University in Madrid and frequently lectures at professional conferences and seminars. He has published extensively and regularly contributes to a number of legal periodicals.