The legal framework of M&A activity in Spain is made up of:
(i) the provisions on general agreements, purchase agreements and assignment of receivables and payables in the Civil Code and the Commercial Code;
(ii) 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 and, from July 4 2009, also the new law on structural modifications of commercial companies;
(iii) the provisions on takeover bids in the Securities Market Law and the Royal Decree on Takeover Bids, applying to listed companies; and
(iv) 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
Recent legislative changes
The most important recent legislative changes affecting M&A in Spain were brought about by Law 3/2009 of April 3, on structural modifications of commercial companies.
By means of this law, Spain implemented two Directives: (i) Directive 2005/56/EC of the European Parliament and Council, dated October 26 2005, concerning cross-border mergers of capital companies and (ii) Directive 2006/68/EC of the European Parliament and Council, on September 6 2006, amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their share capital.
The main purpose of this new regime was to regulate in detail and in a single legal body, the applicable requirements and procedures of certain corporate transactions which affect the corporate structure of companies, such as mergers, de-mergers, spin-offs, global assignments of assets and liabilities in favour of shareholders and transformations in the type of legal entity. Specific mention should also be made of the regulation on cross-border mergers between companies belonging to the EU.
Generally speaking, the entry into force of Law 3/2009 has been regarded as a positive and practical measure by those who take part in the M&A market because its purpose was to clarify and in some circumstances, reduce or make more flexible the necessary steps and procedural requirements for implementing the different types of structural modifications affecting companies.
Less than one year after this law came into force, it is difficult to assess its impact on the nature and amount of M&A activity in the market, especially because of other factors that are likely to have been more influential than legislative changes (notably, the global financial crisis).
However, some companies have used the changes introduced by Law 3/2009 to carry out deals somewhat differently than before. A good example of this would be the so-called segregations approved by Cintra and Colonial, which means the en bloc transfer of a whole business (including assets and liabilities) to a subsidiary in exchange for shares in the subsidiary.
Finally, the creation of the Ordered Bank Restructuring Fund (Fondo de Reestructuración Ordenada Bancaria) by the Spanish Government in June 2009, which provides financial assistance on the restructuring of the Spanish banking industry, will most likely foster M&A activity in this sector.
Significant recent M&A transactions
The M&A market in Spain has followed the downtrend of the economy, resulting in a dramatic reduction in not only the number of transactions carried out in 2009, but also their value in comparison with 2008.
Despite the financial crisis, however, a handful of large M&A transactions have taken place in Spain during 2009, particularly in the energy field (which has accounted for more than 70% of the total value of last year's M&A transactions). Two deals should be highlighted here: the sale of Acciona's 25% stake in Endesa to Enel for a total consideration of €12 billion ($15.24 billion); this transaction also resulted in the acquisition by Acciona of renewable energy generation assets from Endesa valued at €2,89 billion. This has been the biggest acquisition carried out in Europe and the second biggest worldwide in 2009. The other important transaction was the sale by Banco Santander of its 32.5% stake in CEPSA to the Emirati International Petroleum Investment Company (United Arab Emirates) for a total value of €2.70 billion.
With regard to the collapsed real estate market, mention should be made of the sale by the Sanahuja family of its 55% stake in Metrovacesa to the Banks BBVA, Banesto, Banco Sabadell, Banco Santander, Banco Popular and Caja Madrid to offset the debt that the company held with those banks.
In the construction sector, Cintra sold its parking branch to a Portuguese consortium in June, led by Banco Espirito Santo for a total consideration of €451 million ($572 million). Subsequently, Cintra merged with its parent company Ferrovial at the end of 2009.
Finally, during 2009, there were a number of M&A transactions in the banking sector, such as the merger between Unicaja and Cajasur or the take over of Caja Castilla La Mancha by Cajastur. Most analysts expect to see an increase of M&A activity in this sector in 2010 for restructuring reasons.
Restrictions on M&A
As a general rule, M&A transactions with a foreign involvement are not subject to any substantial restrictions in Spain.
In the past, there were some restrictions on foreign purchasers in specific sectors, such as energy, transport, insurance, finance and telecommunications, but these have been almost completely removed. The government keeps certain supervisory and/or veto powers in order to secure general public interest in these strategic sectors, but these powers apply regardless of whether there is a foreign involvement in the transaction or not. However, foreign involvement is still restricted in national defence related sectors on the basis of national interest.
Due diligence
Concerning private M&A transactions, there are no specific disclosure requirements other than those resulting from the corporate procedures for mergers and demergers. Pursuant to those procedures, which generally involve a resolution by the shareholders of the relevant companies, certain information on the proposed 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 Comisión Nacional del Mercado de Valores (CNMV), which should include extensive information on the following areas:
- Information about the bidder and the target company, including: the 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.
- 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 amount of the guarantees granted by the bidder to ensure completion of the transaction.
- Information about the formal aspects of the offer including term and formalities for the acceptance and expenses arising from the acceptance or settlement of the offer.
- 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.
- 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.
Finally, the takeover bid regulation establishes the obligation of the target company to guarantee equal treatment in terms of information amongst bidders or potential bidders, whereby the target company, when specifically required to do so by a bidder or potential bidder, is obliged to disclose to them any information concerning the target company 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.
Transparency of disclosure requirements
The various disclosure requirements applicable to or related to Spanish listed companies (takeover bids and public offer prospectuses, relevant facts affecting the company's quotation, large 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 on transparency, which contributes to the harmonization of transparency regulation across the EU.
In a takeover bid, the CNMV analyses the prospectus and only after it has decided that the prospectus complies with law will it authorise the bid. The bidder's directors could be held liable if the information included in the prospectus is false, inaccurate or incomplete.
This directors' liability can appear mainly in the form of administrative 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 the inaccuracy of the information contained in the prospectus. However, there is no experience in Spain of lawsuits based on prospectus liability.
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. It is only in private equity 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.
The takeover bids regulations do not permit Mac clauses to be included in mandatory public tender offers.
Unresolved issues
There are no major unresolved issues in the M&A field. However, the law on structural modifications of commercial companies which came into force last summer, has introduced important changes in the formalities and procedures for carrying out corporate transactions. The application of these changes has so far given rise to some procedural uncertainties, which presumably will be sorted out little by little when all the market players have become familiar with the new rules.
Takeovers
The Securities Market Law and Royal Decree 1066/2007 lay down the legal framework that governs takeover bids in Spain. The main regulatory body supervising takeover bids 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 in insurance or energy), the involvement of the competent independent authority is required.
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.
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, the new takeover bid regulation treats mandatory and voluntary takeover bids quite differently. The main differences between them are the following: (i) in the framework of mandatory takeovers bids, the price offered must be an equitable one, being subject to the CNMV's approval, in a voluntary takeover bid the price can be freely determined by the bidder; (ii) 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; (iii) the effectiveness of voluntary takeovers bids can be subject to the fulfilment of almost any kind of condition (namely, a minimum acceptance level, the approval of certain corporate resolutions or the suppression of voting restrictions in the target company); in contrast, a mandatory takeover bid can only be subject to clearance from the antitrust authorities; (iv) finally, 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.
Penalties for non-compliance
Sanctions for not complying with the regulations on takeover bids include the following:
(i) 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;
(ii) Any resolutions of the target company based on a majority of votes including the shares whose rights have been suspended shall be deemed void;
(iii) Fines and other penalties; and
(iv) In the case of senior managers or directors, disqualification from holding the office of director.
Thresholds for disclosing bids and offers
Apart from a few transitory exceptions, there is only one threshold in the takeover regulations that 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 a person reaches or exceeds this percentage of the voting rights by any of the following means:
(i) an acquisition of shares or other securities that confer, directly or indirectly, voting rights in the target company;
(ii) entering into a shareholders' agreement or acting in concert with other shareholders; or
(iii) an indirect or subsequent acquisition of control (such as a merger with a listed company, a takeover of a company that directly or indirectly holds a stake in the target company, or a share capital reduction).
Furthermore, a mandatory takeover bid would also be triggered in the event that a person reaching a percentage of voting rights lower than the 30% threshold were to appoint a number of directors who represented more than half of the board members within the 24 months following the date of the acquisition of this percentage.
Steps needed to take 100% of the target
As indicated in the preceding sections, a takeover bid should be launched in order to acquire 100% of a listed company. The acquisition of 100% of a non-listed target is not subject to any legal restriction (other than anti-trust or regulatory authorizations where applicable), but will typically be affected by the provisions in the company's by-laws or shareholders' agreements which deal with the transfer of shares.
The regulation on takeover bids establishes squeeze-out and sell-out rights in favour of the bidder and the minority shareholders respectively, in both cases at an equitable price. These rights are enforceable when, as a result of a takeover bid for all the shares of the target company, the bidder reaches at least 90 per cent of the voting share capital and the bid is accepted by at least 90 per cent of the voting rights to which the bid was addressed. Squeeze-out and sell-out rights can only be exercised within the three months following the end of the acceptance period of the bid.
Apart from the above-mentioned regulation, which is only applicable to listed companies that are the target of a takeover bid, Spanish Law does not provide a squeeze-out procedure for public companies, although other company law mechanisms have been successfully used in the past to achieve similar results (e.g. certain types of share capital reduction).
In private limited liabilities companies, the by-laws may include provisions effectively permitting a squeeze-out of minority shareholders owning less than 25 per cent of the company's shares. However, including such provisions in the by-laws requires the unanimous consent of the company's shareholders. The squeeze-out can be completed in a few months and the main hurdle in the process is the need for a valuation of the minority shareholders' shares.
Updates and trends
After the subprime crisis began at the end of 2007, virtually every country in the world has suffered an abrupt decline in its economic activity. This slowdown has not only affected the number of transactions carried out by market players in different areas of the economy, but has also hindered access to the necessary financing.
2009 has been a year in which M&A transactions have followed the downtrend of the market initiated in 2008, decreasing in value by 30% and in volume by 40% in comparison with 2008. M&A deals have, to a large extent, been replaced by intragroup and financial restructuring transactions. The crisis has led to a severe decline in consumption and investment, a dramatic fall in prices on the stock exchanges, higher rates of unemployment, an increase of the national debt and very serious credit restrictions. This has prevented most companies from carrying out new projects.
However, new business opportunities have appeared in 2009. Most analysts agree that the credit crisis has brought about the possibility of investing in companies that are on the verge of going bankrupt. Thus, some family businesses have had great difficulty accessing financing and have therefore been forced to sell up to companies which were not greatly in debt. This is a trend that will certainly continue in 2010.
Competition
A major development from a competition perspective is the adoption for the first time by the National Competition Commission (NCC) of guidelines for setting fines to be imposed on companies that infringe the Spanish Law on the Defence of Competition (Ley de Defensa de la Competencia) (LDC).
M&A transactions qualifying as concentrations and exceeding the relevant thresholds must be notified to and authorised by the NCC or, if it were 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. The Council of the NCC will authorise the concentration, with or without remedies that the parties may have offered, if it does not raise serious competition concerns. 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 and a hearing may take place before the Council of the NCC who will decide whether to prohibit the concentration, or to authorize it with or without remedies or conditions.
The Council of Ministers is entitled to re-examine the concentrations that have been prohibited or subject to commitments or conditions on the basis of the 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 from the relevant sector's regulatory body on the effect that the concentration could have on the market.
Under Spanish competition rules, the substantive test for assessing the anticompetitive effects of a concentration is not based on whether it creates or strengthens a dominant position, but rather if 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 to be more comprehensive than the dominance test as some transactions might substantially lessen competition without necessarily creating or strengthening a single or collective dominant position.
Prior notification
Notification of an M&A transaction to the Investigation Directorate of the NCC is mandatory when it constitutes a concentration and it 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 reach either of the following two thresholds:
(i) 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; or
(ii) the combined aggregate turnover of the parties in Spain in the previous financial year exceeded €240 million (£304 million), provided that at least two of the companies involved in the transaction each had a turnover in Spain of €60 million.
The draft Law on Sustainable Economy which is at present being discussed in Parliament will establish, if finally passed under its current terms, a new exemption to the obligation to notify the NCC of a concentration that exceeds certain thresholds. In accordance with this new rule, any concentration exceeding the threshold set out in (i) above will not have to be notified to the NCC when the acquired company or assets have a turnover of below €10 million ($12.71 million) in Spain, provided that the companies involved in the transaction do not achieve an aggregate share of 50% in any market affected.
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About the author
Vicente Conde is a partner and head of the capital markets team of PEREZ-LLORCA. He is an expert 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, especially in the ECM area. His experience and knowledge in this field have allowed him to take part in some of the most important transactions carried out in Spain in recent years. Vicente's recent transactions include high profile international takeovers, IPOs, block trades, rights issues, the issuing of convertible bonds and mergers and acquisitions in the banking, finance and real estate sectors.
Vicente has a law degree from the Universidad Autónoma de Madrid as well as a postgraduate degree in European Law from the Université Libre in Brussels, Belgium. As an expert in corporate law and the stock market, Vicente regularly participates as a speaker at seminars and conferences and has published a wide variety of articles and works related to his practice areas. |
Contact information
Vicente Conde
Perez-Llorca
Alcalá, 61 28014 Madrid
Tel: +34 91 436 04 20
Fax: +34 91 436 04 30 Email:vconde@perezllorca.com
Web:www.perezllorca.com |
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About the author
Oriol is a partner and head of the EU and competition department at PEREZ-LLORCA. He has vast experience in advising on competition law and related matters. He acts in administrative proceedings before the Spanish and EU competition authorities, as well as 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 most significant corporate transactions on the Spanish market.
Armengol graduated in law from the Universitat Autònoma de Barcelona in 1992 and in 1993 he 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 the Universidad Carlos III in Madrid as well as at the Madrid Barand frequently lectures at professional conferences and seminars. He has published extensively and regularly contributes to a number of legal periodicals. |
Contact information
Oriol Armengol
Perez-Llorca
Alcalá, 61 28014 Madrid
Tel: +34 91 436 04 20
Fax: +34 91 436 04 30
Email:oarmengol@perezllorca.com
Web:www.perezllorca.com |