Spanish Financial Assistance Rules

Spanish corporate law (Ley de Sociedades de Capital, or “LSC”) foresees a general prohibition regarding financial assistance, which prohibits a company from financially assisting another person (natural or legal) in order to enable that person to acquire the shares of the assisting company or of the parent company of the assisting company. In the case of limited liability companies, it is also prohibited to provide financial assistance for the acquisition of shares in any company of the assisting company’s group.

This financial assistance prohibition works for both public limited companies (sociedades anónimas) (S.A. Companies) and limited liability companies (sociedades de responsabilidad limitada) (S.L. Companies). This is a surprising difference between Spain and other European jurisdictions, as Spain is one of the few European jurisdictions prohibiting financial assistance by limited liability companies.

As seen below, the financial assistance prohibition under Spanish law is very strict and is defined in very broad terms. This prohibition applies to “any kind of financial assistance” and extends to financing provided before, simultaneously with or after the acquisition, provided that the financing was given in order to assist the buyer in the acquisition of the shares.

The consequences of breaching the financial assistance rules are severe, not only in terms of the potential nullity of the financial assistance agreement, but also for the directors involved in the financial assistance transaction.

Key elements of the financial assistance prohibition under Spanish law

Parties involved in the prohibited financial assistance

On the side of the party granting the assistance, the financial assistance prohibition under Spanish law applies to both S.A. Companies and S.L. Companies. Nevertheless, there are two differences between the regimes applicable to each of these two types of companies:

• S.A. Companies are exempt from the application of the financial assistance prohibition in two cases, and these exemptions do not apply to S.L. Companies. The exemptions are:
• Transactions aimed at facilitating the acquisition by the company’s employees of shares in the company itself or of shares in any other company belonging to the same group. Some legal authors question why this exception has not been included in the regime applicable to S.L. Companies.
• Transactions entered into by banks or other credit institutions (which, according to Spanish law, must operate in the form of S.A. Companies), within the scope of their ordinary course of business, which are financed with disposable assets of the company.
• The scope of the prohibition on financial assistance is broader for S.L. Companies since it extends not only to the acquisition of its own shares and those of its parent company, but also to the acquisition of shares in any group company.

On the recipient’s side, the LSC states that the party acquiring the shares with financial assistance must be a “third party”. The general reference to a “third party” in the LSC leads to a wide interpretation of this term, to include any individual or legal person, other than the assisting company. The concept of “third party” would not exclude the actual shareholders and directors of the assisting company.

The acts which are forbidden by the financial assistance prohibition

The prohibition is drafted in very broad terms in the LSC and it includes “advancing funds, granting credits or loans, giving guarantees or providing any kind of financial assistance to third parties for the acquisition of its own shares” (remember that in case of S.A. Companies this also includes the shares of its parent company and for S.L. Companies the shares of any group company, whether upstream or downstream).

Therefore, we can distinguish between two related behaviours in the financial assistance prohibition:

• On the financing side, the advancing of funds, granting of credits or loans, provision of guarantees or any kind of financial assistance to third parties. The existence of financial assistance needs to be looked at broadly since the legislator has chosen to include a catch-all mention of “any kind of financial assistance”; and
• The reference to the acquisition by third parties of shares of the assisting company through such financial assistance does not mean that the assisting company needs to directly provide the financing to the third party acquiring the shares. Provided that the final purpose is to facilitate the purchase of the shares, it may well be that the financial assistance is structured in other ways, such as the provision by the assisting company of: (i) a guarantee regarding any deferred payment for the purchase price of its own shares; or (ii) financial assistance to a “fourth entity”, which, in turn, financially assists the third party to acquire the shares of the assisting company.

Existence of a casual link between the financial assistance and the acquisition of the shares

For prohibited financial assistance to exist under Spanish law, there must be a causal link between the provision of financial assistance and the acquisition of the shares, or, in other words, the financing must have been provided in order to assist in the acquisition of the shares.

The main problem is to evidence that the financing has been provided by the assisting company in order to assist in the acquisition of its own shares, especially when such purpose is not explicitly stated in the financing documents. In this regard, a wider purpose of the financing does not discard the existence of prohibited financial assistance. Such further purpose does not prevent the financial assistance from causing potential damage to the shareholders and creditors, which the LSC tries to avoid.

Timing of the financial assistance

The prohibition on financial assistance extends to financing provided before, simultaneously with or after the acquisition, provided that the financing was given in order to assist the buyer in the acquisition of the shares. Nevertheless, the more time that elapses from completion of the transaction, the more difficult it becomes to evidence the link between the financial assistance and the acquisition of the shares.

Although Spanish legislation includes a very specific and absolute prohibition on financial assistance, it also includes a special procedure for carrying out leveraged mergers post-LBOs (merger by absorption of a company previously acquired by the absorbing company using debt) whereby these are validated once three years have passed from the time the debt materialised.

Consequences of infringement of the financial assistance prohibition

Administrative sanctions

Financial assistance prohibition could lead to a fine being imposed on the directors of the assisting company and, where applicable, on the directors of the controlling company who induced the controlled company to provide the financial assistance. For these purposes, directors, executives and attorneys with broad representation faculties shall be deemed “directors”. The fine would be an amount up to the face value of the shares acquired by the third party with the financial assistance provided by the assisting company.

The statutory limitation period for imposing this fine is three years.

Civil liability of the directors

As expressly stated by the Spanish Supreme Court, directors approving a financing which constitutes a breach of the financial assistance provisions under the LSC would be presumed liable for any damages caused to the company, the shareholders and the company’s creditors by such illegal financing approved by them.

The Spanish Supreme Court has also recently considered that the directors of a company who agreed to a prohibited financial assistance transaction (which took place 14 years before the initiation of the bankruptcy proceedings) in favour of the parent company aggravated the insolvency situation of the assisting company and are therefore liable for the payment of those debts that cannot be satisfied with the company’s assets.

Nullity of the financial assistance agreement

The majority of the legal authors and the Spanish Supreme Court have traditionally deemed that the breach of the financial assistance provision entails the nullity of the financial assistance agreement. Nevertheless, in recent years, there has been a tendency in the case law to (i) seek alternatives to nullity, when possible, and, (ii) when nullity is upheld, limit it to the strict business of financial assistance (the loan, guarantee, etc.) and not to the related transaction (the sale and purchaser, merger, etc.). At the same time, the case law has also stated that nullity does not exclude the parallel imposition of the administrative sanction on directors or their civil liability as detailed above.