Financial assistance rules in Spain
In the commercial-corporate context, we can define the concept of “financial assistance” as an economic operation that allows -directly or indirectly- financing to a third party so that it can acquire stocks and shares of a company, with the financing source being the company itself whose stocks and shares the third party intends to acquire (for example, through the granting of a loan to the third party by the company itself or the granting by the company of guarantees in relation to the financing of the purchase transaction). Therefore, there are three essential elements to the financial assistance’s concept:
- The shares or stocks of a company
- A third party
- A financing granted or provided by the company itself; and generally two legal businesses:
- That of the financing, between the company and the assisted third party
- That of the acquisition of the stocks or shares, between the assisted third party and the seller of the stocks or shares.
Financial assistance rules and prohibition
The Capital Companies Act, specifically in articles 143, for limited companies, and 150, for public limited companies, regulates financial assistance in Spain. There is an absolute prohibition on financial assistance, so that generally, a company cannot contribute financially to the acquisition by a third party of its own stocks and shares. It has led to numerous criticisms by an important sector of the Spanish doctrine and jurisprudence, because of the rigidness of the prohibition, its non-adaptation to the current reality, as well as by the severity of the sanction imposed against the breach of the prohibition: the absolute and full judicial nullity of the legal business in which financial assistance materialises.
The prohibition on financial assistance has one exception, only for public limited companies, those businesses directed at facilitating the personnel of the company with the acquisition of its stocks and whose objective requirement is the existence of a working relationship between the individual that acquires the stocks and the company.
The basis and origin of financial assistance
Since its origins, the prohibition on financial assistance has been based:
- on the one hand, on preventing the administrators of a company from taking control of the company through the corporate assets and,
- on the other hand, to protect the interests of social creditors, who could be in danger of putting at risk the solvency of the company for being without corporate assets.
While it is true that the prohibition fulfils its purpose, the absolute prohibition, attending to the literal words of the law, also prevents response to the needs of the current reality. As we said, this point has been strongly criticised by both doctrine and jurisprudence, which in practice has led judges and tribunals to refrain from declaring the absolute nullity of the financial assistance operation, when doing so would have been safe for the social interests and the position of the creditors. All this, in order to avoid the devastating effect of a radical nullity.
Solutions to the current problem
Considering the situation described, a more flexible interpretation of the standard practice is proposed. This requires a detailed study of each specific case to determine if there is a risk for the social creditors or if the operation allows the administrators to take control of the company’s corporate assets. Only in such a case, will the prohibition take place and the nullity of the legal act declared.
At the European level, the majority of countries have opted to follow the wording of the new article 23 of the Second European Directive. This article is based on a special procedure designed to ensure the viability and safety of the operation by requiring a strengthened majority of partners and the obligation on the part of the governing body to present a report specifying the motivation of the operation and the conditions and risks for the liquidity and solvency of the company. In addition, the administrators will be responsible for the operation and this must be done under fair market conditions.
This article is not considered as legal advice