Before analysing the available restructuring strategies, we remind that these measures apply exclusively to situations involving an equity deficit, not to cases of insolvency.
Equity deficit and statutory grounds for dissolution
Under the Spanish Companies Act (Ley de Sociedades de Capital – LSC), an equity deficit arises when a company’s net equity, due to accumulated losses, falls below half of its share capital.
This situation constitutes statutory grounds for dissolution, unless appropriate remedial measures are adopted in due time, as provided under Article 363.1(e) of the LSC.
Early detection is crucial. Failure by directors to act promptly may result in personal liability, including joint and several liability for corporate debts incurred after the triggering event.
Net equity vs solvency: a critical distinction
It is essential to distinguish between net equity and solvency, two concepts that are often confused.
- Net equity represents the difference between assets and liabilities and includes share capital, reserves, retained earnings and the current financial year’s result.
- Solvency, by contrast, refers to the company’s actual and ongoing ability to meet its payment obligations as they fall due.
A company may be fully solvent from a cash-flow perspective while still being in a state of equity imbalance for corporate law purposes.
Our extensive experience advising international groups with Spanish subsidiaries has allowed us to identify several effective corporate strategies to restore equity balance. The suitability of each option must always be assessed on a case-by-case basis.
Corporate strategies to restore the equity balance of a Spanish subsidiary
Shareholder contributions to offset losses
Shareholder contributions are one of the fastest and most cost-effective solutions in terms of formalities, provided the shareholder has sufficient financial capacity.
From an accounting perspective, these contributions are recorded as equity, directly improving the company’s net worth. As they do not qualify as loans, they do not generate repayment rights or creditor claims in favour of the contributing shareholder.
Where the shareholder’s objective is to recover the funds in the future, alternative financing instruments—such as shareholder loans or profit-participating loans—may be more appropriate.
This option is particularly common in multinational groups where the foreign parent strengthens the equity position of its Spanish subsidiary while avoiding more complex corporate transactions.
Profit-participating loans as a hybrid instrument
Profit-participating loans (préstamos participativos) are especially attractive where the shareholder—or even an external investor—wishes to finance the company while retaining a repayment right.
Their key advantage lies in their accounting treatment: they are classified as equity rather than enforceable debt, contributing directly to the restoration of equity balance.
In addition, returns may be linked to the company’s performance, and the loan may later be capitalised if the lender joins the share capital.
Due to their simplicity and low implementation cost, profit-participating loans are a recurring tool in both domestic and cross-border restructuring processes.
Capital increases with the entry of a new investor
In certain scenarios, equity balance can be restored through a capital increase involving a financially strong investor.
This strategy requires careful prior analysis from both a corporate and tax perspective, ensuring proper allocation of economic and voting rights and adequate protection of existing shareholders.
Capital reduction to offset losses and conversion from S.A. to S.L.
This scenario is common among solvent public limited companies (Sociedades Anónimas) whose shareholders are unwilling to make additional contributions.
A capital reduction to offset losses allows the equity deficit to be absorbed. If, as a result, share capital falls below the statutory minimum of EUR 60,000, the company must simultaneously convert into a private limited liability company (Sociedad de Responsabilidad Limitada – S.L.).
Although technically sensitive, this operation is entirely feasible and allows the corporate structure to be aligned with economic reality, optimising costs and simplifying the legal framework.
Accordion transaction with share premium and investor entry
In cases of significant equity imbalance, the entry of an external investor may be structured through a capital reduction followed by a capital increase with a share premium.
This mechanism absorbs losses through capital and premium reductions, helping to prevent future reductions and avoiding the need for additional audit reports, resulting in considerable time and cost savings.
Upstream merger within parent–subsidiary structures
In corporate groups with foreign parent companies and Spanish subsidiaries, an upstream merger (reverse merger) may be an effective solution when one company—typically the subsidiary—suffers an equity deficit.
This transaction simplifies the group structure, eliminates equity imbalances and improves operational efficiency, provided that its corporate, tax and employment law implications are carefully assessed.
Insolvency and formal insolvency proceedings
Finally, it must be emphasised that where equity deficit coincides with actual insolvency, the company is legally required to file for insolvency proceedings.
Early detection and specialised legal advice are essential to avoid director liability and further financial deterioration.
Frequently Asked Questions
Equity balance exists when the company’s net equity is not lower than half of its share capital, thereby avoiding statutory grounds for dissolution under the LSC.
The company incurs mandatory dissolution grounds, and directors may face personal liability if they fail to act diligently.
Yes. For accounting purposes, profit-participating loans are treated as equity, making them an effective recapitalisation tool.
Yes. Solvency and net equity are distinct concepts. A company may meet its payment obligations while still being in an equity imbalance.
It depends on the group structure, shareholder objectives and strategic priorities. Tailored legal analysis is essential.
If your Spanish subsidiary is facing an equity imbalance—or if you wish to anticipate potential corporate risks—,
