ACT 31/2004, AMENDING THE COMPANIES ACT (“LEY DE SOCIEDADES DE CAPITAL”) Improvement of Corporate Governance 01 | Act 31/2004, Amending The Companies Act (“Ley De Sociedades De Capital”) For The Improvement Of Corporate Governance INTRODUCTION Act 31/2014, of 3 December, amending the Capital Companies Act for the improvement of corporate governance, as published in the Official State Gazette (BOE) of 4 December 2014, has introduced significant changes in Spanish Company Law on corporate governance. The background to this Act is the Cabinet Resolution of 10 May 2013, whereby a committee of experts on corporate governance (“Committee of Experts”) was created for the purposes of ensuring the good governance of Spanish companies. This Committee was tasked with safeguarding the proper functioning of corporate bodies, which comprise the Board of Directors and the General Meeting, to promote the highest levels of competitiveness, generating trust and transparency for domestic and foreign investors and shareholders, improving internal control and corporate responsibility and ensuring an adequate separation of functions, duties and responsibilities, with the utmost professionalism and rigour. Moreover, Act 31/2014, was drafted based on a study of the regulatory amendment proposal on corporate governance (“Report”) issued by the abovementioned Committee on 14 October 2013, and has adopted almost all its recommendations. The amendments to Act 31/2014 can be grouped as follows: amendments affecting all Companies, those exclusively related to Listed Companies, other amendments, transitional regime and effectiveness, and repealing provision. 1. AMENDMENTS AFFECTING as the case may be, the shareholder or shareholders ALL COMPANIES affected by the dispute will have the burden of proof of the resolution being in accordance with the 1.1 Amendments relating to the General Shareholders’ corporate interest. Meeting –– It will be for the challenging shareholder or ■■ The faculties of the General Shareholders’ Meeting shareholders to provide evidence on the existence include deliberating and resolving on the acquisition, of a conflict of interest, except for resolutions disposal or contribution of core assets to other relating to the appointment, removal, revocation and companies (assets are taken to be core assets when the accountability of directors and any other officers amount of the transaction exceeds 25% of the value of of similar significance, in which cases it will be for the assets included in the latest approved balance sheet). the challenging parties to provide evidence of the ■■ The power of the General Shareholders’ Meeting to damages caused to the corporate interest. deal with management issues is expressly extended ■■ Right to information in an S.A. to stock companies (formerly only applicable to limited liability companies), and the provision that the –– Failure by the directors to respond to the verbal by-laws may limit such power remains. request for information by the shareholders in a General Shareholders’ Meeting shall not amount ■■ With regard to the conflict of interest and the to grounds to challenge the general shareholders’ prohibition on voting: meeting, the shareholder only being entitled to –– The shareholders of limited liability companies (SL) demand the fulfilment of the reporting obligation, may not exercise the voting rights inherent to their and claim for any damages it may have suffered in shares when adopting any resolution (in addition relation thereto. to the provisions of Article 190 of the Companies –– The shareholder shall be liable for any damages Act (LSC)) authorising them to transfer shares caused in the event of an abusive or harmful use of subject to a restriction under the Act or by-laws, or the information requested (this provision must be exempting them from the obligations arising out of seen in conjunction with Article 204.3 which also the duty of loyalty, in accordance with Article 230 excludes the right to challenge due to the shareholder (non-competition clause). incorrectly or insufficiently exercising its right –– In stock companies (SA), the shareholders shall to information prior to the General Shareholders’ only be subject to the prohibition on exercising their Meeting being held). voting rights in the event of resolutions authorising ■■ Voting on resolutions them to transfer shares subject to a restriction under the Act or by-law, or removing them from –– A new provision on separate voting per issue, the company, where said prohibition is expressly Article 197 bis, is added. The following issues provided for in the relevant clauses of the by-laws must be voted on separately, even if included under governing the restriction on free transfer or removal. the same item of the agenda: (i) the appointment, ratification, re-election or removal of each director; –– Shareholders are not denied their voting rights in (ii) the amendment of stand-alone articles of the other cases of conflict of interest under Article 190 by-laws; and (iii) any other matters as determined of the LSC. by the company by-laws. –– In the event of challenge of company resolutions –– Calculation of majorities: (i) in an SA, resolutions (where the vote of the shareholder or shareholders shall be adopted by simple majority, noting that involved in the dispute has been decisive in the such majority shall be obtained when the votes adoption of the resolution) then the company and, 04 | Act 31/2004, Amending The Companies Act (“Ley De Sociedades De Capital”) For The Improvement Of Corporate Governance in favour exceed the votes against; (ii) in the case –– The time limit shall be calculated as follows: of resolutions that require a reinforced voting (i) from the date of adoption of the resolution, if the quorum, in addition to the attendance, in person or resolution is adopted in a shareholders’ meeting or in represented, of more than 50% of the share capital, a meeting of the board of directors; (ii) from the date an absolute majority shall be required at first call, of receipt of the copy of the minutes, if the resolution and a majority of two thirds of the share capital and, is adopted in writing, and (iii) from the date of at least, 25% of the share capital attending in person enforceability (or registration date), if the resolution or represented, shall be required at second call. is registered. ■■ Challenges to corporate resolutions –– The persons entitled to challenge are: (i) any of the directors; (ii) third parties proving that they –– Any corporate resolutions contravening the have a legitimate interest and (iii) any shareholders company general shareholders’ meeting regulations who acquire this status prior to the adoption of the may be challenged. resolution, provided that they represent, individually –– The distinction between void and voidable or jointly, at least, 1% of the share capital (this resolutions disappears. percentage may be reduced in the company by-laws). –– A new concept of “harm to the corporate interest” –– Shareholders who do not meet these percentages is introduced: such harm occurs where a resolution, and, therefore, are not entitled to challenge, shall be while not causing damage to the company’s assets, entitled to compensation for any damages suffered is imposed abusively by the majority, pursuing their due to the challengeable resolution. own interest to the unjustified detriment of that of –– Anyone who has not denounced a particular formal the remaining shareholders. defect in the resolution-making process despite –– A corporate resolution may not be challenged: having the opportunity to do so may not rely on any (i) where it has been annulled or validly replaced such defect at a later stage. by another resolution adopted prior to the challenge 1.2 Changes relating to Directors being filed, or (ii) where the challenge is based on the following reasons (unless they are deemed to ■■ Remuneration of directors be essential): infringement of merely procedural –– The by-laws shall establish the remuneration requirements for the call or the setting up of the of directors (including, as specified by the Act, general shareholders’ meeting or the board of without limitation, the following): (i) fixed salary; directors, or for the adoption of the resolution, (ii) allowance for attendance; (iii) profit sharing; incorrect or insufficient information provided by (iv) variable remuneration; (v) remuneration by the company in response to the exercise of the right shares; (vi) compensation for removal; and (vi) any to information prior to the shareholders’ meeting, savings or pension/insurance schemes as deemed participation in the meeting of persons not entitled appropriate. to do so, one or several votes being invalid, or erroneous calculation of the votes cast. –– The maximum amount of the annual remuneration of all directors shall be approved at a general –– Distinction is only made, for the purposes of the shareholders’ meeting. time limit for challenge, between challengeable resolutions and resolutions contrary to public –– The distribution of remuneration among the policy (not resolutions that are null and void). directors falls within their competence (unless otherwise agreed by the shareholders’ meeting). –– The right to challenge corporate resolutions shall not expire or terminate for those resolutions that, –– Reasonable and proportional remuneration criteria because of their cause or content, are contrary to are established, designed to promote long-term public policy (the one-year term is maintained for profitability and sustainability of the company, the remaining resolutions). incorporating the necessary measures to avoid excessive risk-taking and the rewarding of poor performance. www.dlapiper.com | 05 –– The general shareholders’ meeting shall determine the company); (ii) using corporate assets and the percentage applicable, not exceeding the confidential information for private purposes; remuneration limit, by means of profit sharing as (iii) taking advantage of business opportunities established in the by-laws (in an SL, a legal limit of of the company; (iv) obtaining benefits or 10% is established, and in the SA, the limits in force remuneration from third parties other than the prior to the reform of the law are maintained). company or its group, related to the performance of his/her office (excluding acts of mere courtesy). ■■ Directors duties ○○ Breaching the duty of loyalty shall lead not only –– The scope of the director’s duty of care is extended to the obligation to compensate for any damages and clarified: directors shall employ the required caused to the corporate assets, but also to the dedication and take any necessary measures for the reimbursement to the company of the unjust proper management and control of the company, and enrichment obtained by the director. shall have the duty to request and the right to obtain from the company the adequate and necessary ○○ Civil liability claims may be brought separately information for the fulfilment of their duties. from claims related to actions performed in breach of the duty of loyalty. –– The business judgment rule is introduced, which reflects the standard of care of a prudent ○○ Certain actions conflicting with the company’s businessperson in decisions subject to the directors’ interests may be permitted, provided that the discretion. A reference is made to good faith, without shareholder’s meeting or the board of directors personal interest, with sufficient information, in consents thereto. accordance with an appropriate decision-making ■■ Liability of directors procedure (excluding those decisions that personally affect other directors and related persons and, in –– Clarification is made that liability arises “where particular, those seeking to authorize projected wilful misconduct or negligence is involved”, and transactions in the event of absence). that guilt will be presumed, unless otherwise proven, where the relevant action is contrary to the –– The scope of the directors’ compulsory duty law or to the by-laws. of loyalty and the liabilities incurred for the infringement thereof is more widely regulated, –– De facto directors are defined (for the purposes of and any provisions in the by-laws limiting or liability claims) as any person who, in the course of contravening such regulations shall have no effect: trade, performs, without a title, or with a non-valid or expired title, or any other title, the duties inherent ○○ Concepts such as the loyalty of a faithful to a director, and that person on whose instructions representative, good faith, and performance of the directors of the company act. the role of director in the best interest of the company, are included. –– Should there be no permanent delegation of the board powers to one or more chief executive officers, the ○○ Also included is the principle of personal provisions regarding the duties and responsibilities responsibility with freedom of judgment in the of the directors shall apply to the person holding the performance of the directors’ duties. powers of the company’s senior management. ○○ In particular, the duty to avoid entering into –– It is established that any natural person representing any situations conflicting with the corporate a director with legal personality, is subject to the interests is provided for. The director (and any same requirements and has the same duties as those persons related thereto who are the beneficiaries of the latter, and both the natural and the legal of the actions detailed below) shall refrain from persons are jointly and severally liable. (in addition to those actions already regulated): (i) carrying out transactions with the company –– Minority shareholders are entitled to call upon (except for regular and non-relevant standard a liability claim, if the directors do not call the transactions performed for clients, the details shareholders’ meeting, or to directly exercise a of which are not necessary to fairly reflect the corporate liability action when the duty of loyalty equity, the financial situation and the results of is infringed. 06 | Act 31/2004, Amending The Companies Act (“Ley De Sociedades De Capital”) For The Improvement Of Corporate Governance –– The right to exercise liability actions against 1.4 Other amendments directors, whether corporate or individual, will ■■ The management report of companies that cannot expire on the fourth anniversary of the date upon produce abridged profit and loss accounts shall include which the relevant action may have been exercised. the average time taken to pay suppliers. If this exceeds 1.3 Amendments relating to the Board the maximum limit established in the legislation on late payments, an indication shall also be given as to ■■ The board shall meet, at least, quarterly. the measures to be applied in the following year in ■■ An agreement shall be entered into by and between order to reduce the payment periods to such limit. the chief executive officer (or any other directors ■■ For the purposes of non-discrimination between performing executive duties) and the company, to be classes of shares in the S.A., any amendment approved in advance by the board of directors, with the substantially entailing a clearly asymmetrical effect vote in favour of 2/3 of its members. on the economic or voting rights inherent to the ■■ The agreement shall contain, at least, details on various share classes, or to the holders thereof, shall be remuneration for the performance of executive duties deemed to be discriminatory. and potential compensation for early termination thereof, and any amounts payable by the company II. AMENDMENTS AFFECTING EXCLUSIVELY with regard to insurance premiums or contributions LISTED COMPANIES to savings schemes. No additional remuneration can be received for performing executive duties, the 2.1 General regime amount or description of which are not provided for ■■ In addition to the provisions already applicable to the in such agreement, all of which in accordance with SA, the following specifications are expressly added: the remuneration policy as approved in the general shareholders’ meeting. –– 3% of share capital, as compared with the general 5%, for the exercising of certain shareholder rights. ■■ The powers of the board of directors that cannot be delegated are expressly described: supervising the –– 0.1% of share capital for the challenging of corporate effective operation of any committees created, and the resolutions. performance of any delegated bodies and executives –– Three-month expiry term for the action of challenging that may be appointed; determining the general policies of corporate resolutions (except for resolutions and strategies of the company; authorising or waiving contrary to public policy, which do not expire). any obligations arising from the duty of loyalty; its ■■ The right to know the identity of the shareholders is own management and operation; preparing the annual extended to any shareholders’ associations created accounts and presenting them to the general shareholders’ within the issuing company representing, at least, meeting; formulating any type of report required 1% of share capital, as well as to any shareholders under law from the board of directors; appointing and holding, individually or jointly, at least, a 3% stake dismissing chief executive officers of the company and in share capital. executives directly reporting to the board or to any of its members, and setting forth the conditions of their ■■ The shareholders’ association or, as the case may agreements; the remuneration of directors within the be, the shareholder shall be liable for any abusive or scope of the by-laws and the remuneration policy as detrimental use of the information requested. adopted in the general shareholders’ meeting; calling of the general shareholders’ meeting and drafting of the 2.2 General shareholders’ meeting agenda and proposed resolutions; elaborating the policy in relation to own shares; and any powers that the general ■■ Powers reserved to the general shareholders’ meeting shareholders’ meeting delegates to the board of directors. shall comprise the transfer of core business to subsidiaries, any transactions equivalent to the liquidation ■■ The percentage stake necessary to challenge any of the company, and the directors’ remuneration policy. resolutions by the board is lowered to 1%. The core nature of business and operating assets is ■■ Breaches of the board of directors’ regulations assumed where the size of the transaction exceeds are included as grounds for challenging company 25% of the total assets on the balance sheet. resolutions. www.dlapiper.com | 07 ■■ The general information prior to the shareholders’ ■■ Different categories of executive and non-executive meeting is extended to cover, in relation to the directors are established and regulated: directors appointment, ratification or re-election of members of representing substantial shareholders and independent the board of directors, the identity, curriculum vitae and other external directors. and category thereof. Such information may also be ■■ The power of co-optation is extended since directors requested on any individual representing a legal person. do not need to be shareholders, although substitution ■■ The share capital necessary to submit proposals or to of directors is not allowed. complete the agenda is lowered from 5% to 3%. ■■ The term of office of directors shall be determined in ■■ Directors are exempt from the obligation to provide the by-laws, and in no event shall exceed 4 years. such information, if this is stated on the company’s ■■ Directors may be re-elected, one or more times, website. for periods not exceeding 4 years. ■■ Shareholders’ requests and directors’ responses shall ■■ Certain board committees are more specifically be included on the company’s website. regulated: board committee, audit committee and ■■ The by-laws may not require the holding of more than appointment and remuneration committee. one thousand shares in order to attend the general ■■ Directors shall be remunerated, unless otherwise shareholders’ meeting. stated in the by-laws. 2.3 Board of directors ■■ Directors’ remuneration policy is fully regulated. ■■ A board of directors is mandatory, and gender ■■ A corporate governance report and a report on the diversity when appointing the members thereof must directors’ remuneration shall be submitted annually to be ensured, facilitating the incorporation of women the Spanish Stock Exchange Commission (CNMV), into the selection process. the contents of which are regulated. ■■ A larger number of non-delegable powers of the board are set forth (including such powers generally III. OTHER AMENDMENTS non-delegable by the boards of all stock companies). ■■ The Securities Market Act 24/1988, of 28 July, is ■■ Attendance at the meetings by the directors shall amended to bring it into line with the new provisions be in person, although directors may delegate of the LSC, and it is stated that a number of the their representation to another director, with the provisions applying to listed companies are now particularity that non-executive directors may only incorporated into the stock exchange organization and delegate to non-executive directors. conduct rules, under the supervision of the CNMV. ■■ The powers and duties of the chairman and the ■■ Additional Provision Three of the 15/2010 Act, secretary of the board are established. of 5 July, amending Act 3/2004, of 29 December, ■■ A coordinating director shall be appointed for whereby measures on combating late payment are independent directors, if the chairperson is an implemented for commercial transactions, is modified executive director. to bring it into line with the amendments of the LSC, in particular, by adding that listed companies, and ■■ The performance of the board of directors shall be unlisted companies which do not file abridged annual assessed annually. accounts, shall publish on their websites the average time it takes for them to pay their suppliers. 08 | Act 31/2004, Amending The Companies Act (“Ley De Sociedades De Capital”) For The Improvement Of Corporate Governance IV. TRANSITIONAL REGIME AND on the directors’ remuneration, the company’s EFFECTIVENESS remuneration policy contained therein shall also be deemed to have been approved. ■■ Act 31/2014 of 3 December entered into force almost in its entirety on 24 December 2014. ○○ In the event that the annual shareholders’ meeting above was not to approve on a ■■ The provisions listed below became effective on consultative basis the report on the directors 1 January 2015 and shall be resolved upon at the first remuneration, the directors’ remuneration policy general shareholders’ meeting to be held thereafter: must be submitted to the general shareholders’ –– Any amendments introduced by this Act with meeting for binding approval, no later than the regard to the remuneration of directors in stock closing of the following year, with effects from companies. For a listed SA, any amendments the subsequent year. regarding the non-delegable powers of the board –– Directors appointed prior to 1 January 2014 may of directors, the board of directors’ performance complete their mandates even if they exceed the review, board committees, audit committee, maximum term of 4 years. appointment and remuneration committee, and remuneration of directors based on their roles or on the performance of their executive duties. V. REPEALING PROVISION –– Any amendments relating to the approval of the ■■ Any equal or lower rank provisions are contrary to directors’ remuneration policy in a listed SA, this Act and, in particular, to Articles 61 bis, 61 ter, as follows: 100.b) ter and b) quáter, and Additional Provision Eighteen of the Securities Market Act 24/1988, of ○○ In the event that the first general shareholders’ 28 July, are repealed. meeting, to be held from 1 January 2015 onwards, were to approve on a consultative basis the report www.dlapiper.com | 09 CONTACTS José Antonio Sánchez-Dafos Ignacio Gómez-Sancha T +34 913 19 12 12 T +34 913 19 12 12 jose.sanchez-dafos@dlapiper.com ignacio.gomez-sancha@dlapiper.com Juan Picón Santiago Hierro T +34 913 19 12 12 T +34 913 19 12 12 juan.picon@dlapiper.com santiago.hierro@dlapiper.com Íñigo Gómez-Jordana Paula Goyanes T +34 913 19 12 12 T +34 913 19 12 12 inigo.gomez-jordana@dlapiper.com paula.goyanes@dlapiper.com Joaquín Echanove T +34 913 19 12 12 joaquin.echanove@dlapiper.com 10 | Act 31/2004, Amending The Companies Act (“Ley De Sociedades De Capital”) For The Improvement Of Corporate Governance www.dlapiper.com DLA Piper uk llp is authorised and regulated by the Solicitors Regulation Authority. 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