SPAIN Law and Practice Contributed by: Miguel Cases, Toni Barios, Joaquín Fabré and David Navarro, Cases & Lacambra
5.4 Restrictions on the Target Spanish companies are prohibited from advancing funds, granting loans, providing guarantees or secu- rity interest, or providing any form of financial assis- tance to a third party for: (i) in case of private limited liability companies ( sociedades limitadas ), the acqui- sition of its own shares or the shares in any of its group-affiliated companies; and (ii) in case of public limited liability companies ( sociedades anónimas ), its own shares or shares of its controlling entity. Considering Spanish law does not provide for any whitewash procedure mechanisms and that it does not clarify a specific duration for which such restric- tion may apply, the most conservative approach is to consider that debt tainted with a financial assis- tance prohibition may include any refinancing of debt incurred for acquisition purposes. The implications for contravening these financial assistance guidelines can be grave. Directors might incur liability (civil and/or criminal) and the financing transactions, guarantees, and/or security interest may be rendered null and void. There are several mitigation measures and financing structures against these prohibitions that have been implemented in order to mitigate financial assistance prohibition risks, although these need to be reviewed on a case-by-case basis. While the central intent of this rule is to protect a com- pany’s assets, the applicable law for assessing impli- cations should logically be that of the target entity. Nonetheless, discussions persist about its relevance to non-Spanish target companies. 5.5 Other Restrictions In addition to the restrictions set out in 5.4 Restric- tions on the Target with respect to the corporate ben- efit and financial assistance prohibition, granting of security may also need to be approved by the share- holders if the assets given as security are considered essential for the company. Assets are presumed essential when their book val- ue represents more than 25% of the asset’s value. In addition, other limitations may be included in the company by-laws or shareholders’ agreements.
While the Spanish legal system recognises the struc- ture of corporate groups and the legitimacy of intra- group transactions, it underscores the importance of preserving the independent existence and operational autonomy of individual companies. In this spirit, direc- tors must perpetually prioritise their company’s spe- cific interests, lest they face potential liabilities. The notion of “corporate benefit”, although not overtly elucidated in Spanish law, is pivotal in the realm of guarantees or in rem security interests. It is essential that, when Spanish entities contemplate giving guar- antees or establishing security interests, there exists a corporate advantage. This does not mandate the guarantor’s direct involvement as a borrower in the financing continuum, but the benefit should be mani- fest. Given the emphasis on individual company interests, the legal framework allows for the provision of down- stream, upstream, or cross-stream guarantees in instances where they align with the group’s interests. Nevertheless, the directors of the guarantee-issuing company should evaluate the corporate benefits derived from such actions, ensuring they do not con- tradict the guarantor’s interests. Downstream guaran- tees often present a clearer case for corporate benefit since they can enhance future dividend flows for the parent company and bolster the subsidiary’s viability. On the other hand, upstream or cross-stream guaran- tees present a challenge, necessitating demonstrable and clear compensation to the guarantor. Such com- pensation can come in different forms and at different times. Thus, determining the alignment of a guarantee or security with a company’s best interests demands a case-specific analysis, encompassing various facets: • indirect benefits accrued by the guarantor; • financial robustness of the Spanish guarantor and the parent group; • direct and tangential advantages derived from the financing; • financing proceeds bolstering the guarantor’s liquidity or fortifying the group’s long-term stability; • approval from shareholders and management bod- ies; or • access to more financing and on better terms within the group.
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