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CHANGES IN THE REGIME GOVERNING RESTRICTIONS ON VOTING RIGHTS AT SPANISH LISTED COMPANIES

October 2010 - Corporate & Commercial. Legal Developments by Garrigues.

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On June 17, 2010, following a rough and eventful passage through Parliament, the Lower House of the Spanish Parliament finally approved a transcendental amendment to the Spanish Corporations Law (to article 105.2) affecting only listed corporations: a prohibition on voting ceilings for a same shareholder (or companies in the same group), regardless of the number of shares they own. 

To date the Spanish Corporations Law allowed corporations (both listed and unlisted) to specify a voting ceiling in their bylaws for a same shareholder or companies belonging to a same group.  This rule dates back to 1951 and the provision was originally intended as a mechanism to make shareholders’ meetings more democratic and a defense instrument for minority shareholders, by not allowing one shareholder to garner an excessive amount of power and control the company single-handedly, and compelling the shareholders to reach agreements and adopt joint decisions with the other shareholders.

These voting ceilings were, in any event, voluntary, and each company could decide how they were to be implemented, if it considered they suited their particular arrangement of affairs, by including them in their bylaws. Thus, for example, in 2009, six companies on the IBEX-35 had ceilings of this type in their bylaws, and the usual choice was to place 10% ceilings.

With this amendment, however, Spanish law moves away from the flexibility it has contained to date and aligned itself with the small number of European countries, Germany and Italy mainly, that prohibit voting ceilings in the bylaws of listed companies. I must clarify at this point that the amendment relates only to listed companies, as occurs in Germany and Italy.  Unlisted companies will still be allowed to have ceilings of this type.

The immediate origin of this reform was in a proposal filed in February of this year by the Spanish Socialist Parliamentary Group in which the amendment to article 105.2 of the Spanish Corporations Law was intended to prohibit, for all kinds of corporations, any bylaw clauses that contained voting ceilings for a same shareholder. The justification for this proposed reform was based on the views of corporate/commercial law commentators, corporate practice and recommendation number 1 in the Unified Code of Good Corporate Governance. The bottom-line argument was that the elimination of these ceilings would have to have a healthy effect on transparency in the securities market, by contributing to reestablishing consistency between the amount of risk assumed and the amount of control exerted, stemming out of a necessary acknowledgement of the principle of proportionality.

The submission of this proposed reform sparked an animated debate both in legal circles and in the economic and business world between those in favor and those against the reform.  There was also criticism in relation to the hasty preparation of the reform and the lack of a more lengthy analysis and an appropriate debate more in keeping with the transcendence of the proposed amendment. 

Among those in favor of eliminating the voting ceilings for a same shareholder it was argued that clauses of this type are used by directors as a protection mechanism which enables them to secure control over the company and defend themselves in relation to unsolicited tender offers or shareholders taking up large stakes which could jeopardize their position at the helm of the company.  This argument is, nevertheless, controversial, considering the provisions of the new law and regulation on tender offers in Spain, fully adapted to the EU legislation.

On this subject, the Spanish Unified Code expressly recommends that the bylaws of listed companies not contain voting ceilings for a same shareholder, or any other restrictions that hinder control being taken of a company by acquiring its shares on the market, and it mentions that the existence of a market with active control is a first-rate stimulus for the good governance of companies which therefore makes it advisable for companies to turn away from placing barriers or protection mechanisms in the bylaws such as voting ceilings.

The Unified Code does, however, acknowledge that these measures can be justified in exceptional cases, in particular where put in place when a company is first listed or where they have been approved by a very high percentage of the capital stock.

Those in favor of keeping the status quo argue that clauses of this type with voting ceilings for a single shareholder protect the interests of small investors, primarily at companies where there is a high level of floating capital, since, in the absence of such clauses, a minority could gain control of the shareholders’ meeting, if a large majority of the shareholders are absent, which usually occurs. Thus, placing voting ceilings can be an instrument to strengthen stability in management and prevent a situation where, de facto, a listed company can be controlled through a large ownership interest which is nevertheless less than 30%, without therefore the obligation to submit a tender offer to the benefit of all of the shareholders.

They also believe that voting ceilings are not really an obstacle to tender offers being made to acquire control over companies, as many of the companies that have ceilings of this type also have in place counteracting measures in the event of tender offers (as is common practice in France, for example) and as all tender offers can be made conditional on the elimination of the ceiling as has occurred on several occasions in our recent practice.

Lastly, they consider that just the opposite trend currently holds sway in Europe, and most countries continue to allow clauses of this type.  Thus, in relation to the prohibition option taken by Germany and Italy (and now Spain), they argue that most European countries continue to allow voting ceiling clauses to be added: Great Britain, Sweden, Portugal, the Netherlands, Denmark and France (also France has a hybrid system with exceptions to the validity of such clauses in the event that a tender offer is made on the company.

As a result of this debate, the amendment has been confined, as mentioned above, to listed companies and, thus, while this type of bylaw clauses continues to be lawful for unlisted companies, the new wording of article 105.2 of the Spanish Corporations Law states that in the case of listed companies, any bylaw clauses that, directly or indirectly, place a voting ceiling for a same shareholder or companies belonging to a same group will be null and void as a matter of law.

The fact that the law now lays down a different system for listed and unlisted companies makes it necessary to establish some kind of provision for unlisted companies with voting ceiling clauses that apply for their shares to be listed on a securities market.  The lawmakers chose to allow the voting ceiling to be kept for up to one year.  Thus, the new article 105.2 of the Spanish Corporations Law provides that where the shares of a company whose bylaws contain voting ceiling clauses are admitted for trading on a securities market, that company must adapt its bylaws, by eliminating those clauses, within up to one year from the date of admission to listing.  If a company breaches this obligation to adapt its bylaws within a year, the voting ceiling clauses will be held not to exist.

And the last point to mention is the transitional regime.  The approved amendment will only enter into force one year after the law has been published in the Official State Gazette.  At the time of writing this article the law has not been formally published, although this is expected to take place within this second fortnight of June, which implies that the voting ceiling clauses in the bylaws of listed Spanish corporations will not become invalid until the end of June 2011, and therefore it will only take effect in practice at the shareholders’ meetings held after then.

 


Fernando Vives Ruiz
Managing Partner of Garrigues