Corporate Law: Partnership Agreements

Introduction to Corporate Law

• The legal structure for entrepreneurs can be individual or a legal entity.
• Individual was historically the predominant form.
• Legal entities are increasingly favored due to capital needs, legal mandates, liability limitation, and tax benefits.
• Legal entities are divided into non-commercial/corporate and corporate companies.

Partnership Agreements

• Articles 116-124 of the Spanish Commercial Code offer a general, but somewhat outdated, theory of partnership agreements.
• Articles 1665-1708 of the Civil Code provide a more extensive, though not always effective, regulation.
• The Civil Code defines a partnership in article 1665, while the Commercial Code provides its definition in article 116.
• Both definitions include two key elements: contribution of goods/industry (activity) to a common pool and the intention to make a profit.
• The profit motive distinguishes partnerships from entities like associations and foundations.
• Pooling of assets characterizes partnership contracts, where partners contribute to a common fund for a shared goal.
• Partnership agreements differ as they have aligned interests and establish lasting relationships.
• The parties in a partnership aren't facing each other with opposing interests, seeing as they are positively or negatively (+ or -) aligned.
• The non adimpleti contractus exception does not apply; partners can’t refuse obligations if another partner breaches.
• The tacit resolutory condition (condición resolutoria tácita) doesn't apply; breach doesn't wind up the company, but the breaching party is excluded.
• Defects in consent (vicios de consentimiento) only affect the specific declaration if there are two valid declarations, or one from a sole member.
• A single person can establish a company, moving past the traditional idea of multiple partners.
• Directors/managers must protect the corporate interest, considering workers, suppliers, customers, and communities.
• Corporate interests include the interests of workers, suppliers, customers, creditors and even the communities where the company operates.

Legal Formalities and Agreements

• Spanish Commercial Law outlines partnership agreements, requiring a public deed (escritura pública) with bylaws.
• The public deed includes the business purpose and the bylaws that govern its operations
• Registration with the Commercial Registry (Registro Mercantil) is required for foundation and amendments.
• Agreements beyond the founding documents are common, known as shareholders’ agreements (pactos parasociales) or reserved agreements (pactos reservados).
• In non-listed companies, these agreements are valid among partners, but unenforceable against the company.
• Publicly traded companies must disclose these agreements to the CNMV (National Securities Market Commission) and register them.
• Agreements cannot remain secret in publicly traded companies.

Commercial Company as a Legal Entity

• Registration grants a commercial company legal personality, creating a new entity distinct from its partners.
• Full legal capacity allows the company to enter contracts, even with partners, and perform acts beyond defined bylaws.
• Limits on corporate purpose affect directors' powers; shareholder approval is needed for activities outside this purpose.
• Companies have patrimonial autonomy, with assets distinct from partners.
• There is a separation of liabilities, the company and its partner are responsible for their own obligations.
• Companies must acquire Spanish nationality and a unique corporate name
• Companies are required to set up governing bodies

Piercing the Corporate Veil

• Courts may disregard a company's separate legal personality to hold shareholders/directors liable, especially when fraud occurs.
• Courts set aside a company's separate legal personality in order to hold its shareholders, directors, or other parties personally liable for the company's actions or debts.
• Courts may pierce the veil when assets are mixed, the company is underfunded to defraud, or formalities are lacking.

Irregular Companies

• Companies operating without registration are relatively common
• These are distinct from companies in formation, which intend to register.
• There is a public deed and an intention to register, with a lapse of time until the registration occurs, but the company is already operating.
• Contracts with third parties are valid to protect those acting in good faith.
• Partners are jointly and unlimitedly liable for the company's debts.

Types of Companies

• The Commercial Code allows both typical and atypical companies
• The Corporate Companies Act restricts forming new types.
• Historically, the public limited company (sociedad anónima) was the most common in Spain.
• Since the 1995 amendment, the limited liability company (sociedad limitada) has become more popular.
• Public limited companies are mainly for large entities listed on the stock exchange.
• Public limited companies apply to those with special statutes, like credit institutions, insurance companies, securities entities, security firms, etc.
• Capital in public limited companies is divided into freely transferable shares (acciones).
• Partners are not personally liable for debts, and management is appointed regardless of shares.
• Limited liability companies (sociedad limitada) are the most common, featuring shares (participaciones sociales) subject to partner right of refusal.
• Partners are not personally liable for debts, and management is appointed regardless of shares.
• Limited liability companies are regulated by the Spanish Corporate Companies Act.

European Public Limited Liability Company (SAE)

• The European public limited-liability company is derived from the public limited company.
• Minimum capital is 120,000 euros.
• Establishment can occur through merger, as a parent, creating a subsidiary, or transforming a public limited company.
• Regulations depend on the country of registration.

General and Limited Partnerships

• Both general and limited partnerships are traditional company structures.
• General partnerships' partner status is non-transferable without consent, and partners are jointly liable for debts.
• Management is exclusive to partners.
• Regulated by the Spanish Commercial Code.
• Limited partnerships have general partners, liable for debts and management, and limited partners, able to transfer shares but not manage.

Cooperatives and Economic Interest Groupings

• Cooperatives are organizations based on ideological principles, meeting member/community needs.
• Cooperatives are regulated nationally by the Cooperatives Act of 1999 and regionally.
• Economic Interest Groupings (AIE) are second-tier companies where members conduct economic activity together.
• An example being, two electric companies purchasing coal together, or five automobile manufacturers producing screws together.
• Members are jointly liable for debts, management can be members or third parties, governed by their law of 1991 and general partnership rules.

Corporate Name, Registered Office, and Website

• The corporate name identifies the company in legal transactions and must be unique.
• Companies can only have one name, which they must use in all their relationships
• A certificate from the Commercial Registry verifies name uniqueness.
• Names must not mislead about the company's identity, type, or nature.
• Corporate names can be objective, subjective, or mixed.
• Companies must have an office in Spain if their primary activity is there.
• If the office is not established in Spain at the time of incorporation, the company will not have Spanish nationality and cannot be created under Spanish law.
• Office location must be in company article of association
• A website requires shareholder agreement and registry in the Commercial Registry.
• Directors and the company can be liable for website interruptions (unless due to force majeure).
• Listed companies must have a website.

Groups of Companies

• Corporate groups involve interconnected companies under common ownership or control, often led by a parent entity
• Subsidiaries are legally distinct, but controlled by the parent company.
• Control is through majority voting rights or shareholder agreements.
• Spanish law lacks general regulation for corporate groups.
• Subsidiaries can isolate risks; groups emerge from acquisitions.
• An example of a group emerging from acquisition is Banco Santander's acquisition of Banesto
• Financial statements of the parent company should be consolidated to present a accurate view.
• To address this, Articles 42 and following of the Spanish Commercial Code require groups to prepare consolidated financial statements.
• Consolidated financial data of the parent and its subsidiaries should be made available.
• Should all companies within a group be liable for each other's debts?
• The approach to this should be aligned to the piercing the corporate veil approach in the event of certain conditions
• Conflicts can arise between minority shareholders and wider group interests, which can be detrimental to minority shareholder interests.

Nationality

• Being Spanish requires registration in Spain and constitution under Spanish law.
• S.A. and S.L. companies must have their registered office within Spain.
• According to Article 8 of the Spanish Companies Act, any S.A. (public limited company) or S.L. (limited liability company) constituted in Spain must necessarily have its registered office within the national territory.

Multinational Companies

• Multinational companies involve a parent company controlling subsidiaries in foreign countries.
• Each subsidiary holds that state's nationality that it is incorporated in.
• Economic actions may conflict with host states, where subsidiaries have independent liability.

Single-Member Companies

• Single-member companies have only one shareholder, granting full ownership and control.
• Spanish law allows both limited liability (sociedad limitada) and public limited companies (sociedad anónima).
• The situation of being a single-member company must be stated in documentation and advertising.
• As long as the situation of being a single-member company persists, the company must expressly state this condition in all its documentation, correspondence and invoices, as well as in any advertisements that must be published by legal or statutory requirement.
• Single-member company key characteristics are: 100% ownership, limited liability (protection of personal assets), the single member being able to be the sole director or nominate others, and legal independence.