Understanding Company Shares

• Shares are traditionally viewed as part of the capital, a set of rights, and a title.

Shares: Key Aspects

• A share represents a fractional part of a company's capital, and its nominal value is derived by dividing the total capital by the number of shares issued.
• Although the nominal value is freely set in the bylaws shares in the same series must possess an identical nominal value; however, companies can issue multiple series with differing nominal values.
• Spanish Companies Act says shares cannot be issued at a value lower than their nominal value, but can be issued higher.
• The issuance premium is the difference between the nominal value and the issue price.
• Issuing shares with a premium enhances the company's net assets.
• Issuance premiums are commonly used in capital increases to stave off dilution for current shareholders.
• Establishing a premium in capital raises to counter dilution is not always used; existing shareholders often hold a preemptive right to acquire new shares.
• The issuance premium does not form part of the capital but is a freely available reserve.
• The reserve can be distributed among shareholders or used to increase capital.

Shareholders' rights

• Shareholder status is tied to share ownership in a public limited company, and one shareholder can be easily replaced by another.
• Spanish Companies Act says shares grant shareholders rights, including economic and political rights.

Economic Rights

• Economic rights include participating in profits and liquidation assets, and the preferential subscription to new shares and convertible bonds.
• A public limited company exists to make a profit, which is given to the shareholders.
• A shareholder's right to engage in corporate gains forms once the General Meeting decides on dividend distributions.
• Therefore, shareholders lack an automatic entitlement to dividend distributions if there are profits.
• General Meeting of Shareholders approves the financial accounts annually and decides how to allocate profits, either as dividends or reserves.
• Dividends are the attributable fiscal year profit for each share, distributed proportionally to paid-up capital.
• Voluntary reserves can be distributed to shareholders at any point through agreement of the General Meetings
• Shareholders can separate from the company in legally defined cases, or as provided in the company's bylaws.

Liquidation Share

• The right of every shareholder to get a piece of the net assets when the public limited company is dissolved.
• This right is proportional to the shareholder's holdings.
• The right is abstract until the General Meeting of Shareholders decides to dissolve and liquidate the company.

Preferential Subscription Right

• This right cannot be removed by statutory provisions.
• The preferential subscription right prevents issuing new shares from reducing the value of the existing shares.
• The preferential right preserves the political status quo
• There are two legal solutions to avoid dilution,
  • Issuing new shares with a premium equal to their real value in every capital increase.
  • Allowing the General Meeting to set the premium freely (or no premium at all); in this case, it is essential that existing shareholders have the preferential subscription right.
• This right extends not only to new shares but also to new convertible bonds.
• The preferential subscription right must be used within a period: at least fifteen days for listed companies and one month for non-listed companies.
• The shareholder has the right to subscribe to a number of new shares or convertible bonds proportional to the nominal value of the shares they hold.
• Preferential subscription rights are transferable

Issuance Of New Shares

• The company's decision to issue new shares without foreseeing incomplete subscription means the issuance of new shares will be void.
• Directors must refund the contributions made by the subscribers
• The company's decision to issue new shares, which includes the possibility of incomplete subscription, means the capital increase will be considered completed for the shares actually subscribed.
• Spanish Companies Act says there are exceptions to the shareholder or bondholder's preferential subscription right,
  • Merger by absorption or the absorption of assets from another company.
  • Conversion of bonds into shares.
• Capital increase could exclude (partially or entirely) the preferential subscription right based on the company's interest.
• Spanish Companies Act on this point is quite logical: it allows the exclusion of the right, but because a sufficient premium is required, the dilution of value is prevented.
• However, in listed companies, the Spanish Companies Act allows the issuance of shares with exclusion of the preferential subscription right without the need for an expert's report, if it does not exceed 20% of the share capital.

Political Rights

• Political rights include the right of information, attendance, and vote at the General Meeting of Shareholders, and the right to challenge corporate resolutions.

Right Of Information

• Shareholders can get information about the company.
• The company must provide the balance sheet, the profit and loss account, the statement reflecting changes in equity during the period, the cash flow statement, the explanatory notes, and the management report.
• The right granted to the shareholder is quite limited, as they are not allowed to check the accounting records but rather only the documents prepared by the directors.
• Shareholders can request reports or clarifications from the directors before or during the General Meeting of Shareholders.
• However, this right is subject to some limitations and can only be exercised during a General Meeting
• Failure to fulfill the information obligation requested by the shareholder before the General Meeting makes the related decision subject to challenge, as long as the information is essential for exercising the right to vote.

Types of Shares

• Shares either grant identical or different rights.
• Ordinary shares grant holders the standard rights and obligations.
• Privileged (preferred) shares grant special advantages/privileges.
• Privileged shares can be created at the time of incorporation, or later, and modifying the corporate bylaws.
• Only property rights (such as participating in the company's profits/liquidation) can be subject to privileges.

Privileged Shares

• Spanish Companies Act regulates in detail the regime for shares that grant their holders the right to receive a predetermined dividend before the dividends are paid.
• The law establishes two basic rules to protect preferred shareholders:
  • Unless the bylaws provide otherwise, the company will be obliged to agree on the distribution of dividends if there are distributable profits.
  • Listed companies must distribute dividends (mandatory and cannot be waived through bylaws).
• Under no circumstances can ordinary shares receive dividends from fiscal year profits that relates to the privileged dividend.
• Privileged shares cannot violate certain limits.

Restrictions Of Privileged Shares

• Prohibition of unfair agreements that exclude shareholders from participating in profits/losses.
• The right cannot result in the right to receive interest.
• Prohibition of preference regarding subscription rights where the Spanish Companies Act restricts any breach of proportionality between preferential subscription rights and the nominal value of the shares.
• Prohibition of preference regarding voting rights where the right to vote must be proportional to the nominal capital subscribed
• It is not permitted to create shares with multiple votes.

Loyalty Shares

• For listed companies, "loyalty shares" gives shareholders the right to vote twice, provided the holder has been the same shareholder for two consecutive uninterrupted years.

Voting Rights

• Bylaws can limit the maximum number of votes a shareholder can cast.
• This facilitates minority protection.
• The bylaws also establish a minimum number of shares required to attend the General Meeting and vote.
  • In non-listed companies, the bylaws cannot demand a shareholder to hold over 0.1% of the share capital to attend.

Shares Without Voting Rights

• The Spanish Companies act allows the issuance of shares without voting rights.
• The total number of shares without voting rights cannot exceed half of the paid-up share capital.
• Although shares without voting rights cannot vote at the General Meeting, they retain all other granted rights: information, attendance, and right to challenge social agreements.
• These shares are entitled to a minimum annual dividend, which can be either fixed or variable.
• If a capital reduction is needed because of losses, shares without voting rights will not be affected the reduction exceeds the nominal limit of voting shares.
• In case of liquidation, shareholders with non-voting shares have priority over other shareholders in receiving their liquidation proceeds.
• Any statutory change that directly or indirectly affects the rights of non-voting shares will require the agreement of the majority of the non-voting shares involved.

Redeemable Shares (acciones rescatables)

• Only exist in listed public limited companies (sociedades anónimas cotizadas) and are designed to be redeemed/repurchased by the company at predetermined conditions set at the time of issuance.
• May be issued for up to a quarter of the company's capital and must be fully paid at the time of subscription
• Redeemable shares provide additional financing and are particularly useful for companies issuing preferred/non-voting shares.
• Spanish Companies Act establishes specific regulations regarding the right of redemption,
  • Issuance Agreement: Must specify under which conditions the redemption right can be used, including the price for redeemed shares.
  • Redemption Authority: Can be used by either the issuing company, shareholders, or both. -Company's Redemption Right: If it is exclusively granted to the issuing company, it cannot be used before three years.
  • Amortization: Redemption must be carried out in a way that does not reduce the protection of the company's creditors.
• Redeemable shares help companies manage temporary capital needs and provide flexibility, particularly for special financial circumstances/strategic decisions (dividend/interest rate changes).

Shares As Securities

• Shares are considered securities and documented in traditional and electronic forms.
• Traditional form: Representation of shares is through physical certificates (individual or multiple certificates) (títulos).
• These certificates must be either bearer shares (al portador): ownership is determined by possession or registered shares (nominativos): the shareholder is named.
  • Signed by one+ directors.
  • The certificates must be numbered and entered into a stub book (libro talonario).
• Electronic recordings (book entry): Electronic registry replaces physical certificates.
  • Issued upon issuing shares and records names/subscription details
  • All subsequent transfers of shares are recorded ensuring electronic record of shareholders.
  • Listed companies are required to use this book-entry system.

Traditional Form. Certificate

• Shares represented by a certificate constitutes a security, which has several consequences:
• Helps the legitimate holder to proof their status as a shareholder.
• The share enables the transfer of shareholder status to a third party.
• The shares can be bearer (the holder is the bearer of the title) or registered (holder is the person named on the title).
• Companies with registered shares must keep a registry book in which shareholders, transfers, and any real rights/encumbrances are recorded.
• Public companies can freely choose whether their shares will be registered or bearer form.
• Shares must be registered if the shareholders have not paid at least 75% of the amount, when there are statutory restrictions to share transfers, and when shares carry additional obligations.
• If required by special laws (e.g., banks, financing companies, pharmaceutical companies, shipping companies, advertising companies, etc.).

Book-Entry Registration

• Book-entry registration of shares uses an electronic accounting system and is managed by a specialized entity
• It is assumed that whoever appears as the legitimate holder in the accounting registry entries will be considered legitimate shareholders to exercising shareholder rights.
• A shareholder may get a certificate confirming their shareholder status from the entity managing the registry. -The book-entry registration system is reversible (with prior approval from the CNMV).
• Shareholder status is transferred via a negotiable instrument/book entry.
• Shares are inherently transferable.
• The Spanish Companies Act only limits the transfer of shares before they are registered in the company's Commercial Registry or the capital increase.

Regime

• Transferring shareholder status requires a title and traditio.
• There is no special rule for the title, and any contract transferring property can be valid.
• The traditio will vary depending on how the represented shares are.
• Bearer shares are transferred by simple delivery.
• Electronic Book-Entry Shares are transferred through an accounting entry.
• Transferability of shares is a fundamental principle that defines a public limited company.
• There are two types of limitations on the free transferability of shares: statutory and agreements between shareholders outside the bylaws.
• Bylaws (articles of association) can constrain the free transfer of shares in a public limited company and are prohibited in publicly listed companies (sociedades cotizadas).

Terms of Statutory Limitations

• The limitation must be established in the bylaws and the shares must be nominative.
• The limitation can never imply a general prohibition of the transfer of shares.
• The company may prohibit the transfer of shares for a period not exceeding two years from the date of the company's incorporation.
• Types of statutory limitations include consent and preemptive rights clauses.
• Consent clauses make the transfer of shares conditioned on the prior approval of the company. This approval, unless otherwise specified, must be granted or denied directors within two months from the request.

Preemptive Rights Clauses

• Grant shareholders, a third party or the company itself a preemptive right over the shares in the company. They also present an issue in determining the price.
• Effects of transfers of shares in violation of statutory limitations mean the company will not recognize the transferee as a new shareholder, and the transferor will remain the shareholder.
• Limitations agreed among shareholders are valid between them but not against the company.
• A company can get rights over shares.

Co-Ownership

• Co-ownership refers is when ownership of shares are being shared by two or more individuals.
• The Spanish Companies Act requires co-owners to appoint a representative and makes them jointly/severally liable for obligations to the company.

Usufruct

• The legal right granted to a person to use/enjoy the property/assets of another person without altering/damaging the substance of that property.
• In this context, the usufruct over shares presents its own specific issues.
• Regarding shares, the Spanish Companies Act establishes that the general rule (unless otherwise stated in the bylaws) means the shareholder status within the company resides with the bare owner.

Pledge

• Establishing a pledge over shares requires the execution of a corresponding pledge agreement along with the delivery/transfer of the shares.
• Pledges are typically executed before a notary but a pledge does not produce effects vis-à-vis third parties unless certainty of the pledge is recorded through a public instrument.
• Generally the shareholder status belongs to the owner during a pledge, unless said otherwise in the company's bylaws.

Transactions Involving The Company's Own Shares

• The Spanish Companies Act established a strict legal regime regarding transactions and what companies can do with company shares.
• There are three distinctions needed: what the company can do with its own shares, what it can do with shares of its parent company, and what it can do with shares of any other company.
• A company cannot subscribe to its own shares when expanding capital.
• They can acquire validly subscribed shares if they get authorization from the General Meeting to do so.
  • The amount of the shares that the company shares cannot exceed 20% of the share capital and it is dependent on capital levels.
• The following acquisitions may be carried out freely without any payment: when shares are acquired/as part of a capital reduction agreement, as a result of a universal succession of assets, are fully paid-up/acquired free of charge, and if the shares are fully paid-up/acquired due to judicial reward.
• All of the above the company has to sell must be within a maximum period of three years otherwise a sanctioning regime will apply.

Acquisition Of Shares Of The Parent Company

• A corporation is prohibited from original acquisition and cannot subscribe to shares of its parent company.
• A derivative acquisition such as acquiring shares of its parent company cannot be done unless the aforementioned requirements for such acquisitions are met.

Company Regulation

• A company is subject to a strict financial regime:
  • There is a suspension of political rights associated with the shares
  • The situation must be detailed in the management report.
• The Spanish Companies Act prevents the evasion of the legal regime due to use of intermediaries or financial assistance in acquiring shares

Acquisition of Shares Of Another Company

• A company can buy shares in another company, but there are some limitations on them:.
• If >10% of another company is acquired the shares must be communicated and voting rights are suspended.

Sanctions

• There may be an administrative perspective and a substantive law, and both have severe penalties
• A fine up to the nominal shares can be given.
• Founders must pay for all promotional shares and acquisitions are not valid.
• All agreements that have had financial isstance can said to be be void, the acquisition shares are sold and an agreement has to be void as well.