UNIT 4 Capital Companies PDF

NOTES ON SPANISH BUSINESS LAW UNIT 4 Capital companies: corporate bodies (I) Bachelor in Business Administration – BBA Subject: Business Law Year: 2024-25...

NOTES ON SPANISH BUSINESS LAW UNIT 4 Capital companies: corporate bodies (I) Bachelor in Business Administration – BBA Subject: Business Law Year: 2024-25 Publication for the exclusive use of ESADE Business and Law School. Total or partial reproduction is forbidden without permission: [email protected] UNIT 4 Capital companies: corporate bodies (I) 1. Corporate bodies of the capital companies 2. The general meeting. Concept and Competences. Types 3. The managing body. Concept and Duties. Organizational models LEARNING OBJECTIVES: The fact that capital companies have their own legal personality does not prevent natural persons from making decisions related to both internal operations and relationships with third parties. The powers and duties of said natural persons will be specified by law according to their status in the company. Students will learn int this unit about the governing bodies of capital companies, empowered by the legal system to adopt decisions associated to internal operations and external representation. These bodies are namely the general meeting (members´ meeting) and the managing body (the directors). Knowing how to organise governing bodies and understanding their legal regime is extremely important for the operations carried out by these kinds of companies, as the decisions adopted by these bodies will determine the company’s participation in the market. The way they operate is an essential learning objective for students, so as to know how capital companies behave. 1 1. Corporate bodies of the capital companies We saw in previous units that one of the legal elements that characterises capital companies is that the legal representation of the company and the ownership of shares or stakes can correspond to a different person. In other words, the person or persons who oversee the company management do not necessarily have to be members. Another matter is that the same person may be both, but under the principle of the separation of the organic corporate structure, they are two different bodies: one formed by members, acting as such; and the body that holds legal representation and is in charge of company management, known as ‘managing body,’ often shortened to ‘directors.’ Member Legal Representative There is a considerable difference between duties, rights, and obligations and, in short, the legal regime of company members and managing body members, in such a way the organisational structure is defined by the Spanish Capital Companies Act (Ley de Sociedades de Capital, shortened here to LSC), which specifies the rights and obligations corresponding to each one of the duties (company members and directors). The LSC also specifies the necessary elements to enable each body to make valid decisions. All this is notwithstanding the fact that the company by-laws (articles of association) modulate the aspects in which the law allows a certain degree of discretion, thus providing flexibility to address each company’s specific needs. Before dealing with the definition, features, and operations of each one of the governing bodies, it is necessary to understand the hierarchical order held by each one. 2  It is evident that the ‘indirect’ owners of the company’s business assets are the members; that is, by owning the shares or stakes that make up the Capital, a member is indirectly an owner of the value of the company: the company’s net assets (equity). We must not be confused by the fact that the owner of the company’s equity (of the assets and liabilities) is the company itself, as explained in previous units. However, from a financial perspective, it is understandable that to adopt decisions it is the members, who have invested their assets to acquire shares or stakes, who are at the highest hierarchical level in terms of organisation. However, it is important to know that although members have a higher hierarchical level, it does not grant them the power to make decisions that result in obligations or rights for the company. Said power corresponds to the directors. We will see that by way of regulated procedures it is the members who choose who is going to hold the power. Members, acting as such, do not have the power to represent the company, although they choose the directors who will represent and manage it. Under this principle, the law regulates two governing bodies, without which a company is unable to operate: the general meeting, to form the members’ wishes, and the managing body, to direct the company’s actions in business activities and its relationship with third parties. (Article 159 et seq. LSC and article 209 et seq. LSC, respectively). Since the legal regimes applicable to both bodies are remarkably similar for public limited companies – Plc. – (sociedad anónima), and private limited companies – Ltd. – (sociedad de responsabilidad limitada), they will be explained together for both types. Nevertheless, since it is not an absolute legal equivalence, in the sections below that explain the legal regime for each body, the most notable differences will be pointed out....The fact that members choose the directors responds to a decision of trust. The person or group of people appointed are deemed to be the most suitable to manage the company, in other words, they will manage the members’ investment. For this reason, the choice is largely based on the 3 trust in the person being appointed. On occasions, in small and medium enterprises the members themselves are appointed as directors, although, as already mentioned, they will exercise different duties, depending on whether they act as members or directors. In large corporations when a plurality of directors is appointed, there is usually a certain proportionality when it comes to placing trust in each person. Proportionality in the sense that the members or groups of members choose the people who can be trusted the most; therefore there will be a plurality of directors representing the plurality of members. 4 2. The general meeting. Concept and competences. Types Concept of general meeting The general meeting is the company body that constitutes the will of the members. As will be seen below, members have certain powers that enable them to adopt decisions. To exercise these duties, the legal system stipulates that they must be formalised by means of decisions adopted together in which, as a rule, the set of members representing the company’s Capital may participate. For this purpose, the LSC establishes that to make decisions a plurality of formalities must be fulfilled, and the members must meet and put forward the matters to be decided, at the democratic whim of the members attending the meeting. Said meeting is known as a general meeting (article 159 LSC). By legal definition, a general meeting is a meeting of members who adopt decisions on matters whose competence is reserved to the general meeting by majority vote, as defined by law or the company by-laws (articles of association). Consequently, all the members, including any dissenting or any not attending the meeting, are bound by general meeting decisions. As will be seen below, the law imposes specific formalisms for the valid constitution of the general meeting. As a result, failure to meet any of the legal requirements could render the decisions adopted invalid.1...No member alone may exercise the competences granted to the general meeting by law. Although a single member owns a percentage of Capital 1 The reasons that justify bringing a claim against decisions adopted by the general meeting due to it not being validly constituted are shown below. 5  that enables them to unilaterally adopt any decision (for example, with a percentage of more than 50%) said circumstance does not imply that the legal requirements need not be satisfied to enable members to adopt decisions, as a purpose of the law is to protect minority members. The sole exception is the case of sole proprietorship. The fact there is only one member enables them to exercise the duties of the general meeting by themeselves. Competences and types of meetings The general meeting vests members with a series of competences that entitles them to deliberate and adopt decisions. These powers are explicitly enumerated by law and have a limited nature. In other words, a duly formalised general meeting in which its decisions are validly adopted considering formal requirements is not authorised to adopt decisions that do not form part of the legal competences that have been assigned to it. Listed below are the competences of the general meeting, set forth in article 160 LSC: a) Approval of the financial statements, the distribution of earnings and approval of company management. b) Appointment and removal of directors, liquidators and, where necessary, auditors, as well as the institution of liability action against any of these persons. c) Changes in the company by-laws. d) Capital increase and reduction. e) Removal or limitation of pre-emptive rights to take stakes or subscribe shares. f) Acquisition, disposal, or contribution to another company of core assets. Assets are deemed to be core assets when the transaction amount exceeds 25% of the carrying amount of the assets on the last approved balance sheet. g) Transformation, merger, division or global assignment of assets and liabilities; as well as the transfer of the registered office abroad. 6 h) Company dissolution. i) Approval of the final liquidation balance sheet. j) Any other matter stipulated by law or the company by-laws. It can be surmised after reading the competences that there is a difference between those of a recurrent nature and those that are not going to be exercised repeatedly over time. Under this difference, the LSC distinguishes two general types of general meetings: ordinary and extraordinary general meetings. In such a way decision in the scope of competences considered ‘ordinary,’ which are necessarily going to be exercised in a recurring manner, are adopted in the ordinary general meeting; therefore, exercising the remaining competences will take place in extraordinary meetings. Specifically, pursuant to article 164 LSC, ’the ordinary general meeting must be duly convened and meet within the first six months of each fiscal year to approve company governance and the financial statements for the preceding year, as appropriate in both cases, and approve the distribution of earnings’; that is, the competence of the general meeting set forth in article 160 a) LSC. The deliberations and, where relevant, decisions related to the remaining competences set forth in article 160 LSC are conducted in the extraordinary general meeting (article 165 LSC). Procedure for convening a general meeting in a valid manner With the purpose of furnishing general meeting decisions with a binding nature, the LSC establishes a procedure to be conducted before and during the meetings. The procedure essentially satisfies a plurality of requirements considered necessary by the legislator that consist of the following: members must know that a general meeting is going to be held and be aware of the matters that are going to be treated (which translates into a regulated procedure for requesting members to attend and participate); the validity of the decisions is contingent upon the attendance of minimum number of members; therefore, if there is a ‘low’ representation of shares or stakes the decisions will not be binding (which translates into a minimum attendance: necessary quorum, only for S.A. – Plc. – ); and finally, the regime of necessary majority votes to consider approved a certain matter that will be subjected to deliberation is known ex ante the 7 meeting and in accordance with parameters for a minimum number of affirmative votes (which translates into a regime of necessary majority votes). Convene the members Constitute the general meeting (subject to minimum attendance of members with voting rights for S.A., - Plc.-) The meeting is held: decisions are made according to the majority votes specified by law or the company by-laws (different regime for S.A. and S.R.L. – Plc. and Ltd.) Convening meetings Unless stated otherwise, general meetings, always referring to either ordinary or extraordinary meetings, are convened by the company directors and to consider them validly convened some extremely strict 8 formal and publicising requirements must be met (article 166 et seq. LSC). As we mentioned earlier, the purpose of the requirements is to ensure that members entitled to attend general meetings know that one is going to be convened, and are informed of the date, time, and place where it will be held, as well as the items that are going to be discussed: the ‘agenda.’ Furthermore, the notice of the general meeting must be given sufficiently in advance to enable the interested members, where relevant, to request the convening managing body to provide the necessary information about the items on the agenda. As a rule, notice of the general meeting must be published on the company’s website or, if one does not exist or it has not duly been registered and published, in the Official Journal of the Registrar and in one of the daily newspapers most widely distributed in the province of the company’s registered office. In any case, the company by-laws can establish that the notice is announced by any individual and written communication procedure, which ensures it is received by all the members at their home (registered post, bureau fax, etc.). Between the notice and the expected date of the meeting there must be a period of at least one month in the case of S.A. -Plc.- and fifteen days for S.R.L. – Ltd. - - Ordinary meeting every year on a compulsory basis - When deemed appropriate for the interests of the company The directors will - Whenever imposed by law or it is convene stipulated in the company by-laws the general meeting - Whenever requested by members who represent at least 5% of the Capital - In the event of a mandatory dissolution Notwithstanding the foregoing, there is a particular case when the general meeting will be considered validly constituted to discuss any matter without the need for prior notice: ‘when all the capital is 9 present or represented and the attendees unanimously consent to hold the meeting’ (article 178 LSC). In this case, it is known as a Universal Meeting. The universal meeting is the meeting that, without requiring advance notice, is considered validly constituted to discuss any matter, if all the Capital is present, and the attendees unanimously consent to hold the meeting and its agenda....The truth is that it is impossible to know whether a meeting is universal until it has been held, as this status is acquired with the factual element of the attendance of all the members. Consequently, the responsibility of deciding whether or not to hold a general meeting corresponds to the directors (the managing body), at its discretion, decides if it could acquire universal status. If the meeting were not convened thinking it could be universal but in the end the requirements are not met, the adopted decisions might not be valid due to lack of attendance (below we will see the circumstances that may be challenged in court). Therefore, in legal practice, we only find universal general meetings in companies with very few members and it is possible to ‘guess’ beforehand that they will all attend. Constitution The general meeting is considered validly constituted when it has been convened, but that is not enough in all cases. Although there no minimum attendance is necessary for the general meetings of S.R.L. (Ltd.), that is not the case for S.A. (Plc.) when they must be attended by shareholders, either in person or by proxy, that at least represent a specific percentage of Capital. To validly constitute a general meeting of S.A. (Plc.), a quorum calculated in terms of the percentage of Capital is required. 10 Two reasons will make this quorum vary: the items that are going to be discussed and whether it is the first or second call. Without entering details about the necessary minimum attendance percentages for each item to be discussed, we can infer that a special, stricter quorum is required for deliberating on any change in the company by-laws, the conversion, merger or division of the company, or the assignment of liabilities (article 194 LSC). In the event of failure to reach a quorum in the first call, a second call will be made in which the required minimum attendance will be lower. It must be remembered that we are referring exclusively to S.A. (Plc.) since the valid constitution of meetings of S.R.L. (Ltd.) does not require a compulsory minimum attendance. …When publishing the announcement of the general meeting of a S.A. (Plc.), it is widespread practice to include the date and time of an eventual second call; otherwise, it would be necessary to convene the shareholders again once it has been confirmed that the required quorum for the first call has not been reached. Students who would like further information about minimum attendance in general meetings can see the required percentages of Capital in articles 193 and 194 LSC. Holding the general meeting Once the members have convened in the place, on the date and at the time stated in the announcement, it is time to hold the general meeting. First, a list of attendees is drawn up (members present in person or duly represented), which can be used to verify whether the necessary quorum has been reached in the case of S.A. – Plc.-, and a chairperson and secretary will be appointed. If the meeting is understood to have been validly constituted, the chairperson opens the deliberations and subsequent votes on each one of the items included in the agenda established in the announcement. 11  It is only possible to validly adopt decisions in the meeting on matters expressly included in the agenda, with two exceptions: the forced separation or removal of the directors, and the institution of liability action against any of these persons. In a comparable manner as regards the necessary minimum attendance, there is also a regime of necessary majority votes that governs the valid adoption of decisions, although, in this case there is a legal regime of majorities for both S.A. and S.R.L. To calculate the sufficient majorities to approve matters, the governing criterion is to differentiate the necessary aye votes according to the measures to be adopted, with a different regime of majority votes for S.A. (Plc.) and S.R.L. (Ltd.); it is also different, for S.A. depending on whether it is the first or second call, if applicable (articles 198 to 201 LSC). Once the decisions have been adopted with the number of majority votes that corresponds in each case, they will be recorded in the minutes that will have been approved in accordance with established legal channels (article 202 LSC). The decisions must be written in the mandatory minutes book created for this purpose and legalised in the Registrar, thus providing its content and the date upon which it was written with probative value. All members, including any dissenting and any not attending the meeting, are bound by general meeting decisions. However, if members do not agree with a decision, the legal system provides them with the right to challenge, in accordance with the terms and limitations stated by law. 12 3. The managing body. Concept and duties. Organisational models Title VI of the LSC deals with the regime of capital company directors. Although there are some differences as regards listed companies and European companies, the study of enterprises of this nature exceeds the scope of the list of topics; consequently, we will focus on the common regime applicable to S.A. (Plc.) and S.R.L. (Ltd.), which have a high number of features in common, and we will differentiate the notable aspects that are distinct for both types of company. We already know that directors do not have to be members; nevertheless, nothing prevents the company by-laws from making it a rule: ‘Article 212 LSC … 2. Unless specified otherwise in the company by-laws, company directors need not be members.’ A director may be either a natural person or a legal entity. Although, as regards natural persons, the following are not entitled to be a director: non-emancipated minors, the legally incompetent, persons disqualified pursuant to the Insolvency Act, and persons convicted for certain offences (article 213 LSC), or anyone whose position is incompatible with commercial endeavours, as set forth in article 14 CCom (magistrates, judges, heads of government, etc.) Duties of the managing body The definition of the body is found in the duties of the governing body itself: 13  The managing body (directors) is the corporate body that legally represents the company and oversees its management under the terms established by law. The management entrusted to the governing body is not defined in a limiting manner, neither is it specifically determined, but it comprises a series of actions of a different nature whose final purpose is to accomplish the corporate purpose. The directors can perform their duties with a wide margin of discretion. Indeed, the governing body is the highest decision-making body as regards management. In any case, we must remember the organisational structure of capital companies, since it is the general meeting that appoints the directors and has the power to remove them. However, the general meeting’s competences do not include interfering in management matters; in other words, the governing body performs its representative and management duties without the interference of the general meeting, although this does not prevent the annual general meeting from evaluating the management performed by the directors during the year and submit its approval to deliberation. The governing body may perform its duties with such a high degree of autonomy that the directors are personally liable for its acts and decisions under the terms seen below, even if the decisions being analysed to determine liability have been authorised or ratified by the general meeting. Ways of organising the managing body Although the governing body represents a single decision-making unit and its decisions are understood to be adopted by a single subject, the truth is that the law contemplates a diversity of models, as set forth in article 210 LSC. a) A sole director (“administrador único”). In such a way that a natural or legal person holds the status of director. It is a governing body 14 consisting of one person and the sole director is responsible for performing all the duties that correspond to the body. b) A certain number of joint and several directors (“administradores solidarios”). This is the case that enables more than one director to act alone without having to jointly act with any one of the other directors. Each one may act alone with all the power that corresponds to the governing body. c) Several joint directors (“administradores mancomunados”). This is the case in which more than one director is appointed, but they must act jointly; that is, each one by themselves does not have the power to function as a governing body. This organisational model is different for S.A. and S.R.L. In the specific case of S.A. (Plc.), there may only be a maximum of two joint directors; as a result, if the intention is to have more than two acting jointly, they will have to be established as a board of directors. d) A board of directors (“consejo de administración”). It is made up of a minimum of three members and, in the case or S.R.L. (Ltd.), it may not have more than twelve members. This way of organising the administration means that the decisions are adopted together, with a majority vote regime. …The board of directors is the organisational model typical seen in large corporations; moreover, listed companies must be governed by a board of directors (article 529 bis LSC). The system that enables the board of directors to adopt decisions together is the organisational model that best deals with the proportionality of trust that we referred to earlier. As a rule, members that own most shares (or stakes) will also have directors in the board of directors who they trust in a majority proportion. The company by-laws will have to choose one of these four models or ways of organising the administration. All decisions that alter the way company administration is organised, whether it implies changing the company by-laws, will be recorded in a public instrument, and entered in the Registrar (article 210.4 LSC). 15