Private equity in Spain: market and regulatory overview
A Q&A guide to private equity law in Spain.
The Q&A gives a high level overview of the key practical issues including the level of activity and recent trends in the market; investment incentives for institutional and private investors; the mechanics involved in establishing a private equity fund; equity and debt finance issues in a private equity transaction; issues surrounding buyouts and the relationship between the portfolio company's managers and the private equity funds; management incentives; and exit routes from investments. Details on national private equity and venture capital associations are also included.
To compare answers across multiple jurisdictions visit the Private Equity Country Q&A Tool.
This Q&A is part of the global guide to private equity. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateequity-guide.
According to the annual reports published by the Spanish Private Equity and Venture Capital Association (ASCRI), 2009 to 2013 saw much reduced levels of fundraising and dry powder steadily fell, with an estimated EUR1,348 million at the end of 2013 (excluding the use of international funds in their investments).
The statistical data in the 2014 report shows a total volume of new funds raised in 2013 of EUR2,274 million, reflecting an 11% increase from 2012. Only EUR633 million was due to national fundraising. The rest was applied by international funds to their investments (EUR1,641 million), and as such does not represent money available for investment. Of the EUR633 million, EUR155 million was due to fundraising from national public entities, and EUR478 million from national private entities.
The 2015 Annual Report shows that EUR4,800.7 million in "new funds" was raised during the fiscal year 2014, of which:
EUR2,736 million was applied by international funds to their investments.
EUR1,822 million was raised by private national operators and the rest (EUR243 million) by public national operators.
Fundraising underwent substantial growth, thanks to:
Allocations from the first three calls of the public fund of funds, FOND-ICO Global.
Return of international investor appetite.
Recordbreaking divestment data.
As of 31 December 2014, FOND-ICO Global had approved an investment of EUR631 million in 23 funds (nine venture, ten growth, two debt and two incubation). The 23 selected funds intend to invest about EUR2 billion in Spanish companies.
The 2016 Annual Report (which analyses 2015 behaviour and includes an outlook for 2016) has not been published yet.
There remains a challenging investment environment due to political uncertainty. The lack of a stable government, at least in the first half of 2016, makes it difficult to forecast how investments will perform in a certain regulatory scenario. A possible new extreme left led government could bring about very significant changes. In the last few years there had been an increase in lending activity for private equity, with more leveraged buyout structures. Banks are now taking a more prudent approach until the political landscape is settled and the markets regain confidence. Safe harbours continue to be solid cash flow businesses, such as healthcare and telecoms.
As valuations increase, it is even more crucial for general partners to create growth in their portfolio, which is increasingly challenging as the economy remains relatively flat.
Increasing competition for private equity players from trade buyers, family offices and other private equity houses means they have to be more creative and flexible in deal terms, to differentiate themselves.
According to the Spanish Private Equity and Venture Capital Association reports, following the period starting in 2009 in which fundraising significantly decreased, 2014 saw a return to normal levels. In 2014, fundraising by domestic private venture capital and private equity firms exceeded EUR1,821.8 million, representing 270.7% growth.
This figure is far from the 2007 record high of EUR3,593.6 million, although it is the fourth highest amount on record. If new funds for public entities (EUR242.7 million) and international funds invested (EUR2,736.2 million) are added to this amount, the total amount of new funds raised is EUR4,800.7 million (109.7% growth from 2013).
The global environment for raising new funds has progressively improved over the past two years, largely due to capital returns made to limited partners (LPs). These resulted from various divestments in portfolio companies in this sector, which gave rise to significant liquidity. This cash abundance explains the more than 1,000 funds raised worldwide, with total commitments of nearly EUR500 billion (as published in Global Private Equity Report 2015, Bain & Company).
In addition to renewed LP interest in this financial asset, two additional factors occurred in Spain:
Regained confidence of international investors in the Spanish economy.
The implementation of FOND-ICO Global, the first public fund of funds, endowed with EUR1,200 million for a four-year investment period.
As seen in 2015, private equity activity is increasing in terms of the number of deals, while there is a decrease in total volume given the lack of large deals over EUR100 million (there were only four in 2015).
Middle market investments continue to account for most investment activity, with over 57% in deal count. Key sectors are technology, healthcare, retail consumers and energy. Given the recent regulatory changes, renewables have become more attractive to investors.
Larger deals have in most cases been a secondary buyout. In the middle market, most deals have been management buyouts with leverage, accounting for 80%. The rest have mainly been turnarounds.
Generally, more than 50% of exits have been private sales to third parties, over 25% have been IPOs and the rest have been secondary buyouts.
On 13 November 2014, the Official State Gazette published Law 22/2014 of 12 November (Law 22/2014), which entered into force on 14 November 2014. It governs:
Private equity entities.
Other closed-ended collective investment undertakings.
Management companies of closed-ended collective investment undertakings.
It amends Law 35/2003 of 4 November on Spanish Collective Investment Undertakings (Funds Act). Law 22/2014 transposes Directive 2011/61/EU on Alternative Investment Fund Managers (AIFM Directive) into Spanish law.
Law 22/2014 applies to managers of private equity and similar closed-ended alternative investment funds incorporated in Spain or that are marketed in Spain. These managers must be authorised by the National Securities Market Commission (Comisión Nacional del Mercado de Valores) (CNMV). Law 22/2014:
Reinforces reporting obligations, the mechanisms to monitor and prevent conflicts of interest, and the rules on the approval of remuneration and incentive policies.
Imposes restrictions on asset stripping and the requirement to designate depositaries.
Grants legal recognition to the new European venture capital funds and the European social entrepreneurship funds, created by EU Regulations 345/2013 and 346/2013 respectively.
Deals with cross-border marketing and management of closed-ended alternative investment funds, both by Spanish managers abroad and alternative investment fund managers in Spain (including the European passport for the marketing of European closed-ended alternative investment funds by managers authorised in EU member states).
Already authorised management companies of private equity entities (or SGECR, as they were known in Spain) have been automatically converted into alternative investment fund managers of closed-ended vehicles (SGEIC, in Spanish) when Law 22/2014 came into force, with no need for authorisation. Transition periods were established for existing management companies to submit certain information required by Law 22/2014 to the National Securities Market Commission. The latest elapsed on 14 November 2015.
No further reforms (tax, legal or regulatory) are expected in the near future.
Tax incentive schemes
Sale by private equity funds/companies of shares in their subsidiaries. There is a tax exemption for private equity funds/companies for capital gains from the sale of shares in their subsidiaries (Article 21.1 Law 27/2014, 27 November, Corporate Income Tax) (Law 27/2014).The main conditions are:
A minimum 5% participation or minimum EUR20 million acquisition price.
A one year holding period.
There is a further 99% tax exemption for private equity funds/companies for capital gains from the sale of shares in their subsidiaries (Article 50.1 Law 27/2014). The main conditions are:
The sale must generally take place between the second and the 15th year of investment.
The acquirer must not be resident in a tax haven or be a related party (except for other private equity funds/companies).
The shares must not have been acquired from a related party.
Sale of shares in private equity funds/companies. There is a further tax exemption for (Article 50.4, Law 27/2014):
Resident shareholders (companies): exemption on capital gains from the sale of shares in private equity funds/companies.
Non-resident shareholders: capital gains from the sale of shares of private equity funds/companies are not subject to tax in Spain.
The main conditions are:
Resident shareholders: no specific requirements.
Non-resident shareholders: they must not be resident in a tax haven.
Generally, the buyer must not be resident in a tax haven.
There is a tax exemption for private equity funds/companies on dividends received from subsidiaries (Article 50.2, Law 27/2014). The main conditions are:
Resident subsidiaries: no specific requirements.
Non-resident subsidiaries: the subsidiary must have been taxed at least at a 10% rate or be resident in a country with a tax treaty signed by Spain.
There is a tax exemption for (Article 50.3, Law 27/2014):
Resident shareholders (companies) on dividends received from private equity funds/companies.
Non-resident shareholders: dividends received from private equity funds/companies are not subject to tax in Spain.
The main conditions are:
Resident shareholders: no specific requirements.
Non-resident shareholders: they must not be resident in a tax haven.
Venture capital deduction
There is a venture capital tax deduction for Spanish business angels (individuals) of 20% of equity contributions made to new unlisted companies (the deduction base is limited to EUR50,000 per year). The main conditions are that the:
Initial equity of the company cannot be higher than EUR400,000.
Business angel must acquire the shares within the three first years from the founding of the company.
Stake is limited to 40%.
The great majority of private equity funds in Spain are structured as domestic private equity funds (FCRs) or private equity companies (SCRs) incorporated under Law 25/2005, now replaced by Law 22/2014.
Investments in shares of Spanish companies by international private equity entities are usually structured through EU-resident holding companies (typically incorporated in
Luxembourg or The Netherlands), to benefit from withholding tax exemptions in Spain on dividends, interest and capital gains. These EU holding companies must have enough legal, business, or operational "substance" to prevent the application of Spanish anti-avoidance tax rules (which may look through the EU structure).
Domestic private equity entities
Domestic private equity entities (funds or companies) are subject to entity level taxation at a 25% tax rate.
Direct foreign investment
Investments by international private equity entities are usually structured through EU-resident holding companies, so tax is levied on the foreign entity through a withholding mechanism. However, EU holding companies can benefit from withholding tax exemptions on dividends, interest and capital gains, if the legal requirements are met (see Question 5).
Private equity funds structured through tax havens are tax inefficient for Spanish tax purposes, because in this case the special tax regime does not apply (see Question 5). The alternative structure used is incorporating a new company in an EU country which holds the participation in the private equity fund or the portfolio companies. This Newco must meet certain requirements (see Question 6).
Fund duration and investment objectives
Fund regulation and licensing
Any company whose main activity is the management of private equity structures must obtain authorisation to qualify as a management company from the National Securities Market Commission under Law 22/2014 (which transposes Directive 2011/61/EU on Alternative Investment Fund Managers into Spanish law).
No authorisation or licence is required for promoters, principals or individual managers. Directors of an SGEIC (that is, a self-managed private equity company) must file a certificate at the National Securities Market Commission, attesting that they are persons of good repute with appropriate professional qualifications or experience in managing investments.
An equivalent certificate is required for investors with a significant stake in a private equity entity. Representations in this certificate refer to the activities of the investor, both in and outside Spain.
Although not considered an investment company, private equity activities in Spain fall within the scope of regulated activities and require a regulatory authorisation from the National Securities Market Commission. There is a strict regime for obtaining National Securities Market Commission authorisation to manage private equity entities. Additionally, the National Securities Market Commission must be notified of any significant change to the circumstances in which the original authorisation was granted.
Law 22/2014 broadly regulates the cross-border commercialisation and management of closed-ended venture capital, private equity and other investment entities incorporated in other EU member states and in third-countries. The European passport is allowed in Spain for alternative investment funds (AIF) incorporated in EU member states and managed by AIF managers (AIFM) authorised in EU member states under the Alternative Investment Fund Managers Directive, requiring only a notification from the home regulator.
The marketing of the following in Spain requires prior authorisation from the National Securities Market Commission:
AIF incorporated in non-EU countries and managed by European AIFM authorised under the Alternative Investment Fund Managers Directive.
AIF managed by managers not established in any EU member state.
The marketing of a private equity entity is the acquisition of clients through an advertising activity on behalf of the private equity entity, or any entity acting on its behalf or on behalf of one of its traders or customers, for their contribution to the private equity entity's funds, assets or rights (Law 22/2014).
For this purpose, advertising activity means any form of communication addressed to potential investors to promote, directly or through third parties acting on behalf of the private equity entity or the management company of the private equity entity, the subscription or acquisition of units/shares of the private equity entity. In any case, there is an advertising activity when the means used to address the public are telephone calls initiated by the private equity entity or its management company, home visits, personal letters, e-mail or any electronic means, which are part of a publicity campaign, marketing or promotion.
The campaign is deemed to be carried out in Spain if it is addressed to investors resident in Spain. In the case of e-mail or any electronic means, the offer is presumed to be addressed to investors resident in Spain when the private equity entity or its management company, or any person acting on their behalf online, either:
Propose the purchase or subscription of shares.
Facilitate to the Spanish residents the information needed to assess the features of the issue or offer and adhere to it.
Under Spanish Securities Market Act, there is usually no need to file a prospectus for the offering or marketing of the shares/units of the private equity entity, as the offerings for private equity entities usually meet the requirements to be considered private placements. However, a prospectus should be issued for information purposes, and needs to be provided to the investors when they join the fund.
The Securities Market Act regulates offerings of transferable securities and exemptions from public offer requirements. In any case, the requirement of publishing a prospectus does not usually apply, due to the offering qualifying as a private placement.
The following offerings of transferable securities qualify as a private placement:
Exclusively directed at qualified investors.
Directed at fewer than 150 natural or legal persons of an EU member state, without including qualified investors.
Directed at investors who acquire securities/interests for at least EUR100,000 per investor, for each separate offer.
With a unit nominal value of at least EUR100,000.
For a total sum of less than EUR5 million in the EU, calculated over a 12-month period.
In general, a private equity entity can be marketed in Spain as follows:
To investors considered professional investors, as defined in Article 205 of Royal Legislative Decree 4/2015 of 23 October, for the approval of the consolidated text of the Securities Market Law.
To other investors, if:
they commit to invest at least EUR100,000; and
the other investors state in writing that they are aware of the risks involved in the commitment, in a document other than the contract for the investment commitment.
Investors who comply with the conditions in the second bullet point above cannot benefit from the simplified regime in Article 72 of Law 22/2014, which incorporates the thresholds of Article 3 of the AIFM Directive.
Shares and/or units in private equity entities can also be marketed to non-professional investors without having to comply with the two requirements above, if one of the following applies:
they are administrators, directors or employees of the management company managing the private equity entity;
they invest in private equity entities listed on a stock market;
investors who are justified, from experience in investing, managing or advising private equity entities similar to the private equity entity in which they intend to invest.
In this case, a SGEIC or self-managed private equity company can benefit from the lighter requirements for management companies with assets under management below certain thresholds, which are established in Law 22/2014.
A marketing activity is deemed to be made in Spain if it is addressed to investors resident in Spain.
If the private equity entity is marketed to non-professional investors, the SGEIC (or private equity entity, if incorporated under a self-managed private equity company) will not benefit from the lighter requirements applicable to management companies with assets under management below the thresholds in Article 72 of Law 22/2014.
There are no statutory or other maximum or minimum investment periods, amounts or transfers of investments in private equity funds under Spanish law.
However, from a tax perspective, a minimum investment period of one-year is required to benefit from the tax exemption on dividends and capital gains. For certain investments, a maximum investment period of 15 years applies to benefit from the exemption on capital gains (see Question 5).
Under Law 22/2014, private equity entities must maintain at least 60% of their accountable assets in:
Shares or other financial instruments or securities that can grant a right to subscribe or acquire these, or equity holdings in companies within the scope of their main investment activity.
Shares or equity holdings in non-financial companies listed or traded on a secondary market of a Spanish stock exchange or multilateral trading facility, or an equivalent market in another country.
The granting of participative loans thereto.
However, Law 22/2014 has broadened the type of assets to which this mandatory investment can be directed, including:
Investments through participative loans (when, without limitations, the investment is made in a company within the scope of their main activity, and where returns are fully linked to the company's profits or losses).
Investments in shares or units of other venture capital and private equity funds. This implies a significant change from the repealed Venture Capital and Private Equity Law (Ley de Entidades de Capital Riesgo, LECR), as the funds of funds are eliminated.
Further, Law 22/2014 increases the cases in which temporary non-compliance with the mandatory investment ratio is allowed:
Contribution of additional resources to venture capital and private equity funds.
Capital decrease in self-managed venture capital and private equity companies.
The relationship between the investor and the private equity entity is governed in the management regulations (for a fund) or the articles of association (for a company). It is very common for the investors, the private equity entity and the management company to execute a limited partnership agreement, which includes provisions on management fees, distribution waterfall, carried interest, clawback and so on.
There is no Spanish organisation or entity that provides guidance on best practices and/or investor/fund relationships. However, private equity entities incorporated as companies are regulated by the Companies Act. This imposes certain rules on corporate governance, including duties of diligence, of loyalty, conflicts of interest and directors' liability rules.
Interests in portfolio companies
Most common form
Such interests are commonly taken as equity through a capital increase and debt through a shareholder loan.
A capital increase is more costly than a shareholder loan, since it involves notary costs and registry fees. In addition, inter-company loans are more tax efficient, since interest is tax deductible (up to the higher of 30% of the company's tax earnings before interest, taxes, depreciation and amortisation (EBITDA) or EUR1 million). On the other hand, banks usually require private investors to inject equity into the company to provide financing.
Other investment instruments less commonly used are profit participating loans and equity contributions. Profit participating loans were commonly used up to 20 June 2014. Since then (when the tax laws changed), interest accrued under profit participating loans between related parties is not tax deductible.
Equity contributions are rarely used, even though they are cheaper and more tax efficient than capital increases, because they are not specifically regulated under Spanish laws.
Under Spanish law, the transfer or issue of shares in limited liability companies (SLs) is subject to the pre-emption right of the company's shareholders.
Issuing shares in joint stock companies (SAs) is also subject to the pre-emption right of the company's shareholders but the transfer of shares in SAs is not.
Under the articles of association, additional restrictions can be agreed in SLs and SAs.
Shareholder loans are the most tax efficient instrument, since interest is tax deductible (up to the higher of 30% of the company's tax EBITDA or EUR1 million). In addition, repayment of equity is taxable at 1% if it is executed through a capital reduction.
See Question 5.
It is fairly common for sellers to dispose of their business by auction. Auctions allow a seller to set up a defined process for circulating information on the business and obtain offers from competing potential buyers.
There is no specific legislation under Spanish law governing auctions. The general principle of good faith in all preliminary deals applies to auctions. This can give rise to liability in case of abusive termination of negotiations outside the scope provided by the auction rules.
The seller and its advisers define the auction process and rules, which are usually customary to these type of transactions. The seller can choose the law that governs the auction process. If not agreed, the laws of the place where the business is located (Spain) apply.
The seller can also choose the laws applicable to the sale. If the business has been incorporated as a Spanish corporate entity, there are a number of formalities under Spanish law to be complied with for the valid transfer of the shares or business unit, and to ensure the effectiveness of the sale in Spain.
The number of delisting transactions of Spanish listed companies has increased significantly in recent years, due partly to the increase of takeovers of Spanish listed companies by private equity investors. Between 2010 and April 2016, 35 Spanish listed companies have been delisted from the Spanish stock exchanges (the last 14 in the last year).
The delisting of a Spanish listed company requires a delisting takeover bid under the Spanish takeover regulations, unless:
Delisting occurs after a public takeover bid and the bidder ends up holding 100% of the issuer's share capital, due to the exercise of a squeeze-out by the bidder or sell-out rights by the minority shareholders.
All shareholders waive their right to sell their shares in a public takeover bid, and the delisting is approved unanimously by all the existing shareholders.
There is a merger with a different company, as a result of which the dissolved company's shareholders become shareholders of another listed company.
A public takeover bid for 100% of issuer's share capital has previously been launched and:
the prospectus disclosed the intention to delist the company;
an independent report confirms that the price offered in the previous bid satisfied the requirements of a delisting bid (the price is an "equitable price", (see below); and
the sale of the remaining shares is guaranteed by a permanent order from the bidder to buy all outstanding shares tendered to it, at the price offered in the previous bid.
The issuer's general shareholders' meeting approves a procedure which the National Securities Market Commission regards as being equivalent to a public takeover bid in terms of shareholders' protection.
The delisting takeover bid can be made by the issuer itself or by another entity, provided that the entity obtains the approval of the issuer's general shareholders' meeting.
The price must be fully paid in cash and approved by the issuer's general shareholders' meeting and must be at least the higher of:
The equitable price. This must be at least the highest price that the bidder or persons acting in concert with it have paid or agreed to pay for the same securities over the 12 months before the announcement of the takeover bid. The bidder must submit to the Spanish securities markets regulator, the National Securities Market Commission, at least one report prepared by a reputable independent accounting expert (usually one of the Big Four auditing firms) which supports that the offer price should be considered an equitable price.
The price resulting from considering collectively certain valuation methods, including discounted cash flows, multiples used in peer transactions, net book value, liquidation value, and the average trading price in the last six months.
In addition, the issuer's board of directors must approve a report containing a rationale for the proposed delisting and at the offered price, on the basis of the above valuation methods. This report must be made available to the issuer's shareholders at the time of the call for the general shareholders' meeting at which the delisting is to be adopted.
On the equity side, the main documents are:
Letter of intent or non-binding/binding offers.
Sale and purchase agreement or, depending on the structure, framework or investment agreement. Some ancillary documents to this are the:
disclosure letter or schedule;
escrow agreement, with a bank in Spain or first demand guarantee; and
indemnities side letter.
Transitional services agreement, where necessary.
Employment contracts, including senior executive contracts.
For the debt package, the main documents are:
Interest rate hedging agreements.
Subordination agreements (in respect of shareholder loans).
Transaction security documents (such as share pledges, bank account pledges, pledges over credit rights and other agreed security).
Private equity entities usually require full representations and warranties from sellers. Depending on the outcome of due diligence, they may also request specific indemnities.
Except for title and capacity, sellers' liability is usually capped at:
25% to 50% of the purchase price.
Time barred according to statutes of limitation for tax, employment, social security and environment issues, and after an average of two years for other issues.
Mega-deals and public to private transactions, and aggressive auction driven processes, limit these liability provisions even further, and usually restrict them to title and capacity. This is also the case in most secondary buyouts.
Venture capital deals include similar protections. Where anti-dilution provisions are included, they are commonly weighted average mechanisms or hybrids.
Non-directors only have duties arising from their employment contracts but are also subject to unfair competition rules.
If a manager is also a director, he is also subject to the duties owed by directors to the company, including confidentiality, non-compete, duty to act in the best interest of the company, and the duty to act in a diligent manner.
Post-termination restraints are common for management, particularly for managers with access to confidential information, but should always be tailored to individual employees. Those covenants are only enforceable if both:
The restraint is no wider than necessary to protect a legitimate business interest.
Certain additional legal requirements are met, namely payment of adequate consideration to the employee and the duration of the covenant not exceeding two years.
Other than cases in which the Unfair Competition Act applies (such as a mass solicitation of employees aimed at eliminating a competitor from the market), enforcement means that the company will generally be able to recover the consideration paid to the employee in respect of the covenant and may receive compensatory damages (if there is evidence of damage).
The types of post-termination restraints permitted are:
Non-solicitation of clients.
Non-solicitation of employees.
Non-competition during employment can be agreed contractually, but employment law already prohibits non-competition during employment. An employee cannot compete with his employer, either on his own or through another employer.
A duty of exclusivity during employment must be expressly agreed if the employer wants to ensure that the employee does not work for another (non-competing) business. In such cases consideration must be given in return for the employee's agreement. However, a duty of exclusivity is inherent for managers who are senior executives (generally, the general manager) so no consideration is required in this case.
Notice periods must be in line with any applicable collective bargaining agreement. For managers who are senior executives, a notice period up to three or six months can be agreed, depending on the type of contract.
Garden leave is not expressly permitted by law, although in practice where garden leave is imposed by the company it does not usually raise any issues. Salary must be paid in full during garden leave, and ideally the employer should get the consent of the employee to remain on garden leave.
In relation to variable remuneration, specific attention is paid to good leaver and bad leaver provisions, which have to be adapted to the exit situations provided by Spanish employment law.
Various intellectual property rights, such as copyright, patents and database rights, can apply to protect confidential business information.
Confidential information is protected by law during and after employment. However, employers in Spain typically enter into express confidentiality clauses, which provide protection throughout employment and afterwards.
Private equity entities require board representation. If they hold a majority stake they will control the board, otherwise they have veto rights. They often reserve the right to appoint the chairman and/or chief financial officer. These rights are included in the shareholder agreement and often also in the articles of association.
In addition, in some cases there is a right to remove managers in good leaver and bad leaver situations, which is regulated in the shareholders' agreement.
Usually around 55% to 70% of financing is proved by bank debt. The remaining 30% to 45% is provided by the sponsors/managers through equity or subordinated loans (compared to an 80%/20% ratio in 2005 and 2006).
It is customary for bank debt to be an acquisition facility as a term loan with a term of five to seven years, together with a capital expenditure facility (term loan) and working capital facility (revolving credit facility). It is not uncommon to have refinancing facilities (such as term loans) in place, which can be embedded in the acquisition facility or a separate tranche of financing.
Most recent transactions are only being closed with senior bank financing. However, several unitranche and mezzanine deals have also been closed recently.
Bond financing is not yet customary for private equity in Spain, although the authors are starting to see an appetite to fund leveraged buyout and management buyout transactions through bonds.
Debt providers typically use the following to protect their investments:
Share pledges over newco (the borrower entity under the acquisition facility), the target and target group companies (all subsidiaries or those considered material subsidiaries) granted by the corresponding shareholders.
Bank account pledges in respect of newco, the target and target group companies.
Pledges over credit rights arising from the sale and purchase agreement, hedging agreements, insurance policies and other material agreements granted by newco, the target and target group companies.
Pledge over credit rights arising from shareholder loans granted by the corresponding shareholders granting the loans.
Mortgages (or promissory mortgages) in respect of key real estate assets or IP (depending on the relevance of the asset, as such security usually implies additional costs such as stamp duty and registry fees).
Promissory pledges in connection with material agreements executed after closing.
The target and target group companies cannot guarantee or secure acquisition tranches due to the financial assistance prohibition (see Question 25).
Contractual and structural mechanisms
Customary covenants include:
Maximum net debt/EBITDA.
Minimum EBITDA/net finance charges.
Minimum cashflow cover (cashflow/debt service).
Maximum capital expenditure.
All shareholder loans are usually subordinated, either contractually (by means of subordination agreements with the senior lenders), structurally (with debt at Newco level or above) or both.
Debt push-down mechanisms are usually used to merge Newco and the target after a certain period of time (usually three to three and a half years). Such mechanisms include margin step-up and more restrictive financial covenants if the merger does not take place on or before a certain date. Until debt push-down takes place, neither the target nor any target group companies can guarantee or secure acquisition tranches, due to the financial assistance prohibition.
Spanish law prevents a company from giving financial assistance for the purpose of assisting a purchase of shares in that company.
Spanish buyouts therefore have to be structured so that financial assistance rules are met. Typically, the structure chosen to meet financial assistance is (in summary) as follows:
A newco is created and subsequently leveraged, receiving finance.
Newco acquires the target company.
Newco grants a share pledge over its own shares.
Newco and the target merge and the surviving entity (newco) usually provides further guarantees/security with the former assets of the target.
However, Spanish law has recently introduced provisions governing this type of structure, in particular the merger phase (introducing "leveraged mergers"). Such provisions establish a whitewash procedure, so that an independent expert must issue a report regarding the merger plan and has to give an opinion on if there is financial assistance or not.
An SA company cannot anticipate funds, grant loans, grant guarantees nor facilitate any type of financial assistance for the acquisition of its own shares or of shares of its dominant company (controlling/holding company) by a third party.
SL companies cannot anticipate funds, grant credits or loans, grant guarantees, nor facilitate financial assistance for the acquisition of its own shares or of shares issued by a group company to which it belongs.
The main difference is the scope of the financial assistance. Financial assistance in SA entities refer to its own shares and the shares of its dominant company (controlling/holding company), whereas in SL entities it refers to its own shares and group companies.
Spanish law only provides exemptions for SA entities, that is:
Transactions the purpose of which is to facilitate company employees acquiring company shares or the shares of any group company.
Ordinary transactions involving banks and financial entities within the scope of their corporate purpose that are defrayed/backed by freely disposable company assets.
The order of priority on insolvent liquidation is the following:
Debts of the insolvency estate (super preferential claims) (créditos contra la masa). These include the receiver's fees, debts incurred in the ordinary course of business during the insolvency process and salaries for the 30 days worked prior to the declaration of insolvency (capped at twice the minimum wage). These are paid out of the debtor's assets in priority to all other claims.
Specially privileged debts (secured debts) (créditos con privilegio especial). Debts that benefit from in rem security. These claims must be asserted by separate proceedings, and are paid from the proceeds of sale of the secured assets, with any outstanding balance usually ranking as an ordinary debt. Enforcement proceedings may be delayed by up to a year if the secured asset is necessary for the debtor's business to continue. Otherwise, the enforcement proceedings cannot be commenced until a creditors' arrangement (convenio) that does not bind secured creditors has been approved.
Generally privileged debts (preferential debts) (créditos con privilegio general). These are debts owed to creditors listed in Spanish legislation. The beneficiaries include employees who are owed wages or amounts arising from the termination of their contract, 50% of the claims of certain public authorities, and claimants for non-contractual civil liability.
Ordinary debts (créditos ordinarios). This category covers all debts that are not privileged or subordinated. These debts are paid on a pro rata basis after payment of the prior ranking debt.
Subordinated debts (créditos subordinados). Spanish insolvency legislation provides a list of subordinated debts, including debt held by related entities, contractually subordinated debts owed to shareholders with at least 10% of the debtor's share capital where the debtor is a private company (5% for a listed company) and debts that are reported to the receiver late.
Debts in Spanish companies can be capitalised or converted into capital, through a share capital increase with the off-set of credit rights. Certain requirements apply. Options can also be established with other shareholders to put or call shares. Options can also be set up with a company, subject to treasury stock rules. Actual warrants can only be issued by listed companies.
Portfolio company management
In addition to bonus schemes or stock option plans, the most common incentives offered to management are ratchets and envy ratios, through their stake in the target companies.
Ratchets are the most common incentives for managers who are shareholders. Through this, if an investor hits a profitability threshold on exit (based on internal rate of return and/or multiple, in most cases), distribution ratio on a capital gain in excess of the threshold is reverted, so that a larger proportion is allocated to the ratchet holders. Ratchet distribution among managers is often left to the discretion of key managers.
Through envy ratios, managers who are shareholders may receive a higher stake than the face value they subscribe for. This can be implemented as an envy ratio on investment (which implies investing at a certain discount so that, for instance, their envy ratio is 2x, compared to that of the private equity entity) or on exit. In both cases, consolidation of the envy ratio depends on certain profitability thresholds, such as internal rate of return and/or multiple.
Both incentive methods are subject to good and bad leaver provisions.
Dividends can only be distributed if there is liquidity and sufficient reserves to do so and the legal reserve has the relevant amount. Other payments (such as loans) may be subject to restrictions derived from financial assistance rules (see Question 25).
Investment documents normally contain a representation, under which the parties declare that they have complied with all anti-corruption and anti-bribery laws until the date of the agreement. An undertaking for future compliance may also be agreed, but they are less common. Compensation (or even the right to terminate the agreement) can be agreed due to a breach of this representation or undertaking.
Local anti-corruption and anti-bribery laws are regulated under the Criminal Code. Both individual and legal entities can be criminally liable for these offences and face the following penalties:
Individuals: three to six years imprisonment and a fine, calculated according to the economic relevance of the crime.
Legal entities: a fine equivalent to three to five times the economic benefit derived from the bribe/corruption.
Criminal liability does not extend to the fund company or its executives for offences committed by the portfolio company, unless there is a direct/indirect involvement in the commission of the offence by the fund executives.
If the directors of the fund are not formally appointed as directors of the portfolio company, they may still incur liability as de facto directors of the portfolio company. Spanish law defines de facto directors as those who act openly in representation of the company, who exercise powers of representation that legally correspond to the formally invested directors, who give instructions relating to the management of the company, and whose management actions are acknowledged or tolerated by the shareholders, but their appointment has not been formally recorded at the Commercial Registry. Directors of the fund company cannot be liable as such for certain crimes related to the management of the portfolio company, unless their involvement is shown (that is, their performance as de facto directors).
Forms of exit
There are several types of exits:
Auction sales, most common for larger deals, conducted by a corporate finance bank.
Negotiated trade sales, or secondary buy-outs.
Initial public offers (IPOs).
Dual track, in which both an IPO and auction sale are considered until the point of no return is reached.
Advantages and disadvantages
Auction sales usually maximise price and offer better deal terms. However, they take longer and may incur higher costs. Also, where confidentiality is an issue, auction sales are more difficult to keep away from public knowledge. Dealing with management team issues may also be more challenging.
Trade sales are usually quicker and more confidential, but the private equity entity does not have the upper hand and so prices may not be maximised. Also, deal terms may become more negotiated and therefore less favourable for the private equity entity. The same applies for secondary buyouts, although in this case it is market practice for the selling private equity to not give any warranties other than title and capacity, except for certain indemnity exceptions.
IPOs require a higher capitalisation and larger deal. Market uncertainty is an issue and so is confidentiality. There may also be lock-in provisions but value can be hugely maximised.
Forms of exit
Where the investment has been unsuccessful, the common options of exit for the private equity fund are the following:
Secondary buyout to another private equity fund, at nominal value.
Management buyout or other interested party, usually at a loss.
Liquidation in bankruptcy proceedings.
Advantages and disadvantages
Secondary buyouts to another private equity fund may be beneficial from a reputational point of view and are preferred to liquidation in bankruptcy proceedings, even though there is certain exposure to potential market embarrassment if the acquiring fund achieves a significant exit return. Management buyouts are also preferred to liquidation in bankruptcy proceedings, assuming the acquiring managers assume the liabilities of the distressed investment.
Liquidation in bankruptcy proceedings is the less attractive prospect for an investor due to carried liabilities, reputational risk and timescales. In addition, the private equity fund may have directors on the board of the unsuccessful investment whose actions may be reviewed by the bankruptcy receiver.
However, if there are no interested parties for a secondary buyout or a management buyout, the investor will opt for liquidation where the probable future liabilities and increasing costs and management do not justify the investment.
Private equity/venture capital associations
Spanish Private Equity and Venture Capital Association (ASCRI)
Official State Gazette, Spain
Description. This is the resource for the Official State Gazette (Boletín Oficial del Estado, or BOE) in Spain, where all laws and regulations are published in Spanish only. All downloadable formats are available and in most cases updated, and consolidation texts are available.
José Antonio Sánchez-Dafos, Partner, Head of Corporate
Professional qualifications. Abogado, registered with the Madrid Bar Association.
Areas of practice. Private equity; fund formation; general M&A; commercial law; IT law; telecoms; healthcare, media and consumer products; broad experience in cross border transactions advising international investors.
Non-professional qualifications. University of Kent (UK), MA in Information Technology, 1995
Recent transactions. Advising
- Eurest Colectividades S.L., in the acquisition of a 60% stake in Gourmet on Wheels.
- Nazca Capital, in the sale of the Spanish company Hedonai to Vousse.
- DS Smith Plc, in the acquisition of Andorrana de Cajas de Cartón Ondulado SA (Andopack).
- AECOM Technology Corporation, in the acquisition of the Spanish company ACE International Consultants, S.L.
- Falck Renewables, in the acquisition of Vector Cuatro S.L.U.
- UAG UK Holding Limited, in the acquisition of a 50% stake in Ibericar Keldenich S.L.
- Fosun Industrial, in a 20% investment in Grupo Osborne.
Languages. Spanish, English
Professional associations/memberships. Madrid Bar Association; member of the advisory board at Euro Watch magazine
Pilar Menor, Managing Partner, Spain
Professional qualifications. Abogada, registered with the Madrid Bar Association
Areas of practice. Head of the employment group in the Madrid office; employment social security and immigration law, including business restructuring, employment litigation, collective negotiations, senior management agreements and employment aspects of mergers and acquisitions.
- Universidad a Distancia de Madrid, Spain (UDIMA). Degree in Labour relations and Human Resources management.
- Universidad Complutense de Madrid, Spain. PH studies in the Employment and Social Security Law Department.
- Fundación Universidad-Empresa-UNED, Spain. Master in Human Resources Management Specialist.
- Teacher for the Employment Law Master Degree at the Garrigues Studies Centre (Universidad de Nebrija), and for the Business Law Master at the ICADE university.
Languages. English, French, Spanish
- Madrid Bar Association.
- Spanish Forum of Employment Lawyers.
- International Bar Association.
- European Employment Lawyers Association.
- Inmigration Law Client Strategies in the EU, Thomson Reuters, Aspatore 2010.
- Annual review of employment cases for lawyers. 2007, 2008, 2009, 2010, 2011, 2012, 2013 and 2014. Editorial la Ley, Wolters Kluwer.
- Bloomberg. European Business Law Review, Quarter 2, 2008.
Carlos Rodríguez, Partner
Professional qualifications. Madrid Bar Association; Head of the Tax Department, DLA Piper Madrid.
Areas of practice. M&A tax planning; private equity structuring; transfer pricing; international taxation; tax litigation; highly recognised for international tax planning matters, both for foreign investments in Spain and Spanish investments abroad, and issue of international securities; advises various private equity companies on the structuring of their investments in Spain; purchase and sale transactions in the energy, technology, and food and agriculture sectors.
Non-professional qualifications. Lectures in the Masters in Tax Consultancy at the Instituto de Empresa (Business School), and in the International Masters in Tax Consultancy at ISDE (Law and Business School), both in Madrid.
Languages. Spanish, English
Professional associations/memberships. Member of the Madrid Bar Association since 1992.
Jesús Zapata, Partner
Professional qualifications. Madrid Bar Association
Areas of practice. Acquisition finance and project finance; Head of the Finance and Projects group in the Madrid office; financial and banking matters; significant operations in the national and international markets, and numerous corporate and acquisition financing operations.
Non-professional qualifications. ICADE, Master in Tax Advice
- Debt restructuring of El Corte Inglés, S.A.
- Debt restructuring of NH Hoteles.
- Financing for the acquisition of the Grupo Famosa by Sun Capital Partners.
- Restructuring of the financing granted to Accesos de Madrid Concesionaria Española, S.A. and Alazor Inversiones, S.A. for the construction and operation of the toll-roads R3 and R5 in Madrid.
- Debt restructuring of the listed company Renta Corporación, S.A.
- Debt restructuring of Grupo Peyber.
- Financing of the acquisition of Veinsur, S.A. by Ibersuizas and subsequent restructuring.
- Restructuring of the financing granted to Alteco Gestión y Promoción de Marcas, SLU and Mag-Import, SL, further to Metrovacesa, SA's takeover bid for over 60.39% of their share capital.
Languages. Spanish, English
Professional associations/memberships. Madrid Bar Association