Acquisition finance in Spain: overview
A Q&A guide to acquisition finance in Spain.
This Q&A is part of the global guide to acquisition finance. Areas covered include market overview and methods of acquisition, structure and procedure, acquisition vehicles, equity finance, debt finance, restrictions, lender liability, debt buy-backs, post-acquisition restructurings and proposals for reform.
Market overview and methods of acquisition
Acquisition finance market
The Spanish financial sector has managed to turn things around following the financial crisis (the Spanish government has stimulated mergers of other distressed entities into healthy banks, which has led to a significant drop in the number of saving banks from 45 at the start of 2009 to 11 at the start of 2016). The major players on the lender side are still local banks and a reduced group of international banks. However, there have been a number of deals involving alternative lenders and debt funds, and this trend is expected to continue in the near future.
Methods of acquisition
The acquisition finance of business entities in Spain can be executed through a:
Choosing between an asset purchase and a share purchase is mainly driven by tax factors.
The general advantage of an asset purchase is that it allows the investor to:
Select (cherry pick) the assets which it is specifically interested in.
Seek to exclude potential liabilities.
However, asset purchases (as opposed to share purchases) are rarely used in Spain for the following reasons:
Individual consents are required from the employees (except when the deal can be structured as a transfer of undertaking (see Question 13)).
Individual consents from contractual counterparties are generally required for contract assignments.
The transfer of some assets (such as real estate assets and trade marks) must be registered with the relevant public registry.
Transferring licences, permits and authorisations may be an obstacle in terms of timing.
A share purchase (as opposed to asset deals) is easier to implement, but will not permit the investors to select (cherry pick) those assets which they are specifically interested in. This method of acquisition is frequently used and usually involves lending funds to a vehicle incorporated by an equity investor (normally a private equity sponsor and, in some cases, the management of the purchased company) to acquire the share capital of the target company (Target) and refinance its existing debt. The acquisition facility is then paid with the cash flows generated by Target, which are subsequently up-streamed to the purchase vehicle (NewCo) (see Question 4).
This method would not in principle give rise to any difficulties in relation to structuring the financing.
The main advantage of a merger is that it permits the lenders to have a direct access to the cash flows generated by Target. However, mergers (as opposed to share deals) are rarely used in Spain because the Companies Structural Changes Law provides that certain procedural restrictions must be taken into account by the entities participating in the relevant merger (such as the majority requirements for approval and the right of opposition granted to the creditors, among others).
In addition, it is highly advisable to elaborate on the reasons for the merger, which should be carried out for valid business reasons (other than merely for tax purposes). This is because the Spanish Corporate Income Tax Law sets out a special regime for certain restructuring transactions (such as mergers) in which corporate reorganisations are neutral from a tax standpoint if they are carried out for valid economic reasons.
Structure and procedure
Acquisition finance transactions in Spain are similar to those of other EU jurisdictions. However, certain particulars of Spanish law require the structure of the transaction and the finance documents to be tailored slightly differently.
Subjecting acquisition finance documents to Spanish law has become the norm, and only very large transactions (particularly those which need to be syndicated throughout Europe) are subject to English law. Even then, significant input from Spanish lawyers is required in many areas, such as in relation to (among others):
Corporate law (for example, in relation to financial assistance rules and corporate benefit).
Access to expedite enforcement procedures.
Loan agreements in Spain are mainly drafted in Spanish (although the number drafted in English is increasing) and do not typically follow an industry standard format (such as the Loan Market Association (LMA) documentation in the UK). However, many of the customary features of Spanish acquisition financing documentation do replicate the LMA standards.
Due to time constraints, syndication is normally carried out once the acquisition deal is closed and the acquisition and refinancing facilities are drawn up.
The acquisition structure depends on the jurisdiction of the investors and is generally driven by tax factors. Acquisition finance transactions in Spain usually involve lending funds to a vehicle incorporated by an equity investor (normally a private equity sponsor and, in some cases, the management of the purchased company) to acquire the share capital or assets of a target (Target) and refinance its existing debt. The acquisition facility is then paid with the cash flows generated by Target, which are subsequently up-streamed to the purchase vehicle (NewCo) through:
Loans and fees (subject to financial assistance restrictions).
Pushing down the debt to the Target through a merger with the NewCo.
In most cases, the NewCo is a Spanish entity and subject to Spanish Corporate Income Tax (CIT). Most Spanish companies are either:
Public limited liability companies (sociedades anónimas).
Private limited liability companies (sociedades limitadas).
In each case, shareholder liability for the company's debts is limited to each shareholder's equity contributions.
In general terms, rules applicable to private limited companies are substantially more flexible than those governing public limited companies. Likewise, many of the rules governing private limited liability companies are not mandatory and can be adapted to meet the specific needs and interests of the shareholders through the company's articles of association.
It is not very common to fund a NewCo solely from equity financing. Investors in Spain usually fund NewCos through a combination of debt and equity, the distribution of which will vary depending on the:
Structure of the transaction.
Situation of the credit markets.
In most cases, the financing usually comprises profit participation loans (préstamos participativos) granted by the investors, which are deemed equity for capital impairment tests set out in the Spanish Companies Law. Profit participation loans are deeply subordinated loans in which interest is determined, totally or partially, by reference to an economic variable of the company (profits, turnover or others of a similar nature).
Structures and documentation
Debt financing structures
During the recession, leveraged finance virtually dried out and, in general, new money transactions were scarce. Lenders focused on refinancing or restructuring the debt of their main borrowers and cleaning their balance sheets by selling large portfolios of unsecured and secured loans.
More recently, with Spain's recovery, new money transactions have resurfaced. Leveraged finance deals can be seen again (although the volume of these deals is still well below pre-crisis levels in Spain and current levels in some other EU countries) and the range of financing products available to the borrowers has been extended. Apart from the traditional senior and mezzanine facilities, second-lien facilities, ancillary facilities, bridge-to-equity facilities and equity-type facilities are also offered due to stronger competition. In addition, vendor loans and non-banking loans continue to be used in acquisition financing.
However, the general rule is that these transactions are financed with credit facilities provided by financing institutions, combined with mezzanine or second-lien debt provided by such banks or by specialised investors. Only relatively small transactions have not comprised different types of facilities or loans with different levels of seniority and, accordingly, different levels of return and degrees of risk.
Unlike other jurisdictions (such as the US and the UK), debt security instruments are not commonly used. Only large investment grade borrowers raise capital from the capital market through bonds and notes. However, under a recent reform in Spain, private limited liability companies can now issue debt-type negotiable instruments (such as bonds) and guarantee these instruments issued by a third party. That said, these faculties are capped (at twice the issuer's own funds), unless the issuance is secured by:
Pledge of securities.
Joint and several guarantee from a credit institution (in which case they will not be capped).
Conversely, public limited liability companies have no restrictions.
Bridge-to-equity facilities have not been used extensively in Spain to date. Spanish insolvency regulations increase the risk of this investment, since the banks could be qualified as parties related to the insolvent debtor and therefore their claims under the debt facilities could be subordinated if their stake in the equity amounts to or exceeds either:
5% in listed companies.
10% in non-listed companies.
The main financing documents in Spanish acquisition finance deals are:
Commitment letter. This allows private equity funds to bid on a more equal footing with strategic bidders who can self-finance an acquisition. Spanish financing institutions are still reluctant to ensure the provision of funds in this type of document, whereas the inclusion of material adverse change (MAC) and "diligence out" clauses are standard. Limits to changes in pricing that can be arranged without the borrower's consent have been widened under the "market flex" clauses, and "reverse flex" provisions are not currently included.
Bridge facilities. This is used when the acquisition price must be paid and the Target's debt must be refinanced before a complex structure can be set up. Stepping-up the interest rate of bridge facilities or their short maturity will normally generate an incentive for the borrower to refinance.
Senior term facilities. This is the most common form of debt financing in the Spanish market. Traditionally, this type of loan has been granted to:
Finance the acquisition of the Target by the NewCo, together with equity and (if (applicable) second-lien or mezzanine facilities;
refinance the Target's existing debt;
finance the Target's capital expenditure requirements; and
Finance the Target's potential permitted acquisitions of other companies or assets.
Senior term facilities granted to the Target would be structurally senior to those granted to the NewCo, because they are closer to the source of the cash flows. However, the senior facility agreement and the intercreditor agreement usually correct this structural subordination by requiring the facility agent to distribute the proceeds pro rata among the senior lenders.
Senior revolving credit facilities. These are provided to the Target to fund its working capital requirements. Sometimes a "clean-down" period is required at certain intervals of the life of the facility.
Ancillary facilities. These are not common. When used, the financing documents merely contemplate the Target's right to convert part of the revolving facilities into bilateral letters of credit, guarantees, or term loans with some of the revolving lenders. The conversion is not automatic, especially if the ancillary facilities are intended to rank pari passu with the senior facilities, because the security documents usually need to be amended.
Second-lien facilities. These facilities rank junior to the senior term facilities but senior to the mezzanine facilities. In some transactions, second-lien facilities have benefited from independent second rank security interests, while in other transactions the second-lien lenders have shared the first rank security interests with the senior lenders and agreed in the inter-creditor agreement to transfer or turn over to the senior lenders any proceeds collected from the enforcement of such security interests, until all obligations under the senior facilities are paid.
Mezzanine facilities. These are term loans used to acquire the Target, and are therefore affected by financial assistance rules (see Question 10). Because the mezzanine facilities are junior to the senior and second-lien facilities, mezzanine facilities:
are disbursed in bullet drawdowns;
cannot be repaid early until the senior and second-lien facilities are paid in full; and
have longer maturity periods.
However, in most other aspects, mezzanine debt mirrors senior debt.
Hedging agreements. Since the credit facilities bear a variable interest rate, the NewCo and/or the Target often enter into interest-rate hedging agreements with all or most of the lenders, to ensure that the borrowers' ability to service the debt is not affected by interest rate movements. These agreements usually cover between 50% and 75% of the amount of the senior facilities and must remain in force for between three and five years from financial closing. If the currency of the Target's cash flows and the currency of the financing do not match, currency exchange-rate hedging agreements are also required. The facility agreements can include either:
the execution of appropriate hedging agreements as a condition precedent for financial closing; or
a covenant requiring the borrower to execute the relevant hedging agreements within a short period of time.
Hedging agreements normally rank pari passu with senior facilities.
Hedging facilities are usually documented under separate master agreements, attaching schedules which include specific provisions to make the master agreement coincide with the main terms (for example, representations and warranties, covenants, events of default) of the other finance documents.
The following types of master agreements are used in Spain:
International Swaps and Derivatives Association (ISDA) master agreement;
Contrato Marco de Operaciones Financieras (CMOF), which was updated in 2013 by the Spanish Private Banks Association (Asociación Española de Banca Privada) and is the local master agreement.
In general, the rights of lenders of a syndicate are independent from each other. Therefore, each bank has a separate claim against the borrower, which would, in principle (and unless otherwise stated in the relevant finance documents) allow each lender to individually take any action to protect its rights. As this is a risk for the transaction, the facility agreement and the inter-creditor agreement seek to:
Limit lenders' freedom of action.
Ensure most decisions or actions taken by the lenders are appropriately co-ordinated.
Unlike in the Loan Market Association (LMA) practice, in Spain it is standard practice for the lenders to have an individual right to terminate and accelerate its participation in the facility after both:
An event of default has occurred which is not remedied.
The majority of lenders fail to accelerate the facility during the following 30 calendar days.
If a lender decides to terminate and accelerate its participation, that lender would be entitled to seize the company's assets and to enforce the personal guarantees, but not the security interests (for these, the majority lenders' consent is required). In practice, the individual right to terminate and accelerate is often limited to certain material events of default, such as:
Breach of the financial covenants.
In addition, the termination can also be subject to the terms and conditions set out in the inter-creditor agreements.
Inter-creditor agreements in Spain are similar to those of other jurisdictions, although the specific features established in the Spanish Insolvency Law must be taken into account. In particular:
The debtors do not need to be present.
The circumstances of each case are analysed on a case-by-case basis.
In practice, avoiding the presence of debtors is done to minimise the hypothetical risk that they, or any of their creditors, may either:
Potentially benefit from provisions intended to regulate only the lenders' relations and can try to challenge enforcement on the basis of these provisions.
Seek a claw-back of the inter-creditor agreement if any of the Spanish obligors becomes insolvent.
Contractual subordination in Spain follows international practice. The contractual provisions in this respect do not differ significantly from other jurisdictions.
The facility agreements in Spain also establish that second-lien debt cannot be prepaid until the senior debt is repaid in full. In addition, inter-creditor agreements normally impose blockage periods and standstill periods to second-lien creditors. Second-lien debt is generally used to finance the purchase of Target's share capital and is therefore affected by financial assistance rules. Second-lien facilities normally have a longer maturity date than senior debt, but shorter than mezzanine facilities.
Although not essential to Spanish structures, second-lien and mezzanine facilities can be structurally subordinated to senior facilities. Structural subordination can be achieved by lending directly to the NewCo or even by creating a holding company, either in Spain or abroad (Luxembourg and The Netherlands are the preferred locations), that owns 100% of the NewCo and receives the second-lien and mezzanine financing to then transfer the funds to the NewCo through inter-company loans.
As in other jurisdictions, inter-creditor agreements in Spain usually state that the liabilities owed by the borrower to the primary creditors (the senior creditors, the second-lien creditors and the mezzanine creditors) will rank in right and priority of payment in the following order:
The senior facility liabilities and the hedging liabilities pari passu and without any preference between them.
The second-lien liabilities.
The mezzanine liabilities.
Subordinated, intra-group or parent liabilities are postponed and subordinated to the liabilities owed by the borrower to the primary creditors.
The standard payment waterfall usually establishes that any amounts received by the agent (from enforcement of transaction security or otherwise) will be applied towards:
Any amount owed to the agent.
Enforcement costs and expenses incurred by any senior facility creditor, hedge counterparty, second-lien creditor or mezzanine creditor in connection with the senior facilities, the hedging liabilities, the second-lien liabilities or the mezzanine facility, respectively.
Senior facility liabilities and hedging liabilities pro rata among the senior lenders and the hedging counterparties.
Any person to whom payment is required to be made by law.
Inter-creditor agreements often contain pro rata sharing provisions that provide for all the creditors to share recoveries equally (for example, from the enforcement of transaction security or otherwise). These provisions are adjusted on a case-by-case basis.
Normally, any lenders affected by any situation which qualifies them as subordinated creditors under the Spanish Insolvency Law are excluded from these sharing arrangements (lenders do not suffer the consequences of the legal subordination of other lenders). In addition, according to Spanish law, the creditor applying for the borrower's insolvency would obtain a general privilege of 50% of its credits. Inter-creditor agreements generally establish that:
The 50% privilege would benefit the entire facility if the agent is applying for insolvency on behalf of the other senior lenders.
If the majority of lenders do not agree to apply for insolvency, the 50% privilege would only benefit to the creditors that made the application.
Subordination of equity/quasi-equity
Equity and quasi-equity financing are typically subject to contractual subordination. Inter-creditor agreements governed by Spanish law usually state that prior to the final discharge date, the borrower will not make (and will procure that no other member of its group will make) any payment of these instruments at any time unless the payment is expressly permitted or is a payment expressly authorised in the senior facilities agreement and the mezzanine facility agreement. In any event, the subordination of equity is legally contemplated in the Spanish Insolvency Law.
Extent of security
Some of the main legal features of the security interests granted under Spanish law are the following.
Ancillary rights. The rights of lenders under the security package are ancillary to their rights under the secured obligations. Therefore, any assignment of a lender's participation in a secured obligation must be accompanied by an assignment of that lender's portion of the security package. To enable immediate enforcement in the event of default, the facilities are normally formalised in a public deed. Likewise, the assignment of the relevant portion of the syndicated facility must be formalised in a public deed to avoid enforcement problems.
Approval. Under Spanish law, the general rule is that a company's management body can approve the provision of security interests. However, a vote from the shareholders is normally required, especially when:
Expressly required under the company's articles of association.
The provision of up-stream or cross-stream security interests exceeds the company's objects (ultra vires).
Security is granted over assets which are deemed to be essential for the company (that is, when the amount of the transaction exceeds 25% of the company's asset value pursuant to its latest approved balance sheet).
Security is granted by a private limited company to a third party that is not part of the same group.
Up-stream or cross-stream security interest or personal guarantee. Subject to the financial assistance restrictions and the claw-back risk associated with the provision of this type of security interest or personal guarantee, the provision of up-stream or cross-stream security interest or personal guarantee is not expressly limited or capped in Spain.
However, the directors (or when applicable, the shareholders) must evidence and justify that the up-stream or cross-stream security interests or personal guarantees are granted in the best interest of the company, to avoid any conflict of interest situations (see below, Conflict of interest). The courts have traditionally been very reluctant to recognise up-stream or cross-stream personal guarantee or security interest for no consideration. However, on the basis of a group interest, some scholars and courts (including a recent Supreme Court ruling) argue that up-stream or cross-stream personal guarantee or security interest can be granted if both:
The relevant guarantor receives effective consideration (teoría de la efectiva compensación), which does not always need to be of a quantitative nature.
It does not increase the guarantor's viability and future solvency.
Conflict of interest. The directors and shareholders both have a duty to avoid conflict of interest situations. Directors must ensure that they both:
Refrain from participating in discussions and votes on agreements and decisions in which the director or any of its related persons may have a direct or indirect conflict of interest.
Adopt the necessary measures to avoid situations in which their own interests (or the interests of any other third party) could enter into conflict with the company's interests and their duties to the company.
Shareholders are restricted from exercising their voting rights at a general meeting of the shareholders when the resolution to be passed:
Provides the shareholder with any kind of financial assistance, including the provision of security interests or personal guarantees in its favour.
Releases the shareholder from its obligations that derive from his/her duty of loyalty as a director.
In practical terms, when a company has a single shareholder or is controlled by a reduced number of shareholders, all of which have given their consent to providing a guarantee, and the company has no significant external debt, directors are less likely to be held liable against third parties.
Types of security
Financing documents under Spanish law are frequently secured by security interests and guaranteed by personal guarantees. Lenders will usually seek a security package that is as extensive as possible. However, the costs of creating security interests in Spain and the prohibition of financial assistance will limit the lenders' intentions in this respect. In particular, prior to any debt push-down, the security granted by the Target or its subsidiaries will be used only to secure debt that has not been used to finance the acquisition of the Target's shares (for example, revolving credit facilities or the tranches of the senior loan used to refinance existing debt of the Target's group). Therefore, in practice, these facilities will be structurally senior to the acquisition debt, since their collateral will be "closer" to the principal assets of the Target group.
Under Spanish law, the following security interests can be created:
Pledges (prendas). These are created over moveable assets and possession of the security must be transferred to the pledgee. Some standard pledges include the following:
pledges over shares in the NewCo, the Target and its material subsidiaries (typically, subsidiaries which represent at least 5% of the consolidated earnings before interest, taxes, depreciation and amortisation (EBITDA) or consolidated gross assets of the Target's group); and
pledges over credit rights (for example, those arising from the balance of bank accounts of the NewCo, the Target and its material subsidiaries, operational agreements, insurance policies or hedging agreements).
Real estate mortgages (hipotecas inmobiliarias) . These are created over any real estate assets owned by the NewCo, the Target and its subsidiaries. Real estate mortgages in Spain must be:
executed before a notary public in a public deed; and
registered with the land registry (Registro de la Propiedad) of the place where the asset is located.
Costs and taxes arising from the creation of a real estate mortgage are significant and the granting of these mortgages can be a significant economic burden. These costs and taxes are summarised as follows:
0.5% stamp duty (increased up to 2% certain some autonomous regions), calculated on the basis of the mortgage liability;
notarial fees; and
land registry fees, charged on a sliding scale.
A floating mortgage (that is, a security interest created over a real estate asset to secure an indefinite number of liabilities up to a maximum limit) can be created under Spanish law. However, floating mortgages can only be granted in favour of financial institutions and public authorities (and in the latter case, exclusively to guarantee tax or social security receivables). The floating mortgage deed must describe the:
actual or potential secured liabilities;
maximum mortgage liability (which will cover all the obligations without allocating mortgage liability between them);
term of the mortgage; and
method used to calculate the final secured amount and payable balance.
Chattel mortgages (hipotecas mobiliarias). These can only be created over:
business premises (establecimientos mercantiles);
cars, trains and other motor vehicles;
machinery and equipment;
intellectual property; and
There is a specific type of mortgage for ships (naval mortgage).
Chattel mortgages must be:
executed in a public deed before a notary public; and
registered with the Movable Assets Registry (Registro de Bienes Muebles).
However, these security interests are very rarely used in Spain mainly because:
the mortgagor would not be able to sell the relevant assets without the mortgagees' consent;
most of the assets that can be mortgaged with a chattel mortgage (mainly those which are not moveable) can be covered by a real estate mortgage if expressly agreed by the parties in the real estate mortgage deed;
they entail similar costs and taxes as for real estate mortgages and therefore restrict the debtor's ability to deal with its assets; and
in most cases, the assets which cannot be covered by a real estate mortgage are not valuable enough to warrant the cost of creating a chattel mortgage.
Therefore, chattel mortgages are usually created over intellectual property.
Pledges without transfer (prendas sin desplazamiento). These must be:
executed in a public deed, before a notary public; and
registered with Movable Assets Registry (Registro de Bienes Muebles).
Pledges without transfer can be created over:
harvest from agricultural plots;
animals on plots;
raw materials in warehouses;
merchandise in warehouses;
art collections; and
credit rights held by the beneficiaries of administrative contracts, licences, awards and/or subsidies, provided this is permitted by law or the corresponding granting title;
receivables (including future receivables) not represented by securities and not qualifying as financial instruments for the purposes of Royal Decree-Law 5/2005 of 11 March (RDL 5/2005).
These security interests are very rarely used in Spain mainly because:
the pledgor would not be able to sell the relevant assets without the pledgees' consent;
most of the assets that can be pledged with a pledge without transfer can be also pledged by an ordinary pledge if expressly agreed so by the parties in the deed of pledge; and
they entail similar costs and taxes as for chattel mortgages and they restrict the debtor's ability to deal with its assets.
Security over financial guarantees. Financial guarantees (garantías financieras) are those which secure the fulfilment of main financial obligations (obligaciones financieras principales). The financial obligations are then further secured by a financial security agreement, which gives the right to either:
cash payment (pago en efectivo); or
the delivery of the financial instruments.
Although it has been subject to some disagreement among scholars, the most common construction is that almost any financing document can be secured by financial guarantees.
Financial guarantees are governed by RDL 5/2005, which implements Directive 2002/47/EC on financial collateral arrangements (Financial Collateral Arrangements Directive) into Spanish law. Financial guarantees can consist of security interests created over:
cash, securities and other financial instruments (valores negociables y otros instrumentos financieros); or
credit rights held against financial entities (such as derivatives).
Therefore, the security can consist (although some scholars contend otherwise) of shares issued by a public limited company and credit rights arising from bank account balances.
This type of security interest can benefit from separate enforcement if the debtor becomes insolvent, and the pledges over shares can be foreclosed by either:
private sale (not in a public auction, as is the general rule under Spanish law) conducted by the depository of the shares; or
being directly taken by the pledgee, breaching the general Spanish law principle that any form of security agreement foreclosure which enables the direct and immediate taking of the secured asset by the holder of the security interest, is not permitted).
Likewise, as an exception to the general rule, the pledge of credit rights can be "foreclosed" by set-off since these credit rights are considered "liquid".
Therefore, as set out above:
A pledge will be the form of security taken over shares, inventory, bank accounts and receivables;
A chattel mortgage will be the form of security taken over intellectual property rights and certain types of movable assets (such as planes, cars, trains and other motor vehicles);
A real estate mortgage will be the form of security taken over real estate assets.
The NewCo, the Target and each of the Target's material subsidiaries usually provide a first demand guarantee or other type of personal guarantee in respect of the fulfilment of the obligations assumed by the NewCo and the Target under the financing documents. The first demand guarantee is usually provided to the extent permitted by Spanish law, specifically:
The financial assistance prohibition (see Question 10).
Any conflict of interest restrictions (see above, Extent of security: Conflict of interest).
Under Spanish law, a personal guarantee can be created through either:
An agreement between the creditor and the guarantor.
Operation of law.
To facilitate its enforcement, personal guarantees are usually formalised in a public deed, which clearly indicates the guaranteed amount and includes a liquidation clause (pacto de liquidación). The liquidation clause establishes a process to calculate the outstanding debt and gives the lenders access to an expedite enforcement procedure (if such a clause is not used, ordinary court proceedings will have to be initiated to determine the amount due and enforcement will inevitably be delayed).
Lenders usually require personal guarantees to be called on first demand. First demand guarantees are abstract and independent from the main or underlying obligation: they create a primary liability on the guarantor and are not regulated by law. These guarantees are not subject to the right of excussion (beneficio de excusión), which would allow the guarantor to delay paying the beneficiary of the guarantee until all the debtor's assets have been liquidated.
According to Spanish law, and provided that there are sufficient grounds to conclude that there is a corporate benefit for the guarantor, the same or less obligations can be guaranteed, but never more than those of the main obligor. In addition, some creditor actions may release the guarantor from its obligations. For example, according to the Spanish Civil Code, if the creditor extends the payment term for the debtor without the guarantor's consent, the guarantee is terminated. Accordingly, when financing agreements are amended or novated in Spain, banks require all guarantees to be ratified by the guarantors.
If a Spanish company becomes insolvent (concurso de acreedores), the company's creditors are divided into the following:
Insolvency creditors (acreedores concursales). These have a claim against the insolvency estate (masa activa). Their claims can be divided into the following categories:
privileged claims (créditos con privilegio especial). These are claims that are secured by a specific asset or right (mainly claims secured by a real estate mortgage, chattel mortgage, pledge and pledge without transfer);
general preference claims (créditos con privilegio general). These are paid using the surplus assets of the insolvency estate after the claims against the insolvency estate (créditos contra la masa) and privileged claims (créditos con privilegio especial) have been paid.
ordinary claims (créditos ordinarios). These are claims that do not qualify as privileged claims, general preference claims or subordinated claims (that is, in the absence of a specific rule, all claims will be ordinary claims). Ordinary claims rank pari passu and are paid pro rata;
subordinated claims. These are paid last, in the following order: claims that were reported late to the insolvency receiver (administración concursal);claims stipulated as subordinated under an agreement; claims for interest of any kind; claims for fines; claims of specially related persons; and claims of persons that have been found to have acted in bad faith in a challenge to an insolvency proceeding.
Creditors against the insolvency estate (acreedores contra la masa). These are paid before any assets are distributed among the insolvency creditors. The claims held by these creditors are settled on their respective due dates, regardless of the stage of the proceeding, but without disturbing those assets to be used to pay privileged claims. The list of creditors against the insolvency estate is a closed one and includes:
expenses incurred in the insolvency proceeding; and
expenses necessary for the debtor to continue its business (for example, salaries, utilities).
Since acquisition financing usually includes the refinancing of the Target's existing debt and the granting of cross-stream or down-stream guarantees, there could be a risk of claw-back.
Insolvency. In the context of insolvency, if the debtor becomes insolvent, any act carried out or agreement entered into by the debtor within two years prior to its declaration of insolvency can be set aside (rescinded) by the court if the receiver can prove that the action or agreement was "detrimental to the insolvency estate". This applies even in the absence of fraudulent intent.
As a general rule, creditors can exercise the claw-back action if the receiver does not seek the rescission within two months following the date of the creditor's written request to this end.
The Spanish Insolvency Law does not specifically define the term "detrimental". However, it is possible to conclude that, if an action is justified (that is, the transaction was the most feasible alternative to preventing further deterioration to the insolvency estate), the action should not be considered detrimental to the insolvency estate and should not be rescinded. Likewise, actions and transactions that adversely affect the par condition creditorum (the right of all creditors to be treated equally) may be considered detrimental (for example, actions, agreements or transactions that, while benefiting some creditors, reduce the likelihood of others being paid) even if the debtor's assets are not reduced as a consequence of those actions.
Whether an action, agreement or transaction is detrimental to the insolvency estate should therefore be considered on a case-by-case basis. The Spanish Insolvency Law provides some examples of detrimental actions. An action, agreement or transaction is presumed to be detrimental to the insolvency estate when any of the following are applicable:
It is made, entered into or carried out for no consideration.
It is a disposal for valuable consideration to a "specially-related" party to the debtor under Article 93 of the Spanish Insolvency Law.
It includes the creation of new security interests to guarantee existing debt or new debt that substitutes any existing debt.
It constitutes a prepayment or any similar act of extinction of future obligations secured by a security interest.
The first presumption above cannot be rebutted, and actions or transactions carried out for no consideration will be rescinded, except for liberalities and payments or other acts of extinction of future obligations, except when they were secured by a security, in which case the general presumption rule set out in point four above applies. The other presumptions above are rebuttable. Actions taken in the "ordinary course of business under normal circumstances" cannot be rescinded. However, the Spanish courts will construe what is in the ordinary course of business restrictively.
Guarantees. The granting of down-stream, up-stream and cross-stream security interests or personal guarantees can be subject to claw-back if both:
The guarantor becomes insolvent within two years following the delivery of the guarantee.
The guarantee is considered "detrimental" to the guarantor.
Although down-stream guarantees are likely to entail a benefit for the parent providing the guarantee (such as the expectation of dividend flows or increase in the value of the subsidiary), the position related to cross-stream and up-stream guarantees is less straightforward. Due to existence of a group interest and on the basis of the effective consideration theory (see above, Extent of security: Up-stream or cross-stream security interest or personal guarantee), some recent court rulings have not deemed this type of guarantee a donation or action for no consideration. This is because consideration must be taken into account in the context of the group as a whole rather than as each of the companies of the group individually. This line of reasoning has, however, been disputed.
Finally, guarantees will be protected against claw-back risk if:
They are provided in the context of qualifying "refinancing agreements" (acuerdos de refinanciación) which achieve a minimum level of support from creditors.
They comply with specific requirements or are endorsed by the courts (homologación judicial).
The concepts of trust and security trustee do not exist under Spanish law. Spain has not signed or ratified the HCCH Convention on the Law Applicable to Trusts and on their Recognition 1985 (Hague Trusts Convention), which increases the unlikelihood of a trust being recognised in Spain in the event of a conflict of laws. Moreover, a trust cannot be created by a private agreement of the parties (autonomía de la voluntad), as this is contrary to some core principles of Spanish law.
Therefore, each lender will need to grant a power of attorney in favour of the security agent to enable it to lead a co-ordinated enforcement process on behalf of all of the lenders (or, alternatively, to appear personally in the relevant process). The power of attorney must be notarised and apostilled (or legalised in countries that are not a party to HCCH Convention on the Conflicts of Laws Relating to the Form of Testamentary Dispositions 1961 (Hague Testamentary Dispositions Convention).
Spain currently has no specific thin capitalisation rules or restrictions on debt financings, as these rules were substituted by the interest deduction barrier rules in 2012 (see below). However, it is very advisable to apply a thin capitalisation ratio of 3:1 for the financing of a Spanish company by a related party, as this makes it easier to justify that a financing has been agreed on an arm's length basis.
From 1 January 2012, the deduction of financial expenses is limited in such a way that net financing expenses exceeding 30% of the operating profit in a tax year cannot be deducted for corporate income tax (CIT) purposes, but can be deducted in future tax periods without limitation in terms of time and up to 30% (Corporate Income Tax Law). However, net financing expenses of up to EUR1 million are tax deductible in any case. Therefore, the annual deductible amount will be the higher amount of either EUR1 million or 30% of the operating profit in that tax year.
In addition, deducting interest on leverage acquisitions is further limited. Financial expenses are deductible in the buyer's tax base up to only 30% if the expenses were derived from acquiring companies that were either:
Included in a CIT consolidation group after their acquisition.
Subject to reorganisation transactions in the subsequent four years.
This restriction is intended to avoid the financial expenses payable by the acquiring company being compensated at a group level by creating a tax group or an entity through a merger. However, the above limitation does not apply if either:
During the tax year in which the acquisition takes place, the acquisition debt represents a maximum of 70% of the acquisition price.
Within the following eight tax years the debt is reduced at a rate of up to 30% of the acquisition price.
Spanish law has a general prohibition on the provision of financial assistance. Under this prohibition, public limited liability companies and private limited liability companies are generally prevented from granting financial assistance (including loans, facilities, guarantees or any other type of financial assistance) to third parties to acquire:
Their own shares.
The shares of their parent companies.
Furthermore, private limited liability companies are also prevented from granting financial assistance to third parties to acquire the shares of a company of the same group. Certain exceptions apply to financial assistance provided to a company's employees, and for banks and other credit entities, within the ordinary course of their business.
This prohibition to provide financial assistance derives from Article 23 of Directive 77/91/EC on co-ordination of safeguards relating to formation of public limited liability companies and maintenance and alteration of their capital. Directive 2006/68/EC amended Directive 77/91/EC to make the financial assistance rules more flexible, subject to conditions. Unfortunately, Spain seems to have opted not to embrace this more flexible approach.
Leveraged buyout transactions
There is ongoing debate as to whether the "forward merger", which is the characteristic structure of leveraged buyout (LBO) transactions, is compatible with Spanish financial assistance regulations. Prior to the passing of the Companies Structural Changes Law in 2009, it was generally understood that LBO transactions were compatible with financial assistance restrictions because the aims of the restrictions is to protect shareholders and creditors from the burden of assuming the acquisition-related debt. Given that merger rules grant shareholders particular information and protection (in the form of reinforced quorum and majority requirements for the approval of mergers) and allow creditors to oppose the merger unless their credits are satisfactorily guaranteed, there was a general (though by not unanimous) view that, at least in practice, these protection mechanisms should avoid the risk of the transaction being considered a breach of financial assistance rules.
In 2009, Spain passed the Companies Structural Changes Law which governs mergers (among other transactions). Although not fully satisfactory, Article 35 states that in the event of a merger involving two or more companies, in which any of them has obtained financing within three years prior to the acquisition of a controlling stake in any of the companies part of the merger (or to acquire assets which are essential to operate its business or which are a relevant part of its assets), the following rules apply:
The merger project must specify the resources and the expected repayment calendar to fully satisfy the debts incurred in the relevant acquisition.
The directors must issue a report justifying the acquisition of shares or assets and explaining the merger, including an economic and financial plan containing a description of the resources and the objectives pursued with the transaction.
An independent expert must issue a report on the merger project on the reasonability of the facts set out in the two preceding paragraphs and must expressly state whether any financial assistance exists.
Independent experts are appointed by the Commercial Registry from a list of audit and advisory firms. The applicant has no influence or control over the appointment. However, independent experts usually work on their report in close collaboration with the company and its advisors as they require information and input on the structure.
The law does not provide for the consequences of an independent expert report stating that financial assistance exists. However, there are two main views of this from scholars:
Some consider the report to be merely informative for shareholders and creditors.
Others believe that this makes the transaction unlawful and therefore the registrar should reject its registration with the Commercial Registry, preventing the merger from going ahead.
Case law is still limited on the risk of LBOs being challenged on the basis of a breach of financial assistance rules.
According to some of the most reputed Spanish scholars, the financial assistance rules do not apply to corporate transactions in which the interest at stake is appropriately guaranteed through other rules. Some court decisions have also supported this view. In this respect, the financial assistance prohibition aims to preserve the company's financial solvency in order to protect its creditors and minority shareholders. Mergers are governed by specific rules that are intended to protect both:
Minority shareholders (a reinforced majority is required to approve the merger, directors are required to approve specific reports and the relevant merger is made public in the media).
Creditors (who are given one month to "oppose" or challenge the transaction unless their claims are duly guaranteed).
Therefore, the opinion of the independent expert on the existence of financial assistance is merely informative and should not prevent a merger from going ahead (that is, not be prevented from being registered with the Commercial Registry).
Regulated and listed targets
In principle, acquiring the Target should not require any regulatory consents or licences. However, if the Target operates in a regulated sector which may affect the Spanish national economy (such as banking and finance, insurance, telecommunications, air transportation, energy or healthcare) special supervision rules and licensing requirements could be triggered.
Effect on transaction
If the transaction relates to a regulated industry, the relevant transaction must be structured and documented so that all mandatory authorisations and licences are obtained prior to closing. This usually means structuring the transaction at two different stages (signing and closing) and stating that obtaining the relevant authorisation is a condition precedent for borrowers to draw down any funds.
Specific regulatory rules
The following regulatory rules may apply if the Target is listed:
Royal Decree 4/2015 of 23 October approving the consolidated Securities Market Law (LMV). This governs public offerings, official listings, transactions related to listed securities and takeovers (among other things).
Law 6/2007 of 12 April amending the LMV and reforming the rules on takeover bids and on the transparency of issuers.
Royal Decree 1066/2007 of 27 July on takeover bids.
Methods of acquisition
The most common ways of acquiring a listed company are a takeover bid to purchase the shares of the Target or a merger pursuant to the Companies Structural Changes Law. Spanish law provides for certain regulations on takeover bids. The main types of takeover bids are:
Mandatory bid. A mandatory bid must be made for all of the company's shares, for an "equitable price" and be unconditional. The obligation to make a mandatory bid is triggered when a person acquires "control" of a listed company by directly or indirectly acquiring the Target's securities with voting rights or executing shareholders' agreements.
According to Spanish takeover regulations, control thresholds triggering the obligation to make a mandatory bid are either:
The direct or indirect acquisition of a percentage of at least 30% of the voting rights.
Holding any interest carrying less than 30% of the voting rights but appointing, within 24 months following acquisition, a number of directors which, together with any members already appointed by the bidder (if any) represent a majority of the Target's board of directors.
Mandatory bids must generally be made within one month of acquiring control.
Voluntary bids. For a voluntary bid, there are no restrictions on the proportion of shares to be acquired or on their price, and they can be made subject to certain conditions (for example, the Target's approval of amendments to its articles of association or structural changes, such as a merger, or a minimum level of acceptance).
However, if a voluntary bid leads to the bidder acquiring control of a listed company, it must make a mandatory bid unless the voluntary bid has:
Met the requirements applicable to mandatory bids (particularly, with regard to "equitable price").
Been accepted by 50% or more of the recipients of the bid (excluding those who assumed an irrevocable acceptance undertaking vis-à-vis the offeror).
According to Spanish takeover regulations, bidders intending to take over a listed company must evidence to the National Securities Market Commission (Comisión Nacional del Mercado de Valores) that the necessary guarantees securing compliance with the obligations arising from the takeover bid have been provided.
If the consideration is not for cash (but is, for instance, securities), the regulations are vague and merely state that the offeror must have adopted all reasonable measures to guarantee its satisfaction.
Conversely, when the consideration is totally or partially cash, the offeror must provide a bank guarantee or documents proving that a cash deposit has been made with a credit institution. Bidders normally opt to provide a bank guarantee. Issuing the bank guarantee is usually a drawdown under the relevant finance documentation.
Following UK practice, it is also standard in Spain to include "certain funds" clauses, pursuant to which the circumstances under which the lenders are entitled to refuse to fund the transaction are significantly restricted. Furthermore, and as in other jurisdictions, sponsors increasingly require lenders to offer the same certainty in terms of funding in relation to private acquisitions. In private transactions, "certain funds" defaults are substantially similar to those provided for in Loan Market Association (LMA) documentation and will include only material defaults.
As a general rule, there is no obligation to publish the financing agreements entered into in relation to the takeover bid. However, some information must be made public, such as information regarding the:
Guarantees that the bidder needs to post to settle the bid (including who the guarantors are).
Financing arrangements for the bid.
Effects that this financing could have on the Target.
The bidder must also state whether debt service will depend on the Target's business. If so, the bidder must also include a detailed description of the financing arrangements.
A bidder holding at least 90% of the voting capital of the Target as a result of a takeover bid accepted by at least 90% of the recipients can require the minority shareholders and the holders of the other securities who did not accept the offer to sell all their shares and other securities to the bidder (squeeze-out) (Royal Decree 1066/2007). Reciprocally, minority shareholders can force the bidder to purchase their securities (sell-out) under the same terms and conditions.
The offer document must state whether the bidder intends to exercise this squeeze-out right. The maximum term for a squeeze-out or sell-out is three months following the expiry of the takeover bid acceptance period.
Spain has a public pension system which guarantees a specific retirement pension. Therefore, the potential liability that can be assumed by the investors as a result of private pension schemes implemented by the Target is not as material as in other jurisdictions.
If the Target has implemented private pension schemes the NewCo's acquisition of the Target's shares should not affect any pension schemes held by either the Target or the NewCo, which would continue in force.
If the deal involves the acquisition by the NewCo of a group of organised assets from the Target which qualify as an autonomous production unit with sufficient autonomy to continue functioning independently (the transferred business), a transfer of undertaking could be deemed to exist in accordance with the Spanish Labour Law. This could also happen when pushing down the debt to the Target through a merger with the NewCo.
In general terms, the main consequence of a transfer of undertaking is that:
Employees who are exclusively or mainly assigned to the transferred business will be automatically transferred by operation of law to the NewCo.
All of the employee's labour and social security rights and obligations, including pension arrangements will be transferred by operation of law to the NewCo.
Therefore, in a transfer of undertaking the employees will keep their:
Length of service.
Collective bargaining agreement rights.
All pension benefits (including any pension plans, individual or collective insurance policies and retirement welfare that would need to be set up by the NewCo).
Finally, in the event of a transfer of undertaking, the seller and the purchaser of the transferred business would be jointly and severally liable for all labour liabilities (including pension and social security obligations) existing before the transfer.
The concept of lender liability is not a self-contained concept under Spanish law. The potential liabilities of the lender in an acquisition finance deal will mainly arise if any of the following occur:
The borrower suffers damages as a result of the lender's failure to fund its participation in the financing.
Financial assistance provisions are breached, and therefore the financial assistance transaction (the loan, guarantee or the security) is considered null.
The relevant lender qualifies as a "shadow director".
Lenders should avoid being overly involved in managing the insolvent debtor as they could otherwise be considered shadow directors and have their claims subordinated. A recent amendment to the Spanish Insolvency Law clarified that, unless proven otherwise, lenders should not be considered shadow directors merely because they have set up controls and supervisory obligations to monitor the debtor's business plan. However, this amendment does not completely rule out the risk. Appointing chief restructuring officers or directors in the board of distressed debtors could be a risky move and should be carefully considered.
Debt buy-backs by borrowers or sponsors are not normally contemplated in agreements governed by Spanish law, although exceptions are made for strong borrowers and sponsors, mostly based on the provisions of the Loan Market Association (LMA).
However, in some recent leveraged transactions, lenders have allowed the inclusion of a Dutch auction (that is, a method of selling in which the price is reduced until a buyer is found) in the loan documentation, or a similar mechanism through which the borrower (or its sponsor) can arrange a tender auction to buy-back the participation in the loan from the lenders offering the largest discounts.
A variety of post-acquisition restructurings can be implemented, none of which are unusual under Spanish law.
The most common type of post-acquisition restructuring is pushing down the debt to the Target through a forward merger with the NewCo. However, this can give rise to financial assistance issues because, ultimately, the Target's assets would be financing the acquisition (see Question 10). In this type of restructuring, the parties must be able to evidence the business reasons of the financing to avoid the potential for the debt being re-characterised as equity for tax purposes. This can be evidenced by showing (among other things):
The documentation that formalises the financing.
The real payment of interest in connection with the loan.
The cancellation of the loan through its actual repayment.
To mitigate the application of the financial assistance provisions, many finance documents do not directly require a merger but, rather, include a financial covenant to reach the same result. This covenant requires that a certain level of EBITDA must be achieved within 18 or 24 months after closing, to encourage the NewCo and the Target to merge as part of a debt push-down.
In 2014 and 2015, the following laws were amended:
Insolvency Law. This was amended to provide borrowers and lenders more effective tools and cram-down mechanisms for in and out-of-court proceedings.
Securities Market Law. This was amended to set up a more modern and flexible legal framework for debt issuances aimed at improving Spanish companies' access to debt capital markets.
Companies Law. See above, Securities Market Law.
These reforms have also amended the regulation of other ancillary matters, such as small and medium companies' bank financing, financial credit establishments, securitisations and crowdfunding platforms.
On a separate note, the General Codifying Commission has been drafting a new Commercial Code, which aims to bring together the entire body of law on commercial contracts and companies in a single piece of legislation.
One of the main points introduced in the Commercial Code Draft Bill is that it removes the requirement for an expert to issue a report on the existence of financial assistance in the context of a merger. Although the Council of Ministers approved a Commercial Code Draft Bill back in May 2014, it has not yet been submitted to Parliament, and therefore its actual enactment is uncertain at this stage.
Companies Structural Changes Law (Ley de Modificaciones Estructurales)
Description. These contain unofficial translations that are provided for information purposes only. The Companies Structural Changes Law English version is out of date (updated to November 2011 and does not include latest modifications).
Spanish Companies Law (Ley de Sociedades de Capital)
Description. These contain unofficial translations that are provided for information purposes only. The Spanish Companies Law English version is up to date and includes the latest modifications of July 2015.
Spanish Insolvency Law (Ley Concursal)
Description. These contain unofficial translations that are provided for information purposes only. The Spanish Insolvency Law is updated to August 2015 and does not include the latest modifications of October 2015.
Royal Decree 4/2015 of 23 October approving the consolidated Securities Market Law (Real Decreto en virtud del cual se aprueba el Texto Refundido de la Ley del Mercado de Valores)
Description. As far as we know, there is no updated translation in English available, but the CNMV has an unofficial English version of Securities Market Law updated to July 2012.
Royal Decree 1066/2007 of 27 July on takeover bids (Real Decreto de OPAs)
Description. Uría Menéndez published in 2007 a Guide to the new legal provisions applicable to takeover bids for securities, which contains an unofficial translation of Royal Decree 1066/2007 of 27 July on takeover bids. It does not include the latest modifications of October 2015.
Spanish Labour Law (Estatuto de los Trabajadores)
Description. The Spanish Labour Law. As far as we know, there is no translation in English.
Ángel Pérez López, Partner
Professional qualifications. Spain
Areas of practice. Financing; project Finance; restructuring corporate, acquisition and project finance.
Non-professional qualifications. Law Degree, Universidad Pontificia Comillas de Madrid, 2000; Business Management and Administration Degree, Universidad Pontificia Comillas de Madrid, 2001
Advises lenders and borrowers on transactions in the energy, biofuel, waste treatment and telecommunications sectors.
Advised creditors and debtors on restructuring the debt of some of Spain's biggest companies.
Participated in several sales and acquisitions of non-strategic assets of financial institutions, such as non-performing loans, real estate assets and property management platforms since 2011.
Has worked on some of the most important financing deals that have taken place in Spain in recent years.
Madrid Bar Association.
Member of the board of trustees of the Universidad Católica de Valencia.
Recognised by prestigious legal directories such as Chambers Global, Chambers Europe, IFLR 1000, Who's Who and Best Lawyers in Spain.
Named one of the top 40 lawyers under the age of 40 in Spain and Portugal in the 2015 edition of Iberian Lawyer.
Regular speaker at seminars pertaining to his areas of practice.
Legal teaching: taught the Master's Degree in International Business Law since 2008, the Executive Master's Degree in International Business Law at the Escuela de Negocios CEU since 2009, the Universidad San Pablo CEU's Master's Degree on Access to the Legal Profession since 2014, as well as on the Master's Degree in Energy Finance offered by the Club Español de la Energía since 2009; taught on the Master's Degree in International Legal Practice at the Instituto de Estudios Bursátiles.
Languages. English; German; French; Spanish
Borja Contreras Bernier, Associate
Professional qualifications. Spain, 2010
Areas of practice. Financing (including acquisition finance and corporate financing); corporate law and corporate governance; restructuring.
Non-professional qualifications. Law Degree, Universidad Pontificia Comillas de Madrid, 2010; Business Management and Administration Degree, Universidad Pontificia Comillas de Madrid, 2011
Advises financial institutions and investors on refinancing and restructuring debt.
Recently involved in the sale of non-strategic assets of several financial institutions, such as non-performing loans, real estate assets and property management platforms.
Regularly advises trading companies on corporate governance, general meetings and board meetings.
Professional associations/memberships. Madrid Bar Association.
Languages. English; Spanish