Law amending the Corporate Enterprises Law (LSC) for the improvement of corporate governance (I): Shareholders Meetings

On December 4, 2014 Law 31/2014, of December 3, 2014, amending the Corporate Enterprises Law (Ley de Sociedades de Capital or “LSC”) for the improvement of corporate governance was published in the Official State Gazette. This new law is based on the recommendations set forth in the report prepared by the Committee of Experts created by the Council of Ministers for such purpose, which included the Committee’s proposal for legislative reform to promote the good governance of enterprises.

The amendments can be grouped into two major categories:  those relating to the shareholders’ meeting and those relating to the board of directors. 

We will focus here on the reforms relating to the shareholders’ meeting, which are aimed at extending the powers of the shareholders’ meeting, strengthening the rights of minority shareholders and ensuring the transparency of information received by shareholders.

The following are the main legislative amendments relating to the shareholders’ meeting and to shareholders’ rights:

1. Extension of the powers of the shareholders’ meeting

– Corporate enterprises: the powers now include the acquisition, disposal or contribution to another company of essential assets (article 160), as well as the power to act in matters of management (article 161).

– Listed companies: the powers now include the incorporation of activities essential to subsidiaries, transactions with an effect equivalent to that of the company’s liquidation, and approval of the directors’ remuneration policy (article 511 bis).

 2. Rights of minority shareholders

– The 5% holding stipulated by the LSC for exercising certain minority rights is reduced to 3% in listed companies (articles 495 and 519).

 3. Call notice

– The right to information prior to the holding of shareholders’ meetings at listed companies is enhanced, in particular with respect to the appointment of directors (article 518).

 4. Right to attend the shareholders’ meeting

– The maximum threshold that can be stipulated in the bylaws of listed companies for attending the shareholders’ meeting is set at 1,000 shares, while the former general rule stipulated 1/1000 of the capital stock (article 521 bis).

 5. Voting at the shareholders’ meeting

– At all corporate enterprises, a separate vote of the shareholders’ meeting will be mandatory for matters that are substantially independent (e.g., appointment, ratification, reelection or removal of each director, independent articles or groups of articles in the amendment of bylaws or other matters where so provided by the company’s bylaws -article 197 bis-).

– New measures have been included for dealing with conflicts of interest in decisions of the shareholders’ meeting.

– A more suitable treatment is given to the delegation of representation and to voting by intermediary entities (article 524).

 6. Adoption of resolutions at the shareholders’ meeting

– Questions regarding the calculation of the majority have been answered for all corporations (sociedades anónimas) (article 201). Ordinary resolutions will require a simple majority (more votes in favor than against), while special resolutions (article 194) will require an absolute majority (more than one half of the shares owned by shareholders present or represented at the meeting), except on second call where shareholders owning between 25% and 50% of the subscribed voting capital are present or represented at the meeting, in which case the affirmative vote of two thirds of the capital owned by those shareholders will be required.

 7. Shareholders’ right to information

– Corporations (article 197). The legal consequences of the various forms of the right to information are differentiated.  A violation of the right to information exercised during the shareholders’ meeting will entitle the shareholder to demand performance of the information obligation and the related damages, but will not be a ground for challenging the shareholders’ meeting.  Precautionary previsions are also introduced according to which this right must be exercised in good faith, thus avoiding abusive exercise.

– Listed companies (article 520). The period in which shareholders can exercise their right to information prior to the shareholders’ meeting is extended up to five days prior to the meeting. There is now an obligation for the answers to questions asked by shareholders to be posted on the website from the date of the answer.

 8. Challenge of resolutions

– Reforms are included with a view to maximizing the material protection of the corporate interest and the interest of minority shareholders, as well as to avoid the opportunistic use of the right to challenge, applicable to all types of corporate enterprises (articles 204, 205, 251 and 495).

 9. Shareholders’ associations and forums

– The reform develops the regulations of shareholders associations at listed companies by stipulating the requirements for their formation and the prohibition against receiving any economic amount or advantage from the listed company, including the obligation for them to have their accounts audited in order to give their actions greater transparency (article 539.4).

 10. Knowledge of the identity of shareholders

– The reform reserves the right of shareholders of listed companies to know the identity of shareholders’ consortiums that own a holding of at least 3% of the capital stock, as well as of shareholders’ associations formed at the issuer and representing at least 1% of the capital stock, exclusively for the purpose of facilitating communication with shareholders for the exercise of their rights and the optimum defense of their common interests (article 497).

Garrigues Corporate Department