Approval of the Companies Act reform raises the bar on corporate governance

Written on 4 Dec 2014

On 4 December 2014, Law 31/2014 which modifies the Spanish Companies Act in matters of corporate governance was published in the Official Spanish Gazette. Changes to the text suggested by the different parliamentary groups were not approved and as a result the text submitted by the Spanish House of Commons (Congreso de Diputados) was not modified. 

The main purpose of the amendments introduced in the Companies Act is to promote corporate practices in Spain based on management transparency and risk control. As a result of modifying the Companies Act, practices, which were previously recommended in corporate governance codes, now become binding by law. The aim of these modifications is to ensure that companies in Spain reach the highest levels of compliance in corporate governance matters. This is considered essential in order to generate higher value for Spanish companies and increase the trust of investors.

The amendments introduced can be grouped according to the shareholders’ meeting or the board of directors. In relation to the shareholders’ meeting, we highlight the following points: 

  • The threshold to exercise the rights of minority shareholders in listed companies is reduced from 5% to 3% of the share capital. Moreover, in listed public limited companies the period during which shareholders may exercise their right to information before a general meeting is reduced from 7 to 5 days before the meeting is held. 
  • The current rule applicable to limited liability companies that establishes the prohibition to vote if shareholders may obtain a benefit from voting in certain clear cases of conflict of interest, has now been extended to public limited companies. Furthermore, in those cases in which a resolution has been adopted by the decisive vote of the shareholder or shareholders involved in a conflict of interest, a presumption of infringement of the social interest is established.
  • An additional competence of the general shareholders’ meeting is introduced, consisting of the approval of any corporate transaction such as the acquisition, transfer or contribution of essential assets, presuming that an asset will be essential when the volume of the operation is more than 25% of the total assets on the last balance sheet approved. 
  • In relation to the system of challenging corporate resolutions, the distinction between void and voidable resolutions is eliminated and the period to challenge a resolution is extended from 40 days to one year. Additionally, in order to avoid an abusive and opportunistic exercise of this right, the entitlement to challenge has been limited, and it now requires at least one per cent of the capital (one per mille in listed companies) to be able to exercise said right. 
  • All companies shall include in their annual report the average payment time to suppliers. Additionally, companies which are not listed and do not file abridged annual accounts shall publish this information on their webpage, should they have one. Likewise, listed companies shall also publish their payment time to suppliers on their webpage.

One of the most significant novelties in relation to the managing body is the regulation regarding the directors’ remuneration. Such regulation is introduced in order to reach more transparency regarding directors’ remunerations and adapt them to the real economic evolution of the company. The main features of the amendments related to this matter are the following:

  • The by-laws of companies where the position of director is remunerated shall not only indicate this point but shall also set out the remuneration system, which has to be reasonable, and in accordance with the company’s situation and the duties and responsibilities of the position.
  • When a Chief Executive Officer (Consejero Delegado) is appointed or executive roles are given to a member of the board of directors by means of a different title, the company should enter into an agreement with this member of the board and such agreement has to be approved by two thirds of the governing body.
  • In listed companies, the remuneration policy shall be approved by the general shareholders’ meeting as a separate item on the agenda, at least every three years, and the vote shall be binding. Furthermore, in these companies, the annual remuneration report will still be submitted to the shareholders meeting for a consultative vote, but should the vote be negative, a new remuneration policy for the following year will have to be voted at a shareholder’s´ meeting. 

Other amendments regarding the board of directors that deserve special attention are the following: 

  • The introduction  of the business judgement rule in our legal system in order to limit the scope of judicial control over strict strategic business decisions made by directors, as long as the director has acted in good faith, without personal interest in the matter, having sufficient information and in accordance with an appropriate decision making procedure.  
  • The recruiting processes of members of the board for listed companies shall facilitate the recruitment of women and encourage the appointment of women to the board of directors. Moreover, the term for office for the directors shall not exceed four years in contrast to the current term of six years. 
  • Should the same individual hold the office of chairman and also be an executive member of the board of a listed company, a coordination director shall be appointed. Such director shall necessarily be an independent director, in order to avoid excessive accumulation of power in one person, acting as a counterbalance and enabling the board to act independently from the management team. 

Certain amendments introduced in the Companies Act entail statutory, regulatory or organizational changes for companies, and, consequently, a transitory regime is applicable to them. Those amendments regarding the director’s remuneration and, in the case of listed companies, the audit committee and the appointment and remuneration committee  will enter into force on 1 January 2015 and shall be agreed in the first shareholders’ meeting held after that date.