The concept of “own stock” may be defined as holding shares or membership interests of a joint-stock company or a limited company, respectively, by the company itself.
The Spanish Companies Act (Ley de Sociedades de Capital – LSC) establishes different conditions and limits, depending on whether the company is a joint-stock company or a limited liability company, and the classification of the acquisition in accordance with the following 3 types:
I. Original acquisition
As a general rule, article 134 of the LSC prohibits companies from acquiring their own shares/membership interests (or those of their controlling company) upon the incorporation of the company or an increase of capital.
In limited liability companies, the original acquisition shall be null and void as a matter of law (article 135 LSC).
On the other hand, in joint-stock companies said original acquisition does not imply the invalidity of the acquisition, but the obligation of the founding partners (when the situation of own shares occurs in the incorporation stage) -of a joint nature-, to pay up the amount.
II. Derivative acquisition
The derivative acquisition of own shares (or membership interests or shares of the controlling company) on the part of a limited liability company, is only allowed in the following cases, with any acquisitions carried out beyond such cases being invalid as a matter of law (article 140 LSC):
a) When they form part of assets and liabilities acquired as a whole, or they are acquired at no cost, or as a consequence of a court award in order to satisfy the credit of the company against the holder thereof.
b) When own shares are acquired through the execution of a capital reduction via resolution of the general meeting.
c) When own shares are acquired in the event of auction or award to the creditor.
d) When the acquisition has been authorised by the general meeting, and is carried out from freely available profits or reserves and involves the membership interests of a partner who has exited or been excluded from the company, membership interests which are acquired as a result of the application of a clause restricting the transfer thereof, or membership interests transferred mortis causa.
Nevertheless, own shares acquired by a limited liability company in said cases must be redeemed or transferred, in this case respecting the legal and statutory regime for transfer, within the term of three years (article 141 of LSC).
Joint-stock companies may also acquire their own shares (and membership interests created or shares issued by their controlling company), when the following conditions are present (articles 146 and 148 LSC):
a) That the acquisition has been authorised via resolution of the general meeting and may not exceed five years.
b) That the acquisition, comprised of the shares held by the company in its portfolio, does not have the effect of reducing net equity to below the amount of the company’s capital plus the reserves that the law or bylaws designate as restricted reserves.
c) That the nominal value of own shares does not exceed twenty per cent of company capital.
d) That the shares acquired are fully paid up, unless the acquisition is free of charge. Otherwise, the acquisition shall be null.
III. Unrestricted acquisition of own shares
Furthermore, joint-stock companies may acquire their own shares, or the membership interests or shares of the controlling company in the following cases (article 144 of the LSC):
a) When own shares are acquired in execution of a resolution reducing share capital adopted by the general meeting of the company.
b) When the membership interests or shares form part of assets acquired as a whole, with the limitation that they must be transferred within a maximum term of three years.
c) When the membership interests or the shares which are fully paid up are acquired at no cost, with the limitation that they must be transferred within a maximum term of three years.
d) When the fully paid up membership interests or shares are acquired as a result of a court order for the settlement of a credit held by the company against the owner thereof.
Consequences of the infringement
Membership interests and shares acquired by joint-stock companies in contravention of the aforementioned conditions, carry the obligation of the company to transfer said membership interests and/or shares within a maximum term of one year.
If they are not transferred, the company must proceed with the redemption of own shares with the consequent capital reduction. And in the event that the company does not reduce its capital motu proprio, any interested party may apply for this action via a Court Clerk or Registrar of the commercial registry corresponding to the place of the registered address of the company. Likewise, if the agreement of the general meeting is contrary to the capital reduction or cannot be reached, the directors shall be obliged to apply for a capital reduction before the court or commercial registry.
Likewise, in the event of the non-fulfilment of the aforementioned requirements, article 157 of the LSC provides for a penalty system that may entail fines for the amount of up to the nominal value of the membership interests assumed or shares subscribed, with the directors of the offending company and, where appropriate, those of the controlling company who have induced the offence being held liable for the offence, with not only the members of the board of directors, but also the directors or persons with powers of representation of the offending company being considered as directors.
Carla Villavicencio
Vilá Abogados
For more information, please contact:
2nd July 2021
