With regards to simultaneous capital increase and reduction operations, also known as “accordion operations”, Article 343 of the Spanish Companies Act establishes that:
- The agreement to a reduction in company capital, either to nil or to a level below the legal minimum, may only be made when a transformation of the company, or an increase in its capital to a number equal to or greater than the aforementioned legal minimum, is simultaneously agreed.
- In any case, it shall be mandatory to observe the preemptive right of the partners.
These operations normally aim to correct a negative equity situation that a company might find itself in, deriving from the accumulation of losses. This correction is comprised of two successive operations that must take place simultaneously: the first consists of the reduction of company capital, either to nil or to a level below the legally prescribed minimum, under the protection of Article 5.1 of the Spanish Companies Act (SCA); the second of the increase in the same company capital, through which said company capital will necessarily return to a quantity equal to or greater than the minimum legal amount established in Article 4 of the SCA. This second operation may be carried out through a capital contribution or through other non-monetary assets.
Article 304 of the SCA stipulates that in the case of capital increase operations through the issuing of new company membership interests or shares , charged against monetary contributions each member will have the right to assume or subscribe a number of company membership interests or shares proportional to the nominal value of those that they hold.
In addition, in a resolution dated the 7th of February 2022, the Directorate General of Legal Security and Public Trust (hereinafter, the “DGLSPT”), had posited that the preemptive right was limited to the cases provided for under Article 304 of the SCA, and rejected this in cases of capital increase made by credit compensation, to the extent that the latter cases are regulated specifically under other sections of the law.
That said, Article 343.2 reminds us that “in any case, it shall be mandatory to observe the members´ right to preferential assumption or underwriting.”
Faced with this apparent contradiction, there is the reasonable doubt that in those accordion operations in which the capital increase is non-monetary, – for example, through a credit compensation – the partners continue to have the preemptive right to assumption or subscription.
The DGLSPT has resolved the problem through a resolution dated the 5th of May 2022, in which the following case is discussed: an “accordion operation” was carried out in which the general meeting of partners of the company adopted through a majority vote (although with one fifth (1/5) of the members against and the rest abstaining), the decision to reduce the company capital to nil and increasing it simultaneously through offsetting a credit from a third party. It is worth noting the following about this particular case: (1) all partners participated in the meeting; (2) the partners waiver of their preemptive right to preferential assumption with regards to the new company membership interests was not reflected in the minutes of the meeting; (3) the report of the management body stated that the partners’ pre-emptive right to subscribe the new membership interests would not apply to the capital increase.
The DGLSPT renounced the separate analysis of the operation of company capital increase with respect to the operation of reduction, since the “accordion operation” is a complex act where the reduction is not valid without the concurrence of the subsequent increase, therefore, it is unique and different in nature. It deems that the preemptive right of the partner within the framework of an “accordion operation” has a reinforced objective; we are not just dealing with an ordinary mechanism of anti-dilution (characteristic of the common capital increases), but it also fulfills the objective of preventing that with a majority agreement, the minority partners are not excluded de facto from the company or that their participation is not reduced to a symbolic level as a result of the first of the agreements (the reduction of capital to nil). From this perspective, the expression “in all cases” of article 343.2 has the literal meaning of affecting all operations where the partner holds such right. It also cites that the operation may have been carried out via other methods of non-monetary increase, an increase by installments or a mixed increase, in which case the preemptive subscription right of the partner would not be applicable.
With regard to whether it is possible to understand that the fact that the decisions may have been taken with all partners present, and that the mandatory report of the management body’s report already warned of the lack of concurrence of the right of assumption in this operation, constitutes a tacit waiver of such right (the DGLSPT interprets that this is not the case) for various reasons:
(i) because the aforementioned report has no relevance to the expression of waiver of the right of assumption, since this issue of the preemptive right is not a mandatory content of the report;
(ii) because the partners are not obliged to give their opinion on the matter, and
(iii) because the waiver of the right must be unequivocal, which is not achieved by the mere issuing of the report or its acknowledgement by the partners, especially in the case under study where some of the partners voted against it.
In conclusion, it can be seen from the aforementioned resolution that in “accordion operations” the preemptive right must be respected in all cases, even if the the capital payout is non-monetary, and without considering the purpose being pursued and the fact that there is no intent to defraud or harm the minority partners.
Eduardo Vilá
Vilá Abogados
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3rd June 2022
