The Royal Decree-Law 5/2023 (Real Decreto-ley, RDL 5/2023) introduced a comprehensive regulation of the structural modifications of companies in Spain, harmonising them with EU directives and establishing processes that guarantee the protection of the interests of partner, creditors and workers. When it comes to internal mergers, the regulation provides for a number of simplifications that look to streamline reorganisation operations within the same company group.
In this context, the recent ruling of the Directorate General of Legal Security and Public Trust (Dirección General de Seguridad Jurídica y Fe Pública or DGSJFP) on the 16th of December 2024 marks a pivot in the interpretation of the Structural Modifications Law (Ley de Modificaciones Estructurales or LME). In particular, it specifies that in mergers by absorption of wholly-owned subsidiaries without employees no directors’ report is required, not even as regards the effects on employment.
Case analysis: Intra-group merger without employees
The ruling of the DGSJFP analyses a merger by absorption scenario in which the parent company, owning 100% of the capital of the subsidiary company, agrees to absorb the latter through the unanimous decision of the universal partners’ meeting. This case’s particularity lies in the fact that the absorbed company does not have any employers which generated an interpretative conflict over the need for a trustee’s report outlined in Article 9.2 of the LME.
The Commercial Registry had suspended the registration of the merger arguing that, although Article 9.1 of the LME exempts the report for partners when the merger is approved at a universal partners’ meeting, Article 9.2 of the LME establishes that the employees’ rights to information cannot be restricted. Therefore, the Registry believed that the management body had to show that the directors’ report about the effects on employment had been created and made available to the employees, despite the fact that the absorbed company did not have employees.
The DGSJFP’s Interpretation: the Prevalence of Article 53 of the LME.
The DGSJFP revokes the Registry’s position and orders the registration of the merger, according to the following reasons:
- Application of the special rule of Article 53 of the LME.
The Directorate General emphasizes that fusions in which the absorber owns 100% of the capital of the absorbed, the special rule of Article 53 takes precedence over the general rule of Article 9. Article 53 makes it possible to dispense with the directors’ report in these scenarios, without differentiating between the section for partners and the section for employees.
- The merger of a wholly-owned subsidiary does not alter the power structure nor the company’s composition.
The ruling highlighted that this type of merger is ‘merely a company reorganisation’ within a group and, therefore, does not substantially affect labour relations. As a consequence, requesting a report for employees in a merger in which there are no employees lacks justification.
- Guarantee of labour rights in internal mergers
The ruling stresses that this simplification does not entail a reduction in workers’ rights, given that the provisions of Article 44 of the Workers’ Statutue (Estatuto de los Trabajadores) is still applicable in the case of the succession of the company.
Practical Impact: Internal Mergers in 24 hours
One of the most relevant aspects of this ruling is its impact on the speed of intra-group mergers. By eliminating the need to create, publish and deliver the directors’ report when the absorbed company does not have any employees, the timescales for the execution of a merger are significantly reduced.
This exemption is justified because, in a merger by absorption of a wholly-owned subsidiary, there is no real change in the structure of the group or in the control of the absorbing company. The absorbing company already owned all the capital before the operation and so the merger does not change its shareholding or governance. In this context, the directors’ report loses its reason for being, given that its principal function is that of informing partners and employees about the impact of the operation, something that is irrelevant when the parent company already completely controlled the subsidiary and the latter does not have employees that would be affected.
In addition, the ruling of the DGSJFP clarifies that the merger of a wholly-owned subsidiary does not involve substantial changes in either the operating or financial structure of the absorbing company. In practical terms, it is an internal reorganisation with no relevant external impact. As a result, demanding a report about the labour effects in a scenario where there are no workers is useless and only introduces unnecessary bureaucratic obstacles.
In accordance with this interpretation, once a merger agreement has been reached and the publication as required in Article 10 of the LME has been carried out, the public deed can be executed immediately. This opens the door to the possibility of agreeing in the General meeting, notarising and registering this type of merger all in one day, without needing to endure the necessary timescales that, in normal circumstances, can prolong the operation for weeks.
Furthermore, the ruling also clarifies that this interpretation can be applied in other cases of simplification of mergers, like the absorption of 90% owned companies (Article 54 of the LME), mergers between sister companies (Article 56 of the LME) and simplified divisions under Article 71, as long as the absorbed company does not have employees.
A decision aligned with business efficiency
DGSJFP’s ruling represents a step forward in the simplification of internal mergers and reinforces the interpretation that, in intra-group reorganisation operations formalities that add no value to the procedure must be eliminated. This pronouncement allows businesses to optimise processes, reducing costs and timescales. However, if as a result of this ruling there is an avalanche of express mergers registered, then perhaps there is no other option for the legislator to put the brakes back on, but, in the meantime, if you can merge in 24 hours, do not leave it until tomorrow.
Álex Santolaria
Vilá Abogados
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21st of February 2025
