Article 160 of the Spanish Companies Act, in its current wording, states certain competences of the general meeting, including section f), the text of which literally reads,
“The acquisition, disposal or the contribution of company’s assets to other companies. The essential nature of assets is assumed when the amount of the operation exceeds 25% of the value of the assets which appear in the latest approved balance sheet”.
The main problem arises from the practical application of this precept, especially when the transaction is conducted before a notary public, inasmuch as the Notary Act requires that the notary ensures the formal and material consistency of the acts in which he intervenes.
As such, the question is whether the notary public serves to make a value judgement on whether the asset object of the transfer is of an “essential” nature or not on the part of the transferor.
In this regard, the General Directorate for Registries and Pubic Notaries (Dirección General del Registro y Notariado – DGRN) highlighted, in a resolution dated July 8th 2015, the extent of the notary’s obligations in this area as follows:
a) The basic purpose of article 160.f) consists of preventing certain operations from being conducted without the authorisation of the general (shareholders) meeting, when such operations correspond to the latters’ competence. These include operations whereby the corporate object is indirectly pursued, those leading to the winding up or liquidation of the company, and those corresponding to a significant change or replacement of the corporate object.
b) When the sale of a particular asset takes place, it is quite difficult for the notary public to assess whether said asset may be considered an essential asset. Nonetheless, the notary public has a certain obligation to ascertain and interpret the global willingness of the grantors, and must reflect in the notarial deed “the elements and circumstances necessary for assessing the correctness of the business and establish the good will of the third party contracting with the company (art 24 of the Notary Act). Hence, the Notary may demand a certificate from the administrative body or a declaration from the representative thereof regarding the non-essential nature of the asset subject to transfer, as a preventive measure.
c) Notwithstanding the above, neither producing the certification of the general meeting nor the representation of the representative of the administrative board should be interpreted as a sine qua non condition for granting the public deed, and even less so for its registration. Having said that, the DGRN reminds us that“the declaration contained in the public deed expressing that it is not an essential asset, improves the position of the counterpart in respect of its duty of diligence and assessment of serious fault.”
The second issue is whether the registrar is entitled to correct the notary public when the former believes that the asset is indeed an essential one. In this regard, the judgement passed by the Supreme Court of 24th October 2000 establishes that the responsibility should fall upon the notary public and the registrar to issue an opinion of legality on the legal business which is the object of the public deed, aimed at preventing illegal acts from being included on the public registry. On the other hand, said resolution of the DGRN of 8th July 2015 intends to clarify that the Registrar may issue a second opinion of legality following the opinion issued by the notary public, allowing the registrar to refuse the registration. This, however, is always limited to the following specific cases and circumstances:
• When it is clear that the asset object of the transfer is of an essential nature to the transferring company and this can be discerned from the resources available to him when qualifying the public deed submitted to the registry.
This second perimeter control function conferred to the registrar suggests more theory than practice if we consider that what is “evident” (that is to say, what is obvious or clearly perceived) to the registrar, should have also been previously “evident” to the notary public, it being more likely that the registrar has less data regarding the details of the operation and its participants than the notary public, for the purpose of making a value judgment on the essential nature of the transferred asset.
It can be concluded that the notary public must contrast the appearance of the legality of the operation based upon the data and the circumstances of the case, such as the intentions of the parties of the legal business at issue or the particularities of the transaction. Thus, an operation which constitutes the transfer of an asset or a set of assets, which apparently represent the backbone of a company’s productive or economic activity, should be a clear sign for requiring from the representative of the transferring company, either a statement that the operation does not concern an essential asset, or an authorisation from the general meeting. However, we understand that the notary public must not be required to fulfil a duty that exceeds the set limits, in such a way that, if finally no declaration was made by the administrative board’s representative or said person failed to provide the certificate issued by the general meeting, the notary public should not object to the granting of the public document (and the registrar should not prevent its registration, except in the case mentioned above). The reason for that lays on the fact that the “in bonis” purchaser, acquiring in good faith and without serious fault, is protected and will not see his rights undermined, as Article 234.2 of the LSC makes the operation binding for the company, without prejudice to any action that may be brought against the representative thereof who intervened in the transfer of the essential asset, and acted beyond his competences or the powers of attorney bestowed upon him.
Thirdly, article 160.f) of the Spanish Companies Act (LSC) contains a presumption regarding the essential nature of the asset. The asset is deemed “essential” when the amount of the operation exceeds 25% of the value of the assets according to the most recently approved company balance sheet. This wording lends itself to possible doubts in its interpretation, given that an asset, which on the balance sheet may represent a value exceeding 25% of the assets on the balance sheet, perhaps is not really considered to be essential for the company; we may also consider cases whereby the value granted to the asset on the latest balance sheet does not substantially coincide with the actual value at the time that the operation takes place – whether it be higher or lower. However, we should remember that we are dealing with a rebuttable presumption, which consequently, allows proof to the contrary, in which case, the declaration of the representative of the company in this sense before the notary public should be considered to be sufficient. Questions arise, however, as to what would happen if, despite the explanations of the company representative, the notary public was of a different opinion. In our opinion, in spite of this, and unless the circumstances reveal that clearly an essential asset is involved, the express declaration of the company representative should be sufficient for the granting of the public deed to go ahead.
Finally, in order to determine the quantitative threshold of the presumption of section f) above, we are referred to the “amount of the operation” in relation to the “value of the assets” of the latest balance sheet, which leads us to ask why does the legislator use the term “operation” instead of a more identifiable concept, as would be “amount assigned to assets by the intervening parties”. It seems to be a confusing method because an “operation” may consist of an accumulation of transactions among which, although not exclusively, the transfer of the alleged essential asset may be found, and therefore, the amount of the operation as such may become higher than the mere price of the particular asset. The direct comparison between “asset value” and the “amount of the operation” makes it necessary to dissect which part of the price of the operation should be assigned to a particular asset, and once defined, whether this amount is a verifiable value, given that an element to be considered is that the asset may have been object of a transfer at a price intentionally below market value or book price, in compensation for other goods or rights contained in the operation transferred at a higher price. In light of this, it seems reasonable to conclude that the value of the asset assigned on the balance sheet should be taken into account, without interpreting the concept of the “price of the operation”, given that what is agreed by the parties in the operation may be arbitrary or mediatized by the operation, in which the transfer of the asset in question is encompassed, as a whole, whereas the reference to the value of the assets on the balance sheet is specific and easily identifiable data.
Eduardo Vilá
Vilá Abogados
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20th November 2015
