Business Entities and Corporate Governance in Spain

Posted on Mar 1, 2025 in Law & Jurisprudence

Associations and Foundations

Associations and foundations are legal entities without profit in mind:

a) Associations (Organic Act)

  • Composed of at least three members (physical and legal entities).
  • Members contribute with knowledge, means, and activities to reach common legal targets of particular and general interest.
  • Its legal identity (personality) is acquired at the foundation minutes.
  • Associations will jointly respond to all obligations against third parties. In particular cases, members will jointly respond to third parties when one of them has been part of a contract.
  • The general meeting is the supreme body, composed of all members, and agreements are reachable by majority principle (1 member = 1 vote).
  • There must be a board of directors, but only members of the association can be on the board.
  • Members can leave the association at any time.

b) Foundations

  • The Spanish constitution states: “The right to set up foundations for purposes of general interest is recognized in accordance with the law.”
  • Foundations are legal entities in which a person, the founder, gives assets freely for common use for activities determined by the founder.
  • A foundation is formed by its registration.
  • A difference from associations is that foundations do not have members.
  • The elements of foundations are donations/contributions and assets.
  • The bodies are: Management body and control body. Public administration supervises foundations.

Mercantile Entities

Mercantile entities can be divided as:

  1. Capital companies: With the liability of the shareholders limited to the amount of capital contributed by each. Agreements are taken by the majority rule. Examples include SA (Sociedad Anónima), LLC (Limited Liability Company), and SRL (Sociedad de Responsabilidad Limitada) corporations.
  2. Personal companies: Give importance to the members. There are two types:
  • General partnership
  • Limited partnership

General Partnership

A company in which all partners collectively, under a name, agree to participate in the proportion established (same rights and obligations), responding with all their property to the result of corporate transitions.

  • Company name: General partnerships must engage in business under the name of all its members, followed by the words “and company.”
  • All partners are allowed to attend direction (“to be administrator”).
  • The liability is:
    • Subsidiary: Have to respond.
    • Personal: To third parties.
    • Unlimited liability: Losing just the initial capital, but no more.
  • A personal nature means that it is prohibited to transfer shares, and the dissolution of the company is mandatory in case of death, bankruptcy, or incapacity of the partners.
  • The general rule to apply is writing or recording for creation, and the obligation is contributing with money, property, or industries to the company.
  • Rights:
    • Participate in social management.
    • Right to information (accounts, state of the company).
    • Participate in profit distribution.
    • Right to participate in the liquidation of the company.

Limited Partnership

A company in which a partner responds with all its assets on the outcome of corporate management.

Its features:

  • Two classes of members, like the general partnership.
  • Operates under a name; “a company” must be added to the name.
  • Limited partners are deprived of any interference in corporate management.
  • Identical legal status to the general partnership obligations.
  • Contribute with social capital.
  • Indemnify for damages (abuse of authority, gross negligence, etc.).
  • Bear the losses.
  • They cannot include their names in the company name.
  • Rights:
    • Economic Contest: Identical to those of the General partnership.
    • Political administration content: Right to information is restricted.

Capital Companies: Economic Relevance and Regulations

  • The capital prevails over the title of partner.
  • From shareholders to investors.
  • From commercial code to the Stock Company Act.
  • International regulation.

Concept and Types

  • Corporation (Sociedad Anónima) has a more detailed regulation.
  • Limited liability companies: As a legal regulation fitting small, closed companies.
  • Stock partnership (Sociedad comanditaria por acciones): Stock Companies Act.

Corporation

The concept of capital is essential as a limit for shareholder’s liability. It has to have a commercial nature, no matter which is the corporate purpose. The minimum capital depends on the type:

  • €60,000 Corporation + stock partnership.
  • €3,000 Limited liability companies.

Corporate Name, Nationality, and Address

a) Corporate name: The corporation name is not the same as a trademark and it’s the first identification item, useful for advertising. The registration is registry on the Registry Regulation.

b) Nationality and address: The nationality of a corporation is not only useful as identification but also as a criterion to determine the applicable legal system. It is defined by the place where the address is fixed. The address is determined according to the effective activity. A website is compulsory for LC, with a publicity purpose.

Sole Ownership (SLU)

It is individual from the individual entrepreneur, undertaken on a business person, which is separate from the legal personality. There are two classes:

  • Initial (original).
  • Upcoming (sobrevenida).

Publicity is compulsory. The consequence of the lack of publicity is the liability of the single shareholder. The decisions must be formalized in writing (no resolution).

Group of Companies

They are regulated by tax law. A special concept is to have control of the companies. It is separate the legal personality (difference to individual undertaken from the businessman). It must be holding and subsidiary. The number of the group must be determined.

Topic 5: Incorporation of Stock Company

Type of Incorporation

Companies are incorporated in a “simultaneous way.” The “successive way” happens in almost no cases.

Memorandum of Incorporation (Escritura de constitución)

The shareholders meet before a Public Notary to sign a deed with certain compulsory statements and representation. Bylaws (Estatutos sociales) and other documents required for incorporation must be attached. The following and further formal steps are: tax number, registration in the social security, licenses, etc.

Registration at the Trade Registry

The deed must be registered at the Trade Registry of the province where the corporate address is based. The registry may deny the registration should errors be found in the deed. It is called “assessment” (calificación). Such decision may be appealed, leading to a resolution from registries and notaries, which create legal doctrine. A company incorporated but not registered may be “in formation” (sociedad en formación) or “irregular” (sociedad irregular).

Nullity of Companies

It is linked to the concept of company as a contract; if any of the essential conditions or requirements is missing, the company is void and subject to nullity. The company must be then “undone” as if it would be liquidated.

Topic 6: Shareholder’s Contribution

General Issues

Assets are rights which shareholders contribute when subscribing stock capital, in order to support its reality and integrity. However, the contribution shall never consist of labor.

Contribution in Cash and in Kind

In cash

  • Valued in euros, dollars, etc.
  • Proving them with the bank certificate, attaching it to the memorandum of incorporation.

In kind

  • Assets of any kind (credits, buildings…).
  • In corporations, must be valued by an expert.
  • In LLCs, are valued by shareholders.
  • For 5 years, shareholders shall be liable for the accuracy of their value.

Disbursement (Desembolso)

In a corporation, the amount of shares must be subscribed (25% at the foundation). On the other hand, in LLCs, the nominal must be fully assumed and disbursed at incorporation or with the occasion of the increase of capital. Exception (LLC’s in successive incorporation):

  • Outstanding exceptional disbursement shall be kept in the Bylaws as “positive dividends.”
  • Corporations may claim against the shareholders for payment by maturity, including interest and damages. Shareholders would be deprived of voting rights.

Accessory Considerations (Prestaciones accesorias)

Bylaws may foresee the duty for the shareholders (linked to their shares) to contribute with such considerations. Shareholders must give, do, and abstain from doing something.

Shares

General Rule: Shares and Bonds

Shares are non-divisible equal parts of capital that may be cumulated. The shares provide the rights entitled to shareholders. Shares in corporations are securities; in LLCs, they are not securities.

Bonds may only be issued by corporations and stock partnerships. They must be detailed and may be guaranteed. A bondholder’s syndicate must be appointed. Convertible bonds may be exchanged for shares, at least for their par value. Shareholders have a pre-emptive right to purchase them.

Shareholder’s Rights

Rights of shareholders are:

  • Participation of profits.
  • First refusal.
  • Voting rights and challenging resolutions.
  • Information.

There are equal treatments for shareholders in equal conditions. Shares may be of different classes. Privilege consists of a preference in the distribution of corporate profits, but not interests on alterations between nominal value and privilege. It might be shares with no voting right.

Representation of Shares

  • LLC: Shares in LLCs are registered in the Shareholder’s Registered Book. Transfers shall be formalized in a notarial deed.
  • Corporations: Shares may be nominative, to the holder on book entities. Shares must be registered in a Nominative Shares register. Account registration shares shall be regulated by securities markets law.

Transfers of Shares

  • LLC: May be voluntary; the transfer must be offered to other shareholders and to the company beforehand. Bylaws must not foresee a completely free-transfer system. The procedure must be voluntary and compulsory transfer.
  • Corporations: Bylaws must not foresee a system that makes transfers difficult.

Property Rights over Shares: Co-ownership, Beneficial Use, Pledge

Shares may co-own by different shareholders, though only one of them shall be entitled to act as a shareholder. Beneficial use entitles the beneficiary to dividends. Voting rights remain for the owner unless otherwise agreed. Pledge of shares; voting rights remain for the owner unless otherwise agreed. Shares may be seized, though the owner would keep voting rights.

Own Shares

  1. Original shares: It is forbidden to subscribe new shares; otherwise, the operation will be void. Founding shares would be liable for disbursement. It must be in 1 year or call a shareholders’ meeting to write them off.

Topic 8: Stock Companies – Shareholder’s Meeting

Concept, Competence, and Types

Shareholders adopt decisions on the matters of their competence.

Types:

  • Ordinary: Approve financial statements in the 6 months after the closing of the year.
  • Extraordinary: Any other meeting.

Competences: Shareholders’ meeting has the following powers:

  • Approval of financial statements, distribution of earnings, and approval of corporate governance.
  • Appointment and dismissal of the directors, liquidations, and auditors.
  • Amendment of the Bylaws.
  • Capital increase and reduction.
  • Limitation of the pre-emptive rights.

A general meeting shall be deemed validly constituted to discuss any matter, with no need for advance notice, when all the capital is present or represented.

Call

A Shareholders’ Meeting (SM) shall be called by directors or liquidators. Also upon request of shareholders with at least 5% stock. The court will call if directors don’t prepare the SM. The call must contain certain references as well as the information right of shareholders. In corporations, shareholders with at least 5% stock may request a supplementary call.

Acceptance as Guarantee and Financial Assistance

  • LLC: Own shares cannot be accepted as a pledge, and the company cannot provide financial assistance for the acquisition of its own shares.
  • Corporations: Own shares may be accepted as a guarantee within the limits for back-owned shares. They cannot provide financial assistance for the acquisition of their own shares, except for:
    • Staff remuneration.
    • Banks.

Reciprocal Stockholding

There isn’t reciprocal stockholding of more than 10% that may be set. Stockholding must be reduced under that limit within the year; political rights are suspended. Provision for the excess of 10% to be set in the company that must reduce the stockholding (exception: holding-subsidiary regime). The affected company must be informed, with all political rights being suspended.

Penalties and Front Person

The agreement with a front-person to make transitions forbidden to the company on its behalf is void. “Parking deal.” Non-compliance with regulations of own-shares may constitute an administrative offense and be punished with a fine of an amount equal to the nominal value of the affected shares. There is a liability for directors and managers. LLC: Regulated by the Ministry of Economy. Corporations: CNMV.

Directors

The directors shall be empowered to manage and represent the company under the terms. Types of directorship:

  • Sole director.
  • Several directors acting jointly or severally.
  • Several directors acting jointly.
  • Board of directors.

In LLCs: the Shareholders’ Meeting may opt. In corporations, when there are two directors, they shall act jointly; when there are more than two, a board.