Investor entry into a Spanish limited company (SL): capital increase, share premium and pre-emption rights

An investor almost always enters a Spanish limited company (sociedad limitada, SL) through a capital increase: the company creates new shares (participaciones) and the investor takes them up in exchange for a contribution. The rules are set out in the consolidated Spanish Companies Act (Ley de Sociedades de Capital, approved by Royal Legislative Decree 1/2010 of 2 July), which governs majorities, pre-emption rights, payment, the notarial deed and registration. Founders should understand them before negotiating the valuation, because they shape the timetable of the round and the founders' own position.

How does an investor enter a Spanish SL?

The Act allows two ways of increasing capital: creating new shares or raising the nominal value of existing ones, under article 295. Bringing in a third party requires the first; the second only increases the nominal value held by existing members and needs the consent of all of them unless it is funded entirely from profits or reserves, under article 296.

The consideration may be a cash contribution, a non-cash contribution (including claims against the company) or profits and reserves shown in the last approved balance sheet, as article 295 provides. Converting an investor's loan into equity is a set-off of claims and has its own requirements.

The share premium: how the valuation is paid

If the company is worth more than its share capital, the investor pays a share premium on top of the nominal value, reflecting the agreed valuation. Article 298 permits shares to be created at a premium and requires the premium to be paid in full when the shares are taken up.

For example, in a company with EUR 3,000 of share capital divided into 3,000 shares of EUR 1, an investor contributing EUR 150,000 for 20% receives 750 new shares: EUR 750 goes to share capital and EUR 149,250 to share premium.

What majority does the general meeting need?

The increase is resolved by the general meeting with the requirements for amending the articles of association, under article 296. In an SL, article 199 requires the favourable vote of more than half of the votes attached to all the shares into which the capital is divided, not merely those present. If pre-emption rights are removed or limited, the same article raises the threshold to two thirds of those votes.

An SL cannot delegate to its directors the power to increase capital: article 297 reserves that delegation to public limited companies (sociedades anónimas).

Pre-emption rights and their exclusion

In cash capital increases, each member is entitled to take up a number of new shares proportional to the nominal value of the shares already held, under article 304. This protects against dilution, the loss of percentage suffered by a member who does not take part in the increase.

The resolution sets the subscription period, which may not be shorter than one month from publication of the notice in the Official Gazette of the Companies Register (BORME); the directors may replace that notice with a written communication to each member, under article 305. Unless the articles provide otherwise, shares not taken up are offered for up to fifteen days to the members who did exercise their right, and in the following fifteen days the directors may allot them to third parties, under article 307.

When the increase is designed for the investor alone, the usual route is to exclude pre-emption rights. Article 308 allows this where the company's interest so requires, subject to three conditions:

• a directors' report stating the value of the shares and justifying the proposal, the consideration and the persons to whom the shares will be allotted;
• the notice of meeting must state the proposal to exclude the right, the issue price and the members' right to inspect the report;
• the nominal value plus premium must match the real value attributed to the shares in that report.

The third condition protects the minority: if the investor comes in below real value, the member who loses percentage also loses value. Article 204 allows a resolution imposed abusively by the majority to be challenged, meaning one that does not meet a reasonable need of the company and is adopted by the majority in its own interest and to the unjustified detriment of the other members.

Payment and evidence of contributions

In an SL there is no partial payment: the new shares must be fully taken up and paid when the deed executing the increase is signed, under article 78. Cash contributions are evidenced before the notary with a bank certificate of deposit in the company's name, valid for two months, under article 62.

If the investor contributes assets or rights, the directors must make available to the members a report on the contributions and their valuation, under article 300. The contributor, the persons who were members when the increase was resolved (except those who recorded their opposition in the minutes) and the directors, for the valuation shortfall, are jointly and severally liable for the existence and value of those contributions under article 73; the liability is time-barred five years after the contribution, under article 75. To convert a loan, article 301 requires the claim to be fully liquid and payable and a directors' report confirming that it matches the company's accounts.

If the increase is not fully paid within the period, the capital is increased by the amount actually paid, unless the resolution provided that the increase would then lapse, under article 310.

Deed and registration with the Companies Register

The deed executing the increase states the assets or rights contributed, the identity of the allottees, the numbering of their shares and the directors' statement that ownership has been entered in the register of members, under article 314. The resolution and its execution are registered at the same time with the Companies Register, under article 315.

If six months pass from the opening of the pre-emption period without the execution being filed for registration, the investor may terminate the obligation to contribute and claim back the contribution, with statutory interest if the delay is attributable to the company, under article 316.

Coordinating with the shareholders agreement

The capital increase fixes the investor's percentage; the shareholders agreement governs how it will be exercised. That is where the parties negotiate anti-dilution protection, which protects the investor if a later round closes at a lower valuation; drag-along, which obliges minority members to sell if an offer for the whole company is accepted; and tag-along, which lets a minority member sell on the same terms as the majority. We analyse these in our piece on key clauses in a founders' shareholders agreement.

Agreements kept private between members cannot be enforced against the company, under article 29. That is why the deed, the articles and the shareholders agreement should be drafted together, and anything that must bind the company should be placed in the articles where the law allows. If the company is, or aims to become, a certified start-up, it is also worth reviewing start-up certification with ENISA.

Frequently asked questions

Can the investor buy shares from an existing member instead of subscribing to a capital increase? Yes, but the money then goes to the selling member rather than to the company, and the rules on share transfers apply.

Are there pre-emption rights if the investor contributes an asset or converts a loan? No. Article 304 limits pre-emption rights to cash capital increases.

How long do members have to exercise pre-emption rights? The period set in the resolution, with a minimum of one month from the notice or the written communication, under article 305.

How RCM Legal advises on investor entry and capital increases

There are three points at which a funding round commonly stalls: excluding pre-emption rights without a report that justifies the value, a timetable that ignores the one-month minimum period, and a deed that does not reflect what the founders and the investor agreed. Any of them delays registration or leaves the resolution open to challenge.

RCM Legal's corporate lawyers, based in Murcia, act for founders and companies across Spain from the negotiation of the investor's entry and the general meeting resolution through to the execution deed, registration and the shareholders agreement, in English and Spanish, through our Business 360 practice for company formation. Tell us about your case.