Mergers and demergers under Royal Decree-Law 5/2023: Spain's new structural modifications regime

Mergers, demergers and the other structural modifications of Spanish commercial companies are governed by Royal Decree-Law 5/2023 of 28 June, whose Book One has been in force since 29 July 2023. That instrument repealed Law 3/2009 of 3 April on structural modifications of commercial companies and transposed Directive (EU) 2019/2121 of 27 November 2019, which amended Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. The result is a single regime for domestic and intra-European operations, with a reinforced system of reports and of protection for shareholders, creditors and employees. Anyone planning a corporate reorganisation needs to understand these rules before settling on the structure of the deal.

Which operations count as structural modifications

A structural modification is an operation that alters the organisation or the asset structure of a company beyond a mere amendment of its articles of association. Under article 1, Royal Decree-Law 5/2023 governs four of them: conversion —a change of corporate form—, merger, division and global assignment of assets and liabilities, in both domestic and cross-border form. The former international transfer of the registered office is no longer a separate category: where a Spanish company becomes a company of another Member State while retaining its legal personality and moves at least its registered office there, the operation is channelled as a cross-border conversion, as defined in article 96.

Article 2 extends the regime to all entities regarded as commercial companies and refers cooperatives to their own specific legislation. Article 3 also allows companies in liquidation to carry out a structural modification provided distribution of their assets among the shareholders has not begun, as well as companies in insolvency proceedings or subject to a restructuring or continuation plan, in which case the formation of the corporate will and the protection of creditors follow the consolidated Insolvency Act, approved by Royal Legislative Decree 1/2020 of 5 May. We examine that scenario in insolvency proceedings and the restructuring plan.

The three types of division

Article 58 admits three forms. In a full division, under article 59, the company is wound up and its entire estate is split into two or more parts transferred as a whole by universal succession to new or existing companies, with the shareholders receiving shares in the recipient companies in proportion to their previous holding. In the partial division of article 60, one or more parts of the estate are transferred as a whole, each of which must constitute an economic unit; the shareholders of the divided company receive shares in the recipient companies and the divided company reduces its capital accordingly. In the hive-down of article 61 the transfer is likewise made as a whole and by economic units, but it is the transferring company itself, not its shareholders, that receives the shares in the recipient company. In full and partial divisions a cash payment may be added to adjust the exchange ratio, capped at ten per cent of the nominal value of the shares allotted.

The draft terms and the prior reports

The directors draw up draft terms of the structural modification with the minimum content set by article 4: the details of the participating companies and of the resulting company, the indicative timetable, the implications for creditors and any safeguards offered to them, the particulars of the cash compensation offer and the likely consequences of the operation for employment. In a merger the document is called the common draft terms of merger and is completed with the items listed in article 40; in a division, with those of article 64, which requires a precise description of how assets and liabilities are allocated, including the treatment of items not expressly assigned.

The draft terms are accompanied by the report of the management body governed by article 5, split into a section for shareholders —cash compensation, exchange ratio and consequences of the operation— and another for employees —effects on employment relationships and material changes in working conditions or in the location of the company's establishments—. That report must be made available at least one month before the general meeting, a period extended to six weeks in cross-border operations. Where required, an independent expert appointed by the Commercial Registrar at the directors' request gives an opinion on whether the cash compensation or the exchange ratio is adequate, under article 6.

Article 7 also imposes preparatory disclosure: at least one month before the meeting, the draft terms and the expert's report are posted on the company's website —or filed with the Commercial Registry if it has none—, with free publication in the Official Gazette of the Commercial Registry and a notice informing shareholders, creditors and employee representatives that they may submit observations up to five working days before the meeting.

The shareholders' resolution and when the operation takes effect

A structural modification must be approved by the general meeting, with the reinforced quorums and majorities of article 8: in public limited companies, attendance of fifty per cent of the subscribed voting capital on first call and twenty-five per cent on second call, with a simple majority where that first threshold is met and a favourable vote of two thirds of the capital present or represented where second-call attendance falls below it; in private limited companies, a favourable vote of at least two thirds of the votes attaching to the shares into which the capital is divided.

The resolution is recorded in a public deed and registered with the Commercial Registry. Under article 16, the operation takes effect from the date of registration and, once registered, cannot be declared void, without prejudice to any claims for damages available to shareholders and third parties. That rule explains why the review must be done beforehand: after registration, a dispute no longer unwinds the deal, it only converts into compensation.

How the law protects shareholders and creditors

The right to dispose of shares in exchange for adequate cash compensation is not a general one. Article 12 grants it to shareholders who voted against approval of the draft terms or who hold non-voting shares, and only in three cases: domestic conversions, mergers by absorption of a ninety-per-cent-owned company where the directors' and experts' reports are not prepared, and cross-border operations in which the shareholder will become subject to a foreign law. A shareholder exercising the right must notify the company within twenty days of the meeting that approved the resolution, and the compensation is paid within two months from the date the modification takes effect.

If the shareholder considers that the compensation was set below value, that is not a ground for challenging the resolution: article 11 rules out that an inadequately set compensation or exchange ratio, or the information provided about them, can in itself support a challenge. What the law affords is a claim for additional cash compensation before the Commercial Court of the registered office, which has exclusive jurisdiction, or before the arbitral tribunal provided for in the articles of association, within two months of the date on which the initial compensation was or should have been received. Neither that claim nor those of creditors halts the operation or prevents its registration. Where the underlying tension is between shareholders, it pays to revisit what was agreed: we address it in shareholders' agreements and Supreme Court case law.

Creditors whose claims arose before publication of the draft terms, even if not yet due, and who have notified the company of their disagreement with the safeguards offered or with the absence of them, have one month in domestic operations and three months in cross-border ones to react, under article 13: they may apply to the Commercial Registrar or to the Commercial Court, depending on whether an expert's report found the safeguards inadequate or adequate, or request the appointment of an expert to assess them. Directors may attach to the draft terms the statement on the financial position provided for in article 15, which strengthens the company's position against such claims.

Cross-border operations and the pre-operation certificate

Title III of the Royal Decree-Law governs intra-European cross-border structural modifications, which article 80 defines as conversions, mergers, divisions and global assignments involving limited liability companies of the European Economic Area where at least one of them is subject to Spanish law. In those operations, article 88 requires that employee representatives —or, failing them, the employees themselves— be informed and consulted before the draft terms or the directors' report are decided, whichever is earlier, and refers participation rights to Law 31/2006 of 18 October.

The pivot of the control is the pre-operation certificate. Where Spain is the departure State, it falls to the Commercial Registrar of the registered office to review the legality of the part of the procedure governed by Spanish law and to issue a certificate attesting that all conditions and formalities have been met, under article 90. The Registrar rules within three months and, where defects are found, allows no more than thirty days to remedy them; failing that, the certificate is refused and the operation cannot proceed. Article 92 sets the certificate's validity at six months, extendable by a further six on justified grounds at the Registrar's discretion. Article 91 allows the review to be extended by up to three further months where there are well-founded suspicions that the operation pursues abusive, fraudulent or criminal purposes.

Aligning the deal with the tax neutrality regime

The corporate design does not exhaust the operation. Chapter VII of Title VII of Law 27/2014 on Corporate Income Tax contains the special regime for mergers, divisions, contributions of assets and exchanges of securities, which allows deferral of tax on the capital gains that the restructuring brings to light. Article 89 provides that the regime is deemed to apply unless expressly stated otherwise and requires the operation to be notified to the tax authorities; failure to file that notification on time is a serious tax infringement, penalised with a fixed fine of 10,000 euros per operation.

The limit is set by that same article 89: the regime does not apply where the main purpose of the operation is tax fraud or evasion and, in particular, where it is not carried out for valid economic reasons —the restructuring or rationalisation of the activities involved— but merely to obtain a tax advantage, and inspections finding such a purpose remove only the effects of that advantage. Hence the economic rationale must be documented from the draft terms onwards, rather than reconstructed later before a tax audit. We cover this year's corporate tax changes in corporate income tax: what companies must know.

How we help with mergers and demergers at RCM Legal

There are two recurring sources of trouble. The first is treating the protection of shareholders and creditors as a formality, when it is in fact a web of strict deadlines —twenty days to notify the exercise of the disposal right, two months to claim additional compensation, one or three months for creditors to react— which, if mishandled, translates into unplanned payments and delays at the Registry. The second is approaching the reorganisation without coordinating its corporate, tax and employment effects from the outset: since the operation cannot be annulled once registered, a defect can no longer be fixed along the way and is paid for in damages or in the loss of the tax neutrality regime.

At RCM Legal we design and execute mergers, demergers, conversions and global assignments of assets and liabilities: we draft the terms and the management body's reports, organise the quorums, majorities and disclosure periods, obtain the pre-operation certificate in cross-border deals, and document the valid economic reason underpinning the tax neutrality regime. As commercial lawyers in Murcia specialising in corporate transactions and structural modifications, if you are planning to reorganise your company, tell us the objective and we will structure the operation so that it reaches the Commercial Registry with no loose ends.