On April 12, 2021 Spain approved Law 5/2021 that transposes EU Directive 2017/828 (SRD II) into its corporate law. The Spanish lawmaker also took this opportunity to introduce loyalty shares and to regulate virtual-only general meetings, among other changes.
Spanish listed companies may now adopt double voting rights through the loyalty share system, like neighboring countries of France and Italy. This has been prompted by the attempt to “strengthen the marketplace attractivity”.
Companies must follow an opt-in procedure, which requires the necessary bylaw amendment to be approved by shareholders with a 75 percent supermajority of votes cast at a meeting where at least 25 percent of voting shares must be (re)present(ed), or 70 percent if at least 50 percent of the voting shares are (re)present(ed) at the concerned general meeting. The company’s bylaws may increase the majority requirements, but may not decrease them. These requirements also apply to private companies that go public.
Once the loyalty-share system is adopted, those shares that have been held continuously for at least two years and registered in a special register will carry two votes per share, though the company may establish a longer retention period. Shareholders may waive their double voting rights at any time. The company must disclose on its corporate website up to date information on double voting rights.
In a capitalization of reserves or bonus issue, free shares allocated will be assumed to have been retained for as long as the underlying shares have been held and may carry double voting rights where applicable. However, double voting rights are forfeited upon the transfer of the shares, except under limited circumstances (e.g. inheritance on death or intra-group transfer). Any company-specific voting right ceiling applies to double voting rights as well.
The law also establishes a sunset provision whereby the bylaw provision regulating loyalty shares must be submitted to a shareholder vote at least every five years, though the removal of this bylaw provision may occur at any time, with a two-third majority of votes cast if at least 25 percent of voting shares are (re)present(ed) or an absolute majority if at least 50 percent of voting shares are (re)present(ed). When a company’s bylaws have included a loyalty share provision for more than 10 years, double voting rights shall not count towards quorum requirements or for vote counting purposes at a general meeting convened to resolve on their removal.
In view of the COVID-19 outbreak, Royal-Decree Laws 8/2020 and 11/2020 adopted in March 2020 allowed companies to hold virtual-only meetings in FY2020.
Law 5/2021 allows companies to amend their articles of association to introduce the possibility of holding virtual-only general meetings. The concerned bylaw amendments must be approved by a two-third majority of votes cast, regardless of the share capital (re)present(ed) at that general meeting.
Virtual-only meetings must meet legal requirements: (I) the identity of shareholders and proxies must be authenticated; (ii) the participation in the general meeting through remote means, either audio or video, must be effective and complemented by real-time text messaging in order for shareholders to exercise their rights to speak and interact with management and the board, vote, and table agenda items; and (iii) shareholders must be able to vote or grant a proxy prior to the meeting.
Related Party Transactions (RPTs)
The Spanish Corporate Law already requires shareholder approval of related party transactions that exceed 10 percent of corporate assets, where the conflicted shareholder is disenfranchised and may not vote unless the general meeting proposal was adopted without a majority of independent directors dissenting in which case the conflicted shareholder may vote at the meeting. Other related party transactions must be approved by the board, who shall not delegate this power. Conflicted directors must abstain from participating in discussions and voting, except in intra-group related party transactions.
Related party transactions must be disclosed on the company’s corporate website at the latest when they are executed. The concerned RPTs are those that exceed (i) 5 percent of the equity value of the last individual or consolidated balance sheet; or (ii) 2.5 percent of revenues of the last individual or consolidated income statement.
Issuance of shares and convertibles
An independent expert report is no longer required for the issuance of shares or convertibles without pre-emptive rights that do not exceed 20 percent of share capital unless the shares are issued at a discount of 10 percent or more.
The law also incorporates a local best practice recommendation which calls for the issuance of shares or convertibles without preemptive rights not to exceed 20 percent of capital versus 50 percent, currently. In addition, the minimum period for exercising preemptive rights is reduced from 15 to 14 calendar days.
These provisions also apply to companies listed on a non-regulated market.
Identification of shareholders and facilitation of shareholder rights
The Spanish Corporate Law already recognizes the company’s right to identify its shareholders, without any ownership threshold requirement. The law further allows companies to identify ultimate owners. Three percent shareholders and shareholder associations representing at least 1 percent of share capital will enjoy the same rights.
Institutional investors and proxy advisors
Institutional investors and asset managers are required to annually disclose their engagement policies. Proxy advisors are required to publish every year, on their website, a reference to a code of conduct they apply and to report on the application of that code of conduct. Proxy advisors are also required to inform their clients about conflicts of interest.
Remuneration Policy and Report
The current say on pay voting rules, which encompass (i) a binding vote on the remuneration policy at least every three years and upon each substantial change thereof, and (ii) an advisory vote on the remuneration report every year, have not been amended.
Spanish companies are also already compelled to disclose on an annual basis most of the information required by the Directive. However, the law adds new disclosure requirements, including (i) any annual change in remuneration, (ii) the company performance during FY under review, and (iii) the average remuneration on a full-time equivalent basis of employees of the company other than directors over at least the five most recent financial years, presented together in a manner which permits comparison. If shareholders reject the remuneration report, the company may continue to apply the remuneration policy in force at the date of the general meeting only until the next annual general meeting.
New remuneration policies must be submitted for shareholder approval prior to the end of the last financial year in which the previous policy was applied. If shareholders reject a new remuneration policy, the company shall continue to remunerate its directors in accordance with the remuneration policy in force at the date of the general meeting and shall submit a new remuneration policy proposal for shareholder approval at the next annual general meeting.
Going forward, the remuneration report must be included in the management report together with the corporate governance report, and the company’s auditor must check that the company has published the remuneration report. Also, executive compensation must be regulated not only in the remuneration policy, but also in the articles of association.
Quarterly reporting and Other amendments
Law 5/2021 removes the obligation for listed companies to disclose financial information on a quarterly basis, in line with other European countries. Nonetheless, companies may continue disclosing their quarterly reports, and the Spanish National Market Regulator may request companies to do so, if needed.
Directors of listed companies can no longer be legal entities. This rule will apply to (re)appointments that take place following May 2021
By Paula Graullera Castillejos, Analyst; ISS European Governance Research