Spain has four local stock exchanges (Madrid, Barcelona, Bilbao and Valencia), connected through the so-called Automated Quotation System or Stock Exchange Interconnected System (Sistema de Interconexión Bursátil or SIBE), a system that allows for the electronic trading of certain securities listed in at least two out of the four local stock exchanges. At the end of August 2006, there were approximately 180 companies traded in the main market of the SIBE (known as mercado continuo); this figure includes the approximately 35 companies traded on a special segment existing for trading of Latin-American companies in euros, known as Latibex (although it must be pointed out that Latibex is not an official market). A further 14 companies are traded in the so-called New Market of the SIBE.
In addition to the above, there are a large number of companies listed and traded in only one of the local stock exchanges (eg, the number of companies listed in the Madrid Stock Exchange is approximately 1,900).
In addition to the 35 Latin-American companies listed in Latibex, there were by the end of August 2006, six international companies listed in the mercado continuo, all being companies active in Spain.
On the other hand, some 25 Spanish companies are listed in one or more European Stock Exchanges, and six Spanish companies (Telefónica, Telefónica Móviles, Banco Santander, Endesa, Repsol YPF and BBVA) had ADRs listed in the NYSE in August 2006.
In 2004, the total equity volume traded in the Spanish stock exchanges was €642 billion, with an increase of 33 per cent in 2005, for a total equity trades of €845 billion.
During 2005, the National Commission of the Securities Market (Comisión Nacional del Mercado de Valores, CNMV), registered 27 issues of shares in the Spanish market, raising an aggregate €9.6 billion; during the first six months of 2006, the number of issues registered was 13, for a total volume of €2.9 billion.
In 2004, the total volume traded as a result of takeovers amounted to €1.9 billion; in 2005, the total volume was €6.6 billion.
Securities markets are governed in Spain by the Securities Market Act (Ley del Mercado de Valores, LMV), dated 28 July 1988, as amended. The LMV created the CNMV and established the basic rules governing the primary and secondary markets, the investment services firms, and the rules of conduct applicable in the securities markets and lists the securities markets infringements and their corresponding sanctions.
The LMV is further developed by a number of Royal Decrees, Ministerial Orders and lower ranking rules and regulations. Among those, the following are worth mentioning: (i) Royal Decree 1310/2005, dated 4 November, which develops the LMV regarding listing of securities, issues and offers for sale of securities and the prospectus; this Royal Decree has been partially developed by a Ministerial Order dated 10 November 2005, which regulates the prospectuses; (ii) Royal Decree 1197/1991, on takeovers; and (iii) Royal Decree 629/1993, dated 3 May on rules of conduct on the securities markets and mandatory registrations.
The offering of new securities is governed, as mentioned, by Royal Decree 1310/2005. Article 3 of Royal Decree 1310/2005 lists the securities subject to it, expressly excluding private limited companies (sociedades limitadas) from its scope. In addition to defining the rules applicable to the issue or public offer of sale of shares and other securities, Royal Decree 1310/2005 also establishes the framework for the listing of securities in the Spanish markets.
Royal Decree 1310/2005 has implemented in Spain the contents of Directive 2003/71/CE of 4 November 2003 (the Prospectus Directive). It contains the rules applicable in Spain to prospectuses registered in a member of the EU other than Spain as well as rules applicable to third country issuers in those cases where Spain is the member state of origin.
According to article 25 of the LMV, issues of securities are not subject to any prior administrative authorisation, and the issuer must be duly incorporated and validly existing in accordance with the laws of its home country; therefore, there is no need for a foreign company wishing to issue securities in Spain to be registered or licensed or to have any kind of local presence in Spain.
In general terms, any issue or public offer of sale of securities in Spain is subject to the prior registration with the CNMV of (i) documentation evidencing that the issuer and the securities to be issued are subject to the laws applicable to them; (ii) financial statements of the issuer prepared and audited in accordance with the laws applicable to it; and (iii) a prospectus.
Securities are defined in RD 1310/2005 to include, inter alia, shares and other securities giving rights to acquire shares; debentures; mortgage bonds; securitisation titles; preferred stock; warrants and other derivatives giving right to acquire or sell any securities, currencies, interest rate, yield, raw materials, credit risk or other indexes or measures; funds units; and money market instruments, such as promissory notes, deposit certificates and similar instruments.
The entity in charge of settlement and clearing of the trades made in the Spanish exchanges and in the public debt market is the Management Company for the Securities’ Registry, Settlement and Clearing Systems (Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, known as the ‘Systems Company’, or IBERCLEAR); its main duties are the following: (i) to maintain the book-entry Securities Registry of all eligible securities listed on the Spanish stock exchanges and the public debt market as well as the securities listed on other secondary markets when requested by the appropriate governing bodies; and (ii) to manage the settlement, and when appropriate, the clearing of securities and money resulting from those trades settled on the stock exchanges, public debt market and, when appropriate, the secondary markets.
In Spain, the supervisory authority is the CNMV. The CNMV was created by means of the LMV in 1988, as amended. It is a public law entity with full capacity to act, subject to the LMV and to the laws and regulations governing governmental entities.
The purpose of the CNMV is to ensure the transparency of the Spanish market and the correct formation of prices in them, and to protect investors.
The actions of the CNMV relate to issuers, investment services firms, collective investment schemes, and the secondary markets. It also supervises investment services firms and collective investment schemes in order to ensure transaction security and the solvency of the system.
According to article 26 of the LMV, listing of securities on an official secondary market shall be subject to compliance with a number of conditions, including the filing with the CNMV and the publication of a prospectus. Article 30 bis, in turn, extends the obligation to prepare and publish a prospectus to issues and public offers of sale of securities.
Royal Decree 1310/2005 develops the contents of the prospectus, and is, in turn, further developed by a Ministerial Order EHA/3537/2005, of 10 November. In essence, the contents of the prospectus must be that established in the Prospectus Directive. Article 27 of the LMV sets forth that the prospectus must contain information relating to the issuer and the securities to be listed or offered and, in particular, all the information that is necessary for the investor to evaluate the assets and liabilities, financial condition, profits and losses and prospects of the issuer as well as the rights and obligations attached to the securities. A summary of the information contained in the prospectus must be inserted at the beginning of the document.
The preparation of a prospectus is usually the result of the joint effort of the auditors, the banks, the lawyers and other advisors, based on information provided by the issuer, whether directly or through due diligence. The preparation of the prospectus is made to a great extent in the course of drafting sessions.
A significant part of the information contained in a prospectus is based on the due diligence of the issuer carried out by the lawyers, auditors and other consultants, depending on the type of business of the issuer. Due diligence is performed through both the examining of documentation made available by the issuer and the questioning of the senior management. The timing or the performance of a due diligence depends very much on whether the prospectus is the first prospectus prepared for an issuer or not, and on the size of the issuer’s group and its activities.
The issuer, offeror or the entity that requests the listing of the securities, as well as their respective directors, will be responsible for the contents of the prospectus and liable for any misstatements. Those who have accepted responsibility for the prospectus, and those who have approved, in whole or in part, its contents, will also be responsible and liable provided that the prospectus expressly mentions their acceptance of responsibility or their approval.
In addition, the guarantor of the securities will also be liable in respect of the information provided by it, and the lead manager will also be liable in case of negligence in the gathering and verification of the information in the prospectus.
As mentioned above, for securities subject to the scope of the Prospectus Directive, the financial information to include in the document will be that listed in Annex I to the Prospectus Directive and in Regulation (CE) 809/2004.
The company must file with the CNMV its audited annual accounts, as well as the audited consolidated annual accounts of the group, corresponding to the last three years. The accounts shall include the balance sheet, the profit and loss account, a statement concerning net worth variations, a cash flow statement and an explanation of accounting policies. All those documents must be audited. In addition the prospectus will include intermediate financial information.
The company must include a statement of current projects and ongoing investments.
In the case of debentures, the prospectus shall follow the form appropriate to the case attached to Regulation (CE) 809/2004.
In the case of an equity prospectus, the document must mention the dividend policy followed by the company.
It is not usual to include disclaimers in the Spanish prospectuses registered with the CNMV. International prospectuses, though, usually include disclaimers and selling restrictions in relation to the offering of the securities in certain jurisdictions, or in jurisdictions other than the jurisdiction where the international prospectus is to be registered.
Prospectuses registered on exchanges of another EU member state enjoy the benefits of the EU passport, following the provisions of the Prospectus Directive. For companies domiciled in third countries that select Spain as a country of origin, a prospectus prepared in accordance with the laws of the country of origin may be approved by the CNMV if it has been prepared following international standards and provides basically information equivalent to that required by the Prospectus Directive.
Usually, an offer for sale of securities has several different tranches, eg international offer versus domestic offer. International tranches are usually addressed to institutional investors and domestic tranches are usually divided into institutional offer and retail offer.
Distribution in Spain follows very much the international practice, eg in an offer addressed at institutional investors, there will be a bookbuilding exercise in order to determine the price of sale of the shares; in any event, offers are typically underwritten by the agent, and there is typically a ‘green shoe’ option in favour of the underwriters.
According to article 63 of the LMV, brokers and dealers may carry out distribution activities and, in addition, dealers may act as underwriters of the issue or offer.
Coordinators and underwriters belong typically to banking groups; they execute an underwriting agreement with the seller/issuer; also, distribution is usually made by banking group entities or brokers and dealers.
These are agreed in the underwriting agreement. The aggregate fees and commission range usually between 2 per cent and 3.5 per cent.
All the activities involved in an issue or public offer for sale of securities may only be carried out by certain investment services firms and by credit entities, pursuant to articles 63 and 65 of the LMV. Dealers and credit entities may carry out all activities related to an offer or issue; brokers, however, cannot underwrite an issue or offer.
The global coordinator is usually the entity that coordinates and leads the drafting of all offering documents and the meetings and negotiations with the regulators for their approval.
From the date the prospectus is registered with the CNMV, the distribution process up to final settlement of the offer is approximately three weeks to a month, provided that the offer is unconditional.
Article 28 of Royal Decree 1310/2005 sets forth the rules applicable to the publicity of the offer; these are, in essence, the following: (i) the publicity must state that a prospectus has been or will be published and where it can be obtained; (ii) the information contained in the advertisement must be consistent with that contained in the prospectus; and (iii) all information concerning the offer transmitted in written or oral form must be consistent with the prospectus. Publicity is not subject to the prior approval of the CNMV, but the materials are subject to inspection by the CNMV.
Issues of debentures are subject to the same requirements as issues of securities; they are therefore subject to filing and registration with the CNMV of certain documents, including a prospectus following the form applicable to the case pursuant to Regulation (CE) 809/2004. Issues of debentures by a sociedad anónima are also subject to the provisions of the Corporations Act (Ley de Sociedades Anónimas, LSA).
Payments to debenture holders are made following the rules of the exchange where the debentures are listed.
Debenture holders are organised in and represented by a syndicate of debenture holders, regulated in detail in the Corporations Act.
According to Royal Decree 1310/2005, each stock exchange shall publish its own listing rules. Listing of securities is subject to compliance with certain requirements concerning the issuer and the securities and with certain information obligations.
In general terms, the securities to be listed must be issued as book entries, the issuer will have to apply for listing of all the securities forming the same class (ie, it will not be possible to apply for a partial listing of a class of securities), the securities must be freely transferable, and the minimum value of the securities to be listed will be, in the case of shares, €6 million calculated at market prices and, in the case of debentures, €200,000. Also, in case of shares, these must have sufficient distribution: this requirement will be, in principle, met when at least 25 per cent of the shares to be listed are spread among the public at large (formerly this requirement was met when the number of shareholders holding 25 per cent of the share capital was at least 100). As regards the issuer, Royal Decree 1310/2005 does not require any longer any particular profit track record for the issuer, who will have to file, in principle, financial statements for the last three years.
The requisite documentation (corporate documents and resolutions, audited financial statements and the prospectus) will be filed with the CNMV. Usually, the issuer, the coordinator and the lawyers for the issuer negotiate with the CNMV drafts of the prospectus before this is finally approved and registered by the CNMV.
As mentioned above, one of the documents that must be submitted to the CNMV is a prospectus; this will be essentially in the same form as the prospectus needed for an issue or public offer for sale, ie it will have to follow the lines of the Prospectus Directive and Regulation (CE) 809/2004.
Royal Decree 1310/2006 sets forth a number of exceptions to the obligation of filing a prospectus. In general terms, these exceptions follow those listed in article 4 of the Prospectus Directive.
In the event that the CNMV refused to register a prospectus, in theory, such refusal would be subject to appeal, like any other governmental act. However, as mentioned above, it is common practice to negotiate the draft documents with the CNMV and there is no precedent of an appeal against a decision to refuse registration of a prospectus.
Please see section 8.1 above.
Each of the four stock exchanges (Madrid, Barcelona, Bilbao and Valencia) is subject to the authority of a governing corporation (sociedad rectora); these four sociedades rectoras have authority to regulate certain matters concerning tradings in the exchanges they operate. In turn, the four sociedades rectoras are part of the group Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A. (BME). The BME group includes, in addition to the four stock exchanges, other official secondary markets including the fixed income and variable income derivatives markets. BME is a listed company.
The SIBE (see section 1.1) is operated by Sociedad de Bolsas, S.A., a company belonging also to the BME group and directly participated by the four sociedades rectoras.
The prospectus to be filed will list the secondary markets where the issuer intends to list the securities. Each sociedad rectora has the authority to enact its own rules for admission in the exchange operated by it. In general, the stock exchange will require the filing of certain corporate documents, resolutions and certificates, and an undertaking to comply with the rules applicable to the exchange in question. After the corresponding exchange has verified that the documentation filed meets with the applicable requirements, it will issue a listing certificate.
The sociedades rectoras are subject to the control and surveillance of the CNMV; the decisions of the CNMV, in turn, are subject to appeal as mentioned above.
The main fees applicable to a listing are the following: registration of a prospectus (CNMV); study and analysis (exchange); and admission fee (exchange). The amount of the fees is available on the websites of the CNMV and of the corresponding exchange.
Pursuant to article 28.3 of the LMV, an investor shall be entitled to claim compensation for the damages and losses suffered as a result of misstatements or the omission of information that should have been disclosed according to the applicable law. Liability for the content of the prospectus shall lay with the issuer or offeror, the lead manager or the guarantor, as explained in 5.5 above.
Legal actions may be filed within the three years following the date the investor could have been aware of the misstatement or the omission.
Legal actions to claim liability for misstatements or omissions will be heard by the ordinary courts following the declaration procedure (proceso declarativo) and, depending on the amount of the compensation, will follow the rules of the ordinary declaration procedure or, for minor amounts, the oral procedure.
9.4 Criminal liability
According to the Spanish Criminal Code, it is a criminal offence to prepare untrue annual accounts or other documents that must reflect the financial or legal condition of an entity in a way able to cause damage to the entity, its shareholders or third parties.
It is also a criminal offence to spread untrue information with the aim of changing the prices of securities that would result in conditions of ‘free competition’.
For insider trading, please see question 12 below.
10. CONTINUING REQUIREMENTS
10.1 Nature of requirements
Listed companies are subject to certain continuing obligations defined in the LMV. These are in essence the following: (i) obligation to report quarterly, biannual and annual financial information (art 35); (ii) obligation to report to the market any relevant information (art 82) as soon as this becomes known; (iii) obligation to report substantial shareholdings in listed companies (art 53); and (iv) obligation to publish an annual report on corporate governance (art 116).
The provisions of the LMV are developed by a number of lower ranking provisions, described in further detail below.
10.2 Financial statements
According to article 35 of the LMV, a listed company will have to file with the CNMV its audited financial statements. It will have to report also, on a quarterly basis, the results of its operations and, every six months, interim financial statements. Article 35 of the LMV has been developed by a Ministerial Order dated 18 January 1991 (as amended).
10.3 Required interim disclosure
Article 82 of the LMV establishes that relevant information will be deemed to be that information that, if known to an investor, may reasonably affect its decision to purchase or sell securities and that therefore, may have an impact on the value of that security in the market. Issuers must disclose to the market immediately, through the CNMV, any relevant information in their possession.
10.4 Proxies
The LSA establishes that in case of public solicitation of proxies, the solicitation must request voting instructions from the shareholder for each point of the agenda of the shareholders meeting and must indicate how the proxy holder will vote in the absence of instructions.
The LMV also contains provisions governing conflict of interests in case of public solicitation of proxies by directors of listed companies.
10.5 Certain disclosures on directors
Both the LMV and the LSA establish certain information obligations in respect of the listed company directors. The LSA establishes that the management report to be prepared along with the annual accounts of the company must disclose the remuneration received by the directors of the company. On the other hand, the corporate governance report required by article 116 of the LMV imposes the obligation to disclose contracts entered into by the company with its directors, any direct or indirect conflict of interest they may have with the company and the remuneration received by these; conflicts of interest must also be disclosed to the board of directors of the company. Royal Decree 1333/2005, of 11 November on market abuse, develops the obligation of directors to disclose transactions with its company.
10.6 Substantial shareholding reporting
According to a Royal Decree 377/1991, dated 15 March 1991, acquisitions or transfers of shares in a listed company that result in a holding by the purchaser of five per cent or a multiple thereof of the share capital of the listed company, or in a reduction of the holding of the seller below any of the above percentages, will have to be notified to the listed company, to the corresponding sociedad rectora and to the CNMV.
10.7 Requirements of transfer agent, clearing, paying agent
Transfer agents and IBERCLEAR have certain reporting and filing obligations in connection with the trades in which they participate.
10.8 Other continuing obligations
The above, along with the corporate governance obligations described in question 11 below, are the main continuing obligations applicable to listed companies.
11. CORPORATE GOVERNANCE
11.1 Code/law
The principal instrument relating to corporate governance is the Good Governance Unified Code prepared by the Special Working Group on Good Governance of Listed Companies and approved by CNMV on 22 May 2006. The Unified Code harmonises and updates the existing recommendations on good governance, basically those contained in the Olivencia Report and in the Aldama Report. It also considers the international recommendations on good governance, mainly (i) the Principles on Good Governance published by OCDE; (ii) the recommendations and proposals of the European Council; and (iii) the recommendations on good governance for banking organisations approved by the Basel Committee on Banking Supervision.
The Unified Code does not have the force of law but it contains binding definitions that must be respected by the companies in the annual corporate governance report required by Article 116 of the LMV.
11.2 One or two-tier board
The LSA allows the board of directors ample freedom in delegating its full powers for the company’s strategy and management. Therefore, in practice, companies can adopt widely divergent models of board organisation and procedures, especially as regards its involvement in day-to-day management. The Unified Code tries to prevent excessive delegation resulting in a failure to comply with its most basic duty: the general oversight function. The Unified Code defines certain powers that configure the core of these functions and should not be delegated. Therefore, all directors as a whole have equal duties, although executive directors have their areas of executive responsibility within the board and the chairman has a particular role inherent to his office.
The Unified Code makes no comment on the advisability of separating the role of CEO and Chairman, but it recommends that when the Chairman is also the CEO, a lead independent director be appointed.
11.3 Publication of internal regulations
According to article 117 LMV, further developed by Ministerial Order ECO/3722/2004 dated 26 December, listed companies must have a website where they must publish, at least, their articles of association, the internal regulation of the shareholders’ meeting, the internal regulation of the board of directors and of the board of directors committees, if applicable, the financial annual report, the internal code of conduct, the annual corporate governance report, the information concerning Shareholders’ Meetings and all relevant information (as defined by article 82 LMV).
11.4 Responsibility of directors
Usually, internal board of directors regulations of listed companies approved in accordance with Article 115 LMV, distinguish between executive and non-executive directors, the latter being either proprietary or independent, and establish that certain matters be dealt with exclusively by non-executive directors, eg remuneration and nomination committees are usually formed by non-executive directors. However, the LSA, the LMV and internal regulations establish the same duties for all directors whatever the origin of their appointment. Thus, all directors must share the common purpose of defending the corporate interest.
According to the LSA the power to lay off accounts and balance sheets to the Shareholders Meeting can not be delegated. Therefore, all members of the board, whether executive or non-executive, must sign the accounts.
11.5 Committees
LSA allows the board to appoint an executive committee, unless otherwise provided by the articles of association. Also, the Unified Code recommends that, in addition to the audit committee mandatory under the LMV, the boards of directors of listed companies form one or two separate committees on nomination and remuneration. The Unified Code contains several recommendations on the composition and operation of these committees. There are also some listed companies that have a separate corporate governance committee.
11.6 Consent of shareholders meeting
In addition to those matters which according to the LSA must be invariably decided by the shareholders’ meeting (ie approval of the annual accounts, amendment of articles of association, appointment and dismissal of directors, mergers, spin-offs, etc), the Unified Code recommends that listed companies submit for approval of the shareholder’s meeting any decisions involving ‘fundamental changes’ in the company, even when not expressly required by the LSA.
According to the LSA remuneration of directors must be expressly authorised by the articles of association. The remuneration consisting of the delivery of shares, share options or based on the value of the shares shall be expressly foreseen in the articles of association and its implementation must be approved by the shareholders’ meeting. The Unified Code recommends that the board of directors submit to the advisory vote of the shareholders’ meeting a report on the directors’ remuneration policy approved by the board for the current year.
11.7 Depth of information. Proxy solicitation
Please see question 10.4 above.
11.8 Appointment/dismissal of directors
Under the LSA, the appointment and dismissal of directors is of the exclusive competence of the shareholders’ meeting. Only where a director is dismissed or resigns from his office before the end of the term for which he was appointed, the board is entitled to appoint a director, who must necessarily be a shareholder, and only until the next shareholders’ meeting is held. In practice, shareholders’ meetings of listed companies usually approve the appointments or dismissals of directors on the basis of a proposal submitted by the board. The Unified Code recommends that the proposal of the board, when it is related to independent directors, be approved by the board on the basis of a proposal made by the nomination committee and in other cases, on the basis of a report from the same. The Unified Code contains other recommendations regarding the appointment and dismissal of directors such as the resignation of proprietary directors when the shareholders they represent sell their ownership interest in the company.
11.9 Income and options for directors
The Unified Code contains a wide range of recommendations regarding the remuneration of directors. Inter alia, it contains some recommendations seeking transparency in the remuneration policy and others trying to avoid potential conflict of interests for non-executive directors. It also contains several recommendations on share-based incentives and other variable remunerations. Finally, it recommends that director remuneration should suffice to attract and retain the right kind of person but not be so high as to compromise their independence.
11.10Earnings guidance
As stated in question 11.5 above, the Unified Code recommends that the boards of directors of listed companies have a remuneration committee who, inter alia, should propose to the board the remuneration policy for directors and senior officers, as well as oversee compliance with the remuneration policy.
11.11Directors’ liability
According to article 133 LSA all members of the board of directors shall be jointly and severally liable against the company, the shareholders and the creditors of the company for any damage caused as a consequence of acts or omissions contrary to the law or the articles of association, as well for those carried out failing to comply with the duties inherent to their office. Only those members of the board who can prove that they were not involved in the execution or approval of the damaging act or resolution and did not know about its existence, or knowing about it, did everything to prevent the damage or expressly opposed to it, may be exonerated from such liability.
The action for liability may be exercised by the company, the shareholders and the creditors in the terms set forth in article 134 LSA.
12. INSIDER TRADING
12.1 Laws and regulations
Insider trading is regulated by article 81 LMV which has been further developed by Royal Decree 1333/2005. This Royal Decree has implemented in Spain the contents of Directive 2003/6/CE of 28 January 2003 on insider dealing and market abuse (the Market Abuse Directive).
The insider dealing offence is regulated by article 285 of the Spanish Criminal Code.
12.2 Codes of conduct
Royal Decree 629/1993, dated 3 May on rules of conduct on the securities markets and mandatory registrations sets forth a General Code of Conduct applicable to any person or entity, whether private or public, acting in a securities market. This General Code sets forth the general principle of good faith and contains some general rules for the prevention of insider dealing.
Likewise, according to Royal Decree 629/1993 any companies acting in the securities market, inter alia, shall approve an internal code of conduct addressed to their managing bodies, their employees and their representatives. In such internal regulations, the companies shall prevent their managing bodies, employees and representatives from using any information obtained by the company for their own benefit, either directly or by transmitting such information to selected clients or third parties.
12.3 Definitions
Article 81 LMV defines inside information as any specific information referred directly or indirectly to one or more securities or financial instruments governed by LMV or to any issuer of such securities or financial instruments, which have not been disclosed to the public, and which, if disclosed to the public, would have significantly influenced the prices in the market. Article 81 has been further developed by Royal Decree 1333/2005.
Article 81 LMV also lists the conducts which may not be executed directly or indirectly by any person who has had access to inside information and which, if executed, may be considered insider trading.
Finally, according to article 285 of the Spanish Criminal Code it is a criminal offence to use reserved information accessed as a result of the exercise of a professional activity or to spread such information obtaining a certain economic profit or causing damages.
12.4 Sanctions
Sanctions for insider dealing consist of a fine amounting to up to three times the profit obtained and, if applicable, imprisonment for a period not exceeding four years. In addition, according to the LMV, any person or entity infringing any of its provisions may be subject to administrative liability.
12.5 Defences
The Spanish Criminal Code does not provide for any defences for insider dealing.
12.6 Major shareholders in case of takeover
Trying to obtain irrevocable undertakings from major shareholders is a practice known in Spain; of course, such major shareholders will be subject to all insider trading regulations.
12.7 Trading in certain periods
The Unified Code recommends that the board of directors approve, in general, any transaction made by the company with its directors or with major shareholders. Other than that, as regards insider trading, all transactions, including those made by the directors of a company, would be subject to the general rules.
12.8 Buying before launch of takeover bid
Again, buying before the launch of a takeover bid would be subject to the general rules on insider trading.
12.9 Buying after closing of takeover bid
A successful offeror who launched a takeover bid with respect to less than 100 per cent of the shares of the target is not entitled to buy shares of such target within the six months following the close of the bid without launching a new takeover bid with respect to 100 per cent of the shares of the target and on the same conditions as the previous bid.
12.10Analysts
Royal Decree 1333/2005 develops in detail article 6.5 of the Market Abuse Directive dealing with analysts.
13. MUTUAL FUNDS AND UNITS
13.1 Special regulation for mutual funds
Mutual funds are governed by Act 35/2003, of 4 November on Collective Investment Schemes (Ley de Instituciones de Inversión Colectiva, LIIC) and Royal Decree 1309/2005, of 4 November, enacting the Regulations of the LIIC (IIC Regulations). The LIIC defines two different types of collective schemes, investment funds (fondos de inversión) and investment companies (sociedades de inversión). The LIIC defines collective investment schemes as those schemes the purpose of which is to attract funds, assets or rights from the public at large with the aim of managing and investing them in assets, rights or securities, and provided that the profit obtained by the investor be calculated on the basis of the collective results.
13.2 Controlling agency
Collective investment schemes are subject to the CNMV; the Ministry of Economy has also certain powers in respect of collective investment schemes and their managers.
13.3 Regulated functions
Trading of units, management and custody of the schemes are regulated activities; only investment services firms and credit entities may trade units, and both the manager and the custodian must be licensed by the authority to perform their activities.
13.4 Exemptions
Neither the LIIC nor its Regulation contain any list of entities or activities exempt from the collective investment scheme regulation; therefore, only those entities falling out of the definition of collective investment scheme will be exempt from compliance with the LIIC. As a matter of fact, the so-called ‘investment clubs’ are not considered to be collective investment schemes.
13.5 Requirements
Schemes must be authorised and registered by the CNMV. Among the documentation required to authorise a scheme, the following is worth noting: the sponsors must file a report and documentation evidencing that the directors and officers of a scheme are professional and honourable; funds must in addition file a prospectus and companies that do not appoint an external manager must file a report explaining the organisation of the company.
13.6 Special requirements for foreign entities
Subject to certain conditions (such as, eg ensuring appropriate means of paying Spanish investors) and to the filing of certain documentation, units or shares of collective investment schemes authorised in the EU are freely negotiable in Spain. The documentation to be filed is the following: (i) a prior notice; (ii) a certificate of the member state of origin attesting to the fact that the scheme meets the requirements of the UCITS Directive (Directive 85/611/EC); (iii) regulations of the fund or, in the event of companies, deed of incorporation; (iv) full and simplified prospectus; (v) latest annual and biannual report; and (vii) a report on the intended forms of negotiation of the units or shares.
13.7 Relationship with clients
The LIIC and its Regulations contain detailed rules concerning the rights of and the information that must be furnished to investors. In addition, the managers must have a client attention service.
13.8 Reporting/guarantee systems
The LIIC establishes obligations of the schemes to report to the CNMV certain facts; the schemes are also subject to certain continuing reporting obligations; in particular, the manager must publish an annual report, a biannual report and two quarterly reports, plus the audited financial statements.
13.9 Extra disclosure requirements
The schemes and their managers are subject to certain specific disclosures, such as the investments they make or the periodicity or method for calculating their net asset value.
13.10Types of schemes
The LIIC distinguishes between investment funds and investment companies. In turn, the schemes may be financial or non financial. Within the financial schemes, the IIC Regulations also regulate hedge funds or schemes addressed only to qualified investors and with a nominal value per unit of a minimum of €50,000.
13.11Registration and requirements for managers
Managers must be corporations (sociedades anónimas) authorised by the Ministry of Economy. They must have a share capital calculated in accordance with certain formulae, but which can in no event be lower than €300,000. They are subject to certain operational restrictions. The application must contain the following: (i) draft articles of incorporation; (ii) activities programme; (iii) a description of the organisation of the manager; (iv) a list of shareholders and directors; and (v) the internal code of conduct.
13.12Registration and requirements for custodians
Custodians may be credit entities, brokers and dealers domiciled in Spain or acting through a Spanish branch. They are authorised by the CNMV.
13.13Registration and requirement of redemption agent
The redemption of shares and units of schemes is carried out by the manager.
13.14Regulation of investment powers
The LIIC and the IIC Regulations contain detailed rules concerning what types of assets, securities or rights a scheme may invest in and what percentages and coefficients of investment apply to the different types of schemes.
14. SECURITIES INSTITUTIONS
14.1 Regulation of securities institutions
Securities institutions are governed by the LMV (articles 62 to 76 bis) and by Royal Decree 867/2001, of 20 July on the legal regime of investment services firms.
14.2 Controlling power
Investment services firms are authorised to operate by the Ministry of Economy; subsequently, they are subject to the control and surveillance of the CNMV.
14.3 Regulated functions
The following are deemed to be investment services, reserved to investment services firms and credit entities: (i) receipt and transmission of orders for the account of third parties; (ii) execution of such orders for the account of third parties; (iii) dealing on own account; (iv) management of investment portfolios; (v) mediation, directly or indirectly for the issuer’s account, in the placement of issues and public offerings; (vi) underwriting of the subscription of issues and public offerings.
14.4 Exemptions
The activities listed in 14.3 above are reserved to investment services firms and to credit entities; there are a number of activities ancillary to the above, listed also in the LMV, that are not reserved to these entities: among these, it is worth mentioning the rendering of financial and investment advice and the provision of services related to underwriting.
14.5 Requirements
Investment services firms must be incorporated as sociedades anónimas or sociedades de responsabilidad limitada with the exclusive purpose of rendering investment services; the minimum share capital required shall be as follows: €2,000,000 for dealers; €300,000 or €500,000, depending on certain circumstances, for brokers, and €100,000 for portfolio managers; the firm must have a board of directors; all members of the board must be reputed and honourable, and the majority of them must have knowledge and experience in connection with the services to be provided by the firm; the firm must prepare an internal code of conduct and must adhere to the Investment Guarantee Fund. It must also file with the CNMV an activities programme.
14.6 Foreign entities
Investment services firms authorised to operate in another EU member state may operate in Spain through a branch or on a cross-border basis, the only condition being that the CNMV receive a notice from the regulator of the member state of origin.
Branches of investment services firms authorised in a third country shall be subject to the general regime for authorisation of investment services firms.
14.7 Relationship with clients
Rules of conduct, information obligations, forms of contracts, registry of orders and other aspects of the relationship of investment services firms with their clients are regulated in a Royal Decree 629/1993, of 3 May on rules of conduct in the securities markets and mandatory registries, and in developing regulations and circulars.
14.8 Guarantee system
As mentioned, investment services firms must adhere to the Investments Guarantee Fund regulated by article 77 of the LMV and by Royal Decree 948/2001, of 3 August on systems for compensation of investors.
15. NOTIFICATION OBLIGATIONS
15.1 Notification of substantial shareholdings
Please refer to question 10.6 above.
15.2 Which thresholds
The general threshold is five per cent or a multiple thereof of the share capital; for investments made from tax havens, the threshold is one per cent, and directors must notify any acquisition or sale they make of shares or options of the companies they manage.
15.3 Publicity of notifications
Information on substantial shareholdings must be made available by the listed company to its shareholders, must be published by the stock exchanges where the shares are traded, and must be registered with the CNMV.
15.4 Substantial holdings in credit institutions
For credit institutions, the thresholds are 5, 10, 15, 20, 25, 33, 40, 50, 66, and 75 per cent. In the case of credit institutions, the acquisition must be authorised in advance by the Central Bank of Spain, and may be denied in case the purchaser is not deemed to be suitable.
16. PUBLIC TAKEOVERS
16.1 Applicable laws and regulations
Takeovers are governed by article 60 of the LMV and by Royal Decree 1197/1991, of 27 July, on Public Takeovers. It must be mentioned, though, that the Ministry of Economy released in June 2006 a draft Bill of Law amending the LMV in respect of takeovers, in order to implement in Spain the Takeover Directive (Directive 2004/25/EC, dated 21April 2004).
16.2 Competent authority
The takeover must be authorised by the CNMV.
16.3 Thresholds
There is an obligation to launch a takeover bid when the bidder (i) intends to acquire at least 25 per cent of the share capital of the target company, or (ii) holding already more than 25 per cent but less than 50 per cent, it intends to increase its stake by at least six per cent ; or (iii) it intends to increase its holding above 50 per cent.
16.4 Obligation of same price for offer
Royal Decree 1197/1991 establishes certain cases where the bidder will have to pay a price per share at least equal to the price paid in previous transactions by it or by a third party acting in concert with it for the same shares; these are: (i) delisting takeovers; (ii) those cases where the purchaser is forced to launch a mandatory takeover bid in spite of not having exceeded the thresholds because the holding purchased will allow it to appoint a certain number of board members; (iii) the case where the offeror purchases shares within the takeover period at a price greater than the offer price, which will entail an automatic increase of the takeover price; and (iv) the case of a purchase made within the six months following the end of a successful partial takeover bid.
16.5 Timing
After all the requisite documentation has been filed, the CNMV will have to authorise or refuse the bid within 15 business days (this period may be longer if the CNMV requests clarifications); subsequently, the bidder will have to publish the offer within the following five business days; the date of the publication will be the trigger for the acceptance period, which will be between one and two months.
16.6 Strategy
The strategy will depend on whether the takeover bid is ‘hostile’ or ‘friendly’. In any event, Royal Decree 1197/1991 requires that the board of directors of the offeree publish a report stating (i) whether it supports the offer or not; (ii) whether there exists any prior agreement between the bidder and the offeree or its directors; and (iii) whether the directors who hold shares in the target will accept the bid or not.
16.7 Irrevocables
In friendly ‘takeovers’, it is common practice to negotiate with major shareholders the execution of irrevocable undertakings to sell their shares.
16.8 Prohibitions to buy on exchange
Royal Decree 1197/1991 distinguishes the following cases:
(i) in the event of exchange offers, the offeror will not be entitled to purchase shares until the result of the bid is published; and
(ii) in the event of cash consideration, purchases are not prohibited but if the bidder purchases shares at a price greater than the offer price, that fact will entail an automatic increase of this.
16.9 First announcement
The first announcement will be made when the bidder files its takeover bid; at that time, the CNMV will suspend the trading of the shares of the target and will notify the market that such suspension is due to the filing of a takeover bid.
16.10Period between first announcement and offer document
The first announcement of the offer can only be made after the bidder has filed with the CNMV all requisite offer documents.
16.11Offer document content
The takeover prospectus will contain information on (i) the offeror and its relations with the offeree; (ii) the conditions of the offer (shares to which the offer relates, price, maximum and, if applicable, minimum number of shares to which the offer refers, guarantees and conditions); and (iii) the formal aspects of the offer (acceptance period, form of acceptance, where the acceptance may be formalised).
16.12Drafting of offer document
The prospectus is usually drafted by the financial and legal advisors of the bidder, in close cooperation with the directors of the bidder.
16.13Addressees of offer documents
The announcement of the authorisation of the bid must contain the essential data of the offer, and an indication of the place where the full prospectus may be obtained. Such announcement must be published in the Official Gazette of the Commercial Registry, in the Listing Gazette of the corresponding exchange and in two major newspapers.
16.14Due diligence
The carrying out of a due diligence of the offeree will depend on the circumstances, eg whether the bid is friendly or hostile or whether there is an irrevocable undertaking or not or whether there are any agreements between offeror and offeree or its directors. According to article 7 of Royal Decree 1333/2005, information obtained as a result of the due diligence exercise may be exempt from the disclosure rules, but it will in any event be subject to insider trading rules.
16.15Conditions
Royal Decree 1197/1991 admits the following conditions that authorise the offeror to withdraw the offer: acceptance by a minimum number of shares; acceptance by the shareholders meeting of the offeror; filing of a competitive bid; failure to obtain antitrust clearance, or obtaining of a clearance subject to burdensome conditions; and exceptional and unforeseeable circumstances, subject to the CNMV consent.
16.16Obligation of financing: cash, shares and mixed
The bidder has to provide evidence that it has sufficient guarantees for the fulfilment of its obligations under the bid. In the event of a cash consideration, the guarantee may be a cash deposit, public debt or a bank guarantee. In the event of existing securities, it will be necessary to justify that those are available to the offeror for the purposes of the offer.
16.17Break-up fees
Royal Decree 1197/1991 does not regulate break-up fees and, although scholars tend to agree that they should be admissible, the fact is that there exists one precedent where the CNMV did not authorise break-up fees previously agreed between the offeror and the offeree; the obligation to pay the fees was finally taken up by the major shareholder.
16.18The Takeover Directive
As mentioned above, the Ministry of Economy has released a draft Bill of Law to implement the Takeover Directive in Spain. The text released follows very much the contents of the Directive including matters such as article 9 of the Directive (prohibition to take defensive action to frustrate a bid).
16.19Defence mechanisms
Royal Decree 1197/1991 prohibits the directors of the target from making or concerting any practices or transactions out of the ordinary scope of the business of the target aimed at frustrating the bid. In particular, the following is prohibited: issue securities; carry out direct or indirect transactions on the securities which are the subject of the bid with the aim of frustrating the bid; and sell, encumber or lease the properties or other assets of the company, when such acts may frustrate the bid.
16.20Nature of listed securities
In Spain, all listed shares must be book entry shares. There are special rules for certain types of entities, such as credit entities, that must have mandatorily registered shares.
17. FOREIGN INVESTMENT
17.1 Restrictions on foreign control
The only industry that is still subject to certain restrictions is national defence; investments in this sector are subject to prior governmental authorisation (except for investments in listed companies of stakes representing less than five per cent of their share capital).
Foreign investments in Spain are not subject to any prior control, but must be declared to the authorities.
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