LESSON 7: SOCIEDADES DE CAPITAL

FORMATION

1. Basic characteristics of SA/SRL

2. Corporate name, registered office, nationality
3. Formation of an SA: 4.1 Formalities; 4.2 The notarial deed; 4.3
Corporate by-laws; 4.4 Subscription and minimum initial contribution;
4.5 Registration in the Mercantile Register
4. Corporation in formation and failure to register
5. Types of incorporation
6. Nullity of an SA
7. Branches and subsidiaries
8. The webpage

Traditionally, the corporation (“S.A.”) has been by far the most commonly used
type of companies in Spain basically due, in the first place, to the fact that the capital is
divided in transferable shares and in the second place to the absence of responsibility or
shareholders for the debts of the company, which is entirely responsible for its debts and
obligations. This is changing. During the last years the number of SRL is increasing to
the point that over the 90% of new companies are SRL which seems to be more
adequate to the SME (small and medium enterprise-PYME in spanish).

In some cases it will be preferable a SRL depending on the commercial purpose

the members are interested in, the number of participants in the company, the amount of
capital needed to develop the purpose of the company, and the flexibility during the
process of formation and along the whole life of the company. That is: if the partners
are interested in a smaller company, closer relationship between the members of the
company, an easiest operational system and less expensive costs of operating, it will
probably be a better option the creation of a SRL. On the contrary, if we need a large
amount of capital, if we expect high mobility for the capital shares, if we want to
develop one of the activities reserved to SA by the legislation (insurance, banking,
pharmaceuticals, leasing…) the better option is an SA.

Both SA and SRL are regulated in the Corporate Enterprise Act (Ley de
Sociedades de Capital approved by Real Decreto Legislativo 1/2010, de 2 de julio). In
addition, the Law 3/2009, of April 3, on Structural Modifications to Commercial
Companies (Ley de Modificaciones Estructurales de Sociedades), regulates the
processes for the restructuration of companies, including changes in corporate form,
mergers, spin-offs, global transfers of assets and liabilities and international transfers of
registered offices. This legislation is supplemented by the Royal Decree 1784/1996, of
July 19, 1996, on the Regulation of the Commercial Registry (Reglamento del Registro
Mercantil)

1. BASIC CHARACTERISTICS OF SA/SRL

1
 The legislation does not give us a definition of SA nor SRL. We have to go to
art. 1 and 4 to find out the basic characteristic of both types.

SA is a corporation (public company in England, joint stock companies) whose

capital, is divided into shares and shall be over €60.000. The capital consists of the
contributions made by the shareholders. Shareholders are not personally liable for the
debts of the company.

SRL is a company whose capital is divided into stakes (certification units) and
shall be over €3000. The capital consists of the contribution of the partners. Partners are
not liable for the debts of the company.

In addition, it is important to remark that no matter the purpose of the business

the company shall be “commercial organisation”. In this sense art. 2 provides that “an
capital companies are commercial organizations” “irrespective of their corporate
purpose”.

It is unquestionable that the lack of personal liability of the members is the

characteristic that has made of capital compamies the most popular type of company
due to the fact that the risk of the loss assumed by them is limited to the amount of their
contribution to the company’s capital.

To finish with, Art. 33 of the Law states that upon registration, capital
companies shall become a legal entity. That means that, once formed, the corporation
has its own distinct personality, separate from its member. As the corporation exists on
its own right, changes in its membership have no effect on its status or existence.
Moreover, members can transfer their shares to a third party without having any effect
on the continuation of the business. By means of the legal personality, the company is
the only responsible for its debts, it is the owner of the business and the patrimonial
assets needed for it, and has contractual capacity in its own right and can sue and be
sued in its own name.

2. CORPORATE NAME, REGISTERED OFFICE, NATIONALITY

2.1 Corporate name

Article 6 of LSC provides that the Corporation’s name must always include the
words “Sociedad Anónima” or its abbreviation, S.A. In the case of SRL the company
name shall always include the words Sociedad Responsabilidad Limitada o Sociedad
Limitada or its abbreviation SRL or SL.

Art. 7 prohibits the use of a name identical to that of a pre-existing company. We

have also to take into account arts. 395 to 419 RRM that establishes further rules for the
composition and register of the corporation’s name.

The company name is the name of the corporation and it serves to distinguish it
from other companies. The name can be an objective or a subjective denomination, but
if it includes the proper name of an individual, the consent of the individual named is
needed. The name can be related to the activity of the corporation, but in this case it

2
must be related to the real activity of the firm, so that there is no place for confusion to
third parties. The corporation can also use a fantasy name as far as it does not include
any terms which are contrary to the Law, morals or public order and it does not induce
to error or confusion with a pre-existing legal entity.

The corporate name shall be included in the by-laws of the corporation.

2.2 Nationality

Article 8 LSC establishes the criteria for the nationality of the S.A. Nationality is
in relation with the geographical place where the company has its registered office or its
main activity. And so “All corporate enterprises with registered offices on Spanish soil,
irrespective of the place of formation, shall be Spanish and subject to this act”. The
registered office of a company whose main business activity is within the Spanish
territory must also be in Spain. This article makes possible that a corporation formed in
a foreign country but with its principal business activity in Spain can be considered
Spanish and ruled by the Spanish Law.

2.2 Registered office

The registered office is the official address at which legal documents, notices
and other communications can be formally presented.

It is to the election of the company to choose the local place of its registered
office within the Spanish territory and, in this sense, article 6 establishes “that the
registered office of an S.A. or a SRL shall be within the Spanish territory in the place
where their effective management and administration are located or where they have the
principal business activity or main economical operations.” The reason for this rule is
the convenience that the economic activity and the official address of the company are
in the same place in order to avoid frauds to third parties.

The registered office shall be included in the by-laws of the corporation.

However, in the event of a difference between the registered office and an office where
the corporation has it effective management or main business activity, third parties may
deem any one of them as the registered office.

3. FORMATION OF AN S.A. /SRL

4.1 Formalities

The Corporation Law establishes a strict procedure with which corporations

have to comply before they can operate legally.

The first step is an agreement by and between two or more parties (art. 19). Plus
over, Art. 20 and 21 provide that a corporation shall be created by a notarial deed,
signed by all the founding partners or shareholders, and registered in the Mercantile
Register. Upon Registration, the corporation shall become a legal entity for all purposes.

3
4.2 The notarial deed

The notarial deed is the formal document which contains the circumstances of
the formation of the corporation. The notarial deed is granted by a public notary and it
contains the intention of the founders to create a corporation. That means all the
contractual aspects of the agreement, including the by-laws (or articles of association)
which regulates the organization of the corporation.

Article 22 regulates the notarial deed and provides that it shall contain: the
proper names of the founders and their formal address or registered office; a statement
of the intention of the founders to create the corporation, and specify the type of
company they want to create; the contributions to the capital of each of the
shareholders/partners and the shares/stakes each of them will receive; the total amount
of the costs of the formation process; and the by-laws of the corporation. The deed may
also include any valid agreements and conditions that the founders deem appropriate to
establish.

4.3 Corporate by-laws

The by-laws are the basic provisions governing the organization of the company.
The by-laws are to be treated as an enforceable contract, though a peculiar contract,
which terms can be altered by the majority of the members. Capital companies are at
liberty to draw up its own provisions but the Law set a series of circumstances that shall
be necessarily included.

Article 23 estates that they shall contain: - the name of the company; - the
purpose and activities, in a concrete and precise manner; - the duration; - the location of
the registered office of the corporation, and - the date on which operations are to
commence, which normally cannot be earlier than the date of execution of the public
deed of incorporation.

It shall also contain: - the shared capital, that is the shares or stakes in which the
capital I divided. In the case of SA, shares the bylaws shall express the proportion not
paid-in and the number of shares in which the capital is divided (par value, class and
series, if they are represented by book entries or certificates). In SRL, mention shall be
made of the number of stakes into which the capital is divided, their par value,
consecutive numbering and, where such stakes are not equal, the rights granted thereby
to their holders and the proportion of capital owned.

The bylaws shall also content managing body, determining the structure of the
representative body, if there will be a Board of Directors or management will be
entrusted to any other body or person, the duration, and the system of directors’
remuneration;- the manner in which corporate bodies are to deliberate and adopt their
resolutions; - the closing date of the general accounts, which will be the 31st December
in case the by-laws are silent.

4
 There must be included in the by-laws, if any: - restrictions on the free
transferability of the shares in the case of an SA or the specific rules for the transfer of
stakes in SRL, - ancillary obligations, stating the content and whether or not they are
remunerated and penalties for breach thereof; and - the especial rights reserved for
promoters or founders in SA. They may also contain whatever agreements or terms
agreed as far as they do not contravene any law or the fundamental principles that
govern S.A’s or SRL.

Inter-partner or inter-shareholder agreements not included in the by-laws shall

not be effective in respect of the company (art. 29)

4.4 Subscription and initial contribution

In SA, Article 79 provides that the shares into which the share capital of joint
stock companies is divided shall be fully subscribed by the shareholders and at least
one-fourth of the par value of each share shall be paid up by the date of formalisation of
the company’s deed of incorporation or instrument on capital increase.

Each of the first shareholders of the corporation is obliged to pay-in, at the

moment of the foundation of the company, the 25% of each share, and must pay the rest
when the company call them for pay. The fully subscription of the capital and the
minimum payment of the contribution are conditions sine qua non the corporation is
validly incorporated and if these conditions are not fulfilled the corporation can be
declared to be null.

On the contrary, in SRL art. 78 estates that the stakes into which the capital of
limited liability companies is divided shall be fully subscribed and the par value fully
paid by the partners by the date of formalisation of the company’s deed of incorporation
or instrument on capital increase.

4.5 Registration in the Mercantile Register

The corporation receives its separate legal personality upon registration and the
foundation of the company will not be finished until registration is completed. Before
registration the corporation does not properly exists, it is only a company in the process
of constitution. Because the registration is absolutely necessary for the existence of the
corporation, we can say that the birthdate of the corporation is the moment of the
registration.

4. CORPORATION IN FORMATION AND FAILURE TO REGISTER

A company exists from the date of the registration, but the constitution can be a
long-term process. Prior to registration it is necessary to execute the public deed, to
bring it to the Register office and it has to be examined by the Register Officer in order
to certify that there are not rules that contravene the Law. In the meantime the founders
need to realize all the operations that are necessary for the formation of the corporation.
The Law provides the rules to regulate the consequences of the acts realized prior to
registration and of the failure to register in art. 36-40.

5
 5. CORPORATION IN FORMATION

A corporation in formation is a corporation in which the founders had executed

the public deed but the company is not yet registered. This period lasts one year
maximum. The Law establishes several rules for the acts and contracts made in the
name of the corporation in formation in art. 36-38.

Persons who enter into contracts on behalf of the corporation prior to its
registration are jointly and severally liable for their performance, unless such
performance was made conditional on the corporation’s registration and, if applicable
its later assumption of liability.

However, in some cases the corporation in formation is liable for the debts
produced by them. These is the case of those acts and contracts which are indispensable
for the constitution of the company (i.e. taxes, registration fees, public notary fees), and
the case of the acts and contracts made within the powers granted to the managers in the
notarial deed.

Just in case that the date of the commencement of operations is the same in
which the notarial deed is granted, the managers are fully entitled to the full
development of the corporate purpose and to perform any kind of acts and contracts
within its business activities and the corporation in formation shall be liable for them.

Once registered, the corporation exists as a separate person and has to assume
the acts and contracts made in its name prior to registration if they are included in the
above mentioned. It will also assume the managers and founders actions during the
three months period following registration. Personal liability of the managers, founders
or representatives shall cease.

The corporation can assume other acts and contracts made by the managers or
founders in the three-month period after registration. If the corporation does not assume
them, the persons who made them shall be liable for their consequences.

5.2 Failure to register

In case that the founders have no intention of register the company after a
reasonable period, the corporation is no more in formation but an “irregular”
corporation.

The irregular situation can be stated when the proof of the intention of the
founders not to register exists. However, after one-year period from the execution of the
notarial deed and no movement to register has been done, it can be presumed that there
is no intention to register. In such cases, any shareholder may request the dissolution of
the corporation in formation and demand the return of his contribution upon liquidation.

If the corporation has undertaken operations, the question is about the rules
governing the irregular company. Article 39 provides it shall be governed by the rules
for general partnerships or, as appropriate, non-mercantile organizations.

6
 6. TYPES OF INCORPORATION

The Law establishes two different procedures for the incorporation of a

company: incorporation in a single procedure (fundación simultánea) and incorporation
in phases (fundacion sucesiva. Art 19 states that capital companies shall be formed
under an agreement concluded by and between two or more parties or, in the case of
single member companies, under a unilateral instrument. SA may, in addition, be
formed successively through public share offerings. ).

The incorporation in a single procedure exists when the notarial deed is executed
by all the founders and all of them have to subscribe the whole of the shares. The
subscribers of the shares are the first shareholders and founders of the corporation.
They are jointly liable with the corporation, among other cases, for the authenticity of
the contributions or for the proper use of the funds gathered for incorporation expenses,
but at the same time they can retain some special economic rights, the total value not
exceeding of the net profits of the company and for a maximum of ten years.

The incorporation in phases is a procedure that involves an offering to the public

at large by the promoters to subscribe shares before the execution of the public deed of
incorporation. To this end, advertising or financial brokers may be used by the
promoters. The promoters offer the public to subscribe shares through the foundation or
program, shares are subscribed by the public, promoters call for a general meeting,
shareholders vote the by-laws of the corporation and order and empower promoters or
directors to execute the notarial deed of incorporation and to file the application to
register the company. Promoters are liable, among other situations, for the list of
subscribers, the information given in the program or the authenticity of the
contributions.

7. NULLITY OF THE COMPANY

The lack of one or more essential requirements of the agreement recorded in the
notarial deed means the invalidity of the company and thus its nullity. However, the law
establishes that once it has been registered the company can only be declared null for
the reasons established in the Law.

Article 56 estates that nullity can be declared if the purpose of the corporation is
illegal, if the compulsory clauses of the statutes are not fulfilled (name, purpose,
contributions of shareholders, amount of capital and if minimum 25% of capital is not
paid-in), the legal disqualification of all the founding shareholders, the lack of consent
of at least two founders or the sole member, if the case.

The main effect upon the declaration of the nullity of a company is liquidation.
Art 57 states that the judgement declaring a corporation null and void shall lead to its
liquidation under the rules of the dissolution process.

8. BRANCHES AND SUBSIDIARIES

7
 In addition to the forms of business enterprise created under Spanish law that
constitute separate legal entities the company may operate in Spain through a branch or
a subsidiary or a representative office.

A branch is a secondary establishment with a permanent representation and

certain managing independence, by means of which the activities of the head office are
totally or partially developed, and with no legal personality independent of that of the
head office (art. 295 RRM).

The formation of a branch requires the execution of a public deed that must be
registered at the Mercantile Register (art. 297 a 308 RRM). The branch must have an
assigned capital, which is not subject to any minimum amount requirement. The branch
must have a legal representative who is empowered by the home office to administer the
affairs of the branch. Apart from this requirement, there are no formal administration or
management bodies. Except for the obvious differences in terms of internal structure
and organization, a branch operates much like a corporation in its dealings with third
parties. Having the consideration of permanent establishments for tax purposes,
branches shall have their own accounting referred to the transactions they make and the
assets assigned to them. Additionally, the branch shall deposit with the Mercantile
Register the head office’ annual accounts, a certification of their deposit in its
Commercial Register or, in certain cases, the accounts corresponding to the branch
activity. The managing body of the head office shall appoint a branch Director. He will
act as an attorney in fact of the head office in the branch. The general rule is that the
Director might exercise all the activities of the branch recorded in the Mercantile
Register. In any case, it is subject to the limitations provided for in the powers of
attorney.

A subsidiary is a separate legal entity, a company of a commercial nature

devoted to the development of an economic activity, with a capital stock divided into
shares or participation units. The capital consists of the contributions of the partners,
who, as a general rule, are personally liable for company debts only up to the limit of
the made or promised contribution.

A representative office has no legal personality separated from that of its head
office. No mercantile formalities are required to open a representative office. However,
in some cases (tax law, social security legislation) it can be necessary a public deed to
express indicate the opening of the representative office, the funds allocated to the
office, the identity of their tax representative, which will be a legal entity or individual
resident in Spain, and his faculties. Registration in the Mercantile Register is not
required.

There are no formal managing bodies, but rather the representative of the office
acts under the powers granted to him/her. In principle, the activities of a representative
office are limited, being mainly of coordination, collaboration, etc. The company is
liable for any and all the debts of the representative office.

9. THE WEBSITE

Companies may establish websites. However in the case of listed companies

websites are compulsory. Art. 11bis, 11ter, 11quater regulate the circumstances for the
8
creation of the website, that shall be approved by the general meeting and shall be
entered on the company’s page in the Mercantile Registry and published in the Official
Journal of the Mercantile Register. The announcements concerning companies websites
must also be published in the OJMR (Boletín Oficial del Registro Mercantil).

The notices between the company and its members may be served via electronic
media providing they have consented to. The company shall provide a function on the
webpage able to stablish the date of receipt of the correspondence as well as the content
of the electronic messages exchanged by the company and its partners of shareholders.