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Netherlands -
Spain
The incorporation of limited liability companies in The Netherlands and in Spain
24 January 2023
- Corporate
Summary
Spain’s Labour and Social Security Inspectorate has inspected the “Big Four” firms to control working time and overtime, which employees claim is regularly exceeded. Spanish law requires companies to record workers’ start and end times each day to prevent employees from working longer than the stipulated day. Companies failing to comply can face fines and even criminal charges. The inspections could set a precedent for firms in the auditing and consultancy sectors.
In recent days, the press has reported on the “macro-inspection” carried out in the “Big Four” (the most important firms in the consultancy and auditing sector) by the labour authority, namely the Labour and Social Security Inspectorate (“Inspección de Trabajo y Seguridad Social”).
The aim of this inspection is, fundamentally, the control of working time, overtime and time recording, all aspects which, according to the workers themselves, are flagrantly breached by the aforementioned companies.
Thus, it seems to be a general trend that the employees of the “Big Four” work up to 12 hours a day (“from nine to nine”), which means approximately 4 hours of overtime a day; overtime that, to make matters worse, is not compensated either financially or by days off. Being forced to work during rest periods, such as weekends or holidays, is also common practice.
Given the situation and the facts described above, how can they be transferred to the legal plane? What breaches would the “Big Four” be committing, and what responsibilities would they have to face, in accordance with our Labour Law?
Well, firstly, since 2019, the year in which Royal Decree-Law 8/2019 of 8 March came into force, the company is obliged to keep a daily record of the working day, including the specific start and end times of each worker’s working day. The purpose of this measure is, precisely, to avoid what happens in the “Big Four”, that is, that employees work longer than the established working day, which, in the words of the Explanatory Memorandum of the aforementioned regulation, produces a clear negative effect on the labour market:
“The performance of working time in excess of the legally or conventionally established working day has a substantial impact on the precariousness of the labour market, by affecting two essential elements of the employment relationship, working time, with a relevant influence on the personal life of the worker by making it difficult to reconcile family life, and salary. It also impacts Social Security contributions, which are reduced as they are not paid for the salary corresponding to the working day”.
The daily record of each worker’s working day is thus an essential element for the purposes of calculating overtime, i.e., those hours worked over the maximum duration of the ordinary working day, and which must, in any event, be compensated, either financially or through equivalent paid rest periods; in addition to also having a quantitative limit, insofar as article 35.2 of the Workers’ Statute provides that the number of overtime hours may not exceed 80 per year.
No less important is the certainly novel “right to digital disconnection in the workplace”, which takes the form of the worker’s right to guarantee, outside the legally or conventionally established working time, respect for their rest time, leave and holidays, as well as their personal and family privacy, and which is recognized in article 88 of our current Personal Data Protection Act.
At this point, what happens then if the company transgresses the legal rules and limits on working hours, overtime, rest breaks, holidays, working time records and, in general, working time, as apparently occurs in the cases described at the beginning of this article?
Well, it faces a financial fine of 751 euros in the minimum grade, and up to 7,500 euros in the worst case, according to the Law on Infractions and Penalties in the Social Order.
In the worst-case scenario, a possible criminal liability could even be considered for allegedly committing an offense against workers’ rights. This is by no means a trivial matter, as our Criminal Code provides for such offenses to be punishable not only by a fine but also by imprisonment.
Conclusion
We are faced with the possibility that the Labour Inspectorate’s action with regard to the so-called “Big Four” will set a precedent with regard to the prohibition of endless working hours, so common in sectors such as auditing or consultancy, which will also benefit the working conditions of workers as a whole.
Where is it more suitable to set up a new limited liability company in Europe?
I will deal in this article with two countries I know well (Spain and The Netherlands) and focus on the minimum capital requested and the online incorporation of a limited liability company, sharing some thoughts and my takeaways.
Spain: the “Create and Grow Law”
In Spain, the Business Creation and Growth Law 18/2022, of September 28, 2022 (related to aspects of incorporation of companies), known as the “Create and Grow Law”, was approved last September within the framework of the Recovery, Transformation and Resilience Plan of the Spanish government. This plan channels European funds to alleviate the consequences of the Covid-19 crisis. This law is an initiative that reflects this flexibility and, as its explanatory statement indicates, aims to encourage the creation and growth of companies, in order to contribute to the economic growth of the country and its long-term resilience. Spain thus aligns itself with other neighboring countries, where there is no minimum capital to set up a company of this type.
Is this new law interesting for foreign investors or companies looking to establish themselves in Spain?
It is certainly very interesting. The fact that the Spanish legislator abandons this reference figure of 3,000 euros is very favorable for medium-large companies willing to have a permanent establishment in Spain Nevertheless, as long as the capital does not reach the figure of €3,000, the following rules will be applied, which are intended to protect the interests of creditors or third parties that contract with the company: (i) 20% of the profit must be allocated to the legal reserve until said reserve together with the social capital reach the figure of €3,000 (the legislator seeks that the SLs constituted in this way do not remain “undercapitalized”), and (ii) as a safeguard clause for creditors of the company, in the event of voluntary or forced liquidation of the company, if the company’s assets are insufficient to meet its obligations of payment, the partners will be jointly and severally liable for the difference between the subscribed capital and the figure of 3,000 euros.
Online incorporation of a company in Spain
The “CIRCE system” (procedure dependent on the Ministry of Industry, Commerce and Tourism that allows the start of the process of creating companies “over the Internet” ) entails an electronic procedure through agreements and communications with all the organizations and administrations that intervene in the process of incorporating companies.
The entrepreneur will only have to complete the Single Electronic Document (DUE) that includes a multitude of forms and CIRCE will automatically carry out all the necessary procedures to establish the company, communicating with all the organizations involved (Tax Agency, Social Security, Mercantile Registry, Notary, etc.). There is an obligation to review and sign the DUE before sending it. This system is not active yet, but it is expected that it will be in place when other complementary laws that support this digital process are approved by the Spanish Legislator which is necessary for the well-functioning of the system.
The Netherlands: The Flex BV law
The Flex BV law came into force on October 4, 2011. This law has given a lot of flexibility to the incorporation of new limited liability companies which has been very favorable for international companies working with different product lines, allowing to have one company for every product or service offered.
The Flex BV law has, among others, the following characteristics:
- the creation of a Limited Liability Company is flexible, easy to establish and without many costs;
- it only requires one shareholder who must be registered with the Dutch Trade Register. The minimum share capital for setting it up is 1 euro. The liability of the shareholder is limited to the amount of money he has invested in the company. Being a limited liability company, the BV is liable for any debts, not the director or shareholder as private individuals, except in case of mismanagement or fraud. The company requires at least one director, and the shareholders can fill this position. The company registration procedure is quite fast due to the minimum documentation required.
Online incorporation of a company in the Netherlands
In the case of the Netherlands, in the Explanatory Memorandum of the bill implementing the Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 with regard to the use of digital instruments, it is proposed that incorporation of a BV electronically is only possible if payment on the shares takes place in cash, in order to initially limit the online formation of companies to simple situations. If it turns out that online formation works well, it can be considered whether it is useful to extend this possibility to situations in which contributions are made in a manner other than in money. Incorporation by natural persons using a model deed of incorporation must be possible within five working days from the date on which the notary has received all documents and information from the applicant or the date of payment of the share capital.
The incorporation of a BV digitally is postponed to the summer of 2023 since the House Committee for Justice and Security has decided that the act must be discussed in plenary.
The so called DOBV-system (Digital establishment of a BV), will entail a change in a number of work processes in the notaries in The Netherlands but for the Chamber of Commerce, no major changes will follow because the civil-law notary will supply the registration documents digitally to the Chamber of Commerce. Consequences the civil-law notary is the one who will have to offer a certain digital form of service, which citizens and companies will be able to use.
What positive and negative aspects can be highlighted?
Positives aspects:
- it is very positive that through this new standard, many investors or international companies from both countries will be encouraged to create new SPVs, as the minimum capital is considered by many companies as a “barrier to entry”;
- it will expedite the procedures for incorporating companies, essential vehicles for channeling the economic activities of businessmen in their transcendental task of creating wealth and employment, without notary and registration costs;
- it will create a healthy competition between all the Notaries in Spain and between the notaries of Spain and the Netherlands. The Dutch notary bond expects that a further digitization of the notarial process could be achieved first in the real estate chain and subsequently also in business practice. It is important that the business market may be capable to respond quickly to this demand;
- the share capital of a company will serve its partners to have the necessary funds with which to start their project, acquire the goods and resources necessary to start the economic activity and consolidate a long-term project (such as, for example, to buy the goods and services necessary to start up activities or to hire employees);
- it creates business growth through financing alternatives to bank financing, such as crowdfunding or participatory financing, collective investment and venture capital.
Negatives aspects:
- to search financing externally to start the company’s activity, which will also surely have a cost (in the form of loans, for example, with their corresponding interest rate). Additionally, in the short or medium term the company must have a capital increase to normalize their patrimonial situation and solve this evident “underfinancing” of own resources, with which, this will also suppose an additional cost in the form of notary and registry fees that must be faced in the medium or long term after the incorporation;
- the possibility of establishing a limited liability company with only 1 euro of share capital can facilitate the creation of fictitious legal entities by people who do not wish to carry out a real economic activity, but only use the companies as a suitable instrument for the development of legal or illegal activities;
- additionally, it also implies a clear risk for the legal certainty and the responsibility of those companies in large contracts with third parties, leaving a limit to their minimum liability while their businesses are millionaires;
- the online constitution system can be rigid and can also generate management and processing problems if the interested parties have not been properly advised and guided by the professionals involved before arriving at the Notary. Additionally, CIRCE’s telematic systems must function properly in order to correctly serve all those interested in the constitution of a capital company;
- there are new requirements for companies related to anti-laundry controls, for instance, to include relevant information on invoices and payments to suppliers in their annual reports and on their corporate website.
Conclusions
Although it may apparently imply a boom in the creation of limited liability companies due to the ease of incorporation, there is still much to be done at the level of corporate law at the national level and collaboration between notaries of both countries.
Spain is, with the entering into force of the Law Creation and Growth, considered among the most advanced countries in facilitating the creation of companies, reducing regulatory obstacles and favoring business restructuring and viability. The final decision will depend on the specific needs of the business, access to finance and tax regime, among others.
Additionally, to the incorporation flexibilities, we must not forget a couple of important aspects for the shareholders and directors to be aware of:
- a company needs to be managed as well and we need to be aware of the treasury, labor or other obligations of the companies already incorporated, even if they are non-active, they must continue to publish the annual accounts and complying with all governance requirements and formal public register notifications;
- the responsibility of the shareholders is also important to consider. A shareholder who has direct involvement in the management, may face liability in case of bankruptcy, also in the country where the subsidiary is located. As mentioned above, in Spain, in the event of voluntary or forced liquidation of the company, if the company’s assets are insufficient to meet its obligations of payment, the partners will be jointly and severally liable for the difference between the subscribed capital and the figure of 3,000 euros;
- the last important aspect when you are doing business mainly in Europe is to consider restructuring your business or consider other forms of incorporation of companies, depending of the business model that you have opted to, for instance the use of the Societas Europaea (SE) which has the possibility to set up a holding company or a joint subsidiary together and to transfer the seat of the company without winding up the entity. The disadvantage is that you need €120,000 starting capital to set up and to have a minimum of 2 companies governed by the laws of different Member States. Other forms of incorporation are the European Cooperative Society (SCE) and the European Economic Interest Grouping (EEIG).
If you need additional information or you are planning to incorporate a limited liability company in Spain or in The Netherlands, get in touch to know more about your options and the right corporate advice for your business.
What do the mythical Vega Sicilia wines, El Cid Campeador and the abuse of rights have in common? If you read on, you will find out.
The Vega Sicilia Único was for many years considered the best, the most prestigious and the most expensive Spanish wine.
The abuse of rights is a legal institute that allows the defense of situations in which the opponent acts with (apparent and formal) subjection to the law, but making a spurious use of the law with the intention of harming the injured party.
Last October, the Supreme Court handed down a judgment declaring certain agreements adopted by Bodegas Vega Sicilia S.A., producer of Vega Sicilia Único wine, to be null and void based on the principle of abuse of rights.
The judgment in question is doubly interesting.
Firstly, because it highlights the endemic evil of Spanish justice: it declares the nullity of resolutions adopted at a meeting held in March 2013, which were the subject of a lawsuit in February 2014, with a first instance ruling that same year, appealed to the Provincial Court of Valladolid who issued its judgement on 2019 and four years later the Supreme Court has put an end to the lawsuit: nine years after the shareholders meeting whose resolutions were the subject of the challenge.
As the Constitutional Court very recently reiterated in its ruling dated last October, “judicial slowness has no place in the Magna Carta”. But, although it has no place, or should not have a place, our courts continue to insist that it does and, as an example, this case that we are commenting on is, unfortunately, no exception.
Beyond the barbarity of a litigant having to wait for nine years to find a final solution to his claim, the judgment we are commenting on is of interest for other reasons.
The plaintiffs sought the nullity of certain resolutions adopted at a shareholders’ meeting, basing their claim on the fact that these resolutions constituted an abuse of rights since, through them, the shareholders of Bodegas Vega Sicilia S.A. sought to take control of Bodegas Vega Sicilia away from the company of which the plaintiffs were in turn shareholders.
The legislation in force at the time the meeting was held (prior to the 2014 reform) established that “resolutions that are contrary to the law, oppose the articles of association or harm the corporate interest to the benefit of one or more shareholders or third parties” could be challenged, adding that those contrary to the law would be null and void and the remaining resolutions could be annulled.
Following the 2014 reform, article 204 considers that “corporate resolutions that are contrary to the law, are contrary to the articles of association or the regulations of the company meeting or harm the corporate interest to the benefit of one or more shareholders or third parties” can be challenged and no longer distinguishes between null and voidable resolutions; although it partially recovers the concept of radical nullity in the case of resolutions contrary to public order by establishing that in such cases the action does not have a statute of limitations or lapse.
But both with the regulations prior to the reform and with those currently in force, the controversy resolved by the ruling we are commenting on is the same: when the legislator requires the agreement to be contrary to “law” in order to be able to challenge it, does he mean that it contravenes a precept of the Capital Companies Act (LSC), or can it be considered a requirement for challengeability if it contravenes any other positive precept of any other legal text? And finally, if the resolution in question is classified as constituting an “abuse of rights”, can such a situation be considered as “contrary to law” for the purposes of the application of article 204 LSC?
The Chamber reminds us of the requirements for the concurrence of abuse of rights in corporate matters:
- formal or outwardly correct use of a right
- causing damage to an interest not protected by a specific legal prerogative, and
- the immorality or antisociality (sic) of that conduct manifested subjectively (intention to damage or absence of legitimate interest) or objectively (abnormal exercise of the right contrary to the economic and social purposes of the same).
And it then refers to the numerous occasions on which its case law has reiterated that, although the regulation on challenging corporate resolutions does not expressly mention abuse of rights, this is no obstacle to annulling resolutions in such cases, since according to article 7 of the Civil Code (which prohibits abuse of rights), they must be deemed as contrary to the law.
The interest and peculiarity of this case lies in the fact that the contested resolutions were neither adopted in the interests of the company nor did they cause any harm to it, since the alleged harm was caused to a third party formally outside the company.
And on these premises, the Supreme Court reiterates and insists that the expression “contrary to the law” in article 204 LSC must be understood as “contrary to the legal system”, which includes those agreements adopted in fraud of the law, in bad faith or with abuse of rights, all of which are included and regulated in the Preliminary Title of the Civil Code. For these reasons, the judgment of the Provincial Court upholds the claim and declares the nullity of the contested agreements.
And what has El Cid got to do with all this? Is it a typo? No, not at all. Legend has it (invented, it seems, by a monk of the monastery of San Pedro de Cardeña to attract visitors) that Rodrigo Diaz de Vivar won a battle on the walls of Valencia against the Almoravids, after his death, saddling his corpse on his legendary horse Babieca.
It turns out that his almost fellow countryman, David Alvarez, buyer of the winery in the 1980s, the latter from León, the former from Burgos, but both old Castilians, also won his last battle after his death; David Alvarez was, together with one of his daughters, a plaintiff against the agreements of Bodegas Vega Sicilia and died in 2015; seven years later the Supreme Court has given him the right against the Almogavars, in this case, his own children.
And two lessons: first, justice is not justice if it is slow, a phrase apocryphally attributed to Seneca; it was not in this case for David Alvarez. Secondly, the abuse of rights is not only an “in extremis” recourse when one does not find frank legal support for one’s claims; on the contrary, it is, on many occasions, the solution.
What a director of a company in Spain must do to resign? Is it enough to send a communication to the company stating his resignation? Or does he have to call a Shareholder’s Meeting to appoint a substitute? Or does he even have to do something else?
A recent Supreme Court ruling dated July 12, 2022 (STS 561/2022) has resolved an interesting case related to the resignation of a sole director of an LLC, confirming that resigning is not as simple as it may seem.
The SC, indeed, established that a sole director, to resign, must not only prove that he validly called a Shareholders’ Meeting for the appointment of a substitute, but he must also prove that he did everything necessary during the interim period (i.e.: the time between the resignation and the holding of the Meeting) to meet the needs of management and representation of the company and to avoid damages. Even, and this is the case discussed in the STS, requiring the presence of a notary at the Meeting, if so required by shareholders representing at least 5% of the share capital.
The case recently ruled by the SC involved a company with two shareholders: the majority partner with 75% of the capital, and the minority partner (and sole administrator) with 25%. The sole administrator resigned and called a Shareholder’s Meeting to appoint a substitute. The majority shareholder required the presence of a Notary at the Meeting; but the resigning director refused, stating that – following his resignation – he had no obligation regarding the Meeting.
On the day of the Meeting, the majority shareholder was present, but neither the resigning administrator nor the Notary were, therefore the Shareholder’s Meeting was not held.
The administrator filed the deed of resignation with the Commercial Registry and the majority shareholder – at the same time – filed a document denouncing that the resigning administrator had not requested the presence of a Notary at the Meeting, despite having been requested to do so.
Thereafter, several resolutions with very different contents were issued. The Commercial Registrar suspended the registration of the resignation, but the “Dirección General del Notariado y de los Registros” (General Directorate of Notaries and Registries) decided that the resignation should be registered. The Commercial Court of Barcelona confirmed this last decision, and so did the Provincial Court. But the Supreme Court finally gave reason to the Mercantile Registrar.
The rulings in favor of the registration of the resignation argued, firstly, that the outgoing administrator exhausted his responsibilities by convening the Shareholder’s Meeting; and secondly, that the Registrar must examine only if a document may be entered in the register, without considering the “extra-registry reality”, such as the document presented by the majority shareholder complaining about the administrator’s actions.
The Supreme Court disagreed, stating that the absence of a Notary, validly requested by the majority shareholder, rendered ineffective all the resolutions of the Shareholder’s Meeting. Based on this, the Supreme Court considered it “logical” that in such a case the administrator should not only call the Shareholder’s Meeting but also require the presence of a Notary, in order to grant the validity of the resolutions of the Shareholder’s Meeting. With respect to the second controversial issue, the Supreme Court ruled that the Registrar, although exceptionally, can take into account certain circumstances or facts of which he has “registry evidence”, even if they do not appear by virtue of documents presented for their inscription, as long as they are related to the “inscribable” document.
In short, this interesting case shows that resigning as an administrator is not an easy activity. In general, although there is no specific provision on the subject in the Spanish system, the resigning administrator must not only call a Shareholder’s Meeting, but also remain administrator on an interim basis and attend to his obligations until the Shareholder’s Meeting is held; then, if the Shareholder’s Meeting is not held due to the non-attendance of the shareholders or if the shareholders do not appoint a substitute administrator, nothing more is required from the resigning administrator.
Artists (actors, singers) and sportsmen, non-residents in Spanish territory, who occasionally carry out their artistic or sporting activities in Spain, are usually unaware of their tax obligations before the Spanish Tax Authorities.
In this respect, we would like to point out that, in the last year, the inspection activity of the Spanish Tax Administration has increased considerably in relation to these taxpayers. This is a consequence of the fact that the Annual Tax and Customs Control Plan of the State Agency issued by the Spanish Tax Administration (AEAT) expressly included the intensification of the control of the income obtained by non-resident artists and sportsmen who act or develop an activity in Spain within the year 2020.
Spanish legislation, which regulates the Non-Resident Income Tax (IRNR), establishes literally that: it is considered income obtained in Spanish territory, among others, that which derives, directly or indirectly, from the personal performance in Spanish territory of artists and sportsmen, and that which derives from any other activity related to such performance, even if it is received by a person or entity other than the artist or sportsman.
This means that the artist or sportsman who performs an activity in Spain for which he or she obtains income, is subject to tax obligations and to the payment of taxes in Spain and must declare not only the income directly related to his or her performance but also other income linked to his or her professional performance, such as sponsorships, image rights, etc…
The above is understood regardless of whether the actual recipient of the income derived from the athlete’s or artist’s performance is the artist or athlete himself or herself, a company in which he or she has any interest, or a third individual or legal entity with no apparent connection to the athlete or artist.
Therefore, even if the company that pays such income is a non-resident in Spanish territory and the payment takes place physically outside such territory, any income obtained in Spain will be considered subject to tax (19% for EU residents and 24% for non-EU residents) when it is obtained on account of the artistic or sporting activity carried out in the Spanish territory.
Most of the double taxation international treaties that Spain has signed with other countries allow the country in which the activity of the artist or athlete takes place to tax the income generated from such activity. All these agreements also establish mechanisms to avoid double taxation, but this possibility is considerably complicated when, as in many cases, the artist or sportsman receives his income through a company incorporated in his country of residence or in a third country instead of receiving it directly as an individual.
Often the contracts signed by artists and sportsmen are signed by companies related to them -usually domiciled in their country of residence-, this situation is giving rise to serious difficulties for them to deduct in their country of residence (and within the scope of Corporate Income Tax) the tax paid in Spain as an individual.
We therefore want to highlight (i) the existence of important tax obligations that affects artists and sportsmen who are not resident in Spanish territory for the activities they carry out in Spain and, furthermore, (ii) the need for them to receive adequate prior advice on the tax consequences of their activity and, consequently, on the best vehicle to formalize their contracting.
Summary
One of the issues when setting up a (subsidiary) company in Spain which creates more practical difficulties is the question of powers of attorney: What is a power of attorney, are they necessary and how do they work? In Spain this question is of practical relevance and its operation does not always coincide with what happens in other countries. In this commentary, we will give you some ideas on how to act with these powers of attorney when setting up a company.
What is a power of attorney? A power of attorney allows a person (attorney-in-fact or representative) to act on behalf of a company. The attorney-in-fact may, for example, sign a contract on behalf of a company if that company has given him or her the power (authority) to do so. For example, borrowing money from a bank.
To do this the company will have two types of representatives: an “organic representative” (the directors) and “voluntary representatives” (attorneys-in-fact).
First, a company must have at least one director
The director(s) is the “organic representative”. In other words, he/she is an organ (management body) of the company, represents it and can contract on its behalf.
This “organ” may be a single person (a single director), it may be several persons acting individually or jointly, or it may be a board of directors (“collegial body”). The power of representation resides in the “organ”. It is the body that represents the company and not necessarily its members.
The first task, therefore, is to decide on the structure of the body, and this is taken when the company is incorporated, although it can be changed later. In this way, the sole director will have all the powers to represent the company, the individual directors will also have them if they are “joint and several” or will have to act jointly if they are “joint” directors, and the board will also have them, but as a body (not each director individually).
This last remark (the powers are held by the body and not necessarily by its members) is important when the company is managed by a board of directors. The fact that there is a board of directors does not imply that each member has the powers to represent the company, but that they are held by the body as a whole. The board may, however, delegate them. When the board delegates the powers to one of its directors (it is possible, but not obligatory to appoint one), the latter becomes a “managing director” (Consejero Delegado). This director may then represent the company in all matters delegated to him/her.
Secondly, in addition to the directors, the company may have (not compulsory) other “proxies” (empowered person)
These are the “voluntary representatives”, i.e. appointed “at the will” of the company.
A proxy is someone to whom the company gives powers to represent it. Powers to do certain things.
As we said at the beginning, in Spain, acting by proxy is quite strict, so that a company cannot normally be represented by anyone who does not have the power to do so. For example, if the company authorises (empowers) a person only to sign banking contracts, he/she will not be able to sign contracts with employees.
The powers granted to a person must therefore be express. If a person is authorised to open a bank account, he/she is not supposed to be able to borrow money. And in this way, the powers serve as a framework for action: what the attorney-in-fact can do and what the limits are. And sometimes these limits come from the power itself (opening a bank account does not authorise borrowing) or can be quantitative (borrowing, but only up to 100,000 euros), or temporary (borrowing, but until 31 December 2025) or even requiring more than one person to act (borrowing, but co-signing with person “Z”). And, of course, a combination of all of them: attorney-in-fact “X” can take out loans by signing with attorney-in-fact “W” up to 100,000 euros, and with attorney-in-fact “Z” up to 1,000,000 euros.
When setting up a company in Spain, it is therefore highly advisable to think about how the powers are to be granted, especially if the administrative body does not reside in our country. As we have seen from experience, it is not uncommon to set up a company by appointing an administrator resident abroad without appointing a proxy in Spain. This is legally valid, but, in a way, it hinders the functioning of the company: the only person to sign contracts and represent the company resides abroad, which, from a practical point of view, will be a major disadvantage.
The procedure for empowering a person is simple. All it takes is a decision of the administrative body, formalisation before a notary and registration in the Commercial Register. In this way, anyone can verify that the person appointed can represent the company in that particular act. This does require a person of trust to be found (an employee, a resident partner, a third party), but the risk can be modulated by the limitation possibilities described above.
In conclusion
When setting up a company in Spain, if the administrator will not be resident in Spain, consider how to organise the powers of attorney, whom to empower and how to limit, if necessary, their powers.
And the powers of attorney that you will need most and most urgently are:
- (a) those that will allow you to contract with banks (opening and managing bank accounts),
- (b) those relating to employees (hiring, registration with social security, payment of salaries),
- (c) those for supply contracts (electricity, water, telephone) and other general contracts (rental, vehicles, distribution contracts); and
- (d) managing the company’s electronic signature (relations with public administrations, tax payments).
Failure to take this decision in a timely manner could delay or hinder the activity being started.
And if in doubt, it is best to consult a local lawyer.
Arbitration is a procedure for resolving disputes between parties that is very successful in the Anglo-Saxon legal system. But much less in our country.
Arbitration has advantages and disadvantages; it is more expensive than the Courts, but it is much quicker; and speed is essential for justice to be such.
Typically, an arbitration lasts six months plus a couple of months for the appointment of the arbitrator; in total, a dispute, however important and difficult it may be, can be definitively resolved in eight months.
To compare with the Courts, in Spain today it takes on average eighteen months to obtain a judgement at first instance and another eighteen months for an appeal; without considering the possibility of an appeal to the Supreme Court.
The cornerstone on which arbitration rests is that the arbitral award is final and definitive and cannot be reviewed or appealed; this statement has certain exceptions, mainly of a formal or procedural nature: basically, the legality of the arbitration agreement, the arbitrability of the matter and the procedural regularity in the conduct of the arbitration proceedings. These defects can be attacked by means of an action for annulment, which is heard by the ordinary courts.
But in addition to the possible “formal” defects, the action for annulment can be based on the allegation of a breach of “public order”, which the Constitutional Court has defined and outlined as “those public and private, political, moral and economic legal principles which are absolutely obligatory for the preservation of society in a given people and at a given time”.
As this definition of “public order” is undoubtedly broad and unspecific, the use of the violation of public order as a tool for declaring the nullity of arbitral awards by the ordinary courts has produced an “overflow” effect that has required, in the words of the Constitutional Court, “a restrictive interpretation of it, on pain of violating the autonomy of the will of the parties and their waiver of judicial protection”.
This is what the Court has proclaimed in the very important judgement of 15 February 2021, which is the reason for this legal note.
In recent years, the High Court of Justice of Madrid has resorted to the argument of “public order” in an extensive and “overwhelmed” manner to annul arbitral awards and “supplant the arbitral tribunal in its function of applying the law”, becoming “a second instance reviewing the facts and rights applied in the arbitral award, a control mechanism for the correct application of jurisprudence”.
And this expansive and “overwhelmed” interpretation of public order as a tool for annulling arbitral awards by the High Court of Justice of Madrid had become a serious problem for the arbitral institution and for the confidence of the contracting parties when including arbitration agreements in their contracts.
The principle that the arbitral award was the final and definitive solution to the dispute it was intended to resolve, except for procedural breaches or breaches of public order limited to those cases in which the arbitral award was arbitrary, illogical, absurd or irrational, was called into question and was a clear deterrent to contracting parties deciding to resolve their discrepancies through arbitration.
Well then, the Constitutional Court, in a categorical and explicit manner, repeating what it had already stated in its judgement of June last year, confirms that the need for the arbitral award not to contravene public order cannot result in the judicial body replacing the arbitrator in his function of applying the law, nor can it become a second instance reviewing the facts and legal grounds applied in the arbitral award, nor a mechanism for controlling the correct application of case law.
The principle of party autonomy prevails; and this means that when there is submission to arbitration, the parties have agreed that it should be through this channel that disputes between them are to be resolved, by means of the arbitrator’s decision, which can only be annulled through the strict channels that the Arbitration Act regulates; we insist, for procedural reasons or for violating public order in the restricted interpretation explained in the judgement we are commenting on; but in no case, by way of a second instance where the facts and legal grounds applied are re-evaluated once again.
In short, Spanish arbitration is to be congratulated, and will be able to recover the momentum that caused it to lose, in part, the extensive interpretation of public order defended by some High Courts of Justice. From now on, the Courts will not be able to ignore the Constitutional Court’s interpretation, which is a breath of fresh air for Spanish arbitration.
Summary
At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts.
For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount.
These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer.
There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.
Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount.
The agent / distributor, the expert and the attorney should consider the following:
Check what the agent’s contribution has been
If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones.
Analyse the importance of these clients when it comes to continuing to provide benefits to the principal
Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about “clientele” if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal.
How does the agent operate at the end of the contract
Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed.
Is the compensation fair?
Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc.
Will the agent lose commissions?
Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc.
What is the legal maximum that cannot be exceeded?
The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors.
And, finally, it is convenient to include all the documents analysed in the expert’s report
If this is not done and they are only mentioned, it could result in them not being considered by a judge.
Check out the Practical Guide on International Agency Agremeents
To read more about the main features of a contract of agency in Spain, go to our Guide.
France – Dismissal of the officer of a simplified joint stock company: priority to the articles of association!
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Spain – Abuse of rights in corporate resolutions
15 December 2022
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Spain
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Summary
Spain’s Labour and Social Security Inspectorate has inspected the “Big Four” firms to control working time and overtime, which employees claim is regularly exceeded. Spanish law requires companies to record workers’ start and end times each day to prevent employees from working longer than the stipulated day. Companies failing to comply can face fines and even criminal charges. The inspections could set a precedent for firms in the auditing and consultancy sectors.
In recent days, the press has reported on the “macro-inspection” carried out in the “Big Four” (the most important firms in the consultancy and auditing sector) by the labour authority, namely the Labour and Social Security Inspectorate (“Inspección de Trabajo y Seguridad Social”).
The aim of this inspection is, fundamentally, the control of working time, overtime and time recording, all aspects which, according to the workers themselves, are flagrantly breached by the aforementioned companies.
Thus, it seems to be a general trend that the employees of the “Big Four” work up to 12 hours a day (“from nine to nine”), which means approximately 4 hours of overtime a day; overtime that, to make matters worse, is not compensated either financially or by days off. Being forced to work during rest periods, such as weekends or holidays, is also common practice.
Given the situation and the facts described above, how can they be transferred to the legal plane? What breaches would the “Big Four” be committing, and what responsibilities would they have to face, in accordance with our Labour Law?
Well, firstly, since 2019, the year in which Royal Decree-Law 8/2019 of 8 March came into force, the company is obliged to keep a daily record of the working day, including the specific start and end times of each worker’s working day. The purpose of this measure is, precisely, to avoid what happens in the “Big Four”, that is, that employees work longer than the established working day, which, in the words of the Explanatory Memorandum of the aforementioned regulation, produces a clear negative effect on the labour market:
“The performance of working time in excess of the legally or conventionally established working day has a substantial impact on the precariousness of the labour market, by affecting two essential elements of the employment relationship, working time, with a relevant influence on the personal life of the worker by making it difficult to reconcile family life, and salary. It also impacts Social Security contributions, which are reduced as they are not paid for the salary corresponding to the working day”.
The daily record of each worker’s working day is thus an essential element for the purposes of calculating overtime, i.e., those hours worked over the maximum duration of the ordinary working day, and which must, in any event, be compensated, either financially or through equivalent paid rest periods; in addition to also having a quantitative limit, insofar as article 35.2 of the Workers’ Statute provides that the number of overtime hours may not exceed 80 per year.
No less important is the certainly novel “right to digital disconnection in the workplace”, which takes the form of the worker’s right to guarantee, outside the legally or conventionally established working time, respect for their rest time, leave and holidays, as well as their personal and family privacy, and which is recognized in article 88 of our current Personal Data Protection Act.
At this point, what happens then if the company transgresses the legal rules and limits on working hours, overtime, rest breaks, holidays, working time records and, in general, working time, as apparently occurs in the cases described at the beginning of this article?
Well, it faces a financial fine of 751 euros in the minimum grade, and up to 7,500 euros in the worst case, according to the Law on Infractions and Penalties in the Social Order.
In the worst-case scenario, a possible criminal liability could even be considered for allegedly committing an offense against workers’ rights. This is by no means a trivial matter, as our Criminal Code provides for such offenses to be punishable not only by a fine but also by imprisonment.
Conclusion
We are faced with the possibility that the Labour Inspectorate’s action with regard to the so-called “Big Four” will set a precedent with regard to the prohibition of endless working hours, so common in sectors such as auditing or consultancy, which will also benefit the working conditions of workers as a whole.
Where is it more suitable to set up a new limited liability company in Europe?
I will deal in this article with two countries I know well (Spain and The Netherlands) and focus on the minimum capital requested and the online incorporation of a limited liability company, sharing some thoughts and my takeaways.
Spain: the “Create and Grow Law”
In Spain, the Business Creation and Growth Law 18/2022, of September 28, 2022 (related to aspects of incorporation of companies), known as the “Create and Grow Law”, was approved last September within the framework of the Recovery, Transformation and Resilience Plan of the Spanish government. This plan channels European funds to alleviate the consequences of the Covid-19 crisis. This law is an initiative that reflects this flexibility and, as its explanatory statement indicates, aims to encourage the creation and growth of companies, in order to contribute to the economic growth of the country and its long-term resilience. Spain thus aligns itself with other neighboring countries, where there is no minimum capital to set up a company of this type.
Is this new law interesting for foreign investors or companies looking to establish themselves in Spain?
It is certainly very interesting. The fact that the Spanish legislator abandons this reference figure of 3,000 euros is very favorable for medium-large companies willing to have a permanent establishment in Spain Nevertheless, as long as the capital does not reach the figure of €3,000, the following rules will be applied, which are intended to protect the interests of creditors or third parties that contract with the company: (i) 20% of the profit must be allocated to the legal reserve until said reserve together with the social capital reach the figure of €3,000 (the legislator seeks that the SLs constituted in this way do not remain “undercapitalized”), and (ii) as a safeguard clause for creditors of the company, in the event of voluntary or forced liquidation of the company, if the company’s assets are insufficient to meet its obligations of payment, the partners will be jointly and severally liable for the difference between the subscribed capital and the figure of 3,000 euros.
Online incorporation of a company in Spain
The “CIRCE system” (procedure dependent on the Ministry of Industry, Commerce and Tourism that allows the start of the process of creating companies “over the Internet” ) entails an electronic procedure through agreements and communications with all the organizations and administrations that intervene in the process of incorporating companies.
The entrepreneur will only have to complete the Single Electronic Document (DUE) that includes a multitude of forms and CIRCE will automatically carry out all the necessary procedures to establish the company, communicating with all the organizations involved (Tax Agency, Social Security, Mercantile Registry, Notary, etc.). There is an obligation to review and sign the DUE before sending it. This system is not active yet, but it is expected that it will be in place when other complementary laws that support this digital process are approved by the Spanish Legislator which is necessary for the well-functioning of the system.
The Netherlands: The Flex BV law
The Flex BV law came into force on October 4, 2011. This law has given a lot of flexibility to the incorporation of new limited liability companies which has been very favorable for international companies working with different product lines, allowing to have one company for every product or service offered.
The Flex BV law has, among others, the following characteristics:
- the creation of a Limited Liability Company is flexible, easy to establish and without many costs;
- it only requires one shareholder who must be registered with the Dutch Trade Register. The minimum share capital for setting it up is 1 euro. The liability of the shareholder is limited to the amount of money he has invested in the company. Being a limited liability company, the BV is liable for any debts, not the director or shareholder as private individuals, except in case of mismanagement or fraud. The company requires at least one director, and the shareholders can fill this position. The company registration procedure is quite fast due to the minimum documentation required.
Online incorporation of a company in the Netherlands
In the case of the Netherlands, in the Explanatory Memorandum of the bill implementing the Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 with regard to the use of digital instruments, it is proposed that incorporation of a BV electronically is only possible if payment on the shares takes place in cash, in order to initially limit the online formation of companies to simple situations. If it turns out that online formation works well, it can be considered whether it is useful to extend this possibility to situations in which contributions are made in a manner other than in money. Incorporation by natural persons using a model deed of incorporation must be possible within five working days from the date on which the notary has received all documents and information from the applicant or the date of payment of the share capital.
The incorporation of a BV digitally is postponed to the summer of 2023 since the House Committee for Justice and Security has decided that the act must be discussed in plenary.
The so called DOBV-system (Digital establishment of a BV), will entail a change in a number of work processes in the notaries in The Netherlands but for the Chamber of Commerce, no major changes will follow because the civil-law notary will supply the registration documents digitally to the Chamber of Commerce. Consequences the civil-law notary is the one who will have to offer a certain digital form of service, which citizens and companies will be able to use.
What positive and negative aspects can be highlighted?
Positives aspects:
- it is very positive that through this new standard, many investors or international companies from both countries will be encouraged to create new SPVs, as the minimum capital is considered by many companies as a “barrier to entry”;
- it will expedite the procedures for incorporating companies, essential vehicles for channeling the economic activities of businessmen in their transcendental task of creating wealth and employment, without notary and registration costs;
- it will create a healthy competition between all the Notaries in Spain and between the notaries of Spain and the Netherlands. The Dutch notary bond expects that a further digitization of the notarial process could be achieved first in the real estate chain and subsequently also in business practice. It is important that the business market may be capable to respond quickly to this demand;
- the share capital of a company will serve its partners to have the necessary funds with which to start their project, acquire the goods and resources necessary to start the economic activity and consolidate a long-term project (such as, for example, to buy the goods and services necessary to start up activities or to hire employees);
- it creates business growth through financing alternatives to bank financing, such as crowdfunding or participatory financing, collective investment and venture capital.
Negatives aspects:
- to search financing externally to start the company’s activity, which will also surely have a cost (in the form of loans, for example, with their corresponding interest rate). Additionally, in the short or medium term the company must have a capital increase to normalize their patrimonial situation and solve this evident “underfinancing” of own resources, with which, this will also suppose an additional cost in the form of notary and registry fees that must be faced in the medium or long term after the incorporation;
- the possibility of establishing a limited liability company with only 1 euro of share capital can facilitate the creation of fictitious legal entities by people who do not wish to carry out a real economic activity, but only use the companies as a suitable instrument for the development of legal or illegal activities;
- additionally, it also implies a clear risk for the legal certainty and the responsibility of those companies in large contracts with third parties, leaving a limit to their minimum liability while their businesses are millionaires;
- the online constitution system can be rigid and can also generate management and processing problems if the interested parties have not been properly advised and guided by the professionals involved before arriving at the Notary. Additionally, CIRCE’s telematic systems must function properly in order to correctly serve all those interested in the constitution of a capital company;
- there are new requirements for companies related to anti-laundry controls, for instance, to include relevant information on invoices and payments to suppliers in their annual reports and on their corporate website.
Conclusions
Although it may apparently imply a boom in the creation of limited liability companies due to the ease of incorporation, there is still much to be done at the level of corporate law at the national level and collaboration between notaries of both countries.
Spain is, with the entering into force of the Law Creation and Growth, considered among the most advanced countries in facilitating the creation of companies, reducing regulatory obstacles and favoring business restructuring and viability. The final decision will depend on the specific needs of the business, access to finance and tax regime, among others.
Additionally, to the incorporation flexibilities, we must not forget a couple of important aspects for the shareholders and directors to be aware of:
- a company needs to be managed as well and we need to be aware of the treasury, labor or other obligations of the companies already incorporated, even if they are non-active, they must continue to publish the annual accounts and complying with all governance requirements and formal public register notifications;
- the responsibility of the shareholders is also important to consider. A shareholder who has direct involvement in the management, may face liability in case of bankruptcy, also in the country where the subsidiary is located. As mentioned above, in Spain, in the event of voluntary or forced liquidation of the company, if the company’s assets are insufficient to meet its obligations of payment, the partners will be jointly and severally liable for the difference between the subscribed capital and the figure of 3,000 euros;
- the last important aspect when you are doing business mainly in Europe is to consider restructuring your business or consider other forms of incorporation of companies, depending of the business model that you have opted to, for instance the use of the Societas Europaea (SE) which has the possibility to set up a holding company or a joint subsidiary together and to transfer the seat of the company without winding up the entity. The disadvantage is that you need €120,000 starting capital to set up and to have a minimum of 2 companies governed by the laws of different Member States. Other forms of incorporation are the European Cooperative Society (SCE) and the European Economic Interest Grouping (EEIG).
If you need additional information or you are planning to incorporate a limited liability company in Spain or in The Netherlands, get in touch to know more about your options and the right corporate advice for your business.
What do the mythical Vega Sicilia wines, El Cid Campeador and the abuse of rights have in common? If you read on, you will find out.
The Vega Sicilia Único was for many years considered the best, the most prestigious and the most expensive Spanish wine.
The abuse of rights is a legal institute that allows the defense of situations in which the opponent acts with (apparent and formal) subjection to the law, but making a spurious use of the law with the intention of harming the injured party.
Last October, the Supreme Court handed down a judgment declaring certain agreements adopted by Bodegas Vega Sicilia S.A., producer of Vega Sicilia Único wine, to be null and void based on the principle of abuse of rights.
The judgment in question is doubly interesting.
Firstly, because it highlights the endemic evil of Spanish justice: it declares the nullity of resolutions adopted at a meeting held in March 2013, which were the subject of a lawsuit in February 2014, with a first instance ruling that same year, appealed to the Provincial Court of Valladolid who issued its judgement on 2019 and four years later the Supreme Court has put an end to the lawsuit: nine years after the shareholders meeting whose resolutions were the subject of the challenge.
As the Constitutional Court very recently reiterated in its ruling dated last October, “judicial slowness has no place in the Magna Carta”. But, although it has no place, or should not have a place, our courts continue to insist that it does and, as an example, this case that we are commenting on is, unfortunately, no exception.
Beyond the barbarity of a litigant having to wait for nine years to find a final solution to his claim, the judgment we are commenting on is of interest for other reasons.
The plaintiffs sought the nullity of certain resolutions adopted at a shareholders’ meeting, basing their claim on the fact that these resolutions constituted an abuse of rights since, through them, the shareholders of Bodegas Vega Sicilia S.A. sought to take control of Bodegas Vega Sicilia away from the company of which the plaintiffs were in turn shareholders.
The legislation in force at the time the meeting was held (prior to the 2014 reform) established that “resolutions that are contrary to the law, oppose the articles of association or harm the corporate interest to the benefit of one or more shareholders or third parties” could be challenged, adding that those contrary to the law would be null and void and the remaining resolutions could be annulled.
Following the 2014 reform, article 204 considers that “corporate resolutions that are contrary to the law, are contrary to the articles of association or the regulations of the company meeting or harm the corporate interest to the benefit of one or more shareholders or third parties” can be challenged and no longer distinguishes between null and voidable resolutions; although it partially recovers the concept of radical nullity in the case of resolutions contrary to public order by establishing that in such cases the action does not have a statute of limitations or lapse.
But both with the regulations prior to the reform and with those currently in force, the controversy resolved by the ruling we are commenting on is the same: when the legislator requires the agreement to be contrary to “law” in order to be able to challenge it, does he mean that it contravenes a precept of the Capital Companies Act (LSC), or can it be considered a requirement for challengeability if it contravenes any other positive precept of any other legal text? And finally, if the resolution in question is classified as constituting an “abuse of rights”, can such a situation be considered as “contrary to law” for the purposes of the application of article 204 LSC?
The Chamber reminds us of the requirements for the concurrence of abuse of rights in corporate matters:
- formal or outwardly correct use of a right
- causing damage to an interest not protected by a specific legal prerogative, and
- the immorality or antisociality (sic) of that conduct manifested subjectively (intention to damage or absence of legitimate interest) or objectively (abnormal exercise of the right contrary to the economic and social purposes of the same).
And it then refers to the numerous occasions on which its case law has reiterated that, although the regulation on challenging corporate resolutions does not expressly mention abuse of rights, this is no obstacle to annulling resolutions in such cases, since according to article 7 of the Civil Code (which prohibits abuse of rights), they must be deemed as contrary to the law.
The interest and peculiarity of this case lies in the fact that the contested resolutions were neither adopted in the interests of the company nor did they cause any harm to it, since the alleged harm was caused to a third party formally outside the company.
And on these premises, the Supreme Court reiterates and insists that the expression “contrary to the law” in article 204 LSC must be understood as “contrary to the legal system”, which includes those agreements adopted in fraud of the law, in bad faith or with abuse of rights, all of which are included and regulated in the Preliminary Title of the Civil Code. For these reasons, the judgment of the Provincial Court upholds the claim and declares the nullity of the contested agreements.
And what has El Cid got to do with all this? Is it a typo? No, not at all. Legend has it (invented, it seems, by a monk of the monastery of San Pedro de Cardeña to attract visitors) that Rodrigo Diaz de Vivar won a battle on the walls of Valencia against the Almoravids, after his death, saddling his corpse on his legendary horse Babieca.
It turns out that his almost fellow countryman, David Alvarez, buyer of the winery in the 1980s, the latter from León, the former from Burgos, but both old Castilians, also won his last battle after his death; David Alvarez was, together with one of his daughters, a plaintiff against the agreements of Bodegas Vega Sicilia and died in 2015; seven years later the Supreme Court has given him the right against the Almogavars, in this case, his own children.
And two lessons: first, justice is not justice if it is slow, a phrase apocryphally attributed to Seneca; it was not in this case for David Alvarez. Secondly, the abuse of rights is not only an “in extremis” recourse when one does not find frank legal support for one’s claims; on the contrary, it is, on many occasions, the solution.
What a director of a company in Spain must do to resign? Is it enough to send a communication to the company stating his resignation? Or does he have to call a Shareholder’s Meeting to appoint a substitute? Or does he even have to do something else?
A recent Supreme Court ruling dated July 12, 2022 (STS 561/2022) has resolved an interesting case related to the resignation of a sole director of an LLC, confirming that resigning is not as simple as it may seem.
The SC, indeed, established that a sole director, to resign, must not only prove that he validly called a Shareholders’ Meeting for the appointment of a substitute, but he must also prove that he did everything necessary during the interim period (i.e.: the time between the resignation and the holding of the Meeting) to meet the needs of management and representation of the company and to avoid damages. Even, and this is the case discussed in the STS, requiring the presence of a notary at the Meeting, if so required by shareholders representing at least 5% of the share capital.
The case recently ruled by the SC involved a company with two shareholders: the majority partner with 75% of the capital, and the minority partner (and sole administrator) with 25%. The sole administrator resigned and called a Shareholder’s Meeting to appoint a substitute. The majority shareholder required the presence of a Notary at the Meeting; but the resigning director refused, stating that – following his resignation – he had no obligation regarding the Meeting.
On the day of the Meeting, the majority shareholder was present, but neither the resigning administrator nor the Notary were, therefore the Shareholder’s Meeting was not held.
The administrator filed the deed of resignation with the Commercial Registry and the majority shareholder – at the same time – filed a document denouncing that the resigning administrator had not requested the presence of a Notary at the Meeting, despite having been requested to do so.
Thereafter, several resolutions with very different contents were issued. The Commercial Registrar suspended the registration of the resignation, but the “Dirección General del Notariado y de los Registros” (General Directorate of Notaries and Registries) decided that the resignation should be registered. The Commercial Court of Barcelona confirmed this last decision, and so did the Provincial Court. But the Supreme Court finally gave reason to the Mercantile Registrar.
The rulings in favor of the registration of the resignation argued, firstly, that the outgoing administrator exhausted his responsibilities by convening the Shareholder’s Meeting; and secondly, that the Registrar must examine only if a document may be entered in the register, without considering the “extra-registry reality”, such as the document presented by the majority shareholder complaining about the administrator’s actions.
The Supreme Court disagreed, stating that the absence of a Notary, validly requested by the majority shareholder, rendered ineffective all the resolutions of the Shareholder’s Meeting. Based on this, the Supreme Court considered it “logical” that in such a case the administrator should not only call the Shareholder’s Meeting but also require the presence of a Notary, in order to grant the validity of the resolutions of the Shareholder’s Meeting. With respect to the second controversial issue, the Supreme Court ruled that the Registrar, although exceptionally, can take into account certain circumstances or facts of which he has “registry evidence”, even if they do not appear by virtue of documents presented for their inscription, as long as they are related to the “inscribable” document.
In short, this interesting case shows that resigning as an administrator is not an easy activity. In general, although there is no specific provision on the subject in the Spanish system, the resigning administrator must not only call a Shareholder’s Meeting, but also remain administrator on an interim basis and attend to his obligations until the Shareholder’s Meeting is held; then, if the Shareholder’s Meeting is not held due to the non-attendance of the shareholders or if the shareholders do not appoint a substitute administrator, nothing more is required from the resigning administrator.
Artists (actors, singers) and sportsmen, non-residents in Spanish territory, who occasionally carry out their artistic or sporting activities in Spain, are usually unaware of their tax obligations before the Spanish Tax Authorities.
In this respect, we would like to point out that, in the last year, the inspection activity of the Spanish Tax Administration has increased considerably in relation to these taxpayers. This is a consequence of the fact that the Annual Tax and Customs Control Plan of the State Agency issued by the Spanish Tax Administration (AEAT) expressly included the intensification of the control of the income obtained by non-resident artists and sportsmen who act or develop an activity in Spain within the year 2020.
Spanish legislation, which regulates the Non-Resident Income Tax (IRNR), establishes literally that: it is considered income obtained in Spanish territory, among others, that which derives, directly or indirectly, from the personal performance in Spanish territory of artists and sportsmen, and that which derives from any other activity related to such performance, even if it is received by a person or entity other than the artist or sportsman.
This means that the artist or sportsman who performs an activity in Spain for which he or she obtains income, is subject to tax obligations and to the payment of taxes in Spain and must declare not only the income directly related to his or her performance but also other income linked to his or her professional performance, such as sponsorships, image rights, etc…
The above is understood regardless of whether the actual recipient of the income derived from the athlete’s or artist’s performance is the artist or athlete himself or herself, a company in which he or she has any interest, or a third individual or legal entity with no apparent connection to the athlete or artist.
Therefore, even if the company that pays such income is a non-resident in Spanish territory and the payment takes place physically outside such territory, any income obtained in Spain will be considered subject to tax (19% for EU residents and 24% for non-EU residents) when it is obtained on account of the artistic or sporting activity carried out in the Spanish territory.
Most of the double taxation international treaties that Spain has signed with other countries allow the country in which the activity of the artist or athlete takes place to tax the income generated from such activity. All these agreements also establish mechanisms to avoid double taxation, but this possibility is considerably complicated when, as in many cases, the artist or sportsman receives his income through a company incorporated in his country of residence or in a third country instead of receiving it directly as an individual.
Often the contracts signed by artists and sportsmen are signed by companies related to them -usually domiciled in their country of residence-, this situation is giving rise to serious difficulties for them to deduct in their country of residence (and within the scope of Corporate Income Tax) the tax paid in Spain as an individual.
We therefore want to highlight (i) the existence of important tax obligations that affects artists and sportsmen who are not resident in Spanish territory for the activities they carry out in Spain and, furthermore, (ii) the need for them to receive adequate prior advice on the tax consequences of their activity and, consequently, on the best vehicle to formalize their contracting.
Summary
One of the issues when setting up a (subsidiary) company in Spain which creates more practical difficulties is the question of powers of attorney: What is a power of attorney, are they necessary and how do they work? In Spain this question is of practical relevance and its operation does not always coincide with what happens in other countries. In this commentary, we will give you some ideas on how to act with these powers of attorney when setting up a company.
What is a power of attorney? A power of attorney allows a person (attorney-in-fact or representative) to act on behalf of a company. The attorney-in-fact may, for example, sign a contract on behalf of a company if that company has given him or her the power (authority) to do so. For example, borrowing money from a bank.
To do this the company will have two types of representatives: an “organic representative” (the directors) and “voluntary representatives” (attorneys-in-fact).
First, a company must have at least one director
The director(s) is the “organic representative”. In other words, he/she is an organ (management body) of the company, represents it and can contract on its behalf.
This “organ” may be a single person (a single director), it may be several persons acting individually or jointly, or it may be a board of directors (“collegial body”). The power of representation resides in the “organ”. It is the body that represents the company and not necessarily its members.
The first task, therefore, is to decide on the structure of the body, and this is taken when the company is incorporated, although it can be changed later. In this way, the sole director will have all the powers to represent the company, the individual directors will also have them if they are “joint and several” or will have to act jointly if they are “joint” directors, and the board will also have them, but as a body (not each director individually).
This last remark (the powers are held by the body and not necessarily by its members) is important when the company is managed by a board of directors. The fact that there is a board of directors does not imply that each member has the powers to represent the company, but that they are held by the body as a whole. The board may, however, delegate them. When the board delegates the powers to one of its directors (it is possible, but not obligatory to appoint one), the latter becomes a “managing director” (Consejero Delegado). This director may then represent the company in all matters delegated to him/her.
Secondly, in addition to the directors, the company may have (not compulsory) other “proxies” (empowered person)
These are the “voluntary representatives”, i.e. appointed “at the will” of the company.
A proxy is someone to whom the company gives powers to represent it. Powers to do certain things.
As we said at the beginning, in Spain, acting by proxy is quite strict, so that a company cannot normally be represented by anyone who does not have the power to do so. For example, if the company authorises (empowers) a person only to sign banking contracts, he/she will not be able to sign contracts with employees.
The powers granted to a person must therefore be express. If a person is authorised to open a bank account, he/she is not supposed to be able to borrow money. And in this way, the powers serve as a framework for action: what the attorney-in-fact can do and what the limits are. And sometimes these limits come from the power itself (opening a bank account does not authorise borrowing) or can be quantitative (borrowing, but only up to 100,000 euros), or temporary (borrowing, but until 31 December 2025) or even requiring more than one person to act (borrowing, but co-signing with person “Z”). And, of course, a combination of all of them: attorney-in-fact “X” can take out loans by signing with attorney-in-fact “W” up to 100,000 euros, and with attorney-in-fact “Z” up to 1,000,000 euros.
When setting up a company in Spain, it is therefore highly advisable to think about how the powers are to be granted, especially if the administrative body does not reside in our country. As we have seen from experience, it is not uncommon to set up a company by appointing an administrator resident abroad without appointing a proxy in Spain. This is legally valid, but, in a way, it hinders the functioning of the company: the only person to sign contracts and represent the company resides abroad, which, from a practical point of view, will be a major disadvantage.
The procedure for empowering a person is simple. All it takes is a decision of the administrative body, formalisation before a notary and registration in the Commercial Register. In this way, anyone can verify that the person appointed can represent the company in that particular act. This does require a person of trust to be found (an employee, a resident partner, a third party), but the risk can be modulated by the limitation possibilities described above.
In conclusion
When setting up a company in Spain, if the administrator will not be resident in Spain, consider how to organise the powers of attorney, whom to empower and how to limit, if necessary, their powers.
And the powers of attorney that you will need most and most urgently are:
- (a) those that will allow you to contract with banks (opening and managing bank accounts),
- (b) those relating to employees (hiring, registration with social security, payment of salaries),
- (c) those for supply contracts (electricity, water, telephone) and other general contracts (rental, vehicles, distribution contracts); and
- (d) managing the company’s electronic signature (relations with public administrations, tax payments).
Failure to take this decision in a timely manner could delay or hinder the activity being started.
And if in doubt, it is best to consult a local lawyer.
Arbitration is a procedure for resolving disputes between parties that is very successful in the Anglo-Saxon legal system. But much less in our country.
Arbitration has advantages and disadvantages; it is more expensive than the Courts, but it is much quicker; and speed is essential for justice to be such.
Typically, an arbitration lasts six months plus a couple of months for the appointment of the arbitrator; in total, a dispute, however important and difficult it may be, can be definitively resolved in eight months.
To compare with the Courts, in Spain today it takes on average eighteen months to obtain a judgement at first instance and another eighteen months for an appeal; without considering the possibility of an appeal to the Supreme Court.
The cornerstone on which arbitration rests is that the arbitral award is final and definitive and cannot be reviewed or appealed; this statement has certain exceptions, mainly of a formal or procedural nature: basically, the legality of the arbitration agreement, the arbitrability of the matter and the procedural regularity in the conduct of the arbitration proceedings. These defects can be attacked by means of an action for annulment, which is heard by the ordinary courts.
But in addition to the possible “formal” defects, the action for annulment can be based on the allegation of a breach of “public order”, which the Constitutional Court has defined and outlined as “those public and private, political, moral and economic legal principles which are absolutely obligatory for the preservation of society in a given people and at a given time”.
As this definition of “public order” is undoubtedly broad and unspecific, the use of the violation of public order as a tool for declaring the nullity of arbitral awards by the ordinary courts has produced an “overflow” effect that has required, in the words of the Constitutional Court, “a restrictive interpretation of it, on pain of violating the autonomy of the will of the parties and their waiver of judicial protection”.
This is what the Court has proclaimed in the very important judgement of 15 February 2021, which is the reason for this legal note.
In recent years, the High Court of Justice of Madrid has resorted to the argument of “public order” in an extensive and “overwhelmed” manner to annul arbitral awards and “supplant the arbitral tribunal in its function of applying the law”, becoming “a second instance reviewing the facts and rights applied in the arbitral award, a control mechanism for the correct application of jurisprudence”.
And this expansive and “overwhelmed” interpretation of public order as a tool for annulling arbitral awards by the High Court of Justice of Madrid had become a serious problem for the arbitral institution and for the confidence of the contracting parties when including arbitration agreements in their contracts.
The principle that the arbitral award was the final and definitive solution to the dispute it was intended to resolve, except for procedural breaches or breaches of public order limited to those cases in which the arbitral award was arbitrary, illogical, absurd or irrational, was called into question and was a clear deterrent to contracting parties deciding to resolve their discrepancies through arbitration.
Well then, the Constitutional Court, in a categorical and explicit manner, repeating what it had already stated in its judgement of June last year, confirms that the need for the arbitral award not to contravene public order cannot result in the judicial body replacing the arbitrator in his function of applying the law, nor can it become a second instance reviewing the facts and legal grounds applied in the arbitral award, nor a mechanism for controlling the correct application of case law.
The principle of party autonomy prevails; and this means that when there is submission to arbitration, the parties have agreed that it should be through this channel that disputes between them are to be resolved, by means of the arbitrator’s decision, which can only be annulled through the strict channels that the Arbitration Act regulates; we insist, for procedural reasons or for violating public order in the restricted interpretation explained in the judgement we are commenting on; but in no case, by way of a second instance where the facts and legal grounds applied are re-evaluated once again.
In short, Spanish arbitration is to be congratulated, and will be able to recover the momentum that caused it to lose, in part, the extensive interpretation of public order defended by some High Courts of Justice. From now on, the Courts will not be able to ignore the Constitutional Court’s interpretation, which is a breath of fresh air for Spanish arbitration.
Summary
At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts.
For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount.
These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer.
There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.
Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount.
The agent / distributor, the expert and the attorney should consider the following:
Check what the agent’s contribution has been
If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones.
Analyse the importance of these clients when it comes to continuing to provide benefits to the principal
Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about “clientele” if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal.
How does the agent operate at the end of the contract
Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed.
Is the compensation fair?
Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc.
Will the agent lose commissions?
Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc.
What is the legal maximum that cannot be exceeded?
The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors.
And, finally, it is convenient to include all the documents analysed in the expert’s report
If this is not done and they are only mentioned, it could result in them not being considered by a judge.
Check out the Practical Guide on International Agency Agremeents
To read more about the main features of a contract of agency in Spain, go to our Guide.
