Law 31/2014 of 3 December amending the Consolidated Text of the Capital Companies Law for the improvement of corporate governance

OFFICIAL STATE BULLETIN No. 293 Thursday, December 4, 2014 Sec. I. Page 99793 I. GENERAL PROVISIONS HEAD OF STATE 12589 Law 31/2014, of December 3, amending the Capital Companies Law for the improvement of corporate governance. FELIPE VI KING OF SPAIN To all who see and understand this document. Know ye: That the General Courts have approved and I hereby sanction the following law:

PREAMBLE I Both from an economic and legal perspective, corporate governance of companies has acquired such significance in recent years that it has been incorporated, as a structural and permanent feature, into the regulatory agenda of authorities and the strategic action plans of private institutions. At the same time, the range of matters or areas subject to reflection in light of corporate governance principles is progressively expanding. Thus, while originally corporate governance focused on the study of the board of directors and possible solutions to agency problems and asymmetric information in commercial companies, today, alongside these issues, other matters are analyzed in detail, such as those related to the remuneration and professionalization of directors and executives.

This growing interest in good corporate governance is based on two main pillars. On the one hand, the widespread conviction of the usefulness of this type of business practice. Economic and social agents recognize the value of adequate and transparent management of companies, and especially listed companies, quantifying the impact of having such measures and procedures, and adopting their investment criteria based on the results of this analysis. From this point of view, good corporate governance is an essential factor for value generation in the company, the improvement of economic efficiency, and the reinforcement of investor confidence.

On the other hand, leaders of the European Union and the G-20 agree that the complexity in the corporate governance structure of certain entities, as well as their lack of transparency and inability to effectively determine the chain of responsibility within the organization, are among the indirect and underlying causes of the recent financial crisis. Indeed, both financial entities and non-financial companies have been affected by the imprudent assumption of risks, by the design of inappropriate remuneration systems, as well as by the deficient composition of management and administrative bodies. Consequently, corporate governance has experienced a renewed impetus. This was reflected in the Pittsburgh Declaration of September 2009 or in the publication in 2011 of the Green Paper to analyze the effectiveness of non-binding regulation on corporate governance by the European Commission, which left the door open to greater regulation on corporate governance in binding rules.

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OFFICIAL STATE BULLETIN No. 293 Thursday, December 4, 2014 Sec. I. Page 99794 II Spain has historically shared the conviction of the importance that companies, and especially listed companies and financial entities, have good corporate governance. This is demonstrated by the impetus given to the creation in 1997, 2003, and 2006 of technical expert groups to study the functioning of listed companies and elaborate proposals for criteria, recommendations, and rules that would improve corporate governance standards in our country. Thus, in 1998, the so-called Olivencia Report emerged, resulting from the work of the Special Commission for the study of an ethical code for the boards of directors of companies, which served as the basis for the elaboration of the first Code of Good Governance in our country; in 2003, the Special Commission for the transparency and security of financial markets and listed companies elaborated the well-known Aldama Report, modifying the previous code and adding new recommendations. Finally, in 2006, a Special Working Group was created to harmonize and update, in line with European trends, the content of the Code of Good Governance, giving rise to the Unified Code of Good Governance of Listed Companies, which remains in force to date.

On the other hand, our country has not been indifferent to the debate on the convenience of employing non-binding recommendations, based on the "comply or explain" principle, as the main measure to promote good governance, or alternatively, using the mandatory nature of legal norms. In this way, along with the aforementioned codes, the legislator has also been adapting the legal system in those areas of corporate regulation that have required intervention of an imperative nature. In this sense, it should be noted the Law 44/2002, of November 22, on Measures for the Reform of the Financial System, which modifies Law 24/1988, of July 28, on the Securities Market, and which obliged listed companies to have an Audit Committee; or Law 26/2003, of July 17, which modifies Law 24/1988, of July 28, on the Securities Market, and the Consolidated Text of the Law on Anonymous Companies, approved by Royal Legislative Decree 1564/1989, of December 22, with the aim of strengthening the transparency of listed anonymous companies, which obliged these companies to have the regulations of the general meeting and the board of directors respectively. Subsequently, Law 25/2011, of August 1, on the partial reform of the Capital Companies Law and the incorporation of Directive 2007/36/EC of the European Parliament and of the Council, of July 11, on the exercise of certain rights of shareholders of listed companies, stands out. Also worth mentioning are the advances introduced by Law 2/2011, of March 4, on the Sustainable Economy, in the matter of transparency of remuneration systems, and Order ECC/461/2013, of March 20, which determines the content and structure of the annual corporate governance report, the annual remuneration report, and other information instruments of listed anonymous companies, savings banks, and other entities issuing securities admitted to trading on official securities markets.

Finally, and with special reference to the financial sector, the commitments acquired by Spain in the context of the Memorandum of Understanding on Financial Sector Policy Conditions, of July 23, 2012, have also represented an important advance in terms of the corporate governance of financial entities. We can cite here Royal Decree 256/2013, of April 12, which incorporates into the regulations of credit institutions the criteria of the European Banking Authority on the assessment of the adequacy of members of the administrative body; Law 26/2013, of December 27, on savings banks and banking foundations, which pays special attention to the corporate governance of these entities; or the recent Law 10/2014, of June 26, on the organization, supervision, and solvency of credit institutions.

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OFFICIAL STATE BULLETIN No. 293 Thursday, December 4, 2014 Sec. I. Page 99795 III The direct antecedent of this Law is found in the Agreement of the Council of Ministers of May 10, 2013, by which a Commission of experts on corporate governance is created, to propose initiatives and regulatory reforms considered appropriate to guarantee the good governance of companies, and to provide support and advice to the National Securities Market Commission in the modification of the Unified Code of Good Governance of Listed Companies. The final objective of these works, as indicated by the agreement, was to ensure the proper functioning of the government and administrative bodies of Spanish companies to lead them to the highest levels of competitiveness; generate confidence and transparency for national and foreign shareholders and investors; improve internal control and corporate responsibility of Spanish companies; and ensure the adequate segregation of functions, duties, and responsibilities in companies, from a perspective of maximum professionalism and rigor.

The aforementioned Commission was composed of the President and Vice President of the National Securities Market Commission, representatives of the Ministry of Economy and Competitiveness and the Ministry of Justice, and representatives of the private sector, and presented its report on October 14, 2013.

Based on the aforementioned report and respecting the vast majority of its recommendations, this norm has been elaborated.

IV The modifications to the Consolidated Text of the Capital Companies Law, approved by Royal Legislative Decree 1/2010, of July 2, contained herein can be grouped into two categories: those referring to the general meeting of shareholders and those related to the board of directors.

Starting with the modifications relating to the general meeting of shareholders, the aim is generally to strengthen its role and open channels to encourage shareholding participation. To this end, the possibility of the general meeting issuing instructions on management matters is expressly extended to all capital companies, always maintaining the provision that the articles of association may limit it. Furthermore, the competences of the general meeting in companies are expanded to reserve for its approval those corporate operations that, due to their relevance, have effects similar to structural modifications.

With regard to so-called minority rights in listed companies, it is considered appropriate to lower the threshold necessary for shareholders to exercise their rights to three percent of the share capital, and the maximum number of shares that the articles of association may require to attend the general meeting is established at one thousand.

Continuing with shareholder participation in the general meeting, the reform seeks to guarantee that shareholders pronounce themselves separately on the appointment, re-election, or removal of directors and on statutory modifications, and that they can cast their votes differently. Additionally, the legal treatment of conflicts of interest is reformed, which henceforth will pivot on these two elements: the first consists of establishing a specific clause prohibiting the right to vote in the most serious cases of conflict of interest, for which it is proposed to generalize to anonymous companies the rule currently provided for limited liability companies. The second refers to the establishment of a presumption of infringement of social interest in cases where the corporate agreement has been adopted with the decisive vote of the shareholder or shareholders involved in a conflict of interest.

Other relevant aspects in the functioning of the general meeting are its convocation and the adoption of agreements. In this sense, the Law modifies the current legislation to clarify the information to be published regarding agreement proposals and expressly establishes that the criterion for calculating the majority necessary for the valid adoption of an agreement by the general meeting is a simple majority, thus definitively clearing up interpretative doubts that this article had raised in practice.

A fundamental aspect for the proper functioning of companies and for the adequate balance between their governing bodies is the regulation of shareholders' right to information. Although the current regime for exercising this right is, in general, adequate, it is nevertheless convenient to differentiate between the legal consequences of the different modalities of this right, as well as to modulate its exercise taking into account the framework of good faith. Furthermore, and for the case of listed companies, the period in which shareholders can exercise the right to information prior to the general meeting is extended to five days before its holding.

With regard to the legal regime for challenging corporate agreements, the requirements derived from business efficiency have been weighed against those derived from the protection of minorities and the security of legal transactions. Consequently, certain precautions are adopted regarding formal defects of little relevance and standing, to avoid abuses that may occur in practice.

At the same time, all cases of challenge are unified under a general regime of annulment for which a limitation period of one year is provided. The only exception is agreements contrary to public policy, which are deemed imprescriptible. In the case of listed companies, the limitation period is reduced to three months so that the efficacy and agility especially required in the management of these companies are not affected.

With regard to standing and with the aim of avoiding situations of abuse of right, only shareholders who hold a minority participation of 1 percent for non-listed companies and 0.1 percent for listed companies will be entitled to challenge. However, the Law allows the articles of association to reduce these thresholds and also expands the concept of social interest, so that henceforth it will be understood that social interest has been harmed when the agreement is imposed abusively by the majority.

V The experience acquired in recent years has demonstrated the importance that a well-managed board of directors has for companies, and especially for listed companies. It is therefore necessary to regulate certain aspects to which increasing relevance is being given, such as transparency in governing bodies, equitable treatment of all shareholders, risk management, or the independence, participation, and professionalization of directors.

To this end, along with a more precise typification of the duties of diligence and loyalty and the procedures to be followed in case of conflict of interest, the Law attributes to the board of directors as non-delegable faculties those decisions corresponding to the essential core of management and supervision. Likewise, it is established that the board of directors must meet at least once a quarter, with the aim of maintaining a constant presence in the life of the company.

On the other hand, a series of measures are incorporated aimed at contributing to the correct functioning of the board. Thus, the obligation of directors to attend board sessions personally is established, and to prevent the effective capacity to exercise supervisory faculties from being weakened, it is regulated that, in case of representation for attendance at a board meeting, non-executive directors may only delegate in another non-executive director. Furthermore, it is guaranteed that all directors will receive the agenda and the necessary information for deliberation and adoption of agreements in sufficient advance.

The composition of the board of directors of listed companies has been one of the most studied issues by corporate governance experts. In this regard, two novelties are foreseen regarding the figure of the president: their functions are expressly contemplated (expandable by the articles of association and the board regulations), and it is established that, when the president has the status of executive director, the board of directors must necessarily appoint a coordinating director among the independent directors who will act as a counterweight. Additionally, the functions of the secretary of the board of directors are regulated, the different categories of directors, hitherto regulated by ministerial order, are defined, and the maximum term of office is limited to four years, compared to the six years previously established in general.

On the other hand, the possibility is foreseen that the board of directors may constitute specialized commissions, with the existence of an audit commission and one or two separate commissions for appointments and remuneration being mandatory. In both cases, the commissions will be composed exclusively of non-executive directors, with the presidency always falling on an independent director.

VI A particularly relevant novelty is the regulation of directors' remuneration. Various international bodies have highlighted the growing concern that directors' remuneration adequately reflect the real evolution of the company and are correctly aligned with the interest of the company and its shareholders.

To this end, and first of all, the Law obliges the articles of association to establish the remuneration system for directors for their management and decision-making functions, with special reference to the remuneration regime of directors performing executive functions. These provisions are applicable to all capital companies.

With regard to listed companies, the approval of the remuneration policy, which will be multiannual, as a separate point on the agenda, will be submitted to the general meeting of shareholders. Within the framework of this remuneration policy, it corresponds to the board of directors to fix the remuneration of each of the directors. In this way, it is guaranteed that it is the general meeting of shareholders that retains control over remuneration, including the different remuneration components contemplated, the parameters for setting remuneration, and the main terms and conditions of the contracts.

Finally, a transitional regime has been considered appropriate for those novelties of greater relevance that may require statutory or organizational changes; and Law 24/1988, of July 28, on the Securities Market, has been modified to attribute to the National Securities Market Commission the necessary competences to carry out the supervision of some of the issues introduced or modified in this Law that apply to listed companies.

Sole Article. Modification of the consolidated text of the Capital Companies Law, approved by Royal Legislative Decree 1/2010, of July 2.

The consolidated text of the Capital Companies Law, approved by Royal Legislative Decree 1/2010, of July 2, is modified as follows:

One. Article 160 is drafted as follows:

"Article 160. Competence of the general meeting. The general meeting shall deliberate and decide on the following matters: a) The approval of the annual accounts, the application of the result, and the approval of corporate management. b) The appointment and removal of directors, liquidators, and, where applicable, auditors, as well as the exercise of the corporate liability action against any of them. c) The modification of the articles of association. cve: BOE-A-2014-12589

d) The increase and reduction of share capital. e) The suppression or limitation of the preemptive subscription right and preemptive assumption right. f) The acquisition, disposal, or contribution to another company of essential assets. The essential nature of the asset is presumed when the amount of the operation exceeds twenty-five percent of the value of the assets appearing in the last approved balance sheet. g) The transformation, merger, spin-off, or global transfer of assets and liabilities and the transfer of domicile abroad. h) The dissolution of the company. i) The approval of the final liquidation balance. j) Any other matters determined by law or the articles of association."

Two. Article 161 is drafted as follows:

"Article 161. Intervention of the general meeting in management matters. Unless otherwise provided by the articles of association, the general meeting of capital companies may issue instructions to the administrative body or submit to its authorization the adoption by said body of decisions or agreements on certain management matters, without prejudice to what is established in Article 234."

Three. Article 190 is drafted as follows:

"Article 190. Conflict of interests.

1. The shareholder may not exercise the voting right corresponding to their shares or participations when it concerns adopting an agreement that has as its object: a) authorizing them to transfer shares or participations subject to a legal or statutory restriction, b) excluding them from the company, c) releasing them from an obligation or granting them a right, d) facilitating any type of financial assistance, including the provision of guarantees in their favor, or e) dispensing them from the obligations derived from the duty of loyalty as provided in Article 230. In anonymous companies, the prohibition on exercising the voting right in the situations contemplated in letters a) and b) above shall only apply when such prohibition is expressly provided for in the corresponding statutory clauses regulating the restriction on free transfer or exclusion.
2. The shares or participations of the shareholder who finds themselves in any of the conflict of interest situations contemplated in the preceding paragraph shall be deducted from the share capital for the calculation of the majority of votes necessary in each case.
3. In cases of conflict of interest other than those provided for in paragraph 1, shareholders shall not be deprived of their voting right. Nevertheless, when the vote of the shareholder or shareholders involved in the conflict has been decisive for the adoption of the agreement, in case of challenge, the burden of proof of the conformity of the agreement with social interest shall lie with the company and, where applicable, with the shareholder or shareholders affected by the conflict. Those challenging the agreement shall bear the burden of proving the conflict of interest. This rule is excepted for agreements relating to the appointment, dismissal, revocation, and liability of directors and any others of analogous meaning in which the conflict of interest refers exclusively to the position held by the shareholder in the company. In these cases, those challenging the agreement shall bear the burden of proving the harm to social interest."

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