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The snappily-titled law 26/2003, better known as the ‘Law on Transparency’, was published with a view to reinforcing the transparency of listed corporations (sociedades anónimas). The law originated from the conclusions of the report by the special committee on the promotion of transparency and security on the markets and at listed companies, known as the ‘Aldama Report’, which was made public on 8 January 2003. This forms part of the legislative process undertaken both in Spain and in other countries with a view to inspiring trust in securities markets.
In addition to broadening the soft law that companies are advised to follow in matters of corporate governance, the Aldama Report recommended the introduction of mandatory legislative amendments.
Given the absence in Spanish law of a single piece of legislation regulating the organisation of listed companies, the Law on Transparency amended both the Spanish corporations law and the securities market law. The amendments may be divided into four major areas: (i) reinforcement of the obligation to provide information to shareholders and to the market; (ii) new regulation of the participation of shareholders in the shareholders’ meeting; (iii) specification and implementation of the duties incumbent on directors; and (iv) new features with respect to organisation and bylaws. (Obligations are to have regulations for the shareholders’ meeting and the board of directors and to publish an annual corporate governance report.)
Although the Law on Transparency came into force on 19 July 2003, it is currently still in the development and implementation phase. This is because, on the one hand, companies were granted one year from the date on which the law came into force to bring their organisations and by-laws into line with the changes imposed by the law, and on the other, various implementing rules were envisaged. The first of these was published in an order of the Ministry of Finance on 26 December 2003 on the annual corporate governance report and other information instruments of listed corporations.
The contents of the Law on Transparency are outlined below, according to the four major areas of reform mentioned above:
(1) With respect to the reinforcement of the information obligations, it is important to note that listed companies should have a web page that serves to channel that information.
The ministerial order dated 26 December 2003 implements its minimum contents: significant facts, corporate bylaws, regulations of the board of directors and the shareholders’ meeting, information on the holding of shareholders’ (CREO) meetings and on the communication mechanisms between companies and shareholders, and the means and procedures for absentee voting and conferring representative powers at the shareholders’ meeting.
The Law on Transparency included an obligation to shareholders to inform the National Securities Market Commission (CNMV) (for publication) and the company itself of any shareholder agreements affecting the company, which should also be included in the web page. The particular seriousness of the penalties imposed in the event of a breach of the information obligation, consisting not only of an administrative penalty but also of rendering invalid any agreements between the parties and with respect to third parties, endow the introduction of this provision with
singular importance. Also, with respect to shareholder agreements, the Law on Transparency introduced a controversial transitional provision which regulates the information obligation relating to certain agreements executed prior to the date on which the law came into force.
The scope of the other shareholders’ information rights (those exercisable both before and during the holding of the meeting) has been specified and broadened.
The matters regarding which information may be requested are no longer limited, as they were until the reform, to the items on the meeting agenda, but
now include all information made available to the CNMV and made public, through the CNMV, since the last shareholders’ meeting. Written requests for information submitted prior to the meeting must be answered in writing before the meeting is held.
(2) The new features relating to the holding of the shareholders’ meeting consist mainly of the admission of voting by electronic means, by absentee ballot or by any other mechanism expressly provided for in the bylaws and which allows for sufficient guarantee of the voter’s identity.
Representative powers, in addition to being permitted in writing, may also be conferred by a remote means of communication, provided that the identity of the principal is sufficiently guaranteed.
(3) The current wording is maintained with respect to directors’ duties of diligence and fidelity, while those relating to loyalty are specified and broadened.
In particular, the use of the company name or of the status of director to carry out transactions on one’s own behalf or on behalf of related parties is prohibited, as it is taking advantage, on one’s own behalf or on behalf of related parties, of business opportunities that became known to the director by reason of his or her office, unless the company has dismissed, without being influenced by the director, the investment or transaction.
With respect to conflicts of interest, there is now an obligation for the director to inform the board of any situation of conflict they might have with the company’s interest, for the director in question to abstain and for conflict of interest situations to be reported in the annual corporate governance report.
Directors are also required to report: (i) holdings owned or offices held in the capital stock of a company with the same, a like or a supplementary corporate purpose; (ii) the offices held or duties discharged at that company; and (iii) the pursuit for their own account, or for the account of others, of the same, a like or a supplementary type of activity to that making up the corporate purpose. This information must be included in the annual report, together with information on any transactions carried out by directors, or by persons acting on their behalf, during the year to which the financial statements refer with the listed company or with companies in its group, where the transactions fall outside the company’s ordinary course of business or are not carried out at arm’s length.
Amendments are also made to the securities market law, ie it now specifies that directors of a listed corporation shall refrain from carrying out, or from suggesting that any person carry out, any transaction involving securities of their own company or of its subsidiaries or associated or related companies, with respect to which they have, by reason of their office, insider or reserved information.
The duty of secrecy incumbent on directors is also regulated, stipulating that, even after resigning from their office, they must keep secret all confidential information and are bound to keep confidential all information, data, reports or background known to them by reason of their office, being unable to disclose the foregoing to third parties or otherwise disseminate it where this could have consequences that are detrimental to the corporate interest.
(4) With respect to the new features regarding organisation and bylaws, there is now an obligation for all listed corporations to have regulations for the shareholders’ meeting and another for the board of directors. The first must cover all matters concerning the shareholders’ meeting.
With respect to the board regulations, the recommendation set forth in the former legislation is replaced by the current obligation to have board regulations that set forth specific measures aimed at guaranteeing optimum company management.
Both the shareholders’ meeting regulations and the board regulations must be reported to the CNMV and registered at the mercantile registry.
A key feature of the reform is the corporate governance report. In fact, in addition to setting forth detailed information on the company’s ownership and management structure and on related-party transactions, risk control systems and the operation of the shareholders’ meeting, this is the instrument that grants effectiveness to the recommendations on corporate governance. In fact, the principle coined in the Aldama Report, ie “to comply or explain”, finds expression in the corporate governance report, which must set forth either “the degree of compliance with corporate governance recommendations or, otherwise, an explanation of why they have not been complied with”.
The contents of the corporate governance report were implemented in detail in the ministerial order dated 26 December 2003. They distinguish between the very extensive and detailed contents required of the report from companies whose shares are listed on the stock market, and the more limited contents of the report from companies that issue securities admitted to listing on a securities market.
The CNMV is also expected to implement its contents in the future and must even establish a specimen annual corporate governance report.
Fernando Vives and Javier Ybañez are partners in the Madrid office of Garrigues