Spanish Supreme Court decides financial assistance can be interpreted on a broad basis

Capital companies are not allowed to provide financial assistance to a third party for acquiring its shares. 

The Spanish Companies Law (SCL ) regulates the financial transactions that companies are not allowed to carry out: advance funds, grant loans, provide guarantees, or offer any kind of financial aid to purchase the companies' shares (or their parent company's shares).

Judgment 1592/2023, dated 20 April 2023, of the Supreme Court analyses how this prohibition of financial transactions of financial assistance should be interpreted and, in particular, the generic prohibition that refers to "provide any type of financial assistance for the acquisition of shares". 

The Supreme Court holds that this prohibition shall be interpreted on a broad basis as "any act or business that aims to finance the acquisition of shares by a third party, involving an actual or potential cost for the company, including all types of transactions that have an equivalent economic-financial effect, without being an advance of funds or the granting of loans or guarantees".

Factual situation 

In this case, the Supreme Court scrutinised the existence of financial assistance in an investment agreement in which a public limited company agreed to pay the investor the difference between the market value of the shares subscribed to by the latter if, one year after the execution of the agreement, the market value of the shares was lower than the value at that time. After the one year period had elapsed, the investor requested compensation and the company opposed this request claiming it was a financial assistance matter.

The Supreme Court recognised that the case under analysis, where the company guarantees the value of the shares, is uncommon since it is not regulated in the SCL. Even so, this type of agreement is observed in legal transactions. 

The Supreme Court pointed out that this type of agreement is considered by case law within the scope of the prohibition of financial assistance provided that they are agreements where "the company guarantees or assures the shareholder or the third-party acquirer an inevitable economic return or value of the shares within a specific period. A variant of such arrangements would be for the company to grant the acquirer an option to sell the shares at a price that guarantees the return or value at the end of the period during which the option can be exercised. This way, the acquirer can obtain the price agreed upon in the option without being exposed to the risk of a fall in the value of the shares on the market which in a balanced way means that the company assumes the risk and, if necessary, the economic cost of the loss in value of the shares, which will be charged to its assets".

Arguments in favour of financial assistance

The Supreme Court dismissed the claim and confirmed the decision of the Provincial Court declaring the investment agreement null and void. 

The agreement fell within the scope of the prohibition of financial assistance since all three structural elements of financial assistance were present :

• there is an acquisition of the company's shares by the investor through a capital increase;
• the assumption by the company of the obligation to financially compensate the investor for the difference of the market value of the shares; and
• the existence of a causal relationship between the obligation to financially compensate and the share acquisition, which ultimately represents a benefit for the investor.

The agreement presented the main risk for which the prohibition of financial assistance applies: "to favour a third party in acquiring shares, which can cost or damage the company's assets (i.e. a potential cost or damage that arises at the time of the execution of the agreement) being the acquirer exempted from the risks of the transaction (by obtaining a guaranteed return)".

The court found that agreement should be understood as an unusual guarantee where the primary obligation "doesn't lie in the payment of the shares" but rather "provides other financial incentives or advantages that facilitate or favour the acquisition" or as an unusual transaction that falls under the scope of the general closing clause regulated in Article 150.1 SCL, "which includes all types of financial assistance for the acquisition of shares".

The importance of these jurisprudential pronouncements that have arisen with these emerging cases help us understand that the scope of the prohibition of financial assistance not only extends beyond traditional business activities (such as advancing funds, granting loans and providing guarantees) but to other economic transactions as well.