Barcelona court rules on appeal against breach of financial assistance rules
Published on 29th Sep 2023
Two security interests of the deferred purchase price are null and void as they violate the prohibition on financial assistance
The judgment of the Barcelona Provincial Court (Audiencia Provincial de Barcelona) (15th Section) of 15 June 2023, no. 380/2023 declared the granting of two non-possessory pledges, over the assets of a public limited company to secure the deferred payment of the price of the shares by the purchaser, as null and void and a violation of the legal prohibition of financial assistance in article 150 of the Spanish Capital Companies Act (LSC).
The prohibition of financial assistance for a public limited company (sociedad anónima) is foreseen in article 150 of the LSC and provides that "a public limited company (sociedad anónima) may not advance funds, grant loans, provide security or provide any type of financial assistance for the acquisition by a third party of its shares or shares or quotas in its parent company", subject to certain exceptions set out in the same article.
Acquisition dispute
The judgment relates to an acquisition whereby a limited liability company (sociedad limitada) acquired all the shares of a public limited company (sociedad anónima) (from its two original owners). The buyer paid part of the price in cash and it was agreed that the remainder would be paid in six instalments.
As security for the deferred payment, the target granted two non-possessory pledges (over certain of its assets and rights). Due to the purchaser's failure to make the last two payments, the sellers proceeded to foreclose one of the pledges.
The purchaser and the target applied to the Court of First Instance (Juzgado de Primera Instancia) to declare the pledges null and void, claiming that the pledges violated the prohibition of financial assistance set out in article 150 of the LSC. The court considered that this infringement had occurred, however, it dismissed the claim as it found bad faith in the nullity action brought by the purchaser and, consequently, did not declare the pledges null and void.
On appeal, the Barcelona Provincial Court (Audiencia Provincial de Barcelona) considered, like the Court of First Instance (Juzgado de Primera Instancia), that the pledges constituted a breach of the prohibition of financial assistance; however, as regards bad faith, it ruled to the contrary and upheld the appeal, declaring the pledges null and void.
Barcelona court arguments
The arguments of the Barcelona Provincial Court (Audiencia Provincial de Barcelona), following the jurisprudential line of the Supreme Court (Tribunal Supremo) (according to its judgment 582/2023 of 20 April), mention that the following requirements must be fulfilled in order to assess that there is a violation of the prohibition of financial assistance:
- an act or business of financing or "financial assistance" (the granting of the pledges, in this case) by the company (the target in this case) in favour or for the benefit of a third party (partner or not (the purchaser, in this case));
- an original or derivative acquisition of shares in the assisting company (the target, in this case) by the third party (the purchaser, in this case); and
a finalistic, teleological or causal link or relationship between the business or act of financial assistance and the acquisition, as the purpose of the financial assistance is to favour or facilitate the acquisition (in this case, the pledges granted were intended to facilitate the acquisition of the shares of the target by the purchaser).
Bad faith
Lastly, as regards bad faith, the Barcelona Provincial Court (Audiencia Provincial de Barcelona) took a contrary view and based its argumentation on the Supreme Court's (Tribunal Supremo) judgment of 16 January 2013 (no. 582/2013). In this judgment, the court stated that in cases where the contract is vitiated by absolute nullity (as is the case in question, given that the prohibition of financial assistance was violated), the nullity action may be brought by those who are party to the pledge agreement (as established in art. 1303 CC) or by a third party who may be harmed by the contested business.
The purchaser has standing to bring the nullity action and given that it is not the only beneficiary as there are third-party creditors of the target whose assets are protected in the exercise of the purchaser's action, the Barcelona Provincial Court (Audiencia Provincial de Barcelona) considered that it was not appropriate to classify the exercise of this action as abusive, even though it is closely linked to the breach of the pledge agreement.
