Article 160 f) When does the General Meeting decide?

In which cases does the essential asset of Article 160 f LSC operate?

In those corporate operations in which essential assets are acquired, disposed of or contributed to another company, the authorization of the General Meeting is required. This is provided for in article 160f LSC.

We refer to those operations that, due to their relevance, contain similar effects to structural modifications. Such as the transformation, merger, spin-off and global transfer of assets and liabilities of the company.

Most of us who work in the world of -corporate finance- believe we know the relevance of art. 160f LSC. However, the difficulty of the subject allows me to say, almost certainly, that we don’t know it at all.

Therefore, we propose the following article with the aim of answering some of the most relevant questions. What is an essential asset and in what cases does the essential asset of article 160 f LSC operate?

Unfortunately, this quiz has a limited amount of entries it can recieve and has already reached that limit.

Time's up

Introduction: 160 f) When does the General Meeting decide?

Law 31/2014, of December 3^rd, amended article 160 f, establishing the following regulation:

Article 160. Competence of the General Meeting.

It is the competence of the General Meeting to deliberate and decide on the following matters:

1. 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.

This modification was intended to provide greater protection to minority shareholders with respect to the disposal of essential assets.

It should not be forgotten that, on many occasions, minority shareholders are not represented on the administrative body. And when faced with relevant decisions (e.g. transfer of total assets) they could be seriously harmed.

Therefore, the new regulation establishes that the General Meeting will be in charge of agreeing on the acquisition, disposal or contribution to another company of essential assets.

What is an Essential Asset?

Essential assets are those whose disposal, acquisition or contribution to another company would result in an effective modification of the corporate purpose.

In addition to the above, essential assets are also those whose sale would lead to the dissolution and liquidation of the company.

Therefore, when there are operations of considerable importance to the company, Article 160.f LSC will apply.

Si te ha interesado este artículo no dudes en leer:

A Practical Guide to Directors Liability

The company’s director will be held responsible of the company's debts to the company’s owners and to its creditors. He must therefore respond with his personal assets for the company's debts.

What does the Law mean by “essential”?

The law establishes an iuris tantum presumption as to the essential nature of a particular asset. Thus, an asset is essential if the amount of the transaction exceeds 25% of the total value of the assets. To this end, the value of the assets shown on the last approved balance sheet must be taken into account.

With the above, we find that in order to determine the essentiality of the asset, we will have to attend to different criteria, quantitative and qualitative.

• Quantitative criterion

In accordance with this criterion, any asset in excess of 25% of the value of the assets in the company’s last approved balance sheet is essential.

• Qualitative criterion

Irrespective of its value in quantitative terms, an asset can also be essential. This is explained by the link that an asset has with the achievement of the corporate purpose. Consequently, an asset may have a certain relevance for society, from a structural point of view.

Take, for example, the disposal of a company’s main establishment. This operation could be assimilated to a transfer of domicile, and therefore, be a transcendental change that affects the corporate purpose.

What is the relevance of article 160 LSC?

The relevance is that it requires the authorisation of the General Meeting for the disposal, acquisition or contribution of the essential assets.

It is worth mentioning the Sentence of the Supreme Court 285/2008 of April 17th 2008. The Court ruled on the competence to dispose of essential assets, and established the following:

“What is being challenged is, therefore, the sufficiency of the powers of the Managing Directors to carry out the granting of the public deed. We estimate that it exceeds the normal traffic of the company to leave it without its assets, without the authorization of the General Meeting for this extraordinary management business”.

In summary, the Court states that the authorization of the General Meeting is required for extraordinary management business.

In which cases does the essential asset of Article 160 f LSC operate?

The general meeting must deliberate and decide on certain acts that affect the essential assets of the company. These acts are:

1. Acquisition acts

First, acts of acquisition of assets essential to the company are included. Here, acquisitions free of charge are excepted. As an example, the purchase of a new hotel (in a hotel company), would need the authorization of the General Meeting.

However, there are some cases where such approval will not be required. This is the case when the acquisition of the asset is made in execution of the program approved by the shareholders. For example, in approval of what was stipulated at the time of the constitution of the company.

2. Acts of Disposal

Second, the rule also deals with acts of disposal of essential assets. Thus, the disposal must involve the definitive loss of the right of the initial owner (the company). Those acts of disposal free of charge are excluded.

3. Acts of contribution

And finally, acts of contribution of essential assets to another company. This includes operations that involve a structural change in the company.

An example of these acts is subsidiary operations. In other words, the transfer to subsidiary companies of essential activities carried out up to that point by the company itself.

It is particularly relevant to know the criterion followed by the General Directorate of the Registry and the Notary’s office on the concept of “contribution”. (Hereinafter, DGRN). In this respect, we mention Resolution 9119/2015 of July 10^th 2015. The DGRN establishes that all types of goods or rights available to society can be essential assets.

In order to affirm the essential nature of non-pecuniary contributions such as pecuniary ones, attention must be focused on the specific case. For this purpose, reference should be made to the Resolution of July 22^nd 2016. Thus, it establishes that the contribution of a branch of activity must be approved by the General Meeting. But not in all cases. Only in those cases in which the economic unit contributed has the character of an essential asset. In these cases, the position of the shareholders could be compromised.

With reference to the capital increase by offsetting credits, the DGRN does not understand it as an essential asset, except in the following case:

“that the credit to be compensated is an essential asset with respect to the company that is going to acquire or increase its status as a shareholder”.

Are acts of liens included in Article 160f?

The creation of a security right is common currency in the context of financing transactions. They also constitute a large part of the ordinary course of business.

Are security rights in assets that are considered “essential” covered by article 160f? For example, a mortgage or pledge on assets that are presumed to be essential.

There is no definitive answer to this question. On the one hand, no mention of liens can be drawn from the wording of the article. Furthermore, the DGRN resolutions affirm that the authorisation of the General Meeting is not required for this type of operation.

On the other hand, some authors point out that for greater security the authorisation of the General Meeting should be requested. This is because the lien could be understood as implying the loss of availability or usefulness of the encumbered asset. Therefore, it would directly affect the development of the corporate purpose. Consequently, the application of article 160.f would come into play, requiring the approval of the General Meeting.

Conclusion

In summary, in the majority of relevant corporate transactions, Article 160f LSC must be contemplated.

This legal imperative implies obtaining the authorisation of the General Meeting in certain cases. And these are the acts of acquisition, contribution and disposal of essential assets.

If you liked this article, you may also find the following
interesting:

Quorum and legal majorities in General Meeting and Board of Directors

Contacto No te quedes con la duda, contacta con nosotros. Estaremos encantados de atenderte y ofrecerte soluciones.