Privileges and Obligations associated with company shares: Accessory benefits and Plural Voting

Introduction

Limited companies are the most common type of commercial company among entrepreneurs. They offer speedy incorporation procedures, but, above all, they offer partners the possibility of limiting their liability to the capital contributed.

When setting up a limited company, it is important to know the rights and obligations of the partners. It is important to know the different legal figures that can be established in the articles of association in this respect.

In this post, ILP Abogados explains the main differences between the privileges of the partners and the ancillary benefits.

What are ancillary services?

Ancillary obligations are additional obligations that the partners may assume towards the company. These obligations may be of various kinds, such as the provision of services, the delivery of goods or the refraining from certain activities.

Ancillary benefits must meet the following requirements:

• They must be distinct from the contribution to the share capital.
• They must be set out in the articles of association.
• They must be accepted by the obligated partner(s).

Ancillary benefits may be free of charge or remunerated. In the case of remunerated ancillary services, the remuneration may be monetary or non-monetary.

The creation, modification and termination of ancillary benefits require the individual consent of the obligated shareholders. This is without prejudice to the fact that the shareholders’ meeting must adopt the decision affecting ancillary benefits with an enhanced legal majority.

And if ancillary services are obligations associated with shares, what are the privileges on certain shares?

In general, shares confer the same rights on shareholders. However, it is possible to create units or shares which confer special privileges on the shareholders who hold them.

Shareholding privileges are those rights that give their holders a preferential position with respect to the holders of ordinary shares. These privileges may be economic or political.

Economic privileges are the most common in limited companies and may consist of:

• Preferential dividend: preference shares are entitled to receive a preferential dividend, which is a fixed or variable dividend paid before the dividend on ordinary shares.
• Priority in the redemption of the liquidation share: preference shares are entitled to be redeemed in preference to ordinary shares in the event of liquidation of the company.

Political privileges are less common than economic privileges and may consist of:

• Plural voting: preference shares may give their holders a higher number of votes than would correspond to their shareholding in the share capital. This plural voting is permitted in limited liability companies: the voting proportionality of the shares will be identical, unless the Articles of Association provide otherwise. However, it is prohibited in public limited companies.
• How do corporations get around this prohibition? By creating non-voting shares. If you allocate non-voting shares (which is permitted) you are, de facto, altering the proportionality of the vote. Imagination to Power!!!! Or perhaps we should say “Fraud of Law to Power?
• Voting privileges for certain company resolutions: preference shares may give their holders preferential voting rights for certain company resolutions, such as amendments to the articles of association or the dissolution of the company.

The Capital Companies Act lays down certain prohibitions with regard to privileges. In this respect, it is not possible to create shares with the right to receive an interest. Nor is it possible to create shares that alter the proportionality between the nominal value and the pre-emptive right.

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Keys and Regulations for Listed Companies in Regulated Markets

Listed companies are public limited companies whose shares are traded on a Spanish regulated market. The general provisions apply to them, with certain particularities, such as the minimum percentage for exercising certain shareholder rights and the deadlines for challenging corporate resolutions.

What are the main differences between privileges and ancillary benefits?

The main differences between privileges on certain shares and ancillary benefits are as follows:

• Privileges are rights that the shares of one shareholder have over the shares of other shareholders. Ancillary services, on the other hand, are obligations that the shareholders voluntarily assume in favour of the company.
• Privileges can be set out in the articles of association or in a shareholders’ agreement, whereas ancillary benefits can only be set out in the articles of association.
• Privileges can be modified by a simple majority of shareholders, whereas ancillary services can only be modified by a reinforced majority of shareholders.

What are the most common problems when regulating ancillary services in Spain for limited companies?

The most common problems in regulating ancillary benefits in Spain are the following:

• Lack of clarity in the articles of association on ancillary services. This can lead to conflicts between shareholders and problems in enforcing ancillary services.
• Failure to foresee the consequences of the modification or non-fulfilment of ancillary services. The articles of association must provide for the consequences of the modification or non-fulfilment of ancillary services, in order to avoid conflicts between the shareholders.

Conclusion

The regulation of privileges and ancillary benefits in limited liability companies is a complex issue that must be approached with care. It is important to seek the advice of a lawyer specialised in commercial law to ensure that the regulation is clear, precise and effective.

At ILP Abogados, we are specialists in commercial law and have extensive experience in the regulation of relations between partners and companies. If you are thinking of establishing privileges for shares or ancillary services in your company, do not hesitate to contact us for advice.

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Preferred Liquidation