Directors’ reports and workers’ rights in mergers under Royal Decree-law 5/2023

The new legal framework for mergers in Spain: Royal Decree-law 5/2023

The entry into force of Royal Decree-law 5/2023 (RDL 5/2023), which regulates structural modifications in commercial companies, has sparked debate over the requirement for a directors’ report to be provided to workers in certain types of mergers, particularly in the context of simplified mergers and mergers between wholly owned companies.

What is the directors’ report and when is it required?

One of the most debated aspects of the new regulation is the interpretation of the provisions concerning the obligation to inform workers. Below, we examine the key provisions of the RDL and the different scenarios in which the need for this report is questioned.

Article 5 of the RDL provides that the directors’ report must include one section for shareholders and another for workers. The regulation also makes it clear that companies may choose either to prepare a single report including both sections or to issue separate reports for each group. In addition, article 5.6 stipulates that the report must be made available to shareholders and to workers’ representatives at least one month prior to the general meeting that approves the transaction. This provision reflects the general approach of the law regarding workers’ right to information.

Furthermore, article 9.2 states that workers’ rights to information—including access to a report on the employment-related effects of the structural modification—may not be restricted, thereby reinforcing the importance of the directors’ report in all mergers.

Information requirements in simplified mergers and mergers between wholly owned companies

However, article 53.1.2 introduces a special rule for mergers involving wholly owned companies, which allows the omission of the directors’ report, without clarifying whether this exemption applies to both the section addressed to shareholders and the one intended for workers. This lack of clarity has led to differing interpretations among legal experts.

A recent decision by the Directorate-General for Legal Certainty and Public Faith (DGSJFP), dated 16 December 2024, addressed precisely such a case involving a merger between a parent company and a wholly owned subsidiary. The decision concluded that it was not necessary to provide a directors’ report for workers. In that particular case, the absorbed company had no employees, and although the absorbing company did have workers, the merger plan stated that the operation would have no impact on employment in the absorbing entity.

In this instance, the registrar initially rejected the merger deed, on the basis that the right of workers to be informed—as established in article 9.2 of the RDL—had not been respected. However, the DGSJFP overturned this objection, ruling that the special provision in article 53 prevailed over the general rule in article 9.2, and that the directors’ report for workers was therefore not required.

Key factors in determining whether a directors’ report is required

The DGSJFP’s decision does not differentiate between the sections of the directors’ report, and it is therefore inferred that the report need not be provided to workers in mergers between wholly owned companies, provided that the following conditions are met: (i) the merger involves a wholly owned company; (ii) the absorbed company has no employees; (iii) the merger is approved unanimously; and (iv) the merger plan clearly states that there will be no impact on employment in the absorbing company.

This ruling is significant, as it departs from previous practice, which held that, as long as at least one of the merging entities had employees, the relevant section of the directors’ report had to be prepared and made available to workers. However, the decision emphasises that its conclusions are based solely on the specific circumstances of the case and do not necessarily apply generally to other scenarios.

Conclusions

The Directorate-General for Legal Certainty and Public Faith has set an important precedent by allowing the omission of the directors’ report for workers in certain simplified mergers and mergers involving wholly owned companies. Nevertheless, the legislation leaves room for interpretation as to how this principle should be applied in other contexts, and it does not resolve all uncertainties in relation to non-simplified mergers or situations where workers are employed by one or more of the participating companies.

In any event, companies should pay close attention to the specific circumstances of each transaction and monitor the evolving case law on this issue to ensure compliance with legal requirements and the proper protection of workers’ rights.

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