The Draft Public Integrity Bill and its Impact on Spanish Companies

Since the 1989 reform of Spanish commercial law, ownership of equity interests in a private limited liability company has been evidenced, vis-à-vis the company itself, by notifying it of the transfer and subsequently recording that transfer in the Register of Members.

This Register of Members is an internal corporate record, maintained by the management body, which is not publicly accessible to third parties and is not subject to any form of registration oversight. However, on 17 February, the Spanish Council of Ministers approved the Preliminary Draft Organic Law on Public Integrity (the “Preliminary Draft”), which implements the National Anti-Corruption Plan and incorporates, among other provisions, various recommendations issued by the OECD and the European Commission concerning corporate transparency.

One proposal stands out in particular because of its potential immediate impact on ordinary commercial transactions: the introduction of a requirement for registration of transfers of equity interests to have constitutive effect, one of the proposed measures concerning public integrity.

Should the Preliminary Draft ultimately be enacted, this would undoubtedly represent one of the most significant reforms, if not the most far-reaching, of Spanish company law in recent decades, within the framework of the new public integrity requirements. This article therefore examines the potential consequences of its entry into force and implementation for the Spanish business community, particularly for private limited liability companies.

Public integrity and corporate transparency: purpose of the Preliminary Draft

The stated purpose of this part of the Preliminary Draft is to reduce the lack of transparency surrounding ownership of equity interests, thereby advancing the objectives of public integrity and corporate transparency, in line with both existing anti-money laundering legislation and efforts to combat the use of shell companies in corruption schemes.

The text itself justifies the reform on the grounds that the Register of Members, being a document confined strictly to the company’s private sphere, is susceptible to alteration and has no legal effect vis-à-vis third parties.

Against this background, the proposal seeks to restore to the Commercial Registry a public disclosure function that it had, to some extent, lost following the aforementioned legislative reform, bringing its role in relation to equity interests closer to that currently performed by the Spanish Land Registry in respect of immovable property.

Main changes to company law concerning public integrity

As regards the Commercial Code, the first significant amendment proposed by the Preliminary Draft concerns article 18, which would allow transfers of equity interests to be registered on the basis of a notarial deed, a private document bearing the qualified electronic signatures of the parties involved, or a private document with signatures authenticated by a notary. To some extent, this is consistent with the move towards electronic documentation and digitalisation initiated by Law 11/2023.

Secondly, article 22.2 of the same Code would provide for the creation of a special section within each company’s Commercial Registry record, separate from its general section, as part of the public integrity and corporate transparency measures envisaged in the Preliminary Draft. This special section would record the original ownership of equity interests, subsequent transfers, the creation of any rights in rem or encumbrances over those interests, and the identification of beneficial owners in accordance with Law 10/2010.

Alongside these amendments, and turning to the provisions of the consolidated text of the Spanish Companies Act (Ley de Sociedades de Capital, “LSC”), Article 104, if amended following the approval of the Preliminary Draft, would make it mandatory to maintain the Register of Members in electronic form. Its management would be centralised through the platform of the Spanish Association of Registrars, using certificates incorporating a Secure Verification Code (“CSV“).

Furthermore, among the measures concerning public integrity envisaged in the Preliminary Draft, Article 108 LSC would be reformulated to render void any provisions in a company’s articles of association intended to exclude, condition or undermine the constitutive effect of registration with the Commercial Registry. Members would therefore have no scope to agree otherwise through the articles of association. This already raises a potential issue concerning the content of companies’ articles of association, which they should address in anticipation of the adaptation that may be required if the Preliminary Draft is ultimately approved in substantially its proposed form.

Legal effects of the constitutive effect of registration

The proposed changes extend beyond the legislative framework itself, with consequences for corporate structures and transactions (as discussed in the following section). Accordingly, the decision to give registration with the Commercial Registry constitutive effect, as proposed within the framework of the public integrity measures, is far from a purely formal matter. Rather, the Preliminary Draft allows us to identify a number of potential consequences affecting different aspects of corporate life. Specifically:

(i) Membership status would be recognised only in respect of natural or legal persons registered in the special section of the company’s record at the Commercial Registry.

(ii) Payment of dividends or other distributions of a similar nature would discharge the company’s payment obligations only where made to registered persons.

(iii) In judicial or administrative proceedings, the person registered as the holder of the equity interests with the Commercial Registry would, in all cases, prevail for the purposes of the decision.

(iv) In addition to the grounds already established under the LSC, corporate resolutions adopted with the decisive vote of an unregistered member would become subject to challenge.

(v) Heirs acquiring equity interests mortis causa would be unable to exercise the economic or voting rights attached to those interests until the transfer had been registered with the Commercial Registry.

These consequences would be accompanied by other targeted amendments to the LSC with significant practical implications. Indeed, numerous changes would affect established corporate procedures and ordinary commercial transactions more generally:

• Regarding single-member companies, the proposed wording of Article 13.1 LSC would prevent a company’s single-member status from being registered in the general section of its Commercial Registry record unless the relevant transfer had first been recorded in the special section.
• In relation to acquisitions of a company’s own equity interests, article 140.1 LSC would restrict the circumstances in which a company may acquire its own equity interests through derivative acquisition, removing those involving compulsory transfers and acquisitions authorised by the general meeting.
• As regards general meetings, Articles 179 and 182 LSC would allow the management body to request an up-to-date certificate identifying the registered members from the Commercial Registry during the 15 days preceding the meeting. The chairperson would therefore be entitled to admit only those persons appearing on that certificate. In the case of general meetings held electronically, proof of registration would also be required to establish entitlement to participate.
• Where the proceedings of a general meeting are recorded in notarial minutes pursuant to Article 203 LSC, the aforementioned certificate would have to be attached if it had been requested. The Commercial Registrar could refuse to register corporate resolutions if any discrepancy were identified between the certificate and the list of attendees participating as members.
• Finally, notarial deeds formalising capital increases and reductions governed by Chapters II, III and IV of Title VIII LSC, including capital reduction and subsequent increase transactions (operaciones acordeón), would have to specify the identity and numbering of the equity interests concerned. Both the resolution and its implementation would have to be registered simultaneously in the general and special sections of the company’s Commercial Registry record.

Public integrity: sanctions and transitional compliance periods

The Preliminary Draft also seeks to strengthen compliance with the obligations described above concerning public integrity through a twofold approach.

Firstly, from a civil law and registration perspective, it establishes that the rights of unregistered members cannot be asserted against the company or third parties. This would, for example, prevent the registration of attachments, pledges or subsequent transfers until the preceding transfer had been duly registered with constitutive effect. The management body would bear responsibility where there has been an unjustified delay in arranging that prior registration.

In addition, a new ground for automatic dissolution by operation of law would be introduced alongside those already provided for in Article 360 LSC. This would apply where a company fails, for ten (10) consecutive years, to comply with its obligation to submit to the Commercial Registry a certificate identifying its registered members and their ownership interests.

In this context, companies already incorporated would have, subject to final confirmation, a period of one (1) year from the legislation’s entry into force to submit a standardised electronic certificate to the Commercial Registry containing up-to-date information on their members, ownership interests and rights in rem over their equity interests.

If this period expires without the obligation having been fulfilled, the Commercial Registry would be entitled to refuse to make any further entries, subject to certain exceptions, such as the removal of directors, dissolutions, liquidations or acts ordered by judicial or administrative authorities. In practical terms, this could bring a substantial proportion of the company’s registry-related activity to a standstill.

Impact on commercial contracts and M&A transactions

Beyond its justification in terms of transparency and public integrity, this legislative reform has the potential to substantially alter the mechanics of any transaction involving the purchase and sale of equity interests. Consequently, it could affect a significant proportion of M&A transactions involving Spanish private limited liability companies, including those ongoing when the final Organic Law arising from the Preliminary Draft enters into force. Such transactions routinely involve transfers of equity interests, whether between existing members or between members and third parties.

Until now, closing, evidenced by the delivery of the notarial deed, has been sufficient for the purchaser to acquire membership status in the company. However, under the new regime envisaged by the Preliminary Draft, that status would no longer arise at that point, but only once the relevant entry had been made in the Commercial Registry in accordance with the applicable requirements. Accordingly, if registration is delayed because of a defect in the documentation or, as may become commonplace, the Commercial Registry’s workload, the purchaser would find itself in a form of legal limbo, principally characterised by an inability to exercise the economic and voting rights attached to the equity interests.

This situation would require parties to redesign the contractual structure of transactions of this nature. It is foreseeable that such agreements would incorporate a condition precedent designed to defer the release of all or part of the purchase price (and completion of the transfer of the equity interests) until registration has actually taken place. The party responsible for arranging registration might also be required to provide evidence of its completion. Furthermore, security arrangements or escrow mechanisms could be introduced to cover the interim period pending registration.

These documents and, on a supplementary or complementary basis, the shareholders’ agreements frequently arising from M&A transactions should expressly regulate which party assumes the risk of an adverse registration decision or a delay attributable to the Commercial Registry itself, and how the economic rights accruing during that interim period are to be allocated between the parties. Although these issues are not entirely new, the Preliminary Draft introduces new considerations as to how they should be addressed from both a legal and commercial perspective.

An additional issue remains unresolved in the Preliminary Draft: the requirement for a qualified electronic signature on the standardised private document. This could create significant difficulties for foreign investors and members who, in most cases, may not hold certificates recognised by the Spanish system, requiring them to complete an additional administrative procedure on top of those already involved in such transactions.

This could undoubtedly become a further barrier to international investment in Spanish private limited liability companies unless interoperability solutions are introduced.

The precise scope of the Commercial Registrar’s examination of these transfers also remains to be clarified. In particular, it is uncertain whether the Registrar’s review will be limited to formal legal compliance or extend to substantive aspects of the underlying transfer transaction. This distinction will be decisive in assessing the additional time and legal analysis that the reform will introduce into commercial transactions.

Ultimately, the balance between legal certainty and efficiency, which in Spain has traditionally favoured the private limited liability company as a flexible corporate form with relatively low transaction and registration costs, could shift significantly towards legal certainty. In practical terms, this could bring its operation closer to that of a public limited company (sociedad anónima) as regards the transfer of the instruments representing its share capital.

Conclusion on the Preliminary Draft Organic Law on Public Integrity

In light of the foregoing, it is clear that the Preliminary Draft Organic Law on Public Integrity proposes what would be the most significant reform of the Spanish company law framework in recent years, particularly in relation to the registration of equity interests.

The proposed public integrity measures, including the introduction of constitutive registration, the creation of a special section within the Commercial Registry and the requirement to maintain a centrally managed electronic Register of Members, would substantially alter notarial, registration and contractual practices relating to commercial companies, particularly those incorporated as private limited liability companies.

Nevertheless, the text is still undergoing parliamentary scrutiny and is subject to the absolute majority in the Congress of Deputies required under Article 81 of the Spanish Constitution. Its final wording therefore remains uncertain, leaving scope for amendments that could alter the anticipated effects before its approval.

Accordingly, it is strongly advisable for these companies to review their articles of association, verify the current status of their Register of Members and, more generally, anticipate the potential impact of the Preliminary Draft on their corporate structures and ongoing transactions, adapting their arrangements to the proposed regulatory requirements.

At Devesa Abogados, we continuously monitor the legislative progress of the Preliminary Draft Organic Law on Public Integrity and assist our clients in reviewing and structuring their corporate arrangements and transactions, anticipating the risks and regulatory implications that this reform may introduce into commercial dealings.

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