LESSON 9: SHARES. STAKES.

1. Stakes and shares

2. Shares and stakes as a part of the capital
3. Partners and shareholders rights
3.1 Basic rights
3.2 Classes and series of shares and stakes
3.3 Non-voting shares or stakes
3.4 Minority holders right
3.5 Redeemable shares (acciones rescatables)
4. Documentation and transfer of shares
4.1 Shares represented by certificates
4.2 Shares represented by book entries
4.3 Transfer of shares.
4.3.1 Modus operandi
4.3.2 Limits on transferability
5. Representation and transfer of stakes in srl
a) Representation of stakes
b) The transfer of stakes
6. Joint ownership and third parties rights on shares and stakes

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1. STAKES AND SHARES

The capital is divided into stakes in SRL or shares in SA. Both, stakes and shares
constitute aliquot, indivisible and cumulative parts of the capital.

Shares and stakes are the expression of a proprietary relationship. Shareholders

and partners are owners of the company but do not own the company’s assets, which
belong to the company as a separate and independent legal entity. Shares and stakes are
units of account for measuring a member’s interest in the company (the more
shares/stakes you own, the more power you have in the company) and can be defined as
“the interest of the shareholder in the company measured by a sum of money, and made
up of various rights contained in the contract”.

Each and every share or stake grants to its lawful owner the status of partners or
shareholder and with it the rights acknowledged in the law and in the by-laws.

Stakes and shares are represented in different types of documents. While stakes are
represented by certificates, shares may be represented by certificates of title or book entries. In
both instances, shares shall be regarded to be transferable securities and can be marketed. On
the contrary, stakes and under no circumstances shall be regarded to be securities.

Shares and stakes can be seen as: a) a part of the capital of the company; b) the
representation of the shareholders right; and c) a document

2. SHARES AND STAKES AS A PART OF THE CAPITAL

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 Art.90 provides that shares represent indivisible and equal parts of the capital.

The principles governing the capital of the company are also to be applied to the
shares. As a general rule, we can say that payment for shares can be only made in
patrimonial assets (money or money’s worth). Thus, the creation of shares/stakes that
do not represent an actual contribution of assets to the corporation shall be null and
void.

The value of the share/stake can be seen taking into account several aspects.
The nominal or par value is the value established in the by-laws. It is a permanent and
fixed value that can only be altered through the alteration of the by-laws. The account
value: is the value established by the general accounts of the company, the value in the
balance sheet. The real value is the value that represents the economic value of the
assets of a company. And the market value, in case of shares, which is the value of the
share in the market, mainly in the stock market.

Not all shares/stakes in a company need to be identical. We can find different

series and classes. A serie is composed by all the shares/stakes with the same nominal
value. A class is composed by all share/stakes with the same content of rights. However
the law establishes that shares shall be equal in value within the same series.

One of the principles governing the capital in company law is the one of
correspondence of capital and patrimonial assets, and in this sense the law prohibits, in
art.59.2, the issue of shares or stakes at a discount.
We can see the strictness of the rule in the following example. In a company shares were
issued at a nominal value of 1€. The trading of shares was only 25 cents. In an attempt to
refinance the company new preference 1€ shares were issued at 75 cents already paid so that the
new shareholders only paid 25 cents. The company was declared insolvent and shareholders were
required to pay the 75 cents left.

It is lawful, and quite common, to issue shares a premium (acciones con prima),
that is, to charge those who take the shares more than their nominal value. In such
circumstances, any additional payment received must be transferred into a share
premium account, which may be used only for limited purposes (RD 1514/2007). Being
a capital reserve, the share premium account cannot be used to finance dividend
payments. The reason for the premium is on the one hand, to enlarge the patrimonial
assets of the company, and on the other, in the case of an increasing of the capital, that
the new shareholders subscribe the shares at the real value, when it is over the nominal
or par value of the share.
In the same sense, it is permitted the creation of stakes at a premium.

3. PARTNERS AND SHAREHOLDERS RIGHTS

3.1 Basic rights

Art. 91 provides that the owning of a share or stake confers the owner the status
of a shareholder or partner. In this sense, shares and stakes are a bundle of rights and

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liabilities. The basic rights of shareholders are established in art.93 and completed by
the provisions of the bylaws. The basic rights of shareholders7partners are as follows:

- Right to take part in the distribution of corporate earnings. This right is,
commonly known, a right to a dividend. Although there is a general right to share
profits, a shareholder would only have a right to a dividend if the dividend is duly
declared. It is possible that the general meeting decides that no dividend is paid to the
shareholders but the profits are used for other purposes, such as the increase of reserves
or investments. Once the dividend is declared the shareholders are creditors of the
company.

- In the winding up of the company, after the payment of the debts, to receive a
proportionate part of the capital or otherwise to participate in the distribution of the
assets of the company.

- Preferential right to acquire new stakes or subscribe new shares or convertible

bonds in case the company increases of the amount of issued capital or in case the
company issues bonds or other securities. Arts. 304, 305, 503, 306 LSC develop the
content of this right while providing that “In capital increases involving the issue of new
ordinary or preference stakes or shares, posted against cash contributions, partners or
shareholders shall be entitled to take or subscribe a number of stakes or shares in
proportion to the par value of their holdings prior to the increase”. Pre-emptive rights
are to be exercised within the period of a month after the date of the new subscription
offer (published in the Official Gazette of the Mercantile Register- BORM). Pre-
emptive rights are transferable.

- Right to attend and vote at meetings (except non-voting stock) and to challenge
corporate resolutions. The attendance and vote in the meeting is one of the basic rights
by the means of which shareholders and partners take part in the decisions of the
company. The right to attend and vote at the general meeting can be exercised
personally or by a representative. This is a basic right and cannot be abolished neither
by the by-laws or the general meeting.
However, in SA, it can be limited and, in this sense, companies often require the
shareholders to hold a minimum number of shares for attending and voting at the meeting (art.
179.2, 188.3, 515, 189). Grouping of shares is admitted in order to exercise this right. Limits can
also come from the requirement of the by-laws that can fix the maximum number of votes that
may be cast by any single shareholder. In addition, there are cases in which the right to vote
cannot be exercised: - if the shareholder has not paid the uncalled capital when called to (art.83)
and - in case the company owns its own shares (art. 148).

- Right to obtain information about the company’s affairs. The right to

information is developed in art.196 in the case of SRL and 197 in case of SA.
Art. 196 establishes that partners of limited liability companies may request in writing
prior to the general meeting, or verbally during the meeting, any reports or clarification that they
deem necessary in connection with items on the agenda. 2: The governing body shall be bound to
provide such reports or clarification either verbally or in writing, depending on when and what
kind of information is requested, except where, in the governing body’s opinion, disclosing such
information may be detrimental to the company’s interests. Information may not be withheld
when requested by partners representing at least twenty-five per cent of the capital.
Art. 197 provides that the shareholders may request any reports or clarification they may
consider important, in writing prior to the meeting or orally at the same meeting. It is also

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 established that any shareholder can obtain from the administrators all the documents to be
approved in the general meeting and the report of the auditors.

3.2 Classes and series of shares and stakes

Prima facie, all shares/stakes enjoy equal rights. However, the company can
divide its capital into shares/stales of different classes and the presumption of equality
must be specifically displaced. According to the rights granted to the holder, a company
may issue ordinary or preference shares/stakes. Preferred shares/stakes may be created
as a separate class or classes.

Ordinary shares have no express rights conferred above the basic rights implied
by the law or the by-laws. Unless otherwise indicated, all shares issued by a company
are presumed to be ordinary shares.

Preference shares/stakes are all those that confer the holders extra rights. The
extra rights for the preference can consist of - the right to prior payment of a fixed
dividend, which entitle the holders to a preferential dividend, or - the right to be repaid
first on the winding up of the company.

In any case, preferential shares or stakes will not be valid in the following cases:
- remunerated in the form of interest; - if they directly or indirectly alter the ratio
between their par value and voting rights or the existing shareholders’ preferential right
to subscribe new shares in capital increases (art. 94, 96, 95 y 498)..

The corporate bylaws should establish the consequences of failure to pay part or
the entire preferential dividend, whether this is or is not accumulative as regards the
unpaid dividend, and the possible rights of holders of privileged shares/stakes in
connection with dividend to which the ordinary ones may be entitled.

In case a company has issued different classes of shares or stakes, all those
having the same rights shall constitute one class of and where within one class of shares
there are various series, all shares or stakes within the same series shall have the same
par value (art. 94.1).

3.3 Non-voting shares or stakes

Non-voting shares/stakes provide the holder very little or no vote on corporate

matters. This type of share/stakes is usually implemented for individuals who want to
invest in the company’s profitability and success at the expense of voting rights in the
direction of the company. They are only interested in the economic aspects of their
investment and have no intention to participate in the decision making process. The
most typical rights for non-voting share or stakes are identical to those of ordinary ones
apart from the lack of a vote and they receive a preferential dividend for this reason.

The purpose of non-voting shares/stakes is to allow the holders of the ordinary

ones to maintain control.
The holders of the ordinary shares may, for instance, be founders of a company, the
existing shareholders of a company (often a family company) that wishes to list the company in

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 the stock market, a company that wants the benefits of an employee shares scheme without the
existing shareholders losing control.
Non-voting shares are usually less valuable than voting shares despite being entitled to
exactly the same stream of dividends. There are a number of reasons why the prices should be
different: - The voting shares are more valuable in a takeover bid as most bidders aim at control,
which owning non-voting shares does not help achieve. - The appointment of directors can bring
an additional income stream. This is most relevant for small companies, especially family
companies and those still controlled by their founders. - Control can bring the ability to make the
company deal with connected parties. Visibly abusing this brings the risks of legal challenges
from the minorities. All these reasons should make it clear why investors have become
increasingly resistant to buying non-voting shares, which have becomes less widely used.

In LSC non-voting shares/stakes are regulated in articles 98, 99, 100, 101, 102,
103, 499, 500, 501

Non-voting shares/stakes may be issued for a total par value that does not exceed
one-half of the total paid-in capital.

Non-voting shares/stakes have the following rights:

- To receive a minimum annual dividend. Once the minimum dividend has been
stated, non-voting holders have the right to the same dividend paid on ordinary ones. In
other words, non-voting also participate proportionately with common shares/stakes if a
dividend is distributed on the common shares/stakes. The minimum annual dividend
and ordinary dividends are cumulative for a period of five years in the case of non-listed
companies. In the case of listed companies this period will be indefinite.

- Preferential rights in liquidation. In the event of liquidation of the company,

non-voting holders rank above common holders with respect to their right to obtain
reimbursement of the paid-in portion of their shares or stakes.

- In case of capital reduction due to losses, the reduction must first be applied
against all other classes of stock before it can affect non-voting shares or stakes.

Non-voting holders have the same basic rights as common stock except for the
right to vote at the meetings However, under certain exceptional circumstances, no-
voting holders may acquire a transitory right to vote at the meetings. These cases are: -
if the minimum annual dividend is not distributed or, - if due to a capital reduction, all
common shares/stakes are redeemed, then non- voting holders recover the right to vote
until the proportion between voting and non-voting stock is restored. If this proportion
is not restored within a two years period, the company is subject to mandatory
dissolution

3.4 Minority holders right

It has be seen how the day to day operation of a company’s business is left in the
hands of its directors and managers, with shareholders having no direct input into
business decisions. Even when the members convene in a general meeting, the
individual holder is subject to the wishes of the majority. Minority holders are often
concerned that their rights and interests will be trampled by those of the majority

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shareholders. The Spanish law wants to enlarge the position of minority holders and has
established several rules to give them important rights for their protection.

These rights are:

a) the right to request the calling of an extraordinary meeting (art. 167, 168) and
the right to request an additional complement on the notice convening the
meeting in order to include one or more matters in the agenda (art. 172);
b) the right to challenge any resolution adopted by the Board of Directors (art.
251);
c) the right to file an action for liability of directors, if such claim has not been
filed by the company itself (art. 239) and to object to the dismissal of a claim
seeking the liability of the directors (143.2;
d) the right to request the Mercantile Register to appoint an auditor (art. 265) and to
request the Tribunals to revoke the appointment of an auditor (art. 420); and
e) the right to requests the presence of a public notary at the shareholders meeting
(art.203)

3.5 Redeemable shares (acciones rescatables)

Redeemable shares as a form of privileged shares have been very recently

introduced in Spanish corporate legislation. However the possibility of issuing this type
of shares is only open to listed companies, subject to certain conditions. Redeemable
shares are those whose redemption of full or partial purchase by the issuer or by third
parties is fixed in time or released at the choice of the shareholder, according to the
conditions of the issue; or those whose redemption or full or partial purchase by the
issuer or by third parties is undertaken in any other manner, excluding that
contemplated above.

4. DOCUMENTATION AND TRANSFER OF SHARES

In general, shares may be either issued physically as certificates or recorded by

a book-entry system held in electronic files. The conditions for recording shares under a
book-entry system and the regulations of this system are contained in the Securities
Market Law (Law 24/1988), as amended by Law 37/1998 and by Law 26/2003.

In both cases, they have the status of marketable securities

4.1 Shares represented by certificates

The shares of an S.A. can be registered or bearer shares (acciones nominativas o

al portador). Registered shares must be recorded in a special book (art.116) and the
company will only recognize as a shareholder those persons recorded in the company’s
books, while the person holding a bearer share will be recognized as a member of the
company as far as he is able to show to the company that he is the holder of the
certificate that represents the share.

Certificates must contain a minimum information about the company and the
share itself (art. 114), such as: the corporate name and registered office, the par value of
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the shares and any special right attached to them, whether they are registered or bearer
shares, any restrictions on transferability, any ancillary contribution, the sum paid in or
the indication that they have been fully paid, the signature of one or more administrators
of the company

The company is at liberty to issue registered or bearer shares. However, shares

must be registered in the following cases (art.113):- If they are not fully paid in; - If
their transferability is subject to restrictions; - If they are subject to ancillary
obligations; - When so required by special regulations (e.g. shares of banks and
insurance companies).

It is not uncommon that share certificates are not printed. In this cases the
shareholder will only receive a receipt, and the shares must be registered in the
company’s book.

4.2 Shares represented by book entries

Article 118 LSC estates that shares represented by book entries shall be
governed by the Securities Market Law (Ley del Mercado de Valores).

All companies can issue its shares either by certificates or book entries, but
representation of securities by book entry is irrevocable.

Shares represented by book entries are recorded and no certificated is to be

issued. Transfer of shares is done by accounting transfer: once recorded the transfer is
effective and any person appearing as the legitimate owner according to the book entry
records shall be presumed to be the legitimate owner. In the same way, the creation of
limited rights, such as usufruct or pledge of shares, shall be recorded in the relevant
book. The creation of the lien is valid from the time the corresponding entry is recorded.

4.3 Transfer of shares.

4.3.1 Modus operandi

Becoming a member of the company can be intervivos o mortis causa.

Intervivos: by subscription, by transfer from other member, by means of any valid
contract. Mortis causa: shares are passed to the heir on the death of the shareholder

In principle shares are freely transferable and, unless the company’s by-laws
provide otherwise, every shareholders has a right to transfer his shares freely. A share
certificate is prima facie evidence of title. However, supplementary conditions need to
be fulfilled on transferring registered shares or shares represented by book entries. The
company cannot register the transfer unless a proper instrument of transfer is delivered
to it. In case of registered shares, the transfer shall be recorded in the books of the
company. In case of book entries, the transfer shall be made by accounting transfer and
registered in the account book.

4.3.2 Limits on transferability

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 The by-laws can establish restrictions on free transferability. Only where
expressly provided for in the by-laws shall restriction by binding. Restrictions on free
transferability are only admitted for registered shares.

Restrictions on transferability are admitted but not to the extent of making the
transfer impossible. If the by-laws are so strict as to prevent any transferability at all, the
by-laws clauses shall be null and void. The LSC recognizes restrictions to free
transferability in the following cases:

a) Preferential rights recognized to shareholders in order to acquire shares from

other shareholders.
b) Especial conditions to be fulfilled by the future shareholders
c) Prior approval of the corporation. In this sense the by-laws can establish that
transfers shall be subject to prior approval of the corporation, but the reasons to
deny the transfer must be expressly established. In other sense, transferability
shall be granted if the managers remain silent after a 2 month period of time.
d) Special rules are stated in the case of death of the shareholder or when the
acquisition of the shares is a consequence of a judicial or administrative
executory proceeding. When the company does not accept the heir as a
shareholder it must tender the shareholder a purchaser or must itself offer to
purchase them at the market value.

5. REPRESENTATION AND TRANSFER OF STAKES IN SRL

c) Representation of stakes

Stakes may not be represented by certificates or book entries, nor be called

shares, and under no circumstances shall be regarded to be securities (art. 92.2). So,
how are they represented? Any other way that are not those in art. 92. So, the question
is how the company can identify the partners. For this purpose, the LSC establishes the
obligation for the company to keep a stakeholders’ ledger (art. 104). This book shall
contain the records of the original stakes and subsequent voluntary or obligatory stake
transfers, as well as the creation of rights ad rem or other encumbrances thereon. Only
the parties entered in such ledger shall be acknowledged by the company to be partners.
The ledger shall be kept and custodied by the governing body

The ledger may only be rectified by the company either at a request of a partner
or at its own initiative. In this last case, the company shall give notice to the partners
affected. The company will proceed to the change if no objection is raised. Partners’
personal data may be modified at their request, until which time no such modification
shall have any effect on the company.

Holders are entitled to obtain a certificate of the stakes, rights or encumbrances

recorded in their name (art 105)

d) The transfer of stakes

The requirements for the valid transmission of the stakes is regulated in art. 106
to 112 LSC. In the first place, the transfer of stakes shall be recorded in a public
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document. Secondly, transferability of stakes is restricted to partners or partners close
relatives of the partner who wants to transfer his participation in the company.

The starting point of the legal regime is: stakes are freely transferable if
acquired by other stakeholders, ascendants, descendants or companies within the same
group. In fact, unless otherwise provided in the bylaws, the Law establishes a
preferential acquisition right in favour of the other partners or the company itself in the
event of transfer of the participation units to persons other than different than those
mentioned.

In other cases, voluntary transmissions shall be subject to the rules and

limitations established in the by-laws. However, art. 108 establishes several prohibitions
such as Clauses allowing voluntary virtually free transfers inter-vivos or those others
stablishing an absolute prohibition of the transmission.

Where not regulated in the by-laws, voluntary transfers inter vivos shall be
governed as following: - a) partners wishing to transfer their stakes shall notify their
intention to the company; - b) the company shall give its authorisation, granted under a
decision of the annual general meeting; and - c) authorization can only be denied if the
company offers a different person to acquire the stakes under the conditions established
by the offerer.

Transfers mortis causa, as established in art. 110 LSC, confers partnership status
on the inheritor or legatee. However, the by-laws may grant the surviving partners or the
company, the right to purchase the deceased partner’s stakes at their fair value on the
date of the partner’s death, cash down.

In the case of mandatory transfer, that is in the cases where the transfer occurs
through a public bid or any other legal means of forced transmission as a result of a
legal or administrative procedure, the seizure of stakes must be immediately reported to
the company. In case the company does not agree on the person of the acquirer, it shall
present a different person (a partner or third party).

6. JOINT OWNERSHIP AND THIRD PARTIES RIGHTS ON SHARES

AND STAKES

Shares and stakes are indivisible. Joint owners of a share/stake shall designate
one person to exercise the rights of the holder (ar. 90 Y 126).

Where a usufruct is granted, the question is who is entitled to exercise the

rights conferred by the share/stake, the owner or the usufructuary. As a general rule,
otherwise agreed, the owner of the share/stake is entitled for the exercise of all the rights
except the right to dividends (art.127). That means that the proprietor can attend the
meeting, demand information, vote and challenge the decisions of the meeting or the
board. Other specific rules are stablished in case of capital increase and preferential
rights.

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 In case of pledge of shares, the owner of the share/stakes is entitled to exercise
shareholders rights. The secured creditor shall be bound to enable the owner to exercise
such rights. (art.132).

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