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OCW: Business Law for managers and entrepreneurs
COMMERCIAL LAW
BUSINESS LAW FOR ENTREPRENEURS
GUIDE Block 1.- Setting up the structure
INTRODUCTORY REMARKS
The Course on Commercial Law has been approached from the perspective of the entrepreneurial
activity. Therefore, in the drafting of the syllabus, those issues more likely to impact on the
decision process leading to the setting-up and the running of a business project are selected and
structured on a systematic basis to devise a program of Business Law for Entrepreneurs.
Since lessons and practical exercises are going to be entirely focused on business issues,
it may be advisable to read first some materials related to the whole Private Law system
and the particular features of Commercial Law in the Spanish legal system in contrast
with, for example, common law systems.
To that end, you might be interested in reading the following sections:
Introductory reading materials and other additional references:
- RODRÍGUEZ DE LAS HERAS BALLELL, Teresa, Introduction to Spanish Private Law:

Facing Social and Economic Challenges, London: Routledge, 2009:
- pp. 1-4: History
- pp. 4-17: Private Law in the Spanish legal system
- pp. 17-20: Civil Law and Commercial law
- pp. 20-27: New Trends
BLOCK 1. SETTING UP THE STRUCTURE

READING MATERIALS, CASES AND PROBLEMS
1. GETTING STARTED. CHOOSING THE LEGAL FORM AND OPENING THE

BUSINESS
1.1. Defining the project, planning the organization and assessing needed resources:
choosing between individual entrepreneurs and organizational forms
© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 1

Reading materials and other additional references:

Facing Social and Economic Challenges, London: Routledge, 2009:
- pp. 53-64 (The individual and business)
- pp. 72-75 (Legal persons)
- pp. 77-84, 90-94, 104-117 (Categories of organizations)
Main ideas, aims and questions:
The first step in the decision process leading to the setting up of a business project is to assess if
an individual can run the project alone or teamwork is needed.
If an individual decides to set up the business alone will surely become a sole trader who makes
the main decisions and takes on financial risks arising from the activity. Accordingly, the
entrepreneur assumes unlimited responsibility for all (existing and future) debts and risks deriving
from the running of the business (Article 1911 Spanish Civil Code).
Which are then main advantages of acting as a sole entrepreneur in the market? Firstly, no
incorporation costs (costs related to the process, formalities and steps aimed to set up an
organization – registration, public deed, legal advice, capital -) have to be afforded. Secondly,
management costs are very limited and in some cases inexistent, for the sole trader might manage
the business on his/her own. Thirdly, no risk of conflict with partners in the decision-making
exists.
Nevertheless, acting as a sole entrepreneur entails risks that are, in certain cases, higher than in a
company. Mainly, the entrepreneur exposes his/her assets, both personal assets and
professional/business ones to business risks. No line can be drawn between goods devoted to
personal/family purposes and professional/business ones. As a general rule, any asset can be sold
to pay business’ debts. As an exception, a recently enacted Act (Law 14/2013) in Spain allows
entrepreneurs to safeguard part of his/her goods from creditors, under certain conditions (text
available at http://www.leydeemprendedores.es/leydeemprendedores/).
Capital raising, risk mitigation and needed resources can make wiser the decision to set up a more
complex organizational form. Take a look at the catalogue of legal organizational forms, as
summarized below (read further about in Chapter 3 of recommended textbook), that can be chosen
to run economic or social activities and find out main differences and distinguishing features of
each one. Notably, companies are the preferable vehicles to run a business project in a market.
Among them, stock corporations (SA, Sociedad Anónima) and Limited Liability Company (SRL
or simply SL, Sociedad de Responsabilidad Limitada) jointly represent more than 95% of
enterprises operating in Spain. Same percentage depicts the fabric of industry in Europe.

Sociedad Sociedad
Year (*) Others
Anónima Limitada
2017 410 93.803 785
2016 397 100.371 1.628
2015 605 93.976 400
*Número de constituciones. Fuente: Registradores de España. Estadística mercantil 2017
Legal catalogue of organizational forms and key characteristics
1. ASSOCIATION: group of persons / organized / common aim / stable
2. FOUNDATION: non-profit / goals of general interests / distinct patrimony / durable basis
3. COMPANIES: partnership / LLC / corporation
4. OTHERS: Cooperatives, economic interest grouping, worker-owned companies, so on
5. GROUPS: joint ventures, alliances, holding
1.2. Commercial companies. The protection of limited liability
Key vocabulary:
Sociedad Anónima (SA) ≈ corporation (Inc. or Corp.)

Sociedad de Responsabilidad Limitada (SRL) ≈ Limited Liability Company (LLC)
(Artículo/disposición) dispositiva = default provision
imperativa = mandatory provision
Yet in order to make an informed choice it is important to know the main differences among
companies, partnership and corporations. Right now you are in a better position to distinguish
between the corporate/LLC form and the form where the individual entrepreneur acts in her own
name, or where several entrepreneurs sign a contract of partnership.
Are you precluded from choosing the corporate/LLC form if you are alone (i.e. you are the only
individual to start with a business)? No, you are not. Most jurisdictions, including Spain, enable
entrepreneurs to set up a corporate/LLC to run business, even if there are no other partners. It is
a one-partner company.
One of the most important advantages of choosing commercial companies (in particular SA/SRL)
is the legal protection of limited liability. Unlike individual entrepreneurs who expose all their
assets to business debts and risks, the setting up of an incorporated company (in particular,
SA/SRL) entails that entrepreneurs become shareholders/partners of the company and

accordingly succeed in limiting their liability. Indeed, the company, as a new legal person, is
liable to third parties and its assets will pay existing and future debts. And, each
shareholder/partner restricts responsibility to his/her share in the company. Partners/shareholders
are not personally liable against creditors. Contracts are concluded between third parties and the
company itself, as a legal person, whereas shareholders/partners are not contracting parties in
such transactions.
Finally, the choice between the SA and SRL is the trickiest.
a). SRL’s origin dates back to the end of 19th Century, when, as private companies or close
corporations, this company type aspires to satisfy unattended needs of trade and business whereby
an organizational model suitable for running economic activities by a limited number of members,
usually linked by family or close bonds or simply selected on grounds of their personal features
and/or professional skills, able to combine flexibility and limited liability, without the complexity
and rigidity burden of incorporating a joint-stock company (sociedad anónima). Therefore,
sociedades limitadas are normally described as hybrid companies, interweaving personal
elements and capital ones. Members of a SRL are called “partners” (socios) whereas in a SA they
are shareholders because they hold shares. Accordingly, equity capital in a SA is divided in shares
but in a SRL it is divided in parts or units (participaciones). Unlike parts or units, shares are
negotiable in a regulated market (stock exchange). To set up a SRL in Spain a minimum start-up
capital of 3,000 Euros is needed (although it is possible to set up a SRL without contributing that
total amount of capital at that time, provided that it is subjected to a specific regimen that of the
“limited company of successive formation” where certain rights are limited, e.g. distribution of
dividends, remuneration, etc.). However, minimum start-up capital to set up a SA amounts to
60,000 Euros.
b). In general terms one can say that the SA is instead designed for growth, i.e. it requires more
initial capital, it is designed to be “open”, and its regulation includes more mandatory provisions
than that of the SRL, which is presumed to be a form for smaller businesses (in principle, they
don’t seek to go public and cannot be listed on stock markets), is more flexible, requires a lesser
amount of capital, is “closed”, and with more “default”, rather than “mandatory” provisions.
Notwithstanding different configuration of members’ interests in the company, in both types of

companies above, investment of members (partners/shareholders) is to be of pecuniary character
or in kind. But in any case, contributions of work, industry or professional services are not
permitted, except as ancillary obligations (prestaciones accesorias) stated by articles of
association and whose performance is imposed on partners as a manner to personalize sociedades
limitadas. As regards investments in kind, legal regime for sociedades limitadas significantly
differs from the one applicable to sociedades anónimas. No expert report assessing the value of
investments in kind is required. Value thereof is proposed by the investing partner and agreed by
the remainder ones. Hence, failure to duly value the investment in kind entails the jointly and
severally liability of all partners for the existence and the value thereof against third parties and
the own company.

1.3. Personalizing the organization: by-laws, articles of incorporation and

shareholders’ agreements.
1.3.1. Choosing the legal form: the company as a (formal) contract. And personalizing the legal
form: the different documents and their significance
Vocabulary:
Escritura de constitución = articles of incorporation

Estatutos ≈ Bylaws
Pacto parasocial ≈ pacto reservado ≈ pacto de socios ≈ shareholders’ agreement
A company (especially with corporate form) is a complex creature, because it originates in a

“contract” (i.e. an act between several persons) but then, that act gives rise to another person, or
body of rights and obligations (hence the word “corporate”, from the Latin corpore). This
complexity must be somehow represented in the “ritual” for the incorporation of the company,
and the documents necessary for that.
Examining the sample of different documents facilitated, you may identify, between the “escritura
de constitución” (articles of incorporation) and “estatutos” (bylaws), which represents better the
“contractual” side (where several other parties get together and express their will to create a
company) – articles of incorporation -, and which the “corporate” side (where the internal working
of the new person is established) - bylaws.
Since the ultimate aim of the incorporation is to create a new “person” (the company) who can
assume obligations and be entitled to exercise rights, main features of “its personality” have to be
established: name, nationality, ID number, initial “patrimony”, domicile, and so on. Most part of
these elements are stipulated in the articles of association. How the company name is given to the
company? Founders apply for a company name to the Central Mercantile Registry. In the
application form (electronically available), applicants propose several names (usually maximum
of 3 options) in order to priority and the Registry check if there are other companies using the
same name or a similar one likely to mislead third parties. Should the same name be not registered
and no risks of confusion exist, the requested company name is reserved in favor to the applicants.
Which is the legal relevance of the domicile? Domicile does in most jurisdictions determine which
domestic legislation the company and its operations will be subject to.
Once the most suitable legal form has been chosen by the partners to run the business, it has to
be tailored to adapt to partners’ needs and meet their interest. Such a customizing aim is achieved
by carefully drafting the by-laws instead of copying a standard model. To draft the by-laws, main
elements of the organization have to be identified and then adapted to partners’ interest within the
framework of the applicable legislation. Then, which are, in your opinion, the main elements of
the organization to be discussed among partners and regulated by the by-laws afterwards?

Considering that bylaws are subject to the applicable legislation, partners cannot depart from
certain binding legal provisions in the drafting of the bylaws. Accordingly, very often the
company partners or shareholders sign other agreements that do also regulate different aspects of
the functioning of the company but aim to better meet their interests. Are these documents valid
and enforceable? What aspects of the internal working of the company and business are frequently
regulated in these shareholder agreements and why?
The signing of shareholders’ agreements is commonplace in the market. They adopt a wide
variety of forms, contents and scopes. However, we will study in depth those agreements that are
usually signed with venture capital, investors or business angels in financing transactions for start-
ups. Which aspects in particular might investors be presumably interested in negotiating?
1.3.2. Legal personality and their implications
- Spanish Corporations Act, 1/2010, of July 2: Article 33
In the previous section, we have talked about the complex nature of a company, in the sense that
a contract between persons creates another “person”, but what does it (really) mean that a
company has “separate legal personality” for business purposes? Can the creditors of a partner
seize the assets of the partnership where he is a member? And the creditors of a shareholder in a
corporation (SA or SRL)? Can those assets be the subject of separate rights and obligations? If
you had to choose a legal form for your business, would choose one with or without separate legal
personality? Why?
1.3.3. Limited liability, general rule and anomalies

Facing Social and Economic Challenges, London: Routledge, 2009: p. 74 and pp. 118-120
NOTE: Please note that the references of the book to old legal provisions have to be updated according to the law in
force (1/2010, of July 2)
- Spanish Corporations Act, 1/2010, of July 2: Articles 1(2) and (3), and 36-39
Key Vocabulary:
Terceros= third parties

Acreedor=creditor
Deudor=debtor
Sociedad colectiva/Sociedad civil ≈ partnerships

Levantamiento del velo=Veil piercing
In the previous sub-section, we have started introducing a very subtle distinction between those
who are “inside” the company (such as shareholders and directors) and those who are “outside”
the company (we called them “third parties”). Those “third parties”, however, may have a “right”,
or “credit” against, or an “obligation” or “debt” towards, the company, for example because they
have signed a contract with the company. As holders of such “right” or “credit”, they are called
“creditors” of the company; and as holders of such “obligation” or “debt” they are called
“debtors” (a same party can be both creditor and debtor as a result of a single legal relationship).
You will realize that a crucial part of company law is the “weapons” that the law gives to such
creditors in case they do not get paid. What does it mean exactly that a company has “limited
liability”? Creditors can only attack company’s patrimony, but they are not entitled to seize
partners’/shareholders’ goods. Partners’/shareholders’ liability is limited to their contribution to
company’s equity capital. Can those creditors sue the shareholders directly then? No, as a general
rule, they cannot. Can they sue the company directors? Only if legal conditions are met, usually
those conditions entail a negligent behavior able to damage other interests. If you had to choose,
would you choose a company form with or without limited liability? Why?
Even if a corporation normally has limited liability, the question is whether this rule is absolute.
Is it? Can third parties under no circumstances sue the company directors or its shareholders?
Now let us examine such “anomalies”. Let us begin with article 39 of the Spanish Corporations
Act. What type of situations does it describe? What is the consequence? What logic do you think
is behind that legal provision? What happens if you are exercising your business activity as if
under a corporation (SA) or LLC (SRL) but you have not registered it and time passes?
Whereas company in formation constitutes a normality phase in the incorporation process,

irregular company emerges as a pathological situation where real intent not to register the
company is revealed. Given the legal regime provided for company in formation, irregularity may
appear once first year from the deed has passed. Any member of the company is entitled to plead
the court for putting the company into liquidation. But should the irregular company operate in
the market, sociedad colectiva rules shall govern it in case that scope of business is of commercial
character or sociedad civil rules shall be applicable in case of civil scope of business. Accordingly,
founders shall be personally and unlimitedly liable for irregular company’s debts.
Now let us look at article 36. What happens if you start your business before you register the
company? What is the difference between this situation and the one described earlier (under
article 39)? Are the legal consequences the same? How about the situation/consequences
described under article 37?

Company in formation arises from the time when memorandum of association, including articles
of association, has been made before Public Notary manifesting founders’ intent to create a
company and as far as it is not still registered in competent Mercantile Registry. As matter of fact,
registering may be delayed on different grounds, although certain contracts and transactions are
to be concluded. Should time gap existing between the deeds and the registration do not last longer
than one year and company starts to run business in market, special legal regime is applied.
Firstly, those actions, contracts and transactions straight and indispensable aimed to register the
company shall be automatically assumed by the company in formation. Secondly, for those acts
and contracts other than the foregoing one, persons who have entered thereinto are personally and
jointly and severally liable, unless subject to registering condition validity and effect of such acts
and transactions. Thirdly, companies, upon registration, can assume actions and transactions
previously concluded within a 3-month period. Liability of company members and directors in
relation to the said transactions will cease accordingly.
Now let us look at page 74 of the book (Introduction to Spanish Private Law) – extracted below
- mentioning some decisions of the Spanish Supreme Court on veil piercing (levantamiento del
velo). In business terms, what is the consequence when a company’s “veil” (“limited liability
protection”) is “pierced” (“disregarded”)? Is it good or bad? Is it a doctrine/technique that can be
used often, or what are its circumstances? What lessons would you draw as a businessman if you
want to keep the benefits of limited liability?
Abuse of legal personality comprises those cases where personifying attributes and separation of
patrimonies are unduly used to evade liability and for purposes against good faith. Cases likely
to amount to abuse of legal personality are numerous and call for diverse responses. Evolution of
legal rules can moreover alter the judgment on certain situations. Thus, the phenomenon of
figureheads that used to draw a traditional scenario revealing abuse of legal personality is very
differently analysed when one-person companies are allowed by law as in Spain from 1995.
Modern case law and most recent scholar opinions are reacting against situations involving abuse
of legal personality by applying techniques meaning the disregard of legal entity. Spanish
Supreme Court has adopted the foregoing approach under the formulation of the so-called
“piercing the veil” theory. The rationale there behind is the duty to exercise rights in good faith
and the interdiction of abuse of right and fraud – Supreme Court, judgments of 2 April 1990, RJ
1990/2687; of 20 June 1991, RJ 1991/4526 -. By “piercing the veil”, legal personality mask is
lifted in order to uncover real hidden substratum to third parties’ defence.
“Piercing the veil” technique is to be applied on exceptional basis and in moderation in the
interests of legal certainty. Accordingly, it is applied as a last resort remedy. Several groups of
cases have been typified: overlapping or confusion of patrimonial spheres, underfunding of
companies, and abuse of legal personality for purposes of infringing obligations or against the
law.

1.4. Choosing project participants and allocating roles.
1.4.1. Choosing project participants and allocating roles in the organizational structure: the
business organogram, outsourcing strategy and ownership-control in the company
- (A basic overiew) RODRÍGUEZ DE LAS HERAS BALLELL, Teresa, Introduction to Spanish

Private Law: Facing Social and Economic Challenges, London: Routledge, 2009: pp. 120-124
- Spanish Corporations Act, 1/2010, of July 2: Articles 93, 209, 210 and 225-232
Once the project has been defined and the most suitable organizational form has been chosen, it
is a decisive moment to allocate roles among project participants.
A clear line has to be drawn to divide those positions related to the legal structure of the
organization (company) and those ones concerning the business model (enterprise).
a). On the one hand, legal positions within the company are two: owners (shareholders/partners)
for those who contribute to the company capital, enjoy expected benefits and assume business
risks, and directors for those who will be empowered to manage and represent the company in its
transactions. Can a shareholder be nominated as a director? Is it advisable?
b). On the other hand, corporate positions within the enterprise are established in the business
organogram showing different levels of management and subordination/collaboration
relationships (employees). Whereas owners and directors are subject to Company Law, Labor
Law or Commercial Contract Law govern the latter positions. Therefore, company bylaws do
regulate owners and directors’ rights and duties but do not aim to govern employee-employer
relationships. Do employees assume business risks? Do they participate in the decision-making
process? Can the company link to any extent employees’ remuneration to business performance?
How and what is the rationale behind?
We are going to study in depth in next sections shareholders’ rights and director duties.
1.5. Understanding and handling formalities and registration procedure to set up a business
Reference websites in Spain:

Facing Social and Economic Challenges, London: Routledge, 2009: pp. 124-130

force (1/2010, of July 2). Besides, please take into consideration that, from 2010, electronic process is also applicable
to individual entrepreneurs as detailed below.
- Fully electronic process of incorporation to create a company in Spain: www.circe.es
- Taxes, licences and permits to set up a business in Spain

http://www.ipyme.org/es-
es/creacionempresas/procesoconstitucion/Paginas/ProcesoConstitucionTramitesASeguirPorLaEmpresa.aspx
To create a company, some formalities have to be met and a registration procedure has to be
completed. The rationale behind such formal requisites is two-fold.
On the one hand, by creating a company (with distinct and separate legal personality) a new
person is giving birth for the purposes of the legal system. Unlike natural persons (individuals),
legal persons are legal fictions. Therefore, they do only exist provided that certain legal
requirements are fulfilled. The incorporation process does then aim to provide the company with
its “personified features” as a person (name, domicile, nationality) and to verify the compliance
with legal requirements accordingly. Besides, like individuals, who are registered in the Civil
Registry upon birth, companies have to be registered in a specialized Registry (Mercantile
Registry / Commercial Registry / Companies Registry, depending on the legal system). In that
way, third parties can become aware of the existence of the newborn person and know its
characteristics.
On the other hand, the creation of a commercial company entails the protection of limited liability
for the benefit of shareholders / partners. Such a privilege requires the fulfillment of some legal
requirements to avoid misuses of legal personality.
Both above mentioned goals fuel the incorporation process of companies in any legal system.
However, each country decides to implement a longer or shorter procedure, a stricter or an easier
one depending on the prevailing interests. Indeed, each country may decide whether it wishes to
perform its control functions over companies ex ante with prior formalities and authorities
supervising the process or relaxes the incorporation process and exerts an ex post supervision.
In any case, to the extent that the incorporation process of companies is critical to promote
entrepreneurship and may contribute to policies to attract foreign investment, most countries have
strived hard to streamline the incorporation process by simplifying procedures, shortening time
and reducing costs. To that end, fully or partially electronic processes for the creation of
companies have been implemented in some countries.
In Spain, companies – LLCs (Sociedad Limitada) from 2003 (all LLCs from 2006) and individual
entrepreneurs from 2010 - can be created through an electronic process available at www.circe.es
by using the Electronic ID and in an average time of 48-72 hours. This electronic procedure

enables enterprises (LLCs and individual entrepreneur) to handle the payment of taxes and Social
Security contributions and process other formalities that are needed to operate a business.
- Company name has to be previously reserved at the Central Mercantile Registry (Registro
Mercantil Central, www.rmc.es - also available in English). Does this formality make
any sense?
- Public Notary: what is the role of the public notary in the incorporation process? Which
documents have to be presented before the Notary? Why? What does it mean that
something is in “escritura pública” (public deed)? Who needs to have signed it?
- Who have to appear before the Notary and sign the deed? Why?
- Registry: which are the effects of the company registration?
Finally, certain activities require special permits from the regional and local administration,
something that may vary with the town, region or country. Permits do not condition the existence
of the company as a legal person but the running of the economic activity according to the
applicable law.

2. STRUCTURING INVESTMENT AND DECISION MAKING
2.1. Decision-making in the company
- (Read again) RODRÍGUEZ DE LAS HERAS BALLELL, Teresa, Introduction to Spanish

Private Law: Facing Social and Economic Challenges, London: Routledge, 2009: pp. 120-124
- Spanish Corporations Act, 1/2010, of July 2: Articles 58-60, and 86-89
Once the organizational form has been chosen for running the business, we are going to study
how this new legal person (the company) acts in the market: how this person adopts a decision
and how interacts with third parties to enter into economic transactions. The premise is that we
have decided to set up a commercial company, in particular, a Limited Liability Company (LLC
/ SL under Spanish Law) or a Corporation (Corp. / SA under Spanish Law).
Within a commercial company there are two basic positions: partners / shareholders (ownership)
and directors (management and administration). Note that we use “partners” to describe LLC’s
owners and “shareholders” to denominate Corporation’s owners. Whereas shareholders hold
shares that can be negotiated in a stock exchange, partners hold an interest (stakes) in the company
that are not negotiable in financial markets, albeit they are transferrable. For convenience
purposes, we can use the expression “members” to designate partners as well as shareholders
indistinctly.
In a commercial company, partners / shareholders are the owners of the company because they
have contributed to the company’s capital. This contribution can only be in form of money,
property or rights that are susceptible of economic appraisal (i.e. cash, goods, real state,
equipment, trademarks, patents, receivables, and so on). In exchange for this contribution, the
member receives shares (stakes or interests) that represent a part of the company. Therefore, in
commercial companies (LLC/Corp.) members cannot receive shares or hold stakes in the
company in exchange for services or work. Notwithstanding the fact that shareholders/partners
cannot provide services of any kind to the company in exchange for shares, can they be obliged
to perform other ancillary obligations (i.e. to provide professional services)? Can they be expelled
from the company in case of non-compliance of ancillary obligations? See Articles 86-89, Spanish
Companies Act.
In their condition of company’s owners, partners/shareholders are entitled to adopt decisions

regarding the company and making a profit from running the business. To that end,

partners/shareholders have decision rights and economic rights. The extent of those rights does
only depend on their interest in the company’s capital (in principle, the percentage in the total
capital). So, higher the percentage of the capital holds, higher the power to decide is and higher
the expected benefits are.
2.1.1. Decision rights and economic rights
- Spanish Corporations Act, 1/2010, of July 2: Articles 93, 209, 210 and 225-232
According to Article 93 Spanish Companies Act, members have three types of rights: economic
rights (rights of patrimonial or economic character), decision rights (rights of personal-political
character); and to a certain extent rights of hybrid character.
Rights
Economic Political Hybrid
Liquidation Attend Impugn Pre-emptive

Dividends Vote Information
quota meetings decisions rights
a). Pure economic rights comprise right to share in the profits (right for receiving dividends), and
right to receive corresponding liquidation quota in case of company liquidation. The right to
receive dividends resulting from the distribution of company profits is not an absolute right. That
means that a member has only the right to receive dividends provided that in the Shareholders’
Meeting such a decision is adopted. It can be decided instead that a portion of benefits or the
totality of them will be retained to increase financial reserves or to compensate for previous year
losses, Supreme Court, judgments of 27 March, RJ 1973/1126; of 10 October, RJ 1996/7063.
Therefore, shareholders / partners do not have to receive benefits always and in any case, but only
if the company has benefits and these earnings are to be distributed. However, a decision adopted
by the majority of members likely to entail the systematic deprivation of dividends from
minorities could be considered null on abusive grounds or even reason for separation (art. 348 bis
LSC).
b). Decision rights encompass those rights articulating member position in decision-making.
Accordingly, they are distilled in the voting right that presupposes the right to attend meetings,
that is susceptible of being limited (only in Corporations (SA)) by requiring a minimum number

of shares never up to one per thousand of the capital), and the right to be duly informed on relevant
matters related to company.
Likewise, right to impugn decisions adopted by Shareholders’ Meetings (or similar body) on the
grounds stated by law stems from the essential right to participate in decision-making. If the
impugnation is accepted, the decision will be declared null and void.
c). Hybrid right category gathers those rights combining political aspects and economic elements.
Thus, pre-emptive right reveals, on the one hand, political dimension as far as it prevents
shareholder/partner (and convertible debenture holder) from diluting relative share on an increase
of capital (shares or convertible debentures), and, on the other hand, economic dimension since
constitutes the respective widening of share in profits and other patrimonial effects in conformity
with newly acquired shares. Pre-emptive right can be relinquished and transferred by the holder,
and in certain cases and under specific conditions it may be derogated or excluded.
Basic rights as expounded above shapes an ordinary model of shares. Nevertheless, classes of
shares can be issued whereby the redefinition of rights conferred to holders in order to satisfy
varied needs of investors and companies’ fundraising. Spanish Companies Act contemplates the
possibility of issuing different classes of shares where rights differ and different series of shares
where nominal value of shares changes. Classes of shares available under Spanish legislation are
the following.
i). Firstly, privileged shares that aim to grant a preferred divided without altering proportion
between nominal value and voting right (and pre-emptive right) and provided that privilege does
not entail the receiving of an interest as being fixed interest investments (Article 96). Why the
granting of a fixed interest is forbidden? Because, unlike creditors, holders of shares, albeit
privileged ones, are assuming the risks that the business venture entail. They are owners of the
enterprise and participate in proportion in its success and failure. Unlike interests, dividends are
by nature uncertain and variable.
ii). Secondly, non-voting shares – provided that nominal value of issued non-voting shares does
not amount up to half of pay-out capital - that logically are deprived of voting right in exchange
for the right to receive minimum fixed or variable dividend per year (not an interest) that is to be
paid as far as there is distributable profit. Once agreed the payment of minimum dividend, non-
voting shareholders are entitled to receive ordinary dividend as the remainder ordinary
shareholders (Articles 95). Non-voting shares are suitable for minority shareholders whose main
purpose is of financial character (receiving dividends) and slender interest in participating in
decision-making. Issuance of non-voting interests by LLC (sociedades limitadas) is also
admitted, but moreover, possibilities to personalize interests by modifying voting rights are
greater that in SA. Accordingly, LLC (sociedades limitadas) are authorized to issue interests with
plural voting rights or under a one person-one vote scheme.
iii). Thirdly, redeemable shares that can be only issued by quoted companies - Corporations
(sociedad anónima) - and in a number (nominal value) not greater than a quarter of capital.

Redeemable shares can be redeemed on terms and conditions stated in the issuance agreement by
the company at its own request or/and at the request of holders (Articles 500-501). In which
situations can the issuance of redeemable shares be an advisable strategic decision? For instance,
a company may decide to issue redeemable shares to finance the running of a particular project.
Once the project is completed, the company might not need such an additional capital and decide
to reimburse the contributions and redeem the shares to keep the capital within more reasonable
or affordable limits. As far as shareholders are concerned, redeemable shares offer an easier and
more convenient exit. As a matter of fact, they can recover their investment upon the redemption
of their shares. Unlike ordinary shareholders, their exit from the company is not dependent on the
fact that a third party (or a current shareholder) wishes to acquire their shares. Should shares be
illiquid (low negotiability degree), shareholders might be locked in the company longer than
expected. Moreover, in such a case, price has to be negotiated, is uncertain and might be
unprofitable. Contrarily, redemption of redeemable shares is subject to a set of pre-defined
conditions.
2.1.2. The shareholders’ meeting, statutory formalities of decision-making, and voting

syndicates
- Spanish Corporations Act, 1/2010, of July 2: Articles 159-168, 173, 175, 176 and 178 and other
provisions expressly stated below.
Decision-making is vested in the General Meeting of shareholders/partners (called in Spanish

“Junta de accionistas” in SA (Corp.) or “Asamblea de socios” in SL (LLC)), duly convened for
deliberating and deciding on majority basis on certain matters related to the company within the
scope of competence. General Meetings can be classified in two modalities: ordinary meetings
and extraordinary meetings. Ordinary meetings are to be held in first half of the year with the
purpose of deciding and agreeing on three matters: to evaluate management, to approve previous
year accounts, and to allocate current financial results. Extraordinary meetings are defined by
exclusion as those meetings other than ordinary meetings.
Shareholders/partners are entitled to participate in the decision-making process in their capacity

of owners. Accordingly, they have to be duly called to attend the General Meeting where
decisions are adopted. In small or medium-sized companies, meetings might be convened in
practice more easily, with no formalities and individually to each partner. However, in big
companies with a high number of scattered shareholders, even living abroad, or in small
companies with conflicts among members, meetings have to be convened formally, guaranteeing
sufficient notice and complying with some formalities (time, location, agenda). Those situations
would explain the formalities that traditionally have to be met under Spanish Law to validly
convene Shareholders’ Meetings: the call is to be published in the Official Bulletin of Mercantile
Registry and one newspaper among those of major circulation in the province where registered

address is located. However, company members are entitled to modify such a formal legal regime
and lay down more flexible and realistic rules likely to better meet their interests and more suitable
for their company’s characteristics. Accordingly, bylaws can provide for rules to be followed to
convene a Meetings: call can be published on the website, an automatic service of electronic
notice can be implemented, or meetings can be validly convened by email, text or any other
mechanism likely to acknowledge receipt.
Notwithstanding the abovementioned call procedure, a meeting can be validly held on an informal
basis. This meeting is called “universal meeting” and is held when members holding the entire
capital are attending and agree to adopt decisions according to the agenda they decide, even if it
has not been formally convened (Article 178). That is very common in small and medium-sized
companies where partners can agree to celebrate a meeting and adopt decisions, seizing, for
example, the opportunity of being together anywhere and for any purpose.
In any case, all decisions adopted by company members have to be recorded in the Minutes
(Article 202). What are the Minutes for? Firstly, Minutes are for evidence purposes. Secondly,
Minutes enable shareholders to exercise their right to be informed about company’s activities and
decisions. Thirdly, if the decision adopted in the meeting has to be registered in the Registry, it is
recorded in the Minutes.
Decisions are adopted on majority basis. Different majorities are established by law depending
on the matter to decide on (Articles 198, 199 and 201). More important the decision is, higher the
majority is required. Bylaws may modify majorities stated by law (Articles 200 and 201.3), stating
higher majorities that those provided for the law; unless expressly forbidden. Legal majorities
cannot be reduced by bylaws though. For bylaws to personalize decision-making model, legal
majorities (number or percentages of votes) can be increased. Nevertheless, requiring unanimity
(100%) is not admissible. Why cannot companies require unanimity in the decision-making?
Decision-making in commercial companies is inspired by a capital-based majority rule (a kind of
“capitalist democracy”). In practice, if unanimity is required, companies might become
ungovernable.
Deliberating and decision-making processes are traditionally presumed by the law to be naturally
face-to-face and mainly oral. Today, the use of new technologies enables distance attendance and
voting by simulating digital spaces able to emulate presence meetings (videoconference, digital
platforms) (Article 182). Which risks should be prevented? Impersonation (use of electronic
signatures or sophisticated identification keys), interception, hacking or technical failures,
ineffective participation of any shareholder due to its location, limited technical skills or reduced
percentage of participation, lack of transparency or manipulation of votes and decisions.
Decisions adopted are subject to contestation by members on the following grounds: being against
the law, infringing articles of association, or harming company’s interests in the benefit of one or
several shareholders/partners or third parties. According to the severity of infringed interest
decisions are classified as null or avoidable. As far as null decisions are concerned, all
shareholders, directors and any other person holding legitimate interest, are entitled to claim for

declaring decision void. In case of avoidable decisions, only those shareholders having attended
the meeting and whose opposition has been recorded in the minutes, directors and non-attending
shareholders or those shareholders illegitimately deprived of their voting rights.
2.1.3. Choosing a model of direction
- Spanish Corporations Act, 1/2010, of July 2: Articles 209-210

- Law 31/2014, of December 3, to improve Corporate Governance
Administration body is entrusted with management functions, performance of adopted decisions

and representation role of company in relationships with third parties. Directors are part of the
administration body.
Administration body (or direction) may adopt the following structures:

- sole director,
- several directors acting on jointly and severally basis – either director is fully entitled to
bind the company, and accordingly, can sign individually in the name of the company
and represent it against third parties -;
- two directors acting on joint basis – both directors have to sign any transactions to be
valid, they cannot act individually and separately -; and
- Board of Directors that is collective body (a committee) acting and deciding on collegial
basis and according to majority rules.
2.1.4. Anticipating conflicts and breaking deadlock
In case of parity of composition (an even number of members), a lack of agreement may lead to
an indefinite deadlock. If the company becomes ungovernable for no decision can timely be
adopted or even is indefinitely postponed, the company heads towards to dissolution.
Therefore, several preventive measures should be advisable: an even number of members in the
Board of Directors, a mechanism of dispute resolution in case of conflict (arbitration, mediation),
the nomination of an expert if disagreements refer to technical issues, an informal protocol to
break deadlock (resort to holding company).
2. STRUCTURING INVESTMENT AND DECISION MAKING
2.2. Financing the business project: financial structure, investors and investment
agreements
2.2.1. Sources of investment, stages of company’s development and types of investors

2.2.2. Partners/shareholders: basics of capital and consideration for shares
Yet the company is incorporated, available financing options for the business project have to be
considered.
Firstly, company-financing strategy can be based on two different funding sources: equity and
credit.
a). On the one hand, equity financing entails that financial needs of the company are covered by
current partners (founders) or prospective investors wishing to become owners of the business.
As owners, they are exposed to business risks but, in exchange, they are entitled to participate in
company’s benefits via dividends. Dividends are, however, variable and uncertain. Depending on
the stage of development, financial resources can be contributed by: existing partners, different
types of investors or the investing public.
a.1. Partners: if the company needs further funds, current partners (or shareholders) may be
willing to make additional capital contributions to the company. The capital increases
accordingly; new stakes (or shares in a Corporation) are issued and existing partners exercise their
right to subscribe them in the corresponding number in exchange for each contribution. In a
capital increase, nevertheless, a dilution problem may arise. Should all existing partners be able
to contribute in an amount likely to allow them to maintain their previous percentages in the
company capital, no distortion in the power balance results. But if some partners cannot or do not
want to subscribe new stakes (or shares) enough to retain their previous percentages, the capital
increase has an unwanted dilution effect. Those partners who are not subscribing entirely the new
stakes package, or they are not even subscribing any new stake at all, will lose part of their control
of the company and will receive less dividends comparatively.
An example: PAYMING, SL
Year 1: Start-up
Initial capital: 50.000 Euros
3 Partners:
- Patrizia: 10.000 20%
- Carlos: 10.000 20%
- PayMicro, S.L.: 30.000 60%
Year 2: First financing phase

Financial needs: 50.000 Euros
Final capital: 100.000 Euros
Situation A: all partners can contribute in the required amount

- Patrizia: additional 10.000 Total 20.000 20 %

- Carlos: additional 10.000 Total 20.000 20%
- PayMicro: additional 30.000 Total 60.000 60%
Situation B: two of the partners cannot make any additional contribution to subscribe new
stakes (dilution effect)
- Patrizia: 0 Total 10.000 10%
- Carlos: 0 Total 10.000 10%
- PayMicro: 50.000 Total: 80.000 80%
a.2. Investors: third parties might be interested in investing in the company. Hence, investors
may subscribe new stakes (or shares) after a capital increase or buy stakes sold by existing
partners. Investors become partners (or shareholders) accordingly – types of investors will be
explained under section 2.2.3 below -. The entry of investors arouses, however, dilution risks. We
will study under section 2.2.5 below how to prevent and manage dilution in those cases.
a.3. Public: the final and most ambitious funding decision of a company is going public. Only
corporations, whose capital is divided in shares, can go public provided that it complies with a
set of requirements laid down in the Financial Markets Regulations and specifically in the Rules
and Procedures approved by each stock exchange. A company who decides to go public sells part
of its stock (shares) by an Initial Public Offering (IPO) addressed to the public. If the IPO is
successful, company’s shares start to be negotiated in a stock exchange. Therefore, a quoted
company (also called publicly-held company, publicly traded company, listed company) has
access to capital markets to finance its business. But, at the same time, it starts to be subject to a
tougher regulation and supervision and have to comply with disclosure and information
obligations. We will study financial markets and listed companies further in Block 4.
b). On the one hand, credit-based financing means that the company receives money from a
creditor that has to be repaid in an agreed period of time with interests. Therefore, the capital of
the company is not affected by the credit. Creditors are not considered owners (partners /
shareholders) of the business and are not entitled to exercise any of partners’ rights (voting rights,
rights to dividend, right to attend meeting, right to nominate directors, right to subscribe new
shares). So, creditors do not assume business risks, at least, in theory. Their expected returns are
the interests that the company has to regularly (monthly, yearly) pay along the agreed time. Unlike
dividends, interests are certain and fixed in the sense that they are not conditioned existence of
benefits and the amount of them.
Basically, credit can be received from financial entities (a bank loan, for example) or from the
public (bondholders). In the second case, the company, instead of asking for a credit to a financial
entity, issues bonds that can be bought by the public. Bonds are financial instruments representing
parts of a credit. A bondholder buys bonds paying to the company the value of them and receives
interests in exchange for. At the end of the agreed time, the company repay to the bondholders
the amount received from them. Thus, the issuance of bonds is a method for financing companies
via credit.

Secondly, it is well worth noting as well that there is a close link between the stage of the business’
development and the most suitable financing option. Therefore, not all available financing options
should be considered adequate for any kind of business in any stage of development. The diagram
below illustrates the abovementioned relationship between the business development and the
sources of financing.
STAGE 1: IDEA AND START-UP (seed-capital)

3FS: Family, Friends and Fools
Business Angels
Incubators and seed accelerators: funding, mentoring, training, expertise, management
skills, technical support, a place to work…
Crowdfunding
STAGE 2: EARLY GROWTH AND EXPANSION

Venture capital funds
Private equity
STAGE 3: MATURITY
Mergers and acquisitions and others
Bank financing
Management Buy-Out, Management Buy-In, Buy-in Management Buyout

2.2.3. 3Fs, business angels, venture capital and emerging forms of “crowdfunding” to finance
business projects
1). 3Fs (“friends, fools and family”): the people who may provide the initial funds when partners
have no money or assets of their own, or what they have is not enough;
2). Business Angels: the first external source of capital. Business angels (or informal investors)
are individuals who are interested in investing, usually, in highly innovative and creative start-up
business in exchange for equity (usually 10%-20%)
3). Venture capitalists: companies or funds whose main activity is indeed invest in other
companies. They are then professional investors who subscribe stakes or shares of the company
in exchange for their funding. Their ultimate aim is to disinvest in the future (an average range of
3-5 years) with capital gains.
4). Crowdfunding (crowd financing): describes the collective effort of individuals who network
and pool their money, usually via social networks and P2P platforms, to support, sponsor and
finance projects leaded by other people or organizations.
They are a variety of crowdfunding models: based on pre-sale, reward, donations, microcredits
or equity. Some examples:
1. Kickstarter www.kickstarter.com
2.- Partizipa www.partizipa.com
3.- TheCrowdAngel www.thecrowdangel.com
4.- Coworking Utopic_US www.utopicus.es
5.- Verkami www.verkami.com
6.- Microcredits platforms: P2P Social Lending: MycroPlace, Kiva, MyC4
2.2.4. Attracting and keeping talent: participation in profits, stock options schemes and
“vesting” plans
An important aspect of a start-up company is attracting and keeping talent. An effective method
to attract and retain talent may be to offer to directors and key employees a direct part in the
company’s capital, which also means a participation in its benefits.
The company should carefully design a remuneration system that attracts, keeps and motivates
talent according to the law: stock option plan, vesting plans or stock appreciation rights schemes.
Any system of incentives and compensation that the company can design will usually consist on
either:
1) the company giving money to a designated person;

2) the company giving shares to a designated person; or

3) the company giving the designated person options to buy the company’s shares; and including
a stipulation that if the designated person ceases to be involved in the business, she will lose (or
will not acquire) any rights to money or to exercise options, and/or will have a duty to resell the
already acquired shares to the company.
If the plan involves giving a person actual shares, or options settled by the delivery of shares (i.e.
not cash-settled options) the company needs to give that person those shares. There are 2 possible
ways: the company can (1) issue new shares; or (2) give the person shares that the company owns.
Can a company issue and subscribe its own shares (articles 134-136 Spanish Corporations Act)?
At the time of incorporation, a company cannot subscribe its own shares. Such as acquisition is
null and void. However, only in certain cases (articles 140-143 Spanish Corporations Act) a
company can subscribe its own shares after its incorporation but they have to be sold within the
next three years.
2.2.5. Preventing dilution while facilitating entry: nominal value and premiums
The entry of an investor in the company could arouse an unwanted dilution problem. Since the
investor may be willing to invest a high amount of money as equity capital, existing partners /
shareholders can have to face a dramatic reduction of their percentages and, as a consequence, a
significant decrease in prospective dividends and, as a matter of fact, a loss of control. Remember
this example:
Year 1: Start-up
Initial capital: 50.000 Euros
3 Partners:
- Patrizia: 10.000 20%
- Carlos: 10.000 20%
- PayMicro, S.L.: 30.000 60%
Year 2: First financing phase

Financial needs: 50.000 Euros
Final capital: 100.000 Euros
Situation A: existing partners cannot contribute to the capital increase. The investor will
subscribe the whole number of new stakes.
- Patrizia: 0 Total 10.000 10 %
- Carlos: 0 Total 10.000 10%
- PayMicro: 0 Total 30.000 30%
- Investor: 50.000 Total 50.000 50%
Situation B: the investment is divided in two parts. Only a reduced amount of the
promised funds is considered capital contribution (10.000 Euros). The remaining part
(40.000 Euros) is considered “premium” and is invested in the company in form of
“patrimony” (reserves, retained earnings and similar). So, existing partners manage to

reduce the envisaged power of the investor in the company without loosing the
investment.
Final capital: 60.000

Total company property: 10.000
- Patrizia: 0 Total 10.000 16 %
- Carlos: 0 Total 10.000 16%
- PayMicro: 0 Total 30.000 50%
- Investor: 10.000 (capital) + 40.000 (premium) 16%
2.2.6. Entry in and exit from the project
The entry of a new partner/investor is good news, but must be managed carefully to facilitate the
transition. In fact, most of the legal implications for a new entry have already been covered. There
are two ways in which the entry can be facilitated: by an issuance of new shares (the company
gives the shares to the new shareholder), or a purchase of existing shares (the company, or a
former shareholder / partner, sells shares / stakes to the investor). Consequently, it is in these two
respects where the law (or the parties’, through their documents) can facilitate/make harder the
entry. The use of premiums is a method to prevent the dilution risks without losing the expected
financial boost. The premium is added to the nominal value of each stake / share.
Initial Capital: 50.000 Euros

Number of Stakes: 500 (same class and same series)
NOMINAL VALUE: 100 Euros each
Minimum CONTRIBUTION must always be at least the NOMINAL VALUE
Can Contribution be higher than NOMINAL VALUE? Yes
CONTRIBUTION = NOMINAL VALUE + PREMIUM
Remember that Premium is not considered equity capital. Accordingly, the investor can only
exercise its rights in relation to the part of the investment that has been considered capital
contribution (10.000 Euros in our example).
Sometimes one of the original partners/investors may be interested in leaving the project
altogether. This may be due to a situation of mutual agreement, or to a situation of conflict; but
either way it is important to provide for a mechanism to facilitate the smooth exit from the project.
Reasonably, in a successful business, the sale price (the exit price) will be higher that the Nominal
Value. In those cases, the Market Value is used. In our example:
YEAR 1:
Initial Capital: 50.000 Euros
Number of Stakes: 500 (same class and same serie)
NOMINAL VALUE: 100 Euros each

YEAR 2: retained earnings (100.000 Euros)

Capital: 50.000 Euros
Patrimony/Property: 150.000 Euros
Value of the company: at least 150.000 Euros
MARKET VALUE: 300 Euros each
In the exit, some conflicts of interests may emerge. Those risks and conflicts should be anticipated
and carefully regulated in the bylaws and/or in the investment agreement. Two popular clauses
that used to be included in investment agreements are today a commonplace in the bylaws: “drag-
along” clause, and a “tag-along” clause. Before studying the clauses and gaining a full insight
into the situations they are facing, it might be well worth reminding the different implications of
their inclusion in the bylaws or in an investment agreement.
Two main consequences distance the bylaws and the investment agreement from each other.
1). Firstly, bylaws’ provisions bind all partners/shareholders of the company, no matter if they
were founding partners or they joined the company afterwards. Every partner/shareholder has to
abide by the bylaws’ provisions as drafted and agreed anytime. Since partners/shareholders are
entitled to decide and agree to modify the bylaws (with the required voting majority), it may
happen that although a (minority) partner/shareholder might vote against (or not vote even) the
decision to modify, the meeting would adopt, with enough support, the decision and proceed to
modify the bylaws. In such a case, the dissenting partner or the absentee has only to options: stay
and abide by the new bylaws; or leave the company. Both options, nevertheless, should be
qualified. On the one hand, the general rules is that when a decisions if supported by the required
majority, it is adopted and binds all partners. Exceptionally, the decision could have been adopted
against the law, in nonconformity with the bylaws or detrimental to the company’s interest and
in favor of one or several partners or third parties. In such cases, should the partner stay, the
decision could however be impugned on certain grounds as laid down by the law (Article 204).
In particular, a decision can be challenged if it has been abusively imposed by the majority in its
benefit and with an unjustified detriment of other partners and without being based on a
reasonable need of the company. If the decision is contested, the Court will assess whether the
decision is valid or invalid. Apart from these exceptional cases, a decision duly adopted at the
meeting will bind all partners. Contrarily, an investment agreement is a contract. Accordingly,
only contracting parties are bound by contract terms (inter partes effects). The investment
agreement can be signed by the company as a legal person and the investor or by all or several
partners and the investor. Hence, no-signing partner is not bound by the contract.
2). Secondly, effects of non-compliance are different. Should a decision be adopted failing to
fulfill bylaws’ provisions, the decision is not valid. However, it the decision is adopted in
compliance to bylaws’ provisions but in breach of the investment agreement, the decision is valid.
Contracting parties who signed the investment agreement are only entitled to enforce the
agreement against the non-fulfilling party on grounds of breach of contract. For example, if the
investment agreement is not duly performed, the injured parties can ask for compensation or can
enforce any penalty included in the agreement in case of default. But, the decision, despite the

breach of the agreement, is overall valid, provided that it meets both legal requirements and
bylaws’ provisions. Considering that contractual penalties in case of default might lack enough
deterrence effect to prevent the breach, a mechanism to discourage the noncompliance might be
devised. Cleverly, the compliance to the investment agreement might be included in the bylaws
as an ancillary obligation. Provided that all legal conditions to validly create an ancillary
obligation are met, the noncompliance of the agreement may entail the expulsion of the partner
from the company. Thus, a connection between the agreement and the bylaws has been created
aimed at deterring from noncompliance. In effect, a “corporate” sanction is applied to discourage
a “contractual” misbehavior.
In sum, should drag-along and tag-along clauses be included in the bylaws, they will enjoy all
above-explained effects and legal consequences.
Drag-along clause
The situation that drag-along clauses are expected to deal with is the following one.
Partner A holds 75% of the company (the majority partner). The remainder is divided among
three minority partners holding 10% (Partner B), 10% (Partner C) and 5% (Partner D),
respectively. An investor appreciates the business value and its potential and shows his/her willing
to acquire the company. The prospective investor wishes to avoid any dissension within the
company and does not want to deal with minority partners. Therefore, the investor’s offer is only
to acquire the whole company (100%). Should the offer be attractive, the majority partner is
decided to sell but the success of the deal is conditional to the acceptance of the minority partners
as well. Against such a backdrop, the majority partner would like to protect his/her interests and
secure the deal. Otherwise, the majority partner is a “prisoner” in the company. To that end, a
drag-along clause should have been negotiated in advance and included in the bylaws.
Since the investor is only disposed to buy 100% of the company and is not interested in acquiring
just a part of it, the majority partner needs to a legal tool to force the minority partners to sell as
well.
As per a drag-along clause, minority partners commit to sell to the investor in the same conditions.
Therefore, Partners B, C and D have the following alternative: either they decide to sell to the
investor with Partner A; or they offer Partner A to buy his/her stakes/shares in the same conditions
as the investor proposes – bylaws’ provisions regulating transfer of shares/stakes are relevant here
-. Given that the minority partners, despite their commitment, might be reluctant to comply with
their obligation to sell or to buy, the drag-along clause should contain a precautionary measure to
unblock the situation. Thus, the drag-along clause shall provide Partner A a call option (a right to
buy) in those cases. Effectively, Partner A, in view of the refusal to sell of minority partners,
exercises the call option. Under the call option, Partner A is entitled to buy all minority partners’
stakes/shares under certain conditions. As a consequence, Partner A would hold the 100% of the
company and be entitled to sell now to the investor in the agreed conditions. The call option can
be shaped as parties wish. The price by Partner A is entitled to buy from minority partners could
be either exactly the same as the investor is offering or a lower one as a punishment of minority
partners’ breach of their commitment.

Tag-along clause
The tag-along clause is a counterweight in favor of minority partners.
The conflict arises in a company where Partner A holds 75% of the company (the majority
partner) and the remainder is divided among three minority partners holding 10% (Partner B),
10% (Partner C) and 5% (Partner D), respectively. In this case, however, the investor, who also
appreciates the business value and its potential, is only willing to acquire part of the company. In
the negotiations between Partner A and the investor, the latter confirms an offer for the 60% of
the company at a very good price. Partner A could take advantage of that excellent deal and sell
his/her 60% of the company. Minority partners would remain unprotected and “captives” in a
company with a new investor holding a majority position together with the “disloyal” Partner A.
Tag-along clauses anticipate those situations and provide a re-balancing solution. In order to
protect minority partners, they should have the right to take advantage of the deal and sell in same
conditions. It has to be remembered here that the investor is not willing to buy 100% of the
company but just 60%. Therefore, all partners can only be benefitted in their corresponding
proportion. Thus, all partners would be entitled to sell 60% of their shares/stakes – Partner A,
45%; Partner B, 6%; Partner C, 6%; Partner D, 3% -.
Should there be no conflict, Partner A is expected to notify the rest of the partners about the deal
(price, conditions, number of shares/stakes, acquirer). Then, minority partners can decide on good
ground whether they want to adhere to the deal and sell in the exact proportion.
Contrarily, whether Partner A does not disclose the ongoing negotiations and conceal the deal or
simply the investor, who cannot be forced to buy shares/stakes other than the initially considered,
refuses to acquire from minority partners, tag-along clause provides for a defensive mechanism
in favor of minority partners: a put option.
Minority partners are entitled to exercise their put option (a right to sell) and sell the proportion
of their shares to Partner A. It has to be recalled that the investor (third party) cannot be obliged
to buy; hence, Partner A takes on the commitment to buy from minority partners in proportion.
Afterwards, Partner A can complete the transaction with the investor in the agreed conditions.
Like drag-along clauses, tag-along clauses can be shaped as parties wish. Interestingly, the price
by which Partner A must buy shares/stakes from minority partners exercising their put option
could be fixed differently: either the same price as the investor is offering or a higher price to
penalize Partner A’s disloyal behavior.
Personalizing the organizational model
In the process of personalizing the organizational model for running the business activity a set of
key elements should be previously discussed and carefully considered in the bylaws (or
shareholders’ agreements). The following table summarizes key elements to be into account when
anticipating an investor’s entry.

QUORUM at the Members’ VOTING MAJORITIES to adopt CLASSES AND SERIES

Meetings agreements of stakes and shares
LIMITS of voting rights per share VOTING MAJORITIES based on ANCILLARY OBLIGATIONS
number of partners
TRANSFER CONDITIONS EXIT CLAUSES PREMIUM

! ! !
OCW:%Business%Law%for%managers%and%entrepreneurs%
COMMERCIAL LAW
!
GUIDE Block 2.- Protecting Your Business Model and Preserving Your
Competitive Advantages
!
3. COMPETING IN THE MARKETPLACE, AND PROTECTING YOUR COMPETITIVE ADVANTAGES
AND BUSINESS MODEL
!
3.1. Rationale and characterization of intangibles
3.1.1. Business and legal rationale of intellectual property law

3.1.2. Protecting Innovation and Creativity: patents, designs and copyright
3.1.3. Identifying your goods/services and distinguishing from competitors: trademarks and business name. Scope
and functions of domain names
3.1.4. Protecting know-how and our business models as a whole: trade secrets, unfair competition and other rights
!
3.2. The scope of protection. Legitimate uses and illegitimate interferences
3.2.1. Rights of patent holders: right to a patent, indication of the inventor and employees inventions
3.2.2. Protecting against illegitimate uses: the owner’s legal rights, and the breaching party’s defences
3.2.3. Exploiting innovation: licences, technology transfer and other agreements
3.3. Competing in the market: rules, limits and extent. The basics of Antitrust Law
3.4. Advertisement Law: building an image in the market (NOTE: only a presentation will be provided to
prepare this section)
!
BLOCK 2
!
3. COMPETING IN THE MARKETPLACE, AND PROTECTING YOUR
COMPETITIVE ADVANTAGES AND BUSINESS MODEL
!
3.1. Rationale and characterization of intangibles
3.1.1. Business and legal rationale of intellectual property law

!
- (An abridged overview of the whole Block 2) RODRÍGUEZ DE LAS HERAS BALLELL,
Teresa, Introduction to Spanish Private Law: Facing Social and Economic Challenges, London:
Routledge, 2009, pp. 144-161
NOTE: Please note that the Book is published in 2009, therefore do always double check with rules in force.

! ! !
- A selection of practical Guides for Small and Medium-sized Enterprises produced by the
World Intellectual Property Organization (WIPO) are readily accessible at the following links.
The Guides can be used as reference materials to gain a full insight into the working and the
scope of intellectual property law at international level.
a.- Patents
http://www.wipo.int/freepublications/en/sme/917/wipo_pub_917.pdf
b.- Trademarks
http://www.wipo.int/edocs/pubdocs/en/wipo_pub_900_1.pdf
c.- Copyrights
d.- Industrial Designs
- Translated versions of main Spanish legislation in Intellectual property law are available at:
http://www.wipo.int/wipolex/en/profile.jsp?code=ES
From a business perspective, a number of competitive advantages of our business models are
“intangibles” in legal terminology: innovation and technological advantages (patent and utility
models); know-how and organizational advantages (trade secrets); or distinctive features and
reputational advantages (trademarks and design). The success of our business depends on how
strongly we protect our competitive advantages and how efficiently we can exploit them on a
commercial basis in the market. Intellectual property law and other related legislations (such as
unfair competition law) assist business in protecting core assets in the competition game,
distinguishing own goods/services from rivals, strengthening reputational factors, enabling
schemes to fidelize customers/users, deploying monetization strategies, encouraging innovation
and exploiting and transferring technology.
The aim of this section is first to understand what means “intangibles” and why and to which
extent are relevant for business strategy and determining factors of the competitive potential of
our business model. If we compare how work tangibles and intangibles in practice, why are
different rules needed to control, exercise our rights, transfer or exploit intangibles? Since
physical possession is impracticable in relation to intangibles, a different legal device to show
our ownership/authorship/entitlement and exercise our rights and control over intangible goods
has to be devised accordingly. We cannot possess “intangibles”, how can third parties know
then that we are the owner/author/creator? Hence most intellectual property rights, aimed to
protect intangibles, are based on Registry systems (patents, trademarks, registered industrial
designs). Others operate however on a disclosure basis: for instance, as soon as we make our
design available to the public (under certain conditions and if protection requirement are
fulfilled), the design shall be protected.

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Once we have corroborated that intangibles are crucial in our business and identified which
categories of intangibles need to be protected (innovation, know-how, product design,
trademarks), we are going to study how those intangibles are fully protected.
To devise a comprehensive strategy to protect our competitive advantages we have to:
-. Firstly, manage a set of legal rules that we are going to trace along sections of this Block:
intellectual property law and other related legislation. Intellectual Property Law comprises rules
governing, on the one hand, patents, utility models, trademarks, and industrial designs (named
in Spanish, Propiedad Industrial/Industrial Property); and, on the other hand, copyright (named
in Spanish Propiedad Intelectual/strictly Intellectual Property). We have to add other relevant
rules providing an ex post protection of certain elements of our business, such as rules banning
unfair competition. If our competitive advantage is based indeed on certain technical know-how
that can be neither patented not protected as a trademark (this protection would be deemed ex
ante), must we bear any use or exploitative or parasitic behaviour of third parties in relation to
our know-how? Rules banning unfair competition provide us with ex post protection in such
cases.
-. Secondly, assess whether the competitive advantages that we have identified in our business
are likely to be protected under any of the IP rights or other related legal instruments. For such a
purpose, we have to verify first if legal requirements for protection are met in each case and
none of conditions for excluding protection (i.e., against public policy) concurs. To adopt the
final decision, conditions, scope and duration of protection should be evaluated, costs and
expenses should be estimated, and risks and benefits should be duly balanced. To apply for
protection under IP Law is not always and necessarily the wisest decision, even if our
competitive advantage can (and should) be protected. A patent, an industrial design or a
trademark may be expensive, difficult to obtain, to maintain and to enforce. Pros and cons have
to be weighted to adopt a wise business decision.
Which factors should be taken into consideration in deciding whether to protect or not to
protect? Among others, if the duration of the protection is indefinite or limited and, accordingly,
if the assets to be protected are permanent key assets of the business or are seasonable or
temporal; if the protection we are applying for can be considered “strong” or “weak”; how
costly the filing procedure is; how long the filing procedure is; if the invention can be easily
copied by competitors.
3.1.2. Protecting Innovation and Creativity: patents, designs and copyright

!
- (abrogated) Spanish Law 11/1986, of March 20, on Patents: Articles 4, 5, 6, 7, 8, and 9

(recently, new Patent Act has been enacted, Law 24/2015, of July 24, and entered into force on
1 April 2017). When modifications are relevant in the new Law, a mention will be expressly

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made. Otherwise, any reference to Patent Law will be considered to refer to the law in force at
any time.
- Spanish Law 20 /2003, of July 7, on Industrial Designs: Articles 5, 6, 7, 9, 10, 11, and 12
- Spanish Law 1/1996, of April 12, on Intellectual Property: Articles 1, 2, 5 and 10 !
The first set of rules we are going to study share the ultimate aim of stimulating innovation and
creativity and protecting their outcomes. However, Patent Law, Industrial Design Law and
Copyright Law diverge from each other in many issues what reveals that rationale behind them
is different.
-. Patents protect invention, industrial designs protect the appearance or ornamental features of a
product, and copyright protects creative works.
Does original mean new? No, a creative work is considered original when it reveals a unique
style, a personal approach of the author to the reality, even if it is not new. Therefore, a creative
work is original provided that it is not the result of plagiarism of other work.
Why is novelty, instead of originality, one of the requirements for protection in Patent Law?
Because, unlike copyright, the ultimate aim of Patent Law is to promote innovation and
stimulate investment in research and development. An exclusive right to exploit invention (a
monopoly in economic terms) will be granted to inventors (or more accurately to patent holders)
provided that their efforts will revert to state of knowledge upon the termination of the patent.
Therefore, only novel inventions deserve protection. If the invention were not new, the granting
of a patent would entail to deprive public of a part of common knowledge.
How is an invention considered new? An invention is deemed new if it is not included in the
“state of art” until the date of application.
What does the “state of art” or the “prior art” mean in Patent Law? State of art comprises all
what has been published or disseminated in the world until that date. Accordingly, state of art
includes papers, articles, conferences, talks, presentations, showings or demo.
Why does copyright only protect original works? Copyright does not protect ideas but the
expression of an idea. Not surprisingly, we can read two books with same storyline but each
author narrates it in a different personal way. Idea is not protected but expression does. As a
matter of law, copy is forbidden.
What do rules on industrial designs aim to protect original designs or novel designs? Why?
Industrial design protection rules are hybrid. For protection purposes, designs have to be novel
but at the same time it has to be “singular” what resembles the idea of originality. The diverging

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evolution of industrial design in Europe and in United States may explain such a mixed model.
Designs are creative works but strategic and commercial tools as well.
-. Can biological material be patented? Yes, biological material (i.e. isolated gene) or a product
containing biological material can be patented provided that patentability requirements are met.
-. Under Patent Law, Industrial Design Law and Copyright Law,

inventor/designer/creator/author are entitled to exercise a bundle of exclusive rights over their
invention/creation/work for a limited period of time that enables them mainly to control the
economic use of their works.
Why is protection subject to a time limit? Because the ultimate aim is to enhance common
knowledge. Therefore, once protection expires, invention/creation become public domain.
-. Whereas inventions have to be registered in a public Registry to be protected, copyright does

not need any registration. Why? Since an original work is the result of an act of creation,
copyright protection starts at the time of the creation. No public recognition is needed.
-. How can designs be protected? Do they always need to be registered? Designs can be
protected under two models: registered design and non-registered designs. When the design is
registered protection is granted for a maximum period of 25 years (5 years renewable up to 25
years). In some sectors (among others, fashion sectors), designs are seasonal and immediate
protection is needed. Registering may take long and protection period is unnecessarily long.
Hence, protection for non-registered designs has been provided for. Once the design is made
public in Europe, it is protected against copy (plagiarism) just for 3 years.
3.1.3. Identifying your goods/services and distinguishing from competitors: trademarks and
business names. Scope and functions of domain names
- Spanish Law 17/2001, of December 7, on Trademarks: Articles 1, and 2 (scope), 4 and 87

(concept), from 5 to 10 (prohibitions and limits)
- Information about the registering of generic top-level domain names (gTLDs) and resolution
of disputes at the Internet Corporation for Assigned Names and Numbers (ICANN):
http://www.icann.org/en/help
- Domain name dispute resolution at WIPO: http://www.wipo.int/amc/en/domains/ !
In a competitive market, companies strive to catch and captivate potential customers’ attention
and accordingly to distinguish their products and services from competitors. Therefore, the main

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function of trademarks (products and services) and business names (business activities) is to
enable consumers/users to identify a product/service of a company (or the company itself) and
to differentiate it from the competition. At the same time, companies use trademarks to define
their image in the market, build reputation, create trust and enhance goodwill, captivate clients,
and develop branding and marketing strategies.
Considering the functions that trademarks perform, what kind of distinctive signs might be
registered as a trademark? Popular trademarks in the market are combinations of letters, words,
pictures or logotypes.
Could a sound be registered as a trademark? Might an advertising slogan be considered a

distinctive sign? Yes, sounds, slogan or the chorus of a song can be registered as a mark.
And might a smell, the own shape of the product, the Spanish flag or the simple colour? Why?
Some prohibitions are provided for by legislation to avoid confusion, exploitation of rivals’
reputation or consumers’ deception. Accordingly, Spanish flag cannot be registered as a mark
because it would transmit a misleading official support. A simple colour (see Case Orange) is
not distinctive enough. Should a company register a colour as a trademark, it would entail that
no other competitor may use it in its products or advertisement. The own shape of a product or
its wrapper can be registered as a mark provided it is distinctive enough. Registering smells as
trademarks is controversial. Smell can be distinctive and they are indeed strongly evocative.
However, a trademark as a sign has to be clearly and univocally described in the registration.
Can a smell be described in a univocal way and be identifiable as the same time? Think about
the following example: “smell of freshly cut grass of a tennis court” as a trademark for tennis
balls.
Enquire the rationale behind rules governing the protection of distinctive signs: requirements for
protection and prohibitions.
Domain names are valuable business assets that enable companies (but also organizations,
individuals, cities, countries) to identify themselves in the electronic market. Following a
functional reasoning, are domain names distinctive signs then? How can domain names be
protected? Top-level domain names (.com, .info, .net, etc) are generic, internationally managed
and granted on a first-come-first-served basis. Exclusive rights on distinctive signs (trademarks
and business names) are registered at national or regional (European Union) level and are linked
to a category or categories of goods or services. What kind of conflicts can then arise and how
to solve them? Conflicts between domain names and trademarks or even domain names and
other signs (given names, company’s names) may arise. If an agreement between parties is not
reached, WIPO (World Intellectual Property Organization) provides a domain name dispute
resolution.

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3.1.4. Protecting know-how and our business models as a whole: trade secrets, unfair
competition and other rights
- Spanish Law 3/1991, of January 3, on Unfair competition: in particular, Articles 1, 2 and 3

(scope), 4 (unfair act) and 32 (remedies)
Successful business can be based on technical, organizational or strategic factors that although
they entail competitive advantages against rivals in the market, however, cannot be protected
through exclusive rights (patents, industrial designs, utility models, etc.) or simply are
unprotected due to different reasons. As a premise, if the attacked asset is not protected, no
exclusive right can be infringed. Nevertheless, other legal instruments may assist companies in
preventing and combating illegitimate interferences, unfair imitation or deceptive business
practices of competitors that hinder the ability of market participants to compete on equal and
fair terms, are meant to confuse consumers or attempt to unjustly exploit rivals’ reputation, even
when no exclusive right can be exercised.
When is trade secret a feasible and advisable instrument to protect business assets?
Competitive markets are presumed to be efficient markets. Then, when does competition
become unfair? Does unfair mean inefficient? Which interests does Unfair competition law aim
to protect: consumers’ interests, competitors’ ones or general interests? All of them are
protected to a certain extent. Is that relevant to any extent in the drafting and the application of
the law? Yes, depending on which interest law aims to protect, we can decide who (consumers,
attorney general, institutions, competitors) is entitled to initiate a legal action against the
wrongdoer.
Market development is to a great extent based on imitating rivals’ products, services or business
models. When is imitation deemed an unfair business practice? To the extent that it implies an
unfair exploitation of a competitor’s reputation, is likely to mislead consumers or hamper a
competitor’s consolidation in the market.
When might comparative advertising be considered unfair? Comparative advertising is

considered unfair if products are not similar or intended to meet same needs, compared features
are not verifiable, essential and objective or is based on deception, denigration or abuse.

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3.2. The scope of protection. Legitimate uses and illegitimate interferences
3.2.1. Rights of patent holders: right to a patent, indication of the inventor and employees’
inventions
!
- Spanish Law 11/1986, of March 20, on Patents: Articles 15-18 (employees’ patents); Articles
49, 50, 52, 57, and 59 (effects of patents and rights of patent holders). Corresponding provisions
in the New Patent Law.
Unlike literary or artistic works that can traditionally be individual creations, innovation does
usually require a committed level of resources (time, people, money). So, innovation does
frequently emerge within organizations as a result of joint efforts. Companies or, in general,
organizations need incentives to decide to invest money and devote their human, technical and
organizational resources to research and innovation. Patents and utility models aim to provide
them with such incentives by granting exclusive rights to control the economic use of the
patented invention within a territory and along a period of time (in most legislations, 20 years).
Does this average period of 20 years fit properly all industries’ demands? May it be too short in
certain sector? Pharmaceutical companies have long complained to authorities about the fact
that protection is too short for them, considering all previous authorizations and permissions
they need to get before commercializing the new medicine (Supplementary Protection
Certificate). Or may it be too long in highly innovative industries? Technological industries’
innovation rate is faster.
But, at the same time, the innovation process is triggered by ideas and fuelled by creativity, that
are both essentially individual powers. In complex organizations, innovation results from an
interwoven set of individual efforts, company’s means and common experiences. Who should
be entitled to file the patent: the employee as an inventor or the company as the employer? If
invention is the expected result of the labour contract or the services agreement whose provision
the employee has been hired for, the employer is entitled to file the patent. If invention is not
related to the job, the inventor is the envisaged owner. How does the incentive game play then?
How should labour or services contract be drafted in a company whose growth strategy is
essentially based on innovation? Which are the limits?
Patent holders are entitled to exercise their rights against breaching parties provided that the
patent is granted. But the registering process might be long (between 12 and 24 months, even
longer certain sectors). Is the applicant protected against third parties’ interferences before the
granting of the filed patent? To a limited extent, only compensation can be claimed.
Patent holders have exclusive rights to manufacture, commercialize, offer, use or introduce in
the market the patented invention for a limited period of time. What does the “exhaustion of
patent right” mean and which are its legal effects and its practical consequences? Exclusive

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rights expire upon the first commercialization of the patented product by the holder or with its
approval with the European market. !
3.2.2. Protecting against illegitimate uses: the owner’s legal rights, and the breaching party’s
defences

!
- Spanish Law 11/1986, of March 20, on Patents: Articles 62-71 / corresponding provisions in
the New Patent Law
The drafting of patent’s specifications and claims is crucial to delimit the scope of protection
and to allege therefore a possible patent infringement.
In case of patent infringement, how can the patent holder defend his/her exclusive rights over
the invention? Remedies are provided for by law to impede, prevent, cease and claim for
compensation.
According to which criteria should damages be quantified to compensate the patent holder for
losses caused by the infringement? Damages that have been caused but also benefits that the
infringer received from the non-authorized exploitation.
A claim of patent infringement requires logically that the patent allegedly breached is valid and
still in force. Accordingly, if the patent is null or has expired or the patent holder has
presumably breached any of the patent holder’s obligations, the alleged infringement might be
baseless. Can the alleged infringer assert any defence in response to a patent infringement claim
then?
!
3.2.3. Exploiting innovation: licences, technology transfer and other agreements
- Spanish Law 11/1986, of March 20, on Patents: Articles 74 and 75 (licences) / corresponding
provisions in the New Patent Law
- An overview of main agreements for the transfer of technology at

http://www.wipo.int/sme/en/documents/pdf/technology_transfer.pdf

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Transfer and licence (or license) agreements enable companies holding IP exclusive rights to
exploit the commercial use of innovation and make R&D profitable. From the perspective of
common public interests, licences reinforce collaboration among companies and escalate the
innovating process. By virtue of a licence, the licensor (the right holder) authorize another party
(the licensee) to use (under the agreed conditions and within the fixed period) the licensed
materials (technology, trademark, designs, patents).
If the patent holder does at any time desire to transfer its protected inventions to other
companies or entities through commercialization licenses to facilitate the commercial
development of products and processes and in exchange of royalties, which are the main issues
to be discussed in the negotiation? Which is the difference between a transfer and a licence of
technology? In case of transfer, ownership over the technology is transferred. In case of a
licence, the licensee has only a right to use the licensed technology. Licensor is still the owner.
3.3. Competing in the market: rules, limits and extent. The basics of Antitrust Law
- Spanish Law 15/2007, of July 3, on Competition Defence (Antitrust Law)
- Legislation, publications and cases on competition law and policy in European Union
available at http://ec.europa.eu/competition/index_en.html
The ultimate aim of Antitrust Law (US) or Competition Law (i.e. Europe) is to promote or
maintain competition in the market by regulating anticompetitive conducts and by supervising
those business transactions likely to distort or damage the competitive structure of markets.
Competition law is mainly focused on three areas:
a.- agreements or collusive practices likely to restrict free trading and competition between
enterprises. Which kind of agreements could be considered anticompetitive? Companies can
distort competition by cooperating with competitors, fixing prices or dividing the market up so
that each one has a monopoly in part of the market. Anti-competitive agreements can be open or
secret (e.g. cartels). They may be written down (either as an “agreement between companies” or
in the decisions or rules of professional associations) or be less formal arrangements.
Companies in cartels that control prices or divide up markets are protected from competitive
pressure to launch new products, improve quality and keep prices down. Consumers end up
paying more for lower quality. Cartels are illegal under EU competition law, and the European
Commission imposes heavy fines on the companies involved. The Commission’s 'leniency
policy' encourages companies to provide inside evidence of cartels. The first company in a
cartel to do so will not have to pay a fine.

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Can a company fix prices with its distributors? Can they agree on other sale conditions in the
distribution agreement?
Agreements are almost always illegal if the participants agree to fix prices, limit production,
share markets or customers or fix resale prices (between a producer and its distributors).
But an agreement may be allowed if it has more positive than negative effect, is not concluded
between competitors, involves companies with only a small combined share of the market or is
necessary to improve products or services, develop new products or find new and better ways of
making products available to consumers.
Examples
Research and development agreements and technology transfer agreements are often compatible with competition
law, because some new products require expensive research that would be too costly for one company working alone.
Agreements on joint production, purchasing or sales, or on standardisation, may also be legal.
Distribution agreements may be illegal, for example, if producers force retailers to decorate the shop or train staff in a
particular way. But they may be allowed if the aim is to provide a suitable environment for storing or selling the
product, to provide customers with personalised advice, or to prevent one distributor from 'free riding' on a
competitor's promotional efforts. Each case must be assessed individually – taking account of the market position of
the companies involved and the amounts involved
b.- abusive behaviour of a firm dominating the market or anticompetitive practices tending to
gain market power.
How is a dominating position calculated? Does a company need to have a market share higher
than 50% to be deemed dominant? What is the relevant market?
Defining the relevant market is essential for assessing dominance, because a dominant position
can only exist on a particular market. Before assessing dominance, the European Commission
defines the product market and the geographic market.
a). Product market: the relevant product market is made of all products/services which the
consumer considers to be a substitute for each other due to their characteristics, their prices and
their intended use.
b). Geographic market: the relevant geographic market is an area in which the conditions of
competition for a given product are homogenous.
Market shares are a useful first indication of the importance of each firm on the market in
comparison to the others. The Commission's view is that the higher the market share, and the
longer the period of time over which it is held, the more likely it is to be a preliminary
indication of dominance. If a company has a market share of less than 40%, it is unlikely to be
dominant.
The Commission also takes other factors into account in its assessment of dominance, including
the ease with which other companies can enter the market – whether there are any barriers to

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this; the existence of countervailing buyer power; the overall size and strength of the company
and its resources and the extent to which it is present at several levels of the supply chain
(vertical integration).
Which practices can be considered abusive when carried out by dominating companies?
A company can restrict competition if it is in a position of strength on a given market. A

dominant position is not in itself anti-competitive, but if the company exploits this position to
eliminate competition, it is considered to have abused it.
Examples include charging unreasonably high prices, depriving smaller competitors of

customers by selling at artificially low prices they can't compete with, obstructing competitors
in the market (or in another related market) by forcing consumers to buy a product which is
artificially related to a more popular, in-demand product, refusing to deal with certain customers
or offering special discounts to customers who buy all or most of their supplies from the
dominant company or making the sale of one product conditional on the sale of another product.
c.- mergers and acquisitions and other collaboration strategies likely to reduce the number of
economic agents competing in the relevant market
Are then all mergers and acquisitions forbidden? Does any merger have to be notified prior to
completion? In such a case, who is competent to supervise the business transaction? Which are
the thresholds that trigger the supervision system? Should joint ventures and strategic alliances
be notified as well?

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!
!
!
COMMERCIAL LAW
GUIDE Block 3.- Planning the Business Activity and Concluding
Transactions in the Market
4. CONTRACTS AND TRANSACTIONS
4.1. Private autonomy and refusal to deal
4.2. Drafting a contract: drafting exercise
4.3. Concluding a contract:
4.3.1. Negotiation, preliminary dealings and pre-contractual liability

4.3.2. Offer, counter offer, and acceptance
4.3.3. Standard terms and adhesion contracts
4.4. Interpretation and gap filling. Good faith, reasonableness and default rules
4.5. Validity and enforceability of contracts
4.6. Electronic contracting
4.6.1. Running an online business: drafting terms of use

4.6.2. Participating in electronic marketplaces
4.6.3. E-marketing and other commercial strategies for the electronic environment
4.6.4. Digital identity management
4.7. Limits in commercial contracting: consumer law and other mandatory rules
4.8. Breach of contract and dispute resolution
4.8.1. Remedies
4.8.2. Sources of liability: contract liability, tort liability and insurance against liability
4.8.3. Dispute resolution
5. BASICS OF SALE OF GOODS: INTERNATIONAL SALES AGREEMENTS

!
BLOCK 3
!
4. CONTRACTS AND TRANSACTIONS
4.1. Private autonomy and refusal to deal – and 4.7. Limits in commercial
contracting: consumer law and other mandatory rules
4.2. Drafting a contract: drafting exercise

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!
!
!
4.3. Concluding a contract:
4.3.1. Negotiation, preliminary dealings and pre-contractual liability
4.3.2. Offer, counter offer, and acceptance
4.3.3. Standard terms and adhesion contracts
!
4.4. Interpretation and gap filling. Good faith, reasonableness and default rules
4.5. Validity and enforceability of contracts

!
4.8. Breach of contract and dispute resolution
!
- (A further analysis of all issues of Block 3) RODRÍGUEZ DE LAS HERAS BALLELL, Teresa,
Introduction to Spanish Private Law: Facing Social and Economic Challenges, London:
Routledge, 2009, Chapter 6, pp. 213-267, in particular from p. 235 on
NOTE: Please note that the Book is published in 2009, therefore do always double check with rules in force.
Transactions are the driving force propelling trade in the market. Individuals, private undertakings
and public entities run their activities in the market by concluding contracts and performing
transactions with each other. A market is indeed a collection of exchange relationships among the
participants governed by a certain set of rules.
An entrepreneur wishing to run his/her business in the market, either acting alone or incorporating
a company, needs to conclude a number of contracts with providers, clients, independent
contractors, agents, distributors, or collaborating partners.
A contract is an agreement reached by the contracting parties to satisfy mutually their respective
interests. Therefore, when contracting parties enter into a contract, assuming that it is valid and
enforceable, they are bound by its covenants. In other words, contract terms are binding law
between parties. Indeed, it is presumed that contracting parties have freely agreed on contractual
terms that maximize their expected benefits and meet their interests. Hence, if the contract is
fulfilled in their own terms, contracting parties will be fully satisfied; whereas one party departs
from the agreement, he/she breaches the contract and the other party will wish to remedy the
default and compensate his/her damages deriving from the lack of satisfaction of his/her interests.
However, even if, in general terms, parties are widely free to decide whom to contract with and
under which conditions, some limits apply to prevent abuses and restore possible imbalances
between contracting parties. In those cases, binding legal rules will replace what the parties had
presumably agreed. Likewise, as a general rule, only the parties to the contract are bound thereby,
could sue or be sued under the contracts; and third parties could not derive rights from, nor have

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!
obligations imposed on them by. Privity of contract should be the natural consequence of private
autonomy
Accordingly, we have to study: firstly, which limits private autonomy is subject to; secondly,
which requirements a contract has to meet to be valid and enforceable; thirdly, when a valid
contract arises from negotiations between parties; and finally, which remedies parties are entitled
to exercise in case of default.
A.- Private autonomy
Primordial role of contract in economic transaction dynamics is supported by the principle of

private autonomy exalted by the liberalist model of laissez faire laissez passer within a period
characterized by the flourishing of mass trade, industry and commerce.
In Spanish Private Law, Article 1255 Civil Code encapsulates the enshrinement of private
autonomy and the establishment of its general limits (law, morality and public order). The
autonomy of will (autonomía de la voluntad) must be then exercised in accordance to law,
morality and public order. Otherwise, such agreement will not be respected by the Law because
does not comply with its main principles.
Apart from these general limits that empowered the courts to adapt legal provisions to social
reality, circumstances concurring in modern trade and evolving markets has given rise to new
phenomena that require the establishment of specific limits: the increasing participation of
consumers in commercial transactions, the advent of adhesion contracts and standard contract
terms articulating mass trade, the development of antitrust legislation, the growing receptiveness
to a notion of freedom of contract conditioned by human rights and fundamental liberties.
A.1. Specific limits to private autonomy: mandatory law regarding commercial and consumer
contracts
To respond to the intensive participation of consumers in market relationships, Consumer Law

has started to conquer traditionally mercantile-law realms establishing specific limits on the
liberal conception of private autonomy.
Consumer-biased legislation has recourse to the mandatory character of provisions to prevent

abuses and unconscionability. Consumer law system is basically based on two legal tools: the
provision of obligations and duties to companies, deemed as the strong party in the transaction;
and the granting of rights and privilege to consumers, treated thereby as the weakest party in the
prospective contract. Underlying economic rationale is evident, market fails and State
intervention to repair them is demanded. Legal rationale is also clear. Certain circumstances
revealing an imbalance between the parties render private autonomy illusory. With the ultimate
goal of protecting the weakest party legislators set mandatory limits on private autonomy aiming
at rebalance the unfair situation.
A.2. Private autonomy in modern economy: standard form contracts and adhesion contracts

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!
Unlike ideal contractual process seemingly underlying code provisions, characteristics of mass
production and mass trade in modern economies demands more flexible, standard and better
suited instruments. The advent of the so-called adhesion contract and the standard contract terms
redraw transactional dynamics towards “no bargain”, “mute trade” or “contract without dealings”
scenario. Despite the profound controversy aroused by the contrat d’adhesion they have
demonstrated a satisfactory ability to meet mass trade demands: need of uniformity,
depersonalization, expeditious pace of modern contracting, better management of cost, and
rationalization of economic activity.
Given the economic patterns of mass trade, contract terms are not negotiated individually and the
adherent is compelled to decide according to the two-option scheme of “take-it or leave-it”. Legal
concept of “standard terms” or “general conditions” is defined in the Spanish legal system by the
Standard Contract Terms Act 1998 according to the following features: not individually
negotiated conditions predisposed by the seller or supplier (one of the contracting parties) for an
indefinite number of transactions, particularly in the context of pre-formulated contracts, to be
accepted by the other contracting party (consumer but also professional) under the radical
alternative take-it or leave-it.
Standard Terms contracts are valid and enforceable provided that they ensure adequate notice of
the existing standard terms, give the adherent (the contracting party accepting the standard terms
contract) opportunity to review them, and enable the adherent to express a valid consent.
A.3. Freedom to contract. Refusal to deal. Abuse of rights
Freedom to contract should also mean freedom not to contract and freedom to agree conditions
to contract. Therefore, it might be affirmed that parties are free to refuse to deal with a contracting
party regardless of the reason basing the refusal to deal. Nevertheless, market conditions where
refusal to deal takes place are naturally relevant. Therefore, in monopolistic or oligopolistic
markets certain behaviors likely to be inherent in the exercise of the freedom to contract are
treated as abuse of dominant position or inadmissible refusal to deal, in particular, when the
doctrine of essential facilities is applicable. In fact, if a monopolistic provider does systematically
refuse to deal with a company with no good reasons, the company might be unjustifiably expelled
from the market. Additionally, in a competitive environment such exclusion practices might be
considered unfair.
Taking into consideration market conditions and structure, certain behaviors purportedly
sheltered behind freedom to contract may involve abuse of right or antisocial exercise of a right
(i.e. Article 7.2. Spanish Civil Code). Private autonomy would be kept within bounds accordingly.
But limits should always be construed on exceptional and restrictive basis. In conformity with the
opinion expressed by the Spanish Constitutional Court, (Decision 1069/1987, of 30 September
1987) no constitutional or legal provision (apart from, in certain situation, the principle of good
faith) forces an individual to exercise rights in the same manner or in coherent basis against or in
relation to different third parties except for the prohibition of abuse of right and the requirements
of good faith. To assess the abuse character of a behavior, the intention, the substance and the
environment circumstances must be pondered.

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B.- Contract formation
Even if many cases in modern trade parties enter into an agreement instantaneously (daily
transactions), in general terms, a contract is the result of a multi-phased and considerably complex
process: the contract formation process.
In this process, three stages might well be worth being distinguished.
-! Pre-contractual stage or negotiation period: all acts, negotiations and conducts intending
to reach an agreement between the parties.
-! Conclusion of the contract: that describes the moment or the phase where the agreement
arises as a result of the offer and the acceptance
-! Performance stage: once the contract is concluded, it has to be fulfilled in order to satisfy
parties’ interests.
B.1. Negotiation and preliminary deals. Pre-contractual liability.
Broadly speaking, preliminary deals embrace a wide-ranging, elastic and multiform stage of the
formation process comprising acts and statements whose common factor is precisely temporal:
acts, behaviors and statements made by parties aimed at reaching an agreement in the future but
prior to the arising of an offer (or under an extended understanding of formation stage, prior to
the arising of a contract). Such deliberating period is not indispensable for the agreement to be
concluded but it is commonplace in complex transactions and in contracts between big companies
where a number of issues have to be discussed, detailed and agreed before reaching an agreement
for the whole transaction. Then, if preceding the reaching of an agreement they are decisive to:
-! construe parties’ intent for interpretation purposes;

-! fill gaps in the final agreement;
-! detect vices of consent (i.e. mistaken consent due to lack of information provided by the
counterpart during negotiations).
Preliminary deals are aimed at reaching an agreement but do not entail yet the existing of any
contract between the negotiating parties. Therefore, in absence of contract, parties are not to abide
by a set of rules agreed thereby. Good faith principle is the only guiding rule governing
negotiation period. Parties are expected to bargain in good faith. Accordingly, even if parties
cannot be held liable to breach a contract that does not exist yet, they might be, in any case,
responsible for acting in bad faith and causing damages to the other negotiating party reasonably
relying on the expected success of negotiations.
Despite that there are no specific rules on pre-contractual liability in the Spanish legal system
currently in force, situations giving rise to liability in the pre-contractual stage are common and
easy to identify: failure to duly inform the contracting party, unexpected breaking-off of
negotiations, abusive withdrawal of an offer, infringement of good faith requirements in
bargaining.

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In contrast with the absence of regulation in domestic legislation, several supranational texts are
expressly including rules on pre-contractual duties: UNIDROIT Principles, Principles of
European Contract Law or Draft.
In practice, pre-contractual liability may arise in three different scenarios:
-! Unfounded interruption of negotiations before reaching an agreement frustrating other

party’s reasonable expectations on the seriousness of the dealings: extracontractual (or
tort) rules would enable to compensate all costs and expenses that were undertaken in the
belief and for the purposes of the expected agreement and the loss of opportunities to
negotiate with other parties. Several factors are to be met for pre-contractual liability to
arise: reliance deserving of protection, unfair breaking-off of negotiations and losses
caused thereby.
-! Conclusion of an agreement that happens to be null and void due to the violation of pre-
contractual duties (duty to inform).
-! Conclusion of an agreement that is valid despite of the fact that the injured party would
have entered into the agreement under different conditions if the other party
B.2. Offer and invitation to treat
An offer is an act of initiative aimed at reaching an agreement provided that the other party accepts
it. Whereas the offer is deemed an initial act or act of initiative, the acceptance is treated as an
adhesion act dependent of the prior offer.
According to Vienna Convention on International Sales of Goods (Article 14), a proposal for
concluding a contract constitutes an offer if, firstly, it indicates the intention of the offeror to be
bound in case of acceptance, and, secondly, it is sufficiently definite (including the essential
elements of the envisaged contract). The easier-to-use rule of “sufficient precision” tempers the
traditional principle of completeness of the offer. By exclusion, the concept of invitation to treat
is described as a proposal for concluding a contract that it is not sufficiently definite and/or it does
not express the intention of the proposer to be bound in case of acceptance (including formulas
such as “subject to confirm”, or “subject to approval” or lacking real intention to conclude a
contract – animus jocandi -).
An offer becomes effective when it reaches the addressee/offeree. Until that moment, the offer
may be withdrawn, provided that the withdrawal reaches the offeree before or at the time as the
offer. Once the offeree has received the offer, it is still revocable until the dispatch of the
acceptance and unless the offer states a period for acceptance or it is reasonable to rely on the
irrevocability thereof. Likewise, as far as an offer is accessible on Internet it is deemed to be in
effect. In other words, to the extent that an offer is visible on the website the potential offeree can
reasonably rely on the fact that it has not been revoked or withdrawn.
B.3. ‘Mirror image rule’ – acceptance and counter-offer

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An agreement arises as a result of an offer and an acceptance. Whereas the offer is the act of
initiative, the acceptance is the act of adhesion. The graphic expression of “mirror image rule” is
illuminating. A statement made by or other assent-indicating conduct of the offeree constitutes
acceptance if is coincident with the offer. Acceptance is the mirror image of the offer. Should the
mirror break, the statement purporting to be an acceptance but containing additions, limitations
or other modifications constitutes a counteroffer and entails the rejection of the offer and
consequently negotiations follow (Article 19, Vienna Convention).
B.4. Methods of acceptance: acceptance by silence and facta concludentia
An agreement arises as a result of the offer and the acceptance. Therefore, to ascertain which
statements and behaviours mean acceptance and when is of great importance to determine the
arising of an agreement. Unless otherwise stated in the offer, the offeree is free to opt for an
express or tacit method to manifest assent.
Within the tacit forms of acceptance, the offeree may express acceptance by means of assent-
meaning conducts (i.e. dispatch of goods) or remain silent or inactive when silence or inactivity
may amount to acceptance according to the circumstances. Whereas express methods of
acceptance are normally undisputed, tacit forms of expressing assent arouse certain legal concerns
insofar as acceptance is to be inferred or deduced from a set of facts and conducts.
-! On the one hand, no obstacle is found to affirm that certain facts are enabled to express
consent provided that they are sufficiently meaningful of the party’s unequivocal
intention (facta concludentia).
-! On the other hand, like under the uniform rules of Vienna Convention (Article 18), under
Spanish domestic rules neither silence nor inactivity does in itself amount to acceptance.
Nevertheless, under certain circumstances silence or inactivity means assent where
making a statement on the offer is due in accordance to generally observed usages,
practices between the parties or good faith and fair dealing requirements.
C.- Interpreting a contract
The interpretation is a task aimed to ascertain the meaning and the sense of statements made by
and other conduct of the contracting parties in order to state their effects and consequences on the
contractual sphere.
One of the guiding rules on contract interpretation is the search for the “intent of the parties” (i.e.
Articles 1281-2 and 1289 Spanish Civil Code). Intent of the parties means the common intent, not
the intent of each of them. The common intent describes the area where both wills agrees. In order
to discover the real intent of the parties, a series of interpretation rules are provided.
In the interpretation of the contract regard is to be had to customs and usages regularly observed
in the country (in the place of the conclusion of the contract) to resolve ambiguities and fill
eventual gaps with normally used clauses. Hence, customs and usages intervene for interpretation

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purposes when a common intent of the parties has unable to be ascertained. Interpreting usages
are to be proved by the party alleging them.
In addition to customs and usages, the good faith principle guides the interpretation of contract
with the following consequences: manifested will prevails over real will provided that they differ
due to mischievous or careless conduct of the party and the good faith of the other party;
manifested will prevails if it has been understood or should have been understood in the sense
wished by the declaring party despite the objective meaning of the used expression. Likewise,
unclear or obscure clauses are not to be interpreted in a way being favourable to the party liable
for the obscurity (contra proferentem rule). The foregoing rule is particularly relevant for the
interpretation of standard contract terms.
Sales agreements: main features
A sales agreement is subject to commercial rules when the following conditions are met:
acquisition of movable assets, with the purpose of resale, and for profit.
In a nutshell, in a sales agreement, one of the parties, the seller, commit to deliver the good in
conformity with the contract whereas the buyer must pay the price in return. Therefore, delivery
of the goods and payment of the price constitute the most representative obligations in a sales
agreement. As a general rule, in B2B agreements, parties are free to agree on sales conditions
(price, payment method, place of delivery, quantity, quality, warranties). Accordingly, parties
have to perform their obligations in accordance with the agreed terms. Otherwise, whether a party
fails to perform any obligations under the contract, other party is entitled to exercise available
rights and remedies in case of default.
The seller must deliver the goods which are of the quantity, quality and description required by
the contract and which are contained or packaged in the manner required by the contract. The
uniform concept of “conformity with the contract” in the CISG comprises arguably the domestic
concepts of “vicios ocultos” and “vicios aparentes”. Under domestic rules, periods to claim are
significantly different depending of the nature of non-conformity (immediately, in 4 days, in 30
days). Therefore, the doctrine of aliud pro alio has been used to alleviate the severe time limits
and the serious effects.
Finally, when the risk is passed from the seller to the buyer has to be clearly fixed. For any loss
or damage to the goods after the risk has passed to the buyer would not discharge the latter from
the obligation to pay the price, unless the loss or damage is due to an act or omission of the seller.
Unless otherwise agreed by parties (INCOTERMS), the risk passes to the buyer when the seller
hand over the goods.
D.- Performance and remedies
By virtue of the contract, parties are committed to comply with the agreed terms. Accordingly,
both parties are expected to perform obligations and duties arising from the contract in the
conditions provided by it and accordingly in conformity with the contract terms. When one of the
parties departs from the agreement, a breach of contract occurs. The idea of breach of contract

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has two senses. From the viewpoint of the creditor, breach of contract entails the dissatisfaction
of his/her interest whose fulfilment the agreement is intended for. From the position of the debtor,
breach of contract means failure to comply with the duty assumed by virtue of the agreement.
Breach of contract may be a total non-fulfilment (i.e. sold goods are not delivered), a partial
non-fulfilment (i.e. half of the agreed goods are delivered), a delayed fulfilment (i.e. goods are
delivered in the agreed conditions but later than the expected date), or a defective fulfilment (i.e.
the delivered goods are defective and cannot be used to the expected aims).
Since contracting parties expect, when reaching the agreement, that their respective interests
would be fully satisfied, breach of contract means that they have to find other ways to fulfil their
expectations and meet their needs. Remedies try to offer an alternative satisfaction of parties’
interests when the agreement has been breached. Besides the need to satisfy the main interest (i.e.
in a sale, the main interest of the buyer is to acquire the goods), the breach of contract might also
cause damages that should be compensated if duly proved.
Overall, the disappointed party can exercise (joint or separately) one or several of the following
remedies for breach of contract. The most suitable remedy in each case will depend on the type
of contract (sale, provision of services, licence, leasing), the nature of the obligation that has not
been fulfilled and who is the contracting party resorting to the remedy (buyer-seller, provider-
user, licensor-licensee, lessor-lessee):
-! to claim damages
-! to require specific performance according to the contract
-! to require the delivery of substitutive goods in case of lack of conformity
-! to require the repair of the defective goods
-! to fix an additional period of time for performance in case of delay
-! to reduce the price and accept the partial/defective fulfilment
-! to avoid the contract that entails the termination of the contract in its entirety or partially.
D.1. Concept and scope of liability
When a contracting party does not fulfil contractual obligations, one says that he/she is liable
against his/her opposing contracting party. But also, when an accident occurs and a person is
damaged by the act committed by another person, the latter is liable for the damage caused as
well, although no contract (not even a prior contact) exists between the parties. Therefore, a
distinction has to be drawn between the said cases and their legal consequences.
As a premise, liability embodies the binding of a person breaching a duty of conduct imposed in
the interest of another person to compensate for damages. The foregoing generic formulation of
liability forks into two kinds of liability commonly named as contractual liability and extra-
contractual liability (also referred as aquiliana, civil, non-contractual or tort liability). The former
entails the infringement of a duty of conduct set out in a contract. The latter involves the breaching
of the generic duty neminem laedere, that is, the duty to refrain from any behaviour damaging
anybody.

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Although both of them are rooted in the same foundations, a negligent or intentional conduct
inflicting harm to another person, rules governing each kind of liability are different. Because in
the contractual liability, the model to compare with the expected behaviour of contracting parties
is the contract, what they agreed. Whereas in the extra-contractual liability, the criterion to assess
the damaging behaviour is a general rule: nobody should cause, with fault or negligence, damage
to anybody.
Compensation can be also obtained as a complementary measure in criminal proceedings,

although the aggrieved party can opt in any case to claim compensation before civil courts. It is
the so-called liability ex delicto or liability derived from a crime. Civil liability ex delicto
comprises restitution, redress and compensation for (material and moral) damages. As a general
principle, the restitution is due even if the property has been transferred to third parties.
Compensation for damages may cover material and moral damages caused either to the aggrieved
party, and its family members, or to third parties. In case of multiple authors and accomplices,
they will be jointly and severally liable within each class.
D.2. Insurance against liability
Modern societies engender contingencies of future and uncertain needs that in case of occurring
are likely to produce unfavorable pecuniary effects on the person sustaining the damages. Hence,
today societies are commonly described as risk societies. Risk does therefore mean the possibility
that a future and uncertain event happens likely to cause damages or give rise to a pecuniary need.
Insurance is closely linked to the concept of risk, since it aims at preventing or restoring the
pecuniary consequences or the needs unleashed by an accident. Notwithstanding the foregoing,
all risks are not susceptible of being insured. Four prerequisites are to be fulfilled: the event must
be possible, uncertain, fortuitous, and likely to provoke damage or pecuniary need.
Liability entails the obligation of the party who has been declared liable to compensate the
damaged party. Therefore, liability is a risk that has to be managed in market transactions and its
patrimonial consequences should be minimized, prevented or, to the maximum extent, covered.
Insurance policies provide an instrument to prevent and restore those undesirable and unexpected
situations.
In particular, civil liability can be insured by a (professional) civil liability insurance policy.
Insurance market has devised a mechanism to prevent and cover the risk on the insured’s
patrimony created by the obligation to compensate for damages caused by a fact the latter is civilly
liable for. The civil liability insurance has significantly expanded and developed in last days as
far as modern economies have demanded the coverage of increasing risk-creating activities.
An insurance aiming at covering the damages resulting from a negligent conduct of the insured
was seen with cautious and certain hostility. Nevertheless, modernly shaped civil liability
insurance has become an indispensable instrument of coverage for the economic activity and a
key element of Law of Damages. As a consequence, more and more frequently, compulsory civil
liability insurance is a prerequisite to run certain activities either under fault-based liability or
strict rules.

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Contracting civil liability insurance may be voluntary by the insured or compulsory as a
prerequisite to carry on an activity as defined by statute or regulation. In the latter case, the failure
to enter into an insurance contract as stated shall entail the application of administrative sanctions
or the suspension of the ongoing activity until the contracting of the insurance policy. Among the
compulsory civil liability insurance (air transport, vessels for pleasure or sports, nuclear energy,
hunting), the best known and more commonly contracted is the compulsory civil liability
insurance for motor vehicles. If an accident occurs and the person that is civilly liable for the
damages has no insurance, the Consorcio de Compensación de Seguros – or, in case of foreign
vehicles circulating in domestic territory, the Oficina Española de Aseguradores de Automóviles
(OFESAUTO) – shall afford the due compensation.
Likewise, civil liability insurance related to professional activities has also experienced a
significant increase in last days (lawyers, notaries, registrars, doctors, managers, accountants).
D.3. Dispute resolution
When a conflict arises, either in the context of a breached contract or due to an accident/tort, Law
provides parties in conflict with dispute resolution methods.
The main dispute resolution system is the judicial one. Courts embody the independent and
exclusive power to judge and execute judgments in a State. Therefore, States are responsible for
enabling citizens to access to an efficient, fast, easy (and presumably free) Justice system. The
Right to Access to Justice is a fundamental right enshrined in our Constitutions.
In last decades, the capacity of courts to provide an easy, fast, efficient and real justice has been
questioned, and alternative legitimate dispute resolution methods (out of or in parallel to Courts)
have been considered. Although Civil Law legal systems, unlike Common Law systems, used to
show reluctance to accept extrajudicial methods to administer justice, the manifest deficiencies
sustained by judicial system overloaded with cases and with slander economic and human
resources, on the one hand, and the appealing advantages (speed, efficacy, professionalism,
neutrality, impartiality, confidentiality) offered by the alternative dispute resolution methods
(ADR), on the other, have boosted a real trend towards the “extrajudicialization” of dispute
resolution in most countries. Along with conclusive international initiatives thereon, European
Union has launched on resounding campaign to urge Member States to implement alternative
dispute resolution methods of extrajudicial character to realize the universal access to justice
(European Directive 2008/52/EC, of the European Parliament and the Council, of 21 May, on
certain aspects of mediation in civil and commercial matters).
Alternative Dispute Resolution (ADR) is mainly Arbitration and Mediation. Recently, those
dispute resolution methods do also operate on Internet to multiply their advantages (they are
called ODR: On-line dispute resolution).
ADR are especially suitable for dealing with international, interpersonal and cross-border
conflicts. Thus, it makes sense that ADR and so-called ODR (On-line Dispute Resolution) have

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proliferated as alternative dispute resolution methods in electronic transactions and markets,
where judicial methods for dispute resolution encounters severe pitfalls stemming from
delocalization, a-national character, lack of supranational courts and non-existence of universal
legislation. ODR add to the abundant advantages associated to ADR, efficiencies contributed by
the use of new technologies. Most ODR are designed on voluntary and non-exclusive basis.
Access to ODR is contractually established and regulated. Having recourse to ODR to settle a
dispute does not prevent parties from accessing to judicial methods to further resolution.

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OCW:!Business!Law!for!managers!and!entrepreneurs!
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COMMERCIAL LAW
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GUIDE Block 4.- Expanding and restructuring your business
4.1.- STRATEGIES FOR BUSINESS EXPANSION
When the business model is well settled and shows potential to grow, strategies for
domestic and/or international expansion can be considered. The choice of the expansion
model to deploy is a strategical decision that must be based on a serious analysis of costs
and risks, expected aims, and market conditions. As it will be elaborated below, the
expansion strategy is not only a business decision, but also a crucial legal choice whose
consequences should be carefully considered.
Expansion strategies may be grouped in three categories:
1). Organic expansion that entails the opening of subsidiaries or branches or the
acquisition of or merger with another company/ies operating in the target sector/territory.
2). Distribution-based expansion aimed to design and set up distribution channels for the
distribution of products and services – agents, distributors, franchises.
3). Contract-based collaboration under joint ventures or strategical alliances.
4.2.- SUBSIDIARIES AND BRANCHES
The organic expansion model describes those strategies to make the business grow based
on corporation/company instruments. It could entail creating a holding, acquiring other
companies or merging.
Ex: Company X is located in Madrid and provides services to the entire Spanish market.
Sound expectations for following years and regular expressions of interests from clients
located in other European countries encourage the decision to expand the business in
Europe in two phases: next year, Paris; in two years, Rome.
© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 1!

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Under an organic expansion strategy, Company X may decide to incorporate a new
company, first in Paris (Company Y), and subsequently, in Rome (Company Z) to manage
the business growth in such markets.
A subsidiary is a new company, with distinct and separate legal personality, to be

incorporated under the laws of France and Italy, respectively.
There are subsidiaries of Company X because they are participated by Company X as

sole/majority partner or shareholder. Therefore, whereas the partners of Company X are
A, B and C, the partner of Company Y and Company Z is primarily Company X. If
Companies Y and Z are entirely participated subsidiaries, Company is the sole partner.
Otherwise, these companies would be partially participated with Company X as a
majority partner, together with other partners (normally, local partners). That means that
all companies constitute a holding or group under Company X performing the role of
holding company.
In practice, these companies (holding) tend to act in the market as an economic unit,
insofar as they follow a common policy due to the existing economic bonds among the
companies. Nonetheless, from a legal point of view, they are different companies with
distinct and separate legal personality.
Alternatively, Company X may wish to consider the possibility of acquiring a local

company or merge it. In that case, no new company must be incorporated in the target
market.
Should an acquisition be planned, there are two options to articulate the closing: an asset
deal and a share deal. Under an asset-deal acquisition, Company X purchase the asset/s,
selected individually, of the target company. No liabilities of the target company are
transferred to the acquiring company. In the case of a share deal, Company X purchases
the shares of the target company. Consequently, assets and liabilities of the target
company are passed on to the purchasing company. Unlike the asset deal, in a share deal
the economic and financial situation of the target company is relevant, insofar as if it is
in crisis, the purchase is riskier and potentially less attractive.
A merger entails a unification of two (or more) existing companies into a new one. Thus,
it means a reduction in number of legal persons – several existing legal persons
disappears, and a new one is set up. Reasons triggering mergers can be diverse.
Commonly, it aims to expand the reach of the business, cover new business segments, or
gain market share.
Finally, a distinction must be made between subsidiaries and branches. Whereas

subsidiaries, as previously explained, have distinct and separate personality from the
holding company, branches are part of the same company. That means that a branch has

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not separate legal personality. An illustrative example of branches are bank offices in a
country.
Nowadays, expansion is mainly based on digital strategies. Hence, it might be worth

wondering how digital expansion fits into the traditional concepts of subsidiaries and
branches.
A). Is a website on a territorial domain name (amazon.es) a subsidiary?
No, unless the creation of the website entails the incorporation of a company (subsidiary)
in the host country
B). Is a website on a territorial domain name a subsidiary subject to local legislation?

Amazon.es to Spanish Law?
In general, it is not. Other factors should be considered, sole domain name is not enough
to subject a business to the target legislation
C). Is a website hosted in a server to be subject to local legislation of the host

country?
No, it is not. Merely hosting a website in a server located in a specific country does not
mean that the business will be subject to its legislation
D). Which factors have to be considered to assess which legislation the business run
through a website should be subject to?
-! Language
-! Accepted currency for transactions
-! Contact information and customer services location
-! Domain name
-! Direct marketing strategies
-! Stream of commerce
-! Delivery policy and logistics
-! Express exclusions or limitations based on territorial factors
-! Technical measures: avoiding certain address or ZIP codes

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4.3.- DISTRIBUTION CHANNELS
Expansion strategies based on distribution channels entail the conclusion of contractual

relationships with independent collaborators: commission agents, commercial agents,
distributors, or franchisees.
Unlike organic expansion, the establishment of distribution channels is based on the

entering into collaboration contracts with other companies without modifying the
corporative structure of our company (the principal).
The choice among agency, distribution and franchising must be carefully pondered on the
basis of risk allocation, profit distribution, and market proximity - the presentation
provides a comparative table among the main types of collaboration -. The comparison is
based on four criteria. First, whether the contract concluded between the principal and the
external collaborator is regulated by law or, contrariwise, its configuration is amply left
to parties’ autonomy to be set out by agreement. Second, whether the collaborator acts in
the name of the principal and on his/her behalf, or in its own name. Third, whether the
collaboration modality is designed to a durable and stable relationship or solely intended
to assist in one or several spot transactions. Four, how the collaborated is retributed.
Combining the above-described criteria, the most distinctive features of collaboration

variants in terms of risk allocation, profit distribution, and market proximity are explained
below.
i)! Risk allocation
Commission agents and commercial agents act always on behalf of the principal.
Consequently, the risk of the business is naturally allocated to the principal, unless
otherwise expressly provided by contract and retributed accordingly (risk commission).
On the contrary, the distributor is essentially a reseller. Hence, the distributor purchases
from the principal, considering the market prospects, and re-sells to the clients in the
market in its own name and on its own behalf. That means that the principal passes the
risk of the expansion to the distributor who takes on the risks of overestimation, failures,
or competition.
In case of franchising, the franchisee operates fundamentally as a distributor but the

assumed risks is contained insofar as it is in the position of using a reputed trademark,
receiving training from the franchisor, and implementing the know-how provided by the
franchisor in the context of the franchising agreement. Whereas the franchisor contributes
reputation, know-how, training, and common marketing strategies; the franchisee
provides local knowledge, expertise in the target country, and proximity to the end user.

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Given the different schemes of risk allocation articulated by the modalities of commercial
collaboration, profit distribution models are aligned thereto accordingly.
ii)! Profit distribution
The distributor is a reseller. Thus, the profit that the distribution makes is the margin of
the resale price over the purchase price. The principal does not pay any commission to
the distribution.
Unlike distributors, agents operate under commission. Commission is paid by the

principal and is totally or partially based on the transactions promoted and concluded by
the activity of the agents. Commissions can be fixed, variable, or hybrid combining a
fixed component and a transaction-based one.
As a general rule, the agent does not take on the risk. However, if it so agreed by the
parties, an extra risk commission is due.
Franchisees have to pay royalties to the franchisor for the license to use the trademark
and other distinctive signs, for the training and/or for the transfer of know how. The
possibility that the franchisor could fix or recommend sale prices to the franchisees
(minimum price, maximum price, recommended price) is subject to scrutiny under
competition laws as it may lead to price collusion.
iii)! Market proximity
All models are intended to gain more proximity to local markets, by exploiting
networking, contacts, knowledge or expertise of the local collaborator.
4.4.- JOINT VENTURES AND STRATEGICAL ALLIANCES
Companies can expand their business to other markets by creating strategical alliances
with local companies. To penetrate certain markets, a partnership or alliance with a
domestic company is not only advisable, but also a prerequisite to run business in that
country.
Joint ventures and strategical alliances are contract-based commercial strategies aimed to
create a collaboration framework, on short/medium/or long-term basis, between two or
more companies. The agreement defines all aspects of the collaboration, milestones,
goals, profit and cost distribution, decision making, applicable law, and conflict
resolution.
Joint ventures can be divided in two categories. Unincorporated joint venture are
contracts concluded between the collaborating companies without either transforming
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their structure or creating a new company. Companies members of the joint venture
remain independent and separate and only collaborate with the extent and within the
scope of the collaboration agreement. Corporate joint ventures do, however, entail the
incorporation of the new company participated by the collaborating companies. In this
latter case, the collaborating companies remain separate for the running of the respective
business, but their collaboration crystalizes in a new company for such purposes.

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OCW: Business Law for managers and entrepreneurs

To that end, you might be interested in reading the following sections:

Introductory reading materials and other additional references:

- RODRÍGUEZ DE LAS HERAS BALLELL, Teresa, Introduction to Spanish Private Law:

BLOCK 1. SETTING UP THE STRUCTURE

1. GETTING STARTED. CHOOSING THE LEGAL FORM AND OPENING THE

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 1

Reading materials and other additional references:

- RODRÍGUEZ DE LAS HERAS BALLELL, Teresa, Introduction to Spanish Private Law:

Main ideas, aims and questions:

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 2

*Número de constituciones. Fuente: Registradores de España. Estadística mercantil 2017

Legal catalogue of organizational forms and key characteristics

1. ASSOCIATION: group of persons / organized / common aim / stable

2. FOUNDATION: non-profit / goals of general interests / distinct patrimony / durable basis

3. COMPANIES: partnership / LLC / corporation

4. OTHERS: Cooperatives, economic interest grouping, worker-owned companies, so on

5. GROUPS: joint ventures, alliances, holding

1.2. Commercial companies. The protection of limited liability

Sociedad Anónima (SA) ≈ corporation (Inc. or Corp.)

Main ideas, aims and questions:

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 3

Finally, the choice between the SA and SRL is the trickiest.

Notwithstanding different configuration of members’ interests in the company, in both types of

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 4

1.3. Personalizing the organization: by-laws, articles of incorporation and

Escritura de constitución = articles of incorporation

Main ideas, aims and questions:

A company (especially with corporate form) is a complex creature, because it originates in a

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 5

1.3.2. Legal personality and their implications

Reading materials and other additional references:

- Spanish Corporations Act, 1/2010, of July 2: Article 33

Main ideas, aims and questions:

1.3.3. Limited liability, general rule and anomalies

Reading materials and other additional references:

- RODRÍGUEZ DE LAS HERAS BALLELL, Teresa, Introduction to Spanish Private Law:

Terceros= third parties

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 6

Levantamiento del velo=Veil piercing

Main ideas, aims and questions:

Whereas company in formation constitutes a normality phase in the incorporation process,

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 7

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 8

1.4. Choosing project participants and allocating roles.

Reading materials and other additional references:

- (A basic overiew) RODRÍGUEZ DE LAS HERAS BALLELL, Teresa, Introduction to Spanish

Main ideas, aims and questions:

Reference websites in Spain:

- RODRÍGUEZ DE LAS HERAS BALLELL, Teresa, Introduction to Spanish Private Law:

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 9

- Fully electronic process of incorporation to create a company in Spain: www.circe.es

- Taxes, licences and permits to set up a business in Spain

Main ideas, aims and questions:

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 10

© Teresa Rodríguez de las Heras Ballell & Jorge Feliu Rey 11

2. STRUCTURING INVESTMENT AND DECISION MAKING

2.1. Decision-making in the company