Fraud in the indirect transfer of company shares.

1.           General approach.

The legal regime for inter vivos transfers of company shares is established by Article 107 LSC, to which the articles of association frequently refer when regulating this matter, assuming the legal regime as their own. This regime is aimed at preserving the closed nature of the limited company, and therefore restricts the transferability of company shares to persons who – it is assumed – will not alter, or will not alter too much, the personal substratum of the company. It is true that this regime can be altered in the articles of association if the shareholders so decide, but under no circumstances can the articles of association allow the transfer of shares in a practically free manner (Art. 108 LSC) on pain of rendering the transfer of shares ineffective vis-à-vis the company (Art. 110 LSC).

If the shareholders of a company are both companies (partnership companies), the purpose of the statutory regime can be circumvented, since the change in the shareholding composition of the partner company is in practice equivalent to a change in the ownership of the company shares. In the opinion of this writer, this is a legal fraud, since the parent company of a partner company is not prohibited from transferring the shareholdings of the partner company, and a result contrary to the articles of association is pursued, i.e. the indirect transfer of the shareholdings.

As we will see in the second part of this brief column, there are decisions of Provincial Courts to the contrary, and furthermore, we fear that, should the Supreme Court reach this issue, it will not settle this question from a dogmatic point of view either, but rather adjusted to the casuistry and circumstances of each case (presence of bad faith, interpretation of the bylaws, prejudice to third parties, existence of shareholders’ agreements… etc.).

For this reason, in the event that the members of a limited partnership wish to restrict the transfer of shares in order to preserve the personal affinity between the partners and/or the proportion of their respective stakes – which are essentially the ultimate reasons for restrictions on transferability – they must adapt the articles of association so that they clearly state that the restriction on transferability extends to cases of indirect transfers through changes of control of the partnership-partner, either by means of transfers or by means of structural modifications.

2.           The SAP Bizkaia 950/2018 and the SAP Barcelona 477/2023

The judgments of the Provincial Court of Bizkaia, no. 950/2018, and of the Provincial Court of Barcelona, no. 477/2023, although they deal with similar facts relating to the challenge of the transfer of company shares, reach different conclusions due to key differences in the underlying facts and in the legal interpretation of the same.

In the SAP Bizkaia, the indirect transfer of shares in CNN through the use of special purpose vehicles was challenged, claiming that this transfer circumvented the statutory restrictions, specifically the right to accompany. In the SAP Barcelona, the transfer of shares between Arroba Solar S.L. and Flix Solar S.L., and their subsequent transfer to Flix Solar 1 S.L., was challenged, alleging that the pre-emptive subscription right should have been respected and that authorisation by the general meeting was required in accordance with the bylaws of Parc Solar La Devesa S.L.

In the Bizkaia ruling, the court identifies fraud by law in the indirect transfer of shareholdings through the use of special purpose vehicles, considering that the statutory restrictions were circumvented. Specifically, its ratio decidendi states that:

On the basis of the foregoing, and understanding that the requirements for assessing fraud by law are met, we consider that the indirect transfer of CNN’s shareholdings from Global Noges to other shareholders, in equal shares, BBCapital (Ingeteam corporate group) and Namure (Murueta corporate group), circumvents the provisions of Art. 6 of the articles of association, since it is not understood that such complicated corporate mechanisms have been put in place if they are not intended to transfer part of the shares of one partner to the other two majority shareholders, without the rules established in the articles of association coming into play. The restrictions on free transferability established in the clause in the articles of association cannot be circumvented by the fact that the parties use special purpose vehicles or intermediaries to transfer an indirect shareholding in the company CNN. Global Noges, through the sale of Global Incitatus, has indirectly transferred its shares to two companies (BBCapital and Namure) belonging to the two majority shareholders of CNNl, Grupo Ingeteam and Grupo Murueta, thus circumventing the right to accompany the plaintiff.

However, in Barcelona, the court did not find elements indicating fraud in the operation in question, understanding that the transfer of shares between the defendant companies did not constitute a violation of the bylaws of Parc Solar La Devesa S.L., and therefore concluded that the restrictions of one company could not be automatically extended to the transfer of shares of other partner companies, in the absence of a specific provision in the bylaws establishing this.

In the case of the SAP of Barcelona, the shares transferred were also subject to an ancillary service, so that the restrictions provided for in Article 88 LSC (authorisation of the company) were also applicable; however, on the same reasoning that the company’s shares had not been transferred (although they had been, albeit indirectly), the Barcelona Provincial Court found no reason to censure the transfer.

Specifically, the ratio decidendi of the Barcelona SAP literally states that:

We fail to understand, since no explanation has been given, what is the rule that has been defrauded by the transfer made. No provision has been made in the bylaws of Parc Solar la Devesa, S.L. that reveals any intention to protect the subjective element of the company or any concern on the part of the shareholders for stability or representation or proportion in the shareholding that would lead us to believe that this indirect transfer is fraudulent insofar as it seeks to alter the pre-established social order and pre-accepted by the shareholders of Parc Solar la Devesa, S.L.

The existence, for example, of a shareholders’ agreement or a shareholders’ agreement would have been an important element in assessing the intention of the shareholders in regulating, where appropriate, the transfer of their shares to third parties. 20. Therefore, we understand that we cannot leap into the void and assume that the second sale is fraudulent because it alters the shareholder composition of Parc Solar la Devesa, S.L., without further argumentation. This risk was present since its incorporation in 2006 and since then the shareholders of Parc Solar la Devesa, S.L. have not shown any concern in this respect, so there is no fraudulent element in the second level transfer that is now being challenged.

3.           Conclusion.

If the reader has come this far, he may legitimately wonder why one Court has found fraud by law and the other has not, given that the core facts are substantially the same; and the reason lies in the concomitant circumstances and each Court’s interpretation of them. Therefore, in order to avoid leaving an element of such relevance for the company to the mercy of the Court in question, it is advisable, as mentioned above, and if this is the intention of the shareholders, to indicate in the articles of association that the restriction on the transferability of shares extends to cases of changes of control of the partner-companies, either by acquisition or by universal succession (structural modification).

This article was published in Legal Today on th 8th April 2024