Typical due diligence issues

In Spain, it is common that thorough due diligence is conducted and used as an aide to identify breaches and potential issues, which are then addressed in the acquisition documents, including by means of remedies or actions to be taken before signing, between signing and closing, and post-closing.

Although areas of concern may differ depending on the type of business, the environment, privacy and compliance have become key issues to investigate.

Pricing and payment

Spanish M&A practice is increasingly internationalized and Spain can now be considered a sophisticated market for M&A transactions.

Business acquisition agreements are not regulated by any specific law, and their structure and content can and will vary greatly depending on the particularities of the transaction and the covenants, agreements and undertakings of the parties to the agreement.

There are no special restrictions regarding pricing and payment in Spain from a strictly legal/corporate point of view. When the transaction is notarized in Spain (for example, where a share transfer refers to bearer shares or to participation quotas in a limited liability company (Sociedad Limitada), or in certain transfers of assets such as real estate), the Spanish notary public will demand evidence of how payment of the purchase price is made (for instance, by attaching a copy of wiring instructions of a bank transfer or a copy of the bank check) and the identification of the parties' respective beneficial owner.

Generally, share purchases are more common than asset purchases. Other types of acquisition methods, such as mergers, may also be suitable depending on the circumstances.

In terms of precontractual obligations, the parties in an M&A negotiation are under a duty to act in good faith. Anyone in breach of that duty will be liable to compensate for direct damage caused.

Share and asset deals may be subject to the approval of the general shareholders' meeting. The Spanish Companies Act requires that any acquisition, sale or contribution to another company of material assets must be approved by the general shareholders' meeting. The Companies Act presumes that  an asset is material when the amount of the transaction exceeds 25% of the total value of the assets in the last approved balance sheet.

Share sale

Spanish practice around share purchase agreements (SPAs) is similar to standard international practice, including practices related to price determination and adjustment (cash-free debt-free/normalized working capital adjustment, net asset value (NAV) adjustments, locked box structures, earn-outs, etc.), conditions precedents to completion, including mandatory (such as merger control, if applicable) and voluntary conditions (such as material adverse effect conditions), interim period obligations, representations and warranties, and indemnity undertakings.

Contracts or administrative authorizations/permits/licenses may contain "change of control" provisions that trigger the need for the prior consent of the counterparty to the contract or the relevant public authority to complete the sale, in order to avoid potentially adverse effects that may arise, such as the increase of the compensation payable under the contract, or the right to terminate the contract in advance.

Asset sale

Although a share deal tends to be the preferred acquisition method, in certain circumstances, an asset purchase has advantages that may make it more attractive to a buyer. For example, the buyer may favor an asset purchase in order to limit the inheritance of liabilities to the assets acquired rather than to the whole company (although the buyer may still be liable for certain pre-transfer liabilities for labor, tax and environmental matters).

The purchase of all of a company's assets is regarded as a "going concern" purchase and not as the purchase of each individual asset. However, each individual asset must be transferred in accordance with the transfer formalities that apply to that type of asset. For some assets, this will simply be the delivery of the asset to the buyer. In other cases, the formalities are more prescriptive and may require notarization and/or registration with public registries, as is the case with respect to real property), in rem rights (e.g., mortgage, pledge) or intellectual property (e.g., trademarks).

Permits and licenses are not automatically assigned in transfers of going concerns, so an application for consent to assign must be made to the relevant authority. Alternatively, an application for a new license or permit will be required. In addition, contracts are not automatically assigned. However, as indicated before, some liabilities such as tax and labor liabilities may be transferred as part of the asset purchase.

Signing/closing

Normally, signing and closing take place at the same time, unless closing has been made subject to the fulfillment of conditions precedent. In this case, the agreement becomes binding and enforceable on signing, but the sale and purchase do not take effect until the transfer of shares/assets on closing.

It is common (and in certain cases mandatory, such as when the transfer refers to bearer shares or to participation quotas in a Spanish Sociedad Limitada) to formalize the transfer before a notary public.

Foreign investment restrictions

Spain has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed.

The foreign investment review (FIR) regime is limited to certain sectors. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Spain has a mandatory and suspensory merger control regime, which means that transactions that meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed.

It is also necessary to consider EU merger control rules. Mergers involving companies active in several member states and reaching certain turnover thresholds are examined at European level by the European Commission. This allows companies trading in different EU member states to obtain clearance for their mergers in one go. For further information, see the more detailed section on "Antitrust/merger control".

EU Foreign Subsidies Regulation

As of 12 October 2023, the EU Foreign Subsidies Regulation (FSR) requires qualifying transactions, and bids in response to certain large public tenders in the EU, to be notified for upfront clearance by the European Commission where the companies involved have benefited from foreign financial contributions (a broad concept) that exceed certain (low) thresholds. Acquisitions of a target with annual revenues in the EU of at least EUR 500 million will trigger FSR deal notifications. Acquisitions of smaller targets will not, regardless of deal value. Outright mergers and large joint ventures will trigger a notification requirement if the EUR 500 million EU-wide revenue threshold is met by one of the merging parties or the joint venture.

Other regulatory or government approvals

Approval by the competent regulator may be required for acquisitions of companies that are subject to specific regulatory supervision, such as financial institutions, airports, telecom providers, etc.

Method of transfer under local law

Share sale

The mere transfer of shares is not considered a transfer of an undertaking and will not involve the transfer of employees, but simply a change in the ownership of the employer (not a change in the employer). The buyer inherits all the rights, duties and liabilities by virtue of being the new owner of the target company.

Asset sale

If a company transfers a group of assets that functions independently and permits continuity in the business, a transfer of undertakings will occur and the affected employees will automatically transfer to the acquiring company. The transfer could entail the entire company's business or an identifiable part of it.

Mergers and spin-offs

If a company merges with another company or implements a spin-off and transfers a group of assets that function independently and permit continuity in the business and services after the transaction, a transfer of undertakings will likely occur and the affected employees will automatically transfer to the buyer company.

Transfer of business

Acquired Rights Directive and automatic transfer of employees

If the requirements for an automatic transfer exist, the employees will automatically transfer to the transferee, which will take over the employment rights and obligations of the transferor. If those requirements are not met, each employee will need to consent to the transfer.

The transferee becomes jointly and severally liable with the transferor for a period of three years for all those obligations unsatisfied before the transfer for existing employees. Specific statutes of limitations may apply depending on the specific liability involved. If the transfer is subsequently declared a felony, both the transferor and the transferee are held jointly and severally liable for obligations arising after the transfer.

Unless otherwise agreed, any collective bargaining agreements applicable to the affected employees continue to apply until they expire or a new collective agreement is applicable.

If there is a significant change in the ownership of the employer resulting in a change in the board of directors, the main activity or approach to the activity, top executives (normally, the general manager) have the right to terminate their contracts and receive a severance compensation of seven days of cash salary per year of service up to six months' salary. The employee can terminate the contract in the three-month period following the implementation of the change.

Approval or consultation requirements

Works council/employee information requirements

If the transfer of undertakings involves an automatic transfer of employees, both the transferor and the transferee are obliged to notify the employees' representatives (or the affected employees in the absence of representation) of the proposed business transfer. The notification should be provided reasonably in advance, normally no less than 15 days.

The information requirements stipulated under Royal Decree Law 5/2023, of 28 June, establishes that when a company is going to change its legal structure (via transformation, merger, spin-off or universal transfer of all its assets and liabilities), the directors must issue a report for the employee representatives, or for the employees themselves if they do not have representatives, to inform them of the impact that the transaction will have on the labor relations and employment conditions. The report must be made available to the employee representatives or the employees themselves at least one month before the General Shareholders Meeting is held to approve the transaction.

Works council consultation requirements

If the transferor or transferee anticipates adopting new measures in connection with the employees as a result of the transfer, depending on the measures to be adopted, they may be obliged to consult with the employees' representatives and to follow specific procedures established by law.

The acquisition of shares is usually not subject to indirect taxation unless, under certain circumstances, the target company owns significant real estate (more than 50% of total assets).

For Spanish tax resident sellers subject to corporate income tax, the capital gain arising from the sale of shares is usually 95% exempt from taxation, provided several requirements are met (i.e., more than 5% of ownership for the last 12 months, the company is not a mere asset holding company and it is subject to corporate income tax). Individual sellers are taxed under personal income tax at a rate that ranges from 19% to 28%.

For foreign tax resident sellers, the capital gain from the sale of shares is usually subject to Nonresident Income Tax (NRIT) at a rate of 19%, unless a double tax treaty provides otherwise.

If the seller of a real estate property located in Spain is a nonresident, the buyer is obliged to withhold 3% of the gross amount to be paid on account of the seller's NRIT.

The acquisition of assets may be subject to either transfer tax or value-added tax (VAT) (and stamp duty, if applicable), depending on whether the deal qualifies as a transfer of going concern. A transfer of going concern is not subject to VAT, but certain assets (such as real estate assets) may be subject to VAT or transfer tax.

For Spanish tax resident sellers subject to corporate income tax, the capital gain from the sale of assets is usually taxed at a 25% rate. Individual sellers are taxed under personal income tax at a rate that ranges from 19% to 28%.

Spanish tax laws provide a special tax neutrality regime for corporate reorganizations (mergers, carve-outs, assets contributions, etc.) that allow the taxpayer to defer taxation of built-in gains arising from a reorganization that is conducted for valid economic reasons.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.