Your company's legal form — SL or SA — has practical implications for an M&A transaction that go far beyond theory. We analyse the differences that matter when the time comes to sell.
When a Spanish entrepreneur sets up their company, the choice between a Sociedad Limitada (SL — limited liability company) and a Sociedad Anonima (SA — public limited company) is made, in most cases, by inertia. The SL is cheaper to incorporate, has fewer formalities, and is the default option for SMEs. The SA is perceived as being for larger companies, with more bureaucracy and more cost.
This choice, made at age 23 with EUR 3,000 of share capital, can have significant consequences thirty years later, when the time comes to sell the company.
The most relevant difference for an M&A transaction is the transfer regime.
In an SA, shares are freely transferable by default. The seller signs the sale agreement, delivers the shares, and the deal is closed. Simple, fast, efficient.
In an SL, participaciones (membership interests) have legal transfer restrictions. The Companies Act establishes a pre-emption right in favour of the other shareholders, who have a period to exercise it at the same price offered by the buyer. This right can complicate a sale if shareholders want to exercise it — or threaten to do so as a negotiating lever.
The SL’s articles of association can relax these restrictions, but they can also tighten them. In a due diligence, the first thing the buyer reviews are the articles to understand the applicable transfer regime.
If what is being sold is the company’s assets (rather than the shares), the transaction may require approval from the shareholders’ meeting as an act exceeding ordinary management.
In an SL, resolutions involving the transfer of essential assets require a reinforced majority of more than half the total share capital. If minority shareholders account for more than 50%, they can block the transaction.
In an SA, majorities are calculated on the capital present or represented at the meeting, making it easier to reach the required threshold when shareholders are absent or disengaged.
Many Spanish SMEs have minority shareholders — the partner who put in 10% at the start, the relative who inherited 5%, the former employee who holds 2%. These minority shareholders are a critical factor in any sale.
In an SA, mechanisms exist for squeezing out minority shareholders when a shareholder reaches 90% of the capital. In an SL, this mechanism does not exist directly, which can leave the minority shareholder with disproportionate blocking power.
The shareholders’ agreement is the tool for managing this situation — drag-along clauses that oblige the minority to sell alongside the majority — but many SLs in the Spanish middle market have no shareholders’ agreement. The statutory regulation is insufficient and the conflict appears precisely when a sale materialises.
A professional buyer — a private equity fund, an industrial group, a special situations investor — will evaluate the legal form as part of their analysis. The aspects that matter most:
Clean transfer. Can the deal be closed without risk of challenge by minority shareholders? Are the pre-emption rights properly regulated or eliminated?
Corporate governance. Does the company have a formal board of directors? Are meetings held regularly? Are annual accounts filed and deposited? SAs tend to have superior corporate discipline compared to SLs, though this depends more on the business owner than on the legal form.
Financing structure. If the buyer needs to finance the acquisition, SA shares are easier to pledge than SL participaciones. Banks are more comfortable with security over shares than over membership interests.
Post-acquisition conversion. Some buyers, especially international funds, will prefer to convert the SL into an SA after the acquisition to facilitate management and a potential later exit.
Converting an SL to an SA before the sale may make sense when the buyer is an international fund accustomed to working with SAs, when there are minority shareholders with whom the transfer regime needs clarifying, when the transaction will include financial instruments (options, warrants, convertible bonds) that the SA handles more easily, or when a subsequent stock-market listing is anticipated.
The conversion requires a shareholders’ meeting resolution, an expert’s report, a public deed, and registration. The process takes between 2 and 4 months and does not trigger taxation if the legal requirements are met.
The reality is that, in the Spanish middle market, the vast majority of companies are SLs. And the vast majority of M&A transactions with SLs close without problems. Transfer restrictions are managed with shareholder waivers, pre-emption rights are resolved with prior agreements, and corporate governance issues are corrected before closing.
What is inadvisable is to ignore the legal form as if it were irrelevant. If you are planning the sale of your company within the next few years, review the articles of association, evaluate minority shareholders’ rights, consider whether you need a shareholders’ agreement, and analyse whether conversion to an SA makes sense for your situation.
At Blue Mountain, corporate structure is one of the first aspects we analyse in any valuation. A small adjustment to the legal form or the articles of association can enormously simplify the transaction and avoid unpleasant surprises at closing. Talk to us.
By Blue Mountain Capital
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
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