The purpose of this note is to provide our clients with answers to some of the issues of interest to companies in the commercial field, which are being raised to us these days, in view of the crisis that has arisen from the COVID-19, the consequent declaration of a state of alarm by the Spanish Government and the adoption of extraordinary urgent measures to deal with its economic and social impact by means of the Royal Decree Law 8/2020, which was promulgated yesterday ("R.D.-L.").

The content of this note is purely informative and will not replace the necessary legal advice for each specific and particular case. In this sense, we are at the full disposal of our clients to assist them during this period of enormous legal uncertainty and constant legislative developments, regarding any legal issue that may affect their companies and businesses.

Corporate issues

1, During the alarm period, how can I hold meetings of the company's governing and administrative bodies if all or some of its members are isolated?

• While the state of alarm lasts, article 40.1 of the R.D.-L. allows these meetings to be held by videoconference, even if this possibility was not provided for in the articles of association. For this purpose, the videoconference system must ensure the authenticity and the bilateral or plurilateral connection in real time with image and sound of the remote attendees, which can certainly be obtained through very different platforms available online. This solution can also be applied additionally to any commission, whether mandatory or voluntary, that is established within the company.
• Likewise, Article 40.2 of the R.D.-L. allows that, during the alarm period, the resolutions of said governing and administrative bodies may be adopted by means of a written vote without holding a session, even if this is not provided for in the articles of association. This possibility may arise from the Chairman's decision or when at least two of the members of the body requests so.

2. Given this situation, our accounting or financial support team is not in a position to prepare all the documentation that makes up the annual accounts on time: what happens regarding the three-month deadline for drawing up the annual accounts after the end of the financial year?

• The deadline is suspended until the end of the state of alarm, due to the provisions of Article 40.3 of the R.D.-L.
• The suspension of the deadline concerns the preparation of the annual accounts, whether ordinary or abbreviated, individual or consolidated, the management report (where legally required), as well as any other document which are mandatory under company law.
• The period will be resumed again for another 3 months once the state of alarm ends.

3. We have already formulated the annual accounts before the declaration of the state of alarm and we have an obligation to audit, do we have more leeway with the deadlines?

• In the event the annual accounts have already been drawn up as of the date of the declaration of the state of alarm, the period for the verification of these accounts, where audit is obligatory, shall be understood to be extended by 2 months from the end of the state of alarm.

4. And what about the deadline for approval of the annual accounts by the Shareholders' Meeting?

• The Shareholders' Meeting must be held within 3 months following the end of the period for drawing up the annual accounts, in accordance with article 40.5 of the R.D.-L. Taking into account what is indicated above regarding the formulation, the deadline for the approval of the annual accounts would be of 6 months after the end of the state of alarm.

5. Before the state of alarm was declared, we had already called the Meeting of Shareholders and now it is going to be impossible for us to hold it on the date initially set. What can we do?

• Article 40.6 of the R.D.-L. allows the administrative body to revoke the call by means of a notice published at least 48 hours in advance on the company's website (or in the BOE if the company does not have a website).
• Following the revocation of the initial call, the administrative body must issue a new call within one month from the date on which the state of alarm ended.
• It is also possible for the administrative body to keep the call for the date set by altering the time or the place of celebration, should this work.

6. We have a minority shareholder who wants to exercise his right of separation during the alarm period by claiming a legal cause for it.

• Even if there is a legal or statutory cause, the shareholders will NOT be able to exercise the right of separation until the end of the state of alarm (and any extensions to it that might be agreed), in accordance with article 40.8 of the R.D.-L. Therefore, the possibility of minority shareholders leaving the company during the state of alarm is deactivated, even if they would have had this right to leave under normal conditions.

7. In our company there is a legal or statutory cause for dissolution, or we expect it to occur in the next few days. When must the administrative body call a Shareholders' Meeting so that it can take the appropriate measures?

• The legal period for the administrative body to make this call is suspended until the end of the state of alarm.
• According to Article 40.12 of the R.D.-L, if the legal or statutory cause for dissolution had occurred during the state of alarm, the directors will not be liable for the debts incurred during that period. Unfortunately, what the R.D.-L. does not clarify is what happens to the liability of the directors with respect to the debts incurred by the company during the alarm period in the event that the legal cause has occurred before the declaration of the state of alarm.

8. Our company will most likely become insolvent as a result of this situation. What happens with the declaration of bankruptcy during the state of alarm?

• According to article 43 of the R.D.-L., while the state of alarm is in force, the debtor who is in a situation of insolvency will not have the duty to request the declaration of bankruptcy.
• In this regard, please note that, until 2 months have passed since the end of the state of alarm, judges will not admit for processing the applications for the declaration of necessary bankruptcy made after the state of alarm was declared. In addition, applications for voluntary bankruptcy will be admitted for processing with preference, even if they are dated later.
• Nor will the debtor who has notified the court of the commencement of negotiations with creditors have the duty to request the declaration of bankruptcy proceedings, while the state of alarm is in force and even if the period referred to in Article 5 bis of the Bankruptcy Law (Ley Concursal) has expired, in order to:
  • reach a refinancing agreement, or
  • an out-of-court settlement, or
  • to adhere to an early proposal of agreement.

Contractual issues

9. Due to the current exceptional situation, the performance of certain commercial contracts has become extremely costly (e.g. initially fixed prices or minimum purchase volumes). Do I have any legal tools to alleviate this situation?

• Under the Latin aphorism "rebus sic stantibus", which would mean "things being as they are", we refer to a doctrinal instrument, not provided for in our Civil Code, but of jurisprudential development, through which it would be possible to re-establish the balance between the performances to be rendered by the parties by allowing the revision of obligations and contracts when, due to supervening circumstances, the economical balance of the contract has been broken and one of the parties finds it impossible or very burdensome to comply with it.
• Some contracts include clauses which address this possibility, although this is not the norm. However, if the contract has a specific clause, we must refer to it to interpret its content and assess its application.
• In the absence of specific provisions in the contract - which, as we say, is the most common - it is necessary to analyse the particularities of the case and assess whether the jurisprudence on the matter applies to them. In general, the main requirements established by the Supreme Court are as follows:
  • It must involve an extraordinary alteration of the original conditions of the contract,
  • It must entail an exorbitant disproportion between the performances to be rendered by the parties and\
  • The circumstances that lead to its applicability must be radically unpredictable, beyond any reasonable expectations of the parties.
• If in our particular case the first two requirements are met, the current state of alarm could easily fit the requirement of unpredictability of circumstances. However, it will be necessary to analyse as well the various elements involved in each case in order to know, for example, whether it is merely a risk of the activity or whether there are other alternatives to alleviate the lack of balance between the performances to be rendered by the parties.
• The latest Supreme Court rulings on this issue, such as that of the First Chamber on March 5, 2015, have significantly limited its exercise. Moreover, the doctrine of "rebus sic stantibus" is confronted with another Latin aphorism that is its antithesis: "pacta sunt servanda" which is, in short, the preferential rule in our system regarding the loyalty to a given word, and the stability or maintenance of contracts.

10. And if, because of the exceptional situation, it is absolutely impossible for me to fulfil certain contractual obligations?

• In this case, we can assess the concurrence of an event of "force majeure" that exonerates us from the fulfilment of our obligations. Doctrine and jurisprudence have categorized "force majeure" as an event that is not only unforeseeable, but even if it had been foreseen, it would have been unavoidable, and that arises outside the scope of the party who is in breach of its performance under the terms of the contract.
• As indicated for the application of the "rebus sic stantibus", we must first see if the contract includes any clause regulating this possibility, which in the case of "force majeure" is more usual. If the contract has a specific clause, we will have to resort to it to interpret its content and assess what legal consequences the parties have agreed upon.
• In the absence of any regulation in the contract in this respect, it would seem that the current state of affairs have an undeniable character of unpredictability, unavoidability and alienation of the parties to the contract, so that the possibility of alleging "force majeure" a priori is fully consistent. However, once again we must analyse the particular elements of each case and, in particular, the time of signing the contract and its temporal distance from current events, as well as the real impediment of the circumstances to the fulfilment of that particular obligation or the adoption by the debtor of preventive measures.

11. Once the alarm period has passed, is there any possibility for the annulment, or that contracts signed during the alarm period be annulled on the grounds that they were signed under a state of necessity?

• We cannot completely rule out this possibility, although in order to do so the party requesting the resolution or the annulment will have to face the complex task of proving the existence of a true "state of necessity" which in a way derives automatically from the current state of alarm. The requesting party will have to prove that it had no alternative but to sign the contract on the terms offered by the other party at that time, so that its consent was invalid at the time of signature.

12. What impact can the current situation have in relation to "material adverse change" / "material adverse effect" clauses in M&A contracts?

• As far as M&A operations are concerned, we will probably be able to see that many transactions, both at national and global level, will not come to a successful conclusion, due to the existence of the so-called "Material Adverse Change" (MAC) or "Material Adverse Effect" (MAE) clauses, which, in view of the very different consequences caused by the Covid 19 crisis, are the perfect instrument for the buyer to disassociate himself from the acquisition transaction before it is closed.
  MAC or MAE clauses are customary in agreements for the purchase and sale of companies when these are subject to one or more condition precedent, and allow one or both parties to disassociate themselves from the contract or renegotiate the terms without incurring liability for breach of contract, provided that there are supervening circumstances that negatively affect the target company to be acquired, which seems to be clearly applicable in the current scenario.
• In any case, we will have to assess the applicability of the aforementioned clauses to the current situation on the basis of their specific wording, interpreting whether it contemplates this situation as a material or substantial change to the conditions initially agreed and whether, where appropriate, the economic parameters envisaged for measuring the magnitude of the impact on the target company are met.