When a person becomes a shareholder or shareholder of a commercial company, one of the first questions that the new shareholder asks himself is what rights he will have. Regardless of the rights that may be protected in a shareholders’ agreement or in the company’s bylaws, the Spanish Corporate Enterprises Act (LSC) grants certain rights or benefits, depending on the percentage of shareholding.
The purpose of this article is not to analyse each of the rights according to the percentage of shareholding granted by the LSC, which would give rise to a separate publication, but to focus (due to the time of year we are in) on one of them: the possibility of requesting the Commercial Registry to appoint an auditor to review the annual accounts for a given financial year.
1.- The Statutory Auditor
Article 263 of the LSC establishes the obligation for the annual accounts and management report of commercial companies to be reviewed by an auditor, with the exception of those companies which, for two consecutive financial years, meet at least two of the following circumstances:
- The total of the asset items does not exceed 2,850,000.00 euros.
- The net amount of its annual turnover does not exceed 5,700,000.00 euros
- The average number of employees employed during the financial year does not exceed 50
A company shall lose this power or exemption if two of the circumstances are no longer met for two consecutive financial years.
The appointment of the auditor shall be made, on the basis of Article 264, by the General Meeting before the end of the year or financial year to be audited and for a period of not less than 3 nor more than 9 years.
As we can see, and considering the Spanish business ecosystem, a very significant percentage of companies would be exempt from the obligation to submit their accounts to an auditor’s review, as many of them meet at least two of the circumstances.
As we can imagine, these exempted companies can be very varied, ranging from sole proprietorships, family companies and even start-ups with a multitude of partners with very different interests. For many of them, and in our experience, the figure of the auditor is not valued positively in the sense that it is of little use and represents a somewhat superfluous expense. In any case, I believe it is undeniable that the figure of the auditor provides a certain degree of security or guarantee in that a third party outside the shareholding or management body, without any conflict of interest and who will have professional responsibility, will verify the accounts and, therefore, the company’s movements in economic terms.
With this last idea in mind, and in order to give extra protection to minority shareholders, Article 265.2 allows companies that could be exempted by Article 263, to be obliged to have their accounts audited by an auditor.
Specifically, paragraph 2 of Article 265 states that:
“…2. In companies which are not obliged to have their annual accounts audited by an auditor, shareholders representing at least five per cent of the share capital may request the commercial registrar of the company’s registered office to appoint an auditor at the company’s expense to audit the annual accounts for a given financial year, provided that three months have not elapsed since the end of that financial year…“.
3.- Requirements
In this case, the rule is quite clear and leaves little room for interpretation; however, a few points should be made in relation to the two fundamental requirements.
(i) The first requirement is that the shareholders requesting the auditor must hold at least 5% of the share capital. In this case, it is peaceful and permissible for several minority shareholders who individually hold less than 5% to group together for the purpose of making the application. Obviously the sum of the percentage of the grouped shareholders must be at least 5%.
When making the application, which is regulated in Article 351 of the Commercial Register Regulations, the shareholders must provide documents proving their entitlement, i.e. that they hold at least 5% of the share capital. If the legal standing can be verified from the information held by the corresponding Companies Register, it would not be necessary to provide the documents. These situations would arise if the shares or holdings had been acquired at the time of incorporation or in one or more subsequent capital increases; in short, information that can be entered in the Commercial Register. However, if the ownership of the shares or holdings derives from a sale or purchase, donation, usufruct, etc. that has not been entered in the Commercial Register, the corresponding transfer document must be provided to prove the entitlement of the shareholder seeking to exercise the right.
On this last point, we wonder what would happen in the case of company shares when the transfer of the shares has been made in a private document and not in a public document. Would the Commercial Registry allow it? As we know, Article 106.1 of the LSC establishes that “the transfer of company shares, as well as the constitution of the real right of pledge over them, must be recorded in a public document“. However, the Supreme Court has had the opportunity to rule on this issue on several occasions, determining that the requirement of the public document is not essential for the perfection of the contract or transfer, but “only fulfils the function of a means of proof -ad probationem- and of opposability of the transfer to third parties”. If the Commercial Register were to admit the private document as proof of legitimation, what could happen is that the company would object and, in this case, in order for it to have this effect vis-à-vis the company, we understand that it must be signed in a public document. It could happen that the registrar, based on the literal wording of the rule and without taking into account and interpreting the pronouncements of the Supreme Court, does not admit it as an element of proof for the aforementioned purposes. Ideally, and with this type of case in mind, the corresponding shareholder, foreseeing the exercise of this right, should be cautious and, before making the request, should proceed to convert the transfer into a public document.
(ii) The second and final requirement is that the application is made within 3 months of the end of the financial year to be audited by the auditor. If the request is made after this period or before the end of the financial year, it will result in the registrar rejecting the request.
With regard to this requirement, the most important thing to bear in mind is that each company can establish the financial year it wishes; in other words, it does not have to coincide with the calendar year and end on 31 December. It is true that it usually coincides with the calendar year, but on many occasions, and for various reasons, other financial years are established. Thinking of most companies, this time of year is key as the financial year 2023 has just ended and we would be within the period (which ends on 31 March 2024) of 3 months to make the application.
Conclusions
As we can see, this is an extremely practical right, as it allows minority shareholders, who are often relegated to the background and, to a certain extent, uninformed of the day-to-day business of the company, to have access to the verification and review of the accounts by an auditor, without them having to bear any cost, as it is borne entirely by the company.
Frequently, and it must be said with very satisfactory results, this right is used as an element of negotiation in cases of exit or conflicts with minority shareholders, since, on many occasions, the company, the majority shareholders or the administrative body may prefer to give in to certain claims of the minority rather than submit to an audit and assume the cost of the audit.
In summary, and regardless of the reason for the shareholder to exercise this right, as mentioned above, the first thing to take into account is whether or not the shareholder has a sufficient percentage of ownership (5%) and the title by which the percentage is held in order to see whether or not it is necessary to provide the Companies Registry with a document accrediting the entitlement to exercise this right. Finally, it will be necessary to be clear about the financial year in order to determine which accounts are to be submitted for verification and, therefore, the deadline for the exercise and application to the Commercial Registry.
This article includes general information and it does not provide professional or legal advice.
