Category Archives:News

China adopts comprehensive Civil Code

The long-expected comprehensive Civil Code in China has been finally passed on May 28, 2020 by the 13th National People’s Congress (PRC -People’s Republic of China’s highest legislature) taking take effect on 1st January 2021. It is the PRC most extensive, modern laws compilation, the only one known as a “code”.

The process has taken about 60 years starting back in 1954, but after several unsuccessful attempts, even in spite the ‘reform and opening-up policy’ of December 1978, the complexity and controversy, finally in October 2014, the Communist Party of China, as part of the necessary progress to achieve the country’s rule of law, resolved to compile a unified civil code by 2020. 

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Spanish real estate legal context post-Covid19- REO, NPLs: Keys and tips for investors.

Spanish Real estate market has suffered for some years from the public scrutiny, from authorities and society representatives and numerous rules and intervention measures aim at favoring and protecting debtors, especially consumers and small businesses, widening a gap of legal uncertainty that has been exacerbated by the economic crisis following the outbreak of the Covid-19, which now discourages the interest of investors and, at the same time, as all crisis this one brings opportunities for those who can identify them on the right time.

1   At present we have:

  • Law 29/1994 of 24 November on Urban Leases, in its latest reform on the subject of rental periods, extended the term of the tenant of dwellings from 3 to 5 years.
  • Law 5/2019, on real estate credit, reinforces the protection of the mortgage borrower and/or guarantor, debtor, and guarantors, with longer and more complex procedures. Spanish central Bank has been warning of its interpretation that loan portfolio assignments must respect the rights of debtors and guarantors provided in this Law.
  • Multiple scattered rules at regional and municipal level on housing policies with debtor-friendly measures for vulnerable groups complicate the picture, e.g. in Catalonia, Law 18/2007, of 28 December, on the right to housing, and more recently Decree-Law 17/2019, of 23 December, on urgent measures, amended by Decree 1/2020, forcing the exploitation of empty housing, and house availability as a solution for vulnerable groups at risk of eviction, even accepting squattering.
  • COVID-19 measures: aids after the coronavirus crisis substantially consist of moratoriums on evictions, on mortgage loan installments and rents, for residential houses and offices, retail stores, and industrial premises of small businesses.   The impact on the real estate sector will not be uniform, but rather will vary according to the sector (tourism, hotels, and restaurants, etc.), the type of product (offices, commercial premises vs. residential) and location, etc

2. In this new context, investments in REO and non-performing Loans NpLs portfolios will sustain a significant impact:

Investors must review the composition mix of each portfolio, taking into account,

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“New normal” in Spain: Business crisis and restructuring scenarios: Risks and opportunities. New insolvency rules and EU Directive 2019/1023

The “new normal” requires companies to review their structure and adapt it to the new economic situation: Companies will have to review costs, adapt the way of servicing customers, work, redefine business strategies, perhaps transfer or discontinue some business units with their elements, or start others: structural changes will affect many areas of the organization, including the corporate level, offering advantages of opportunities to grow acquiring companies, assets or business units having to be smart to negotiate with potentially accumulated debt, integrate with other companies or establish strategic joint-venture agreements, etc.

In many cases this crisis will also trigger latent crisis  pre-covid-29, underlying crises that had been brewing in recent years long before the pandemic. Spanish business landscape, extremely fragmented in numerous medium, small and “micro-business” tiny enterprises and self-employed whose small size and “weak financial muscle”, prevents access to markets, financing and business opportunities will be even more vulnerable to this crisis: It is necessary to gain robustness if you want to survive.

Investors, with savings, financial capacity and funds ready to invest, will find investment opportunities in well-planned businesses and projects needing financing to materialize value propositions.

In the midst of the state of alarm, emergency regulations have been issued, including some relating to certain bankruptcy obligations that, after removal of the state of alarm, become relevant.

In the broader framework in our Law there are legal instruments (more and better than in the previous crisis of 2008) that will be useful to tackle new challenges, but they also have requirements that should not be ignored by directors, shareholders and particularly creditors, let’s see:

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Covid-19 Support to employment. Dividend distributions, Temporary layoffs- benefits and Tax havens.

Through Royal Decree-Law 18/2020, of May 12, on social measures in defense of employment (Official State Gazette of 05 May 2020) that extends the coverage of (Temporary) Lay-off Programs (Expedientes de Regulación (Temporal) de Empleo (“ER(T)Es”) temporary-layoffs instruments with which many employers try to mitigate the impact of confinement measures derived from the Covid-19 health emergency, until June 30, 2020. Along with employment measures, article 5 sets the following:

(A) Companies and entities with tax domicile in countries or territories classified as tax havens under current regulations do not qualify for the temporary lay-off programs.

As a preliminary comment, it would be surprising to find any company or entity of these countries or territories would have directly a permanent establishment or workplace in Spain, and should there be any, even with a PE, this would be a measure against these territories or jurisdictions. Another issue is to specifically list which territories fall under the definition of “tax havens under current regulations” which has undergone a complex, erratic process of legal changes from Royal Decree 1080/1991 which may involve some jurisdictions with non-infrequent transactions with Spain. State Tax Agency website includes a list of tax havens.

(B) Companies and other legal entities that as of February 29, 2020 have at least 50 employees who use of ER(T)Es receiving public subsidies or aids for this purpose are prohibited to declare dividends corresponding to the tax year in which these ERTEs are applied (unless they pay the social security contributions by application of ERTEs exemption). In order not to cause companies to trigger the shareholder’s right of withdrawal applicable when certain minimum amount of dividends is not distributed (pursuant to Article 348 bis of the Companies Act) the financial year of use of ER(T)Es will not be taken into account in the corresponding computation.

As urgent comments: it is difficult to find legal entities other than companies distributing dividends; one cannot think of a legal entity other than capital companies allowed to distribute “dividends”. This provision does not indicate when these “frozen” profits can be distributed, or what kind of reserve or account they ought to be booked. Besides, this prohibition does not include distribution of accumulated free reserves, nor operations of redemption of shares or similar. We trust that our legislators will soon clarify these issues.

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Spanish new Revised Consolidated Text of Insolvency Act (Royal Decree-Legislative 1/2020, of May 5th).

The deep economic crisis brought up by the outbreak of the Covid-19 health crisis, just few days after the extraordinary measures adopted through Royal Decree-Law 16/2020 of April 28, has urged Spanish legislator to speed up further legal reforms, and finally, has passed the Royal Legislative Decree 1/2020, of May 5, enacting the Revised text of Insolvency Act (published in the Spanish Official State Gazette of 07 May 2020), pursuant to the Parliament’s mandate of May 2015 to recast, harmonize, clarify and order insolvency legislation, confirmed in February 2019.

It comes into force, generally, on September 1st, 2020, although it sets a lengthy transitional regime on certain areas, many of which are subject to regulatory development. The new consolidated text has a total of 752 articles (previously 242) divided into three “books”:

  1. Insolvency-Bankruptcy.
  2. Pre-bankruptcy law.
  3. International insolvency rules.

With this, in one single consolidated text, the provisions of Bankruptcy Law 22/2003, of July 9, and the 28 legislative amendments since it came into force have been reordered and clarified: solving inconsistencies, interpretive problems and systematic alteration that had been generating legal uncertainty in such crucial matter.

It also aims to lay the foundations for the transposition of Directive (EU) 2019/1023, of the European Parliament and of the Council, of June 20, 2019, on preventive restructuring frameworks, on the discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency, and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency). This Directive provides alert mechanisms on insolvency risks, comprehensive rules for preventive debt restructuring, simplifies bankruptcy rules, improves efficiency and costs rationalization, and more possibilities for debt relief.

The unquestionable opportunity of this legal instrument, needed to relieve the effects of the Covid-19 health crisis, which has quickly turned to a profound economic crisis, recession worldwide. We hope that it is not too late and the necessary regulatory development it requires is provided as a matter of urgency that is required.

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COVID-19 in M&A transactions while interim period.

M&A transactions privately negotiated are being deeply affected by the sudden Covid-19 outbreak, many in the basics and fundamentals of a recently agreed deal.

In nowadays international transactions M&A agreements signed (e.g. a share and purchase agreement, SPA) require certain events, conditions to be satisfied (e.g. regulatory approvals, conditions precedent) for completion needing a period of time.

For certainty, the agreement provides that business risk passes to buyer right upon signing the agreement. In turn, it is also common to introduce buyer termination rights (apart from other remedies like price reduction): fulfillment of certain conditions precedent, interim period obligation to conduct the business “as a going-concern in the ordinary course of business”, except under the occurrence of an event constituting a “Material Adverse Change” (MAC). Representations and warranties (R&W) are often qualified, subject to the lack of material adverse change event in the target business and/or the seller undertakes to reiterate R&W upon closing.

COVID-19 outbreak occurring during the interim period may cause serious distress in different forms and intensity, affecting the target -e.g. governmental measures prohibiting target’s business activities, operations, suspension of governmental procedures, sudden plummeting of customers’ orders and sales, while structure costs remain, supply chain failures- of the buyer: – inability to transfer non-cash items agreed as consideration (e.g. shares, real property, etc.), failure of its lenders,.. etc.

Deals completed with running earn outs while part o consideration agreed is subject to the performance of target business under the management control of buyer; M&A insurance policy agreements pending signature may be at peril; Auditors are reviewing their approach to financial statements closed just a few weeks before the COVID-19, or about to close addressing going-concern issues…

The impact of the COVID-19 pandemic outbreak leads many to plead force majeure, hardship and in M&A, the application of Material Adverse Change (MAC) clauses generally included in M&A agreements. Needless to say, the urgent issue is now for signed agreements: the solution to the conflicts will depend on how this contingency was contemplated and if so, how clauses are drafted.  Most jurisdictions lack specific regulation on the impact of a pandemic in legal transactions in progress, or running obligations, other than the general statutes on force majeure, hardship, and the like. if parties fail to reach amicable settlement courts will solve, on a case-by-case basis.

In Spain MAC clauses are common in M&A and VC deals as they provide a flexible tool to balance parties risk allocation, but the wording of the clause must be wide enough to cover a huge variety of contingencies and scenarios but also accurate enough to clearly identify triggering events and the effects in the deal.  If this is not the case in agreements already signed, parties will have recourse to the general legal framework in which this matter is quite restrictive to alter the sacred general rule of obligatory fulfillment of contractual obligations (“pacta sunt servanda”) where the parties agreement is binding under the “perpetuatio obligationis” principle. Spanish courts are likely to approach cases in two major ways:

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Royal Decree-Law 15/2020 dated 21 April setting urgent complementary measures to support economy and employment (Official State Gazette April 22 de, 2020) NON-RESIDENTIAL LEASES.

With this Royal Decree-Law Spanish Government offers instruments to mitigate the impact of the Covid-19 crisis in the drastic fall in income in small and medium-sized enterprises (SME) and professionals that were either forced to suspend their activity or indirectly affected by their clients or suppliers in these circumstances.

The aim is to provide a legal instrument to moderate or reduce rental costs from non-residential urban leases of premises used by SME, self-employed and professionals in their business or professional activities, (retail stores, warehouses, offices, etc.) regulated under the current Law 29/1994 of November 24 on urban leases(“ULL”) or industry leases – it should be noted that leases regulated by the previous urban lease legislation are left out.

This Royal Decree bases its solutions on the “rebus sic stantibus” jurisprudential doctrine (to a certain extent equivalent to the hardship of Anglo-Saxon Law), which allows to moderate contractual obligations provided that certain requisites are fulfilled by the cause of the imbalance: unforeseeable and inevitable risk, disproportionate onerousness of the obligation due and contractual good faith, it all to reduce operating costs of SME and the self-employed, let’s see:

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Compliance in COVID-19 times

Spanish legal system, like that of neighboring countries, has been raising the standards of legal compliance of companies and organizations (very clearly with the 2015 reform of our Criminal Code introducing the new art. 31 bis) with greater requirements for the prevention of law non-compliance -not only to avoid criminal punishment- and reinforced sanction mechanisms-, in order to reduce the risks derived from non-compliance, although these new requirements are being adopted unevenly and the COVID-19 outbreak burst into this context.

These difficult days of sharp crisis derived from the governmental measures adopted following the state of emergency decreed on March 14, 2020, are a test on the strength of administrative and management structure of companies and organizations.

These are moments of urgent and difficult decisions that expose managers to increased risk in many aspects, also the risk of regulatory breach by making decisions or acting in violation of laws in different areas, including particularly, unduly applying rules or legal benefits in the exceptional situation.

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COVID-19 Tax measures: Royal Decree-Law 14/2020, dated April 14 that extends the term of filing and payment of certain tax returns and self-assessments.

This Royal Decree-Law extends the term for filing and payment tax returns and self-assessments whose deadline falls between April 15 2020 and until May 50,2020 until the same day May 05, 2020 (May 15, 2020 if the form of payment is by direct debit).

Filings regulated in Regulation (EU) No. 952/2013 of the European Parliament and of the Council, of October 9, 2013, of the EU customs code and implementing provisions are excepted.

Who can qualify for this extension? Taxpayers whose sales in 2019 does not exceed €600,000, except for:

  • Corporation Tax Groups in special tax consolidation regime regardless of their net sales.
  • VAT Groups under special VAT regime (Chapter IX Title IX of Law 37/1992) regardless of their volume of operations.
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