Notaries, or any other legal professional, are not able to immediately answer any question that is put to us for consideration. If there is a subject that requires me to re-study the legislation every time it is put to me, it is the one referring to the acquisition by a company of its own shares (in the case of SA) or participations (in the case of SL).
Knowing when this can be done and what happens once these shares or interests are acquired is what I intend to clarify for myself, and at the same time for anyone who might read these lines.
Accounting treatment and economic meaning
Although in all corporate matters it is convenient to be familiar with accounting standards, in the case of treasury stock, convenience becomes necessity, and as a way of introducing the subject, we must take into account the standards of the general accounting plan that regulate this matter.
The 108th account called own shares or participations in special situations establishes that the shares or equity interests acquired by the company, will appear in the net worth, with negative sign.
Its movement is as follows:
a) It will be charged for the amount of the acquisition of the shares or participations, with credit, generally, to accounts of the subgroup 57.
b) The following shall be paid:
b1) For the sale of shares or interests, generally charged to accounts of the subgroup 57.
The difference between the amount obtained from the sale of the company's own shares or interests and their book value will be charged or credited, as appropriate, to accounts in subgroup 11.
b2) For the reduction of capital, charged to the account 100 for the nominal amount of the shares or interests.
The difference between the purchase price of the shares or interests and their nominal value will be charged or credited, as appropriate, to accounts of subgroup 11.
From this operation of the account, we can draw the idea that the acquisition of own shares or interests is a loss in assets, since it decreases net worth and its sale does not determine positive or negative income for the company that can be integrated into the tax base, since the difference between the amount obtained from the sale of the own shares or interests and their book value will be charged or credited, as appropriate, to accounts in subgroup 11 (other equity instruments).
The economic sense of acquiring one's own shares or interests is similar to a capital reduction.
In a capital reduction, we give money to the partners and amortize or eliminate the share. Whereas when the company buys its own shares or interests from its partners, the only difference is the non-elimination or amortization of the share or interest, that is, the chosen business form changes but not the economic meaning.
Corporate law
For the economic reason we have indicated, the possibility of acquiring own shares or interests is limited by law and thus in articles 140 (for SL) and 144 (for SA) of the Capital Companies Law, the following is established:
For limited liability companies, cases of permitted acquisitions are regulated
Article 140. Permitted derivative acquisitions.
1. A limited liability company may only acquire its own shares, or shares or stocks of its parent company, in the following cases:
a) When they form part of a patrimony acquired by universal title, or are acquired free of charge, or as a result of a judicial award to satisfy a credit of the company against the owner thereof.
b) When the own shares are acquired in execution of a capital reduction agreement adopted by the general meeting.
c) When the company's own shares are acquired in the case provided for in article 109.3.
d) When the acquisition has been authorized by the general meeting, is made against freely available profits or reserves and is aimed at shares of a partner separated or excluded from the company, shares that are acquired as a result of the application of a restrictive clause on the transfer thereof.
For public limited companies, there are cases of free acquisition and cases of conditional acquisition.
Article 144. Cases of free acquisition.
The corporation may acquire its own shares, or the interests or stocks of its parent company, in the following cases:
a) When the treasury shares are acquired in execution of a capital reduction agreement adopted by the general meeting of the company.
b) When the shares or stocks form part of a patrimony acquired by universal title.
c) When the shares or stocks that are fully paid up are acquired free of charge.
d) When the fully paid-up shares or stocks are acquired as a result of a court award to satisfy a credit owed by the company to its owner..
Article 146 Conditional derivative acquisitions
1. The public limited company may also acquire its own shares and the participations created or the shares issued by its parent company, when the following conditions are met:
a) That the acquisition has been authorized by agreement of the general meeting (…),
b) That the acquisition, (…) does not produce the effect that the net worth is less than the amount of the share capital plus the legally or statutorily unavailable reserves.
2. The nominal value of the shares acquired directly or indirectly, added to those already held by the acquiring company and its subsidiaries, and, where applicable, by the parent company and its subsidiaries, may not exceed twenty percent.
For conditional derivative acquisitions, therefore, there are certain requirements, on the one hand, authorization and on the other, economic limits, and as we will see, they have special treatment.
The differences that arise between public limited companies and limited liability companies are a consequence of the conceptual differences of each type of company, and with the addition that in public limited companies, conditional acquisition is permitted on a broader basis.
In an attempt to systematize all these assumptions in which the acquisition by a company of its own shares or interests is permitted, I would differentiate between two assumptions:
a) That the company pays a consideration, that is, that it is an onerous title, a category in which we would include the following assumptions:
1.- When the shares or own interests are acquired in execution of a capital reduction agreement adopted by the general meeting. This must be done by adopting the capital reduction agreement and, in execution of the same, proceed to the acquisition of the own shares to be redeemed.
For purely educational purposes, we will say that this is the case that gave rise to the resolution of the General Directorate of Registries and Notaries of April 26, 2013, in which the deed that motivated the appeal said:
«First.–After all partners have waived their right of preferential acquisition (…) it is agreed to purchase from the partner Katso Assets Inc, six thousand sixty-four (6,064) shares (…) identified with the numbers 33,361 to 39,424, both inclusive. The purchase will be made for a price of 30 euros per share, and therefore, in total, for the amount of one hundred eighty-one thousand nine hundred twenty (181,920) euros, paid in cash. Second.–To reduce the share capital by the amount of three hundred sixty-four thousand four hundred forty-six euros and forty cents (€364,446.40), leaving it therefore fixed at the amount of two million four thousand nine hundred thirty-six euros. The reduction is agreed as a consequence of the previously agreed sale of shares, all of which will be formalized simultaneously in the same deed. Third.–As a consequence of the reduction of capital and the purchase of shares, those that are the object of the aforementioned sale numbers 33,361 to 39,424, will be amortized upon the granting of the aforementioned deed.
A different issue from the above is that the treasury stock is acquired previously by the company and the capital reduction is adopted subsequently, since as indicated by the DGRN resolution of January 9, 1998, the reduction of the share capital through the amortization of shares acquired by the company itself can occur in two different ways:
One, starting from the reduction agreement and, once adopted, and in its execution, proceeding to the acquisition of the shares that are to be amortized (in which case we must adhere to the general rules on the reduction of share capital, but respecting the equal treatment of all partners);
and the other, following the reverse order, previously acquiring the own shares and subsequently agreeing to reduce the capital through their amortization (in which case, without prejudice to the fact that it must also adhere to the general rules of any agreement to reduce the share capital, it is only subject to the requirement of the prior existence of treasury stock).
2) When the fully paid-up shares or stocks are acquired as a result of a court award to satisfy a credit owed by the company to its owner.
In this case, from an accounting point of view, in parallel with the entry for the acquisition of shares or interests, there would be another entry for the cancellation of the asset (credit) against the partner.
3) When the acquisition has been authorized by the general meeting, is made against freely available profits or reserves and is aimed at shares of a partner separated or excluded from the company or shares that are acquired as a result of the application of a restrictive clause on the transfer of the same or shares transferred mortis causa.
This possibility of treasury stock refers exclusively to limited liability companies, and the requirements are cumulative
4) The assumptions of conditional derivative acquisition of public limited companies.
b) that the company does not satisfy a consideration, which is free of charge, a category in which we would include the following cases:
1) When they form part of a heritage acquired by universal title, or are acquired free of charge, these would be the cases in which the company received by inheritance or donation, shares or interests of a partner.
2) or acquired shares or interests as a result of a merger procedure, in which the absorbed company was the owner of shares in the absorbing company.
In this case, the existing considerations are between the partners of the companies participating in the merger process.
This regulation must be put in relation to article 26 LME, which deals with the prohibition of the exchange of own shares. Therefore, the situation that is really regulated is the case in which the absorbed company participates in the absorbing company. In this case, as a consequence of universal succession, the shares pass to the absorbing company, which if it keeps them and does not deliver them to the shareholders of the absorbed companies, they will be in treasury stock.
The temporary nature of these acquisitions.
Once the shares or own interests have been acquired, for the reasons mentioned above, and which are reflected in the accounting records in the manner we have indicated, this acquisition has a time limit, since they must be amortized or sold within a period of three years (articles 141 and 145 LSC), with the exception of public limited companies, since it allows for an exception to amortization or alienation, when, added to those already owned by the acquiring company and its subsidiaries and, where applicable, the parent company and its subsidiaries, they do not exceed twenty percent of the share capital.
The alienation of own shares or interests.
As we have just said, one of the possible destinations for own shares or interests is their alienation, which does not pose excessive difficulties.
From a purely organizational point of view, it will simply mean that there will be a new partner or that the previous partners will increase their percentage of participation in the share capital.
And for the company, as we have said, this sale does not generate positive or negative income that can be included in the tax base, since the difference between the amount obtained from the sale of the company's own shares or interests and their book value will be charged or credited, as appropriate, to accounts in subgroup 11 (other equity instruments).
Treasury stock and reserve for own shares or participations.
The law on capital companies, subjects the treasury stock of the public limited companies in its article 148, which obliges the company that has acquired its own shares or participations or shares of its parent company, among other things, to establish in the net worth an available reserve equivalent to the amount of the participations or shares of the parent company computed in the assets.
On the contrary, in the limited liability companies, the mere acquisition of own shares does not, in principle, generate the obligation to constitute any type of reserve in the company, at least from the point of view of commercial legislation. (see article 141 LSC))
The obligation to create a reserve may be necessary due to accounting requirements, as indicated by the ICAC through consultations, when the difference between the purchase price of the shares and their nominal value is greater than the total of the reserves that may be applied in accordance with commercial legislation (free profits or reserves).
In these cases, the company must create a reserve item with an appropriate name, the accounting nature of which determines its inclusion in the liabilities of the balance sheet with a negative sign, decreasing the equity, since in the end this amount is generally identified with results to be generated in the future that are paid by the company today.
However, as stated in the DGRN resolution of 27 March 2001, the requirement of such a reserve cannot be upheld since it is not only a purely voluntary decision of the company, but is also conditioned on the existence of profits or reserves available from which to fund itself, which may well not exist.
Reduction of share capital.
If the shares or interests are not sold within three years, the company must immediately agree to their amortization and the reduction of capital.
Regarding the reduction of share capital, we must start from what the doctrine that the General Directorate of Registries and Notaries has been establishing through various resolutions in the sense that the reduction of share capital by amortization of own shares must be carried out in compliance with the rules governing the protection of creditors, but that it does not constitute an autonomous form of reduction of share capital.
In the case of public limited companies, the protection of creditors is determined, whatever the cause of the reduction:
to) first of all by the obligation established in article 319 LSC to publish the reduction agreement in the Official Gazette of the Commercial Registry and on the company's website or, if it does not exist, in a widely circulated newspaper in the province in which the company has its registered office.
b) and secondly, by the right established in article 334 LSC, which empowers the creditors of the public limited company whose credits have arisen before the date of the last announcement of the capital reduction agreement, have not matured at that time and until such credits are guaranteed to oppose the reduction. (RDGRN of May 7, 2015)
In the case of limited liability companies, when the capital reduction does not entail return of contributions It will be necessary, as determined by article 141 LSC, to provide a reserve for the amount of the nominal value of the redeemed shares, which will not be available until five years have elapsed from the publication of the reduction in the Official Gazette of the Commercial Registry, unless before the expiry of said period all the corporate debts incurred prior to the date on which the reduction was enforceable against third parties have been satisfied.
As we can see, the reserve is delayed in limited companies until the capital reduction is made, but only in the event that this does not entail the return of contributions.
If on the contrary, Capital reduction with amortization of own shares entails restitution of contributions to partners society will be forced alternatively, in accordance with the rules for the protection of creditors, provided for in article 331 LSC,
a.- record the identity of the partners whose shares are being redeemed and the nominal amount of those shares, who shall be jointly and severally liable among themselves and with the company for the payment of the company's debts incurred prior to the date on which the reduction was enforceable against third parties;
b.- or to provide a reserve from profits or free reserves for an amount equal to that received by the partners as restitution of the social contribution.
