Accordion facility: validity of agreements taken at different times

Ignacio Cerrato & Álvaro García-Pelayo

In a decision issued on the 10th of October 2022 the Directorate-General of Public Governance (DGSJFP by its Spanish acronym) reversed a decision made by a registrar from III Mercantile Registry of Seville that decided not to register as a public deed some corporate agreements that simultaneously increased and reduced a company’s capital, reiterating the verification of the balance sheet by the auditor as proof of the validity of an accordion feature.  

On December 31, 2021, a deed was executed to certify corporate agreements (a capital increase and a capital reduction) adopted unanimously at the general shareholders meeting of the granting company, whereby, after approval of the balance sheet, the capital was reduced from 18,600 euros to 0 euros as a result of losses, and was simultaneously increased to 3,100 euros with a following amendment to the bylaws (the "Deed").

The Deed was presented to the Mercantile Registry of Seville and was rejected by a registrar from Registry nº III. The Deed was withdrawn and presented again together with corrections (a diligencia de subsanación), but it was again considered to have deficiencies, with the present Decision taking into account solely the first of these (the "Deficiency"):

“I. (…). In this specific case, as the reduction and simultaneous increase was agreed in the general shareholders meeting held on November 18, 2021, and the balance sheet reflecting this operation must be verified by an auditor, it is not possible to correct the deficiency stated in the registration dated 28 March 2022 which agreed another increase by monetary contributions in the amount of 15,500 euros, so that added to the 3,100 euros, the initial share capital of 18,600 euros was reached. Remediable deficiency”.

Subsequently, the appellant filed a writ against the Deficiency in which it argued that the DGSJFP has issued numerous agreements that exempt parties from the requirement to verify the balance sheet if the following conditions are met: (i) the interests of the creditors are safeguarded; and (ii) the right of preferential acquisition of the shareholders is respected, which requires unanimous approval of the agreement. These conditions are understood to have been met by the appellant.

In response to this writ the Registrar of III Mercantile Registry of Seville issued a report ratifying the decision taken, stating that an exemption from the requirement to verify the balance sheet cannot be attributed to two corporate decisions taken at different times, and he referred the case to the DGSJFP.

The DGSJFP recalled the registry’s legal framework, pointing out that the protective measures contemplated by the law only make sense to the extent at which the interests of affected shareholders and creditors may be damaged, stressing that it is not right to require the completion of paperwork or formalities (such as the verification of the balance sheet by the auditor) which hamper the economic progress of the companies without just cause.

Therefore, bearing in mind this legal framework, the DGSJFP affirmed both the possibility of exempting parties from submitting the accounts to verification by an auditor if there is unanimous consent from all the capital shareholders, and when the interests of the corporate creditors are protected by maintaining or even strengthening the economic situation of the company as a result of a subsequent capital increase.

However, the specific nature of this case lies in the fact that, having agreed on an accordion operation in which the resulting capital was lower than the previous amount (thereby leading to the rejection by the registrar because the balance sheet had not been verified), a subsequent general shareholders meeting that bore the registrar’s decision in mind unanimously agreed to a new capital increase so that the capital matched the amount prior to the reduction. Therefore, what is considered relevant about this specific case is whether such subsequent agreement can remedy or perfect the first one so that either the deficiency or even the absence of validation thereby lose relevance.  

With regards to the above, the DGSJFP understood that the important element of the regulation is not the time frame in which the capital reduction and capital increase decisions were made, but their mutual causality: the circumstance that one cannot be adopted without the other (article 343 of the LSC), from which it follows that they cannot be carried out in isolation (article 344 of the LSC), nor, as a direct consequence, can the decision to reduce the capital be registered without the decision to carry out an increase in the capital  (article 345 of the LSC).

The DGSJFP pointed out that this is what has happened in the current matter, where a unanimous decision was taken at the general meeting to reduce the capital to zero as a result of losses and a simultaneous decision to increase the capital meant that they lacked the legally enforceable requirement of verification. However, this shortcoming was remedied by means of the adopted increase agreement which, because it is linked to the previous one, cannot be considered in isolation. Therefore, the appeal is upheld.

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