State of Alarm in Spain: New Rules for Businesses

On March 14, 2020, the Spanish Government declared a 15-day “state of alarm” for all of Spain. This state of alarm was then extended three times for another 15 days each and is now in place until May 9, 2020.

Spain and all administrative and judicial activity has been on hold for over a month. There has been very little court activity (it is restricted to emergency cases), and most administrative activity is on standby since the majority of the administrative offices remain closed. The economy has slowed down and almost one million Spaniards have lost employment during these first weeks of confinement. Over Easter weekend, the government marshaled a complete lockdown and economic hibernation for ten days, with only essential activities allowed.

With high legislative activity and new laws and statutes being enacted on a daily basis, not only does it seem close to impossible to be aware of all legislative news, but often the situation is confusing due to conflicting laws.

Our Spanish alliance firm, Monereo Meyer, has been publishing extensively about all legislative changes these past weeks. In this post, we will focus on corporate law measures to ease and facilitate continued corporate activity despite ongoing confinement and closure of businesses and their offices.

State of Alarm in Spain: What Does It Mean for Spanish Businesses?

By virtue of Royal Decree 463/2020 dated March 14, the state of emergency was declared for all Spanish territory to deal with the health crisis situation caused by COVID-19 (the “Emergency RD”). On March 18, Royal Decree 465/2020, dated March 17, was published, amending the Emergency RD.

The most important measures involved the closure of certain businesses such as all retail establishments except for food, beverages, essential products, pharmacies, and certain healthcare and veterinary centers. There was much speculation and disagreement as to what should be considered “essential products.”

All activities of the hospitality and restaurant sectors were suspended, with the inherent closure of those businesses. Museums, libraries, and all premises in which public performances are held were also closed. All sport and leisure activities were suspended. School buildings were closed, and classroom-based education was suspended. The possibility of temporary requisition of goods and the temporary intervention and occupation of industries, installations, and premises by the governing authorities was discussed.

Basically, businesses had to close their establishments to the public in order to avoid further contamination and spread of the disease but remain open for employees when possible. Remote work was suggested when feasible for the business.

Another Measure: Standby of All Judicial and Administrative Proceedings and Suspension of Most Statutes of Limitations

During the state of alarm and all subsequent extensions, all judicial and administrative proceedings and all procedural deadlines and timelines in these proceedings were suspended. All statutes of limitations and all other court and administrative timelines were suspended, with certain limited exceptions in each jurisdiction. These exceptions relate to urgent and unavoidable measures as well as those jurisdictional measures that are legally or administratively determined to be necessary to avoid irreparable damage to the parties to the proceedings.

Restricted Mobility for Employees and Business Owners

Asides from these and a variety of other measures ensuring that basic supplies remain available to the population, implemented through a variety of laws and orders, the Emergency RD also restricted the freedom of movement of persons. Restricted mobility has been in place since then, with the exception of some activities allowing for very limited movement of individuals, such as to purchase food, pharmaceutical items and other essentials, attending health centers, traveling to the workplace and returning home, assisting and caring for the elderly, minors, persons with disabilities, and dependent persons. The entry of travelers at national land borders was prohibited, with certain exceptions, not including the transport of goods and Spanish residents and citizens.

Most Important Corporate Law Measures to Facilitate Activity

We have written here and here about general measures applicable to companies. The corporate law measures can be separated into three categories: (1) those facilitating the adoption of corporate resolutions during the current restrictions on movement; (2) the preparation of annual accounts has been eased and deadlines postponed; and (3) a variety of other measures have been taken, as discussed below.

  1. Measures concerning corporate resolutions

On March 18, Royal Decree-Law 8/2020 dated March 17, on urgent, extraordinary measures to deal with the economic and social impact of Covid-19, was published. The following are some of the extraordinary measures explained that are applicable to companies and other legal entities such as associations, cooperatives, and foundations.

Even though the bylaws or other governing documents of an entity may not contain any specific provision, during the state of alarm, companies and all legal entities are allowed to organize any meetings by video conference. This applies to meetings like the annual shareholders’ meeting, which does not require physical attendance of the required person to reach the required quorum for voting. Holding a meeting via video conference must be done by some means that ensures authenticity and real-time connection with video and audio of those in attendance.

It was not completely clear what meetings were to be allowed to take place by video conference, but Royal Decree-Law 11/2020 dated March 31 seems to make a clear distinction: both management bodies and shareholders’ meetings are seemingly included in that legislative change.

Furthermore, all resolutions of the shareholders or owners and of the governing body of a company can be adopted by written vote and without a meeting if the president makes that decision or it is requested by at least two of the members of the body where the decision needs to be made.

  1. Annual financial reporting

Under normal circumstances, according to the Capital Companies Act, the directors of the company are responsible for preparing the annual financial reports within a maximum term of three months from the end of fiscal year. They furthermore are required to convene the ordinary general shareholders’ meeting within the first six months of each financial year, in order to approve the annual financial reports for the previous fiscal year, get the management of the company approved and decide on the application of profit or loss. Finally, the approved annual financial reports need to be deposited at the Commercial Registry. Failure to comply with these duties entails not only penalties but may eventually lead to the closure of the business’ file at the Commercial Registry.

These deadlines have been suspended. Preparation of the annual financial reports should have been done for most businesses in Spain at the end of March, but that term has been suspended during the state of alarm. From the date on which the state of alarm ends, a new period of three months is granted to proceed with the preparation of the annual financial reports.

In the event the annual financial reports have already been prepared but a financial audit is required, the company has another two months from the end of the state of alarm to carry out the audit of the financial accounts.

The general shareholders’ meeting to approve the annual financial reports will necessarily take place within three months after the end of that term to prepare the reports. Hence, the 2020 general meeting for the approval of the annual financial account reports will take place within six months after the end of the state of alarm.

If the general shareholder meeting had already been called when the state of alarm was declared, and the general meeting was scheduled for after the state of alarm was declared, the governing body may choose between either modifying both place and time of the meeting or revoking the summons. In both cases, the decision must be made and communicated at least 48 hours before the general shareholder meeting was supposed to be held.

If the first call to the meeting is revoked, a new date and time for the general shareholder meeting must be announced within one month following the end of the state of alarm.

One other important amendment provides an opportunity to modify proposals for application of profit or loss due to the current situation caused by COVID-19, even though the corresponding corporate resolution has already been adopted. If such decision has not been made yet, it can be removed from the agenda of a scheduled meeting and must be made within three months from the preparation of the annual financial account reports, which needs to be completed within three months from the end of the state of alarm.

  1. Other corporate measures

According to the Spanish Companies Act, companies that suffer from significant losses and/or are insolvent can either reach agreements with their creditors in order to either guarantee survival of the business or dissolve. If there is any cause for dissolution and winding-up as required by law, the directors are usually required to convene the general shareholders’ meeting within two months from obtaining knowledge of the cause of dissolution. If the director violates that duty and does not convene the general shareholder meeting to agree on the dissolution of the company, the director becomes personally liable for company debts.

These terms were modified due to the current state of alarm. If, prior to the declaration of the state of alarm or during its term, there is cause for dissolution of the company, the term of two months is suspended until the end of the state of alarm. That also means that if there is cause for dissolution of the company during the state of alarm, the director will not be liable for the debts that the company could have incurred in that period.

The notary public who is requested to attend a general shareholder meeting to draw up the minutes may use any electronic means of communication in real time to guarantee the correct fulfilment of this duty.

All deadlines for filing with the Commercial Registry have been suspended. The shareholders of a company may not exercise their right to separate from the company in capital companies, even if there is a legal or statutory reason for dissolution, until the end of the state of alarm or its extensions. Companies that were formed for a finite term that ends during the state of alarm shall not be considered dissolved until two months have passed from the end of the state of alarm.

Legal News for Spanish Employers During COVID-19

For most Spanish companies, normal activity has been altered in some way and most have had to take employment-related steps. Our firm’s labor law department has been watching this crisis as it started in China and expanded into Europe, discussing all possible scenarios and consequences for Spain’s labor market here and here. The measures that were finally taken in mid-March on local Spanish level are summed up here. Most importantly, you need to read up about proceedings for temporary collective dismissal and suspension of labor contracts (ERTE – Expediente de Regulación Temporal de Empleo) or workday reduction either due to force majeure or to economic, technical, organization-, or production-related causes.

When strict confinement (aka economic hibernation) was ordered over the Easter weekend, Royal Decree-Law 10/2020 dated March 29 was passed, providing guidance on recoverable paid leave for employees who do not provide essential services, with the aim of reducing the population’s movements in the context of the fight against COVID-19. The Spanish Government created a recoverable, remunerated permission for persons working on behalf of third parties that do not render essential services, and were hence not allowed to continue labor activity, as explained in more detail here.

Tax Relief Offered to Spanish Companies Due to COVID-19

At the eleventh hour in high tax season, certain tax relief was granted to relieve small and medium-sized companies and the self-employed by extending filing and payment deadlines for certain tax returns. The deadlines for certain tax filings related to the first quarter were extended only a few days before they were due. These included extending the deadline for VAT filings for certain companies and postponing certain tax return filings. Last week, more measures were taken such as the possibility of making installment payments, and reduced VAT types were temporarily established for certain goods and services.

Legal insecurity is high because deadlines related to tax administration have not consistently been suspended or delayed. One must closely watch the legal changes happening on a daily basis if your company is doing business in Spain and affected by the current COVID-19 crisis.

This article provides limited insight into extensive legal measures taken in Spain these past weeks and does not claim to be complete or represent any legal advice.

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