Should you use English law in a Spanish M&A contract?

Introduction
Risks of using English law in Spanish M&A contracts
Comment

Introduction

The stronger party to an M&A contract with a Spanish element will often select, or somehow impose, English or New York law as the governing law. This may be because:

• the purchaser comes from the United Kingdom or the United States and is not familiar with the peculiarities and tenets of Spanish law; or
• the transaction is being financed in the London or New York markets and the banks or funds insist on not using the laws of a foreign country.

Sometimes, what it is sold is a group of companies in various European jurisdictions among which there is a Spanish affiliate. In such situations, the transaction is simplified by having a single contract governed by English law covering the whole group with one-to-two-page annexes providing for so-called "local agreements" regarding the legal peculiarities and conditions of each country in which the group has an affiliate. When the United Kingdom was part of the European Union, this approach made sense because of the favourable EU regime for enforcing judgments on contractual disputes (ie, the EU Recast Brussels Regulation).⁽¹⁾

Another circumstance that sometimes occurs is that a single company is bought in Spain and the contract uses an English law template. The role of the Spanish lawyer is to adjust the English common law template to Spanish legal provisions, while the English lawyer is often in charge of the drafting and the negotiation of the deal.

In all these situations, English (or New York) law become pre-eminent and Spanish law plays a secondary role. It is fair to say that English law offers predictable solutions in contractual disputes between parties of equal bargaining power and admits little or no limitations on freedom to contract.

Risks of using English law in Spanish M&A contracts

However, in the real world, this use of common law precedents may create significant risks and legal inconsistencies that cannot be ignored.

Notarisation
In Spanish law, the transfer of title over shares entails the double requirement of:

• signing an agreement; and
• delivering the shares to the purchaser.

The second condition involves the granting of a notarial deed in front of a local notary, which operates as a sort of fake delivery. The intervention of a notary is, therefore, not a superficial formality but a substantive element of the contract.

Governing law
When the purchaser is a Spanish company that is an affiliate of a US or UK company, free choice of the governing law will be limited by article 3(3) of the EU Rome I Regulation.⁽²⁾ In such a case, a Spanish judge will consider that all the elements of the deal are located in Spain. The Spanish courts consider that the nationality of the affiliate company is determined by the law of incorporation and registration of the company – in this case, Spanish law – and disregard the criteria of the nationality of the controlling party, except in exceptional circumstances.

Because of this, the Spanish courts will set aside any contractual provisions that are contrary to Spanish law, as the law of the country in which all the elements of the transaction take place. On the contrary, the English courts rarely apply article 3(3) of the EU Rome I Regulation, simply because freedom to contract is of paramount importance. In Banco de Santander Totta v Companhia de Ferro de Lisboa,⁽³⁾ the English Court of Appeal emphasised that article 3(3) of the Rome Convention (the predecessor of the EU Rome I Regulation) is an exception to the fundamental principle of party autonomy and therefore is to be construed narrowly. The English courts consider that if the matter is not purely domestic but rather contains international elements, the choice of English law must be upheld. This criterion has been consistently applied in judgments on derivatives governed by the International Swaps and Derivatives Association Master Agreement.

Contractual terms
The terms used in English agreements have no exact equivalent in Spanish law. English agreements contain long lists of representations and warranties, covenants, and indemnities, whereas a typical Spanish contract only deals with events that constitute contractual breaches. Spanish agreements may contain monetary penalty clauses (which can always be "alleviated" by the Spanish courts) that are absent in English agreements – in English agreements, other tools are used to promote contractual performance by the parties.

Force majeure
"Force majeure" is loosely defined under Spanish law, as compared with the long descriptions of events that qualify in a common law contract as "acts of God".

Set-off
Finally, set-off (ie, compensation) in civil law is a way to put an end to a contractual obligation. Under common law, however, it is a right to be exercised in the event of default, which somehow operates as a security affected by insolvency law.

Comment

These inconsistencies, among others, are the result of different legal traditions. What is important is to think carefully when selecting the governing law of a M&A contract. The governing law clauses are at the end of contracts and are seldom discussed in detail because they have little to do with the economic substance of the deal under negotiation.

If all the elements of a deal are in Spain, it may be safer to start with a Spanish law precedent and avoid the easy solution of "translating" a common law template by simply changing the governing law clause from English to Spanish law. Spanish judges may misunderstand the key clauses on representations, warranties or indemnities. In legal matters, clarity is fundamental.

Endnotes

(1) Regulation (EU) 1215/2012.

(2) Regulation (EC) 593/2008.

(3) (2016) EWCA Civ 1267.