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News Spanish legislation aims to provide clear guidelines for mergers following structured leveraged buyouts, but the process remains unclear. Jose Fernandez-Ranada explains

Leveraged buyouts (LBOs) followed by a merger between the purchaser and the target company have been very common in recent years, particularly in the private equity field. Traditionally, there have been doubts over their compatibility with the rules prohibiting financial assistance.

The fact is that at a European level, an increasingly flexible approach is being taken in relation to transactions of this type. The Italian corporate law reform in 2003 and Directive 2006/68/EC are good examples of this trend.

The Spanish Bill on structural modifications to commercial companies, inspired in this regard by Article 2501 of the Italian Civil Code, apparently took the same line. However, the Bill’s final wording does not clear up certain grey areas.

This type of transaction has traditionally sparked much debate among legal commentators in Spain, as some authors take the view that it contravenes the prohibition on financial assistance. By contrast, another broad section of the legal academic community has argued that the prohibition does not apply to these transactions. The main argument they use is that there are adequate legal safeguards in these processes to sufficiently protect the interests at stake.

The decision ruled by panel number 28 of the Madrid Provincial Appellate Court on 9 January, 2007, in the context of the Endesa tender offer (which the Spanish Civil Code does not recognise as binding case law) shed some light on this debate. In referring to the hypothetical event of a merger taking place subsequent to the tender offer, the panel held that such a merger would not justify the application of the prohibition, “because it is a process that already provides specific safeguards for creditors and minority shareholders”.

In a merger between two or more companies, if any of them incurs debt in the immediately preceding three years in order to acquire control (or essential assets) of another company participating in the merger, the following rules would apply (according to article 35 of the Law on Structural Modifications to commercial companies):

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