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What has COVID-19 changed for companies in Spain from a legal standpoint?
What has COVID-19 changed for companies in Spain from a legal standpoint?
One year after the state of emergency was declared in Spain due to the spread of COVID-19, Garrigues analyzes the regulatory changes companies face both now and post-pandemic.
2020 started off without a hitch. The legal industry was poised to address what it expected to be the hard-hitting issues for the year: the reform of the Capital Companies Law to incorporate the EU Directive on long-term shareholder engagement, timekeeping of working hours, the announced repeal of the 2012 labor reform, the long-awaited new digital tax and the new Food Supply Chain Law. But then March 14 arrived, marking a before and an after.
The declaration of the state of emergency in Spain as a result of the spread of COVID-19 ushered us into unchartered waters and forced companies to react in record time to a new social, economic and legal context, in which the rapid-fire passing of new regulations required more sophisticated legal advice than ever before, so as to interpret, almost in real time, the new and unprecedented legal framework.
Since then, new trends have appeared, some of which are here to stay. Others, however, will wane once the pandemic and its effects are gone. Below we analyze the current situation and the most relevant issues that will set the agenda for 2021, from all angles of business law.
Technology pervades everything
One of the most patent outcomes of the pandemic is that it hastened the technological revolution and the attendant legal ramifications, including issues such as how to best manage remote working, sign documents electronically, carry out negotiations via videoconference, and hold shareholders’ and board of directors’ meetings, court hearings, trials and even tax inspections virtually and online.
Feeling of legal uncertainty
A feeling of legal uncertainty has spread, triggered by a number of factors: the uncertainty shadowing all things at present, the lack of predictability and the fact that the pandemic has done away with any ability to make plans, the regulatory deluge at all levels (European, but especially national, regional and municipal), which can easily cause companies to lose their way in the legal labyrinth, and the still insufficient case law on this new legal framework, which we need in order to decide how to proceed based on clear interpretation criteria.
Ability to react in the face of a legislative maelstrom
In the first three months of the pandemic (from the declaration of the state of emergency until June), 3,754 pages of COVID-19-related laws and measures were published, along with 71 issues of the Official State Gazette, 22 of which were special issues. Reflecting the widespread interest sparked by this legislative whirlwind, the Official State Gazette website logged 800,000 downloads of the COVID-19 Electronic Codes. This avalanche of reforms and new regulations approved in record time has posed (and, one year later, continues to pose) a challenge for all law professionals, who have had to stay abreast of each and every real-time development in order to help and support their clients, which are often overwhelmed by the constant changes published in the official gazettes.
As José Manuel Mateo, partner with the Garrigues Labor and Employment Law Department, noted, “it was an unprecedented barrage of new legislation, particularly in the labor and employment area, and the depth and impact of the changes surpassed even what we saw in the previous crisis and the labor reform of 2012.” Beyond the labor and employment arena, all practice areas were affected, to a greater or lesser degree, by the myriad reforms introduced in the past year.
A torrent of legal disputes
Another consequence of the pandemic was the sharp rise in litigation. The already congested courts and tribunals are now even more backlogged due to the numerous legal abeyances during the first state of emergency and the lawsuits related with the effects of the pandemic. The numbers don’t lie: according to the figures published by Wolters Kluwer, by December 2020, nearly 10,000 judgments and orders featuring the term “Covid” had been issued in all jurisdictional areas. This means that the current gridlock in the courts is not just temporary, and this has several ramifications, including the uncertainty that will reign until we know how the courts will interpret key questions.
Labor and employment impact on companies
Ever since the state of emergency was declared, companies have had the critical task of managing the employment status of workers in the midst of an economic shutdown and a mass move to work-from-home arrangements. While there were notably fewer questions about hiring, work at the workplace (except where related with detecting and preventing COVID-19 contagion), the posting of workers abroad or even timekeeping of working hours (which was expected to be a hot topic for 2020), the bulk of client queries were about remote working and temporary collective layoff procedures (ERTE). Some of the changes ushered in by COVID-19 will be here for as long as the economic crisis lasts, while others will remain longer, such as the new ways of working. As José Manuel Mateo explains, in these months we have seen unprecedented situations such as trade union negotiations being held virtually, something that would have been unthinkable before and that has raised novel management challenges, like how to run these negotiations, how to sign the minutes and documents, etc.
Looking to the year ahead, other salient topics in the labor and employment area will be remote working, equality, pay audits and the specific impact of the Charter of Digital Rights on labor and employment.
The paradox of remote working and a work/life balance
Timekeeping of working hours, which was once expected to be a major topic of 2020, was one of those issues that was relegated to the background during the pandemic. However, labor and employment experts expect that once employees begin returning to their workplaces in the coming months, it will once again feature among companies’ concerns.
Nevertheless, COVID-19 laid bare the drawbacks of remote working, which has shifted from being a tool for achieving a work/life balance to being a potential threat to that balance, due to the special personal circumstances of many employees, who have to work at home while taking care of children and whose working hours have become blurred. The line between personal life and work life will need to be redefined for those people who continue to work at home.
Lack of predictability and more out-of-court dispute resolution
In view of the glut of legal disputes and the gridlock in courts, another trend we are seeing is that disputing parties are more willing to reach out-of-court settlements and agreements. According to Cristina Mesa, partner with Garrigues’ Intellectual Property Department, this is the case in the intellectual and industrial property area, where the number of disputes has dropped sharply and more parties are attempting to reach amicable agreements.
In the same vein, Alejandro Huertas, principal associate with Garrigues’ Litigation and Arbitration Department, notes that companies’ chief legal officers are focusing on two new questions in that regard. For one, the new and unique scenarios cropping up in today’s world cast greater uncertainty when negotiating settlement agreements, because the potential outcome of lawsuits is also more uncertain. Secondly, parties now need to use alternative conflict resolution mechanisms before reaching trial. This trend is not new, but it could become a more widespread practice in view of the Bill on Justice Service Procedural Efficiency Measures, which already aims in that direction.
Revisiting old elements in new contracts
The pandemic has had a far-reaching impact on contracts and caused parties to rethink how we should interpret traditional concepts such as force majeure or the rebus sic stantibus clause, which allows the conditions of a contract to be changed because of a fundamental change of circumstances, in today’s new world. The type of queries we most frequently receive from clients has also changed, with a growing focus on leases, financing and the like.
That said, one year after the declaration of the state of emergency, the “COVID-19 factor” is neither new nor unfamiliar. And it is certainly not unforeseeable, says Jaime Bragado, partner with Garrigues’ Corporate/Commercial Law Department. When signing a contract, parties must now bear in mind the adverse effects already being caused by COVID-19, along with those that it could continue to trigger in the future. Contracts concluded or amended as a result of the pandemic must be negotiated bearing in mind these effects. “In the current unstable context, parties must evaluate, on a case-by-case basis, the advisability of introducing a material adverse change (MAC) clause or of making provisions for adjusting reciprocal considerations or prices, so as to avoid lawsuits”, noted Bragado.
A rebalancing in public contracts and the effects of restrictions
During the first state of emergency, administrative and court proceedings were paused and a number of measures were approved (many of them through royal decree-laws) with ramifications in virtually all areas. Both factors (the paused court dockets and the avalanche of legislation) spurred numerous doubts in the companies that came to us with questions each time new measures were announced, reports Juan Manuel Cabeza, partner with the Administrative Law Department.
These companies were concerned about the different restrictions and how they would be affected, as well as whether they could be compensated for the loss or damage these measures were causing them. Queries were received across the entire spectrum of industries and areas, from shopping centers to the transport sector.
The Garrigues Administrative Law Department advised clients in connection with rebalancing in public contracts, which has been progressively regulated through several different royal decree-laws during the pandemic (see here). Clients have also inquired about the possibility of seeking enforcement of the financial liability of the state for measures adopted at both national and regional level (in the latter case, assessing the suitability and appropriateness of the measures adopted, looking at, inter alia, the diversity of measures in each territory).
A respite from insolvencies and hibernation for companies
Undoubtedly, restructurings and insolvencies have been (and will continue to be) common occurrences in the new economic reality, with refinancings and sales of production units among the most frequent operations. Under the rolling legislation approved to respond to COVID-19, companies are able to have a certain “respite” from insolvencies, as they are not obligated to file insolvency applications when they encounter financial difficulties, at least until March 14 and most likely beyond if the deadline is extended again. Some companies have also gone into “hibernation” on two fronts: hibernating operations, including the workforce through collective layoffs (ERTE), and hibernating finances, in certain cases delaying repayment of borrowings in view of the current difficulties. Institutional lenders, aware of the exceptional situation we are facing, are not pressuring companies despite defaults.
As Adrián Thery, partner with the Restructuring and Insolvency Department, explains, a lot of the restructurings and insolvencies we are seeing look very different from how they once did. While the respite from insolvencies has eased the pressure on company directors to have to resort to insolvency filings, the pandemic has also been a catalyst pushing companies with liquidity shortage problems to turn to refinancings or sales of their insolvent companies.
At the same time, novel initiatives are arising in the field of insolvencies, such as that proposed by the Barcelona commercial courts, which published a set of basic guidelines for processing the Spanish insolvency pre-packs, introducing the optional tool of the silent administrator and facilitating the sale of production units immediately after an insolvency petition is filed.
Separating advice for companies from advice for shareholders
Thanks to the aforementioned respite from insolvencies, we are also seeing fewer queries on directors’ liability for insolvencies, which, in turn, means that less litigation is underway in that respect, at least for the time being.
Executives are finding themselves in unfamiliar territory: the land of restructurings. Consequently, as Adrián Thery notes, more than ever before they need chief legal executives to advise them on their next steps, coupled with external lawyers to help define their best strategic options. In many cases, this advice may be two-fold: advice for the company itself, and also for its shareholders. At a time when companies’ debt often outweighs their value, shareholders are not the only ones with an interest. Accordingly, in some cases it can be advisable to offer separate advice to shareholders and to companies. Furthermore, restructuring processes can sometimes trigger a change in control of the business; in this case, directors are concerned about who will ultimately own the company and to whom they are duty-bound.
Jaime Bragado with the Corporate/Commercial Law Department explains that there have been fewer queries about winding up companies and directors’ liability when a company’s equity is below 50% of its share capital. Companies have also been afforded a respite from this rule, although the question of for how long is rather complex and open to interpretation. In companies with independent directors on their boards, these directors are wondering how the financial distress of their companies could affect them.
Foreign investments, in the spotlight
Another relevant change relates to the rules on foreign investments. The European Union (EU) had already established criteria for requiring prior administrative authorization of foreign investments in certain sectors and situations, and COVID-19 hastened its implementation. In Spain, the rules lend themselves to various interpretations, each with very different consequences. According to Jaime Bragado, Spanish clients want to avoid problems when selling, and foreign investors are looking for support in avoiding potential obstacles to investing. Currently, the Spanish public administration is interpreting the regulation and, where there is any room for doubt, leans toward a restrictive reading. This will lead to very complex situations, for example, regarding investments made with private equity funds that had previously faced no administrative restrictions when investing in Spain. In this context, it is essential to have case law to shine a light on the surest way forward.
Remote management of companies
Among the recurring queries of companies in the corporate/commercial area are those regarding the holding of virtual meetings of managing bodies, as this entails many unknowns, such as the technical limitations of technological tools. This practice is one of the ones that is here to stay. At the time this document was prepared, two regulatory reforms were underway. One is an exceptional extension of Royal Decree-law of March 2020 to allow virtual-only shareholders’ meetings to be held in 2021. Another is a permanent reform of the Capital Companies Law to allow companies to write virtual-only shareholders’ meetings into their bylaws.
Listed companies, in turn, are concerned about complying with the European single electronic reporting format requirement for their financial statements. According to Teresa Bocos, principal associate with the Corporate/Commercial Law Department, since the regulation came into effect before the requisite computer software, some formats are not sufficiently developed to allow a smooth signature process by directors.
ESG, on the rise
Even before the pandemic, some of the most common questions among the boards of listed and non-listed companies had to do with environmental, social and corporate governance (ESG) factors, as noted by Sergio González Galán, partner with the Garrigues Corporate/Commercial Law Department. The reform of the CNMV’s Good Governance Code of Listed Companies in June 2020 introduced aspects that are closely linked to business sustainability: fostering the presence of women on boards of directors; greater attention for reputational and non-financial risks, and the non-financial information statement, which has been required for a number of years but continues to elicit questions. Not to mention the new legislative developments, such as the bill on the reform of the Capital Companies Law, which introduces, among other measures, the possibility of regulating the grant of loyalty shares under Spanish law for the first time. With loyalty shares, shareholders of listed companies who have held their shares for more than two years receive two votes for each loyalty share held, thereby rewarding the long-term engagement of shareholders.
Also related with sustainability, a couple of notable studies are being carried out in the European Union on the level of director diligence and on due diligence in the value chain. In addition, two EU regulations that recently entered into force require private equity funds to invest in companies that meet certain sustainability criteria. In this area, Garrigues has the unique competitive advantage in the market of working with its subsidiary G-advisory, which complements the firm’s legal advisory services with comprehensive technical advice in areas including private equity.
The tax authorities, always open for business
During the pandemic, the tax authorities have continued to conduct their proceedings as usual. According to Abigail Blanco, partner with Garrigues’ Tax Department, clients (even those in the sectors hit hardest by the pandemic, such as the pharmaceutical industry and the hotel business) continue coming to the firm with their usual tax questions and their concerns about how to handle the inspection proceedings they are undergoing.
Taxpayers, hopeful after observing what happened in other countries, have long been awaiting favorable tax law changes. Álvaro de la Cueva, partner with the Tax Department, recalls that, during the first quarter of the pandemic, the most often-heard question was: “Spain really isn’t going to defer tax payments?”.
Although some tax deadlines were relaxed during the pandemic, inspection proceedings have actually ramped up. One of the problems that is most concerning to chief financial officers and to companies’ tax advisors at this time is precisely the tax control plan, since it appears that the tax authorities will not halt their inspections of pre-pandemic years and will continue to require any unpaid tax due, despite acknowledging that companies are experiencing sizable liquidity tensions at present.
In addition, while remote inspections are not obligatory, when they are conducted this way, contact with inspectors is exceedingly more difficult, putting an even higher barrier between taxpayers and the tax authorities. And throw in difficulties in getting assessment documents signed, which generates uncertainties for companies and individuals.
Moreover, there have been many tax questions directly related with COVID-19, such as those regarding: (i) tax residence (for example, a few months ago, the Directorate-General of Taxes issued a ruling concluding, in contrast to the related OECD recommendations, that people who spent more than 183 days in Spain strictly because they had to stay in the country during lockdown will be considered tax residents in Spain for 2020), or; (ii) taxation of certain aspects related with employee compensation. For example, when assessing the compensation derived from use of company cars, the Directorate-General of Taxes concluded that the lockdown period should be considered one of “private use” of the vehicle, even though mobility was highly limited and sometimes even prohibited during that period.
Uncertainty in housing legislation
As regards the housing sector, there was already some uncertainty before the pandemic due to the national law prohibiting eviction proceedings. This trend has heightened in Catalonia, where a large number of regulations are being passed, affecting even the price of rentals. A close eye should be kept on how this issue is regulated in other autonomous communities and at national level.
A before and after in e-commerce
One very clear fact is that the pandemic, and above all the lockdown period, was a major boon for e-commerce, with all its ramifications in terms of contractual matters and litigation, highlights Cristina Mesa. A number of groundbreaking undertakings, such as online car sales, debuted online in this period.
In the digital arena, this year companies will face two important legislative changes regarding internet platforms: the regulation on platforms and the Digital Services Act (DSA). This new regulation changes the responsibility structure of intermediaries and introduces due diligence obligations for service providers. It is a 180-degree change that will surely give rise to noteworthy disputes.
A breeding ground for fake news
Cristina Mesa also cited another trend: fake news has doubled down during the pandemic to become one of the chief concerns in the information society. Collaboration of large internet platforms will be key for quashing the rampant misinformation.
Just as online commerce has grown exponentially, so have the number of fake reviews attempting to hype the value of products or services on the internet. The CNMC and the OCU are taking measures toward achieving more transparent communication online and platforms are already working to stamp out these bad practices.
One of the most relevant topics for 2021 will undoubtedly be the Recovery Plan for Europe and the managing of the NextGenerationEU funds. Juan Manuel Cabeza notes that companies are looking for sound legal advice both on projects in which they can invest and on the process as a whole, from application to execution of investments. This work must be approached from a cross-disciplinary standpoint, with the participation of multiple practice areas, a method in which Garrigues excels, offering unique value for clients. For example, for companies seeking assistance under Spain’s Strategic Projects for Economic Transformation and Recovery (PERTEs), unerring legal advice from the public law perspective is essential, while legal advice in other areas could be extremely useful as well.
A reordering of priorities?
On the whole, COVID-19 has shifted the usual legal concerns of companies and has set a whole new list of priorities. Clients require faster responses to their problems, certainty when taking decisions and a proactive heads-up for any potential obstacles that could arise along the way.
And what about the way we work? Garrigues professionals note that COVID-19 has increased their work load, triggered more virtual meetings, and led to the design of legal instruments tailored to the new needs and, of course, to social distancing.
But beyond all this, they are clear about one thing: clients come to us for what they always have, namely to have professionals at their side, invested in the company’s problems, to help them find the best possible path forward. Garrigues professionals, who have always put forth their very best, are right at home in this role.