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VII. Consolidation
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Law 19/1989 also introduced, for the first time in Spanish corporate law, the hitherto unacknowledged concept of a corporate group.
Although the Commercial Code did not define the concept of a corporate group, Law 19/1989 established that a business entity had to prepare consolidated financial statements and a management report at consolidated level if it is a shareholder of another enterprise and it is in any of the following situations:
– it holds the majority of the voting rights;
– it can appoint or remove a majority of the members of the other enterprise’s managing body;
– it can hold, by virtue of agreements with other shareholders, a majority of the voting rights; or
– it has appointed, by exercise of its voting rights, a majority of the members of the other enterprise’s managing body in office when the consolidated financial statements have to be prepared and during the two immediately preceding years.
In these cases, when preparing the consolidated financial statements the full consolidation method should be used.
The 2004 Accompanying Law amended certain articles of the Commercial Code relating to the presentation of consolidated financial statements. Of particular interest are the following amendments made to Articles 42 and 43 of this Code:
– The amendment to Article 42 modifies the criteria for the formation of a consolidated group for accounting purposes. Under the previous wording, the existence or otherwise of a consolidated group for accounting purposes was determined on the basis of the parent company’s ownership interest in its subsidiaries and of limited circumstances relating to control over voting rights at the subsidiaries and the power to appoint most of the members of the Board of Directors.
– The new regulations amend these criteria, focusing on a new concept known as "decision-making unit", which does not necessarily take into account ownership interests among enterprises. It does not include a definition of what should be understood to constitute a decisionmaking unit, but rather establishes a series of cases in which the existence of such a unit will be presumed:
- Firstly, a decision unit is presumed to exist when the circumstances arise in which a group was deemed to exist pursuant to the former regulations, i.e. the existence of ownership interests between the enterprises and the concurrence of control over the voting rights and the power to appoint most of the members of the managing body.
- Second, a "decision-making unit" will be presumed to exist when the enterprises are under single management. In particular, when most of the members of the subsidiary’s managing body are members of the managing body or senior executives of the parent company or of another enterprise controlled by the parent company. In this second case, there does not necessarily have to be an ownership interest between the group companies, which is a major novelty introduced by the new regulation.
– Article 43.2 was repealed. This Article had previously established the possible exclusions of enterprises from consolidation for the following reasons: (I) scant materiality; (II) the existence of significant and permanent restrictions hindering their management; (III) the fact that they can only be consolidated if disproportionate expenses are incurred; (IV) the fact that they are owned solely for the purpose of being subsequently transferred; and (V) the fact that they engage in very different business activities, as a result of which their inclusion would run against the objective of consolidation.
In short, the changes made to the Commercial Code broadened the scope of the definition of a group for financial statement consolidation purposes (in line with the trend set by Article 4 of the Securities Market Law).
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