Can you pay for a stake in a Spanish limited company (SL) in two instalments through a capital increase?

Investors often want to buy into a Spanish SL (Sociedad Limitada, private limited company) by paying part now and the rest once the business is more established. Spanish company law sets a clear limit on this.

Shares in an SL must be fully paid up

Under Article 78 of the Ley de Sociedades de Capital (Spanish Companies Act), shares in an SL must be fully subscribed and paid up when the capital increase is executed. The share premium must also be paid at that point. Therefore, a single capital increase cannot be paid half now and half later.

Alternatives for investing in tranches

• Two successive capital increases. The second is committed in the shareholders' agreement and made conditional on agreed milestones. Until it is completed, the investor holds a lower percentage than planned.
• First tranche as equity, second as a convertible or participating loan (préstamo participativo). The loan converts into shares once the agreed milestones are met.

In both cases, the shareholders' agreement (pacto de socios) should set out the conditions, the price of the second tranche and the investor's final percentage.

Loan or equity?

An ordinary loan gives no shareholding or voting rights, only the right to repayment and interest. If the aim is to become a shareholder with a specific percentage, equity is usually the most efficient route. A convertible or participating loan makes sense for the second tranche.

If the investment is made through a Spanish company, dividends and capital gains may qualify for the exemption under Article 21 of the Ley del Impuesto sobre Sociedades (Spanish Corporate Income Tax Act). This requires a minimum 5% holding held for at least one year.

Before investing: trademark, recipes and due diligence

For brand-based businesses, check the following before completion:

• That the trademark is registered with the OEPM (Spanish Patent and Trademark Office) or the EUIPO in the company's name, not the founder's. If the founder owns it, it must be assigned or licensed to the company in writing.
• That the know-how (recipes, processes) is documented and assigned to the company, including contributions from other shareholders or collaborators.
• If the trademark includes a geographical name, that a trademark specialist reviews the registration and its scope.

A basic due diligence is also advisable, covering:

• Deeds and articles of association.
• Current shareholding structure.
• Latest annual accounts and interim figures.
• Certificates showing the company is up to date with the Spanish Tax Agency (Hacienda) and Social Security.
• Breakdown of debts and loans.