Spanish Law

Mr. Sánchez, a Spanish national and Madrid resident, has had a furniture manufacturing business (the “Business”) for the past years.
In January 2014 he incorporated a Spanish company (Nomoretaxes, S.A., the “Company”) with his family (wife and 2 children). Each of the parents (Mr. Sánchez and his wife) fully paid in cash 30% of the Company’s share capital; Susana, the eldest daughter, fully paid in 15% of the Company’s share capital by contributing the plot of land on which the furniture factory is located (the “Plot of Land”), and Juan, the youngest son, fully paid in kind 25% of the Company’s share capital by contributing 50% of the quotas (participaciones) that he held in the Spanish entity Juan in a Million, S.L., when the Company was incorporated. Juan currently owns the other 50% of Juan in a Million, S.L.

The Company’s share capital is 100,000€. The Company is registered before the Commercial Registry of Madrid. Mr. Sánchez, Juan and Mr. Sánchez’ wife have been appointed directors of the Company.

In February 2014 Mr. Sánchez entered into a Business Sale and Purchase Agreement with the Company by virtue of which (i) he transferred the Business to the Company and (ii) the Company undertook to pay Mr. Sánchez an aggregate price of 2,000,000€ payable in 2 annual installments.
The Company finally paid the aggregate price in November 2016.
The Company entered into a Wood Supply Agreement with Woody, S.L. in December 2016 for the provision of wood on a regular basis.
In addition, Juan in a Million, S.L. entered into a Loan Agreement with Rob-A Bank N.A. (the “Bank”) in early 2017 for working capital purposes. In order to guarantee Juan in a Million, S.L.’s obligations vis-à-vis the Bank under the Loan Agreement, the Company granted a pledge over its quotas in Juan in a Million, S.L.

Recently the Company has not been doing very well and unfortunately has not been able to pay all its creditors, among them, Woody, S.L. Therefore, Woody, S.L. is suing both the Company and the Sánchez family for the due and unpaid amounts payable under the Wood Supply Agreement, alleging that the Company should be held jointly and severally liable with its shareholders, and therefore Mr. Sánchez and his family should be held jointly and severally liable for the Company’s due amounts.

In turn, Juan in a Million, S.L., the Company and the Sánchez family are being sued by the Bank due to Juan in a Million, S.L.’s default of its payment obligations under the Loan Agreement. The Bank alleges that the Company and the Sánchez family fully own and control Juan in a Million, S.L, therefore, they must be held liable for Juan in a Million, S.L. debt’s
In light of the latter, Mr. Sánchez reached out to Fabric, S.L. to invite it to invest in the Company.

Fabric, S.L. is a company dedicated to the production of fabric and tapestry business. The CEO of Fabric, S.L. conveyed to Mr. Sánchez that (i) due to liquidity issues, Fabric, S.L. did not have cash to pay for the shares in the Company, but, if the Company granted Fabric, S.L. a loan to acquire the shares in the Company it would be willing to pay high interest to the Company during
the next two years and (ii) in the alternative, Fabric, S.L. would be willing to contribute part of it tapestry business, which he believed would definitely be able to create synergies with the Business. In turn, Mr. Sánchez, knowing that the Fabric, S.L. had liquidity problems, tried to secure a loan to acquire the tapestry business in his personal capacity, so that he could, among
others resell fabric to the Company and “refloat” the business.

In light of the above, Mr. Sánchez’ youngest son, Juan, very frightened by Woody, S.L. law suit requests the Company and his sister and parents to give him back the Juan in a Million, S.L. quotas -or an equivalent amount in cash- he paid into the Company upon its incorporation in return for his shares, and if they fail to do so, he will sue them.

Moreover, Susana is interested in entering into a loan agreement with the House Bank, N.A., to which she has offered as security a mortgage over the Plot of Land and a pledge over her shares in the Company and the number of quotas in Juan in a Million, S.L. that she says correspond to her pro rata her participation in the Company.

Last week, Mr. Sánchez approached you as his attorney, and requested you to prepare an e-mail analyzing the following from a corporate law perspective: (i) the risks the Company, Juan in a Million, S.L. he and his family might be facing; (ii) if Susana can offer the security package detailed above to House Bank, N.A.; (iii) if he could acquire the relevant business from Fabric, S.L. and (iv) from a legal perspective, what would be preferable for the Company, either to grant the loan to Fabric, S.L. or to have Fabric, S.L. contribute the tapestry business.

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