Disputes February 2016

Download printed edition

Introduction to Negotiation (III)

By Alejandro Casas

Comments on the recent Judgments of the Supreme Court on Bankia stock purchase.

By Xavier de Bernat

Introduction to Negotiation (III).

Alejandro Casas


The process of generating and analysing options during the negotiation is another key point of the Business Theory developed by the Harvard Negotiation Project.

The options can be defined as the range of possibilities on which the parties may reach a negotiated agreement or, from the parties’ interest point of view, as the different solutions that may satisfy the parties.

In most cases, the range of possibilities that may lead the parties to succeed in the negotiation is much wider than it may seem at first. For reaching a good agreement as beneficial as possible for both parties, the best one of these possibilities must be chosen.

To this end, the parties should be prepared beforehand investing reasonable time, since it is usually difficult to generate solutions to problems under pressure or before new unexpected situations which may arise during the negotiation process.

Options may be defined as the range of possibilities on which the parties may reach a negotiated agreement and it is advisable to generate as many as possible beforehand (…)

Firstly, it is recommendable to generate as many options as possible. An adequate forum could a brainstorming so that the components of the group may generate the widest range of possibilities. During this process, it is also recommendable not to criticise the ideas that seem to be absurd, since this attitude may limit the creativity of the group which, at this stage, may be determining.

A different thing is that once the brainstorming is concluded, it is advisable to develop such options that may seem to be the more promising ones and then create one or several proposals that may satisfy the interests of the parties.

Preparation may be carried out internally or with the other party, clarifying in advance in this last case the purpose of the meeting and trying to make it clear that no commitment will be assumed at this stage. This may be very useful, particularly in complex negotiations, where there are many variables and interests at stake.

Therefore, once the list of options have been prepared, the most useful ones should be chosen and, if any, they should be developed exhaustively, just leaving those that may seem to be less appropriate in the background.

Anyone in the position of a negotiator who has not performed this preliminary exercise may run the risk to position himself in his initial ideas, thus not being well disposed to deal with the different options that have been generated during the negotiating process and which, after being thoroughly analysed, could be more advantageous.

It is worth mentioning that one of the most frequently detected error is to limit – although unconsciously -, the profits of both parties based on the initial positions of each party.

For example, let’s suppose that the parties are negotiating a sale. One of the parties offers a payment of 10 as a limit. The other, instead, does not want to sell under 12. Regardless of the agreement reached, the value of the transaction may be easily placed between these two values. However, if the parties previously analyse the interests at stake and are willing to cooperate by generating options jointly, multiple solutions may arise which generate higher profits than the ones initially expected for both parties:

  • To sell at a lower price for the purchase of more units in the future.
  • To subject the sale price to an exclusive supply agreement.
  • To sell more units for a lower price.
  • To sell at a higher price in return of a service agreement with lower costs.
  • To sell at a mid price in return of extending the warranty.

Once the list of options has been drawn up, the negotiator will select the one that best covers its interests(…)

Or in the example of two friends that must share an orange, the options could be as follows:

  • The exact half for each one
  • The whole orange for one of the parties
  • The whole orange for the other party
  • The peel for one party and the juice for the other

A joint analysis of all the options on the bargaining table notably enhances the possibility to increase the joint benefits. In a cooperative negotiation – in which the parties do not fight, but they jointly collaborate to reach an agreement – the parties should evaluate the pros and cons that each of the options implies in relation to their interests, so that the agreement becomes the most beneficial one for all the parties.

Therefore, one of the keys of this process lies in the generation of joint profits – the interests of the parties being satisfied – to enhance as much as possible the profit sharing.

The best option will be the one that may not be improved without damaging the other party. This factor may be confirmed when, if we increase the profit of one party, the profit of the other decreases.

In conclusion, before assuming commitments, the negotiator should analyse if the option he will opt for is the best one among all possible options.

Comments on the recent Judgments of the Supreme Court on Bankia stock purchase.

Xavier de Bernat

The Civil Courtroom of the Supreme Court has recently settled a new case law criterion with its judgments numbers 23/2016 and 24/2016, of 3rd February, related to two appeals lodged by the financial entity BANKIA against the invalidation of the acquisition of its stock under the Takeover Bid in 2011.

In both cases, the Supreme Court has dismissed the appeals lodged by BANKIA against Judgments of 7th January 2015, of the Ninth Section of the Provincial Appeal Court of Valencia, and of 11th May 2015, of the Fifth Section of the Province Appeal Court of Oviedo, which, broadly speaking, agreed the following:

a) They declared the subscription-acquisition of BANKIA shares by some retail clients null and void.

b) They sentenced BANKIA to refund the amounts paid out by such retail clients under the subscription-acquisition of shares, plus interests.

Against such decisions on the appeal stage, the financial entity brought the relevant extraordinary appeals for procedural default and cassation, which, as we have advanced, have been dismissed by the Civil Courtroom, together with the existence of criminal prejudiciality related to the criminal proceedings followed before the National Appeal Court for alleged fraud in the public stock offering of BANKIA. The former ministers Mr. Rodrigo Rato and Mr. Ángel Acebes appeared, among others, as suspects (now under investigation after the last Criminal Procedure Act reform).

(…) serious inaccuracies in the prospectus prepared by BANKIA (…) led the small savers/investors to error (…) and thus of the possible profitability of their investment (…)

Regarding the adjournment of the ongoing Civil Proceedings due to criminal prejudiciality argued by BANKIA, the Civil Courtroom has rejected such claim for the following reasons:

a) Adjournment due to criminal prejudiciality must be interpreted on a restrictive basis since each jurisdiction may lead to prosecution and charge qualification in independent legal levels with different outcomes depending on the application of the assessment criteria of one jurisdiction or another.

b) Although the decision of the Criminal Court were in favour of the defendant, this would not lead to the dismissal of the claim filed in the Civil Proceedings, since in this kind of proceedings (regarding claims for avoidance in the BANKIA stock purchase) the principal criteria are the accounting and the stock exchange rules and the evidence requirements are less demanding than in the criminal jurisdiction.

c) The differences that may arise in the evidence examination in the Criminal and Civil jurisdiction do not infringe articles 9.3 and 24 of the Constitution to the extent each jurisdiction has its own independent assessment criteria, according to its function and the characteristics of the claims filed before each jurisdiction.

d) In turn, adjournment of the Civil Proceedings for criminal prejudiciality would render the liability for damages set forth in former article 28 of the Stock Exchange Act (current article 38 of the redrafted text) ineffective, if before claims of such nature we should wait for termination by final ruling of the criminal proceedings that may be followed against the corporate directors for forgery in the annual accounts or other documents that may reflect the legal or economic situation of the entity.

e) Finally, the plaintiffs (in this case, small investors) are entitled to an effective protection of courts which excludes the existence of undue delays, since Criminal Proceedings as those followed before the former directors of BANKIA are extremely long-lasting considering the complexity of the issues litigated, which would unduly violate the shareholders’ rights to court proceedings without undue delays in the civil jurisdiction.

As regards the other pleadings filed by BANKIA in its appeals, the Supreme Court elaborates on each of the arguments put forward by the entity, underlining that the serious inaccuracies in the prospectus prepared by BANKIA for the Stock Public Offering and Admission to Trading in 2011 led the small savers/investors to error (contrary to large investors or the so-called institutional investors, which may have access to another type of supplementary information), thus causing them a mistaken representation of the entity solvency and thus of the possible profitability of their investment. Otherwise, they had to handle the stock acquisition of a financial entity on the brink of insolvency and with non-admitted multimillion losses (on the contrary, they asserted the existence of profits).

Similarly, one of the rulings in the Supreme Court under analysis sentences that small investors (…), contrary to other more qualified investors, lack other means (other than the prospectus) to obtain information on the economic data affecting the company whose stock are to be traded and which are important to take the investing decision.

(…) with these two new judgments on avoidance for stock subscription, the Supreme Court raises the prospects that this type of liability will apply to small investors only (…)

Consequently, these two new Judgments of the Supreme Court cause an immediate effect for this financial entity, to the extent:

a) They open the door to thousands of small investors to file the corresponding legal actions to claim the amounts paid out for the subscription of shares of such entity, which shall be joined to other court claims in which BANKIA has been recently immersed, such as the complaints filed by the clients affected by the subscription of preference stakes and subordinated debt.

b) They force BANKIA to procure itself a high volume of economic resources to meet the possible liabilities they shall face up to in the next months, either in currently pending proceedings or new proceedings to be initiated as a consequence of the two new judgments of the Supreme Court.

Notwithstanding the foregoing, it is not all bad news for BANKIA, since with these two new judgments on avoidance for stock subscription, the Supreme Court raises the prospects that this type of liability will apply to small investors only, thus excluding large investors or the so-called institutional investors.

Currently, large or the so-called institutional investors are expected to have assigned 1,237 million Euros in the acquisition of BANKIA shares, which ended up losing 80% of the purchase value after the collapse of its shares.

Therefore and until the Supreme Court does not agree a thousandth interpretative turn, we should understand that the financial entity BANKIA shall be allegedly released from any liability for the sale of its shares to large or institutional investors which underwrote them, since this type of investors are supposed to, as determined by the Supreme Court in two recent rulings, have access to another type of supplementary information additionally to the one provided by the financial entity to know its state of solvency.