We analyze the Supreme Court ruling of February 2, 2017 in relation to the conflict of interest of a company.
The Supreme Court ruling of February 2, 2017, addressed a case of conflict of interest involving the administrator of a limited company.
In the case being judged, the agenda of a meeting of a commercial company included an item that provided for the exemption of the administrator (and partner of the company) from the prohibition of competition.
The vote passed with the favorable vote of the managing partner and a company linked to the managing partner (also owned by his wife and children) and the opposing vote of the minority shareholders.
The minority shareholders (brothers of the managing partner) challenged these agreements, arguing that both the managing partner and the company linked to him should have abstained from participating in that vote.
That challenge was partially upheld at first instance and dismissed at second instance, with the matter reaching the Supreme Court.
Before referring to the meaning of the ruling of the highest adjudicating body, we believe it is appropriate to bring up the regulations applicable to the case.
Thus, in the Capital Companies Act (LSC), under the section on the duties of directors, article 228 literally states that:
Article 228 Basic obligations arising from the duty of loyalty
In particular, the duty of loyalty obliges the administrator to:
(…) c) To abstain from participating in the deliberation and voting on agreements or decisions in which he or a related person has a direct or indirect conflict of interest. Agreements or decisions that affect him in his capacity as an administrator, such as his appointment or removal from positions on the board of directors or other positions of similar significance, shall be excluded from the above obligation to abstain.
In turn, Article 229 of the same LSC provides the following:
Article 229 Duty to avoid situations of conflict of interest
- In particular, the duty to avoid situations of conflict of interest referred to in point (e) of Article 228 above obliges the administrator to refrain from:
(…) f) To carry out activities on one's own behalf or on behalf of others that entail effective competition, whether actual or potential, with the company or that, in any other way, place him in a permanent conflict with the interests of the company.
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The above provisions shall also apply in the event that the beneficiary of the prohibited acts or activities is a person linked to the administrator.
For its part, Article 230 of the referenced regulation literally states that:
Article 230 Mandatory and dispensation regime
- The rules regarding the duty of loyalty and the liability for its breach are mandatory. Statutory provisions that limit or contradict them will not be valid.
- Notwithstanding the provisions of the preceding paragraph, the company may waive the prohibitions contained in the previous article in specific cases by authorizing a director or a related person to carry out a specific transaction with the company, use certain company assets, take advantage of a specific business opportunity, or obtain a benefit or remuneration from a third party.
The authorization must necessarily be granted by the general meeting when its purpose is to waive the prohibition against obtaining an advantage or remuneration from third parties, or when it affects a transaction whose value exceeds ten percent of the company's assets. In limited liability companies, the authorization must also be granted by the general meeting when it relates to the provision of any kind of financial assistance, including guarantees from the company in favor of the director, or when it is aimed at establishing a service or work relationship with the company.
In other cases, authorization may also be granted by the board of directors, provided that the independence of the members granting it from the exempted director is guaranteed. Furthermore, it will be necessary to ensure that the authorized transaction is harmless to the company's assets or, where applicable, that it is carried out under market conditions, and that the process is transparent.
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The obligation not to compete with the company may only be waived if no harm to the company is expected, or if any expected harm is offset by the benefits anticipated from the waiver. The waiver shall be granted by an express and separate resolution of the general meeting.
In any case, at the request of any partner, the general meeting will decide on the dismissal of the administrator who carries out competitive activities when the risk of harm to the company has become relevant.
Finally, Article 190 of the LSC (in the context of the General Meeting) has the following content:
Article 190 Conflict of interest
- The partner may not exercise the voting right corresponding to their shares or holdings when it comes to adopting an agreement whose purpose is:
(…) e) to exempt him from the obligations arising from the duty of loyalty as provided for in Article 230.
In public limited companies, the prohibition on exercising the right to vote in the cases contemplated in letters a) and b) above will only apply when such prohibition is expressly provided for in the corresponding statutory clauses regulating the restriction on free transfer or exclusion.
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The shares or holdings of the partner who is in any of the situations of conflict of interest contemplated in the previous section will be deducted from the share capital for the calculation of the majority of votes that is necessary in each case.
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In cases of conflict of interest other than those provided for in paragraph 1, shareholders shall not be deprived of their right to vote. However, when the vote of the shareholder or shareholders involved in the conflict has been decisive for the adoption of the resolution, in the event of a challenge, the burden of proof regarding the resolution's conformity with the company's interests shall lie with the company and, where applicable, with the shareholder or shareholders affected by the conflict. The shareholder or shareholders challenging the resolution shall bear the burden of proving the conflict of interest. This rule does not apply to resolutions concerning the appointment, removal, dismissal, and liability of directors, and any other resolutions of similar nature where the conflict of interest relates exclusively to the shareholder's position within the company. In these cases, the burden of proving harm to the company's interests shall lie with those challenging the resolution.
Once the factual background and applicable regulations have been established, we must focus on the judgment that is the subject of this article, which defined the disputed issue in the following terms:
“2.- The issue raised in the grounds we are now examining is whether this duty of abstention, which affects the managing partner whose exemption from the non-compete obligation is being debated at the general meeting, also extends to a single-member company whose capital belongs entirely to another company of which, in turn, the affected manager owns 50.68% of the capital and the remainder to his wife and children.”
Well, the Supreme Court's answer to this question is no, that this duty of abstention only falls on the managing partner, and that it does not extend to the company linked to him, basing this consideration on the express content of the rule established in article 190.1 e) of the LSC, which circumscribes and only projects the prohibition of the right on the partner who is exempt from the obligations derived from the duty of loyalty (in the case of study, the prohibition of competition), not extending it to the other partners linked to the affected partner.
“However, Article 190 of the Spanish Companies Act (TRLSC) only prohibits the right to vote, as did Article 52 of the Spanish Limited Liability Companies Act (LSRL) , to the affected shareholder, but does not extend this prohibition to related parties. In other words, related parties are subject to the prohibitions and restrictions of Articles 229 and 230 of the TRLSC, but not to the deprivation of voting rights, which both Article 190 of the TRLSC and Article 52 of the LSRLlimit exclusively to the affected shareholder or shareholders.”
Neither the Limited Liability Companies Act nor the current Capital Companies Act regulates the so-called indirect conflict of interest, that is, the one in which the interests of a partner are not in direct opposition to those of the company, but there is a close link between such interests of one partner and those of another partner, which in the matter in question, come into open conflict with those of the company.
For a conflict of interest to exist, the waiver of the duty of non-compete (Art. 65 LSRL) should affect the group of companies or all the partners, but if it only affects some of them, it cannot be considered, and therefore the duty of abstention of another company in the group or of another partner does not apply.”
Conclusion
The solution offered by the Supreme Court ruling is not without controversy, since in the case at hand it was established that the company linked to the managing partner was not only linked to him but also controlled or dominated by him (he held 50.68% of its share capital). Consequently, although Article 190 of the Spanish Companies Act (LSC), insofar as it limits the voting rights of shareholders, must be interpreted restrictively, given the factual elements of the case, the restriction on the managing partner's voting rights could have been extended—by analogy—to the company controlled by the managing partner, thus avoiding the paradoxical result of the ruling.
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A graduate in Law from the University of Barcelona and with a Master's degree in Business Law from the same university, he worked at the law firm Alonso-Cuevillas Advocats and later joined the Civil and Commercial Litigation department of the law firm Bufete Bueno Bartrina. He then joined the team at the firm Casamitjana-Cuyas-Morales, and subsequently continued his career at Bufete Herrera Advocats, in the Commercial and Litigation department. In November 2015, he joined aÀmbitJurídic i Econòmic, SLP, as a professional partner, to head the Commercial and Insolvency practice.
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