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Main duties of directors of capital companies
José Luis Vecilla Camazón
November 24, 2022
The directors of a capital company are the persons entrusted with the management and representation of the company, which will be carried out, depending on how the company is organised, individually (sole director), collectively by several directors who may act jointly and severally (joint and several directors) or jointly (joint directors) or collectively (board of […]

The directors of a capital company are the persons entrusted with the management and representation of the company, which will be carried out, depending on how the company is organised, individually (sole director), collectively by several directors who may act jointly and severally (joint and several directors) or jointly (joint directors) or collectively (board of directors).

Administrators must comply with a series of duties in the performance of the function entrusted to them, which the Spanish Companies Act classifies into two main blocks:

1. Duty of diligence

This consists basically of performing the position and fulfilling the duties imposed by the law and the bylaws with the diligence of an <<orderly businessman>>, which means that the director must act in the field of strategic and business decisions under the following rules:

(i) bona fide;

(ii) without personal interest in the subject matter of the decision;

(iii) with sufficient information; and

(iv) in accordance with an appropriate decision-making procedure.

This means incorporating into our corporate law the Business Judgment Rule which involves limiting the liability of directors in strategic and business decisions, so that if they act in accordance with the above-mentioned rules, they will be considered to have acted diligently even if the decision finally adopted is unsuccessful or fruitless for the company, thus preventing them from being held liable for the damages that said decision may have caused to the company.

The Business Judgment Rule is exempted and, therefore, does not apply to those decisions that personally affect other directors and persons related to them and, in particular, those whose purpose is to authorise transactions in which the directors are in a situation of conflict of interest.The diligence required of directors is not the same for all of them, but must be in accordance with the nature of the position and the functions attributed to the director.

Therefore, the same diligence will not be required of a sole or joint and several director as of a member of the board of directors, since the first two may act individually and should therefore be required of them more diligently than of the members of the board of directors, who must act collectively. Nor should the same diligence be required of board members with executive powers (e.g. managing directors, members of the executive committee) as of those who merely have representative functions.

This duty of diligence is further specified in the following duties:

(i) appropriate dedication;

(ii) adoption of the measures necessary for the proper management and control of the company, i.e. a duty of vigilance and supervision;

(iii) the duty to demand and the right to obtain from the company the appropriate and necessary information to enable it to fulfil its obligations.

This means that the director must play an active role in the exercise of the functions entrusted to him/her, and is not exempt from liability for the mere fact of not intervening in decision-making or lacking information, either because he does not request it or because it is not provided, and in the latter case he must take all the actions available to him/her (i.e. those that any orderly businessman would be expected to take) to obtain the information.

2. Duty of loyalty

This basically consists of performing the position by prioritising the interests of the company over one’s own personal interests, which means that the director must act:

(i) with the loyalty of a faithful representative,

(ii) acting in bona fide and

(iii) in the best interests of the company.

In particular, the duty of loyalty obliges the director to comply with the following basic obligations:

(a) Not to exercise his or her powers for purposes other than those for which they have been granted.

(b) To keep confidential the information, data, reports or background information to which he has had access in the performance of his duties, even when he has ceased to hold them, except in those cases in which the law permits or requires it.

(c) To refrain from participating in the deliberation and voting on resolutions or decisions in which he/she or a related person has a direct or indirect conflict of interest. Any resolutions or decisions that affect him as a director, such as his appointment or revocation for positions on the administrative body or others of similar significance, shall be excluded from the foregoing obligation to abstain.

(d) To perform their functions under the principle of personal responsibility with freedom of judgement and independence with respect to instructions and third party links.

(e) To adopt the necessary measures to avoid incurring in situations in which their interests, whether on their own account or on behalf of others, may conflict with the corporate interest and with their duties towards the company.

This duty to avoid situations of conflict of interest also obliges the director to refrain, both he/she and the persons related to him/her, from:

i) Carrying out transactions with the company, except in the case of ordinary transactions, made under standard conditions for clients and of little relevance, understanding as such those whose information is not necessary to express a true and fair view of the equity, financial situation and results of the entity.

ii) Using the name of the company or invoking his/her status as director to unduly influence the performance of private transactions.

iii) Making use of corporate assets, including confidential company information, for private purposes.

iv) Taking advantage of the company’s business opportunities.

v) Obtaining advantages or remuneration from third parties other than the company and its group in connection with the performance of their duties, except in the case of mere courtesy.

v) Engaging in activities for his own account or for the account of others which involve effective competition, whether actual or potential, with the company or which in any other way place him in permanent conflict with the interests of the company.

This duty of abstention may be waived by the company in individual cases by authorising a director or a related person to carry out a specific transaction with the company, to use certain company assets, to take advantage of a specific business opportunity or to obtain an advantage or remuneration from a third party.

The authorisation must necessarily be approved by the general meeting if the purpose of the authorisation is to waive:

√ the prohibition of obtaining an advantage or remuneration from a third party;

√ it concerns a transaction whose value exceeds ten per cent of the company’s assets;

√ in limited liability companies (sociedades de responsabilidad limitada), authorisation must also be granted by the general meeting when it concerns the provision of any kind of financial assistance, including guarantees of the company in favour of the director or when it concerns the establishment of a service or work relationship with the company; and

√ an obligation not to compete against the company by express and separate agreement provided that (a) no harm to the company is to be expected or (b) such harm is outweighed by the benefits expected to accrue from the dispensation.

In the remaining cases, the authorisation may also be granted by the administrative body provided that the independence of the members granting the authorisation from the waived director is guaranteed. Furthermore, the harmlessness of the authorised transaction for the company’s assets or, as the case may be, its execution under market conditions and the transparency of the process must be ensured.

(f) To communicate to the other directors and, where appropriate, to the board of directors or, in the case of a single director, to the general meeting , any situation of direct or indirect conflict that they or persons related to them may have with the interests of the company, as well as to report on this in the notes to the annual accounts.

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