BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

The current scenario – with a dramatic change of circumstances and rules, the absence of previous experience and great uncertainty as to how long special measures will last – increases the importance of diligent management of a company and its businesses. The business judgment rule plays a determinant role in the present context, in particular regarding the requirement of adequate information and a proper decision-making procedure, adapted to the inevitable limitations of the current lockdown. This rule will undoubtedly recommend the use of experts in different fields (law and finance, in particular) when necessary, and a careful record of the decisions and their background, both procedural and material.

Diligence is particularly important for the analysis of how this crisis may affect the solvency of a company, both in the short and medium term. Although directors’ duties are owed to the company rather than to creditors, liability implications in the case of insolvency will inevitably be influenced by how diligent the management of assets, liquidity and cash flow was during this crisis.

Diligent management will also be relevant in other fields. Changes in circumstances may result in the interest, or even the need, to adapt contracts to the new situation that will require a careful consideration of the legal mechanisms available (MAC clauses, rebus sic stantibus). The COVID-19 crisis also impacts heavily on working conditions that should be dealt with carefully by directors (remote working, workers’ protection policies, labour force reduction, etc.).

2. What government relief measures have been made available to directors?

The Spanish Government has announced a plethora of measures that may affect companies and should be taken into consideration by directors when running their businesses. The most relevant measures in this regard include the following:

  • Tax payment terms flexibility and interest rate benefits
  • Special line of guarantees by ICO (Official Institute of Credit) to support liquidity needs for companies affected by the COVID-19 crisis
  • New procedural rules for temporary suspension of jobs (ERTE)
  • New rules on virtual meetings and on the duty of directors to file for insolvency
  • New rules on moratoriums and eviction on leases for business premises.

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

Since 17 March 2020, the functioning of management bodies has been adapted to the obstacles stemming from the restrictions on mobility under the state of emergency. Board and internal committee meetings may be held using remote connection (videoconferences; plus multiparty telephone calls since 31 March), even where not provided for in the company’s articles of association, provided that some requirements are met. In addition, the board and their committees may adopt resolutions in writing and without holding a meeting if decided by the chairman or requested by at least two members, once again even where not provided for in the company’s articles of association.

The allotted time frames relating to the drawing up, review and approval of annual accounts have been amended to adapt to the COVID-19 situation. From 17 March the three-month period granted to a management body to draw up annual accounts has been suspended until the end of the state of emergency; it then resumes for a further three months. A suspension also applies to mandatory auditing, although in this instance, the time period is only two months from when the state of emergency is lifted. The ordinary shareholders’ general meeting should take place in the three months after the end of the term for drawing up the annual accounts. Despite these options, however, companies may still choose to draw up, review, approve and audit annual accounts during the state of emergency.

Since 31 March, directors may amend the initial proposal for the result of the fiscal year included in the annual accounts provided that their decision is justified by the consequences of the COVID-19 crisis and they include a statement by the company’s auditor confirming that its opinion would not have changed. Directors can also withdraw the initial proposal and postpone the decision to hold a shareholders’ general meeting until after the state of emergency is lifted. (However listed companies cannot amend an initial proposal, according to the CNMV.)

If a cause for winding up exists, the two-month time limit for directors to convene a general meeting is suspended until the lifting of the state of emergency. Directors’ liability for corporate debts associated with a breach of their duties in relation to winding up the company will not apply to debts incurred by the company during the state of emergency, even if there was cause for winding up at that time.

More information on these issues can be found in CMS Spain’s reports of 18 March and 1 April.

Duties and responsibilities of directors

1. What form does the board of directors take?

A company’s managing body may consist of either an individual, two or more individuals acting jointly or jointly and severally, or a board of directors with a minimum of three members. The managing body of a listed company consists of a board of directors.

The board is a collegiate body. The articles of association must set out the number of members of the board, or the minimum and the maximum number of members, in which case, the general meeting determines the actual number of directors.

The maximum number of directors for a private limited liability company is twelve.

The Law does not provide a maximum number of members for a public limited company. The recommendation of the former ‘Good Government Unified Code’ for listed companies (2006) has disappeared from the current Code (2015), which only considers the provisions between independent and dominical directors and executive directors.

2. What is the role of non-executive or supervisory directors?

The board of a company may comprise both executive directors and non-executive directors. Non-executive directors can be independent directors or directors representing main shareholders – dominical directors - whose role is mainly to supervise the executive directors. The basic rules for private limited companies do not differentiate between them.

Much of the information in this guide will apply equally to non-executive (or supervisory) directors. The most practical exception is the need for a specific contract between the company and the executive managing directors that is not necessary for non-executive directors.

3. Who can be appointed as a director?

The company’s managing body may consist of either an individual, two or more individuals acting jointly or jointly and severally, or a board of directors with a minimum of three members and a maximum of twelve members. Both individuals and legal persons, such as corporations, may become directors. A director is not required to be a shareholder in the company and need neither be resident in Spain nor be a Spanish national. A foreign director does need to obtain a Spanish Tax Identification Number (NIE), however. Minors and incapacitated persons cannot be directors.

The following are restrictions on who can become a director:

  • persons barred by reasons of bankruptcy or undischarged insolvency; those barred from holding public office by a judgment; and those who have seriously breached the law or social rules;
  • persons whose current positions are incompatible with a directorship, for example, those who cannot trade by reason of their post (magistrates, judges etc.); high public officers (members of government); public administration civil officers; and
  • persons who may not become company directors for other reasons, for example if they are the company’s auditor (note this prohibition lasts for three years from cessation of appointment as the company’s auditor), or if they are the directors of a competing business.

Notwithstanding the above, the company’s articles may impose further conditions such as the need to be a shareholder at the time of appointment, or the necessity for a period of time to have passed after the acquisition of shares, or for the director to be of Spanish nationality.

4. How is a director appointed?

Directors are ordinarily appointed at a general shareholders’ meeting, except in cases when directors are appointed in the incorporation deed of the company. Further exceptions to the general rule (applicable only to public limited companies) are the possibility to appoint a number of members of a board of directors proportionally representing the minority shareholders, and co-opting appointment by the board of directors itself. Co-opting is possible (in a public limited company) when there is a vacancy on the board of directors, whereby the board can temporarily appoint a director from among the shareholders until the next general shareholders’ meeting. When co-opting in a listed public limited company, the directors do not necessarily have to be shareholders of the company.

The directors of a public limited company are appointed for a period of time stated in the articles of the company, which may not exceed six years (four years in listed public limited companies). Directors of private limited companies can be appointed for an indefinite term, unless the articles state otherwise. However, in both cases, directors can be re-elected for the same period of time unless the articles provide otherwise. Directors must accept the appointment and the appointment must be registered with the Mercantile Register.

5. How is a director removed from office?

A director may resign from office at any time by notifying the board of directors or the shareholders at a general meeting. In this case, the director may be required to settle current business.

Directors can be removed at any time without good reason by a resolution of a general meeting and without the necessity of the cessation proposal being included in the shareholders’ meeting agenda. A director’s appointment may expire if he/she is not re-appointed. In the event of a director’s appointment expiring before a shareholders’ meeting is in session, his/her office is extended until the next general shareholders’ meeting. A director who is disabled from acting as a director, as referred to above, must be removed.

A director may be dismissed from his/her post for miscellaneous reasons such as death, court decision, or the commencement of a liability claim against him/her. Removal or resignation of a director must be registered in the Mercantile Register. Resignations, other than in writing, have not always been legally recognised.

6. What authority does a director have to represent the company?

The directors are the company’s managing body with full authority to represent the company in all acts related to the company’s corporate purpose. This authority cannot be limited as regards third parties. The company will always be liable to third parties acting in good faith in respect of the acts of its directors, even when acting outside its corporate purpose. The authority to represent the company becomes effective upon acceptance of the post. However, in relation to third parties, the appointment is not recognised until the post is registered in the Mercantile Register.

When the company’s managing body is organised as a board of directors, the board as a whole has the authority to represent the company. Since this representation is cumbersome when decisions are carried out, it is common practice to delegate the board’s powers to a managing director or to an executive committee. In this case, the delegate(s) have the same authority to represent the company as the board as a whole. However, the powers to render the company’s accounts, and to present the company’s balance sheet and other documents that relate to the company’s accounts to the general shareholders’ meeting, are expressly reserved for the board and cannot be delegated. Unless the articles of association provide otherwise, managing directors can grant powers of representation to third parties. Notwithstanding this power, the grantee can never be considered the company’s managing director. To be effective before third parties, both the delegation and the powers of representation must be registered in the Mercantile Register.

7. How does the board operate in practice?

Members of the board may appoint a chairman and a secretary from among themselves. The secretary, with the countersignature of the chairman, has the power to certify the board minutes and the resolutions passed by the board. The chairman is entitled to convene meetings of the board. A minimum attendance of half plus one of the board’s members is required for a valid quorum of a public limited company. There is no legal minimum attendance requirement for private limited companies, but a minimum of two attendees must be present to validly constitute the meeting.

Decisions of the board of a public limited company are reached by absolute majority of present or represented members. Decisions in a private limited liability company are made by majority and the articles must state whether this majority is calculated by reference to the board’s members or attendees. Despite this, a company’s articles may require a higher majority to reach decisions as long as unanimity is not required. The articles may also provide for a casting vote for the chairman in the event of an equality of votes. Board minutes are drafted by the secretary and must be recorded in the meetings book.

The board of directors must meet at least on a quarterly basis.

8. What contractual relationship does the director have with the company?

The appointment of a director does not constitute a contract itself, but rather a corporate relationship. When the company appoints a managing director, however, it has to enter into a contract with the managing director. The contract is subject to prior approval by the board of directors and has to include the remuneration to be received by the managing director.

As a rule, the office of a director is not remunerated unless otherwise provided in the company’s by-laws. In listed companies, the office of a director is remunerated unless the company’s by-laws provide otherwise. However, remuneration is agreed in most companies. In this case, the company’s articles need to state the remuneration system. The remuneration system sets out different forms of remuneration for directors, including a fixed fee structure, assistance allowances and profit sharing. The maximum amount of the annual remuneration available for all the directors must be approved by the general meeting of the company. In any event, the remuneration of directors must be reasonably established in the context of the company’s financial situation. The managing director may not receive any remuneration that has not been expressly agreed in the contract.

Under Spanish law, a director’s relationship with a company is not an employment relationship but a mercantile relationship. Notwithstanding this, if a person holds the position of a director and other positions in the company through an ordinary employment contract, the mercantile relationship may coexist with an employment relationship provided that the functions corresponding to each position are clearly differentiated, with the employment contract describing a function other than the generic management activity of a company. In this case, the director can receive remuneration by virtue of a service or employment contract with the company, even if the office of director were not remunerated.

A special labour relationship of senior executive employee exists whenever the employee executes powers inherent to the legal ownership of a company and related to the company’s general objectives, and acts with independent authority and full responsibility only restricted by the criteria and instructions given by a director or members of the board who are considered executives.

The Spanish Supreme Court has established that the functions of a director and of a senior executive employee are the same. Therefore, in cases where the same individual occupies both positions in a company, a dual mercantile and labour bond would coexist in such individual, but not implying diversification of the functions to be performed. In such cases, Supreme Court case law favours the prevalence of the mercantile relationship over the labour one. In some exceptional cases, case law has acknowledged the compatibility of both relationships whenever the by-laws of the company envisage the possibility of entering into a senior executive employment contract with a director, differentiating clearly the functions to be performed in each position.

9. What rules apply in respect of conflicts of interest?

A conflict of interest between the directors and the company may arise when the interests of the director conflict with those of the company. In accordance with the main obligations under their loyalty duties, directors must avoid conflicts of interest. The duty to avoid a conflict of interest obliges the director to refrain from:

  • entering into transactions with the company, except for transactions of no material importance entered into in the ordinary course of business on standard terms
  • using the name of the company or using the position of a director to unduly influence a private transaction
  • making private use of the company’s assets
  • taking advantage of the company’s business opportunities
  • obtaining advantages or remuneration from third parties in relation to the performance of his/her office, or
  • engaging in activities on his/her own or on behalf of another which involves competing with the company or in any other way leads to a permanent conflict with the company’s interests. In this case, unless a director resigns, he/she will be likely to incur personal liability. Usually, this situation occurs when a director is appointed as a director of a competing company or of a company with opposing interests. Consequently, a permanent conflict of interests arises. A director may then be removed at the request of any shareholder and by the general meeting.

A general meeting of a private limited liability company can expressly authorise its directors to act as directors of a competing company. In some cases the company may release a director from restrictions relating to the aforementioned conflict of interest by a general meeting or by a resolution of the board of directors.

10. What other general duties does a director have?

Duties of directors are broadly defined under Spanish company law. The directors of a company must comply with the duties imposed on them by Spanish company law and by the by-laws of the company. Directors must act with diligence (business judgment rule applies), caution and loyalty, taking the appropriate measures for the proper governance of the company. Similarly, when discharging their duties, directors have the duty to acquire and the right to gather from the company all the information necessary for carrying out their obligations as directors. They are subject to a duty of confidentiality, even after their removal or resignation. They shall inform of any situation that may involve conflict of interest and are under specific prohibitions of competition or of taking advantage of business opportunities.

Directors of public limited companies have, amongst others, the following main duties: lodging the incorporation deed at the Mercantile Register; informing the company’s shareholders of onerous acquisitions involving more than 10% of the share capital of another company (during the first two years after incorporation); issuing share certificates; calling ordinary and extraordinary general meetings; assisting at general meetings; representing the company; preparing and disclosing annual accounts and the directors’ report (if applicable); proposing distributions of profits; appointing experts; calling a general meeting to dissolve the company; challenging resolutions of the general meeting when they are contrary to the interests of the company; and keeping the minutes book.

Directors of private limited companies have, amongst others, the following main duties: lodging the incorporation deed at the Mercantile Register; updating the shareholders’ book; calling general meetings; representing the company; preparing and disclosing the annual accounts and the directors’ report; calling a general meeting to dissolve the company; challenging resolutions of the general meeting when they are contrary to the interests of the company; and keeping the minutes book.

11. To whom does the director owe duties?

Directors’ duties are defined in the interest of the company and not in the interest of particular shareholders. The interest of the company is usually understood as that of the shareholders as a whole, although sometimes and exceptionally courts may include other stakeholders in the scope of application of directors’ duties. That notwithstanding, in the development of their duties, directors may need to protect the interest of a shareholder in particular (i.e. when attending the request of information in the context of shareholders’ legal information rights).

12. How do the director’s duties change if the company is in financial difficulties?

Directors must act in the interest of creditors once an insolvency procedure is opened and they remain in office. However, there is no legal duty-shifting before that moment if the company faces financial difficulties. Nevertheless, the issue is widely discussed by Spanish scholars who accept some limitation to this criterion in extreme circumstances.

13. What potential liabilities can a director incur?

Directors will be liable for unlawful actions or omissions which cause damage to the company, provided that there is sufficient causality between the action and/or omission and the damage. Directors are also liable if they do not dissolve or request the insolvency of the company when they should do so. Directors are jointly and severally liable, unless they can prove that they were not aware of the decision or act causing the damage, or that despite being aware of it, they did everything in their power to avoid the damage or expressly opposed such unlawful decision or act. Not only de jure directors but also de facto and shadow directors could be declared liable. The legal representative of a legal person acting as a director of the company will be jointly and severally liable together with the legal person. All the duties and responsibilities characteristic to the office of director are also extended to facto directors and the managers of the company.

There are two main legal claims in relation to a director’s liability for unlawful actions: (i) corporate legal action; and (ii) individual legal action. A corporate legal action is appropriate when damage is suffered by the company, while an individual action is relevant in the event of damage suffered by shareholders or third parties. In both scenarios, the limitation period for bringing liability actions against directors is four years since action could be brought by the damaged party.

Corporate legal action

Corporate legal actions aim to recover damage suffered directly by the company as a consequence of a director’s actions or decisions. Such actions can be brought by the company itself, by the shareholders or by the company’s creditors. Exercise of legal claims by the company needs to be approved at a general meeting. Corporate legal action brought for breach of the duty of loyalty does not need to be approved by the general meeting. The resolution to bring about such a claim can be passed even if it was not stated in the agenda of the meeting. Public limited companies require a simple majority of votes of the attendees at the meeting in favour of the action. However, private limited liability companies require a majority of the attendees’ votes representing at least one third of the share capital. The by-laws cannot increase or modify those requirements.

Exercise of corporate legal action either by individuals or shareholders

The shareholders’ claim is secondary. Shareholders with legal authority to call a general meeting must exercise the liability action when the duty of loyalty is considered to have been infringed. An action can be brought in the following situations:

  • if the directors have not called the general meeting required to approve the exercise of the corporate legal action of the company
  • if a month has elapsed since the general meeting at which it was agreed to bring the claim and such claim has not yet been filed, or
  • if the general meeting has not approved bringing the claim.

Exercise of corporate legal action by creditors

Creditors can bring a corporate legal action if neither the company nor the shareholders bring it and the company’s assets are not sufficient to pay liabilities owed to them.

The statute of limitations for corporate legal actions is four years since the action could have been brought.

Individual legal actions

These actions are personal indemnity actions which aim to re-establish the individual assets of those shareholders or third parties who have suffered direct loss to their assets as a consequence of a director’s act. In the event of illegal behaviour by a director acting as such, shareholders or a third party affected will be able to bring an individual claim against the directors themselves, separate from any claim against the company. Corporate legal claims and individual legal claims may be brought simultaneously. As with corporate legal claims, individual claims must be brought within four years since action could be brought by the damaged party.

Tax liability

Directors are jointly and severally liable for breach of the company’s obligations under tax legislation.

Criminal liability

Directors may be personally found to be criminally liable for crimes defined by the Penal Code, including:

  • misrepresentation of company information
  • harmful abusive agreements
  • taking advantage of harmful agreements agreed by fictitious majorities
  • denial of rights (i.e. the information right)
  • disloyal and/or fraudulent administration, and
  • obstructing administrative supervision and inspection.

Liability may also arise in respect of administrative, environmental or other issues.

Liability in case of insolvency

Directors’ liability in case of insolvency is regulated under the Spanish Insolvency Act, which provides special rules for the liability of directors should the insolvency proceeding be declared tortious and the directors deemed responsible for causing or aggravating the insolvency situation. The judgment declaring an insolvency proceeding as tortious will identify the individuals - usually the directors - liable for having caused or aggravated the company’s insolvency.

Among other consequences, such a judgment could provide the following: directors being declared personally and jointly liable for any company debt not fully paid to creditors; directors being disqualified from managing a company for a given number of years; and directors losing any right that they may have against the insolvent company’s estate.

For this purpose, the Insolvency Act sets out a list of acts that can be presumed to have caused or aggravated the insolvency. Latest court decisions have cleared that the liability requires some form of proof of damages and a certain relationship between them and the directors’ acts.

14. How can a director limit his/her liability?

A director’s liability cannot be limited by agreement. Under Spanish law it is debatable if future liability vis à vis shareholders may be excluded or limited through a shareholders’ general meeting decision. Notwithstanding this, directors may enter into insurance contracts which cover liability in relation to the company and third parties. This insurance cannot cover wilful misconduct.

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Carlos Peña