Conflicts of interest under the new Law 31/2014, which amends the Companies’ Act with the aim of strengthening the corporate governance
Conflicts of interest are regulated under article 190 of the reformed Companies Act. Conflicts of interest were previously restricted to Limited Liability Companies (S.L.) and have now been expanded by the recent reform to include Public Limited Company’s (S.A.) but with some notable characteristics.
In general, the concept of conflicts of interest refers to those situations where a shareholder cannot vote because the matter implies granting or revoking a right to this shareholder. The situation is relatively common, because loan, sale or supply agreements among group companies would be included in this category of agreements.
The new regulation of conflicts of interest revolves around two main considerations:
Firstly, in the most serious cases of conflicts of interest, a general prohibition of voting by the shareholder who incurs a conflict of interest is established. The right to vote is forbidden in the situations already established by the Law for Limited Liability Companies (S.L.) but is now extended to all capital companies (S.L. and S.A.). However, the new law establishes that in Public Limited Companies (S.A.) there are two situations which are exceptions to the general rule of prohibition of voting when there is a conflict of interest and such situations are instead subject to statutory provisions. The exceptions are:
- The approval of transfer of shares/equity which are subject to a legal or bylaw restriction and;
- The exclusion of a company shareholder. In such cases, the voting prohibition will only be exercised when it is expressly provided for in the Articles of Association.
Furthermore, it must be stipulated within the relevant regulatory provisions of restriction of the freedom to transfer or exclusion, respectively.
On the other hand, the reform attempts to protect the corporate interest. It does so assuming that there has been a breach of the corporate interest when a resolution has been adopted as the result of the decisive vote of the shareholder(s) who are forbidden to vote on the basis of conflict of interest, under this article. There are a number of situations in which a vote may be decisive. It could be the case that a vote is marginal in proportion but decisive in achieving the majority in question; it may be an individual vote with a sufficient percentage to constitute a majority. The votes corresponding to the excluded shareholder are not taken into consideration in order to calculate the necessary majority to pass a resolution. This implies that in many cases the decision will be taken solely with the votes of minority shareholders. Let’s imagine, for example, a joint venture where company A has 70% of the shares and supplies the products that are distributed by company B, whose minority shareholder is company C. The supply agreement will have to be approved by the General Meeting solely with the votes of company C; and this makes essential to have a Shareholders’ Agreement. The burden of proof to prove that the resolution does not damage the corporate interest is shifted to the shareholder(s) affected by the conflict.
Notwithstanding the above, in the event of appointment, termination, revocation or requirement of liability of the Directors, as well as in any other similar cases in which the conflict is exclusively about the position of the shareholder in the company, the burden of proof rests on the objecting shareholders.