corporate & commercial LAW
Law 31/2014, dated 3 December, amending the Spanish Companies Act (Ley de Sociedades de Capital) to improve corporate governance
Spain’s Official Gazette published last week Law 31/2014, dated 3 December, amending the Spanish Companies Act (Ley de Sociedades de Capital) to improve corporate governance (Ley 31/2014, de 3 de diciembre, por la que se modifica la Ley de Sociedades de Capital para la mejora del gobierno corporativo). The new law mostly follows the recommendations issued by the Commission of experts on corporate governance in October 2013 and, in general terms, constitutes a positive modernisation of Spain’s corporate law for both public and privately-held companies. The law will enter into force on 24 December 2014, although certain provisions affecting listed companies (mainly on organisational matters) have been postponed until the coming year for their approval in the first general shareholders meeting of 2015.
Among others, the following modifications can be highlighted:
1. Powers reserved to the general meeting
The law widens the powers reserved to the general meeting for all companies under the Spanish Companies Act, including in respect of the acquisition, disposal or transfer of core assets, laying down the presumption that assets representing over 25% of the total assets shown in the last existing balance sheet merit such qualification. This provision, which narrows the scope of powers reserved to company directors, may hinder the acquisition or disposal of businesses or companies. This is particularly so when consideration is paid in cash because such transactions will now require to be endorsed by the shareholders of the company. Likewise, the general meeting may now issue instructions on the directors of public limited companies.
2. General meeting voting prohibitions (plc)
The law regulates several conflict of interest situations preventing shareholders of public limited companies from casting their votes at the general meeting, including in respect of waiving a director’s non-compete obligation, authorising a director to take advantage of a company’s business opportunities or whenever a director is receiving compensation from third parties in consideration for his/her activities as director.
3. Restrictions on challenging corporate resolutions
The possibility of challenging corporate resolutions merely on the grounds of formal breaches or errors that have no bearing on the result of the votes, is narrowed. A minimum stake of 1% (0.1% for listed companies) is required for a shareholder to challenge corporate resolutions. The company’s articles of association may lower such minimum holding requirement.
4. Overcoming the “linkage doctrine”
Regarding director remuneration, we can anticipate that with this reform the existing problems caused by the case law trend known as the “linkage doctrine” (doctrina del vinculo) will be finally resolved, at least for listed companies. When the governance system consists of a board of directors, the Spanish Companies Law now clearly establishes that the power to decide on the remuneration to be paid to executive directors for the exercise of their executive functions falls upon the board itself. With regard to listed companies, the terms of executive directors’ compensation must be either (i) consistent with the directors’ remuneration policy that must also be approved by the general meeting, at least, every three years, or (ii) have been separately and expressly approved by the general meeting.
5. Remuneration policy approval process for listed companies
The general meeting’s approval of the directors’ remuneration policy, at least every three years, is another of the most important changes to the Spanish Companies Law. If, after the approval of such remuneration policy, the general meeting were to reject (for any reason and during any of the fiscal years for which it was approved) the annual remuneration report (which must be submitted to the non-binding vote of shareholders yearly), the remuneration policy shall be subject to a new approval by the general meeting in the following business year, although it seems that the rejection by the general shareholders meeting of the annual remuneration report for a particular fiscal year does not affect payments made to directors during the preceding or current fiscal year, provided that such payments were in line with the previously approved policy. The approval in the 2015 general meeting of the annual remuneration report will be considered an approval of the company’s remuneration policy for the coming three-year period (i.e., up until and including 2017).
6. Fiduciary duties
The due diligence and loyalty fiduciary duties of directors are further detailed. Regarding due diligence duties, the business judgement rule is expressly acknowledged, a rule that, mirroring US practice, had already been admitted by the most insightful Spanish case law. This rule protects discretionary corporate and business decisions taken with a minimum standard of diligence (good faith, absence of conflict, sufficient information and compliance with due process), avoiding any subsequent judicial review of actions taken by directors merely because of the results achieved. However, the protection afforded by the new law does not apply when directors or related parties have any personal interest in the transaction (even if they did not partake in the decision precisely for that reason), in which case, a court may assess the appropriateness of such business decisions in the light of the adequate fulfilment of the duty of due diligence of company directors.
Likewise, regarding loyalty duties, the new law expressly sets out certain behaviours that are considered contrary to these duties, such as profiting or receiving remuneration for being a company director from a third party, except when approved by the general meeting. The general meeting will also have to approve any transaction between a director (or a related party) and the company if its value exceeds 10% of the company’s assets.
7. Organisation and powers reserved to the board of directors
A more detailed list of the powers of the board of directors that cannot be delegated is expected (that, in turn, is broadened for listed companies, placing particular emphasis on their supervisory condition and underscoring the importance of compliance and prevention protocols). Additionally, listed companies must have in place an appointment and remuneration committee (or two separate ones) and the composition of both this committee and the audit committee must be comprised of non-executive directors, of which at least two should be independent directors.