Reform of the Spanish Companies Act and new legal framework … · 2021. 5. 19. · On 4 December 2014, the Spanish Official State Gazette published Ley 31/2014, de 3 de diciembre,

Reform of the Spanish CompaniesAct and new legal framework forcorporate governance

On 4 December 2014, the Spanish Official State Gazette published 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“LSC Reform Act”) which amends the Spanish Companies Act (“LSC”) with the aim of improvingcorporate governance. The LSC Reform Act entered into force on 24 December 2014, as stipulated infinal provision four thereof.

The LSC Reform Act is the direct descendent of the work of the Expert Committee on CorporateGovernance (the “Expert Committee”) and, more specifically, of the Study on proposed regulatoryamendments (Estudio sobre propuestas de modificaciones normativas) issued by said Committee on14 October 2013 (the “Study by the Expert Committee”). The Expert Committee was createdpursuant to a Decision of the Council of Ministers dated 10 May 2013 (Order ECC/895/2013, dated21 May), “with the aim –in the terms of said decision- of improving efficiency and responsibility in themanagement of Spanish companies while, at the same time, raising domestic standards to the highestlevel of compliance compared with international criteria and principles on Good Governance”.

In accordance with the recommendations of the Study by the Expert Committee which the LSCReform Act has incorporated virtually in its entirety, the changes to the LSC refer –as is to be expectedin the case of a reform concentrating on the improvement of corporate governance- to the two bodiesthat comprise the corporate structure of companies (“sociedades de capital”):

n some amendments affect the shareholders’ general meeting and shareholders’ rights, with therecurrent aim –as stated in the preamble to the LSC Reform Act- of “strengthening their role andproviding means for promoting shareholder participation”;

n other amendments affect the management body and, to be more precise, in the case of listedcompanies, the board of directors, due to the need to “regulate certain aspects –as the preambleof the LSC Reform Act puts it – which have been acquiring increasing relevance, such as, forexample, the transparency of governing bodies, fair treatment of shareholders, risk managementor the independence, participation and professionalisation of directors”.

Some of the amendments to the LSC come from the Proposed Mercantile Code of June 2013, draftedby the Commercial Law department of the General Code Committee (the “Proposed MercantileCode”). And many others have consisted of raising to legal status what until now were mere voluntaryrecommendations in the Unified Code of good governance for listed companies, approved in 2006 andupdated in June 2013 (the “Unified Code”). Despite this, the Expert Committee, and by extension theLSC Reform Act, have considered that the voluntary nature of the codes of good governance and thecorrelative principle of “comply and explain” continue to be a useful system for addressing a large partof the corporate governance system. Nevertheless, the conversion of some of these recommendationsinto mandatory rules is justified by the growing recognition of some aspects of corporate governanceas basic and essential when until recently they were not considered imperative, as well as by theorganisational deficiencies which the recent financial crisis has laid bare in several entities.

Introduction

Javier García de EnterríaHead of Corporate/M&A

The new powers of the general meeting and its ...............4intervention in management affairs

Announcement and operation of the general meeting .......8

Challenging corporate resolutions ..................................13

Remuneration of administrators.......................................17

Administrators’ rules of conduct. Duty of care ................22and duty of loyalty

Administrators’ liability regime .........................................27

Delegation of powers by the board of directors ..............31including those powers which cannot be delegated

The board of directors of listed companies ....................36(posts and operation)

Appointment and types of directors in ............................41listed companies

Board of directors’ committees of listed companies........45

Annual corporate governance report and annual ............49report on the remuneration of directors

Contacts ........................................................................ 52

contents

1. The new powers of the generalmeeting and its intervention inmanagement affairs

Reform of the Spanish Companies Act and new legal frameworkfor corporate governance

5

The possible intervention ofthe general meeting inmanagement affairsThe LSC Reform Act addresses atraditional aspect of Spanish corporatelegislation, consisting of the absence ofa clear differentiation between thepowers of the general meeting(supreme, sovereign body) and those ofthe management body (the body thatmanages and represents the company).The reform, moreover, forms part of anincreasing trend in comparative law –themost significant point of reference ofwhich is the famous “Holz-Müller”doctrine under German law – consistingof increasing the participation by thegeneral meeting in corporate affairs, inorder to promote shareholderparticipation in the decisions of greatestrelevance for the company andguarantee control over the actions ofthe administrators.

The Unified Code recommended thatlisted companies submit certaintransactions that could involve astructural modification of the companyto the approval of the general meeting“even if not expressly required by

commercial law”. The approval of theStructural Modifications Act (“Ley deModificaciones Estructurales”) alsorepresented important progress in thisregard, with the amendment of Articles160 and 161 LSC representing theconsolidation of this trend.

In its new wording, Article 161 LSCreproduces the content that it hadpreviously, with regard to empoweringthe general meeting to “give instructionsto the management body or to submitthe adoption of decisions or resolutionson certain management affairs to thegeneral meeting’s authorisation”, albeitprovided the by-laws do not stateotherwise. But while this power waspreviously envisaged only in the case oflimited liability companies (“sociedadeslimitadas”), the new wording expresslyextends it to the general meetings of“Spanish companies” (“sociedadesde capital”).

Thus, what was previously reserved forlimited liability companies, due to theirclosed, personal nature, is extended bythe reform to all Spanish companies,including listed companies. However, theextension of this power in the case of

listed companies is unlikely to have greatrelevance in practical terms, not just dueto the possibility of over-ruling it in theby-laws, but also because of the habitualinoperativeness of the general meeting asa decision-making body in this kindof companies.

On the regime for interventionof the general meetingThis new provision has nothing to do withany interest by the legislator in restrictingthe autonomy of the management bodyin general terms. The intervention of thegeneral meeting must be restricted to“certain management affairs”. And it isreasonable to think that such affairs mustbe of an extraordinary nature, in thesense that due to their exceptional natureor effects, they represent a departurefrom ordinary matters and could end upaffecting the position of the shareholders.

Moreover, unlike new Articles 160 and511 bis LSC, which make it obligatory forcertain matters to be approved by thegeneral meeting, Article 161 LSC merelyrecognises the possibility for the generalmeeting to give instructions to themanagement body motu propio on

Key aspects:

n The general meetings of joint stock companies (“sociedades anónimas”) are now able tointervene in management affairs, giving instructions to the management body or renderingsaid body’s decisions or resolutions on certain matters subject to approval

n The general meeting is given a new exclusive power, consisting of decision-making regardingthe acquisition, transfer or contribution of essential assets

n In listed companies, the general meeting will also be exclusively responsible for transfers ofessential activities performed by the company to dependent entities, even if the formermaintains full ownership of the same (“subsidiarisation”)

n An asset/activity is considered essential when the transaction represents more than 25% ofthe value of the assets appearing on the last balance sheet approved

© Clifford Chance, March 2015

6 Reform of the Spanish Companies Act and new legal frameworkfor corporate governance


management affairs, or subject certaindecisions to authorisation. As such, thisis purely an option or possibility that thegeneral meeting may or may not use.

The LSC is indeed imprecise in relation tothe matters that should be submitted tothe general meeting for approval or onwhich it can give instructions.

With regard to the first question, if weconsider that the legislator has reservedthe exclusive power for the generalmeeting to deliberate and decide oncertain matters (Articles 160 and 511 bisLSC), it is reasonable to think that themanagement matters that could besubmitted for the approval of the generalmeeting are precisely those that do notcorrespond to said matters. In thisregard, and according to commonpractice in shareholder agreements, itwould be possible to establish certainareas of management in which approvalby the general meeting is obligatory,either in general terms or when certainquantitative thresholds are surpassed.

With regard to the instructions, herethings seem to be even more imprecisedue to the need to determine whether ornot, if given, they are binding on themanagement body, in the sense that it isobliged to comply with them in order toavoid incurring liability.

Of course, as indicated in the finalreference in Article 160 LSC to Article234 on the scope of the power ofrepresentation of administrators, it mustbe understood that a failure by the latterto comply with the instructions receivedfrom the general meeting, will not, inprinciple, affect the validity of the actsthey perform. The administrators have thefullest powers of representation of thecompany, with any restriction on thesame being ineffective vis-à-vis thirdparties even when their acts go beyond

the remit of the corporate object. Thepotential liability to which administratorscould be exposed is a different issue,although any action in this regard wouldrequire, in addition to a breach of theinstructions received, that the actionwould have resulted in financial harm forthe company.

This right for the general meeting tointervene in management affairs, moreover,can be over-ruled by means of an expressprovision in the by-laws. This possibilitywould clearly be justified in the case ofcompanies with a particular corporatestructure and a greater centralisation ofthe management function, such as in thecase of listed companies.

The new powers of thegeneral meeting: theacquisition or transfer ofessential assetsIn line with what we have explainedabove, with a view to involving the generalmeeting more actively in managementaffairs that affect the company in astructural sense, Article 160 LSC includesas new matters reserved for approval bythe general meeting “the acquisition,transfer or contribution to anothercompany of essential assets “, assuming“the essential nature of the asset whenthe amount of the transaction exceedstwenty-five per cent of the value of theassets appearing on the latest balancesheet approved”. As in so many otherareas, the LSC Reform Act has given legalstatus to something that until now wasjust a recommendation of the UnifiedCode (recommendation 3).

The aim here is to reserve for thegeneral meeting the approval of certaincorporate transactions which, due totheir financial significance, can havesimilar effects to those of a structural

modification, even though technicallyspeaking they do not constitute this kindof transaction. In this way, in contrast tothe situation existing to date, thesituation where the board of directorsdecides independently on the possibleacquisition, transfer and contribution ofessential assets, without any kind ofrestriction in terms of the value of thesame, is avoided due to the significanteffects that such transactions can haveon the company and, by extension, onthe position of the shareholders.

Moreover, unlike the Unified Code, whichdoes not establish any quantitativecriterion and merely assumes that theacquisition or transfer is essential whenthe transaction “involves an effectivemodification of the corporate object”,the new Article 160 LSC –as we haveseen- establishes an objective criterion:assets will be considered essential whentheir transfer, acquisition or contributionrepresents a value in excess of 25% ofthe value of the company’s assetsaccording to the latest balance sheetapproved. In this regard, we canunderstand that it will be necessary totake into consideration the net bookvalue –not the market value – of boththe essential assets and the totalcompany assets appearing on the saidbalance sheet. The balance sheet usedwill be the latest one approved by thegeneral meeting, without express needfor it to be audited in those cases inwhich it is not obligatory.

The reference to the amount of the“transaction” means that, when itencompasses the transfer of a series ofassets that are not classed as “essential”separately, but are considered as suchtaken together, it must be approved bythe general meeting. At the same time,doubts may arise when the same financialtransaction involving the acquisition ortransfer of “essential” assets takes place


7

in legal form via a series of deals thatwhile formally independent, only exceedthe above-mentioned quantitativethreshold when considered as a whole.

Nevertheless, the aspect of this newregime that will foreseeably prove mostdelicate refers to the consequences of abreach, when the administrators decide orcarry out any of these transactions withouthaving obtained prior approval from thegeneral meeting. In these cases, the ruleson the formation of the corporate will clashwith the need to protect legal relationsand, more specifically, the irrevocablecontent of the powers of representation ofadministrators (Article 234.1 LSC), whichcannot, in principle, be restricted vis-à-visthird parties.

Meanwhile, the major significance of thenew regime can be seen considering theeffect it will have on the presentation oftakeover bids. Until now, the decision tolaunch a takeover bid clearly fell withinthe exclusive remit of the managementbody, meaning that a resolution of thegeneral meeting was only required whenthe consideration for the same was toconsist of securities, which the latter hadto issue (Article 14.5 RD 1066/2007). Butwith the new regime, the authorisation ofthe general meeting will be necessarywhen through the takeover bid thequantitative thresholds of Article 160 LSCare surpassed. This should not be aproblem in the event of a voluntarytakeover bid, due to the expresslyenvisaged possibility of subjecting it tothe prerequisite of “approval by thegeneral meeting of the bidder company”[Article 13.2.c) of RD 1066/2007] – aprovision introduced with foreigncompanies subject to a similar regime inmind. Meanwhile, the new regime shouldhave a significant impact on thepossibility for one company to acquirecontrol of a listed company and thusbe in the position of a mandatory

takeover bid, due to the impossibilityof subjecting the latter to anequivalent prerequisite.

The additional powers ofthe general meetings oflisted companies; inparticular, “subsidiarisation”transactionsIn addition to the above amendment, theLSC Reform Act also envisages a seriesof additional powers for the generalmeetings of listed companies by means ofthe inclusion of Article 511 bis. Inparticular, these powers refer to theapproval of the remuneration policy fordirectors (something we will be specificallyanalysing in another chapter), and also to

(i) “the transfer of essential activitieshitherto performed by the companyitself to dependent entities, evenwhere the company maintains fullcontrol thereof”, and

(ii) “those transactions whose effect isequivalent to the liquidation ofthe company”.

In this regard, and like in Article 160LSC, the essential nature of theactivities and the assets is assumed“when the volume of the transactionexceeds twenty-five percent of the totalassets on the balance sheet.”

As such, in listed companies, the generalmeeting has to grant approval not just forthe transfer, acquisition or contribution ofessential assets, but also for the transferof essential activities to dependentcompanies, even where it maintainscontrol of the latter (“subsidiarisation”).While it does not specify what should beunderstood by “essential activities” in thisregard, it does not seem necessary that itentail a branch of activity or economicunit, due to the need to differentiate this

scenario from the segregation transactiongoverned by the Structural ModificationsAct (Article 71).

Any transfer of essential activities must beto “dependent entities”, understood ascontrolled companies – be they existing ornewly created – otherwise the applicableregime would be that of “contribution” ofessential assets to another company,addressed in Article 160.

Required majoritiesThere is no mention in said articles of themajority needed to approve theresolutions in question. However,according to new Article 201 LSC, it isworth considering that they will inprinciple have to be approved –unless theby-laws establish a higher majority – by asimple majority of the votes ofshareholders present or represented atthe general meeting, that is, when thereare more votes in favour than against. Anabsolute majority of votes, on the otherhand, is only required for the adoption ofthe resolutions referred to in Article 194LSC (Article 201.2), which has not beenamended by the LSC Reform Act anddoes not include the acquisition, transferor contribution of essential assets amongthe resolutions which require areinforced quorum.


2. Announcement and operation ofthe general meeting


9

IntroductionBoth the Study by the Expert Committeeand the LSC Reform Act expresslyinclude enhancing the role of the generalmeeting and promoting shareholderparticipation among their main reformobjectives. This aim is not a new one, ithas been a feature of virtually allcorporate governance reforms approvedin recent years, both in Spain and in theEU, as well as in the recommendationsfrom international bodies.

The general meeting, as the body onwhich the shareholders deliberate, facesserious structural problems that affect itseffective development and operation,particularly in the case of large listedcompanies. The existence of numerousshareholders has an effect not just interms of increased cost and complexity inpreparing general meetings, it alsohinders the discussion on the differentmatters, leads to absenteeism anddisaffection and worsens agencyproblems between managers andowners, among others.

These problems are intrinsic to listedcompanies and the consequent failures inthe system of corporate governance areconsidered one of the indirect andunderlying causes of the current financialcrisis. This has led the need to promoteshareholder activism to be in thespotlight, and this aim has become oneof the principles behind the lawsgoverning listed companies.

In this context, the LSC Reform Act,following the proposals of the Study by theExpert Committee almost to the letter, hasapproved a series of quite diverse reformsin relation to the announcement andoperation of the general meeting. Someaffect not just listed companies but allSpanish companies, which is an indicationof the vis expansiva of matters in relationto corporate governance. Moreover, like inother areas of the reform, the legislator hasopted for introducing mandatory rules inmatters that were previously subject toself-regulation, which points to a paradigmshift in the regulation of certain aspects ofcorporate governance.

The new thresholdfor minority rights inlisted companies In addition to the individual rights thatcorrespond to all shareholders, the LSCassigns another series of rights to thoseshareholders (applicable in the case ofboth joint stock and limited liabilitycompanies) holding a minimum stake inthe share capital, which in most cases isa 5% holding. These are what are knownas minority rights, such as –amongothers- the rights to request the call of ageneral meeting, to add items to theagenda of a general meeting alreadycalled, to prevent the directors refusing todeliver requested information by citingcompany interests, to request notarialminutes of the meeting, to bring liabilityactions against the directors, to challengeboard resolutions or the right to presentproposed resolutions on items alreadyincluded or that should be included onthe agenda of the general meeting.

The LSC Reform Act has amendedArticle 495 LSC by reducing the

Key aspects:

n The percentage of share capital necessary to exercise minority rights in listed companies isreduced to 3%

n In listed companies, shareholder associations representing at least 1% of the capital andshareholders with more than 3% are granted the right to obtain the identity details ofshareholders from Iberclear

n In listed companies, the provision of information prior to the meeting is enhanced, andrestrictions on the right of attendance and the right of financial intermediaries holding shareson behalf of different persons to issue conflicting votes are regulated

n In general terms, the rule on matters being voted separately is established, the majoritiesnecessary for the approval of resolutions are clarified, the duty for a shareholder to abstaindue to a conflict of interest is extended to joint stock companies and some aspects of theright to information are modified



percentage of capital necessary toexercise minority rights in listedcompanies, which now becomes 3% (thethreshold of the significant stake forcommunication purposes), while thecurrent 5% stake continues to apply, ingeneral terms, for non-listed companies.

This reduction in the percentage shouldbe welcomed, although it is worth askingwhether the reform should not have beenmore ambitious and gone for an evenlower percentage, as the 3% will still bedifficult to reach in many cases.Moreover, it seems reasonable from thepoint of view of simplicity and legalcertainty that the legislator have opted fora fixed threshold for assigning minorityrights, instead of the option taken by theProposed Mercantile Code of defining thenotion of minority in variable anddiminishing terms depending on theshare capital.

Extension of the right toascertain the identity of theshareholders to minoritiesThe LSC Reform Act has also amendedArticle 497 LSC in relation to the right oflisted companies to obtain the necessarydetails to identify their shareholdersfrom Iberclear.

Until now, the LSC attributed this rightexclusively to the issuer company(see also Article 118.3 LSC), althoughsome regulations extended it – albeitwith debatable legal effectiveness - to allshareholders (Article 22.3 Royal Decree116/1992). In any event, the reform hasconsidered that this right cannot beconfigured as an individual right of all theshareholders and has opted to restrict it,together with shareholder associationsrepresenting at least 1% of capital, tothose shareholders holding a minimumstake of 3%. Therefore, this right isconceived as a minority right, which inpractical terms can be instrumental in

terms of the exercise of other rights alsolinked to holding a minimum stake in thecapital (such as requesting that ageneral meeting be called or havingnew items included on the agenda,when the requesting shareholder seeksto obtain support for his proposals fromother shareholders).

Announcementand attendance at thegeneral meetingThe Study by the Expert Committeeproposed strengthening the right toinformation of the shareholders of listedcompanies in order to facilitate effectiveaccess to proposed resolutions as of themoment the general meeting is called, sothat the shareholders can decide how toexercise their rights (information, voting,etc.). Following this proposal, new Article518 d) LSC clarifies that the full text of allproposals and of “each and every one ofthe items on the agenda” must besupplied, except those that are “purely forinformation purposes”, in which case it willbe necessary to have a report from themanagement body discussing said points.

The question arose due to the previouswording of this rule, which seemed toaccept that proposed resolutions oncertain items of the agenda could bemissing or that they could be publishedafter the announcement of the generalmeeting. This practice, in particular, hasbeen used in relation to the appointmentof directors. The new text will no doubthelp to enhance the information given toshareholders, guaranteeing that they havethe chance to be apprised of all theproposals to be discussed and decidedon at the meeting sufficiently in advance.But at the same time, the reform mayintroduce an element of inflexibility inthose cases in which the need to appointone or more new directors –a frequentoccurrence- arises after the generalmeeting has been called.

As for the right to attend general meetingsof listed companies, a new Article 521 bisis introduced, reducing the threshold thatthe by-laws can stipulate for attending ageneral meeting to no more than onethousand shares, with a view to avoidingexcessively high percentages of sharecapital being required, thus undulyrestricting said right. This thresholdcontrasts with the one in a thousand thatapplies to the share capital of non-listedjoint stock companies (Article 179.2 LSC).

Separate votes foreach matterThe LSC Reform Act has introduced anew Article 197 bis in the LSC, applicableto both listed and non-listed companies,which establishes recommendation 5 ofthe Unified Code (a recommendation thatall Ibex 35 companies declared theyfulfilled) as a legal obligation. It expresslyrecognises the need to have separatevotes at general meetings on thosematters that are materially independentand specifies that, in any event, thefollowing matters must be voted uponseparately (i) the appointment, ratification,re-election or removal of eachadministrator; and (ii) amendments toArticles or groups of Articles of theby-laws that are deemed autonomous.

Splitting of votes andconflicting votesThe issue of the splitting of votes andconflicting votes in listed companies hasbeen mainly highlighted in those casesin which the holder of the shares is adepositary or nominee acting on behalfof one or more beneficial owners, as inthe traditional case of foreign investorswho hold their shares via a chain offinancial intermediaries.

The problems arose because the formalholders of the shares could findthemselves disqualified from splitting or



11

exercising the corresponding conflictingvotes, in accordance with the votinginstructions received from their clients.With a view to addressing this situation,recommendation 6 of the Unified Codeproposed that listed companies shouldbe able to split the vote in thesesituations. Article 524 LSC (added byAct 25/2011) also tackled this matter,although in a clearly defective manner. Onthe one hand, the conflicting vote referredto cases in which the clients designated aprofessional financial intermediary torepresent them, meaning that the formalholder of the shares is entitled to vote –asit appears as a shareholder in theregister- without the need to obtain anypower of attorney. On the other hand,disproportionate and clearly unnecessaryduties to inform were established for thefinancial intermediary.

The reform has clarified these aspects. Itis now specified that intermediaries whoappear legitimised as shareholders “butwho act on behalf of several parties, mayin any event split the vote and issueconflicting votes” when they receivedifferent voting instructions (Article 524.1).It also clarifies that intermediary entitiesmay delegate their vote to “each of theindirect holders” or to the beneficialowners or, if applicable, to third partiesdesignated by the latter, “with no limit onthe number of delegations granted”(Article 524.2).

Calculation of the voteArticle 201 LSC contained the generalprinciple of the adoption of resolutions bythe general meeting of joint stockcompanies by a majority of the votes ofshareholders either present orrepresented. But in referring to the“ordinary majority”, it raised a doubt as towhether a relative/simple majority or anabsolute majority was required and, assuch, how null votes, blank votes andabstentions were to be treated.

The LSC Reform Act has clarified that ingeneral terms, the majority must besimple or relative. That is, it isunderstood that the majority must becalculated taking into account onlyvotes in favour over votes against.Therefore, blank votes, abstentions andnull votes are not taken into account,which facilitates the formation ofmajorities and, as such, the adoption ofresolutions by the general meeting.

Nevertheless, this general rule lapses incertain scenarios. On the one hand, thereform also specifies that resolutions toamend the by-laws or similar measures(Article 194 LSC) require an absolutemajority, which is a new development,and when the general meeting has beenconvened at second call with a quorumof less than 50% of the capital, thefavourable vote of two-thirds of thecapital present or represented is required(Article 201.2 LSC). On the other hand,the possibility for the by-laws to raise thelegal majorities, which may refer either tothe capital attending the meeting or thetotal share capital, is maintained.

Conflicts of interestof shareholders Until now, Article 190 LSC only regulatedthe duty of shareholders to abstain due toconflicts of interest in limited liabilitycompanies, leading to an ex ante controlof this kind of situation. In joint stockcompanies, meanwhile, the absence of arule on conflicts of interest of shareholdersmeant that this kind of situation wascontrolled ex post, by the possibility ofchallenging resolutions considered abusiveand harmful to the company’s interests,when approved with the participation ofthe shareholder affected by a conflict.

Following the reform, Article 190 LSCextends the duty of shareholders toabstain in certain conflict of interestscenarios to joint stock companies where

it previously only applied to limitedcompanies. This refers to resolutionsinvolving: (i) authorising a shareholder totransfer shares or participationssubject to legal or by-law restrictions;(ii) excluding it from the company;(iii) releasing it from an obligation orgranting it a right; (iv) providing any kindof financial assistance; or (v) excusing it–when also an administrator – from theobligations derived from the duty ofloyalty, pursuant to the provisions of newArticle 230 LSC.

In relation to any other conflict of interestscenario in which a shareholder might finditself, it is now specified –clearing up aquestion that had led to some controversy– that “the shareholders will not bedeprived of their right to vote” (Article190.3 LSC). Nevertheless, when the voteof the shareholder(s) involves an interestthat is contrary to that of the company(and provided that it does not refer to theposition they hold in the company, aswould be the case of resolutions on theappointment, removal or enforcement ofadministrators’ liability) and has beendecisive in the approval of the resolution,which has been challenged, the companyand if applicable the affectedshareholder(s) will bear the burden of proofin accordance with the company’sinterests (Article 190.3 LSC).

Shareholders’ rightto information In relation to the right to information, theLSC Reform Act has just introducedsome amendments to the general regimefor this right (Article 197 LSC) as well asin the specific regime for listedcompanies (Article 520 LSC).

The general regime has been amended inorder to avoid abuse of the right toinformation and in accordance with theproposal that inspired the reform –whichis analysed in the chapter on challenging



resolutions- to avoid strategic andinstrumental challenges to the corporateresolutions based on insignificant formalinfringements. Thus, the scenarios inwhich it is possible to deny the right toinformation have been increased and nowcover cases in which “that information isunnecessary for the protection of theshareholder’s rights, or there are objectivereasons to consider that it could be usedfor purposes unrelated to the company orwhere public release of the same wouldharm the company or related companies”(Article 197.3 LSC). Different regimes arealso established regarding the violation ofthe right to information exercised before

the general meeting is held and when it isexercised during the same. In the lattercase, the shareholder will be entitled todemand fulfilment of the informationobligation and any damages caused, butthe denial of said right will not constitutegrounds for challenging the generalmeeting (Article 197.5 LSC). Moreover, itis stipulated that in the event of abuse orinjurious use of the requested information,the shareholder will be liable for anydamage caused (Article 197.6 LSC).

As for the additional regime on the rightto information in listed companies, Article520 LSC has been amended to (i) extend

the term for exercising the right toinformation prior to the general meetinguntil the fifth day prior to the date set forthe meeting (instead of the seventh,which used to be the case); and (ii)promote transparency and equality ofshareholders in terms of information,requiring the publication on thecompany’s website of valid requests forinformation, clarification or questionsmade in writing, as well as the writtenreplies from the administrators ofthe company.


3. Challenging corporate resolutions

Reasons for the reformThe LSC Reform Act seeks to simplify thesystem for challenging corporateresolutions and strike a balance betweenthe principle of legal certainty and thestability of corporate resolutions, on theone hand, and the protection ofshareholders and minorities, on the other.

It has two main objectives: to maximise thematerial protection of minority shareholdersand minimise the risks of opportunistic ortactical use of the right to challenge.

(a) Maximising protection of theinterests of the company and ofminority shareholdersThis aim is to be achieved by unifyingthe grounds for challenges andremoving the existingdistinction between null andannullable resolutions.

From now on, there are onlyresolutions that can be challengedaccording to the grounds contained inthe new wording of Article 204.1 LSC.This article includes as new entriesthe resolutions adopted incontravention of the regulations of thegeneral meeting or, in the case of

board resolutions, in contravention ofthe regulations of the board.

Moreover, the act explicitly extendsthe concept of harm to the company’sinterests, which had hitherto not beendefined, associating it with theresolutions that do not cause damageto the company’s assets, but areapproved with an abuse of themajority. Such abuse is assumedwhen there is no reasonable need toadopt them and they benefit themajority to the detriment of the othershareholders (Article 204.1.II LSC).

(b) Minimising opportunistic use of thechallenge of corporate resolutions The main measure adopted to reduceinstrumental and strategic challengesby minorities is to establish minimumthresholds for stakes held in the capitalin order to be entitled to challenge (1 %in general and 0.1 % in listedcompanies), indicating that, belowthese thresholds, the shareholders willnot be entitled to challenge resolutions,but merely to request indemnificationfor any damage caused to them(Article 206.1.II LSC). The replacementof the right to challenge with a purely

compensatory remedy, which does notcompromise the security and stability ofthe corporate resolutions, is a measurethat has some significant precedents inSpanish law (see Article 47.1 of theStructural Modifications Act).

Moreover, the reform establishes aseries of situations where the challengeis inadmissible..The aim is to avoidunjustified challenges that may haveno purpose, such as resolutionsrendered void or resolutions that werevalidly replaced by others (Article 204.2LSC). In these cases, the reformintroduces a new development thathad been disputed in the courts untilnow, which is the possibility forresolutions to be remedied after thechallenge has been filed.

Taking into account the reasons andprinciples behind the reform, it is easy tounderstand that the new unified regimeonly has two general exceptions,envisaged in the Act, and that constitutespecific regimes for challengingresolutions: the rules applicable to listedcompanies (in which it is necessary tointensify the certainty of legal situationsand avoid instrumental challenges) and

Key aspects:

n The reform seeks to strike a balance between the protection of minority shareholders andavoiding abuse in the challenges of resolutions

n The current system for challenging is unified and systematised in order to facilitate theidentification of those resolutions that can be challenged, the grounds for the same,entitlement to challenge and the term for bringing the action

n The distinction between null and annullable resolutions is removed

n A minimum percentage is required for shareholders to be entitled to challenge resolutions,except where such resolutions are contrary to public order

n Special conditions are established for listed companies



the special treatment received byresolutions that can be challengedbecause they contravene public order (inrelation to which the regime ofentitlement is extended).

Resolutions that canbe challengedThe description of resolutions that canbe challenged is still contained inArticle 204 LSC, although it has beenamended considerably.

The main aspect of the reform, asmentioned earlier, is the disappearance ofthe legal distinction between null andannullable resolutions, which were subjectto different regimes. This was a disturbingdifferentiation, originating from thetraditional categories of ineffectiveness oflegal transactions, which entailed significantdifferences with regard to terms andentitlement to challenge.

As of the reform, resolutions are onlyconsidered challengeable and thescenarios for challenging them are setout in greater detail; those that arecontrary to the law or the by-laws beingjoined by resolutions that contravenethe regulations of the general meeting ofthe company and, in relation specificallyto the resolutions of the board ofdirectors, the regulations of said body(Article 251.2 LSC).

The possibility of challenging resolutionsdue to infringement of the regulations ofthe general meeting, which is envisagedin general terms (Article 204.1 LSC)despite the fact that only listedcompanies are obliged to approve them(Article 512 LSC), could be consideredat cross-purposes with the aim of thereform to avoid challenges due to minorformal infringements, in view of thenature of the regulations of the generalmeeting as essentially procedural rulesthat are subordinate to the by-laws

and, as such, unlikely to affectshareholders’ rights.

Another new development, as we havealready mentioned, is the establishmentof a ground of harm to the company’sinterests for the benefit of one or moreshareholders or third parties consistingof adopting resolutions by abuse of amajority, indicating the requirementsthat can lead to said ground beingconsidered to exist, without there beingany harm to the company’s assets:resolutions for which there is no“reasonable need” on the part of thecompany and that benefit the majorityto the detriment of the rest of theshareholders (Article 204.1.II LSC).

The reform also elaborates on andspecifies a matter of a practical naturethat has given rise to debate in the past,namely the question of the rule thatresolutions rendered void or validlyreplaced by others cannot be challenged.Article 204.2 LSC now clarifies that thechallenge cannot be lodged even whenthe voiding or replacement of theresolution takes place after the claim hasbeen filed and specifies the decision thatthe courts will have to adopt,rendering the proceedings concluded“due to supervening lack of object”(Article 204.2 LSC).

Finally, Article 204.3 LSC establishes fourexceptions to the general definition ofresolutions that can be challenged:

�n The infringement of purely proceduralaspects or requirements in relation tothe announcement and constitution ofthe body adopting the resolutions, aswell as for the approval of the same,unless relevant aspects are involved(e.g. form and term envisaged for theannouncement, the essential rules onthe constitution of the body or themajorities necessary for the adoptionof the agreements).

�n Incorrect or insufficient non-essentialinformation supplied prior to thegeneral meeting, which iscomplemented with the provisions ofnew Article 197.5 LSC in relation tothe information requested verballyduring the general meeting, andwhich cannot be used as grounds fora challenge in the event ofinfringement and will only entitle theparty in question to seek damages.

�n The participation of persons who arenot entitled to do so, unless it isdecisive for the valid constitution ofthe body.

�n The invalidity of one or more votesthat were not decisive for theformation of the majority (known asthe “resistance test”, formulated bycase law up to now).

Expiry of the challengeAs for the term for challenging, new Article205.1 LSC, following the removal of thedifferent treatment of null and annullableresolutions, establishes a general term ofone year.

However, a different regime is establisheddepending on the body on which theresolutions are adopted (general meetingor board). Further exceptions areestablished, one of a substantive naturefor resolutions that are contrary to publicorder (which does not represent a changein relation to the current rules) andanother of a subjective nature, dependingon whether or not the company whoseresolutions are being challenged is listed.

(a) Resolutions of the general meeting For those resolutions adopted at thegeneral meeting, a general term ofone year is established. But there isan exception to this term in the caseof listed companies, whoseresolutions, due to their relevance, aresubject to stricter certainty and


15


security requirements, and the term inthis case is of less than three months(Article 495.2 LSC).

The only exception, which is alreadyestablished in Spanish law, areresolutions that are contrary to publicorder, which are not subject to anyterm (Article 205.1). With the reform,actions to challenge corporateresolutions that due to their cause orcontent are contrary to public order,are complemented by those whosecircumstances also render themcontrary to public order.

Meanwhile, the calculation of the dies aquo contained in new Article 205.2LSC reproduces the regime prior to thereform, which started counting on thedate the resolution was adopted. Buttwo new specifications are established,consisting of counting from the date ofreceipt of a copy of the minutes forthose resolutions adopted in writing (apossibility that is in principle only opento the board of directors) and the dateof validity for those resolutions recordedin the Commercial Registry — validityoccurs with publication in the OfficialGazette of the Commercial Registry

(BORME) (Article 21.1 of theCommercial Code), while theprevious regime referred to the momentof registration—.

(b) Resolutions of the boardof directorsThe term for challenging theresolutions of a board of directors isshorter, with a general term of thirtydays being established (Article 251.1LSC). Even though this matter couldgive rise to debate, we believe thatthis term does not apply to thoseresolutions considered contrary topublic order.

In line with the previous regime, adistinction is made between the dateon which the term starts depending onwhether the challenge is lodged by thedirectors, who have thirty days to doso as of the adoption of theresolutions, or the shareholders entitledto challenge, who also have thirtydays, although in this case as of whenthey become aware of the resolution,provided the general term of a yearhas not elapsed since it was adopted.

EntitlementThe new system of entitlement forchallenging resolutions requires adistinction to be made between theresolutions of the general meeting andthose of the board of directors.Moreover, it has to be taken inconnection with the special provisionsaffecting listed companies.

(a) General meetingThe general regime entitlesadministrators, shareholders and thirdparties with a legitimate interest tochallenge resolutions.

In particular, in relation to theshareholders, the reform introducesan important new development bylinking entitlement to holding aminimum stake of the capital,

meaning that the right to challengeceases to be an individual right of theshareholder and becomes a minorityright. And in this regard a distinctionis established between unlistedcompanies (subject to the generalregime) and listed ones, in which alower stake is required.

Thus, in order to challenge resolutionsof unlisted companies, the challengingshareholders will have to represent,individually or jointly, more than 1 % ofthe capital prior to the adoption of theresolution (Article 206.1 LSC). But forlisted companies, this threshold islowered to 0.1 % of the capital (Article495.2.b) LSC], due to the fragmentedshareholder profile that ischaracteristic of these companies andthe advisability of not limiting the rightto challenge excessively.

The reform also establishes thepossibility for the by-laws to lowerthese thresholds in order to furtherextend the right to challenge (Article206.1.II LSC), although it is unlikely thatthis option will be used very often.

There is also an exception to theneed to have a minimum stake inrelation to resolutions contrary topublic order (Article 206.2 LSC),which can be challenged by anyshareholders, even if the person inquestion became a shareholder afterthe resolution had been adopted, aswell as by administrators and thirdparties (without any mention to theneed for a legitimate interest).

(b) Board of directorsIn relation to board resolutions, Article251.1 LSC recognised the entitlementof directors and shareholdersrepresenting 1 % of the share capitalto lodge a challenge, although thispercentage is reduced, like in thecase of general meeting resolutions,to 0.1% in the case of listedcompanies [Article 495.2.b) LSC].



4. Remuneration of administrators

Background and aim ofthe reform Prior to the LSC Reform Act, theregulations on the remuneration ofadministrators were partial and limited,consisting of a general regime appliedequally to all Spanishcompanies–whether listed or not- andwhich did not consider the diversenature of the remuneration items usuallyattributed to executive directors.

Thus, no distinct legal regime existed toregulate, as such, the remuneration tobe paid to administrators of listedcompanies, apart from certain attemptsmade to implement measures to addgreater transparency to remunerationsystems, such as certainrecommendations from the UnifiedCode (recommendations 33 to 36) orthe obligation to draw up an annualreport on the remuneration to be paidto directors, imposed under theSpanish Securities Market Act and nowestablished in the new Article 541 LSC.Nor did the legislator pay particular

attention to the different types ofremuneration frequently received byadministrators for performing executiveduties, which –despite a few timidattempts by the courts to react tothis- led to the development ofremuneration practices outside of thecorresponding corporate channels.

The main aim of the LSC Reform Act inthis regard is to ensure the shareholders’capacity to control the remuneration tobe paid to administrators, althoughalways upholding companies’management and organisational capacity,while guaranteeing sufficient transparencyof said remuneration. More specifically,the reform attempts to ensure thatremuneration systems adapt to themarket in which the company operatesand to its financial situation at all times, itaims to establish a process for preventingpotential conflicts of interest involving anyof the participants when adopting thecorresponding resolutions onadministrators’ remuneration and, inrelation to executive directors, it

approaches their remuneration with thepurpose of unifying and standardising it.

Consequently, in addition to betterdefining and improving the regulationsexisting until now, the legislative reformgrants certain additional competenciesto the general meeting in relation toremuneration and establishes that theprinciples of proportionality andreasonability should govern theremuneration system applicable toadministrators. In addition, the reformcreates a system which is more specificand detailed in relation to theremuneration of directors of listedcompanies, and it regulates theremuneration system for directors whoperform executive duties.

This is one of the aspects of the LSCReform Act which has deserved the mostattention, as a result of the relevance theissue of the remuneration ofadministrators has acquired in recentyears within the debate on the corporategovernance of listed companies.

Key aspects:

n Greater transparency and control over the remuneration paid to administrators, therebyreinforcing the role of the general meeting.

n The general meeting must approve the maximum amount of annual remuneration allocated topay all administrators, due to their status as such.

n Directors who perform executive duties must sign a contract with the company setting out inexhaustive detail the remuneration system applied in return for such duties. Such contractmust be approved by the reinforced majority of the board without the intervention of thedirector in question.

n Listed companies must approve a remuneration policy for their directors, which must set outboth the remuneration to be paid to directors due to their status as such and in return for theperformance of their executive duties. Such policy must be approved by the shareholders’general meeting for a term of three years.



General systemfor the remunerationof administratorsThe LSC Reform Act has amended, onthe one hand, the general system forremunerating administrators, whichapplies to all Spanish companies,whether listed or not. Most of thedifferences in the system existing untilnow between joint stock companies andlimited liability companies have beeneliminated, since they generally lackedany objective justification and merelyreflected the different origins of therespective laws governing them.

Thus, the post of administrator in Spanishcompanies continues to not beremunerated, unless the by-laws establishotherwise, in which case the remunerationsystem must be indicated (Article 217.1LSC). Some examples of these possibleremuneration systems which must beindicated in the by-laws are: (i) payment ofa set amount, (ii) payment of expenses forattending board meetings, (iii) share inprofit (which must be established in theby-laws or by the general meeting, withinthe maximum limit set in the by-laws:Article 218 LSC), (iv) variable remunerationwith general indicators or parameters ofreference, (v) remuneration in the form ofshares or linked to performance (regulatedin greater detail in Article 219 LSC), (vi)indemnification following removal (providedsuch removal is not due to a breach bythe administrator of his/her duties) and (vii)the savings or pension plans deemedappropriate (Article 217.2 LSC).

Unlike the previous regulations, whichgave no indication whatsoever in relationto joint stock companies as to whichbody has competence to set theremuneration of administrators and thedecision-making capacity reserved to theshareholders, it is now required that thegeneral meeting approve the maximum

amount of the annual remunerationallocated to pay all administrators, amaximum amount which will remain inforce unless it is modified by the generalmeeting itself (Article 217.3 LSC). Theremuneration to be approved by thegeneral meeting is, in any event, whatcorresponds to the administrators “dueto their status as such”, which in thecase of the directors performingexecutive duties must be supplemented–as we will explain below- by any otherremuneration items that may be includedin the contract they must sign with thecompany (Article 249.3 and .4 LSC).

Furthermore, the general meeting alsohas competence to establish thedistribution of the remuneration betweenthe different administrators. Should it failto do so, said duty corresponds bydefault to the administrators themselvesor to the board of directors, which musttake into consideration the duties andresponsibilities attributed to each director(Article 217.3 LSC).

As a general rule, remuneration must beset reasonably in proportion to thecompany’s size, its financial situation atany given time, and the market standardsfor similar companies. In addition, theremuneration system must nowspecifically be designed to encourage thecompany’s long-term profitability andsustainability and to include thenecessary precautions so as to avoidassuming excessive risk and rewardingunfavourable results (Article 217.4 LSC).This is, in any event, a series ofindeterminate criteria with unclear legalcontent, which, in the most extremecases, could serve to challenge orcontest remuneration which is not duly inproportion to the company’s financialsituation or to the share in profitcorresponding to the shareholders.

Remuneration ofexecutive directorsThe remuneration to be paid to directorswho perform executive duties, differentfrom what they might receive due to theirstatus of administrator, is set, in principle,by the board of directors. But given theimportance of this remuneration and thepossible conflicts of interest it can entail,the LSC Reform Act has created aspecific regulation which includes a seriesof precautions, such as: requiringreinforced majorities, the abstention ofthe directors in question and establishing,in the case of listed companies, that theboard necessarily confine its actions tothose resolutions previously adopted bythe general meeting.

In this regard, when a member of theboard of directors is appointed managingdirector or is attributed executive dutiesby any title (senior executive employmentcontract, commercial relationship, etc.), acontract between the director and thecompany must be executed (Article249.3 LSC). This contract, which must beapproved by the board of directors withthe favourable vote of at least two-thirdsof its members and with the director inquestion abstaining, must set out in detailall remuneration items for which theexecutive director could obtainremuneration for the performance of suchexecutive duties, including, as the casemay be, potential indemnification forhis/her early removal from such dutiesand the amounts to be paid by thecompany as insurance premiums orsavings plan contributions. Given thepurpose of this contract, the director willnot be able to receive any remunerationfor performing executive duties if theseamounts or remuneration items are notset out therein (Article 249.4 LSC).

As has already been stated, thisremuneration for the performance of


19


executive duties is different from or inaddition to the remuneration whichcorresponds to “administrators due totheir status as such”, the maximumamount of which must be approved bythe general meeting (Article 217.3 LSC).In this way, the legislator has intended tokeep the management body somewhatindependent, in terms of its ability toestablish remuneration for executiveduties, leaving shareholders out of thisdirect decision-making process. In anyevent, the remuneration to be paid toexecutive directors must also begoverned by the principles ofproportionality and reasonability and, inthe case of listed companies, must be inline –as we will see- with theremuneration policy approved by thegeneral meeting.

Specific system forlisted companies As stated above, the LSC Reform Acthas established specific additionalregulations in relation to theremuneration to be paid to the directorsof listed companies.

Thus, in contrast to the general systemapplicable to Spanish companies, in thecase of listed companies, an assumptionis made that the post will necessarily beremunerated, unless otherwise indicatedin the by-laws (Article 529 sexdeciesLSC). This rule is undoubtedly justified bythe special responsibility and dedicationrequired from directors of listedcompanies, but also by the actualpractical situation of these companies.

It cannot be inferred from this, however,that the remuneration to be paid to theadministrators of listed companies neednot be the subject of the appropriateprovision made in the by-laws. Theremuneration policy for directors whichthe general meeting must approve –aswe will see- must in any event be in linewith the “remuneration system set out in

the by-laws” (Articles 529.1 septdeciesand 529.1 novodecies LSC). This seemsto confirm that, beyond the assumptionthat the post will be remunerated, theremuneration item or items to be receivedby the directors will indeed have to be setout in the by-laws.

In particular, theremuneration of directorsdue to their status assuch and remuneration forthe performance ofexecutive dutiesThe board of directors must approve aremuneration policy for the directors, atthe proposal of the appointments andremuneration committee, in relation to theremuneration of the executive directors[Article 529.3.g) quindecies LSC], whichmust in turn be subject to approval bythe shareholders’ general meeting. Saidpolicy must set out, at the least, theannual remuneration to be paid to alldirectors due to their status as such andthe remuneration system applicable todirectors who perform executive duties.

In relation to the remunerationcorresponding to directors due to theirstatus as such, the remuneration policymust follow the system established in thecompany’s by-laws and must indicate themaximum amount to be paid to alldirectors in this regard (Article 529.1septdecies LSC). It will fall to the board ofdirectors to determine the individualremuneration of each director (contrary tothe general rule in Article 217.3 LSC), andthe board must consider for this purposethe duties and responsibilities attributedto each director, whether the director ison board committees and all otherobjective circumstances deemed relevant(Article 529.2 septdecies LSC).

Regarding the remuneration paid todirectors for the performance of executiveduties, this must be established –as we

have seen- in a contract between themand the company, which must be in linewith the directors’ remuneration policy.This policy must set out: (i) the annualfixed amount of remuneration and itsvariation during the period to which thepolicy refers, (ii) the different parametersfor setting the variable components,(iii) the main terms and conditions of theircontracts, including, in particular, theirduration, indemnification due to their earlyremoval or the termination of thecontractual relationship, and (iv)exclusivity clauses, post-contractual non-compete clauses and/or minimum-termor loyalty to the company clauses (Article529.1 octodecies LSC). Establishing theremuneration to be paid to the executivedirectors and the terms and conditions oftheir contracts with the companycorresponds in any case to the board ofdirectors (Article 529.2 octodecies LSC).

Necessary approval of theremuneration policy by thegeneral meetingOne of the main legislative changes of theLSC Reform Act in terms of remunerationto be paid to directors of listed companiesconsists of attributing decision-makingpowers to the shareholders’ generalmeeting which go beyond the approval, inan advisory capacity, of the annual reporton the directors’ remuneration. It hasbeen considered necessary, for the goodgovernance of listed companies, that thegeneral meeting have effective decision-making capacity in relation to thedirectors’ remuneration, includingregarding which different paymentcomponents should be included, as wellas the parameters and terms forestablishing their remuneration.

In this regard, the remuneration policy forthe directors of the company, which mustbe adapted as appropriate to theremuneration system established in itsby-laws, must also be subject to approval



by the shareholders’ general meeting asa separate item on the agenda, at theproposal of the board of directors andsubject to a report by the appointmentsand remuneration committee(Article 529.1 and .2 novodecies LSC).

The remuneration policy for directors willremain in force during the three financialyears following the one in which it wasapproved by the shareholders’ generalmeeting, in such a way that anyamendment or substitution of such policyduring said time must be again approvedby the general meeting (Article 529.3novodecies LSC). However, if the annualreport on the directors’ remuneration isrejected during the consultative voteduring the ordinary general meeting, theremuneration policy applicable to thefollowing year must be revised andsubjected for approval by the nextgeneral meeting prior to being applied,regardless of the corresponding three-year period not having elapsed(Article 529.4 novodecies LSC).

Although the general rule is that directorscannot receive any remuneration notestablished under the remuneration policyin force at any given time, the possibilityof the general meeting expresslyapproving other special remunerationitems seems meanwhile to be acceptable(Article 529.5 novodecies LSC).

The transitional regime onthe approval of theremuneration policy Given this new requirement whereby theremuneration policy must be approvedby the general meeting, and in order toharmonise this with the pre-existingsystem for drawing up the annual reporton the remuneration to be paid to thedirectors and on the latter being subjectto a consultative vote by the generalmeeting (now established in Article 541LSC), the LSC Reform Act has takencare to establish, in its transitionalprovision (section 2), a specifictransitional regime for this new

discipline, so as to avoid possibledisruptive situations. In particular:

(a) if the first shareholders’ ordinarygeneral meeting held after 1 January2015 approves the annual report onthe directors’ remuneration following aconsultative vote, it will be construedthat the company’s remunerationpolicy contained therein has likewisebeen approved for the purposes ofthe new regime established in Article529 novodecies LSC, and will applyfrom then on; but

(b) if, on the contrary, the shareholders’ordinary general meeting does notapprove said annual report followinga consultative vote, the directors’remuneration policy must be subjectto the binding approval of theshareholders’ general meeting nolater than the end of the followingfinancial year, effective as from theyear after that.


21


5. Administrators’ rules of conduct.Duty of care and duty of loyalty


23Reform of the Spanish Companies Act and new legal frameworkfor corporate governance

Rules of conduct andgeneral meaning ofthe reformThe post of administrator entails that theparty holding such post be subject torules of conduct which set out a seriesof “duties”. These duties reflect theguidelines or criteria for acting whichadministrators must abide by in theperformance of their roles, and theyserve, in the event of a breach, as abasis for their potential liability. Theseare duties to act or rules of conduct,often known by their English name as“fiduciary” duties, which are reduced totwo main duties: the duty of care andthe duty of loyalty.

The foregoing regulation of the rules ofconduct had its origins in the Act of 17July 2003 on the transparency of listedcompanies, which in turn resulted in thefulfilment of the recommendations ofwhat is known as the “Aldama Report” of20031. The current reform of the LSC,which has in turn included numerousprovisions from the Proposed MercantileCode of June 2013, is limited in essence

to perfecting the existing discipline,mainly by specifying the contents of theduty of care and reformulating the generalcontents of the duty of loyalty and itsmain provisions.

This regulation applies to all Spanishcompanies and not only to listedcompanies, which have not been thesubject of any specific provision in thisregard. Still, the reform has been clearlydominated and inspired by theuniqueness of listed companies. Theserules of conduct applicable toadministrators are an essential part of anycorporate governance system. Theregulatory function of these rules is toalign the interests of the administratorswith those of the shareholders, both forthe purpose of creating value and forsharing it, and this is also the mainpurpose of the corporate governancemovement. Furthermore, the existence ofan effective system for determiningadministrators’ liability, which enables anyinfringement of their rules of conduct tobe identified and sanctioned, alsoconstitutes an essential element forcreating trust in securities markets.

Different treatment ofnegligence and disloyalty Although both duties contribute todefining the role of the administrator, theLSC Reform Act fulfils the main goal oftreating them each differently, accordingto the consequences associated withtheir infringement.

In essence, the main inspiration behindthe LSC Reform Act is that Spanish lawshould be benign and tolerant withinfringements of the duty of care, or withwhat would constitute the problem ofnegligence (thus, the business judgmentrule –as we will see-), yet strict andsevere with infringements of the duty ofloyalty, which can be summarised asdisloyal conduct (which explains –as isanalysed in the chapter onadministrators’ liability- the possibledirect exercise by the minority ofcorporate liability actions for these typesof infringements).

The reasons relate above all to thedifferent objective significance attributedto each of such types of conduct and, in

Key aspects:

n The LSC Reform Act adopts what is known as the business judgement rule, which preventsjudges from revising strategic decisions and business decisions made by administrators

n Distinctions are made within the regime on administrators’ liability, depending on the functionsthey effectively perform

n The main provisions on the duty of loyalty are reformulated while others are added, such asthe administrators’ obligation to always apply their own criteria and not accept instructionsfrom third parties or have ties with them

n Within the duty of loyalty, two type of obligations can be distinguished: basic or substantiveobligations, which constitute absolute prohibitions, and certain key obligations referring tocases of conflicts of interest, which by contrast can be the subject of an exemption

1 Report by the Special Committee to ensure transparency and security in the markets and in listed companies, dated 8 January 2003


practical terms, to the greater or lesserprobability of them being displayed. Notonly do infringements of the duty of carenot bring any benefit to those whocommit them, but also, in general, theytend to be more visible and can berecognised and sanctioned byshareholders and by the market. Theconsequence, then, is that administratorslack, as a matter of principle, theincentives for carrying them out. Disloyalconduct, on the other hand, can entail apersonal benefit or gain for administrators,although at the shareholders’ expense;therefore, it is more likely to be put intopractice. And due to its nature, disloyalconduct tends to disguise itself aseveryday transactions which are formallycorrect, which also makes this conductmore difficult to identify and prosecute.

The adaptation of the dutyof care according to thenature of the post and thefunctions performed The duty of care can be summarised asthe need for administrators to act “withthe care expected from an orderlybusinessperson” (Article 225.1 LSC). Thislegal standard refers to the degree ofdedication, competence, foresight andknowledge required when managing anycompany. It is a model equivalent to thatof the “reasonable businessperson” usedby some international instruments, whichmust be assessed according to the sizeof the company, the sector in which it isactive and the activities it carries out. Theduty of care is related to the creation ormaximisation of value, due to theadministrators’ status as managers ofthird-party assets.

The LSC Reform Act has adaptedadministrators’ general duty of care, byrelating it to the “nature of the post andthe functions attributed to each one ofthem” (Article 225.1 LSC). Although the

board of directors takes the form of acollegiate body and all of its members arejointly and severally liable as a rule (Article237 LSC, which has not been amended),it is thus in keeping with the differentiationor specialisation of functions which is, inpractice, characteristic of more complexforms of administration, such as the caseof listed companies. The degree ofcompetence and dedication –the requiredcare- cannot be the same for anexecutive director, to whom the effectivemanagement of the company isentrusted, as for an external director,whose post mainly entails supervisoryfunctions. The task of each director andthe latter’s required conduct by extension,can also be determined by the boardcommittees on which he or sheparticipates or the duties entrusted tosaid director, and by the resulting divisionof work within the body in question.

All administrators are subject to a duty ofcare. But this does not mean one single,uniform duty for all; instead, this duty mustbe defined according to the functionseffectively performed by each one.

Duty of care and thebusiness judgment ruleThe most relevant reform of the LSC interms of the duty of care is in relation to theexpress adoption in Spanish law of thetheory borrowed from English law, and inparticular from US law, known as thebusiness judgement rule, which the LSChas rechristened as “protección de ladiscrecionalidad empresarial” (Article 226).

This business judgement rule applies tomanagement acts in relation to thecompany. Meaning those strategic andbusiness decisions whose adoption issubject to technical and discretionarycriteria, through which both innovation andrisk taking are channelled, as these formpart of a business’s activities (an

acquisition or investment, the launch of anew product or service, etc.). Providedthat certain prerequisites are fulfilled, thesedecisions are presumed to be in line withthe standards of an orderlybusinessperson. Therefore, although thesedecisions may, in time, be revealed aserroneous and even ruinous for thecompany, administrators cannot beconsidered negligent nor be held legallyliable whatsoever as a result. A type oflegal immunity is thus created in relation tothese acts, based on the assumption that,in these cases, administrators are acting ingood faith and in the belief that they areacting in the company’s best interests.

This business judgment rule gives formto a principle already roughly set out inSpanish case law, which rejected that“the analysis of the intrinsic correctness[of business decisions] in terms of itseconomic aspects can be overseen bythe courts” (Judgment of the SpanishSupreme Court of 17 January 2012).This judgment is based on differenttypes of considerations. The intention isto prevent a severe regime of liabilitythrough negligence from operating as ahindrance or obstacle to theassumption of risks typical of anybusiness activity. The waters aremuddied further by the difficulties whichusually exist in discerning, after a time,if the hypothetical economic damagederiving from a business decisionshould be attributed to the mere risk orto a negligent act. And this should becontrasted with the danger associatedwith a court judging these decisions,due to the inexistence of any technicalrules (lex artis) which would permit themto be assessed objectively, the judges’usual lack of technical training, and theobvious risk of their assessmentacquiring a “retrospective bias”,associating the fact that economiclosses were caused with the negligentnature of the decision behind them.



25

However, the application of this businessjudgment rule is subject to the fulfilmentof certain prerequisites, as established inArticle 226.1 LSC:

n the administrator must have actedwith sufficient information, in termsof a decision made with ample factsand sufficiently reasoned andthought out. In fact, obtaining thenecessary information to properlyperform the role of administrator isnot only a right of the administrator,but also –as the new Article 225LSC specifies- a true duty;

n the administrator must act within thecontext of a proper decision-makingprocess; that is, according to thecorporate rules governing thedecision-making process; and

n the administrator must act in goodfaith and without a personal interest,which rules out those decisions inwhich he or she has a direct orindirect interest, as well as thoseaffecting –as indicated in Article226.2 LSC- other administrators orrelated parties. In cases where theadministrator’s impartiality iscompromised, his or her actionsmust be judged according to theparameters, not of the duty of care,but of the duty of loyalty, which arestricter and more thorough.

In any event, an administrator’s liabilityis not simply derived from the non-fulfilment of these prerequisites. Instead,the judicial immunity protecting themanagement acts will merely disappear,and thus the judge will recover all of hisor her authority to judge the merits ofthe decision which caused theeconomic damage to the company.

The reformulation of theduty of loyalty and itsvarious forms The other rule of conduct comprising thepost of administrator is the duty of loyaltyor of care, which had been containeduntil now in the “faithful representative”standard. But this form of conduct hasbeen reformulated in the LSC ReformAct, which now requires thatadministrators act “with the loyalty of afaithful representative, acting in good faithand in the company’s best interests”(Article 227). A faithful representative, orloyal representative, is one who alwaysstrives to promote and defend theinterests of the persons he or sherepresents and who puts those interestsbefore his or her own, in particular whenthe two conflict. Just as the duty of carefocuses on creating value, the duty ofloyalty concerns the distribution orsharing of value, thus preventingadministrators from exercising their dutiesfor their personal gain and to thedetriment of shareholders.

The reform has, in essence, specified andsystematised the different manifestationsof the duty of loyalty, while adding othermanifestations to the existing ones. Inparticular, a distinction is made between:(i) different “basic” or substantiveobligations deriving from this duty(Article 228), which contain actualabsolute and unconditional prohibitions,and (ii) a series of key obligations, referringto the “duty to prevent conflict of interestsituations” (Article 229), which, on thecontrary, contain relative prohibitions that,as such, can be subject to exemptions “inspecial cases” (Article 230.2).

The substantive obligations include somealready contained in the LSC, such as theduty of secrecy [Article 228.b)] and theduty to refrain from discussions andvoting on resolutions or decisions in

which the administrator has a direct orindirect conflict of interest [Article 228.c)].But other obligations have been added,such as: (i) the general duty not to usethe administrator’s powers “for purposesother than those for which they weregranted” [Article 228.a)], whichencompasses any case of abuse ofauthority or –to use a Public Law term–misuse of power, and (ii) the obligation toact at all times “under the principle ofpersonal liability with freedom ofjudgement and independence with regardto instructions and third-party ties” [Article228.d)], which is an especially relevantrule in the case of consejeros dominicales(proprietary directors representing asubstantial or controlling part of the sharecapital) and, in general, those who haveany ties to a shareholder or a third party.

The duty to avoid conflict ofinterest situations and itsexemption regimeIn addition to the basic obligationscomprising the inalienable core of theduty of loyalty, this duty imposes anotherseries of key obligations which derivefrom the administrators’ general duty notto put themselves in situations in whichtheir interests may collide with those ofthe company [Article 228.e) LSC].

Among these key obligations are alsosome which were already included in theprevious legislation and which have, inany case, been the subject of certaintechnical improvements. This is the casein particular of: (i) the prohibition againstusing the company’s name and invokingthe status of administrator [Article229.1.b)], although only –as the LSC nowspecifies- when this is to unduly profitfrom private transactions; (ii) theprohibition against taking advantage ofthe company’s business opportunities[Article 229.1.d)]; (iii) the prohibitionagainst performing, either on their own or



under the direction of another, activitieswhich compete with those of thecompany [Article 229.1.f)], and (iv) theobligation to notify the otheradministrators, the board of directors orthe general meeting –as the case maybe- of any situation in which there is adirect or indirect conflict of interest withthose of the company (Article 229.3). Butnew obligations have also been added inthis context, such as: (i) that of carryingout transactions –with certain exceptions-with the company [Article 229.1.a)]; (ii)

using the company’s assets for privatepurposes [Article 229.1.c)] and, (iii)obtaining advantages or remunerationfrom third parties in relation to theperformance of the role [Article 229.1.e)].

Given their nature as supporting orsupplementary obligations –unlike those“basic” obligations set out under Article228 LSC- these obligations can be thesubject of an exemption, although neverin general and only “in special cases”(Article 230 LSC). The general meeting, in

some cases, and in others themanagement body (although in this caseonly when the independence of themembers granting the exemption isensured) can therefore authorise theadministrator to perform the transactionin which the conflict of interest occurs.This would be the case –for example- ofan authorisation to use the company’sassets, to take advantage of a businessopportunity or to execute a transactionwith the company.


6. Administrators’ liability regime

Objectives of the reformThe LSC Reform Act has contributedmodifications to the administrators’liability regime, following the example ofneighbouring legal systems, with a viewto adapting it to the tightening up ofadministrators’ duties, particularly thoseof loyalty or trust, and in order tofacilitate the exercise of thecorresponding liability actions.

As the Study by the Expert Committeeindicates, the updating and tighteningup of the duties of administrators andtheir liability regime was a matter thathad been pending for some time,despite the fact that it is at the veryheart of corporate governance. In fact,as far back as in 2006, the Unified Coderecommended the Government toreform the administrators’ liability regimein order to make it tougher and moreeffective, proposing a recognition of “thedirect standing of shareholders to bringliability actions due to disloyalty”, amongother measures.

However, the LSC, being a restated text,and thus unable to introduce innovationsto the legal system, did not reform the

system of duties and liability of companyadministrators, certain formalmodifications apart. Hence the urgentneed to carry out a reform in the contextof a general revision of the rules ofcorporate governance such as the oneembodied in the LSC Reform Act.

Objective scope of theliability regimeThe material prerequisites foradministrators’ liability are, as we know:(i) causing harm to the company’s assetsor, in the case of an individual action, tothose of shareholders or third parties;(ii) the existence of an unlawful or illegalaction or omission on the part of theadministrator, and (iii) the necessaryexistence of a causal link between saidaction or omission and the harm caused(Article 236.1 LSC) which, if it exists,would oblige the administrator to answerto the company, the shareholders andthird parties, as the case may be.

Specifically, administrators’ liability istriggered in those scenarios in whichharm is caused due to acts or omissions(i) contrary to any legal provision in force(failure to call a meeting by a particular

deadline, failure to draw up theaccounts, etc.); (ii) contrary to thecompany by-laws, or (iii) carried out inbreach of the duties inherent in theirpost. This would be the case inparticular of acts or omissions thatviolate the duty of diligence or care (withthe special category of “the businessjudgement rule” established in newArticle 226 LSC, which guarantees alack of liability for purely managementdecisions that end up causing harm) orthat violate the duty of loyalty or trust, inthose cases in which the administrator isperforming his duties for his own benefitand to the detriment of the interests ofshareholders. The reform –as analysedin the foregoing chapter – justifies itsvocation as a measure that is benignwith acts of negligence, while at thesame time hardening its stance on theliability of administrators in relation toacts of disloyalty.

The only modification included in relationto the material prerequisites for liabilityaddresses fault by the administrator.Following the reform, Article 236.1 LSCspecifies that there must be “wilfulmisconduct or fault”. But this clarificationmerely reflects the way that the Courts

Key aspects:

n Presumption of guilt of the administrator when the act or omission in question contravenesthe law or the by-laws

n Extension of the liability regime to de facto administrators, including both non-appointedadministrators or administrators whose appointment has expired, as well as shadowadministrators and natural persons representing administrators who are legal persons

n Making the system for bringing a corporate liability action more flexible, by reducing to 3%the capital required in listed companies for minority standing purposes and for bringing adirect action, without the need for a prior general meeting in the event of violation of theduty of loyalty

n Establishment of a statute of limitations period of four years for corporate and individualliability actions as of the date on which the action could have been brought



had already been interpreting theadministrators’ liability regime. In thisregard, it was understood that theunlawful or illegal act of which theadministrator was accused had to beculpable, which would imply theapplication of the general legal rulesapplying to civil liability (excluding casessuch as force majeure or unforeseeablecircumstances) and also encompass anykind of fault (in vigilando, in eligendo, ininstruendo, etc.) as a source of liability.

One thing that is new, however, is thepresumption of guilt of the administratorin the absence of evidence to thecontrary when the act contravenes thelaw or the company by-laws. This rule,which entails a reversal of the burden ofproof (the claimant only has to prove theexistence of the act or omission thatcontravenes the law or the by-laws, andthe administrator has to prove that thebreach was not culpable), isundoubtedly justified because a breachof the law or the by-laws indicatesimproper and negligent conduct as amatter of principle.

It is also worth looking at how fault istraditionally considered the same asserious negligence. The latter concepttraditionally formed part of the preceptwe are studying, as part of the formula“malice, serious negligence and abuse ofauthority”, envisaged in the 1951 JointStock Companies Act (“Ley deSociedades Anónimas”) meaning that itwill have to be considered included here,even if not specified in the new wordingof Article 236.1 LSC.

In addition, the fact that the intervention ofthe general meeting does not constitute anexonerating factor in relation toadministrators’ liability remains unchanged,as the law still states that the fact that aharmful act or resolution was adopted,authorised or ratified by the generalmeeting will not release the administratorfrom liability (Article 236.2 LSC).

Subjective scope ofthe liabilityThe most significant modification of theadministrators’ liability regime refers to theextension of its subjective scope or ambit.

Although the LSC –following theamendments introduced by the ListedCompanies Transparency Act (“Ley26/2003, de 17 de julio, sobretransparencia de las sociedadescotizadas”)- already extended the scopeof liability to include de factoadministrators, the LSC Reform Act hasspecified that this concept includes both(i) de facto administrators themselves,understood as those who hold the postwithout any appointment or whoseappointment is null or expired, or byvirtue of some other appointment(improperly appointed administrators,whose post has expired, etc.), and(ii) shadow administrators, understood tomean those whose instructions arefollowed by the administrators (Article236.3 LSC). This second category,because of its breadth, is the one thatgenerally gives rise to the mostuncertainties in practice, due to itspossible application in the context ofgroups of companies or even creditors ofcompanies in distress.

Moreover, in those cases in which themanagement body is in the form of aboard of directors and there is nopermanent delegation of powers to oneor more executive directors, the personto whom the maximum powers ofmanagement have been attributed in thecompany, regardless of their job title, alsofalls under the system of liability, theactions of the company based on its legalrelationship with said personnotwithstanding (Article 236.4 LSC).

Finally, the LSC Reform Act has alsoaddressed a matter that had given rise tonumerous doubts in practice, namely thelegal status of natural persons

representing administrators who are legalpersons. In this regard, it has clarified thatthe person must meet the legalrequirements established to be aadministrator, be subject to the samegeneral duties of any administrator and,in the event of a breach of these duties orthe commission of acts contravening thelaw or the by-laws, will be jointly andseverally liable with the administrator thatis a legal person (Article 236.5 LSC).

Joint and several liabilityof administratorsThe joint and several nature of the liabilityof administrators (Article 237 LSC) isunaffected by the reform, except inrelation to natural persons representingadministrators who are legal persons who–as we have just seen- will be jointly andseverally liable with the legal person(Article 236.5 LSC).

In this way, the grounds for exonerationfrom administrators’ liability will continueto apply, and those who can prove thatthey did not intervene in the adoption orexecution of the resolution or act inquestion and (i) were unaware of itsexistence, or (ii) while aware of it, dideverything possible to avoid the harm or,at least, expressly opposed the resolutionor act, will not be held liable.

This joint and several liability amounts toestablishing a presumption of guilt of allmembers of the management body,insofar as they all will be liable unlessthey can demonstrate that one of thegrounds for exoneration exists. Thisrepresents a reversal of the burden ofproof, as it relieves the claimant of theneed to identify the specificadministrators that should be heldmaterially liable for the unlawful act oromission. The joint and several liability ofadministrators should, in any event, beassessed taking into account that theydo not all have the same duty ofdiligence, because this will now depend


29


–according to new Article 225.1 LSC- on“the nature of the post and the dutiesattributed to each one”. As a result,while all the administrators are jointlyand severally liable in principle, they donot all have to face the same charge.

Corporate actions andindividual actionsThe reform maintains the traditionaldichotomy of corporate liability actions(Article 238 LSC) and individual liabilityactions (Article 241 LSC). Even thoughthe prerequisites for liability are the samefor corporate and individual actions, theaims sought by the two are different.

While the purpose of the corporate actionis to indemnify the company’s capitalaffected by the administrator’s action oromission, an individual action seeks toindemnify those whose own assets havebeen directly affected by the action oromission. In the case of an individualliability action then, the indemnification isfor the injured party (which may be ashareholder of the company or a thirdparty) and not the company, as in the caseof a corporate liability action (even in theevent it is brought subsidiarily by a minority,in the event the company fails to act).

Standing to bring acorporate liability actionFurther to the above, one of theobjectives of the reform consists oftightening up the system ofadministrators’ liability, generallyspeaking, but specifically in relation tothe possible violations of the duty ofloyalty or trust.

In this regard, one of the most significantchanges resides in the standing to bringa corporate liability action. On the onehand, the reform reduces the percentageof capital required to request a generalmeeting to be called to decide on

whether or not to bring the corporateliability action and, in the event of arefusal or inactivity on the part of thecompany, to bring said action in order todefend the company’s interests, which inthe case of listed companies is now 3%of capital [Article 495.2.a) LSC] asopposed to the 5% required generally. Onthe other hand, this minority can bring thecorporate liability action directly, withoutthe need to first raise the matter in ageneral meeting, when the action isbased on a violation of the duty of loyalty,with a view to facilitating the sanction andpunishment of disloyal conduct (asopposed to merely negligent behaviour,which merits more benevolent treatment).

Moreover, also with a view to providingan incentive for minorities to bringcorporate liability actions, it is envisagedthat, in the event the claim is upheld infull or in part, the company will be obligedto pay any necessary expenses incurredby the claimant, unless it has alreadyreceived full reimbursement of saidexpenses or where the offer ofreimbursement of expenses wasunconditional (Article 239.2 LSC).

The subsidiary standing of creditors tobring corporate liability actions ismaintained. The reform does not alter thissystem, which allows creditors to bring acorporate liability action againstadministrators when the company or itsshareholders fail to do so, albeit onlywhen the company’s assets areinsufficient to pay its credits(Article 240 LSC). This is however ahypothesis with scant practical relevance,due to the prevailing application of thecorresponding insolvency regime in thesecases rather than administrators’ liability.

Statute of limitations periodfor liability actionsAs far as the statute of limitations periodfor liability actions is concerned, the

reform provides clarification on a pointthat case law has been debating forsome years.

Under the old rules, and in the absenceof an express provision, case lawconsidered that the statute of limitationsperiod for both corporate and individualactions was the one set out in Article 949of the Commercial Code, albeit withcertain qualifications. This latter preceptenvisaged that the statute of limitationsperiod was four years as of when theadministrator in question left his post. Butthe majority of case law was of theopinion that this four-year period shouldbe counted from the moment when theharm in question is caused or becomesknown and not as of when theadministrator leaves his post.

The LSC Reform Act, with a view todispelling any doubts in this regard, hasintroduced new Article 241 bis, expresslyregulating the statute of limitations periodfor corporate and individual actions.According to this rule, the statute oflimitations period for liability actionsagainst administrators, be they companyor individual, will be four years “countingfrom the date on which it could havebeen brought”.



7. Delegation of powers by the boardof directors including those powerswhich cannot be delegated

New regime with respect todelegating powers An important amendment has beenintroduced pursuant to the LSC ReformAct with respect to the regime fordelegating powers in favour of the boardof directors. The reform meets the needto reinforce the role of this body withinthe corporate governance system,especially (but not only) in the case oflisted companies, by regulating in greaterdetail an issue of particular practicalimportance which to date had not beengiven more than partial and limitedattention from the legislator.

The reform has had a twofold impact onthe regime for delegating powers:

(i) by imposing additional requirementsfor the approval of the delegation ofpowers by all Spanish companies(new Article 249 LSC); and

(ii) by restricting the power to delegatecertain duties of the board of directors,thereby establishing the minimum coreresponsibilities which must bemaintained by the board and whichcannot fall under the control of one ormore of its members (in particular, ofthe managing directors and/orexecutive committees). The powersthat cannot be delegated are set out ina list applicable to all Spanish

companies (new Article 249 bis LSC)and there is also an additional list ofresponsibilities required only of theboard of directors of listed companies(Article 529 ter LSC).

Formal requirementsfor delegation In relation to the approval of thedelegation of powers, the former wordingof Article 249 LSC is substantiallymaintained. In this way, and provided thatthe by-laws do not stipulate otherwise,the board may delegate part of itspowers to one or several managingdirectors or executive committees (with itnow being possible to have more thanone executive committee). The possiblepermanent delegation of powers shouldbe understood, logically, withoutprejudice to the general or specialpowers which the board may confer toany person, including any of its members.This notwithstanding, compared to theprevious regime, two additional stepshave been added or are required toadopt delegation resolutions.

Firstly the board is required to establish“the content, the restrictions and thetypes of delegation” (Article 249.1 LSC).The delegation resolution must include–as was already established in Article149.1 of the Mercantile Registry

Regulations- a list of the powersdelegated or, as is more commonpractice, reference to the fact that thedelegation comprises all the powerswhich may be delegated by law or inaccordance with the by-laws. And whensuch delegation is carried out in favourof several directors or committees, it willbe necessary to establish the rules forthe distribution of responsibilitiesbetween them and the regime forperforming them (i.e., on a joint andseveral basis or jointly).

The second step consists of thecompany entering into an agreement withthe director appointed managing directoror to whom executive duties areentrusted by means of any other title (forexample a senior executive contract or aprovision of services relationship), whichmust be approved with the favourablevote of two-thirds of the board membersand with the abstention of the directors inquestion (Article 249.3 LSC). Thisagreement –which is analysed in thesection regarding directors’ remuneration-must cover “all the remuneration items”for which the executive director “mayobtain remuneration for the performanceof executive duties”, with the payment ofany remuneration for items or amountsnot specified in the agreement beingprohibited (Article 249.4 LSC). As theagreement refers to the remuneration

Key aspects:

n An agreement must be entered into between the company and the member of its board ofdirectors appointed managing director or to whom executive duties are entrusted, which mustbe approved by a qualified majority of the board members

n The powers of the board which cannot be delegated have increased, affecting all sorts ofSpanish companies

n Additional powers which cannot be delegated are established in the case of listed companies,with a view to upholding the general duties of supervision and control corresponding to theboard of directors



associated with the performance of“executive duties”, it is plausible in anyevent that it will be separate from anyother remuneration that may correspondto the directors “in their capacity as such”(new Article 217 and, for listedcompanies, Article 529 septdecies LSC).In the case of listed companies,moreover, the agreement must complywith the remuneration policy approved bythe general meeting (Article 249.4 andArticle 529 octodecies LSC),notwithstanding, logically, that it mayregulate other aspects of themanagement relationship other thanremuneration (dedication, duration,exclusivity regimes, etc.).

Powers of the board whichcannot be delegatedAnother relevant amendment of the LSCReform Act on this subject matter, andapplicable to all Spanish corporations, isthe increase of powers which cannot bedelegated by the board of directors. Priorto the reform, the only powers whosedelegation was expressly prohibited was“the disclosure of information oncorporate management and thepresentation of balance sheets to thegeneral meeting”, as well as the powersconferred to the board by the generalmeeting, except in those cases where theboard had the general meeting’s expressauthorisation to delegate such powers.

After the reform, the new Article 249 bisLSC continues to include these samepowers among those which may not bedelegated, although the first refers, withgreater technical precision, to the“drawing up of the annual accounts andtheir presentation to the generalmeeting”. But apart from the foregoing,the list of powers which cannot bedelegated has increased considerably.Even so, they refer primarily to powerswhich other regulations attribute to theboard or powers which even under theformer system used to be understood

–despite the paucity of legal regulation- tocorrespond to the board in their entirety,as they affect its organisation and its ownmanagement body position within thecompany’s corporate structure. Inparticular, the abovementioned Articleintroduces the following new powerswhich cannot be delegated:

a. Supervising the effective operation ofthe committees created by the boardand the activities of the executivebodies and managers appointed bythe board. This would includesupervisory duties and control overthe operation of any committee whichthe board may have created inaccordance with its powers ofself-organisation, and in particular theaudit and appointments andremuneration committees which listedcompanies are obliged to create(Article 529 terdecies LSC), as well assupervising the activities of anyexecutive director or managerappointed by the board.

b. Determining the general policies andstrategies of the company.

c. Authorising or granting exemptionfrom obligations derived from thedirectors’ duty of loyalty, in thosecases in which -in accordance withthe terms of the new Article 230LSC– the granting of the authorisationor exemption (the carrying out of atransaction with the company, takingadvantage of a business opportunity,etc.) corresponds to the board.

d. Organising and operating the board,including creating committees,approving board regulations,appointing board members,establishing rules to call anddeliberate at meetings, etc.

e. Drawing up any type of report requiredof the management body by law, butonly when the procedure to which thereport refers may not be delegated.This would be the case of reports

justifying an amendment of the by-lawsproposed by the board to the generalmeeting, or the equivalent reportsrequired -among other scenarios- toincrease the capital by means of non-monetary contributions or by offsettingcredits, to issue convertible bonds or–in the case of listed companies afterthe reformof the justifying reportwhich must be included with theproposals for the appointment or re-election of directors (Article 529.5decies LSC). Moreover, this new Articleclarifies a previously controversialissue: the lack of necessity for theboard to approve the proceduresreport in those cases when suchprocedures have been delegated toany of its members or to the executivecommittee (for example, an increase incapital delegated by the generalmeeting with the capacity to confer thepowers to any other person).

f. Appointing and removing thecompany’s managing directors, aswell as establishing the terms andconditions of their contract. The newprovisions are in keeping with theregime for delegating powers underArticle 249 LSC, which should alsoextend to the members of theexecutive committees.

g. Appointing and removing managerswho report directly to the board orany of its members, as well asestablishing the basic terms andconditions of their contracts, includingtheir remuneration.

h. Making decisions on the remunerationof the directors, in line with the by-lawsand, if applicable, the remunerationspolicy approved by the generalmeeting. This provision is also inkeeping with the new regulation on theremuneration of directors and, inparticular, with the remuneration-relatedresponsibilities reserved to the boarditself (Articles 217.3, 249.3, 529septdecies and 529 octodecies).


33


i. Calling the general shareholders’meeting and drawing up the agendaand the proposed resolutions. Thispower of the board also derives fromthe general capacity of “thedirectors” to call the meeting (Article166 LSC), as the traditionalinterpretation was that it could notbe delegated or exercised by theboard’s executive bodies.

j. Policy regarding own shares orparticipations. This provision, despiteits general nature, only seemsapplicable to the policy with regard tothe own shares of Spanish joint stockcompanies, given the severerestrictions faced by limited liabilitycompanies in acquiring theirown participations.

Additional powers of theboards of listed companieswhich may not be delegatedApart from the powers which may notbe delegated under the new Article 249bis LSC, and applicable to all Spanishcorporations, the LSC Reform Act alsoexpressly prohibits the boards ofdirectors of listed companies fromdelegating a further series ofadditional powers.

This regime is included in the newArticle 529 ter LSC which, apart from afew minor changes, substantiallyreproduces recommendation 8 of theUnified Code on “responsibilities of theboard” and which, logically, shares withit the objective -in the terms of theCode itself- of “preventing that, due toexcessive delegation, the Board isunable to meet its most essential andunavoidable duty, that is, the “generalduty of supervision”, including the duty

to define and encourage the strategicpolicies of the company and tosupervise and control the bodiesentrusted with its management.

The additional powers which the board oflisted companies cannot delegate areas follows:

a. Approving the strategic or businessplan, the annual managementobjectives and budget, the investmentand financing policy, the corporateresponsibility policy and thecompany’s dividend policy.

b. Establishing the risk management andcontrol policy, including tax-relatedrisks, and supervising internalinformation and control systems.

c. Establishing the corporategovernance policy for the companyand the group of which it is thecontrolling entity; including thestructuring and operation thereof and,in particular, approving and amendingthe corresponding regulations (as isalso required in the case of theregulations governing the board ofdirectors under Article 528 LSC).

d. Approving the financial informationwhich, given their status as listedcompanies, the company in questionmust disclose on a regular basis.These provisions are in line with thegeneral responsibility, which likewisemay not be delegated, for drawingup annual accounts [Article 249 bise) LSC] and with the liabilitydeclarations required of the directorswith respect to the content of theregularly disclosed financialinformation (Article 35 of the SpanishSecurities Market Act (LMV) andimplementing regulations).

e. Defining the structure of thecorporate group of which thecompany is the controlling entity, toavoid where possible –as affirmed inthe Unified Code- “artificial andcomplex structures”.

f. Approving any kind of investmentsand transactions which, due to theirhigh amount or specialcharacteristics, are strategic in natureor entail special tax risks, unless theirapproval corresponds to the generalmeeting (which could be the caseaccording to the new wording ofArticle 160 LSC which requires thegeneral meeting’s approval in thecase of the acquisition or transfer ofessential assets).

g. Approving the creation or acquisitionof stakes in special purpose vehiclesor companies domiciled in countriesor territories deemed tax havens, aswell as any other transactions oroperations of a similar nature which,due to their complexity, couldjeopardise the transparency of thecompany and its group.

h. Approving, subject to a report issuedby the audit committee, thetransactions which the company orcompanies within its group carry outwith directors, in the terms of Articles229 and 230 LSC, or withshareholders owning a significantstake individually or jointly withothers, including shareholdersrepresented on the board ofdirectors of the company or of othercompanies forming part of the samegroup, or with persons related tothem. The said directors or thosewho represent or are related to theabovementioned shareholdersshould abstain from participating in



the deliberation and voting on theresolution in question. This approvaldoes not refer to those transactionswhich meet, simultaneously, threecharacteristics: (i) they are carriedout under agreements whoseconditions are standardised and areapplied en masse to a high numberof clients; (ii) they are carried out atgenerally established prices or tariffsby the person acting as supplier ofthe corresponding goods or service,and (iii) their amount does notexceed one percent of thecompany’s annual returns.

i. Establishing the company’stax strategy.

Contrary to the situation existing inrelation to those powers which cannotbe delegated under Article 249 bis LSC,and given that in this case many of theresponsibilities reserved to the board ofdirectors refer to the company’smanagement and administration, it isexpressly permitted that, when dulyjustified urgent situations arise, thecorresponding decisions may beadopted by empowered persons orbodies; however, these decisions must

be ratified at the first board of directors’meeting held after their adoption(Article 529.2 ter LSC).


35


8. The board of directors of listedcompanies (posts and operation)


37


Essential nature of theboard of directorsThe LSC Reform Act introduces anArticle 529 bis in the LSC, establishingthat the management body of listedcompanies must take the form of a boardof directors. This form of administration,which was implicitly required under otherprovisions (such as the obligation forlisted companies to have board ofdirectors’ regulations –Article 528 LSC- orthe requirement to have an auditcommittee –additional provision 17 of theSpanish Securities Market Act-) andwhich, in fact, all listed companies have,is now mandatory for listed companies.

The chairperson ofthe boardThe new Articles 529 sexies, 529 septiesand 529 octies LSC contain detailedprovisions, previously non-existent, withrespect to the posts on the board ofdirectors, paying particular attention to theirappointment and their duties. In particularthe said Articles refer to the posts ofchairperson (and vice-chairperson),

secretary (and vice-secretary) and the newpost of coordinator director, which is one ofthe main new developments with respectto posts on the board.

Article 529 sexies LSC establishes thatthe chairperson is the “main partyresponsible for the efficient operation ofthe board of directors”, with a wordingsimilar to that of recommendation 15 ofthe Unified Code. The legislator hasthus represented the “key role” of thechairperson –in the terms of the UnifiedCode itself- to achieve the correctoperation of the board of directors, anaspect which previously -apart from thegeneric references to the authority ofthe board to appoint its chairperson-had not been expressly recognised inSpanish legislation.

Given its importance, the chairperson ofthe board of directors is assigned aminimum series of powers (Article 529.2sexies LSC), notwithstanding any otheradditional powers which may beconferred thereto by law, the by-laws orthe board regulations. The powers

included in this list, which follow to alarge extent recommendation 15 of theUnified Code, are as follows:

(a) Calling and chairing the meetings ofthe board of directors,establishing the agenda of themeetings and leading thediscussions and deliberations.

(b) Chairing the shareholders’ generalmeeting, unless otherwise establishedin the by-laws (a provision which wasalready included in Article 191 LSCprior to the reform).

(c) Ensuring that the directors receivesufficient information in advance sothat they are in a position to discussthe points on the agenda. This poweris in line with the duty to provide thedirectors with the information requiredto discuss and adopt resolutions atthe board meetings (established inArticle 529 quinquies and which isanalysed below) and with thestructuring of the directors’ right toinformation as an actual duty (Article225.3 LSC) and essential part of theduty of diligence.

Key aspects

n The posts of chairperson and secretary of the board of directors are regulated, requiring fortheir appointment a prior report from the appointments and remuneration committee

n An executive director may be appointed chairperson, but in this case the appointment willrequire the favourable vote of two-thirds of the directors and a coordinator director must beappointed from among the independent directors

n Non-executive directors may only be represented by another non-executive director

n The company is obliged to provide, sufficiently in advance, the information the directorsrequire to comply with their duties, due to the connection between this information and thedirectors’ general duty of diligence

n The boards of directors are obliged to carry out an annual appraisal of their performance andthat of their committees


(d) Encouraging discussions and theactive participation of the directorsduring the meetings, assuring theirright to take the floor. This latterpower -which as in the previous caseis in fact a duty- seeks to encourageand compare different opinions, witha view to enhancing the nature of theboard as a collegiate body andensuring that its decisions are formedon the basis of a real exchange ofcriteria between its members.

Although this list of responsibilities isprovided specifically in relation to listedcompanies, they are general powerswhich in practice are usually associatedto the post of chairperson andwhich, accordingly, could likewiseapply to Spanish corporations as awhole, as indicated in the Study by theExpert Committee.

Moreover, in relation to the appointmentof the chairperson, it is necessary that,prior thereto, a report from theappointments and remunerationcommittee is obtained (Article 529.1sexies LSC). This requirement must alsobe met with respect to the appointment,if applicable, of a vice-chairperson orvice-chairpersons. The wording of thisprovision does not seem to infer,however, that such report is mandatoryfor the removal of the chairperson andthe vice-chairpersons by the board,which is not the case of secretaries andvice-secretaries, -as we will seebelow- nor does it apply to the proposalsfor the removal of directors by the generalmeeting (Article 529.3 quindecies LSC).

The appointment of anexecutive director aschairperson. Thecoordinating director.The advisability of separating the posts ofchairperson of the board of directors and

the chief executive of the company is oneof the corporate governance issues whichhas given rise to most debate over recentyears, both in Spain and at aninternational level. In Spain this issue hadonly been addressed to date as part ofthe good governance recommendations(recommendation 16 of the UnifiedCode). The LSC Reform Act, followingthe criterion established in suchrecommendations, opts against making itincompatible for the same director topotentially hold both posts or duties,although it does impose certaincompensations and restrictions in casethey overlap.

The general principle is that, unlessotherwise stipulated in the by-laws, thepost of chairperson of the board ofdirectors may fall to an executive director(Article 529.1 bis LSC). But in this case,in order to compensate and mitigate theaccumulation of power implied byexercising both posts simultaneously, thefollowing two measures are established:

(a) The appointment of an executivedirector as chairperson will require thefavourable vote of two-thirds of themembers of the board (Article 529.1septies LSC), which is the majorityalso required for the permanentdelegation of duties to the executivecommittee or to one or severalmanaging directors and in order toenter into an administration agreementwith them (new Article 249 LSC).

(b) The board of directors may appoint,with the abstention of the executivedirectors, a “coordinating director”from among the independentdirectors, who will be empowered to(i) request that a board of directors’meeting be called or the inclusion ofadditional points on the agenda of aboard meeting that has already beencalled; (ii) to coordinate thenon-executive directors; and (iii) todirect the regular appraisal of the

chairperson of the board of directors(Article 529.2 septies LSC).

The coordinator director, based on theconcept lead independent director inEnglish speaking countries, is a new roleunder Spanish legislation, which to datewas covered by the Unified Code(recommendation 16). It is a roledesigned to serve as a counterbalance tothe roles of chairperson-executivedirector,presented as a compromise between theprohibition to exercise both posts on asimultaneous basis and the completecompatibility which had existed to date.

The secretary of the boardThe LSC Reform Act has also reviewedthe role of secretary –and the vice-secretaries- of the board, regulating boththeir appointment as well as their mainduties (Article 529 octies LSC). Theseregulations, in the same way as thosewith respect to the chairperson of theboard, also offer clear regulatory valuefor non-listed companies, given theirgeneral nature.

The duties attributed to the secretary ofthe board of directors, in addition tothose that may be granted thereto bylaw, the by-laws or the board regulations,are as follows:

(a) Keeping the board of directors’documentation, reflecting in the bookof minutes the development of themeetings and certifying their contentand the resolutions adopted.

(b) Ensuring that the actions of the boardof directors adapt to applicableregulations, the by-laws and to anyother internal regulations of thecompany (such as the boardregulations, committee regulations, theinternal code of conduct relating tosecurity market matters, etc.). Onaccount of this duty, the secretarial roleis legally conceived as a guarantor of



39

the formal and material legality of theactions of the board of directors, whichto date was only recognised in thegood governance recommendations(recommendation 17 of the UnifiedCode) and, in general, in theregulations of the boards of directors oflisted companies.

(c) Assisting the chairperson in the tasksrelated to the delivery to the directors ofinformation relevant for theperformance of their duties, whichconfirms –as indicated above- therelevance which is attributed to thedirectors’ duty and right to informationunder the new regulatory framework.

As regards the secretary’s appointment,he/she must be informed in advance bythe appointments and remunerationcommittee, which also applies to thesecretary’s removal (Article 529.1 octiesLSC). This is a rule that was alreadyincluded in the Unified Code, designed –inthe terms of its recommendation 17- to“maintain the independence, impartialityand professionalism of the secretary”.

Operation of the board.Attending General MeetingsThe LSC Reform Act has alsointroduced certain rules relating to theoperation of the board, designed toencourage the active participation of thedirectors and the existence of realdebate on the board. Its aim, in theterms of the Study by the ExpertCommittee, is for the board of directorsto maintain a “constant presence in thelife of the company”, avoiding itbecoming apathetic and passive.

Accordingly, a general duty is establishedfor the directors to “attend board meetingsin person” (Article 529.1 quáter LSC).

If they are unable to do so, they mayappoint a proxy to represent them at themeeting, which must be another board

member (Article 529.2 quáter LSC), aswas already stipulated in the MercantileRegistry Regulations (Article 97.1.4). Thenew development, however, is theprovision that non-executive directors canonly be represented by anothernon-executive director. The aim is tothus avoid a weakening of the duty ofsupervision and control thatnon-executive directors (dominical,independent or other external directors,as defined in new Article 529.2duodecies LSC) are obliged to meet inrelation to the executive directors.

InformationGiven the relevance of the directorsbeing provided with the appropriateinformation for the performance of theirduties and, in particular, to comply withtheir duty of diligence, the LSC ReformAct has expressly established the needfor the directors to receive previously,and sufficiently in advance, theinformation required for the deliberationand adoption of resolutions on thecorresponding matters (Article 529.1quinquies LSC). The responsibility forensuring compliance with this Articlefalls to the chairperson of the board,with the collaboration of the secretary.

The said Article includes two restrictionson the duty to inform directors:

(a) This obligation is only triggered withrespect to information that is “requiredfor the deliberation and adoption ofresolutions”, which implies that theinformation should refer to thedifferent points included, as the casemay be, on the agenda for the boardmeeting. This refers, in any event, tothe company’s duty to make therelevant information available to thedirectors, which may be completedwith any additional information whichthe directors may request in theexercise of their right and their duty toask for the appropriate information

necessary “to meet their obligations”(Article 225.3 LSC).

(b) This obligation will be mitigated, forobvious practical reasons, in thosecases where the board of directors isconstituted or is called on anexceptional basis for urgent reasons(Article 529.1 quinquies LSC).According to the legal wording (“on anexceptional basis”), this is an optionwhich may only be used in justifiedcases, in order to avoid this systembeing abused to force the directors toadopt decisions without the necessaryinformation. This notwithstanding, theobligation does not cease to exist inthese cases due to the exceptionalcircumstances, but is merelymitigated, whereby as a minimum theinformation which it is reasonablypossible to provide given thecircumstances should be delivered.

Performance appraisal.In accordance with the terms of theUnified Code (recommendation 21), theLSC Reform Act has established theobligation of the board of directors oflisted companies to carry out, on anannual basis, an appraisal of itsperformance and that of its committeesand, based on the results, to propose anaction plan aimed at correcting anyshortcomings detected. The results of theappraisal must be included in the minutesof the meeting or attached thereto as anannex (Article 529 nonies LSC), to keep arecord of the appraisal.

The LSC Reform Act has not establishedany requirement to carry out an appraisalspecifically in relation to the performanceof the chairperson of the board ofdirectors. However the powers attributedto the coordinator director includedirecting a regular appraisal of thechairperson (Article 529.2 septies LSC).This would seem to infer that this



individual appraisal will be necessarywhenever a coordinator director isappointed because the posts ofchairperson and executive director fall tothe same person, and that, if this is notthe case, the performance of thechairperson should be duly analysed aspart of the general appraisal of theboard’s operation.

Diversity of the compositionof the board of directors.The LSC Reform Act has established theduty on the part of the board of directorsto ensure that the director selection

processes favour diversity in the board’scomposition and do not involve anyimplicit bias which could be interpretedas discrimination (Article 529.2 bis LSC).

Following the guidelines established bythe European Commission in relation toEU corporate governance regulations,this new Article includes a wide-rangingdefinition of diversity, referring not only to“gender” but also to “expertise” and“knowledge”. This notwithstanding, itgives priority to gender equality, byestablishing that the selection processesshould facilitate “in particular” theselection of female directors, in line with

recommendation 14 of the Unified Code.However the obligation under this Articlerefers more to resources rather thanresults, as it does not insist on the boardappointing female directors or maledirectors who meet certaincharacteristics, but merely that theselection processes favour diversity andare non-discriminatory.


9. Appointment and typesof directors in listed companies

Key aspects:

n The cooptation procedure in listed companies is amended, by removing the requirement forthe appointed directors to be shareholders of the company, and if a vacancy arises after thegeneral meeting has been called, a director may be appointed up to the date of the followinggeneral meeting

n The maximum duration of the post as director of a listed company is decreased to four years

n The proposals for the appointment of directors must include a justifying report from the board

n The proposal for the appointment or re-election of independent directors will be made by theappointments and remuneration committee and in the case of the other directors by theboard itself, pursuant to a report previously issued by said committee

n The different types of directors are defined (executive, non-executive, dominical and independent)

Appointment of directorsby cooptationGiven its importance for the corporategovernance of listed companies, the LSCReform Act has introduced a series ofrules in relation to the appointment andre-election of directors, which affect boththe general meeting as well as the boardof directors itself. In relation to the latter,in addition to the powers to presentinitiatives and proposals corresponding tothe board on a general basis, the newdevelopments added to the cooptationprocedure are particularly important, asthis is the procedure typically followed bylisted companies –as is well known- forthe appointment of the directors.

On the one hand, the reform stipulatesthat in the case of listed companies thedirector appointed by the board via thecooptation procedure to fill a vacancy“does not necessarily have to be ashareholder of the company”[Article 529.2 a) decies LSC], unlike theprocedure applicable to the other jointstock companies (Article 244 LSC). Thisis a requirement which in practice did notusually give rise to any particular

problems, relating to the possibility of theperson appointed director purchasingshares in the market, but whichundoubtedly lacked any basis orimportance in the case of opencompanies like listed companies.

On the other hand, the reform alsostipulates that when the vacancy arisesafter calling the general meeting andbefore it is held, “the board of directorsmay appoint a director up to the date ofthe following general meeting”[Article 529.2 b) decies LSC]. Thisprovision resolves in part an issue which todate had been the subject of certaindebate, that is whether or not the board isauthorised to exercise the power ofcooptation after the general meeting hasbeen called. But at the same time thisprovision should be interpreted inconjunction with the new Article 518 LSC,which requires listed companies to includeon their web page –among otherdocuments- the proposals for theappointment, ratification or re-election ofboard members as from the publication ofthe general meeting’s announcement andup to the date of the general meeting. Byvirtue of this new procedure, if the vacancy

arises after the general meeting has beencalled, the board of directors will not beentitled to make a new proposal for theappointment for submission to the generalmeeting or to present such proposal at thegeneral meeting, as was standard practiceto date in certain cases. But pursuant tothe reform, the board of directors may optin these situations to fill the vacancy bycooptation, with the particularity that thedirector thus appointed will have to beratified, not at the “first” general meeting(Article 244 LSC), that is the meeting thathas already been called, but at the“following general meeting”.

Moreover, bearing in mind thecircumstances affecting the compositionof the boards of directors of listedcompanies and the particularities withregard to the procedure to appoint theirmembers, the legislator deemed itappropriate that, as an exception to thegeneral procedure, substitutes should notbe appointed in these cases (Article 529.3decies LSC), as an exception also to thegeneral regime (Article 216 LSC). Thisensures that the aptitude and suitability ofthe directors is evaluated at the time oftheir effective appointment.



Proposals for theappointment and re-electionof directorsThe LSC Reform Act has also reviewedaspects relating to the procedure formaking proposals for the appointment orre-election of directors, which to datewas only addressed by the Unified Codeand, by extension, in the internal rulesand regulations of listed companies.

The new legal regime, in particular, triesto ensure the effective intervention of theappointments and remunerationcommittee (or, if applicable, theappointments committee for companieswhich have two separate committees),whose existence has become obligatoryfor listed companies (Article 529quindecies LSC). And it also seeks toimprove the information on directorsavailable to shareholders, so that theymay exercise their rights on moregrounds and with greater transparency.

Accordingly, the said committee mustparticipate in the appointment of alldirectors, although not always in the samemanner. In the case of independentdirectors, it is necessary that any proposalfor appointment or re-election, either by thegeneral meeting or by cooptation, is madeby the appointments and remunerationcommittee [Article 529.4 decies and Article529.3 c) quindecies LSC], extending thissame regime to the proposals for theremoval of such directors by the generalmeeting]. This aims to enhance theeffective independence of these directors,avoiding any interference in their selectionfrom the executive directors or theshareholders represented on the board.The very definition of independent directorsmeans it is impossible to consider as suchany person “who has not been put forwardfor either appointment or renewal by theappointments committee” [Article 529.4 h)duodecies LSC]. And in the case of anyremaining directors (executive, dominical

and other external directors), the proposalfor the appointment or re-electioncorresponds to the board itself, although itshould be preceded in any case by areport from the appointments andremuneration committee [Article 529.6decies and Article 529.3 d) quindecies],which also applies to the proposals for theremoval of these directors by the generalmeeting]. This new regime correspondsessentially with recommendation 26 of theUnified Code which, therefore, has becomea mandatory rule.

It should also be borne in mind that theproposal for the appointment or re-election of a director, irrespective ofwhether it is made by the appointmentsand remuneration committee or theboard of directors itself, must in allcases include a report from the latteranalysing “the competence, experienceand merits of the proposed candidate”,and should be attached to the minutesof the general meeting or –in the case ofcooptation- the minutes of the boardmeeting (Article 529.5 decies).

Moreover, this same regime extends tothe natural persons appointed asrepresentatives of directors who are legalentities. In particular, the proposal withrespect to the natural personrepresentative will be subject to a reportfrom the appointments and remunerationcommittee (Article 529.7 decies LSC), sothat the latter can analyse the merits andcapacity of the person who will effectivelycarry out the director’s duties. This rule isin line with the provisions under newArticle 236.5 LSC, pursuant to whichnatural person representatives mustcomply with the same requirements andduties legally established for the directors.

Duration of the postas administratorOn a general basis, the duration of thepost as administrator of joint stock

companies is established in the by-laws,although it cannot exceed six years andsaid duration must be the same for all ofthem (Article 221.2 LSC). In the case oflisted companies, the duration of thepost will also be as established in theby-laws, although in this case -as nowprovided under the new Article 529undecies LSC- the maximum term isreduced to four years. This ensures thatthe shareholders have to decide on thecontinuity of the directors morefrequently, thereby reinforcing theiraccountability vis-à-vis the generalmeeting. The reduction of the term,which numerous listed companies hadalready included in their by-laws due topressure in particular from the proxyadvisors, does not apply to directorsappointed prior to 1 January 2014, whomay complete their mandates even ifthey exceed the 4-year term (section 3of the transitional provision of theLSC Reform Act).

Finally, and pursuant to the same rulesapplicable to non-listed joint stockcompanies, it is envisaged that themembers of the board of directors maybe re-elected once or several times, forperiods of the same maximum duration(Article 529.2 undecies LSC).

The categories of directors Article 529 duodecies LSC defines thedifferent categories of directors, in line withthe traditional corporate governance-basedclassification (executive and non-executivedirectors, with the latter categorycomprising dominical, independent andother external directors). This definition anddistinction of categories, which to date wasfound in the Spanish Securities Market Act(Article 61 bis) and in Order ECC/461/2013(Article 8), both being contributory factorsto the Unified Code, was necessary due tothe numerous references included in thenew regulations to the different types ofdirectors regarding, for example, the


43


composition of the committees within theboard or to the status of the chairperson.

New Article 529 duodecies LSCsubstantially reproduces the definitionsincluded to date in Order ECC/461/2013,albeit with certain amendments.

(a) Executive directorsExecutive directors are those whocarry out management duties withinthe company or its group, irrespectiveof the legal relationship maintainedwith such company (Article 529.1duodecies LSC). Contrary to OrderECC/461/2013 (Article 8.2), there isno requirement, therefore, for suchduties to be “senior” executive dutiesnor does executive status mean thatthe director has to be an “employee”of the company or its group. Itcomprises a functional principle linkedto the performance of managementduties, irrespective of whether theyare provided under an employment ormercantile relationship.

In addition, two rules of prevalenceare established for those cases wherethe same director has, at the sametime, two different statuses, based onOrder ECC/461/2013. Accordingly,those directors who are seniorexecutives or directors of companieswithin the group of the company’scontrolling entity will be deemeddominical directors of the company,on the assumption that they representthe interests of the controlling entityitself. And when a director carries outmanagement duties and, at the sametime, is or represents a significantshareholder or is represented on theboard of directors, he/she will beconsidered an executive director.

(b) Non-executive directorsAny other company directors areconsidered non-executive directors,and may be dominical, independentor other external directors(Article 529.2 duodecies LSC)

(c) Dominical directorsDominical directors are those personswho hold a stake equal to or whichexceeds the one considered by lawas a significant stake (that is, 3%) orwho have been appointed due to theirstatus as shareholders, even if theirstake does not reach such threshold,as well as those persons whorepresent the aforementionedshareholders (Article 529.3 duodeciesLSC). This definition corresponds tothe one contained in OrderECC/461/2013 (Article 8.3), andmerely adds a series of scenarioswhere a shareholder is represented bya director.

(d) Independent directorsIndependent directors are thosepersons who, appointed on thebasis of their personal andprofessional characteristics, maycarry out their duties without beinginfluenced by relationships with thecompany or its group, its significantshareholders or its managers (Article529.4 duodecies LSC). Despite thisgeneral description, a series ofscenarios are established pursuantto which a director may not “underany circumstances” be classified asan independent director, whichcorrespond substantially –apart fromcertain changes in procedure- to theterms of Order ECC/461/2013(Article 8.4).

Moreover, these requirements to beconsidered an independent directorare minimum in nature, due to thepossibility –recognised under newArticle 529.5 duodecies LSC- that theby-laws and the board of directors’regulations may establish additionalincompatibilities for the appointmentas such or impose stricter conditionsfor the consideration of a directoras independent.

Finally, in relation to the registration ofthe appointment of a director at theCommercial Registry, the resolutionadopted by the general meeting orthe board must indicate the categoryof the director, which will be sufficientfor registration purposes, without thecommercial registrar being able toassess effective compliance with theprerequisites for the director inquestion to be placed in the saidcategory. In addition, any incorrectallocation of director category will notaffect the validity of the resolutionsadopted by the board of directors(Article 529.6 duodecies LSC).



10. Board of directors’ committees oflisted companies

Key aspects:

n The appointments and remuneration committee is now obligatory, and any failure to set upsuch committee shall be considered a serious infringement under the Spanish SecuritiesMarket Act (LMV)

n Certain recommendations of the Unified Code are included, becoming obligatory

n Both committees must be comprised exclusively of non-executive directors and at least twomust be independent, including the chairperson

Obligatory nature of theappointments andremuneration committeeThe new LSC dedicates three articles(529 terdecies, quaterdecies andquindecies) to the regulation of theboard of directors’ committees oflisted companies.

The first of them allows the board ofdirectors to set up specialisedcommittees within the board, and todetermine their responsibilities andoperating rules, in accordance with itsgeneral powers of self-organisation(Article 245.2 LSC). In addition to thispower of organisation corresponding toall boards of directors, not just those oflisted companies, an obligation isestablished for the latter to set up anaudit committee as well as anappointments and remunerationcommittee (or, if that is the case, twoseparate committees, one entrustedwith appointments and the otherwith remuneration).

The main development in this area is,therefore, the obligation for listedcompanies to have an appointments andremuneration committee. Previously thesetting up of such committee was a mererecommendation to ensure goodcorporate governance (recommendation39 of the Unified Code), which was metin any case by all Ibex 35 companies.

Setting up an audit committee, however,was already obligatory for all “issuers ofsecurities listed on official secondarysecurities markets”, which included thelisted companies, pursuant to additionalprovision 18 of the LMV, derogated bythe LSC Reform Act, although the reformof the LSC has contributed certaindevelopments to the existing regulations.

The audit committee:composition and operationThe new regulation of the auditcommittee, contained in Article 529quaterdecies LSC, includes andcombines elements of the previousversion of the LMV and therecommendations of the Unified Code

The main development refers to thecomposition of the said committee, whichnow requires that all its members be non-executive directors (dominical, independentor other external directors, in accordancewith the definition under the new Article529.2 duodecies LSC). The exclusivepresence on this committee of “externaldirectors” was a recommendation of theUnified Code [recommendation 39.b)], asthe LMV only required there to be a“majority” of non-executive directors.

In addition, at least two of the membersof the committee must have independentstatus (compared to one memberrequired to date under the LMV), of which

one at least will be appointed on thebasis of his/her knowledge and expertisein accounting, audit procedures or both.

The chairperson of the audit committeemust be one of the independentdirectors. Similarly in this case, the newLSC opts for the criterion advocated bythe Unified Code [recommendation 39.c)],in contrast to the former version of theLMV, which required the chairperson tobe a non-executive director but notnecessarily an independent director. Themaximum duration of the post aschairperson (4 years) remains unchanged,as does the possibility to re-elect him/herone year after the 4-year term has ended.

Notwithstanding the legal provisions, it isnecessary for the by-laws or the board ofdirectors’ regulations to establish thenumber of members of the auditcommittee and to govern the operationthereof, favouring independence in theperformance of its duties (Article 529.3quaterdecies LSC).

The audit committee: DutiesThe new LSC also regulates the minimumduties which correspond to the auditcommittee, without prejudice to the factthat logically they can be increased viathe by-laws or through the board ofdirectors’ regulations. In this regard, thelist of responsibilities is basically the sameas the one already established in the



LMV, although certain duties have beenadded which, to date, were provided inthe Unified Code, such as:

n Regularly gathering information fromthe external auditor on the audit planand its execution [previousrecommendation 45.2 a.)]

n Informing the board in advance on allaspects included in the law, theby-laws and the board of directors’regulations and, in particular, withregard to:

• The financial information whichthe company must makepublic periodically;

• The creation or acquisition ofstakes in special purpose vehiclesor entities domiciled in countriesor territories deemed as taxhavens; and

• Transactions with related parties.

The duties established in this section(which correspond to recommendation47 of the Unified Code) will not be carriedout by the audit committee when they areattributed by the by-laws to anothercommittee made up exclusively of non-executive directors and of, at least, twoindependent directors, one of which mustbe the chairperson. This could be thecase, for example, of the approval ofrelated transactions, when thisresponsibility is attributed to theappointments, remuneration committeeor to another committee with supervisoryand control duties.

Finally it should be borne in mind that theaudit committee regime is also applicableto the issuers of securities other than theshares listed on official secondarymarkets (new ninth additional provisionLSC), as was the case under the previousLMV regime.

The appointments andremuneration committeeThe obligation of the listed companies toset up an appointments andremuneration committee, or if applicabletwo separate committees, constitutes –asseen above- one of the maindevelopments of the reform in this area,by raising what was previously a mererecommendation under the Unified Codeto legal status.

The composition of this committee isgoverned, in any case, by the sameparameters as the audit committee(Article 529.1 quindecies). Accordingly, allits members must be non-executivedirectors [and was already established inrecommendation 39.b) of the UnifiedCode], with at least two of them beingindependent directors (in line withrecommendation 49 of the Unified Code,which stipulates that the majority of itsmembers should have such status even ifthe committee has more than threemembers). As is the case of the auditcommittee, the chairperson must be oneof the independent directors. But, unlikethe audit committee, there is nomaximum duration for the mandate aschairperson, nor does a period of oneyear need to elapse before thechairperson may be re-elected.

As occurs in the case of the auditcommittee, the by-laws or the boardregulations must establish the number ofcommittee members and will govern theoperation thereof, favouringindependence in the performance of itsduties (Article 529.2 quindecies). Withrespect to its duties, the new LSCattributes to the appointments andremuneration committee certain minimumduties, which are summarised below:

n Evaluating the expertise, knowledgeand experience required to be aboard member, defining the duties

and aptitudes needed of thecandidates who are to fill eachvacancy and assessing the time anddedication necessary to efficientlyperform their assignment;

n Setting an objective with respect toequal access of the gender lessrepresented on the board andpreparing guidelines on how toachieve this objective;

n Submitting to the board proposals forthe appointment, re-election orremoval of independent directors andreporting on the proposals for theappointment, re-election or removal ofthe remaining directors;

n Reporting on the proposals for theappointment and removal of seniorexecutives and the basic conditions oftheir contracts;

n Analysing and organising thesuccession of the chairperson of theboard and of the chief executive ofthe company, submitting proposals tothe board so that the succession iscarried out in an orderly andorganised manner;

n Proposing to the board theremuneration policy with respect todirectors and general managers orthose persons who carry out theirsenior executive duties reportingdirectly to the board, the executivecommittees or managing directors, aswell as the individual remunerationand other contractual conditions ofexecutive directors, ensuring thatsuch policies and conditions are met.

As can be seen, the duties attributed bythe new LSC to the appointments andremuneration committee correspondsubstantially to recommendations 26 and50 of the Unified Code.

However, in relation specifically withgender equality on the board, it should be


47


borne in mind that the new LSC does notmerely reproduce currentrecommendation 14 of the Unified Code,which encourages gender equality whenfilling vacancies, but has gone muchfurther. The appointments andremuneration committee now assumes amore active role in this area, having beenentrusted with setting an objective withrespect to equal access of the genderless represented on the board (which isreally an euphemism to refer to femaledirectors) and preparing guidelines onhow to achieve this objective.

Moreover, in relation to the issuers ofsecurities other than the shares listed onan official market, the ninth additionalprovision of the LSC refers only to Articles529 terdecies and 529 quaterdecies, butnot to Article 529 quindecies, which isthe Article which establishes the regimeapplicable to this committee.Nonetheless, it may be inferred from theforegoing that the issuers of securitiesmust also have an appointments andremuneration committee, not onlybecause this is required under Article 529terdecies LSC, but also because undernew article 100.b) LMV an infringementwill be deemed to exist if issuers ofsecurities traded on official secondarymarkets do not have an audit committeeand an appointments and remuneration

committee, “in the terms established inArticles 529 quaterdecies andquindecies” LSC.

Entry into forceIn accordance with the transitionalprovision of the LSC Reform Act, anyamendments introduced in relation to theboard of directors’ committees enter intoforce on 1 January 2015, and must be“agreed at the first general meeting heldafter such date”.

However, to the extent that compliancewith the obligations relating to theexistence, composition and duties ofboth committees is an area that fallsessentially within the remit of the boardof directors, the interpretation of suchprovision is unclear. This first generalmeeting would have to proceed toadapt the by-laws if the regulation withrespect to committees is not in line withthe new legal regime (this adaptationcannot under any circumstances beconsidered a prerequisite for the fullenforceability of such new regime). Butin any case, resolutions regardingamendments to board committees mustbe adopted by the board of directors,preferably at the first meeting held in2015, without any need to wait until thefirst general meeting is held.

Infractions and sanctionsAs is to be expected, the new regulationof the audit committee and theappointments and remunerationcommittee form an integral part of therules on compliance and conduct of thesecurities markets, supervised by theSpanish Securities Market Commission(CNMV) (new seventh additional provisionof the LSC).

In this regard, in accordance with theLMV sanction regime -as mentionedabove- if an issuer of securities does notset up an audit committee as well as anappointments and remunerationcommittee in the terms established inArticles 529 quaterdecies and quindeciesLSC [Article 100.b) LMV], and fails tomeet the rules on the composition andassignment of the duties of suchcommittees, this will be treated as aserious infringement.

As a result any listed companies whichare not currently complying with the newregulation with respect to boardcommittees must adopt as soon aspossible the resolutions required to meetthe terms of such regulation.



11. Annual corporate governancereport and annual report on theremuneration of directors

Meaning and generalaspects of the reformThe LSC Reform Act adds two newarticles to the LSC in relation to theannual corporate governance report (Art.540) and the annual report onremuneration paid to directors (Art. 541).

The two articles form a new section ofChapter IX (“Corporate information”), ofTitle XIV (“Listed companies”), on the“Annual corporate governance report andannual report on the remuneration ofdirectors”, which serves to conclude thetext of the LSC.

Although the regulation on the annualcorporate governance report and theannual report on the remuneration ofdirectors is included for the first time inthe body of the LSC, the mandatorynature of the reports, their content,basic structure and the publicityrequirements to which they are subjectare not actually new. Articles 61 bis and61 ter of the Spanish Securities MarketAct –which are expressly repealed bythe LSC Reform Act (RepealingProvision)– set out the samerequirements, except for a few minorchanges we will explain below.

Annual corporategovernance report The main purpose of the annualcorporate governance report is to providea detailed explanation of the listed

company’s government structure andpractical operation.

The LSC Reform Act has maintained theadvance publicity requirement, which inessence consists of notifying the SpanishSecurities Market Commission of the reportin the form of a relevant event, andannouncing it as such (Art. 540.2 and 3,LSC). This requirement is furthersupplemented by the provisions of SpanishOrder ECC/461/2013, of 20 March, whichsets out the contents and structure of thetwo reports (“Order ECC/461/2013”) andgives details on the requirement to“publicise” this report (Art. 9).

As for the contents and structure of thenew annual corporate governance report,these aspects must be determined by theMinistry of the Economy andCompetitiveness or be expresslyauthorised by the Spanish SecuritiesMarket Commission (Art. 540.4 LSC).This is the same method for delegatingapproval as was used by SpanishSecurities Market Commission Circular5/2013, of 12 June, based on theauthorisation of Order ECC/461/2013, toapprove the current standard report.

The annual corporate governance reportmust be structured into eightmain sections:

1. Ownership structure of thecompany, including:

a. Information on shareholdersholding significant stakes;

b. Information on stakes held bymembers of the board of directorsand shareholder agreements;

c. Information on securities nottraded on a regulated Communitymarket, on the different shareclasses and treasury stock;

d. Information on rules regarding theamendment of corporate by-laws.

2. Restrictions on the transferability ofsecurities and voting rights.

3. Administrative structure of thecompany, including:

a. Composition, organisation andoperation of the board of directorsand its committees;

b. Identification, functions, posts andremuneration of directors;

c. Information on directors’ powersand in particular on their authorityto issue or buy back shares;

d. Information on agreementsentering into force, being modifiedor terminated in the event of achange of control;

e. Information on indemnification orgolden parachute clauses in theevent of dismissal, resignation orchange of control;

f. Information on measures adoptedto achieve gender equality (abalanced presence of men andwomen) on the board of directors.

Key aspects:

n The LSC Reform Act reproduces the regulation on the annual corporate governance reportpreviously contained in the Spanish Securities Market Act, with minor changes

n It also includes the pre-existing regulation on the annual report on the remuneration to be paidto directors, although with certain changes in order to adapt it to the new regime on theirremuneration and, in particular, to the requirement that listed companies approve thedirectors’ remuneration policy



4. Transactions with related partiesbetween the company andshareholders, directors or seniorexecutives and intra-group transactions.

5. Systems for controlling risk, includingtax risk.

6. Operation of the general meeting.

7. Degree of compliance with corporategovernance recommendations, orexplanation, as the case may be, asto why these recommendations werenot followed under the “comply orexplain” principle.

8. Description of internal supervisorysystems in place, in relation to thedisclosure of financial information.

We have highlighted above the two newaspects introduced by the LSC ReformAct: (i) the need to inform on genderequality measures adopted; and (ii) theneed to inform on the risk controlsystems adopted in relation to tax risk.

Since the LSC Reform Act foresees thatthe Spanish Government will issue areport, at the proposal of the Ministry ofthe Economy and Competitiveness, onbarriers faced by senior citizens andpersons with disabilities when accessinginformation on listed companies andwhen exercising their voting rights(Additional Provision Two), it may be that,in the future, some mention must also bemade of these aspects (gender equality,risk control) in the report.

Annual report on theremuneration of directorsIn addition to the annual corporategovernance report, listed companies arealso required to draw up and issue anannual report on the remuneration to bepaid to their directors. This Report, whichwas already regulated in the SpanishSecurities Market Act, acquires greatersignificance following the LSC Reform

Act. This can be seen in the numerousamendments the Act makes with regardto the remuneration of administrators,and especially for listed companies,which –as has been analysed and amongother measures- must be approvedduring the general meeting, in the form ofthe directors’ remuneration policy(Art. 529 novodecies LSC). The LSCReform Act itself has established aspecific transitional regime for this newobligation regarding directors’remuneration (Transitional Provision), soas to harmonise it with the requirementthat listed companies subject theapproval of the report on remuneration toa consultative vote by the ordinarygeneral meeting and in order to avoidpotentially disruptive situations (an issuewhich has been analysed in the sectionon the remuneration of directors).

The regulation on the annual report onremuneration was drafted, in any event,in response to the concern set out in thePreamble of the LSC Reform Act “thatremuneration to be paid to directorsadequately reflect the company’sperformance and that it be properlyaligned with the interests of the companyand its shareholders”. The annual reporton the remuneration of directors is, in thisregard, a fundamental instrument forensuring transparency and information forshareholders and investors.

The publicity requirement of the annualreport on the remuneration of directors isequivalent to that established for theannual corporate governance report: thereport must be issued in the form of arelevant event (Art. 541.3 LSC) and issubject to a consultative vote by theordinary general meeting (Art. 541.4 LSC).This requirement is also supplemented bythe provisions of Order ECC/461/2013,which reproduces the key aspects of theregime applicable to the annual corporategovernance report (Art. 12).

The LSC Reform Act contains no majorlegislative changes in relation to thecontent of the annual report on theremuneration of directors (the standardfor which was approved by SpanishSecurities Market Commission Circular4/2013, of 12 June), apart from sometechnical and grammaticalimprovements. In this regard, it specifiesthat the information on directors’remuneration must include “those whoreceive or should receive remuneration,due to their status as such and, as thecase may be, for performing executiveduties” (Art. 541.1 LSC), according tohow the two types of remunerationestablished for Spanish companies ingeneral are differentiated (Arts. 217.3and 249.4 LSC) and more specificallyfor listed companies (Arts. 529septdecies and 529 octodecies). It alsoclarifies that the report must providedetails on the individual remunerationaccruing “for all remuneration items” foreach director during the preceding year(Art. 541.2 LSC).


51


© Clifford Chance, 2015

Clifford Chance S.L.

Clifford Chance, Paseo de la Castellana 110, 28046 Madrid, Spain

This publication does not necessarily deal with every important topic nor coverevery aspect of the topics with which it deals. It is not designed to provide legal orother advice.

If you do not wish to receive further information from Clifford Chance about eventsor legal developments which we believe may be of interest to you, please eithersend an email to [email protected] or contact our databaseadministrator by post at Clifford Chance LLP, 10 Upper Bank Street, Canary Wharf,London E14 5JJ.

www.cliffordchance.comAbu Dhabi Amsterdam Bangkok Barcelona Beijing Brussels Bucharest Doha Dubai Düsseldorf Frankfurt Hong Kong Istanbul Jakarta* Kyiv London Luxembourg

Madrid Milan Moscow Munich New York Paris Perth Prague Riyadh Rome São Paulo Shanghai Singapore Sydney Tokyo Warsaw Washington, D.C.

*Linda Widyati and Partners in association with Clifford Chance. J201503090046793

Javier García de Enterría MadridT. +34 91590 4102E. [email protected]

Partners

Jaime VelázquezMadridT. +34 91590 9444E. [email protected]

José María Fernández–DazaMadridT. +34 91590 9466E. josemaria.fernandez–[email protected]

Of Counsel

Javier AmanteguiMadridT. +34 91590 7576E. [email protected]

Jaime SánchezMadridT. +34 91590 7574E. [email protected]

Luis AlonsoMadridT. +34 91590 4147E. [email protected]

LawyersCounsel

Samir AzzouziMadridT. +34 91590 9475E. [email protected]

Miguel BarredoMadridT. +34 91590 7593E. [email protected]

Teresa Cid MadridT. +34 91590 9404E. [email protected]

Ilona Culubret BarcelonaT. +34 93344 2275E. [email protected]

Thais Garcia MadridT. +34 91590 4160E. [email protected]

Carmen García–RenedoMadridT. +34 91590 4157E. carmen.garcia–[email protected]

Guillermo Guardia BarcelonaT. +34 93344 2226E. [email protected]

Enif LobelosMadridT. +34 91590 9481E. [email protected]

Javier OlabarriMadridT. +34 91590 9455E. [email protected]

Carlota PuertasMadridT. +34 91590 9425E. [email protected]

Didac Severino MadridT. +34 91590 4136E. [email protected]

Ana Torres BarcelonaT. +34 93344 2254E. [email protected]

Ignacio DíazMadridT. +34 91590 9441E. [email protected]

Contacts

Documents

Reform of the Spanish Companies Act and new legal framework … · 2021. 5. 19. · On 4 December 2014, the Spanish Official State Gazette published Ley 31/2014, de 3 de diciembre,