The decision passed by the General Directorate for Registries and Public Notaries (Dirección General del Registro y el Notariado – DGRN) of 16th March 2016 sheds light upon how the Board of Directors may find itself in a possible situation of paralysation owing to the lack of a quorum for its formation.

The facts:

The Board of Directors of the Joint Stock company United Wineries was made up of 3 members, one of which left. On 18th March 2015, the remaining 2 members formed the Board and unanimously took the decision to call a Shareholders’ Meeting in order to deliberate a number of points. The General Shareholder’s Meeting (not universal) convened on 28th April 2015 and passed the majority of points subject to debate, including the renewal of the members of the Board of Directors.

The bylaws of the company established that the Board shall be validly formed when half of its members plus one attend the meeting.

Point of debate:

Are the agreements passed by the General Shareholder’s Meeting of a Joint Stock company valid and can they be registered when the meeting summons has been carried out by agreement of the Board of Directors in which

*The minimum number of board members established by the bylaws is 3 members?

* One of said members has resigned, and therefore, only 2 remain active? and

* The convening of the Shareholder’s Meeting to renew the Board and to pass other agreements is performed by the remaining two board members?

The registrar of companies rejected the registration of the agreements passed by the Shareholder’s Meeting, on the understanding that the Meeting called by an incomplete administrative organ may only serve to deal with a limited agenda, that being the reconstitution of the Board. In the registrar’s opinion, and looking to article 171 of the Spanish Capital Companies Act (Ley de Sociedades de Capital – LSC), she concludes that the meeting was not validly convened, and consequently, the decisions taken by the Shareholder’s Meeting summoned by said Board were not registered.

In the first place the DGRN makes clear the need for the company to be permanently equipped with an administrative organ and to preserve its capacity to function in an agile manner, even when extraordinary situations or situations of constriction arise. For this reason, it reaffirms that the existence of vacancies cannot prevent the registration of the appointment of an office, if this circumstance does not impede the functioning of the organ.

The legal basis of this resolution is the application of article 247.2 of the LSC, by virtue of which the Board of Directors of a Joint Stock Company shall be deemed validly formed when the majority of its members attend the meeting. In this case, 3 being the minimum number of members of the Board, at least 2 members must attend for it to be validly formed.

The fact that a vacancy exists does not prevent valid formation, even if in this case and while the vacancy has not been filled, the attending board members must pass decisions unanimously.

This conclusion does not prevent the vacant place from being filled through the legally established means (co-optation or agreement by the meeting) and furthermore, it is not contrary to the duty of care of the existing board members, who should foster the filling of the vacancy in the most adequate manner in the interests of the company, by way of the corresponding calling of a Meeting.

In short,

  • Not all resignations or terminations in a Board of Directors lead to its paralysation, this should only be the case if as a consequence, the Board is left without a majority of its members. In this case, article 171 of LSC does not apply, in as far as the facts of the case set out are different, that is to say, that in the analysed case, the termination of a Board majority did not exist, only the termination of one of its three members.
  • Although certain agreements may be passed by a Board of Directors in which there are fewer members than the legally or statutorily established number due to vacancies, but a majority of members exists, said agreements shall be valid. However, we must understand that this rule shall not be applied when dealing with decisions regarding matters which require a legally reinforced or statutory majority, either by vote or attendance of the Meeting.

 

 

Eduardo Vilá

Vilá Abogados

 

For more information, please contact:

va@vila.es

 

15th April 2016