All limited liability companies are directed and represented by a management body, which may be formed by a sole director, various joint and several directors, various joint directors or a board of directors.

When incorporating a company, the partner or founding partners must decide upon which type of management body will govern the functioning of the company. Once incorporated, the company will initiate its activities under the management of its directors. Nevertheless, following the incorporation of a company, the partners may decide, at a later date, on substituting the members of the management body for others (maintaining the same management system), or instead modifying the existing management system (for example from one sole director to two joint and several directors), provided that it does not go against what is established in the bylaws or in the applicable regulations.

In practice, it is common for the partners of a company (or as the case may be, the sole director) to decide at any given moment to modify the management system pursuant to passing the corresponding resolution and the granting of a public deed for the  subsequent registration of the decision at the Commercial Registry. If the modification is carried out without contravening the provisions of the bylaws or the applicable regulations, the corresponding public deed shall be duly registered at the Commercial Registry and the process of modification of the management body will have been completed.

That said, it must be noted that on occasions the registration of the resolution of modification may be refused by the Registrar if, under his/her criteria, it is contrary to the provisions of the company bylaws and the applicable regulations. Such is the case with a company which requested registration at the Commercial Registry of a  public deed regarding the resolution for the modification of the management body; the refusal was appealed by the company, which lead the Directorate General of Legal Security and Public Trust – DGLSPT (Dirección General de Seguridad Jurídica y Fe Pública-DGSJFP) to resolve the issue pursuant to a resolution issued on 23rd May 2023.

The reason for the refusal of the registration was the identity of the three members designated by the company to form part of the Board of Directors, as follows:

  • Two natural persons, and;
  • One legal entity, the representative of which was one of the afore-mentioned natural persons designated as members of the management body.

In effect, the Registrar considered that the designation of the same person as a member of the Board of Directors and, at the same time, as representative of the legal entity forming part of the Board, was contrary to the functioning of the Board of Directors and, therefore, the modification was not deemed registrable at the Commercial Registry.

The company appealed against the refusal of the registration before the DGLSPT with the purpose of attaining the registration of the intended modification of the management body at the Commercial Registry. The main arguments of the appellant company were:

(i) That the bylaws of the company contemplated the possibility for the company to be directed and represented by a Board of Directors;

(ii) That article 160 of the Spanish Companies Act establishes that it is the competence of the General Meeting to agree upon, among other matters, the appointment and the separation of directors;

(iii) That the appointment of a Board of Directors took place in accordance with the provisions of the company bylaws and was consistent with the provisions of article 242 of the Spanish Companies Act (minimum of 3 member directors).

(iv) That the appointment of the members of the Board of Directors was carried out by the partners in the best interest of the company;

(v) That the refusal of the registration was based upon the following presumptions:

    • The non-compliance of the majority rule by means of the decision taken by a single natural person, in his/her dual capacity as an individual director and also as the representative of a legal entity director;
    • Putting ones own interest before the interest of the company (non-compliance of the duty of loyalty of article 227 of the Spanish Companies Act).

Pursuant to the resolution of 23rd May 2023, the DGLSPT considers that the intended modification of the management body by the company is contrary to the majority principle with regard to the decision making of the Board of Directors. The argument of the DGLSPT is the situation of the potential veto which would arise if the intended modification of the management body was accepted, given that in such a case, the passing of resolutions by majority would indispensably require the authorisation of the member appointed with a dual capacity (natural person director and, at the same time, the representative of a legal entity director). Based upon this argument, the DGLSPT rejects the appeal filed by the appellant company and confirms the refusal of the registration of the resolution for the modification of the management system of the company.

As it may be seen, before appointing the members of a management body, whether it be within the framework of an incorporation of a company or a modification of the management body of an already incorporated company, it is necessary to determine the type of management body and the identity of the members forming it with the purpose of avoiding the refusal of those resolutions which, at first, seem to respect the company bylaws and applicable law, but which in reality, are not registrable because they contradict legal principle, as the case may be with the adoption, by majority, of decisions in a Board of Directors.

Our professional team at Vilá Abogados can assist clients with all matters of a corporate nature requiring legal counsel.

 

 

Albert Zúñiga Carulla

Vilá Abogados

 

For more information, please contact:

va@vila.es

 

30th June 2023