The resolution of the Directorate-General of Legal Security and Public Faith of the 28th of March of 2022 resolves the issue surrounding the legality of the system of proportional representation for the appointment of members of the board of directors of a Limited Liability Company (L.L.C.).
The Registrar rejected the registration of two articles of the by-laws, in the first of which it was stipulated that:
“the membership interests that are voluntarily combined, to the point of constituting an amount of company capital equal to or higher than that which is the result of dividing company capital by the number of board members, will have the right to designate those which, exceeding whole fractions, are deduced from the corresponding proportion” in such a way that “in the case that this right is exercised, the membership interests combined in this way will not participate in the election of the remaining members of the board”.
It needs to be mentioned that this article of the by-laws is a transcription of article 243 of the Corporate Enterprises Act, referring expressly to Limited Liability Companies.
The Registrar also rejected the registration of an article that established the right to exit of a given partner if said system was revoked or modified, or if the board of directors dissolved.
The Registrar justified the decision of not registering said articles, alleging that the first of them violated the Spanish Companies Act, on the grounds that the proportional system referred to therein is not accepted for Limited Liability Companies, but only Joint Stock Companies, and that, furthermore, the system is in conflict with article 191 of the Regulations of the Commercial Register.
It`s worth remembering that article 243 of the SCA (Spanish Companies Act) forms a mechanism so that minority partners have the opportunity to participate in the board of directors, through their grouping together and the subsequent increase in specific voting weight where this would otherwise be unfeasible for them separately.
There is no doubt that article 191 of the Regulations of the Commercial Register prohibits the appointing of directors by the system of proportional representation. That said, this article corresponds to a rule hierarchically subordinate to the Spanish Companies Act and is echoed in the Supreme Court, which, furthermore, through Judgment 138/2009 of the 6th of March 2009, recalls that this rule “merely excludes the supplementary application of the system of proportional representation belonging to Joint Stock Companies.” Equally, the Judgment explains how it is essential to bear in mind that the idea of flexibility must govern the organisation of L.L.C.s, as well as the principle of free will of partners, with special mention of the protection of minority partners. In this sense, it would be paradoxical that the Registry Regulations prohibit a system of proportional election of directors that stems from this said idea and principle.
The Directorate General has adopted this decision, recalling that the Spanish Companies Act supports the principle of free will and that article 28 permits the inclusion in company by-laws of all pacts and conditions that founding partners deem to be convenient to establish, so long as they do not oppose acts nor contradict principles of the chosen type of company (be it a J.S.C. or L.L.C.). The Directorate also reasons that, as an analogy, the Act of Employee-Owned Companies allows for a company to be directed by a board of directors where the holders of the Common Shares may combine their shares to appoint a member of said company via the system of representation provided for in article 243 of the SCA. Therefore, if this system is permitted for this type of company, the same should be also applied to L.L.C.s.
Following this logic, it is natural to conclude that there is no justification for the rejection of a by-law proposal as an object of appeal, and that the decision of the Registrar of the Commercial Registry should be revoked. The resolution makes it abundantly clear that in the framework of L.L.C.s the idea of flexibility must rule and that in the absence of legal prohibition or the violation of the principles that support this form of company, the by-law proposals freely agreed by the partners must be declared legal to the extent that they respect said framework. Therefore, the resolution could be extended to the establishment of the proportional system not only to elect members of the board of directors but also for other types of systems of plural organisation, such as that of joint or joint and several administrators, if, and only if, it remains duly reflected in the company by-laws.
Eduardo Vilá
Vilá Abogados
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28th April 2022
