Last December 3rd, Law 31/2014 amending the Corporate Enterprises Act (hereinafter the “CEA”) to improve corporate governance was approved, subsequently entering into force on December 24. The main objective of the reform is to enhance transparency and good practices by the governing bodies of companies in order to achieve effective improvement of the corporate governance of companies, as well as greater efficiency in their management and administration.
In this information note we will focus on changes affecting the governing body of non-listed companies.
Remuneration of directors
- The system of remuneration is now the same for both types of companies, joint stock companies (hereinafter, “JSC”) and limited liability companies (hereinafter, “LLC”).
- The General Meeting will have to approve annually the maximum amount of remuneration received by all the directors of the company as a whole. Nevertheless, the directors themselves will decide how that amount is shared among them.
- The remuneration of the directors must be linked to the sustainability and profitability of the company, which is a further reflection of the philosophy behind this reform aimed at achieving transparency and good governance.
- Directors’ duties are delimited and defined with a view to achieving good corporate governance of companies. The changes include, among others, a more detailed description of the concept of due diligence, its mandatory nature and the extension of the liability regime applicable to it. The duty of loyalty and its liability regime are also dealt with in greater depth. The “business judgment rule” is introduced to protect strategic and business decision-making under certain circumstances.
- Definition of “de facto director” as someone under whose instructions the directors of the company might be accustomed to acting.
- Extension of the liability regime to the chief executive of the company in cases where there is no managing director and to the natural person who is the representative of a body corporate director.
- Any action against directors for corporate and individual liability becomes time-barred 4 years from the date on which it could have been exercised.
Board of directors: organization and functioning
- Regarding board members’ remuneration, the position will generally be unremunerated, unless the Company by-laws provide otherwise. Besides, the amount of remuneration must be reasonable relative to the functions and responsibilities inherent to the position, and proportionate to the importance and economic situation of the company. Henceforth, a contract detailing salary components has to be signed between the company and the managing director (s), or board members having executive functions which are different from those of the managing director (s).
- The list of non-delegable powers of the Board has been expanded (preparation of annual accounts, appointment and removal of executives, decisions regarding the remuneration of board members, but most notably, non-derogable powers include the power to call meetings and to prepare the agenda. This goes against a line of case law that has been recognizing the competence of the managing director to call meetings).
- The Board of Directors shall meet a minimum of once per quarter, that is, there must be at least four meetings per year.
Last December 3rd, Law 31/2014 amending the Corporate Enterprises Act (hereinafter the “CEA”) to improve corporate governance was approved, subsequently entering into force on December 24. The main objective of the reform is to enhance transparency and good practices in the governing bodies of companies in order to achieve effective improvement of the corporate governance of companies, as well as greater efficiency in their management and administration.
In this information note we will focus on the changes affecting the General Meeting of non-listed companies.
Increased Powers of the General Meeting
- The General Meeting of Joint Stock Companies (hereinafter, “JSC”) can now intervene in the management affairs of the company, a power previously reserved only to Limited Liability Companies (hereinafter, “LLC”).
- The General Meeting will now have the power to take decisions on the acquisition, disposal, or transfer to another company of essential assets (an asset will be considered as essential when the amount of the transaction exceeds 25% of the value of the assets appearing on the last balance sheet approved).
Resolution of Conflicts of Interest
- The primary aim of the reform in this area is to protect the company’s corporate interest, a concept which is expanded, as we will see below.
- The reform extends to the JSC the prohibition against the exercise of voting rights by an affected shareholder where there is a transfer of shares subject to a legal or statutory restriction, expulsion of shareholders, release from obligations or the granting of rights, financial assistance or waiver of the duty of loyalty.
- With the exception of the cases mentioned in the foregoing section, it is possible for shareholders to exercise voting rights in situations of conflict of interest, however, when those votes have been decisive for adoption of a resolution which is subsequently challenged, the shareholders having a conflict of interest bear the burden of proof. Those who challenge the resolution adopted must prove the existence of actual damage suffered by the company.
- A clarification regarding majorities in JSC companies is introduced. The concept of “simple majority” (when there are more votes in favor than against, of the shareholders present in person or by proxy) substitutes that of “ordinary majority” which has been used until now
- Obligation to have a separate vote on matters dealt with during the meeting that are deemed to be “substantially independent”. For this reason, it is convenient to separate resolutions of this type under different items of the agenda, in order to avoid distorting the vote. In any event, the appointment, ratification, reelection or removal of a director, as well as the amendment of different articles or groups of articles of the by-laws, and any other matter stipulated in the by-laws, must be voted on separately.
Exercise of the right to information
- One of the main objectives of this reform is to avoid damage to corporate interests and, in view of this, the exercise of the right to information is defined in more detail. There is now no obligation to comply with the right to information not only in those cases in which corporate damage may be caused, but also when the information is not considered as necessary for the protection of shareholders’ rights, or the information could be used for non-company purposes. Consequently, the shareholder will be liable for damages caused by use of the information in a prejudicial or inappropriate manner.
- The determination of whether or not the information needs to be provided will now be made by the directors of the company and not by the chairperson of the general meeting.
Challenging Corporate Resolutions
- Changes introduced in this area aim to comply with the principle of preservation of corporate resolutions
- Consistent with the previous paragraph regarding the right to information, the cases in which resolutions may be challenged on the basis of lack of information are limited, and some additional cases are established, for example, the non-decisive participation of unauthorized persons in the meeting (articles 204.2 and 204.3).
- The former distinction between acts which are null and void and acts which are voidable disappears (from now on there are only “challengeable acts”), and therefore, the different time limits for challenging resolutions also disappear, and are replaced by a single time limit of one year. An exception is made in the case of resolutions contrary to public policy, which will not be time-barred.
- The concept of “damage to corporate interest” is broadened (and now includes abusive agreements which are prejudicial to the minority, even if they cause no material damage to the company), since it is no longer necessary to prove material damage in order to establish a claim.
- Requirement for shareholders to hold 1% of share capital to be able to exercise the right to challenge challengeable acts, but no percentage holding required to challenge resolutions contrary to public policy.
- To challenge resolutions of the board of directors or any other collegiate governing body, shareholders must hold 1% of the share capital (previously, it was 5%)