The Duty of Loyalty

The Duty of Loyalty is established in the Spanish Corporate Law (1) in articles 227 until 232. According to it directors need to act with good faith and in the best interest of the corporation; a breach would entail restitution of the damage suffered by the corporation plus the return of the profit the director could have made.

The legislator wanted to further explain the extent of the obligations:

a) Directors must use their powers with the aim they were granted to them.
b) They must keep confidentiality.
c) They must refrain from deliberation and vote when they face a conflict of interest. They also need to adopt measures not to incur in situations where their interests (or those of related parties) face those of the corporation.
d) They need to act free from instructions and criteria established by third people.


Referring to the conflict of interest, the legislator further explains that it can appear when a director does a transaction with the corporation, when he uses the name of the corporation or its assets in its own interest, when he takes a business opportunity from the corporation, when he/she is paid by a third-party or acts in business as a competitor of the company.

The prohibitions to act may be relaxed if the shareholders general meeting (or in some cases the rest of directors if they are independent with regard to the affected director)) so decides. In general the approval can only be granted if no damage is produced to the company or if it is somehow compensated.

In connection with the Duty of Loyalty, some questions arise in all legal frameworks:

a) To whom the duty is owed. In this case, the law refers to the corporation. In other cases, the shareholders are refered to. But the doctrine is very diverse and this is a very controversial issue in normative perspective. Who should it be owed to?
b) It is also questioned whether directors must pursue the “sole” or “best” interest of the interested, (be it the corporation or the shareholders).
c) Some academics also question the uniformity with which fiduciary duties are imposed among heterogenous directors, (independent, executive or constituency directors).
d) Can other stakeholders´ interests be considered by directors, under materiality considerations?

TO WHOM. (2) Both Shareholder primacy and Director primacy models defend that Shareholder Value maximization is the purpose of the corporation; consequently directors should act with the aim to maximize it. George S. Georgiev thinks that reforms stemming from the 2008 financial crisis establish more an Investor (including debt acquirers and capital markets players, invested or not) primacy model rather than a Shareholder one. Blair and Stout`s Team Production model though states that directors act to reach an equilibrium among the interests of different constituencies: shareholders but employees, clients, providers, etc. Stefan J. Padfield among others defends corporations are a government creation or concession to serve public ends, which leads to Corporate Social Responsibility, (CSR). Others (Christopher M. Bruner) argue the only aim of corporate law is “sustaining business”, so that whatever interest any constituency may have, it fells before sustainability of the business.

SOLE OR BEST. As John H. Langbein argues (3), advocating the “sole” interest of a beneficiary implies that any conflicted transaction is voidable and cannot be remedied anyhow. The duty of loyalty though lets directors use conflicted transactions if they can be executed in the best interest of the beneficiaries, whoever they are. Remedies are generally accepted, as the Spanish legislation establishes, as we have seen.

DIRECTOR HETEROGENEITY. Gelter and Helleringer (4) analyze the contradiction between the said uniformity of directors´duties, and their differences, (in particular regarding how they get elected and by whom, especially in proportional systems, or largely controlled –formally or not- firms).
So called “constituency directors” (elected by employees, large shareholders, creditors, government, venture capitalists, or any other) are very common and the question arises as to whether they should serve those they represent or serve a joint objective collectively with the rest of directors? This latter option is widely accepted by law in most countries. They argue that the contradiction resists peacefully for several reasons: (i) Corporate purpose (as said above) is not totally defined; (ii) duties are generally defined as to what cannot be done, which is less demanding than positive requirements; (iii) Effective Corporate purpose emerges as a result of board deliberation, and is less abstract than the one discussed above.
How do different directors discharge their duties? In general, courts and academics in the US and Europe have stated that directors have uniform duties that are consequently discharged uniformly, without attention to the particular ties of a director with a certain sponsor.
Gelter and Helleringer though argue that: (i) psychological and behavioral aspects cannot certainly be completely banned; (ii) the theory of incomplete contracts could justify that directors pursue their sponsors´ particular interest; shareholders are the less protected of all stakeholders, (all others enter into a contractual relationship with the firm that is only contingent in their case). Consequently it could be economically justified (otherwise venture capitalists could underinvest in illiquid assets, employees could also underinvest in human capital, etc.) that constituency directors take care of their particular interests. The authors think these facts will soon bend the rigid stem of uniformity.

MATERIALITY AND OTHER STAKEHOLDERS. Eccles, Robert G. and Youmans, Timothy (5) review the possibility that directors separate themselves from the strict shareholder interest to favor particular stakeholders. They argue financial capital is not the only one provided to the corporation, so that other stakeholders or audiences count; the purpose of the corporation is “survival” as a legal immortal entity with independent personhood, a task that is delegated to directors, (this implies future generations are also stakeholders). In their effort for company survival directors need to determine which issues and audiences are material; action and reporting follow.

(1) Real Decreto Legislativo 1/2010, de 2 de julio, por el que se aprueba el texto refundido de la Ley de Sociedades de Capital.
(2) See for example documents at “Micro-Symposium on Competing Theories of Corporate Governance” downloadable here:
(3) Langbein, John H., Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?. Yale Law Journal, Vol. 114, p. 929, 2005. Available at SSRN:
(4) Gelter, Martin and Helleringer, Geneviève, Lift not the Painted Veil! To Whom are Directors’ Duties Really Owed? (April 2, 2014). University of Illinois Law Review, Forthcoming; European Corporate Governance Institute (ECGI) – Law Working Paper No. 255/2014; Fordham Law Legal Studies Research Paper No. 2419591. Available at SSRN: or
(5) Eccles, Robert G. and Youmans, Timothy, Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality (September 3, 2015). Harvard Business School General Management Unit Working Paper No. 16-023. Available at SSRN: or

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