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The Duty of Loyalty

February 19, 2017 Leave a comment

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.

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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: Read more…

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