Conflicts of interest. Duty to abstain from voting

Judgment 68/2017 of 2 February issued by the Supreme Court deals with the potential existence of an indirect conflict of interest when voting at a general shareholders’ meeting.

The Supreme Court, in its judgement 68/2017 of 2 February, analyses the case where the general shareholders meeting of a limited liability company passed a certain number of resolutions. Among said resolutions, the general shareholders meeting approved to release the sole director of the company, which was also a direct shareholder of the company, from his non-compete legal duty towards the company. In this case, the director was also an indirect shareholder of the company through a legal entity (such legal entity was a shareholder of the company, and was controlled by the director, who had a 67.1% stake in its share capital). All the items on the agenda were approved by the director and his controlled legal entity.

However, the two remaining shareholders of the company (both of them natural persons), voted against the approval of the resolutions. They understood that the legal entity controlled by the director should have abstained from voting at the meeting, since a conflict of interest existed.

The judgement analyses if the duty to abstain from voting, which in this particular case definitely affected the company’s director as direct shareholder also extends to the legal entity controlled by the director, also shareholder of the company.

The court, to resolve the case, makes a distinction between conflicts of interest, based on whether these affect the director or a shareholder of the company. Concerning the director, the law prohibits him to advantage his personal or financial interest with respect to the company’s corporate interest which he is aimed to represent in his capacity as director. This prohibition includes the prohibition to use any of the persons or entities listed in article 231 of the Companies Law (among others, the legal entities that he may control) as related persons that could have an impact on the company’s corporate interest. On the other hand, it is prohibited for the shareholders to use their vote to achieve specific gains, because this is considered a conflict of interest, which is the reason why article 190 of the Companies Law imposes the duty for the shareholders to abstain from voting in certain situations. However, it cannot be understood from the interpretation of said article that the law also extends said prohibition to any person related to the shareholder. Thus, said prohibition remains exclusively limited to the shareholder or shareholders affected by a specific conflict of interest, and cannot be extended to its related persons as it is the case for the company’s directors.

To conclude, the court states that “neither the former Limited Liability Companies Law, nor the current Companies Law regulate indirect conflicts of interest, that is, a conflict where the interest of a shareholder is not directly contrary to the interest of the company, but in which there exists a close relationship between the interest of two of its shareholders, which in this specific case, are openly in conflict with the interest of the company“.