Dismissal of directors by the general meeting: a Spanish case law analysis
Published on 24th Apr 2023
A recent ruling recalls that the power to remove directors by the general meeting does not require a 'reasonable justification'
A ruling of the Madrid Provincial Court, Section 28, number 90/2023, of 3 February examines an issue of great practical importance in the life of companies: the free revocability of directors by the general meeting.
Background
In the course of a general shareholders' meeting, it was agreed – with the vote, among other things, of the majority shareholder – to remove and replace two members of the board of directors.
This shareholders’ agreement was challenged in court. The claimants claimed that the adoption of this agreement was an abusive use of the right set forth in article 223 of the Spanish Companies Act, as well as a contravention of the provisions of article 7of the Spanish Civil Code. According to the claimants, the agreement was a "revenge" of the majority shareholder because the dismissed directors had voted against his interests.
The Commercial Court upheld the claim and declared the dismissal null and void. The judge considered that the right under article 223 of the Companies Act had been abused, since the shareholders’ agreement did not respond to a "reasonable need", according to article 204.1 of the Companies Act.
The company appealed against this decision. Among other issues, the appellant argued that the legislation grants the general meeting the possibility of agreeing to the dismissal of directors without the need to state a reason.
Ruling of the Provincial Court of Madrid
The ruling upholds the appeal and recalls that the general meeting cannot be required to have a "reasonable need" to use its power to remove the directors ad nutum. Moreover, according to the court, it is feasible not to express the reasons for the dismissal.
As if that were not enough, the Madrid Provincial Court confirmed that not even the abuse of rights can alter the legal regime provided for the dismissal of directors. Otherwise, the judgment says, "it would eventually paralyse the administrative body, preventing it from being revoked and replaced at the meeting by a majority vote".
Osborne Clarke comment
The ruling confirms that the substitution of a director by mere corporate will is a principle of public order, which cannot be altered or abrogated.
That said, the judgment also admits – although it is not applicable to the case – that there are certain situations that could affect this general rule, such as the removal of a director appointed under the proportional representation system. In this respect, it could be argued that the Companies Act does not distinguish, when it comes to the free revocability of directors, between the directors appointed by a majority vote and those appointed under the proportional representation system.
In any case, Article 223 of the Companies Act enshrines an unlimited power of the general meeting that can be exercised at its full discretion since it is the company's decision-making body.
