The exceptional right of co-optation and when this right is exhausted

The Resolution of the Directorate General of Registries and Notaries dated 8 February 2017 (BOE nº 51 – 1 March 2017), addresses the concept of co-optation (appointment of directors by the board to fill a vacancy), providing an interesting interpretation of the scope of this right and when this right is exhausted.

The concept of co-optation, reserved for public limited companies (“sociedades anónimas“),  essentially consists in the right attributed to the board of directors to appoint a director when a vacancy occurs, during their term of office. Before entering into an analysis of the Resolution of the Directorate General of Registries and Notaries (the “RDGRN”) dated 8 February 2017, we will recall some of its characteristics and limitations, literally referred to in the Capital Companies Act (“CCA”) (articles 244 and 529 decies), or resolved either doctrinally or jurisprudentially:

• It is an exceptional right reserved for public limited companies (“sociedades anónimas“), and is not permitted for limited liability companies (“sociedades limitadas“), since “the competence for appointing directors corresponds to the shareholders’ general meeting with no exceptions other than those established by law” (article 214 CCA).
• There should be no substitute directors, as otherwise one of these would have to be appointed. However, it is not possible for listed companies to designate substitutes, so clearly this limitation does not apply to them.
• With the exception of listed companies, the director must be appointed from among the shareholders.
• The term of office is “inherited” from the vacating director, notwithstanding the provisions of the following point.
• The duration of the appointment is until the first general meeting is held.
• For listed companies, if the vacancy occurs after the shareholders’ meeting is called and prior to it taking place, the board of directors is entitled to appoint a director until the next general meeting takes place (“next” being understood as the one following that which has already been called).

With this in mind, the RDGRN addresses a very specific situation which, in fact, occurs in a listed company. Once the board vacancy arises, two general meetings are held within a time span of more than one year, after which the board fills the vacancy in accordance with the concept of co-optation.

The Directorate General resolves the issue, focusing on two key aspects:

1. 1. The concept of co-optation is exceptional and should, therefore, be interpreted restrictively since, as a general rule, the competence for the appointment of directors lies with the shareholders at the general meeting.
   2. The board will reserve this right even after the general meeting has been held provided that it was conferred the possibility to decide on the vacancy at the general meeting.

This latter point is worth further consideration. The administrative body (in this case, the board) is, generally, the one that makes the decision to call the general meeting along with the matters to be discussed at the same by way of an agenda, without prejudice to the possibility for the minority (5% or 3% ) to request an addendum to the meeting or other exceptional methods to ensure that the meeting is called. Therefore, if the board itself does not include any point among those to be discussed relating to the vacancy being filled, it is depriving the competent body, par excellence (the general meeting), of the possibility to make a decision in this regard.

In conclusion, if, as in this case, a vacancy arises and without it having been covered a general meeting is held and no item is included on the agenda addressed to the general meeting so that they can take a decision on the vacancy, the right to co-opt will be considered to have exhausted and it will not be able to cover this (except in cases of listed companies if the vacancy occurs after the general meeting is called, it being understood that the board has not had the opportunity to include the relevant item on the agenda). On the other hand, if the board does include a point on the agenda granting the general meeting the possibility to make a decision and they don’t fill the vacancy voluntarily, the board will still maintain this right after the general meeting has been held.

Finally, the RDGRN lists 3 cases in which it is understood that the general meeting has not covered a vacancy voluntarily:

1. “for having preferred not to appoint directors at that time”
2. “for reducing the number of board members when, in accordance with article 242.1 CCA, the general meeting was entitled to determine the specific number of members of the board, because the maximum and minimum are established in the by-laws”; o
3. “because the general meeting has not discussed this item of the agenda”.

Points (i) and (iii) leave no room for doubt, while item (ii) could lead to different interpretations, since it could be understood that if the board decides to reduce the number of directors to adapt to the new reality after the vacancy occurs it is a clear and positive manifestation that such vacancy shall not be covered and, therefore, the board has exhausted its right to cover the same.