Abstentions in the voting of a limited liability company

Introduction

There are certain cases in which abstentions at the time of voting are stipulated by law.

We must start from the existence of specific situations for Partners and Administrators at the time of voting. In the present article, it will be analyzed when these requirements contained in the law occur. In addition, we will study what they are and how they affect  the voting in a Capital company.

How are the legal majorities computed in the adoption of Corporate resolutions? What are the rules regarding abstentions?

The Capital Companies Law regulates the regime of majorities for adopting resolutions. Decisions adopted always require a majority. However, the majority varies depending on the type of resolution submitted for deliberation.

The majority is computed only on the basis of the votes validly cast. Therefore, blank votes, invalid votes and abstentions are excluded from the calculation.

As we will analyze below, the Shareholder or the Director may not vote in certain situations. That is, he/she will be obliged to abstain.

What is the difference between a Director and a Partner in conflict of interest situations?

We must distinguish between the legal duty to abstain if it concerns a Shareholder or a Director.

In the case of a Director, he/she will not be able to vote if the conflict is direct or indirect.

In the case of a Partner, he/she will have the duty to abstain only when the conflict is direct.

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What are the instructions shareholders can give to the directors of a company?

The LSC reserves exclusive matters for both the Board and the Council. However, this does not prevent the Board from giving instructions to the administrators

When should both abstain from voting?

As we have indicated, directors must abstain in the event of a direct or indirect conflict. That is, whether the conflict affects him personally or affects persons related to him.

Article 229 LSC lists situations in which it is understood that the Director is involved in a conflict of interest:

a) The carrying out of transactions with the Company, except in the case of ordinary transactions under standard market conditions.

b) Using the company’s name or invoking his or her status as a Director to influence the performance of private transactions.

c) Making use of corporate assets for private purposes.

d) Taking advantage of the Company’s business opportunities.

e) Obtaining advantages or remuneration from third parties for their management position (except for mere courtesies).

f) Carrying out activities in competition with the Company.

In such cases, the director must inform the other Directors of the conflict. And, in the case of a sole Director, he/she must inform the general meeting.

As for the shareholders, this matter is regulated in Article 190 LSC. According to this article, shareholders must abstain from voting in the following cases:

a) Authorization to transfer shares or holdings subject to legal or statutory restriction.

b) To exclude him/her from the Company.

c) To release him/her from an obligation or  to grant him/her a right.

d) To provide financial assistance.

e) Exempt him/her from obligations arising from the duty of loyalty if, at the same time, he/she is a Director of the Company.

A special feature: In joint stock companies, the provisions of paragraphs a) and b) only apply if provided for in the articles of association.

What does case law establish with respect to proxies?

As stated in the most current case law, the duty to abstain also extends to voting by proxy. Regardless of whether the exercise of proxy voting is legal, organic or voluntary.

“The duty to abstain is applicable whether  the conflict of interest exists with respect to the shareholder or with respect to the person who specifically exercises the right to vote. This interpretation is extracted from the ratio of the rule (art. 52.1 LSRL), which aims to avoid the conflict with the corporate interest that is caused when the affected Director intervenes in the vote that agrees to exempt said Director from the prohibition of competition, either because he is the partner who directly exercises the vote, or because he acts as a partner´s representative. What is relevant is that the person who holds the extra-company interest in conflict with the company interest cannot intervene in a vote on a matter (his dispensation as director from the prohibition of competition)”.

Conclusion

• Conflict of interest situations can affect both shareholders and Directors.
• In the case of shareholders, we talk about direct conflicts, regulated in article 190 LSC.
• In the case of Directors, the conflict may be direct or indirect (affecting related persons). These conflict situations are regulated in Article 229 LSC.
• In both cases, the affected party must abstain from voting. This implies that his or her vote is deducted for the computation of the required majority.
• This duty to abstain also applies when it is the shareholder’s representative who is involved in a conflict of interest.

If this article has been of interest, we also suggest you to read the following article published on our website: The duty to abstain due to conflict of interest.