Acephalous Corporations

More frequently than we imagine, companies are left without an administrative body. And the worst thing is that they are left without the capacity to replace them: acephalous. This acephaly is widely dealt with in Jurisprudence and Doctrine. The Spanish courts recognize that a ruling of the Supreme Court describes the situation of acephaly better than the others. This sentence defines the criteria of the Supreme Court on this matter. We will talk about it later.

Why do companies often find themselves without managers/directors and without the capacity to replace them?

Although it is impossible to glossy through the whole  typology of cases, we can advance some of the most frequent ones:

1. Expired positions that are not renewed on time.
2. Parity in the administrative body.
3. Regime of reinforced majorities in the bylaws, preventing renewal.
4. Reinforced majorities in a Shareholders’ Agreement, preventing renewal.
5. Paralyzation of the decision-making bodies.

Si te ha interesado este artículo no dudes en leer:

The dissolution of a Company due to the paralysis of its corporate bodies.

What’s the dissolution of a Company ? It is the legal act that opens the process of liquidation that will lead to the extinction of the company.

Supreme Court Ruling 37/2012 of February 23, 2012, on the acephalia.

In this Ruling, Justice Rafael Gimeno-Bayón Cobos, solves with simplicity a core problem of coexistence in commercial companies.

The following are the criteria adopted in the aforementioned resolution:

1. The administrative body of the commercial companies is a necessary and permanent character. It performs a number of essential duties within the company. Among them, the internal management, the organic representation before third parties or the personification to the external sphere. For this, the exercise of the position must be carried out through due conduct and respecting the duty of diligence. And a basic manifestation of these principles is to prevent the company from being left without a director.
2. Therefore, except in cases of a universal meeting, in order to appoint new directors, a general meeting must be called. And this call is the responsibility of the administrators or liquidators.
3. Therefore, if the outgoing director wants to act with due diligence, he must call a general meeting to replace him. But, does the reason for his dismissal matter?
4. The director who called the meeting in question had seen his appointment annulled by a non-final judgment. As no precautionary measures had been taken, and the judgment had not yet become final, the position he held was still in force. As he was the only person authorized to convene the meeting, the duty of diligence obliged him to do so. Otherwise, the company would have been left without a Board of directors and without being able to replace him.
5. But it is not only the duty of diligence and due conduct that comes into play in these cases. It should also be mentioned the principle of corporate conservation and the need to avoid the paralysis of the corporate bodies. The latter could eventually lead to a  cause of legal dissolution of the company itself. Therefore, Judge Rafael Gimeno-Bayón Cobos ends up stating the following: always within certain limits, it is necessary to recognize the de facto administrators’ powers to call a meeting whose purpose is to regularize the corporate bodies. And that, consequently, they seek to comply with their duty of diligence and due conduct. Otherwise, incurring in the aforementioned acephaly could be inevitable. And with it, a possible cause for dissolution and extinction of the company they manage.

Can certain situations of acephaly be solved in a mercantile company?

Let us suppose that a Sole Director resigns, after calling a meeting to replace him, from his position. And that, during the Meeting, the shareholders do not appoint a new Sole Director.

This is one of the multiple circumstances in which acephaly can occur in a mercantile company. The resignation of the Director will have been valid, but the company would lack a new Director in office.

In such cases, there are two options to solve this situation, as described below:

1.- The mechanism of Article 171 of the Capital Companies Act (Ley de Sociedades de Capital: LSC).

The first solution can be found in Article 171 of the LSC.

It covers the event of the death or removal of the sole director, of all the joint and several directors, of any of the joint directors or of the majority of the members of the board of directors without there being any sustitutes.

In such a case, any shareholder may request the calling of a general meeting. Such request must be filed with the Court Clerk or the Commercial Registrar of the company’s registered office. Logically, the purpose of the meeting will be the appointment of new directors.

The DGRN interprets the aforementioned article by resolution of March 14, 2016.

In this case, it addresses the validity of a meeting called by two members of the board of directors. The board of directors was made up of three members, but one of them, the chairman of the board, was removed.

The call included two items: the restructuring of the board of directors and a possible capital increase.

This second point provoked a negative note of qualification from the Mercantile Registrar. Said refusal was based on her consideration that an “incomplete body” could only call a meeting to reconstitute itself.

However, the DGRN ultimately upheld the appeal filed by the company against this refusal. And it does so on the basis of two criteria:

• The need to preserve the ability of the administrative body to function, previously mentioned in this collaboration.
• Article 171 LSC empowers the director who remains in office to call a meeting for the sole purpose of appointing new directors, in the previously mentioned cases (termination of the majority of the members of the board of directors). However, in this case, the requirement was not fulfilled. Let us recall that two out of three of the directors were removed. Therefore, the remaining members had the power to call a meeting for any other purpose.

2.- The universal meeting of Article 178 LSC.

The second option is the holding of a universal meeting (attendance of 100% of the share capital).

This has its legal basis in Article 178 LSC. It takes place when the entire share capital meets without prior notice. In addition, the attendees must unanimously agree to hold the meeting. Once validly constituted, any business may be transacted. This includes, of course, the appointment of a new administrative body.

Conclusion

From the above, we see that the acephaly in commercial companies can be tremendously pernicious. Therefore, it is important to have a management body that always keeps in mind its duty of diligence. However, this acephaly can occur for a multitude of reasons. In this article we have tried to expose some of the most relevant ones, as well as possible solutions.

If this article has been of interest, we also suggest you to read the following article published on our website: A Practical Guide to Directors Liability.