The duty to abstain due to conflict of interest

Action and effect of abstention

How difficult it is sometimes. Especially when there is a conflict of interest for being a partner and a director of a company at the same time. You have to be clear-headed not to mess things up. Our company law prevents directors from exercising their right to vote in two specific cases:

• The dispensation or approval of making competition to the company
• Establishing a service or work relationship with the company

If a member-director does not abstain in such cases, it is the responsibility of the chairman of the board to deny her the right to vote. If she still casts his vote, it will be null and void. The nullity of the agreement would depend on whether or not the vote of that partner is decisive in reaching the agreement.

The position of director entails defending the interests of the company with the diligence and loyalty of an orderly businessman.

The duty of diligence translates into various manifestations, such as: i) adequate dedication; ii) adoption of appropriate measures for the good management and control of the company; iii) good faith; iv) the primacy of the company’s interest over personal interest; and v) the provision of sufficient information to enable a correct value judgment to be made when casting a vote.

If the position is performed according to these guidelines, the director will be acting diligently (even if it does not generate a specific benefit).

On the other hand, the duty of loyalty implies: i) not to exercise the office for a purpose other than that for which it was granted; ii) to keep secret all social information; and iii) to abstention from deliberating and voting when there is a conflict (direct or indirect).

In short, to carry out the position under personal responsibility. By taking measures to avoid conflicted situations.

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Consequences of the nullity of corporate resolutions

The action to contest the social agreements expires within one year. However, when the agreements are contrary to public order, the action will not expire nor will it be time-barred.

What is a conflict of interest?

• To perform transactions with the company (except for those that are ordinary and under market conditions).
• To use company´s assets.
• Using the company name to influence private transactions
• Obtaining benefits or remuneration from third parties.
• Taking advantage of the company’s business opportunities

The law also requires the shareholders to abstain at the meeting in the following cases, as they are affected by them:

1. The authorization for the transfer of shares or holdings that are subject to a legal or statutory restriction;
2. The exclusion of the company;
3. The release of an obligation or the granting of a right;
4. The provision of any financial assistance, including the provision of guarantees in their favour; or
5. The discharge of obligations arising from the duty of loyalty.

What happens in these cases?

In one of these cases, the shares of the partner in question must be deducted from the capital for the purposes of calculating the majority. Naturally, the partner can attend the meeting and retain other rights:

• Voice.
•  Information.
• The exercise of qualified minority rights.
• Requesting a notarial deed.
• Challenging agreements.

The prohibition applies to all the shares held by the partner. The partner must inform the president of the meeting of his conflict situation, and the abstention is voluntary. If this is not the case, the Chairman of the Board, as the guarantor of legality, has the power, after warning the member, to deny him/her the right to vote.

The partner who has been denied that right can:

• Challenge the agreement; or
• Take a liability claim against the president.

If the partner attended the meeting through a representative, the same scenario applies. The representative is prevented from exercising the right to vote.

In the case of co-ownership of shares/stocks there are two possibilities:

• That all co-owners have a conflict of interest. In that case there would be no doubt.
• That only one of them have the conflict. In this case, it is understood that the voting right of the shares of which he is co-owner is excluded.

Breach of the duty to abstain. Consequences

The law does not provide a penalty for anyone who breaches this obligation. However, this vote should be considered void, as it was improperly casted. This nullity is not automatic. It only applies when that vote has been decisive for the adoption of the agreement.

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