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

1. Esclusive powers of the Annual General Meeting.
2. Exclusive powers of the Management Board.
3. The intervention of the AGM in the Board of Directors.
4. Can shareholders instruct directors to apply for a Bankruptcy Procedure?
5. In order fort he shareholders to command something, they have to meet beforehand.

• • Who calls the AGM?
  • What happens if the Meeting is not called?
  • Can shareholders meet in the Universal Meeting without being called by the Board of Directors?

6. What happens if the directors disobey a direct order from the shareholders (owners)?
7.  Conclusions.

The LSC reserves matters exclusively to the Board of Directors (BoD) and the Annual General Meeting (AGM). However, this does not prevent the AGM from giving instructions to the directors. However, before analyzing these instructions, it is appropriate to delimit the exclusive competences of each corporate body.

1. Exclusive powers of the Annual General Meeting.

As we have said, the shareholders are the owners of the company. The AGM decides on the matters attributed to it, thus forming the will of the company. Therefore, it is irreplaceable. Among the most important powers conferred by law, we find

• The power to decide whether or not to approve the annual accounts.
• Designation and dismissal of the directors, liquidators and auditors. Being able to exercise responsibility against these.
• Power to decide on changes or amendments to the company’s articles of association.
• Carrying out or preventing capital increases and reductions.
• Dissolution of the capital company.
• Eliminate or suppress the right of preferential subscription, as well as the right of preferential assumption.
• Obtaining, selling or contributing essential assets to a different company.
• Changing the registered office to a foreign state.

As we can see, the powers attributed to this body have a relevant importance in the life of the company. That is why we have been saying that it is the body that manifests the will of the company.

However, these are only the attributions of exclusive powers carried out by the law. This law also empowers the society to attribute body more powers to the AGM in the social statutes. Provided that the provisions of the imperative rules of our legal system are respected. However, in the interests of this article, we must focus on the exclusive powers of each body.

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2. Exclusive powers of the Management Board.

The Management Board is the corporate body that assumes the management of the company. It is made up of several directors, whose minimum and maximum members are established by the Articles of Association and the AGM, always in accordance with the legal provisions. Benefits over other types of administration include: decisions adopted taking into account other points of view, being flexible and collegiate.

The shareholders and the directors of a company are related through a mandate. This means that the Management Board is subject to a regime of relevantly strict duties. They have to perform their tasks with due diligence. Also, complying with laws, articles of association and the diligence of an orderly businessman. They also have a duty of loyalty, acting with the loyalty of a faithful representative, in good faith and in the interests of society.

As with the AGM, the law gives it a number of exclusive powers. Being able to delegate certain powers, the law emphasizes certain exclusive competences by establishing them as non-delegable. Thus, the following stand out among others:

• Establishment of the company’s strategies.
• The operation and organizational powers of the body itself.
• Verification of the correct functioning of the committees that the body itself has created, among others.
• Preparation of the company’s annual accounts, which must subsequently be approved or rejected by the AGM.
• Preparation of the reports required by law from this body, if the operation described in the report cannot be delegated. These reports generally deal with amendments to the articles of association, capital increases or reductions, etc.
• We are aware that the AGM can designate or dismiss the members of this body. The Board, for its part, may appoint and dismiss Managing Directors.

As we can see, these functions are eminently of an organizational and corporate governance nature. In addition, of course, to the representation of the company itself. Therefore, their functions are correctly separated from those inherent to the AGM. However, there are situations in which the shareholders may wish to give instructions to the directors. Or even force them to perform their functions in one way or another. We will now analyze the limits that exist to this intervention of the AGM in the Board and its powers.

3. The intervention of the AGM in the Board of Directors.

We have been saying that the shareholders, gathered in the AGM, are the owners of the company. They represent its will, despite the fact that the representation is held by the Board of Directors (Management Board in this case). Therefore, it is logical to think that these shareholders will want to have some power of intervention over the Board of Directors. In this respect, the law proposes three ways of empowering the AGM to intervene in the BoD. Let us proceed to analyse these mechanisms:

a.- Instructions and authorizations.

The first, the legitimacy of the AGM to intervene in management matters. This article “invades” the powers of the Management Board. The law itself describes this attribution of powers to the AGM as: a reinforcement of the role and channels of participation of the shareholders. Let us remember that the body in charge of these management matters is the Board of Directors. In this article, we focus on the Management Board. Thus, the law empowers the AGM to (without being able to harm third parties in good faith):

• Give instructions or directives to the Board of Directors.
• Impose compulsory authorisation on certain decisions taken by the BoD. These decisions shall be those relating to organisational and management matters.

We must be clear, however, that there is a clear exception mentioned above. These powers of intervention of the AGM cannot have any effect outside the company. That is, to the company’s relationship with third parties in good faith.

This power of intervention attributed to the AGM can only be understood from the following point of view: the partners that make up the AGM are the owners of the capital, and therefore, of the company, as we have been saying. And how should the AGM exercise this power of intervention in these management matters?

• By establishing in the articles of association which matters will require their authorization. Therefore, it will be beneficial since they will be determined beforehand. And fewer problems will arise in interpreting a very generic description made by the law.
• Voluntary consultation of the Board of Directors before the AGM.
• If the AGM claims its competence on the basis of the provisions of the law, without any statutory provision. We would therefore be faced with the most problematic situation, due to the aforementioned generality of the precept.

This rule presents certain problems in its application, which we will analyse later in this article. For example, in relation to the call of the AGM to decide these instructions. Furthermore, the “generic” nature of this attribution is relevant. Is it unlimited? Does the term “determined” limit this attribution of power to the AGM? In general, the doctrine is divided in this respect. However, it is logical to conclude that despite the situation of mandate we mentioned, and despite the situation of clear dominance of the shareholders as owners of the company, limits must be established. Otherwise, the Board of Directors would become a mere executing arm of the AGM.

Finally, another problem in this respect is the excessive intervention of the AGM in ordinary decisions. It is precisely the AGM that must take the most relevant corporate decisions. The need for authorization by the AGM for minor organizational decisions can be extremely harmful to the company. How does the doctrine resolve this situation? By dividing the decisions into ordinary and strategic, the latter including the structural ones. And determining that the AGM should only intervene in strategic decisions.

b.- Objection.

The second, referring to the impugnation of the agreements carried out by the Board of Directors. The law not only empowers the directors themselves to challenge this type of agreement. It is also express in establishing that the shareholders may challenge these agreements. As long as they represent at least 1% of the share capital. And when said objection is made within 30 days from the date on which it became known. Within a period of one year since this agreement was adopted.

The main difference between the two mechanisms is the foreseeable or subsequent nature of both. Thus, the instructions and authorizations avoid the production of problems that arise with this objection. This is because this objection must be made by suing the company itself in an ordinary trial.

c.- Cessation.

Logically, the AGM is empowered to dismiss the directors at any time. And therefore, it may dismiss and designate others even without this item being included on the agenda.

It is not necessary to apply the above mechanisms before dismissing directors. In other words, the latter can be exercised directly.

4. Can shareholders instruct directors to apply for the Bankruptcy Procedure?

As we know, Bankruptcy Procedures are an obligation and not a right. Therefore, if a company becomes insolvent, the directors are obliged to apply for a declaration of Bankruptcy. Failure to do so, if the bankruptcy is declared, will generally entail the responsibility of this Board of Directors. We have several articles on our website discussing Bankruptcy Procedures and liabilities in them.

However, there have been cases in which the directors have refused to apply. The decision on whether or not to applyt is up to the Board of Directors. In fact, by virtue of the above, the shareholders can give the instruction to the BoD. In order for it to apply for the Bankurptcy Procedure. This body may be held liable within the company as well as for the Bankruptcy Procedure itself. However, even so, this body can refuse. The law authorizes the taking of this decision only to the Board of Directors, attributing specific responsibility to it.

Therefore, let us imagine a situation in which the Board of Directors (Management Board, in this case) does not consider it appropriate to apply for a Bankruptcy Procedure. For their part, the shareholders believe that it is necessary to apply as soon as possible, as the company is insolvent. What can these shareholders do?

• The law legitimizes the shareholders who are personally responsible in the company. These are the only shareholders who are entitled to do so. Therefore, if they do not exist, the shareholders would not be entitled to apply for a Bankruptcy Procedure.
• Therefore, the dismissal of these directors is presented as the most viable option. And with this, the designation of new ones that will certainly apply for the Bankrupcty Procedure. As we have seen, this can be done at any time. However, to do so, an AGM must first be called. And this presents a problem that we will analyze in the following section.

5. In order for the shareholders to order something, they have to meet beforehand.

a.- Who calls the AGM?

This is an exclusive power of the Board of Directors, attributed by law. They will do so at the time they consider it necessary, or by virtue of the provisions of the law and statutes. The legal provision refers to the AGM to be held in the initial 6 months of the financial year. There is also a third situation: when requested by shareholders representing at least 5% of the share capital. In this case, the directors will be obliged to call the Annual General Meeting.

b.- What happens if the Meeting is not called?

In the event that, in spite of the requirements being met, the directors do not call the meeting, there are several options:

• Request to the Court Clerk (LAJ). The law empowers the LAJ to call the AGM, after a hearing with the Board of Directors. The call will be made in accordance with the provisions of the Voluntary Jurisdiction Law.
• Request to the Commercial Registrar. Giving a hearing to the BoD. It will be done during the period of 1 month since the request was made.
• Universal Meeting. The Universal Meeting is held when the entire share capital is present or represented. The holding of the Meeting must also be accepted. This is analysed in the following section. At this meeting, any aspect of the company can be discussed and decided upon.

c.- Can shareholders meet in the Universal Meeting without being called by the Board of Directors?

The law expressly authorises this. The only requirement for its validity is that the entire share capital must be present or represented, as we have seen. As well as that all those present accept the holding of said Universal Meeting. Therefore, it is one of the most viable options when it comes to solving the problem of the directors not calling the meeting.

However, we must take into account the size of the capital company we are dealing with. Thus, a company with a large number of shareholders will present logical problems when it comes to gathering the total share capital. And therefore, the decision to be taken can be delayed enormously. This is not the case in a company with a smaller number of shareholders. In which this option is presented as the most viable.

6. What happens if the directors disobey a direct order from the shareholders (owners)?

The law itself establishes the responsibility of the administrators in a general way. It states that they will be responsible for any damage or omission derived from their acts contrary to the law or the articles of association. Liability before the company (social action), or before the partners and social creditors (individual action). Distinction made on the basis of the estate affected by the action of the Board of Directors.

Therefore, it is not even necessary to state in the articles of association what instructions these administrators must follow. The power of the AGM to give instructions and authorise is given by law. Therefore, failure to comply with them will result in the exercise of liability against the directors. As we have already mentioned, the shareholders are the owners of the company. And the directors, for their part, are related to them through a mandate. There is therefore a clear position of dominance on the part of the AGM. Thus, the obligation to comply with the guidelines and the consequent responsibilities for non-compliance are clear. The shareholders can always review the fulfillment of functions by the Board of Directors.

7. Conclusion.

The AGM has a series of exclusive competences. The same applies to the Management Board. However, the law empowers the AGM to give instructions and authorizations to the Management Board. The Annual General Meeting is beyond the powers of this Board of Directors. This happens because the shareholders are the owners of the capital. And therefore, the owners of the company, expressing the will of the same through the AGM. It is logical that these faculties of control and direction of the Board of Directors are attributed to them. In turn, non-compliance by the directors entails a series of responsibilities. There are also various methods for solving the problems that such non-compliance entails.

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