What is a managers duty of loyalty?

Directors must perform their duties with the loyalty of a faithful representative, acting in good faith and in the best interests of the company. It takes special importance in those directors’ actions that are not pre-determined by law, when they act discretionally.

The duty of loyalty gives security to the partners. Because of the sanctions that can be imposed on directors if they do not comply with this duty. The subjective nature of the duty of loyalty is related to the evaluation of whether the director has performed his duties loyally. In other words, with the exclusive objective of benefiting the company.

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What are the obligations derived from the duty of loyalty?

This duty of loyalty imposes on the director the obligation to look after the company’s interests in any case. He must always put company interests before his own and those of third parties. The Companies Act obliges directors to carry out certain actions, both active and passive, aimed at fulfilling this duty. These duties are regulated in article 228 of the LSC:

1. Not to exercise their powers for purposes other than those for which they have been granted
2. To keep secret information, data, reports or records to which they have had access in the performance of their duties. Even when they have ceased to occupy their position, except in cases where the law permits or requires it.
3. Not to participate in the deliberation and voting of agreements in which they have a conflict of interest. Either the director or a person linked to him. Either directly or indirectly. Except those that affect him as a director.
4. Perform their duties under the principle of personal responsibility. With freedom of judgement and independence from instructions and links to third parties.
5. Taking measures to prevent their interests from coming into conflict with the social interest. As well as with their duties to society, whether they are self-employed or employed by others.

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The duty to abstain due to conflict of interest

If the duty to abstain in the event of a conflict of interest is included, the chairman of the private meeting will correspond to the managing partner of the right to vote.

What is the right way to fulfill this duty?

By avoiding these situations, in which these duties as a manager come into conflict with the social interest. Adopting the necessary measures to do so. If circumstances place you in this position, you must refrain from taking advantage of the situation. To obtain any advantage for himself. This duty of abstention also applies when the person who benefits from these acts is a person linked to the director. In this sense, Article 231 Companies Act delimits this group of related persons, distinguishing between administrators who are natural persons or legal entities.

What actions should the administrator abstain from taking?

They are listed in Article 229 LSC:

1. Take advantage of the company’s business opportunities or make use of the company’s assets
2. Taking advantage of his status as a director to improperly influence the conduct of private transactions.
3. The origination or aggravation of a company’s insolvency also reflects malicious conduct by the director. It is a breach of his duty of loyalty.
4. When the director finds himself in these situations, he must inform the other directors or the board, as the case may be. If the administrative body is made up of a single administrator, it must notify the General Shareholders Meeting.

What does social interest mean when dealing with a group of companies?

Supreme Court’s resolution 695/2015 of 11 December resolves this issue for us. The duty of loyalty of the director of a subsidiary company refers to the interest of the company he manages and not to the others. Regardless of whether they belong to the same group of companies, as well as to the parent company. Independently of the interest of the group. This is because the fact that we are dealing with a subsidiary does not mean that it loses its autonomy. It has its own legal personality and its own particular corporate interest. Corporate interest that is not diluted with the interest of the group. And that it does not justify that the directors of the subsidiary company act to the detriment of the company itself. It is not possible to sustain that they simply do so in order to favor the group to which they belong.

What are the consequences of breaching the duty of loyalty?

The breach of the duty of loyalty will carry with it a series of responsibilities for the corporate managers. They will be responsible for the damages caused by the acts or omissions carried out in breach of their duty of loyalty. When they have carried out acts contrary to the Law or the Articles of Association. And for those carried out in breach of the duties inherent to their office. They will be liable to the company itself and its partners, compensating the damage caused to the company’s assets. But not only that, they must also return to the company the unjust enrichment they have obtained with their unfair actions.

The Companies Act provides for the challenging of those agreements that harm the social interest for the benefit of partners or third parties. It should be noted that the corporate interest is not necessarily the interest of the person holding the majority of the capital. The latter may be contrary to the company’s interest. This gives the possibility to exercise actions for the nullity of these acts and contracts.

If this article has been of interest, we also suggest you to read the following article published on our website:

Loyalty Shares

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