Up Again Spain: Governance


1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?

The duties of directors of Spanish companies are set out in the consolidated text of the Spanish Capital Companies Law, approved by Royal Legislative Decree 1/2010, of July 2 (Texto refundido de la Ley de Sociedades de Capital, aprobado por el Real Decreto Legislativo 1/2010, de 2 de julio).

In the context of COVID-19 outbreak, the key duties are as follows:

  • A duty of loyalty that requires directors to perform their tasks with the loyalty of a “faithful representative” (representante leal), taking into account the nature of the position and the duties attributed to each of them, acting in good faith and in protection of the company’s corporate interest, which means directors must at all times put the company’s interest before their personal interest (or the interest of anyone related to them) and actively prevent themselves from falling into conflict of interest situations.
  • A company’s corporate interest is understood as the common interest of all shareholders on the sustainable creation of value by engaging in the activities included in its corporate object, taking into account other stakeholders related to its business activity.
  • A duty of care requiring directors to comply with the specific duties (imposed by law and the company’s bylaws and internal rules of conduct) in which the general duty of care materialises, with the diligence of an “orderly businessman” (ordenado empresario) as the standard of diligence expected from someone in their position, with their personal skills and experience (i.e. the more qualified or experienced a director is, the higher the standard of diligence will be).

Those specific directors’ duties include:

  • proactively and effectively managing and representing the company, approving the precise measures for the proper functioning and control of the company;
  • regularly monitoring and supervising the company’s performance;
  • obtaining (in compliance with their obligation to actively collect and in exercise of their right to request) any necessary or convenient information to perform their functions and fulfil their duties with an adequate standard of dedication, which, due to the current environment, will likely entail a higher standard.

In the area of strategic and business decisions that are subject to business discretion, the standard of diligence of an “orderly businessman” (ordenado empresario) shall be deemed met if the director has acted in good faith without personal interest in the matter being decided, with sufficient information and pursuant to an appropriate decision-making process. Where those requirements are met and it is sufficiently evidenced before the court, the judge will not go into the substance of the strategic or business decision and the relevant director should not be held liable for the damages that may have resulted from their decision. This is known as the “business judgement rule.”

The business judgement rule will only apply to strategic and business decisions where directors may act in their discretion because the conduct is not predetermined by law (e.g. distributing or not distributing dividends, diversifying activities by investing in diverse sectors, entering a foreign market, a factory shutdown, creating subsidiaries or getting the company into debt).

As such, it is crucial that companies record evidence of the process followed in making strategic and business decisions – typically, through minutes of board meetings.

Below are some practical steps to help directors demonstrate the proper discharge of their duties during the COVID-19 health crisis:

  • Obtain professional advice early and regularly. The health crisis and the measures adopted by the government may have serious implications on numerous aspects of the company (e.g. labour, customer service, directors duties, financial obligations) so it is essential directors are aware of these.
  • Review, with the help of professionals, when and under what conditions business activity may be fully resumed, considering government recommendations and all health and safety issues.
  • Have a structured contingency plan for business return, prepared by the board itself or through a specific commission, to mitigate the impact of the COVID-19 outbreak. This can help the company when facing issues with creditors, business partners or other entities.
  • Be ready to apply this contingency plan, including deployment of business continuity measures, to ensure operational continuity in line with regulatory obligations.
  • Anticipate and be prepared to comply with all the legal and regulatory obligations of the company that may have been postponed due to the temporary extension for compliance during lockdown.
  • Amend or, where appropriate, propose that the company’s governing body (general shareholders’ meeting or equivalent body) approves or ratifies, those amendments of the company’s bylaws or internal rules which, in light of COVID-19, need an improvement to enable the business return in the best possible conditions under applicable legislation.
  • Review and identify, with the help of professionals, any disruptions that may have affected any relevant contracts, obligations, insurance policies, financing facilities, and relationships with relevant parties (e.g. customers and suppliers), with the objective of adopting any necessary corrective measures to eliminate or mitigate such disruptions in future.
  • Proactively provide appropriate information to shareholders, institutional investors, other stakeholders (such as the company’s customers and suppliers) and, in the case of listed companies, the markets in general.
  • Ensure all decisions made or resolutions passed about business return conform to law and the company’s internal regulations, are in pursuit of the company’s corporate interest, take account of the impact of COVID-19, and meet all of the business judgment rule requirements (see above).
  • Consider the deferral of the adoption of those legally and statutorily postponable decisions or resolutions on which a reliable risk assessment cannot be performed, until the appropriate information is available (see reference to dividend payment and directors’ incentive payments in the question below).
  • In the case of boards of directors, seek the maximum possible consensus when approving resolutions, while not interfering with the independent judgement and fiduciary duties of each member of the board. Votes cast by independent directors, particularly in listed companies, can significantly influence the judicial analysis of a particular resolution.
  • Keep on top of potential risks and threads arising from the COVID-19 pandemic, and analyse their potential impact on management objectives and on the company’s financial position.

2. Should boards adopt particular governance practices in this context?

Directors should pay particular attention to preserving liquidity and cash needs, which may allow the company to return to business in the best possible conditions  after the COVID-19 outbreak.

The disruption and uncertainty caused by COVID-19 means directors should consider whether to defer decisions on dividend payments, to consolidate the company’s financial position and enhance its liquidity and solvency to deal with the challenges ahead.

The application of the business judgement rule under the Spanish Capital Companies Law (see above) requires acting with sufficient information. In the current circumstances, this implies being able to reliably assess the existing and future impact of COVID-19 on the company’s business and financial situation.

Some companies will have prepared their annual accounts at a time where the prevailing circumstances were materially different from those at the date on which their GSM were scheduled to be held.

To give such companies the opportunity to reconsider the allocation of earnings submitted to their GSMs, Royal Decree-law 11/2020, of 31 March, provides that companies that had already prepared their annual accounts as at 31 March 2020, would be allowed, regarding their allocation of earnings, to:

  • if the GSM was called after 31 March 2020, replace the proposed allocation of earnings with a different proposal; and
  • if the GSM was called before 31 March 2020, withdraw the proposed allocation of earnings from the agenda and submit a new proposal to the GSM.

In both cases, the following requirements should be met:

  • the replacement of the proposed allocation of earnings must be justified on the basis of the COVID-19 outbreak; and
  • the directors must submit a letter from the auditor stating that it would not have changed its opinion if it had known about the alternative proposal at the time of signing.

In the case of listed companies, the information relating to the replacement of the proposed allocation of earnings must be made public through the company’s and the CNMV’s websites.

Moreover, according to Royal Decree-law 18/2020 of 12 May, companies benefitting from the exemption on their social security contributions linked to their employees’ temporary layoff procedures may not distribute dividends corresponding to the fiscal year in which those temporary layoff procedures are applied (i.e., dividends against 2020 earnings to be distributed in 2021), unless they previously pay the amount corresponding to such exemption.

Regarding financial institutions, the European Banking Federation (EBF) recommended suspension of dividend payments and share buybacks this year to increase credit to companies and individuals affected by the COVID-19 outbreak.

Incentive payments to directors and employees should be reviewed under the same criteria and principles as for dividend payments. Because such incentives should be tied to the fulfilment of objectives, it must be evaluated whether payment of the incentives should be postponed to properly assess if the objectives were effectively met and their compatibility with the company’s sustainable growth.

3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?

As indicated above, a company’s corporate interest is understood as the common interest of all shareholders on the sustainable creation of value by engaging in the activities included in its corporate purpose, taking into account other stakeholders related to its business activity.

According to Spanish Corporate Law, directors must defend the company’s corporate interest above the interests of third parties or their own interests, and their decisions must be aimed at promoting the company's corporate purpose.

This is one of the essential requirements of the business judgement rule, which establishes that directors will not be held liable for the outcome of their discretionary strategic and business decisions where the rule requirements were met.

Most of the decisions made by directors during the lockdown, and about returning to business, will constitute discretionary strategic and business decisions. Therefore, complying with the company’s corporate purpose will be essential for the directors to avoid facing liability actions in the future.


4. Your company is facing liquidity issues as a result of COVID-19:

a. What are the repercussions for continuing to operate your company?

Directors in Spain are under a mandatory obligation to file an insolvency petition to initiate compulsory insolvency proceedings within two months of the date on which the company becomes aware, or should have become aware, that it is insolvent.

Directors may be liable for continuing to trade when there was little prospect of the company being able to pay its regular credit obligations when due, or liable for failing to take steps to minimise losses to creditors.

There is a stay on the duty for filing for insolvency (even if the debtor filed for the pre-insolvency mechanism provided in Article 5b is of the Spanish Insolvency Act) until 31 December 2020.

b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?

A company would be able to file for insolvency if any of the following situations concurs:

  • general suspension of the current payment of its obligations
  • existence of seizures for foreclosures pending with an overall effect on the aggregate assets
  • unlawful removal, hasty or ruinous liquidation of its assets by the company
  • generalised breach of obligations of any of the following classes:
    • payment of the enforceable tax obligations during the three months before the company’s filing for insolvency
    • payment of social security contributions and other items jointly collected with them during the same period
    • payment of salaries, compensations and other remunerations derived from the relevant employment relationships during the three months before the company’s filing for insolvency.

However, as mentioned above, the obligation on directors to file for insolvency is suspended until 31 December 2020.

c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?

There are no concrete steps that should be taking into account under Spanish law.

Directors shall act in accordance with the law, the company’s bylaws or their duties as directors, which include to:

  • hold regular board meetings, especially given how fast circumstances changing, and ensure the rationale for all decisions are properly documented;
  • ensure that all directors have full information from the business (e.g. all accounts and financial statements, key contracts, pipeline);
  • consider ways of minimising losses (e.g. temporarily closing down non-core operations); and
  • seek professional advice from financial advisors and lawyers.

Directors will be generally liable if they perform acts that are contrary to the law, the company's bylaws or their duties as directors.

d. Will your company be wound up if you fail to make payments when due?

From 14 March 2020, the date of the declaration of the state of alarm in Spain, until 31 December 2020, the insolvency courts will not admit any filings for necessary insolvency proceedings submitted by creditors/third parties during this period.