Conflicts of Interest Among Partners in a Company

Conflicts of Interest Among Partners in a Company

Corporate conflicts of interest occur when a partner in a company faces a situation where their personal interests may be opposed to the interests of the company. If this situation arises when making a decision in a partners’ meeting, it can influence the partner’s decision-making, leading them to prioritize their personal benefits over those of the company.

Partners in a company are bound by a duty of loyalty, which means they must prioritize the company’s interests over their own. To ensure that a partner cannot, in the scenario of a vote at a general meeting, vote in a conflict of interest, the legislator has developed Article 190 of the Capital Companies Law.

A partner may not exercise the voting rights corresponding to their shares or holdings when the purpose of the agreement is:

• Authorizing the transfer of their social shares when these are subject to a legal or statutory restriction.
• Deciding whether to exclude the partner from the company.
• Deciding whether to relieve them of an obligation or grant them a right.
• Deciding whether to provide financial assistance to them.
• Deciding whether to exempt the partner from their duty of loyalty.

If a partner finds themselves in any of the above conflict of interest situations, their voting rights will be suspended during the adoption of the specific agreement. However, the prohibition on voting does not eliminate their other rights, which remain intact. The conflicted partner may still attend the vote and participate in the discussion.

If the conflicted partner participates in the vote and their vote is decisive, the agreement can be contested and, if annulled, rendered ineffective.

As stated in section two of Article 190, the shares or holdings owned by the conflicted partner will be deducted from the company’s capital for the purpose of calculating the majority of votes if necessary.

For example, in cases where the law only requires a simple majority to adopt the agreement, there is no need to deduct the conflicted partner’s votes, as only the votes effectively cast in the vote are counted. On the other hand, when a minimum number of votes or a minimum percentage of votes over the total share capital is legally or statutorily required, deduction is necessary. Without this deduction, if the conflicted partner holds a significant share, there would be a constant blockage in making such a decision.

 Section 3 of Article 190 of the Capital Companies Law regulates all other situations in which a partner finds themselves in a conflict of interest not covered by the five circumstances regulated by section one.

 When a partner is in a conflict of interest situation not regulated by section one, they will not be deprived of their voting rights. However, if their vote was decisive for the adoption of the agreement, and the agreement is contested for being contrary to the social interest, the burden of allegation and proof will shift to the company and the conflicted partner to demonstrate that the agreement aligns with the social interest.

Conversely, the partner or partners who have contested the agreement, alleging that it is contrary to the social interest, must demonstrate and prove that the conflict of interest indeed exists.

The prohibition of voting in the event of a conflict of interest is justified to ensure impartiality and integrity in decision-making within a company. This measure seeks to prevent a partner from influencing decisions that could benefit their personal interests at the expense of the collective interest of the company. By abstaining from voting, the conflicted partner allows decisions to be made objectively and fairly, ensuring that only the interests and well-being of the company as a whole are considered.