Duty of diligence and loyalty in corporate management

Duty of diligence and loyalty in corporate management

Managing a company entails responsibilities that go beyond mere decision-making. Directors have a duty of diligence and loyalty, which requires them to act always in the best interest of the company and its shareholders, avoiding any actions that could harm collective interests. This principle is not only ethical but also legal: the Spanish Companies Act establishes clear mechanisms to ensure that directors fulfill their obligations and are accountable for potential damages.

The duty of diligence means that directors must act with care, sufficient information, and prudence in both daily management and strategic decisions of the company. Meanwhile, the duty of loyalty requires that all actions be carried out with honesty and transparency, avoiding conflicts of interest and situations where personal gain outweighs the company’s interest. Failure to comply with these duties can have economic consequences and may even result in personal liability for the director.

When does a director become personally liable?

Spanish law establishes that directors may be held personally liable when they fail to fulfill the legal or statutory duties inherent to their role. In general terms, liability actions can be either social or individual. A social action allows the company to claim damages resulting from a director’s negligent or disloyal conduct. According to Articles 239 to 241 bis of the Spanish Companies Act, minority shareholders may also bring a liability action when directors fail to act in accordance with the law, including cases of breach of the duty of loyalty, without the need to submit the decision to the general meeting.

Creditors may also intervene in cases where the company’s assets are insufficient to satisfy their claims, exercising the social action subsidiarily. On the other hand, an individual action directly protects the interests of shareholders or third parties who have suffered a specific loss due to the directors’ actions. It is important to remember that all these actions prescribe after four years from the moment they could have been exercised, according to Article 241 bis, establishing a clear time limit for claims.

A particularly relevant case is regulated by Article 367, which addresses the joint liability of directors in dissolution scenarios. If directors fail to call a general meeting within the legal deadlines to adopt the necessary dissolution agreements or to remedy causes that could lead to dissolution, or if they fail to request judicial dissolution, they are jointly liable with their personal assets for obligations arising after the event that triggered the cause of dissolution.

This presumption of liability applies unless proven otherwise and protects legitimate creditors by ensuring that obligations arising after the cause of dissolution are assumed by those who should have acted. However, directors may be exonerated if they demonstrate that they communicated negotiations with creditors or requested the bankruptcy declaration within a two-month period.

In practice, this means that directors must maintain active, diligent and transparent management, reporting any situation that may compromise the company’s stability, strictly complying with legal deadlines, and avoiding any action that could cause economic harm. Direct personal liability is precisely intended to encourage prudence and strategic planning, ensuring that directors make decisions based on proper information and guided by the company’s best interests.

Protection of directors against third-party claims

While the law establishes clear mechanisms for liability, there are also tools to protect directors against third-party claims, especially when they act lawfully and within the scope of their duties. These protections include directors’ liability insurance, internal indemnification agreements, and policies covering damages arising from professional actions in the exercise of their functions. The purpose of these protections is to prevent directors from having to answer with their personal assets for situations that do not arise from negligence or disloyalty.

In practical terms, directors should adequately document their decisions, obtain technical and legal reports, and have the company’s backing for any significant action. This combination of legal duties and protective mechanisms allows for safer management, encouraging strategic decision-making without fear of unfounded claims.

Complying with duty of diligence and loyalty

Complying with the duty of diligence and loyalty is far from a mere formality: it is a fundamental pillar of corporate trust and economic stability. Directors must always act in the best interest of the company and its shareholders, avoiding conflicts of interest, making informed decisions, and strictly adhering to legal deadlines and procedures.

Direct personal liability, particularly in cases of dissolution or failure to fulfill essential duties, protects both the company and its creditors, encouraging prudence in management. At the same time, mechanisms designed to safeguard directors against third-party claims allow them to perform their roles with legal certainty, promoting effective and responsible management.

The combination of clearly defined duties and adequate protections ensures a balance between accountability and security, strengthening confidence in corporate governance and supporting the long-term sustainability of the business.