Law amending the LSC in order to enhance corporate governance (II): Boards of directors
We recently commented in the blog on the changes introduced by Law 31/2014, of December 3, 2014, amending the Capital Companies Law (“LSC”) in order to enhance corporate governance, relating to shareholders’ meetings. This time we will focus on the changes relating to boards of directors.
The main objective of this block of reforms is to reinforce the legal rules governing directors’ duties and liability, promote gender diversity and diversity of knowledge and experience on boards of directors, introduce the figure of the coordinating director (where the same person holds the offices of board chairman and CEO), reduce the term of office to four years, clarify the rules on compensation and its approval by the shareholders’ meeting, and make it obligatory, as a statutory obligation for listed companies, to have an appointments and compensation committee, in addition to the audit committee.
Following are some of the main legislative changes:
1. Directors’ statute: duties and rules on liability (for all types of capital companies)
- Duty of diligence. The existing regulations are rounded out in order to establish different rules according to the functions entrusted to each director and enshrine in legislation the so-called “business judgment rule”, with the aim of protecting business discretion in strategic matters and in business decisions. The right and duty of directors to gather the information necessary in order to make informed decisions (articles 225 and 226) is also made explicit.
- Duty of loyalty. The order and description of the obligations deriving from this duty are improved, rounding out the current catalog and extending it to include de facto directors in the broad sense. The scope of the penalty is also extended beyond making good the damage caused (articles 227-232—article 213 remains unchanged—and article 236).
- Rules on liability. The rules on directors’ liability are extended to equivalent persons and filing a company action for liability against directors is made simpler (articles 236, 239 and 241 bis).
2. Board of directors: composition, powers and functioning
- The managing body of a listed company must now take the form of a board of directors (article 529 bis.1) and the importance of gender diversity and diversity of knowledge and experience in the composition of the board is recognized (article 529 bis.2).
- Certain powers are reserved to the board of directors by means of a list of powers that cannot be delegated at listed or unlisted companies (article 249 bis) and another list specific to listed companies (article 529 ter).
- A minimum of four meetings per year, one per quarter, is established for all companies (article 245.3).
- At listed companies, directors must attend meetings and non-executive directors may not grant proxies to executive directors. The directors’ right to receive information on the business to be addressed sufficiently in advance is also recognized (articles 529 quater and quinquies).
3. Board chairman
- The functions of the chairman are regulated for listed companies and the requirement for a prior report on the appointment by the appointments and compensation committee is established (article 529 sexies).
- A coordinating director must be appointed where the office of chairman is held by an executive director (article 529 septies).
4. Board secretary
- As in the case of the chairman, the functions of the secretary are regulated for listed companies and the requirement for a prior report on the appointment by the appointments and compensation committee is established (article 529 octies).
5. Evaluation of the board and board committees
- A mandatory annual evaluation is introduced for boards of directors of listed companies and board committees. The findings of the evaluation must be recorded in the minutes of the meeting or attached as an exhibit (article 529 nonies).
6. Appointment of directors
- Proposals for the appointment or reappointment of board members shall be made by appointments and compensation committee, in the case of independent directors, and by the board itself, for all other directors. Proposals must be accompanied by an explanatory report by the board that assesses the skills, experience and merits of the candidate. In the case of non-independent directors, proposals must also be preceded by a report by the appointments and compensation committee (article 529 decies.4-7).
- The rules on co-optation at listed companies are modified, meaning it is no longer necessary to be a shareholder in order to be appointed director, the possibility of designating substitutes is eliminated and the maximum term of office is reduced from 6 to 4 years (article 529 decies.2, 3 and undecies).
7. Definition of the different types of director
- Definitions are included of the different types of directors provided for in Order ECC/461/2013, of March 20, 2013, that is, executive, nominee and independent directors, and the “other non-executive director” class is maintained (article 529 duodecies).
8. Directors’ compensation. Special consideration given to board members’ compensation
- For all capital companies (articles 217-219 and 249.3)
- The compensation system must be reasonable, in keeping with the financial situation of the company, the functions and responsibilities held, and must be geared towards promoting the long-term profitability and sustainability of the company.
- The bylaws will establish the system of compensation for the office of director and the compensation item or items. The overall annual directors’ compensation must be approved by the shareholders’ meeting.
- The compensation system for directors with executive functions is clarified and adequate caveats are established for its setting by the board. The managing director must sign a contract with the company, to be approved beforehand by the board with the favorable vote of two-thirds of its members.
- For listed companies (articles 529 sexdecies through novodecies)
- It is established that the office of director must be remunerated.
- The board of directors must approve the compensation policy at the proposal of the appointments, compensation and corporate social responsibility committee and shall set the compensation for each director, for both their administrative and executive functions, under such policy.
- The compensation policy must be approved by the shareholders’ meetings at least every three years.
- The consultative vote on the compensation report is maintained. Notwithstanding the consultative nature of the vote, if rejected, the compensation policy must be revised and submitted for approval to the next shareholders’ meeting.
9. Board committees
- It is now mandatory to have a appointments and compensation committee and the composition of the audit committee has been modified. Both committees will be made up of non-executive directors and at least two of them must be independent, from among whom the chairman will be appointed.
10. Annual corporate governance report and annual report on directors’ compensation
- New article 540 is introduced with the content of the annual corporate governance report and information is added on the measures adopted to try to achieve a balanced presence of men and women on the board of directors, as well as any measures agreed by the appointments committee.
- New article 541 is introduced with the content of the annual report on directors’ compensation.
Garrigues Corporate/Commercial Law Department