31 Aug General Meetings in companies and inefficiency of contracts

Although the post’s title invites you to think of very theoretical concepts it will be not that. Last month we came along with an interesting Resolution of the Spanish Directorate General of Registries and Notary in matters of corporate law that may be interesting in the matter of validation of void acts.

There is a legal doctrina abut validity of legal business, which was born in the German scientific field and sought to provide a systematic body of rules. Thus, the most important categories are: nullity and annulability.

This difference between nullity and annulability were already accepted in our Civil Code (The Spanish one) and within the common practice regarding contracts in the day-to-day and have remained almost unchanged.

 Differences between nullity and annulability or voidness and legal aspects regarding it. 

They are collected in the article 1.300 of the Spanish Civil Code and the main difference between them is that the nullity implies that the contract or legal business has never existed, usually because one of the conditions or pre-requisits are absent: consent or capacity, the purpose of the contract, the object, or the specific form when it is essential (think for example of a mortgage loan that requires public deed and registration in the Property Registry for its constitution). In these cases, it is necessary for the parties to return what they have given each other, that is, the return of things to the previous state. The annulability also occurs because there is a fault or vice in the perfection of the contract or legal business, but this is not relevant. It implies that the essential elements are, albeit defectively. An annullable contract can be validated, eliminating this vice. And also until someone exercises the action in order to annul, it might produce effects meanwhile that must be respected. It is impossible to happen in null contracts, which can never be validated and can never produce effects. 

– Now, in the subject that interests us, how it affects the acts carried out in companies Board of Directors?On the face of it, we could say that if a company takes an agreement that can be annulled, it could be validated and therefore allow its registration in the Mercantile Registry or Companies House. This would require a new call and the adoption of the new convalidating act of the previous one.But if the agreement taken by the company is null and void the theory of ineffectiveness of legal business would lead us to think that act can not be validated. Therefore, these agreements are not susceptible of confirmation. We would face a totally insurmountable defect. The previous Capital Companies Act, before the 2014 amendment, distinguished as null agreements all those that are contrary to an imperative law and can be annulled those that are contrary to the bylaws or those wchich damage the companies interest. This distinction disappeared with the amendment. Recently, the Resolution of July 4, 2016, supported by the relevant resolution of May 30, 2013 of the DGRN admitted the registration of the company’s agreement whose object was the validation or “regularization” of another agreement that was totally null. Recalling among other things that corporate law has two fundamental principles: legal security and to encourage protection in contracts. Therefore, “the concepts of inefficiency proper to the general theory of legal business can not simply be transferred to the corporate field.”For this reason, examples of possible validations or rectifications of acts have been introduced in the corporate legislation that, being null and void in their own right, would not allow such a thing. For example:

 1. The declaration of nullity of a merger or demerger, in the light of art. 46 of the Structural Companies Amendments Act do not produce their nullity “per se” and the absence of any act “but is the cause of a corporate obligation to remove, validate or ‘regularize the organizational and societal effects generated by common social agreements Reintegration of assets through, for example, a spin-off to restore the ex ante status quo”.

2. If according to art.56 of the Companies Act is stated the nullity of the constitution the particular law provides for the beginning of a liquidation period.

3. The judgment that annuls a company’s name imposes the “regularization” of it. A change by another name, which also implies a validation or the solution of a void act. Art.417 RRM and D.A 17th of the Trademark Law.

4. Also, “legally nullified a company’s agreement to increase share capital, for example, the correction or cure of the defects that afflict the canceled social agreements is no longer optional ex Article 204.3 of the Capital Companies Act to become a Mandatory renewal or regularization “.

 The entire paragraph deserves to be emphasized: “The Resolution is contrary to an excessively rigorous interpretation of the general doctrine on the nullity of legal acts and business, being more in favor of the jurisprudential doctrine that has been recommending ‘extreme prudence and flexible criteria’ in the application of Radical nullity; Thus benefiting commercial traffic and the protection of third parties because a company has already appeared in traffic in the guise of formal regularity, since the [null] penalty imposed by that statement is extremely serious and therefore requires , A great moderation in their use, bearing in mind the restrictive nature of the grounds of nullity and, also, the strict and tight interpretation that must be made of them outside of expansionist temptations, in order to avoid that civil and commercial traffic is hampered in its normal development.”

Therefore, we find here an important doctrine of the DGRN, which, despite being criticized for its more formalistic resolutions (in the area of ​​social denominations or in the application of the Law of Professional Societies) opts here for easier points of view in order to facilitate corporate life.

We, at Navarro Llima Abogados SL are specialized in both corporate disputes and contractual matters. If you wish do not hesitate to contact us.