The Ineffectiveness of Authority to Represent a Company as a Consequence of Violation of the Directors’ Duty of Loyalty and Conflicts of Interest

Abstract

The Decision of the Spanish Directorate-General of Registries and Notarial Affairs of 3 August 2016 reasons that a conflict of interests is not actually a case of unauthorised action, not in the meaning of article 1259 of the Spanish Civil Code, which states that no-one may enter into contracts in another person's name without being authorised by that person. In the case at hand, legal standing to act stems from the person's standing as a company director. As is well known, directors' power to represent their company covers the company's entire purpose. Any restriction of directors' powers is ineffective vis-a-vis third parties. Even when the acts in question overstep the bounds of the company's purpose, the obligations are binding for the company if entered into with third parties in good faith without gross negligence. This, in our opinion, goes against the judgment of the Court of Justice of the European Union (Sixth Chamber) of 16 December 1997 (Cooperatieve Rabobank «Vecht en Plassengebied» BA v Erik Aarnoud Minderhoud) which admits that the rules governing enforceability as against third parties of acts performed by members of company organs in situations of conflict of interest with the represented company do not fall within the normative framework of Directive 68, 151, EEC of the Council of 9 March 1968 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community, and are matters for the national legislature.