Spain's Supreme Court rules on directors' breach of duty of loyalty in related-company transactions

The Supreme Court, in a judgment dated 20 March 2025, sentenced the directors of a company for breaching its duty of loyalty, emphasising the need to avoid conflicts of interest and ensure transparency in corporate management.

The judgment, no. 449/2025 (STS 1169/2025 - ECLI:ES:TS:2025:1169), addresses a social-liability action against former directors and majority shareholders of a limited liability company. The case involves allegations of diverting business activities and clients to companies related to them.

The judgment addresses a conflict between two shareholders in a limited liability company, who own 60% and 40% of the company's share capital respectively. The minority shareholder initiated a corporate action for liability against the directors and majority shareholders of the company for conducting transactions with related companies without fulfilling their duty of loyalty.

The Supreme Court determined that the directors breached several obligations and ordered them to compensate for damages based on the duration of their management of the company.

Breaches of the duty of loyalty

The legal duty of loyalty requires directors to act in good faith, prioritising the company's interests over their own.

In the present case, the breaches of duty of loyalty included diverting business and clients to companies associated with the directors, which likely resulted in a loss of profit. Additionally, there was a failure to inform the general shareholders' meeting (GSM) about conflicts of interest with related companies, which, as established by legal doctrine, must be disclosed explicitly. Furthermore, transactions with related companies were conducted without the authorisation of the GSM.

Existence of economic injury

The Supreme Court emphasised that breaching the duty of loyalty must result in economic damage to the company. Such economic damage must be compensated and, in this case, included the following:

• The loss of revenue due to decreased profits resulting from the diversion of business to related companies.
• Economic damages incurred from payments made for unnecessary management services that the company contracted with related companies.
• Legal expenses arising from challenging of company resolutions by the minority shareholder, caused by the directors' self-interested actions.

Why is this judgment important?

STS 449/2025 marks a significant milestone in case law regarding directors' liability, highlighting three key points:

• Reinforcement of the duty of loyalty. The ruling emphasises that directors must take proactive measures and not just avoid reporting conflicts of interest. This highlights the importance of consistently acting in the best interest of the company.
• Limitations on unfair management. Directors must not use their position for personal gain or to benefit related companies, especially if it harms the company.
• Increased liability of directors. Directors may be held liable for unfair management practices even if there is no direct economic damage, especially when customers are diverted to related companies.

Osborne Clarke comment

This ruling underscores the significance of directors' duty of loyalty and the necessity for transparency in their operations, particularly when engaging with related companies.

Companies must actively monitor potential conflicts of interest and ensure that their directors prioritise the company's best interests over their own personal benefits.