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According to the Family Business Institute, family businesses account for 92.4 per cent of the Spanish business sector. However, their continuity is not guaranteed: the integration of new generations and management succession processes often increase the risk of internal conflicts and, in many cases, jeopardise the long-term survival of the business, meaning that most of them do not survive beyond the third generation.
Experience shows that many of these conflicts do not stem from financial or management problems per se, but rather from the difficulty of properly separating family interests from the interests of the company.
Added to this is the fact that in family businesses it is not uncommon for certain legal requirements to be relaxed, for roles not to be clearly defined, for decisions to be taken informally, or even for the founder to continue to exert a decisive influence despite having formally stepped down from the management of the family business.
All of this significantly increases the risk of litigation and means that, on occasions, directors – whether de fact or de jure – may be held personally liable for damages caused to the company, its shareholders or third parties, even when they have acted with the shareholders’ authorisation.
In fact, the liability of directors in family businesses is one of the main sources of corporate litigation when family conflicts spill over into the business sphere and, ultimately, into the courts.
In this article, we analyse the main scenarios in which such liability may be imposed and the legal actions provided for under the Companies Act to pursue it.
When might directors be held liable in a family business?
The responsibilities of directors in a family business revolve around two essential duties set out in the Companies Act:
- The duty of care, which requires them to act as a ‘prudent businessman’, meaning that they must devote themselves adequately to the company, gather sufficient information and take the necessary measures to ensure the sound management of the business; and
- The duty of loyalty, which entails acting as a ‘faithful representative’, in good faith and in the best interests of the family business, putting the company’s interests before any personal interests.
These obligations take on particular significance in family businesses. As ownership is distributed amongst different branches of the family and personal ties weaken (which is inevitable as the business is passed down from generation to generation and the degrees of kinship between shareholders become more distant), conflicts of interest are more likely to arise and certain shareholders or directors may prioritise their individual interests over those of the company.
When this occurs, the Companies Act provides for various measures to hold parties accountable:
Corporate liability action (Article 238 of the Companies Act)
The purpose of a corporate liability action is to protect the company’s assets against damage and loss caused by acts or omissions on the part of directors that contravene the law or the articles of association, or that constitute a breach of their duties to the company, with a view to obtaining compensation for the damage.
Generally speaking, it is for the company itself to bring this action, subject to the approval of the General Meeting. However, it may also be brought by shareholders representing more than 5 per cent of the share capital and, on a subsidiary basis, by creditors, where the company’s assets are insufficient to satisfy their claims and where the action has not been brought by the company or its shareholders.
In family businesses, there are numerous examples of conduct that may give rise to this type of liability.
For example, in practice, it is not uncommon for the administrator or the family member responsible for management to use the company’s resources to finance personal or family expenses, to award contracts on favourable terms to related companies, or to take advantage of the family business’s commercial opportunities in order to develop them through companies wholly owned by them. In all these cases, there is a conflict between the administrator personal interest and the company’s interests, which may give rise to a claim for liability.
In such cases, the family business suffers the loss directly. Consequently, the appropriate remedy is a corporate liability action, aimed at obtaining restitution for the damage caused to the company’s assets.
Individual liability action (Article 241 of the Companies Act)
Unlike the previous provision, the individual liability action does not protect the company, but rather the shareholder or third party who has suffered direct damage as a result of the director’s actions.
This scenario is particularly relevant in family-owned businesses where there are different family branches with conflicting interests.
A common example may arise in connection with the transfer of shares, where the shareholders’ right of pre-emption is infringed.
Let us imagine that a shareholder decides to sell their shareholding. If the administrator deliberately discloses the transaction only to the members of a particular family branch (with whom they have a closer relationship) and conceals the information from the others, they would be depriving the latter of the opportunity to exercise their rights. Furthermore, concealing the transaction may upset the existing balance between the different family branches within the company’s ownership structure.
In this case, the loss is not borne by the company, which remains financially unscathed, but by the affected shareholders, who have been denied the opportunity to acquire shares and maintain their position within the company.
Therefore, the claim must be brought by way of an individual action for liability.
Action for liability for company debts (Article 367 of the Companies Act)
The third form of liability is probably one of the most severe for directors.
The law provides that, where the company is subject to a legal ground for dissolution, the directors must act diligently by convening a general meeting to adopt the appropriate measures or, where applicable, by initiating the relevant insolvency proceedings.
Where they fail to fulfil these obligations and the company continues to operate as normal, they may be held personally liable for the company’s debts arising after the grounds for dissolution came into existence.
In a family business, this scenario often arises when the person running the company is reluctant to acknowledge a critical financial situation because of the impact this may have on the family. With the aim of avoiding internal tensions, they keep the business running, continue to place orders with suppliers or take on new obligations, even though the company is already in a situation that would require corporate or insolvency measures to be taken.
The consequences of failing to meet these obligations can be particularly severe, as the director may be forced to use their own assets to settle the debts incurred during that period.
Liability may also extend to those acting behind the scenes
Liability is not limited to those who are formally registered as directors.
The Companies Act extends this regime to so-called de facto directors, that is, those persons who, without formally holding the position, in practice carry out management functions or make management decisions on a regular basis.
This issue takes on particular significance in family businesses, where it is not uncommon for the founder to continue to play an active role in strategic decision-making after stepping down from official positions, or for certain family bodies (such as the Family Council) to exert a decisive influence on the day-to-day management of the company.
In such cases, those who exercise de facto management functions may assume the same responsibilities as a formally appointed director, regardless of whether they are registered in the Commercial Register.
Furthermore, the law makes it clear that a director is not exempt from liability merely because they acted in accordance with instructions from the General Meeting of Shareholders or with its express authorisation.
What can be done to anticipate these problems?
Most cases of directors’ liability in family businesses can be prevented through appropriate corporate and family organisation.
Clearly defining the roles of each family member, professionalising the governing bodies, managing conflicts of interest appropriately, implementing effective family protocols and ensuring compliance with legal obligations are measures that significantly reduce the risk of litigation and personal liability.
When family and business relationships become intertwined, prevention is particularly important. As we have seen, a decision taken without due care may not only jeopardise the company’s assets, but also the personal assets of those involved in its management.
Therefore, in the event of any corporate or family dispute affecting the management of the company, it is advisable to seek specialist advice; however, it is even more advisable to undertake proper corporate and family planning, taking action before the dispute arises. Seeking specialist advice helps to minimise risks, preserve family relationships and ensure the continuity of the business venture.
Litigation and Arbitration Department
