Related-Party Transactions, Conflicts of Interest, and the Duty of Loyalty: The Supreme Court Strengthens Oversight of Directors’ Conduct

Judgment of the Supreme Court No. 449/2025, dated 20 March 2025, examines the scope of directors’ duty of loyalty and duty of care in the context of transactions carried out with related companies, and clarifies the requirements for a derivative action (corporate liability action) to succeed when a director contracts, in a situation of conflict of interest, with entities within his own group.

The ruling examines the duty of loyalty and conflict-of-interest situations under the wording of the Spanish Companies Act (Ley de Sociedades de Capital, the “LSC“) applicable to the facts—prior to the reform introduced by Law 31/2014—in particular Articles 225, 226, 229, 231, and 236, as well as the corporate legislation then in force (Law 2/1995 on Limited Liability Companies). Its conclusions, however, remain fully applicable under the current regime governing the duty of loyalty (Articles 227 et seq. LSC).

The facts

In the case under analysis, a company engaged in the tourist operation of holiday apartments was held by two shareholders, owning 60% and 40% of the share capital respectively.

Management was exercised successively by an individual and, subsequently, by a corporate director controlled by a family member of the former. The director and his family circle also controlled other companies engaged in the same activity of operating tourist apartments in the same location; one of those related companies was, in turn, the majority shareholder of the managed company.

The company entered into various service agreements with those related entities without disclosing the conflict of interest to the general meeting or obtaining its authorisation. Following the termination of the exclusive marketing agreement it had been maintained with a tour operator, the company’s turnover fell dramatically, while the related companies increased theirs.

The minority shareholder brought a derivative action (Articles 236 et seq. LSC), alleging that the directors had breached their duty of loyalty by:

• Diverting business and clientele to companies related to the director.
• Contracting services with those entities without the authorisation of the general meeting and with possible duplication of services and costs.
• Costs and legal expenses incurred by the company in litigation arising from the directors’ conduct.

Both the Commercial Court and the Provincial Court of Appeal dismissed the claim, holding that no actual financial loss to the company had been established.

The Supreme Court’s ruling

The Supreme Court upholds the appeal in cassation and overturns the lower courts’ approach. It reasons that, in order to adjudicate the action brought, the Court of Appeal should have examined whether the alleged conduct had been carried out in a situation of conflict of interest—an analysis it omitted—and confirms that the companies with which the managed company contracted qualified as persons related to the director within the meaning of Article 231 LSC, a point that was not in dispute.

On that basis, the Court reaches the following conclusions:

• There was a breach of the duty of loyalty. The director contracted, on behalf of the company, with entities related to him without disclosing the conflict of interest to the general meeting. The mere failure to make such disclosure constitutes, in itself, a breach of the duty of loyalty (Article 226 LSC).
• The breach caused compensable harm. The Court recalls that the derivative action requires that the breach of the duty of loyalty must have caused loss to the company, and identifies it under three headings: (i) the establishment management agreement entered into with a related company—remunerated at 4% of turnover—which it characterises as unnecessary and as a means of diverting profits to the director’s group; (ii) the costs and legal expenses borne by the company in litigation caused by the director’s conduct through his related companies; and (iii) the loss of profits arising from the drastic fall in turnover during the 2008–2010 financial years, the management of which had been entrusted precisely to a related and competing company.
• Liability arises even without direct evidence of diversion. Entrusting an essential function of the company (the management of its business) to a related and competing company, in a context of declining turnover coinciding with an increase in that company’s own turnover, is sufficient to establish a breach of the duty of care, even in the absence of direct evidence of a transfer of clientele.
• Quantification of loss may be estimated. In light of the difficulties of proof, the Court accepts an estimated and graduated calculation of loss of profits, based on the time elapsed since the termination of the agreement with the tour operator.

Consequently, the Supreme Court orders the individual director to compensate the company, together with the corporate director, for the loss of profits corresponding to 2010, plus statutory interest from the date of the judicial claim.

Conclusions

• The duty of loyalty requires a director to place the company’s interest above his own: the mere failure to disclose a conflict of interest to the general meeting constitutes, in itself, a breach of that duty.
• Contracting with related companies requires special justification of the necessity and reasonableness of the services; in a conflict-of-interest situation, a negative presumption (fumus) operates which it falls to the director to rebut.
• The derivative action (Article 236 LSC) requires unlawful conduct, actual harm, and a causal link, but the Supreme Court accepts circumstantial evidence and an estimated quantification of loss where evidentiary difficulties arise.
• Entrusting essential functions of the company to a related and competing entity may give rise to liability for breach of the duty of care, even without direct evidence of the diversion of clientele.
• Although the judgment applies the wording of the LSC prior to Law 31/2014, its criteria are fully transferable to the current regime governing the duty of loyalty (Articles 227 et seq. LSC).