Business Judgment Rule (Spain)

The Business Judgment Rule in Spanish Law

The business judgment rule (discrecionalidad empresarial) was explicitly incorporated into Spanish corporate law by Act 31/2014 on improvement of corporate governance of capital companies, amending the Ley de Sociedades de Capital (LSC). Article 226 provides that courts will not review the business wisdom of a director’s decision when the director has met certain procedural and conflict-of-interest requirements.

The rule’s rationale is twofold: courts lack the information and temporal perspective needed to evaluate business decisions with hindsight, and excessive judicial review of management decisions would deter the risk-taking necessary for entrepreneurial activity. The law does not require directors to guarantee success; it requires them to be diligent in the process of making decisions.

Requirements of the Safe Harbour

Article 226 LSC requires that the director:

1. Acted in good faith — no intent to harm the company or its shareholders.
2. No personal interest — the director must not be in an unmanaged conflict of interest. If a conflict exists, the director must abstain and disclose it to the governing body.
3. With sufficient information — the decision must be preceded by obtaining and analysing the information reasonably available. Directors may and should request expert opinions in complex high-stakes decisions.
4. With an appropriate procedure — the decision must be taken with the deliberative process appropriate to its importance: prior analysis, debate within the governing body, vote, and documentation in minutes.
5. Within a suitable business policy — the decision must be framed within a business strategy consistent with the company’s object and purpose.

What the Rule Does Not Cover

The business judgment rule does not protect directors from:

• Breach of law or the articles of association.
• Decisions taken with an undisclosed and unmanaged conflict of interest.
• Wilful misconduct or gross negligence (inobservance of even the minimum standard of care required).
• Related-party transactions conducted without following the prescribed approval procedure (Art. 529 ter LSC for listed companies).

Procedural Effect: Burden of Proof Shift

The rule operates as a procedural safe harbour: it shifts the burden of proof. The claimant must demonstrate that the director had a conflict of interest or acted without sufficient information — a mere disagreement with the outcome of the decision does not suffice. Well-maintained board minutes and documented deliberative processes are therefore indispensable for directors who wish to rely on Article 226.