Spain – Abuse of rights in corporate resolutions

What do the mythical Vega Sicilia wines, El Cid Campeador and the abuse of rights have in common? If you read on, you will find out.

The Vega Sicilia Único was for many years considered the best, the most prestigious and the most expensive Spanish wine.

The abuse of rights is a legal institute that allows the defense of situations in which the opponent acts with (apparent and formal) subjection to the law, but making a spurious use of the law with the intention of harming the injured party.

Last October, the Supreme Court handed down a judgment declaring certain agreements adopted by Bodegas Vega Sicilia S.A., producer of Vega Sicilia Único wine, to be null and void based on the principle of abuse of rights.

The judgment in question is doubly interesting.

Firstly, because it highlights the endemic evil of Spanish justice: it declares the nullity of resolutions adopted at a meeting held in March 2013, which were the subject of a lawsuit in February 2014, with a first instance ruling that same year, appealed to the Provincial Court of Valladolid who issued its judgement on 2019  and  four years later the Supreme Court has put an end to the lawsuit: nine years after the shareholders meeting whose resolutions were the subject of the challenge.

As the Constitutional Court very recently reiterated in its ruling dated last October, « judicial slowness has no place in the Magna Carta ». But, although it has no place, or should not have a place, our courts continue to insist that it does and, as an example, this case that we are commenting on is, unfortunately, no exception.

Beyond the barbarity of a litigant having to wait for nine years to find a final solution to his claim, the judgment we are commenting on is of interest for other reasons.

The plaintiffs sought the nullity of certain resolutions adopted at a shareholders’ meeting, basing their claim on the fact that these resolutions constituted an abuse of rights since, through them, the shareholders of Bodegas Vega Sicilia S.A. sought to take control of Bodegas Vega Sicilia away from the company of which the plaintiffs were in turn shareholders.

The legislation in force at the time the meeting was held (prior to the 2014 reform) established that « resolutions that are contrary to the law, oppose the articles of association or harm the corporate interest to the benefit of one or more shareholders or third parties » could be challenged, adding that those contrary to the law would be null and void and the remaining resolutions could be annulled.

Following the 2014 reform, article 204 considers that « corporate resolutions that are contrary to the law, are contrary to the articles of association or the regulations of the company meeting or harm the corporate interest to the benefit of one or more shareholders or third parties » can be challenged and no longer distinguishes between null and voidable resolutions; although it partially recovers the concept of radical nullity in the case of resolutions contrary to public order by establishing that in such cases the action does not have a statute of limitations or lapse.

But both with the regulations prior to the reform and with those currently in force, the controversy resolved by the ruling we are commenting on is the same: when the legislator requires the agreement to be contrary to « law » in order to be able to challenge it, does he mean that it contravenes a precept of the Capital Companies Act (LSC), or can it be considered a requirement for challengeability if it contravenes any other positive precept of any other legal text? And finally, if the resolution in question is classified as constituting an « abuse of rights », can such a situation be considered as « contrary to law » for the purposes of the application of article 204 LSC?

The Chamber reminds us of the requirements for the concurrence of abuse of rights in corporate matters:

• formal or outwardly correct use of a right
• causing damage to an interest not protected by a specific legal prerogative, and
• the immorality or antisociality (sic) of that conduct manifested subjectively (intention to damage or absence of legitimate interest) or objectively (abnormal exercise of the right contrary to the economic and social purposes of the same).

And it then refers to the numerous occasions on which its case law has reiterated that, although the regulation on challenging corporate resolutions does not expressly mention abuse of rights, this is no obstacle to annulling resolutions in such cases, since according to article 7 of the Civil Code (which prohibits abuse of rights), they must be deemed as contrary to the law.

The interest and peculiarity of this case lies in the fact that the contested resolutions were neither adopted in the interests of the company nor did they cause any harm to it, since the alleged harm was caused to a third party formally outside the company.

And on these premises, the Supreme Court reiterates and insists that the expression « contrary to the law » in article 204 LSC must be understood as « contrary to the legal system », which includes those agreements adopted in fraud of the law, in bad faith or with abuse of rights, all of which are included and regulated in the Preliminary Title of the Civil Code. For these reasons, the judgment of the Provincial Court upholds the claim and declares the nullity of the contested agreements.

And what has El Cid got to do with all this? Is it a typo? No, not at all. Legend has it (invented, it seems, by a monk of the monastery of San Pedro de Cardeña to attract visitors) that Rodrigo Diaz de Vivar won a battle on the walls of Valencia against the Almoravids, after his death, saddling his corpse on his legendary horse Babieca.

It turns out that his almost fellow countryman, David Alvarez, buyer of the winery in the 1980s, the latter from León, the former from Burgos, but both old Castilians, also won his last battle after his death; David Alvarez was, together with one of his daughters, a plaintiff against the agreements of Bodegas Vega Sicilia and died in 2015; seven years later the Supreme Court has given him the right against the Almogavars, in this case, his own children.

And two lessons: first, justice is not justice if it is slow, a phrase apocryphally attributed to Seneca; it was not in this case for David Alvarez. Secondly, the abuse of rights is not only an « in extremis » recourse when one does not find frank legal support for one’s claims; on the contrary, it is, on many occasions, the solution.