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The provincial high courts and the General Directorate of Registries and Notaries (Dirección General de los Registros y el Notariado – DGRN), in a number of decisions to date, have assumed the position that two different systems exist regarding the remuneration of company directors, with the following interpretation:
- Article 217 of the Capital Companies Act (Ley de Sociedades de Capital – “LSC”) regarding the remuneration of company directors, made exclusive reference to the functions of administration as such, that is to say, deliberative and supervision functions, etc.
- Article 249 of the LSC regarding the delegation of the faculties of the board of directors made exclusive reference to the remuneration of the executive functions, that is to say the ordinary management of the company.
Through this dual system of remuneration of the company directors, it was understood that only the remuneration of company directors was subject to statutory requirements and, therefore, subject to the maximum annual remuneration approved by the general shareholders/partners meeting, and while this limit did not affect the remuneration of the executive functions of the managing directors, the approval by way of an enhanced majority was carried out by the board of directors in a separate meeting and was not conditioned to the approval of the shareholders/partners.
On 10th September 2015 a claim was filed before the Commercial Court number 9 of Barcelona which contested the rejection of the registration by the commercial registry of the following clause:
“The position of director shall not be remunerated, without prejudice to, where a board exists, said board, at its own convenience, agreeing to the remuneration of the executive board members for the exercise of the executive functions with which they are entrusted, without the agreement of the general meeting or the need for a specific provision in the company bylaws regarding remuneration, under the application of article 249.2º of the Capital Companies Act”.
In accordance with said clause, in the case of the company in question, the remuneration of the executive functions of the managing directors did not require a statutory provision or the approval of the general meeting, thus continuing with the duality of the remuneration systems mentioned above.
However, the Commercial Registry rejected the registration of such clause, substantiating that it infringed upon the principle of statutory provision. Following the rejection of the claim in the first instance and the upholding of the appeal in the second instance, thus revoking the previous decision, the registrar filed a cassation appeal. High Court judgment STS 98/2018 of 26th February, settles the matter, ending the duality of the remuneration systems with the following arguments:
- the dual system may “seriously compromise transparency in the remuneration of the executive director and negatively affect the rights of the shareholders/partners, especially minority shareholders/partners” because it limits the importance of the role played by the general meeting in the remuneration of the directors.
- The remuneration of the managing directors is more important when a board is established, therefore, it does not seem reasonable that a provision in the bylaws or the requirements established in article 217.4 of the LSC are not applicable, that is to say, the principle of proportionality in the remuneration of the directors.
- Regarding the position of director, both the deliberative and supervision functions, as well as the executive functions are brought together, and therefore, it is not necessary to differentiate between them.
- When a board of directors is opted for, the delegation of executive faculties is established for one or various members, however, those faculties are inherent to all the directors or board members, because of their condition as such, and they may decide to “delegate” their faculties. Accordingly, there is no differentiation in the functions of the directors, which requires its own regulation.
- Article 217 of the LSC, should not be applied discriminately depending on whether we are dealing with directors or executive directors, while at the same time, it is understood that both articles 218 and 219 of LSC are in any case applicable to the remuneration of all directors, thus:
a. both articles are closely linked to article 217 and the interpretation thereof, therefore, if the articles 218 and 219 are applicable to the remuneration system of executive directors, it should be understood that 217 is too.
b. In both articles the demand for a provision in the bylaws is reiterated, with reference therefore to article 217 of LSC.
As a consequence of unity in the remuneration system of directors, upon the payment of the executive directors, the following should be complied:
- With the company bylaws, which shall establish whether the position is remunerated or carried out free of charge, while at the same time establishing the system of retribution which shall determine the retribution concepts of the position.
- With the decisions taken by the general meeting which shall establish the maximum amount of annual remuneration of the directors in unlisted companies, without prejudice to the general meeting being able to adopt an agreement of greater reach, which establishes a remuneration system in accordance with articles 249.4.II and 249.bis.i.
- With the decisions of the administrators, who shall decide upon the distribution of the remuneration between the different directors by agreement. In case of a board of directors, the board itself shall decide upon distribution of the remuneration, taking into account the functions and responsibilities of each member.
In conclusion, we must understand that the remuneration of executive directors is subject to statutory provision, and therefore, to the limits established in the company bylaws and the amounts approved annually by the general meeting.
Pedro Blanco Guardado
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9th of March 2018