{"id":12618,"date":"2023-07-21T13:35:20","date_gmt":"2023-07-21T13:35:20","guid":{"rendered":"https:\/\/vila.es\/?p=12618"},"modified":"2023-07-21T13:35:20","modified_gmt":"2023-07-21T13:35:20","slug":"the-contract-between-company-and-executive-director-obligation-when-the-post-is-unpaid","status":"publish","type":"post","link":"https:\/\/vila.es\/en\/corporate\/the-contract-between-company-and-executive-director-obligation-when-the-post-is-unpaid\/","title":{"rendered":"THE CONTRACT BETWEEN COMPANY AND EXECUTIVE DIRECTOR: OBLIGATION WHEN THE POST IS UNPAID"},"content":{"rendered":"

One of the most significant new developments in the area of corporate governance resulting from the amendment of the Spanish Companies Act (Ley de Sociedades de Capital \u2013 LSC) was the creation of a specific retribution system for directors with executive functions. To this end, article 249 of the LSC was modified, introducing the obligation to enter into a contract between the company and the executive director, the approval of which must be agreed by the board of directors by an enhanced majority of two thirds of its members. In this contract \u00aball of the concepts for which retribution may be obtained<\/em> for performing executive functions shall be specified<\/em>\u00bb, and no other amounts may be received from the company which are not provided for in the contract (vide<\/em> article 249.4 in fine<\/em>).<\/p>\n

Upon reading article 249 of the LSC, particularly section 4 in fine<\/em>, it seems to be deduced that the requirement to enter into said contract meets the requirement to clearly establish the remuneration system applicable to the executive director. Thus it is logical to consider whether said contract must be entered into imperatively if the executive director does not receive any remuneration.<\/p>\n

With regard to the retribution of executive directors, the Supreme Court (judgment 494\/2018 of 26th<\/sup> February 2018) makes it clear that in non-listed companies, the relationship between the general system of remuneration of directors \u00abin their condition as such<\/em>\u00bb (article 217 of the LSC) and the system of executive directors is not of an alternative nature, but rather of a cumulative nature<\/u>, that is to say, both articles are applicable to both of them. Therefore, when the bylaws provide that the directors carry out their post without remuneration, the board of directors cannot establish any remuneration whatsoever.<\/strong><\/p>\n

With this in mind, it would be difficult to sustain that the obligation of entering into a contract, the main purpose of which is to establish the remuneration of executive directors, could affect those companies whose bylaws determine the unpaid nature of the post of director, since such directors could never be remunerated and, consequently, the contract provided for in article 249 of the LSC would become unnecessary (vide<\/em> Francisco Jos\u00e9 Le\u00f3n Sanz, in\u00a0 \u00abComments on the reform of the corporate governance regime of capital companies (Law 31\/2014)<\/em>\u00bb, p. 509).<\/p>\n

In spite of the above, neither the Directorate General of Legal Security and Public Trust (Direcci\u00f3n General de Seguridad Jur\u00eddica y Fe P\u00fablica-DGSJFP) nor the Supreme Court has to date made a clear ruling on whether the contract is mandatory in the case of non-remunerated executive directors. Instead, the DGSJFP has limited itself to indicating that \u00abfrom the literal content of the third paragraph of article 249, it is clear that there is an obligation to enter into (…) the contract between the member of the board of directors with executive functions and the company even if it is agreed in the autonomy of the will that such executive functions are performed without remuneration<\/em>\u00bb (vide <\/em>Ruling of 8th<\/sup> November 2018). That is to say, that entering a contract will be imperative when the post is not remunerated by decision of the board (\u00abautonomy of the will<\/em>\u00bb), provided that the bylaws provide for the remunerated nature of the post of director. Conversely, when the unpaid nature is imposed by the bylaws, and not by the board, the contract will not be obligatory.<\/p>\n

Likewise, when the bylaws provide for the remunerated nature of the post of director, but the general meeting had not previously approved a maximum remuneration for the management organ, we understand that the contract would not be mandatory either, since the will of the meeting to remunerate would not be expressed and, furthermore, the contract could not establish a remuneration because the maximum remuneration would be unknown to the board. On the other hand, with the prior establishment of the maximum amount of remuneration, the meeting would be expressing its effective will to remunerate and establishing the quantitative framework for the purposes of the subsequent contract, and, in line with the arguments set forth, in this case, the obligation to enter into the corresponding contract would concur.<\/p>\n

The non-obligatory nature of the contract in a scenario of unpaid directors would likewise be justified by the teleological interpretation of article 249 of the LSC. Thus, it becomes necessary to bring up the report dated 14th<\/sup> October 2013 of the Commission of experts in terms of corporate governance, at the heart of Law 31\/2014 which modified article 249 of the LSC. In said report the following was indicated: \u00abit is necessary to clarify (\u2026) the remuneration system<\/strong> of directors who, forming part of a board of directors, perform executive functions (\u2026). For this (\u2026) a new section 3 in article 249 of the LSC is proposed<\/em>\u00bb.<\/p>\n

In effect, the aim of the legislator pursuant to the reform of article 249 of the LSC was to set up a system of control over the rendering of the services of remunerated executive directors, with the purpose of protecting the company and the partners or shareholders from possible abusive actions by the board. The mechanism provided for in the LSC reduces the risk that the general meeting is caught by surprise by excessive or fictitious remunerations. The financial burden of the regulation is evident, for this reason, the entering into of the contract may only be deemed imperative when executive directors are remunerated, and this imperative nature becomes fruitless when no remuneration is received<\/strong>. The absence of remuneration detracts from the obligatory nature, as the element of gratuity deprives the contract of its financial character and in this way moves away from the interest and the objective intended by the legislator. What goes before does not impede the voluntary entering into of the contract, even if there is no remuneration (vide<\/em> Resolution of the Directorate General of Notaries and Registries of 12th<\/sup> December 2018).<\/p>\n

 <\/p>\n

Eduardo Vil\u00e1 and Joan Llu\u00eds Rubio<\/p>\n

Vil\u00e1 Abogados<\/p>\n

 <\/p>\n

For more information, please contact:<\/p>\n

va@vila.es<\/span><\/a><\/p>\n

 <\/p>\n

21st<\/sup> July 2023<\/p>\n","protected":false},"excerpt":{"rendered":"

One of the most significant new developments in the area of corporate governance resulting from the amendment of the Spanish Companies Act (Ley de Sociedades de Capital \u2013 LSC) was the creation of a specific retribution system for directors with executive functions. 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