RULING NO. 98/2018 OF THE FIRST CHAMBER OF THE SUPREME COURT OF 26 FEBRUARY ON THE REMUNERATION OF THE MANAGING DIRECTORS OR EXECUTIVES OF UNLISTED COMPANIES.
The Supreme Court has begun to analyse the scope of the statutory reserve required to remunerate administrative functions (article 217.1 LSC) in relation to the contractual remuneration system for the Managing or Executive Directors of unlisted companies.
The judgment analysed has its origin in the conflict arising from the refusal of registration by a commercial registrar of a company under the following clause of the Articles of Association concerning the remuneration of directors:
“…The position of director shall not be remunerated, without prejudice to the fact that, if there is a board of directors, it may decide on the remuneration that it considers appropriate for executive directors to be paid for the exercise of the executive functions entrusted to them, without the agreement of the board of directors or the need for any provision in the bylaws for the concept or concepts of remuneration to be more precise, all in application of the provisions of article 249.2 of the LSC“.
The registrar refused to register the aforementioned clause on the grounds that it infringed the principle of the statutory reservation of remuneration “….. given that both the existence of remuneration and the specific system of remuneration of directors are circumstances that must necessarily be included in the articles of association, either in the constitution of the company or in subsequent amendments thereto, which are the exclusive competence of the shareholders’ meeting and not of the board of directors…“.
The company filed a complaint challenging the refusal to register and the Commercial Court dismissed the complaint at first instance. The company challenged the decision of the Commercial Court and obtained a second instance ruling from the Provincial Court of Barcelona, which positioned itself in favour of the majority doctrine and the thesis defended by the DRGN by virtue of which the reform of the TRLSC would establish a double remuneration system for directors:
a) The remuneration of directors in their capacity as such, subject to the provisions of the bylaws (article 217 TRLSC et seq.).
b) Remuneration of executive directors, outside the provisions of article 217 of the Consolidated Text of the Corporations Act and subject to the provisions of article 249 of the Consolidated Text of the Corporations Act. Thus, it would be sufficient to include the remuneration system in the contract signed with the Executive Director, provided that the applicable procedure is respected.
However, the Registry appealed in cassation to the Supreme Court on the grounds that the scope of the statutory reservation was also extended to the Executive Directors.
POSITION OF THE SUPREME COURT IN ITS JUDGEMENT NO. 98/2018 OF 26 FEBRUARY.
The traditional doctrine and the DGRN have maintained that a distinction must be made between the deliberative functions (strategy and control) of the administrator and the executive functions of ordinary management; it also interprets that the executive functions may be contractually remunerated separately from the deliberative functions, without being subject to the latter’s own statutory reserve.
The Supreme Court ruled against this dualist position, opting in its judgment of 26 February 2018 for a monist position in the sense that in the current Spanish corporate system there is no longer an executive and representative body and another supervisory body, as in the dual systems, but that all functions are included in the administrative body, without prejudice to the administrator’s power to delegate executive functions.
The Supreme Court considers that the principle of statutory reserve is not limited to deliberative functions, since it also extends to executive or managerial functions, given that “‘…the expression “directors in their capacity as such” refers to the director in the exercise of his office, that is, the position of director mentioned in the first paragraph of Article 2(1). 217 TRLSC, and is opposed to the use of the term “directors” by provisions such as section 220 TRLSC, referring to limited liability companies, which refers not to the position, but to the person who holds it, but in facets other than those inherent to the exercise of the position of director…“.
In addition, the High Court determines that, if the remuneration of the executive functions of the Chief Executive Officers were to be permitted outside the statutory reserve, it would seriously jeopardize the transparency of the remuneration of the Executive Director and would be detrimental to the rights of the shareholders, especially the rights of the minority shareholder, in unlisted companies, by drastically restricting the importance of the General Meeting.
In the ruling in question, the Supreme Court concluded that the reform of the TRLSC established a system for setting remuneration, which is divided into three levels:
I. First level: statutory provision for all remuneration received by directors.
The bylaws must establish the free or paid nature of the position and, if it is remunerated, the remuneration system, specifying the remuneration concept or concepts assigned to the directors.
II. Second level: resolutions of the General Meeting. Instructions regarding the remuneration of Executive Directors.
The resolutions of the General Shareholders’ Meeting indicate the maximum amount of the annual remuneration and may issue a broad and flexible resolution when establishing a remuneration policy.
III. Third level: decisions of the administrative body.
The collegiate administrative body distributes the remuneration among the different directors, taking into account the functions and responsibilities attributed to each director.
In short, the Supreme Court interprets the relationship between articles 217 and 249 of the TRLSC in unlisted companies as being cumulative and not distributive, with the statutory reserve and other limits set forth in articles 217, 218 and 219 of the TRLSC being applied equally to all directors, without excluding the Managing or Executive Directors. In addition, the ruling establishes that article 249 of the TRLSC contains the special features applicable to Managing or Executive Directors, who must sign a contract with the company, the content of which must comply with the “statutory framework” and the maximum annual amount of the directors’ remuneration for their position established by resolution of the General Meeting.
EFFECTS ON THE LEGAL NATURE OF THE REMUNERATION TO BE RECEIVED BY THE DEPENDENT WORKER.
The doctrine set forth in the judgment of the Civil Chamber of the Supreme Court states, as we have indicated, that it is not possible to distinguish in the Administrator’s remuneration whether it corresponds to purely advisory or deliberative functions or whether it corresponds to executive functions.
This would also correspond to the doctrine developed by the Supreme Court Labour Chamber, known as the “link theory”, by virtue of which, when there is a concomitance of functions between member of the board of directors and special senior management employment relationship (RD 1382/1985), the organic link and thus the commercial nature of this complex legal relationship or of both legal relationships prevails (see, among others, STS 12-03-2014 EDJ 2014/42925). Given the commercial nature of the mixed legal relationship as a board member and senior executive with full powers, there would be no doubt about the legal nature of its remuneration in this case.
The question arises whether we are talking about the coexistence of two legal relationships, one mercantile and the other labour, when the latter will not be a special senior management employment relationship, but a common employment relationship; that is, that of a Director without powers inherent in the legal ownership of the company. In this case, we believe that the mercantile remuneration received as a member of the Board of Directors should be compatible with the salary received by the employee, and we also believe that the doctrine now established by the First Chamber does not prevent all the remuneration received from being for the development of the employment relationship and that, although there is a statutory provision for the remunerated nature of the position, it should be remuneration free.
However, this last point raises a question for us which would be, since remuneration as a director is provided for in the bylaws, the board of directors could covertly establish an increase in their salary through mercantile allowances for being part of the board, which, in turn, would have an impact on the possible compensation to be paid for the termination of their employment contract.
In any event, we believe that the Supreme Court (Civil Chamber) has sought transparency and good corporate governance in its ruling and that this requires that if an employee is to be paid as a member of the board of directors, this must be established in the articles of association and, where applicable, the board of directors must specify how much such remuneration would amount to within the limits established in the bylaws, distinguishing it from that received as a member of the board of directors.