For the first time -after the changes introduced by Law 31/2014- the Spanish Supreme Court has analysed the remuneration regime of company's directors by offering an interpretation that differs from the interpretation generally defended to date, not only by the vast majority of scholars, but also by the Spanish General Directorate of Registries and Notaries, bringing back the debate over the remuneration of the executive directors. In this article, we focus on certain critical considerations raised by scholars in connection with 3 of the main arguments stated by the Spanish Supreme Court in its ruling: the new interpretation of the expression "in such condition"; the usual remuneration systems of the executive directors; and the protection of transparency as well as the information rights of shareholders.
According to the aforementioned ruling, the remuneration of directors performing executive tasks shall not only be included in the services agreement between the director and the company, as laid down in article 249 of the Spanish Companies Act (Ley de Sociedades de Capital "LSC"), which requires approval of two thirds of the board of directors, but it shall also be subject to the provisions of article 217 of LSC (that is to say, a bylaws' provision stating that the director's position is remunerated together with the remuneration system; the approval by the general shareholders meeting of the maximum amount of such remuneration; and -unless otherwise determined by the general shareholders meeting- the distribution by the management body of the approved amount among the directors, based on their functions and responsibilities). Therefore, the relationship between articles 217 and 249, which establish the requirement of a bylaw provision and the need for an agreement between the executive director and the company, respectively, is not -as it had been understood until now- alternative; on the contrary, these articles shall be cumulatively applied when it comes to the remuneration of executive directors.
Following the recent debate about this matter among scholars, we would like to address some critical considerations regarding this new criteria adopted by the Spanish Supreme Court, which reinterprets the remuneration regime of the executive directors contrary to what has been generally accepted to date:
Directors "in such condition"
The highest body of the Judiciary departs from the opinion of the majority of scholars on the basis that the expression contained in article 217 of LSC "directors in such condition" does not aim to make a distinction between deliberative and executive functions -as both are inherent to the condition of director- but it intends to distinguish between the duties inherent to the position of director and those functions that are not related to such position but may be performed by a director under the services agreement established in article 220 of LSC. This argument raises 2 main issues:
- This new interpretation differs from that given by the law to the expression "directors in such condition" when governing the remuneration of executive directors in listed companies. Such regulation raises no doubts since "the remuneration of the directors in such condition" (article 529 septdecies of LSC) is determined by opposition to "the remuneration of the directors for the performance of executive functions" (article 529 octodecies of LSC).
- The Spanish Supreme Court does not seem to distinguish between simple (sole director, joint directors and joint and several directors) and complex (board of directors) forms of management, since it forgets that collegiate bodies cannot perform executive functions themselves because, as legal entities, these bodies have legal capacity but lack of capacity to act. Consequently, a director acting "in such condition" does not have executive functions itself and it is the board -as a collegiate body- through the approval of corporate resolutions, the subject entitled to appoint the person who shall perform executive functions.
Usual remuneration systems
The Court remarks that articles 218 and 219 of LSC -developing article 217- establish the most usual remuneration systems applying to executive directors: profit-sharing schemes and payment in shares. Therefore, if we assume that article 217 only governs the remuneration of those directors who do not perform executive functions, we would be excluding those special forms of remuneration from its most common scope of application.
- It is also common to apply the referred systems to simple management forms (sole directors, joint directors and joint and several directors), to the extent that deliberative and executive functions are performed by the same person in such cases.
- This argument does not seem to be sufficient to justify the requirement of a bylaw provision and the involvement of the general shareholders' meeting, because often the officers in companies who do not hold any position as directors and whose remuneration is not included in the company's bylaws, are frequently better remunerated than executive directors.
Protection of transparency and information rights of shareholders
The Spanish Supreme Court warns that a different interpretation from that offered in its resolution would seriously jeopardise transparency and information rights of shareholders (in particular, minority shareholders) with regard to the remuneration of executive directors.
This argument raises at least 2 issues:
- Any shareholder holding at least 1% of the share capital in a company (whether individually or jointly) has the right to challenge the board of directors' resolution approving the executive director's agreement, as set out in article 249 of LSC. Consequently, such shareholder can, although holding no representation in the board, challenge such resolution if he considers that it is disproportionate or affects the company's interest.
- In order to promote transparency and the right of shareholders to be informed, it would suffice to propose rules aimed at guaranteeing publicity and the granting of information. However, the Spanish Supreme Court appears to have rejected this possibility, as it understands that the requirement of a bylaw provision on the directors' remuneration is the only way to guarantee transparency and the right of shareholders to be informed.
As we have seen, the Spanish Supreme Court's resolution, far from putting an end to the debate about the remuneration of executive directors, contravenes what has been widely accepted from 2015 until now. Furthermore, it raises numerous questions and fails to explain some relevant issues affecting company's management, such as the alternative or cumulative nature of the remuneration systems established in the company's bylaws or the specific regulation on the remuneration of executive directors in listed companies -as this type of companies have been expressly and continuously excluded from the scope of application of the Spanish Supreme Court's ruling-.