Spanish court rules on liability action against a director for excessive remuneration
Published on 23rd May 2023
Debate revolves around whether the remuneration was proportionate or violated the provisions of the Companies Act
The Provincial Court of Barcelona has ruled on the disproportionate remuneration received by the sole director and majority shareholder of a real estate management company and the infringement of the duty of loyalty in the SAP of Barcelona 15ª 1387/2022, of 28 September.
At a general shareholders' meeting of a family-owned company, with only two shareholders holding 66.67% and 33.33% of the share capital respectively, it was agreed, with the favourable vote of the majority shareholder, to fix a gross annual remuneration for the sole director (the majority shareholder and defendant) of €88,800 (€7,400 per month), which is significantly higher than the remuneration he had previously received as managing director of the company.
The minority shareholder and plaintiff brought a liability action against the sole director. He argued the disproportionality of the approved remuneration as it represented 28.33% of the turnover for 2017 and 24.33% for 2018 and the breach by the sole director of the duty of care and loyalty for going against the company's corporate interest, thus requesting the repayment in full of the remuneration received by the sole director.
The defendant (and sole director), by opposing the claim, stated that the remuneration received as sole director was still lower than the remuneration previously received by all board members (composed by three members, with the defendant acting as chairman and managing director) and justified the amount of the remuneration based on the value and complexity of the company's assets and the difficulty of its day-to-day management.
The first instance sentence dismissed the claim on the grounds that that the bad faith of the defendant had not been proven since his remuneration was approved following legal and statutory provisions and was not disproportionate given the significant company's size.
During the second instance court debate, the main focus was to determine if the defendant's actions were considered unlawful for approving a disproportionate and abusive remuneration which undermines the company's interest and whether such conduct caused any harm to the company's assets.
Duty of loyalty and company's interest
As stated in article 227 of the Companies Act (CA), a director must act with the loyalty of a faithful representative, in good faith, and in the company's best interests. The STS 889/2021, dated 21 December, further clarifies that while the company's interest is not limited to the shareholders' interest, it is primarily shaped by it. The company has a connatural economic purpose (profit), which presided over its incorporation and the development of its activity, and which ordinarily redounds to the benefit of its shareholders. This does not prevent that, by recognising the company's own legal personality, distinct from that of its shareholders, and by providing it with a corporate purpose and, consequently, with an objective, it is possible to refer to it as the interest of the company itself. This corporate interest is not identified with that of the shareholders, but it is nourished by the interest of the latter, and that is why case law refers the corporate interest to the interest of the shareholders as a whole. The key point is that directors must not prioritise their personal interest over those of the company, primarily shaped by the interests of the shareholders as a whole, provided that the conduct of the directors, as opposed to what would have been agreed by the shareholders, does not harm the legitimate rights of third parties.
The second instance debate revolves around whether the remuneration received by the sole director violates the provisions of article 217.4 of the CA. This article stipulates that remuneration must always be proportionate to the company's significance, its economic situation at any given moment, and the market standards of comparable companies. Thus, the question arises as to whether the director breached the duty of loyalty outlined in article 227 of the CA.
To address this issue, the Provincial Court concluded that neither the duties of the former managing director, now sole director, nor the company's economic situation had changed enough to justify the increase in remuneration from €5,000 per month that the defendant received as managing director to €7,400 per month that he received as sole director. According to the court, the only relevant change in the company was the shift from a board of directors to a sole director, which did not entail an increase in the defendant's obligations or responsibilities.
Therefore, the court justified the proportionality of the defendant's previous remuneration in his capacity as managing director (that is, €5,000 per month) but found, however, a breach of the duty of loyalty due to the increase, during 2017 and 2018, of his remuneration from €5,000 to €7,400. Therefore, the Provincial Court, partially upholding the claim, ordered the defendant to pay the company the sum of €57,600, this being the result of multiplying (x) the excess of €2,400 per month between the remuneration previously received in his capacity as managing director and that received as sole director, (y) by the 24 monthly payments corresponding to the fiscal years 2017 and 2018.