The Spanish Supreme Court, in its judgment dated 26 February 2018, has analysed the directors’ remuneration system for the first time following the changes introduced by Law 31/2014 of 3 December, which amends the Spanish Companies Act to improve corporate governance. The judgement offers an interpretation of the remuneration of directors of non-listed companies different from that defended by the Spanish General Directorate of Registries and Notaries and the majority of scholars.
According to this new interpretation:
- The bylaws of non-listed companies, when determining whether or not a position is to be remunerated, must take into consideration the remuneration of the executive director(s), and must establish the system for remuneration, including compensation for the performance of executive functions (which, until now, should only be reflected in a contract to be entered into between the company and the executive director(s)).
- Remuneration corresponding to the performance of executive functions must be included in the maximum amount of remuneration to be determined by the shareholders at the general meeting, along with any other directors’ remuneration. This is without prejudice to the fact that the management body may further resolve, if the shareholders themselves have not already done so, the distribution of the corresponding amount among the directors, with regard to their respective functions and responsibilities.
The directors’ remuneration system would be structured on three levels:
(i) The first level is constituted by the bylaws. The bylaws must establish the paid or unpaid nature of the position (in the latter case, either expressly, or through the absence of any provision in this regard). If the position is to be remunerated, the bylaws must establish the remuneration system, which will determine the remuneration items to be perceived by the directors for the performance of their functions (including the executive functions), and that may consist, among others, of one or more of those provided by law (roughly, fixed amounts, attendance allowances, profit-sharing schemes, bonuses, delivery of shares or stock options or other share-based compensations, severance payments and savings schemes).
(ii) The second level is constituted by the resolutions of the shareholders at the general meeting. The shareholders must establish the maximum amount of annual remuneration of the directors (including the compensation for performance of executive functions), without prejudice to them adopting a broader agreement that establishes a remuneration policy (mandatory for listed companies). This maximum limit determined by the shareholders will remain in force until they approve a new limit.
Likewise, unless otherwise provided in the bylaws, at the general meeting the shareholders may issue instructions to the management body regarding remuneration of directors, and in particular of executive directors, or make the management body’s decisions or agreements on such matters subject to shareholders’ approval.
Further, according to the law, at the general meeting the shareholders may intervene in the directors’ remuneration when the bylaws include, among the remuneration items, (i) a profit-sharing scheme with a maximum rate, in which case the shareholders will determine the applicable rate within the maximum established in the bylaws, and/or (ii) the delivery of shares or stock options, or other share-based compensations, given that their application will require an agreement of the shareholders at the general meeting which must include the maximum number of shares that may be attributed in each financial year to this remuneration system, the stock options price or price calculation system, the value of the shares that may be used as a reference, if applicable, and the duration of the plan.
(iii) The third level of the system is determined by the decisions or resolutions of the directors themselves. The directors must agree on the distribution of the remuneration among themselves (considering, in the case of the board of directors, the functions and responsibilities entrusted to each director), unless the shareholders have already done so at the general meeting.
In addition, if the management of the company is entrusted to a board of directors and the latter appoints one or more executive directors or executive committees from among its members, the company, through the board of directors, must enter into an agreement with each of the directors to whom the board has delegated executive powers. This agreement must be approved by the board of directors with the favourable vote of two thirds of its members and the affected director must abstain from both the deliberation and the voting. The agreement must set out all of the remuneration items for the performance of executive functions, consistent with the “statutory framework” and the maximum annual amount set out by the shareholders at the general meeting.
Finally, the Supreme Court considers that the requirement for the remuneration system to be included in the bylaws must be construed in a less rigid manner and without the rigorous precision requirements that had sometimes been established in different resolutions and judgments, to accommodate the board’s scope of autonomy recognized by the law, within the statutory framework and the maximum amount of annual remuneration approved by the shareholders at the general meeting.
The Supreme Court’s judgement has created a stir among legal experts, given that it reinterprets the legal provisions regarding remuneration of directors of non-listed companies, in particular as regards remuneration of executive directors, in a way which is contrary to how the promoters of the amendments to the Spanish Companies Act of 2014 wanted them to read, and based, not on new grounds or grounds beyond the amendments, but on the literacy of the amended provisions themselves. We must now await a new judgement of the Supreme Court on this matter to see if this interpretation is confirmed.