How will the executive directors’ remuneration work after Supreme Court judgment 98/2018?

The recent judgment issued by the Spanish Supreme Court (98/2018) on 26 February has changed the position imposed on the remuneration system for directors with executive functions.

Until judgment 98/2018, the DGRN (Directorate General for Registers and the Notariat), the commercial courts and most of the doctrine interpreted that articles 217 and 249 of the LSC (Spanish Corporate Enterprises Act) were not applied cumulatively but as an alternative. However, the Supreme Court has ruled against the position that had been imposed, so the companies must now adapt their remuneration policy to this new situation.

Before continuing, we must highlight the content of those two articles (article 217 regarding the directors’ remuneration in general and article 249 regarding the directors with executive functions), which are worded as follows:

“Article 217. Directors’ remuneration.

  1. The role of director is unpaid, unless the company bylaws provide otherwise and establish a remuneration system.
  2. The established remuneration system shall determine the concept or concepts for which directors should be remunerated and which may consist, among others, of one or various of the following:

a) a fixed assignment,
b) attendance fees,
c) shares in the profits,
d) variable remuneration with general indicators or benchmarks,
e) remuneration in shares or linked to their performance,
f) compensation for dismissal, assuming that the dismissal was not motivated by the breach of the director’s duties and
g) any savings systems or provision deemed appropriate.

3. The maximum amount of annual remuneration for directors in their capacity as such must be approved by the general meeting and shall remain valid until amendment thereof is approved. Unless the general meeting decides otherwise, distribution of remuneration among each director is established by agreement with the same and, in the case of the board of directors, by said board’s decision, which must take the duties and responsibilities of each director into consideration.

4. In all cases, directors’ remuneration must remain proportionate to the significance of the company, the economic situation at that moment and the market standards of comparable companies. The established remuneration system must be designed to promote the long-term profitability and sustainability of the company and incorporate the necessary precautions to avoid excessive risk-taking or rewarding unfavourable results.”

“Article 249. Delegation of powers of the board of directors.

  1. Unless otherwise specified in the company bylaws and without prejudice to the powers of attorney that may be granted to any person, the board of directors may designate from among its members one or more delegated directors or executive committee members, establishing the content, limitations and duties of said delegation.
  2. The permanent delegation of any of the board of directors’ powers to the executive committee or to any delegated director and the appointment of any director to occupy these positions shall require the favourable vote of two-thirds of the board members and shall not take effect until registration in the Business Register.
  3. When a member of the board of directors is nominated as a delegated director or is granted executive duties with regards to other title, it shall be necessary to draw up a contract between said director and the company, which must be pre-approved by the board of directors with a favourable vote of at least two-thirds of its members. The director in question must refrain from attending the deliberations and from participating in the vote. The approved contract must be incorporated as an annex to the session’s minutes.
  4. The contract shall detail all the items for which remuneration could be obtained for the completion of executive duties, including, when relevant, eventual compensation for early cessation of said duties and sums granted by the company for insurance premiums or as contributions to savings schemes. The director may not receive any remuneration for the performance of any executive duties whose quantities or concepts are not detailed in this contract.

The contract must conform to the remuneration policy approved, where applicable, by the general meeting.”

Although the idea that article 249 of the LSC was applied to the directors with executive functions as an alternative to article 247 of the LSC and, therefore, when a director was delegated with executive functions, the remuneration for this item was not linked to the system envisaged in article 217, Supreme Court judgement 98/2018 has now ruled against that interpretation.

Consequently, from now on the directors’ remuneration will also be affected by the “bylaw reserve” regarding the directors’ remuneration (envisaged in article 217 of the LSC). In other words, the Supreme Court understands that articles 217 and 249 of the LSC are applied cumulatively. This is due mainly to the fact that the previous interpretation enabled the governing bodies to skip the limits established in the bylaws and by the general meeting.

In short, from now on the remuneration for directors with executive functions must pass the following three levels:

  1. the bylaws must allow the directors’ remuneration;
  2. the general meeting must approve the maximum remuneration to be received by the directors and, where applicable, the detailed remuneration policy; and
  3. the board of directors must approve the delegation of executive functions and the remuneration to be received for them, respecting the bylaw limits and those established by the general meeting.

Article from AGM Abogados.

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