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The Supreme Court turns its attention to the regulation of the remuneration of CEOs

| News | Corporate Law and M&A

Pedro Albarracín analyses the Supreme Court ruling in relation to the regulation of the remuneration of the Managing Directors

On 26 February, the Supreme Court handed down a ruling that could lead to a corporate and tax earthquake in the remuneration system for executive directors (those to whom executive powers have been delegated), with effects both for the companies themselves and for their executive directors.

The main issue is whether or not the remuneration of executive directors must be recorded in the Articles of Association.

From the Law on Capital Companies (LSC) operated by Law 31/2014, the predominant criterion, and followed by several resolutions of the DGRN (Directorate General for Registers and Notaries), a duality of remuneration systems were recognised, on the one hand that corresponding to the directors in their capacity as such and, on the other, that of the directors to whom executive powers were delegated.

The first would be regulated by the provisions of articles 217 and following of the LSC, requiring a triple system of control, namely: (i) The Articles of Association should reflect this remuneration, as well as the remuneration system or systems and the remuneration items to be received by the directors; (ii) The fixing by resolution of the General Meeting of Shareholders of the maximum annual and joint amount to be received by the directors (as well as other matters regarding certain remuneration items, such as profit-sharing or delivery of shares); and (iii) the power of the directors themselves, unless otherwise agreed by the General Meeting of Shareholders, to agree on the distribution among them of the approved remuneration.

Remuneration system

On the other hand, with regard to the specific remuneration system for executive directors, the same thesis defended that it would be regulated autonomously in article 249 of the Law on Capital Companies, according to which it requires the formalisation of a contract between said director and the board of directors, in which "all the items for which he may obtain remuneration for the performance of executive functions" must be detailed. Consequently, according to the thesis, it would not be necessary to establish the remuneration of executive directors in the bylaws, and it would be sufficient to approve it in accordance with the provisions of article 249 of the Corporations Act and to have the corresponding contract with the executive director who collected said remuneration standardised. In view of the foregoing, the Supreme Court has concluded that both systems (Article 217 and 249 LSC) are not alternative but cumulative, and therefore the remuneration of executive directors must comply with the general requirements for the remuneration of any director and with the necessary contractual formalisation required by Article 249 LSC. It is not uncommon to find at present companies in which, for example, only the position of managing director is remunerated, and the position of director is therefore regulated as free of charge in their bylaws, or others in which the joint annual maximum limit of remuneration approved by the General Meeting does not consider the remuneration of executive directors. The effects of the judgement in such situations are varied, including the following, among others:

a) In order for the directors' remuneration to be a deductible expense for the company in relation to corporate income tax, all business requirements must be met. Therefore, in situations such as those described above, the deductibility of such remuneration may be questioned in those years when it is not prescribed.

b) The irregularity of the remuneration paid to the executive directors could lead to shareholders considering taking action against the company and/or the directors with a view to recovering remuneration not provided for in the Articles of Association or higher than that agreed by the General Meeting.

Additional practical doubts after new criterion

Apart from the foregoing, the new criteria set by the Supreme Court raises additional practical doubts that must be resolved in the immediate future, such as, among others: (i) In what situation are the current contracts of executive directors who do not comply with the statutory regime? (ii) What is the legal and practical-business framework of a contract -that of article 249- that will be formalized by two parties (board and executive director), but whose fulfilment depends on the will and action of a third party (Board) that, through its agreements (modifying bylaws and/or approving a lower annual maximum amount) may unilaterally determine that the remuneration agreed in said contract becomes irregular?

Perhaps being aware of the practical problems that the ruling raises, the Supreme Court itself ends its ruling with what is itself a rather vague plea to our commercial registrars, pointing out that the statutory framework must be "understood in a more flexible way" so as to "adapt the remuneration of the managing or executive directors to the changing requirements of the companies themselves and of the traffic in general".

In view of all this, it will be advisable for all the companies concerned to revise their bylaws to adapt them to the new situation that has arisen following the Supreme Court ruling.


For further information, please contact:

Pedro Albarracín Morante

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