Remuneration of Administrators: Requirements and Limits

The remuneration of the management body is a complex issue that has given rise to numerous controversies on which case law has repeatedly ruled.

One of the main problems we encounter in this area is whether there is some kind of limit or requirement that directors' remuneration must comply with.

In this regard, it should be noted that both the law and case law establish a series of limitations and requirements with which the remuneration must comply, which are set out below:

1. A statement in the Articles of Association that the position is remunerated.

Article 217 of the Spanish Companies Act (LSC) stipulates that the office of director is free of charge, unless the Articles of Association provide otherwise.

Therefore, it is necessary for the director to receive remuneration for his office, which is laid down in the company's Articles of Association..

2. Determination in the Articles of Association of the form of remuneration

The Articles of Association shall also determine what such remuneration shall consist of, which may be one or more of the following: (a) a fixed amount; (b) attendance fees, (c) profit sharing, (d) variable remuneration with indicators or general benchmarks, (e) remuneration in shares or linked to their performance, (f) severance payments, provided that the termination was not motivated by breach of the duties of director and, (g) such savings or welfare systems as may be deemed appropriate.

Therefore, the director's remuneration shall be in the form determined in the articles of association, may not receive any allowance other than that provided for in the statutes..

3. The maximum annual amount of the remuneration has to be established at the General Meeting.

The Each year, the General Meeting shall determine by resolution the maximum annual amount for all the administrators and, unless otherwise agreed by the General Meeting, the distribution of remuneration among them shall be established by resolution of the shareholders and, in the case of the Board of Directors, by decision of the Board of Directors.

It is also important to bear in mind that, until such time as the Board agrees on a different amount, the amount initially set for previous years will be understood to be in force.

Notwithstanding the above, one of the main controversies arises with regard to the setting of this amount, as it is common in practice to find situations in which the Board approves and ratifies remuneration received in previous years.

In this regard, a recent Supreme Court Judgment of 13 May 2021, which states: "The ratio of the art. 217.3 LSC is that this maximum amount of annual remuneration is approved by the general meeting and that it remains in force until it is changed by the general meeting itself. However, both the initial setting and any amendments need not necessarily be made before the beginning of the financial year to which it is to apply. It is also in line with the purpose of the provision that this approval is made, as in this case, very late in the financial year, as what is relevant is that the board gives its authorisation or agreement during that financial year.."

Therefore, the maximum amount to be received by the directors shall be fixed in the current financial year, It is not necessary to do so prior to the year, but under no circumstances may it be approved after the end of the year, and therefore amounts received in previous years may not be approved.

4. Approval of the remuneration by the managing partner

Another of the most controversial issues regarding directors' remuneration is whether the majority shareholder, who is also a director, can vote to establish the amount of his or her remuneration or, if so, whether this is one of the cases of prohibition to vote established in article 190 LSC.

In this sense, the aforementioned Supreme Court Judgment has ruled that, in principle the majority shareholder who holds the status of director may vote for the resolution approving the remuneration to be received, but, in that case, he must prove that the resolution in question does not harm the company's interest.

Therefore, in the case of a company in which there are minority shareholders and the majority shareholder is a director, if the minority shareholder considers that, in accordance with the parameters established by law, the remuneration set is detrimental to the company's interests, he may challenge this agreement.

5. Remuneration in the case of Managing Directors

Finally, with regard to the remuneration of managing directors, a Supreme Court ruling was handed down in 2018 that went against the criteria that had been established by both the General Directorate of the Registry and Notaries and the Provincial Courts.

Until then, it was understood that the remuneration regime for executive directors was different from the general regime described above, so that it was very common to find companies where the position of director was free but the executive directors received remuneration for the functions performed.

In this regard, the Supreme Court's ruling of 26 February 2018 stated: "The art. 217 The LSC continues to regulate, as its title indicates, the "remuneration of directors", and its first section requires the articles of association to establish, if the position is not to be free of charge, the remunerated nature of the position and to determine the system of remuneration for the "position of director". The provision does not distinguish between different categories of directors or forms of management body. Specifically, in the case of a board of directors, it does not distinguish between executive and non-executive directors..

The location of the provision, its reference not to "non-executive directors", not even to "directors in their capacity as such" but to directors in general, shows that the statutory reserve requirement for directors' remuneration extends to all company directors, including the members of the board of directors and, within them, the managing and executive directorsThe Board's main decisions on directors' remuneration are taken in respect of these directors.

An interpretation of the new legal regime for the remuneration of company directors such as the one made by the Provincial Court means, as the appealed judgement itself acknowledges, seriously compromising transparency in the remuneration of the executive director and negatively affecting the rights of shareholders, especially minority shareholders, in unlisted companies, by severely restricting the importance of the role played by the general meeting".

In this way, it is not possible to agree on a remuneration for executive directors if the articles of association state that the position is free of charge.but such remuneration must comply with the parameters set out above: (i) it must be stated in the Articles of Association that the position is remunerated; (ii) the General Meeting must approve the maximum amount to be received by the directors, including the amount to be received by the executive directors and; (iii) the board itself shall distribute this amount among the different directors in accordance with the functions and responsibilities assumed by each of them.