Why is it important to pay attention to the remuneration of directors?
- Directors of Spanish companies usually receive remunerations for different concepts and these can have their origin in different roles that the directors play in the organization.
- Some of these remunerations have a different origin to the performance of the position of director, but this does not mean that they can be disregarded when it comes to regulating the appropriate way of receiving them.
- It is important to ensure that these remunerations are established in accordance with the legal framework in force at any given time, and this must be analyzed from a commercial, labor and tax perspective, which in recent years has been the subject of various pronouncements and by administrative and rulings judicial bodies that it is important to bear in mind.
- Otherwise, we can find ourselves in undesirable situations such as, for example, that the deductibility of the tax expense is challenged; that conflicts arise between the shareholders or even that it can be argued that the director is failing to comply with his or her duties of loyalty towards the company.
What are the key issues to be taken into account?
1) In the first place, it must be taken into account that the doctrine and jurisprudential criteria regarding the remuneration regime for directors and the deductibility of the tax expense have been changing over the last few years and therefore, there are no single answers, nor single solutions. On the contrary, it is necessary to pay attention to the concrete context and the specific situation in which we find ourselves in order to regulate it appropriately.
What is valid for the directors of one company may not be equally valid for the directors of another and therefore, it is very convenient to analyze it case by case before making any decision.
2) Until 2018 it had been accepted more or less peacefully and by a majority doctrinal sector that certain remunerations of those directors who performed executive functions did not necessarily have to be established in the corporate bylaws and therefore, a greater confidentiality of the same could be ensured.
3) In 2018, following the 2014 reform of the Capital Companies Act for the improvement of corporate governance, there was a pronouncement by the 1st Chamber of the Spanish Supreme Court that, in a way, departs from the thesis, mostly accepted, which defended that the remuneration of CEOs did not have to be stated in the bylaws.
4) This change in the SC’s interpretative criterion caused a headache for many since, for obvious reasons of confidentiality and necessary flexibility, some companies were reluctant to make public more information than the strictly necessary.
5) Following the Supreme Court’s pronouncement, there have been subsequent pronouncements by the General Directorate of Security and Public Faith that have helped to clarify some issues and advocate for greater flexibility.
What is the best way to address all these issues and what steps should be taken?
The first step is to analyze the specific situation of the company and its sector; the structure of the management body and the origin of the remuneration that the directors may receive, depending on whether it is due to their appointment as director or to the provision of other types of services (other than management) to the company.
Once this analysis has been made, it is necessary to assess whether or not it is necessary to carry out some kind of amendment to the corporate bylaws to cover current or future remuneration.
In addition, attention should be paid to the need to document or not in a contract the functions to be performed and remuneration to be received and to document it adequately.
Any remuneration must be consistent with the remuneration policy and the maximum annual amounts approved by the shareholders’ general meeting.
The relevant corporate resolutions should be passed by both at the general meeting and at the management body, paying particular attention to quorums, majorities and, where applicable, duties to abstain from taking part or not, to ensure that resolutions concerning remuneration are adopted in an appropriate manner and to reduce the risks that the resolutions may be challenged or that a corporate action for liability may be brought.
If the necessary measures are taken, we will have solid arguments to defend ourselves against possible corporate conflicts and also in the event that the deductibility of the tax expense is questioned.
