Bylaws and directors’ compensation

The Bylaws and the remuneration of the Directors. What happens when the Bylaws state that the position of director is “Unpaid”?

In many cases, the Administrator of the Company is usually, at the same time, Chief Executive Officer. That is to say, he/she can exercise both management and administrative functions of the Company.

And increasingly, it is frequent to find in the Articles of Association that the position of Director is free of charge.

At this point, we wonder whether this affects in any way the remuneration of the Chief Executive Officer.  So, what happens when the Bylaws state that the position of Director is “unpaid”?

Compensation of the Chief Executive Officer

The Chief Executive Officer of a Company may receive remuneration.  And he/she can receive it even if the Bylaws state that the position of the director is “Non-Remunerated”. This has its basis in the RDGRN of June 17, 2016 (BOE of July 21).

Before this resolution, the Bylaws could not contain a clause that read as follows:

“The position of director shall be free of charge, with the exception of the performance by the Chief Executive Officer Mr. … Who shall perform effective management functions of the Company.  He shall be remunerated by means of the formalization of an employment contract and shall be registered with the Social Security. The amount of said remuneration shall be agreed annually at the Ordinary General Shareholders’ Meeting”.

The RDGRN of June 17, 2016 (BOE of July 21) upholds the appeal filed against the refusal of registration. Consequently, it states that the remuneration system for the aforementioned CEO must be determined, in accordance with Article 217 LSC”.

The resolution recognizes that there is a duality of functions that can perfectly well converge in a single person.

It also explains that the director’s remuneration, which is deliberative, control and advisory, must be regulated in the Bylaws.

Valid types of compensation

It may consist of fixed or variable remuneration, in cash or in species, attendance fees or profit sharing. Share-based compensation, savings systems, and any other admissible mechanism or a combination of different modalities are also valid.

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Is the administrator who is unaware of the injury that his or her actions generate responsible?

The liability of company directors is regulated in articles 236 to 241 bis of the LSC. The administrators are responsible for the damages caused by their acts or omissions to the company, to the partners or to third parties.

Agreement between the Chief Executive Officer and the Company.

We reproduce literally what the General Management resolves.  Not only does it provide a solution to the specific problem. It establishes the way for almost all similar cases:

“But, on the other hand, it provides. If a member of the Board of Directors is appointed managing director or is attributed executive functions by virtue of another title, it will be necessary for a contract to be entered into between him and the Company.  This shall detail all the items for which he/she may obtain “remuneration for the performance of executive duties”. Including, as the case may be, the possible compensation for early termination of such functions. Also, the amounts to be paid by the Company for insurance premiums or contributions to savings systems. In addition, such contract “must be in accordance with the remuneration policy approved, if applicable, by the general meeting”. (Article 249, paragraphs 3 and 4).”(…)

Statutory reserve for the directors’ compensation system

Regarding the statutory reserve, the following should be considered. Remuneration for the performance of the duties of Director constitutes a bonus with respect to those inherent to the position of Director.

However, the rule of Article 217.2 of the Capital Companies Act is not applicable. This imposes the statutory reservation of the system of directors’ remuneration.

Therefore, no objection can be raised against the statutory provision that requires the amount of such remuneration to be agreed annually at the General Meeting.

This provision is in line with the legal requirement that the aforementioned contract must be in accordance with the approved remuneration policy.

Conclusion

In conclusion, there must be a clause in the bylaws that establishes the gratuitous nature of the position of Director. In addition, it must include the remuneration of the position of CEO.

And finally, the contract between the company and the CEO must be formalized.

If this article has been of interest, we also suggest you to read the following article published on our website: Chairman or the Board of Directors? Who convenes the Meeting?.