Introduction
Background
Decision
Comment
In a decision issued on 25 May 2021, the General Directorate for Legal Security and Public Faith (DGSJyFP) ruled on bylaw wording relating to the remuneration of directors and the inclusion of payment for performing extraneous duties to those contemplated in the role of director.
The decision settles an appeal made by the notary public against the refusal of a registrar from the Madrid Commercial Register XXIII to file the articles of incorporation of a limited liability company.
Among other issues, the registrar had understood that the bylaw wording relating to remuneration received by directors also included payment for duties extraneous to those considered part of the role of director, which would be in breach of the law handed down from the Supreme Court and the DGSJyFP.
The wording of the clause states the following:
The role of director is paid and consists of a fixed amount each year as set by the general shareholders' meeting, and not by means of a share in the profits. Performing the role of director is compatible with carrying out other employment tasks for the entity. If such tasks are company management and governance, the remuneration for these roles will rest upon a fixed amount each year to be decided at the general shareholders meeting.
According to the registrar, although the very nature of a company directorship – a corporate relationship – does not impede employment or civil agreements with the company that are remunerated accordingly, the Supreme Court has set conditions stating that in such circumstances, the duties carried out by a company director must be distinct from those that fall within the responsibility of the governing body, thereby excluding contracts for senior management roles. Otherwise, the tasks carried out by a director in accordance with the employment relationship would be included in the nature of the director role.
These employment relationships and payments are incompatible, as the nature of the role as director would take precedence over the employment relationship, known as the doctrina del vinculo único (single-link doctrine).
Furthermore, the registrar asserted that the law has established that when a director is carrying out activities relating to the board of directors of a company simultaneously to senior management and company governance activities, whether this relationship can be described as corporate or employment in nature depends not upon the tasks being carried out, but rather upon the nature of the relationship. If it is a subordinate relationship where orders are followed, then it will be considered as employment.
Therefore, only in cases of normal employment relations under a common regime can a director simultaneously carry out board management activities and those arising from an employment relationship.
The decision issued on 25 May 2021 considers the way in which directors' remuneration is outlined in the bylaws, including remuneration for extraneous duties.
Supreme Court law states that the overall reason the requirement to outline directors' remuneration in bylaws exists is to give the maximum amount of information to shareholders and to allow greater control over directors in this sensitive area. It is for this reason that Article 217 of the Corporate Enterprises Act requires that the remuneration system for directors (if their role is a paid one) be included in the bylaws.
The bylaws should clearly set out the system, whether payment is through a share of profits, allowances, a monthly or annual salary, pension plans, personal use of corporate assets, shares or share options, or any other system they wish to use.
According to the DGSJyFP, the following should be dealt with separately. First, remuneration for the role of director and remuneration for extraneous duties such as those tasks that differ from company management and corporate governance. These do not need to appear in the bylaws, but rather in corresponding contracts.
The DGSJyFP believes that:
in the current matter, where the role of director is paid [...] the remuneration system for directors is duly outlined in the bylaws for carrying out duties inherent to that role, meaning that the bylaws only fail to establish the remuneration system for those 'other employment duties with the company' that are different from those within the role of director – which, in accordance with the same bylaws, are compatible. By interpreting the clause being debated in this way, it should be understood that what is considered to be remuneration for company management and corporate governance duties is a set amount that is decided each year by the general shareholders' meeting.