The Supreme Court has clarified that a company's annual general meeting is not restricted to approving the remuneration of directors prior to beginning of a given financial year and can make such approvals throughout the corresponding year. The Court has also stated that remuneration approvals do not imply the granting of a right, as per article 190.1(c) of the Corporate Enterprises Act and, therefore, the controlling shareholder who is also the director to be remunerated is allowed to vote in the general meeting. Nevertheless, there is a conflict of interest that leads to reversing the burden of proof that is usually required to analyse whether the content of the agreement is abusive.
The remuneration regime that is applicable for managing directors still causes problems, despite the amount of time that has passed since it was reformed in 2014 and the numerous decisions that have been issued since. Proof of this can be found in Supreme Court decision 1859/2021, dated 13 May 2021, which arose from a challenge of a shareholders' general meeting agreement to determine the remuneration of a limited liability company director.
This decision considered the time at which the board must decide upon the remuneration of a director and how the conflict of interests that affects a shareholder who is simultaneously the director to be remunerated, may affect the shareholders' meeting agreement.
The matter settled by the Supreme Court refers to a limited liability company that included remuneration for directors within the bylaws, to be paid by means of a salary that would be agreed "for each financial year by the shareholders' general meeting". The conflict arose when, in a meeting held in 2015, remuneration was agreed for a director for the financial years of 2012 to 2015, with a substantial increment from the amount that she had been receiving prior to 2012, given that the value also included remuneration for her role as director general. The shareholders who disagreed with this decision challenged it on the grounds that the board could not act retroactively and that there was a conflict of interest that should have prevented the director general from voting, among other reasons.
The shareholders' general meeting regarding remuneration relating to the 2015 financial year did not take place until 16 December 2015. The Supreme Court's ruling establishes a timeframe for the general meeting to determine specific remunerations for a given financial year. In this case, the Supreme Court stated that nothing prevented the remuneration from being set at a "very late stage in the financial year", given that the purpose of the rule is to ensure the amounts are decided upon by the shareholders' general meeting. Therefore, the only limit for such decisions is the end of the corresponding financial year.
Conflict of interest
The Supreme Court first had to decide whether there was a conflict of interest to be considered in this case as the shareholder voting in favour of the remuneration was not the director to be remunerated during that time and the vote was cast in the name of a single shareholder company (of which she has sole ownership). Therefore, the conflict arose indirectly: borne by the person who casts the vote, but not by the shareholder on whose behalf it is cast. The Supreme Court stated clearly that this situation does not eradicate the conflict, as "what is of relevance is that nobody can take part in a vote on an issue if they have ulterior interests to that of the interests of the company".
Secondly, the Supreme Court had to decide if the (indirect) shareholder and director to be remunerated as a director general should be allowed to vote, considering that article 190.1(c) of the Corporate Enterprises Act deprives that right to shareholders benefitting from a shareholders' general meeting agreement granting a right. The Supreme Court believed that the matter concerning remuneration was associated with a bilateral agreement to provide services as a director. Rights and obligations arose on both sides and, therefore, would not be subject to the rule, that should be only applied to unilateral decisions by the company.
Thirdly, the Supreme Court had to decide if the existing conflict may otherwise affect the validity of the general meeting resolution. Conflicts of interest may be different than those expressly mentioned in the first section of article 190 of the Corporate Enterprises Act and, for those not mentioned, the voting ban does not apply, but the resolution could nevertheless be challenged as being contrary to the company's interests. When the conflict is evident, the company must proof the resolution's resonance with the company's interest for it to be considered valid (under article 190.3, in relation to article 204 of the Corporate Enterprises Act).
In this case, the company could not prove that the agreed salary had not damaged the company's interests. Therefore, the Supreme Court declared that the agreement was abusive, imposed by the majority as an unjustified detriment to the minority and therefore disadvantageous to company interests. For the Supreme Court, the "economic burden for the company" of increasing payment to the managing director "disproportionately favoured the person with majority control over the company to the detriment of the minority".
The Supreme Court decision has significant outcomes. It is clear now that remuneration does not necessarily need be approved in advance for a certain fiscal year. However, the analysis of the conflict of interest is of particular relevance. Firstly, because the decision serves as a ground to apply the provisions where the conflict is indirect (a common situation in which the person serving as director is the sole owner of a company acting as (voting) shareholder of the affected company). Secondly, because it emphasises that, in these cases, even if the shareholder is allowed to vote, the validity of the shareholders' general meeting resolution is at stake. The company must prove, if challenged, that the decision did not hurt the company's interest, because the existence of a conflict presumes that the resolution is detrimental to it and benefits the voting shareholder.
For further information on this topic please contact Javier Arias at CMS Albiñana & Suarez de Lezo by telephone (+34 91 451 9300) or email ([email protected]). The CMS Albiñana & Suarez de Lezo website can be accessed at www.cms.law.