Background

Pursuant to Spanish commercial legislation, members of the governing bodies of a company can only be remunerated for the services provided in their role when the company’s articles of association expressly allow for it. As a result, to avoid amending the bylaws, companies offer their directors senior executive agreements to grant them compensation for duties performed as a member of a governing body.

Facts

In this Labour Chamber case the Supreme Court determined, once again, that the remuneration agreed in a senior executive employment contract is only valid if the duties and functions assigned to such director exceed those pertaining to directors, which did not occur in the case concerned.

Notwithstanding the above, to the extent that the company only had two different partners (the director and another person), and the senior executive’s remuneration had been agreed for several years in the General Meeting, the remuneration had been tacitly accepted as normal.

As a result, the Supreme Court decided that the other shareholder’s claim that director’s remuneration shall be declared null and void goes against the principle of good faith and, therefore, that the provisions contained in commercial legislation cannot apply in the present case.

Effect on employers

In view of the Civil Chamber and the Labour Chamber’s latest rulings on similar cases, it seems that companies with a sole, or very few, shareholder/s may remunerate their directors through a senior executive employment without the need to amend their articles of association, since it is understood that such remuneration is accepted by the owners of the company and does not contravene any of their rights.

Judgment of the Labour Chamber of the Supreme Court of 29 May 2008