Limits on directors’ remuneration in the Articles of Association

The Directorate General for Legal Certainty and Public Trust has expressed its opinion in its resolution dated 4 December 2023 on the limits that must be complied with when establishing the criteria for the remuneration of the management body in the Articles of Association of a company.

Criteria for the remuneration of the administrative body according to the Capital Companies Act

Article 217 of the Capital Companies Act sets out the requirements that must be met for the remuneration of a company’s directors. On the basis of this article, the following wording was agreed in the Articles of Association at the general meeting of the company that is the subject of the resolution:

Text of the Articles of Association

“Remuneration, which may be in cash or in kind, may consist of one, several or all of the following:

  1. In the form of a fixed annual sum
  2. In profit-sharing
  3. In the form of variable remuneration with indicators or general benchmarks
  4. In the form of shares
  5. In a severance payment, provided that the termination was not due to failure to perform the duties of director;
  6. Through the payment by the Company of such savings or welfare systems as may be deemed appropriate.

The General Meeting shall be responsible for determining the specific system or systems of remuneration to be received by the directors, as well as for specifying the indicators, parameters or references to be applied in the respective remuneration systems, which shall remain in force until such time as their modification is approved by the General Meeting itself”.

Decision of the Commercial Registrar

After analysis and review, the Madrid Mercantile Registrar, who qualified the proposed amendment, decided not to register the deed, on the grounds that the directors’ remuneration did not comply with the requirements of articles 23, 217 and 218 of the LSC, since it is necessary to determine the remuneration system, it not being possible to leave it to the discretion of the general meeting whether such remuneration will consist of one or more of those provided for in sections (i) to (vi).

Appeal against the note of qualification of the registrar of companies

Against this qualification note, the company lodged an appeal, arguing an erroneous interpretation of Articles 217 and 218 LSC, and referring to the Resolution of the former Directorate General of Registries and Notaries of 9 August 2019, which stated the following:

  1. Articles of Association: must establish the specific admissible forms of directors’ remuneration, broken down in Article 217 LSC.
  2. General Meeting: determines the maximum amount that directors may receive for the exercise of their functions.
  3. Directors: within the forms of remuneration allowed by the Articles of Association and the maximum quantitative limit approved by the General Meeting, they have the power to distribute such remuneration.

Position of the Directorate General for Legal Certainty and Public Faith

With regard to the above, the Directorate General for Legal Certainty and Public Faith points out that:

  1. The First Chamber of the Supreme Court has affirmed that the purpose of the bylaws’ statement of the remunerated nature of the position of director and the system of remuneration is primarily to provide maximum information to shareholders.
  2. The legal regime of directors’ remuneration requires that the bylaws expressly state that the director is remunerated, destroying the presumption of gratuity.
  3. It is necessary to determine one or more specific remuneration systems, so that it is not left to the discretion of the general meeting to choose between different remuneration systems.

As a result, it concludes that:

The Directorate General for Legal Certainty and Public Faith insists that the articles of association should clearly establish the remuneration systems for directors, avoiding leaving their determination to the discretion of the general meeting. This ensures transparency and control by shareholders.

The PDF of the resolution is attached below.

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