Directors' remuneration and the ever complex distinction of their functions

Directors' remuneration and the ever complex distinction of their functions

Determining its nature in a commercial company

Redacción CIM Tax & Legal

The remuneration of administrators within a commercial company has traditionally generated many controversies and difficulties in determining its nature and scope, in consideration of the regulatory provisions applicable to it. This difficulty is accentuated by successive regulatory changes (the latest being the Law 31/2014 of December 3) and jurisprudential decisions (the judgment of the Supreme Court dated 26/2/2018 RJ 98/2018), which have notably altered its configuration, as we will analyze. We have already addressed this issue in these pages, in the magazine's issue for April 2018 (Tax & Legal No. 3 April), discussing the unified criterion regarding the nature of administrator remuneration.

Special difficulty arises when high-level executive or managerial positions are combined with functions as a member of the board of directors within a commercial company. According to the recent Supreme Court judgment mentioned earlier, the employment relationship is absorbed by the commercial relationship, determining the classification of the entire relationship as commercial. This is because attention should not be given to the content of the functions performed, but rather to the nature of the link that determines the relationship's nature. Thus, there is an organic integration in the field of social administration, whose powers are exercised directly or through internal delegation. Therefore, the relationship is not considered labor but commercial. Only in cases of employment relationships under a dependency regime, but not classifiable as high-level management but as ordinary, would simultaneous performance of roles in the company's administration and a labor relationship be admissible.

Now, let's examine in detail the configuration of the regulations for the remuneration of administrators, as set out in Articles 217 to 219 of the Capital Companies Law, in accordance with the defining elements:

  1. Presumption of gratuity, as remuneration is only possible if the bylaws establish the remunerated nature of administrators.
  2. The bylaws must determine the concept or concepts of remuneration, which may consist of a fixed allowance, attendance fees, profit-sharing, variable remuneration, stock-based compensation, severance pay, pension plans, or others.
  3. The general meeting will establish the maximum annual amount and possibly its distribution among the administrators, and in the absence of such distribution, it will be done by the administrative body itself.
  4. Remuneration must be proportionate and reasonable in relation to the importance of the company, allowing for the possibility of unequal remuneration among administrators, provided it is justified and takes into account the economic situation of the company and market standards for comparable companies.
  5. The remuneration concepts of the CEO must be reflected in a specific contract for the delegated executive functions, which must also comply with the remuneration policy approved by the general meeting (Article 249 LSC).

Thus, the remuneration system for administrators is structured at three levels, which apply indiscriminately to both inherent administrative functions (deliberative and control) and executive tasks:

a) Statutory regulation establishing the system and remuneration concepts to be received by administrators for all their functions, both inherent and executive.

b) General meeting agreement on the maximum amount of remuneration for all concepts, including all types of ordinary remuneration (variable remuneration, in-kind, etc.) as well as extraordinary amounts (severance pay, etc.).

c) Board of directors agreement for the distribution of remuneration among administrators if not previously done by the general meeting, as well as the mandatory contract for executive directors (approved by 2/3 of the board, with the abstention of the affected director both in deliberation and voting).

It should be noted that in the limited company, the maximum percentage of participation in profits cannot exceed 1% of profits distributable among the partners. In the case of joint-stock companies, the participation in profits can only be deducted from net profits after covering legal and statutory reserve requirements, and after recognizing a dividend to shareholders of 4% of the nominal value of the shares or the highest rate established by the statutes.

The interpretative difficulty, resolved by the aforementioned Supreme Court judgment, lies in paragraph 3 of Article 217 of the Capital Companies Law, regarding the scope of the expression "in their capacity as such" concerning the remuneration of administrators. The normative provision states: "3. The maximum amount of the annual remuneration of all administrators in their capacity as such must be approved by the general meeting and will remain in force until its modification is approved...". It must therefore be determined whether the mention of the administrator's status includes executive functions, as stated by the Supreme Court, to the detriment of the majority interpretation until then, which established the doctrine of the dual link, separating executive functions from deliberative ones. Consequently, the regulation on remuneration only applied to ordinary or deliberative functions and not executive ones, which had their own specific and separate regulation in Article 249 of the Capital Companies Law—a interpretation rejected by the aforementioned Supreme Court judgment.

According to the Supreme Court's doctrine, it is not possible to differentiate two alternative remuneration regimes, either due to the inherent functions of the position for which one has been appointed, of a deliberative or control nature, or due to executive functions. One consequence of this pronouncement prevents a common practice where, through an executive employment contract, remuneration is obtained outside the bylaws and a labor regime, usually with significant remuneration and severance pay, when the statutory regime establishes an organic relationship governed by commercial rules. These rules allow the general meeting to dismiss them at any time without cause and without the right to compensation. As a result of the absorption of the commercial relationship over the labor one, the competent jurisdiction

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