Changes to the rules on directors’ compensation
The Rulings of the Directorate General of Registries and Notaries dated May 10 and June 17, 2016 were published on June 6 and July 21, 2016 respectively, eliminating the uncertainty in relation to directors’ compensation which had resulted from the reforms to the Capital Companies Law introduced by Law 31/2014 of December 3, 2014 for the purpose of improving corporate governance.
Both rulings clarify that there are four ways of organizing the management of an entity, one of which is more complex, and the others straightforward.
The more complex form is collective management, i.e. the company’s management is entrusted to a board of directors. In this case, the functions inherent in the office of director are confined to what is referred to as the deliberative function, related to strategy and control. This is assumed by the director as a deliberating member of the collective management body, and it is the system of compensation in respect of this function that is required to be regulated in the bylaws. In contrast to this, there is the executive function consisting of ordinary management, which is performed individually through the organic or contractual delegation of executive powers and is not a function inherent to the position of “director” as such. It is an additional function which stems from a legal relationship which is added to the relationship deriving from the appointment as director made by the shareholders’ meeting, and derives from the legal relationship which results from the appointment of a director, by the board, to the position of chief executive officer, director general, manager or any other such office.
It is not appropriate that the compensation payable for the performance of the executive function should be stipulated in the bylaws. It should be stipulated instead in the management contract which the plenum of the board of directors must sign with the director.
With the simpler forms of management (sole director, two directors acting jointly or directors acting severally), the functions inherent in the office include those referred to above, and the executive functions in particular. For this reason, in these cases, the fact that the office of director is a remunerated position and the system of compensation to be used must be reflected in the bylaws.
Reference is also made to the theory of contractual relationship absorption – accepting the co-existence, in the case of directors, of contracts for the provision of services, ordinary employment contracts, etc.—depending on the work or tasks to be performed, with the senior management employment contract being excluded.
Garrigues Corporate Law Department
This article was published on Diari de Tarragona