According to the Capital Companies Act and the Doctrine of the Directorate General for Registers and Notaries, company bylaws must state whether an administrator receives compensation, and company bylaws are invalid if the compensation is subject to a subjective or objective condition.
The Directorate General for Registers and Notaries (DGRN) has established, in accordance with the Capital Companies Act, that the compensation of an administrator of a company cannot be conditional upon certain activity of the administrator. In particular, in the Resolution of 27-04-2013 of the DGRN (the Resolution), the debated clause stated the following: An administrator will always receive compensation when the administrator carries out functions of a manager or director. This compensation is an amount between . . . Euros and . . . Euros by joining all the administrator’s functions. The compensation of the administrator is fixed each year by agreement of the general Board in accordance with these bylaws and Article 217 of the Capital Companies Act.
The Register objected, expressing that it is not possible because of the nature of compensation owed to an administrator: It cannot hold . . . on a condition that the administrators carry out other administrative functions. That is, whether there is compensation should not be conditional.
An interested party must rely on the understanding that the clause merely specifies the regulatory provision that permits unequal compensation to administrators (based on Article 124.3 of the Mercantile Registry Regulations).
What the DGRN Says
The DGRN continues to analyze the issues relating to compensation of administrators. The solution is in line with other resolutions, which adopt a definitive stance on the necessity that a company’s bylaws state whether an administrator receives compensation. If this compensation is subject to any objective or subjective condition, it clearly breaches the legislators’ mandate as well as the interpretation of the Management Centre.
This body concluded that the compensation to an administrator cannot be conditional and that in the mentioned debated clause, compensation was conditional in two ways:
First, the clause granted unequal treatment in the compensation of administrators, not by the position (which entails unique functions), but in the performance of some tasks that are, by the Act, the same for all administrators because all are called by their position to manage the company (Article 209 of the Capital Companies Act).
Second, the clause conditions the assessment of whether the particular administrator completed the tasks that they are responsible for on the subjective decision of the general Board. This ultimately gives the Board the power to decide whether exercise of the position of administrator should or should not receive compensation in each specific case, in clear violation of the legal requirement that statute determine this aspect.
Other Debated Questions
The Resolution also addressed other aspects of compensation such as the following:
Should a company’s bylaws indicate that some administrators receive compensation while others do not?
The DGRN finds no issue in that some members of a board receive compensation while others do not. However, the DGRN deems that this should not occur in cases of several or joint administration and only in the case of the collegial body of a board. This point denotes giving companies the freedom to regulate the compensation of its boards as they see fit in the fairest way possible while always complying with the principle of legality. As the DGRN recognizes, a factor that distinguishes the administrators must exist to justify unequal compensation.
Can the compensation be conditional based on work carried out for the company?
The DGRN finds it perfectly possible to condition the compensation of an administrator on work performed when the precise circumstances justify the special compensation.
Can the Board decide this conditional work?
No. The DGRN understands that it is impossible for the Board itself to determine when the administrators are effectively performing the functions that justify their compensation.
The Board cannot be responsible for the decision of whether the specific position receives compensation because it would be equal to leaving to the Board not only the amount of compensation but the very existence of the compensation.
This article is not considered as legal advice