The retribution of managers and the “Link Theory”

The retribution of managers and the “Link Theory”

1.         Introduction

Corporations resemble a person – the best doctrine speaks of “personified estates” – in which, if I may use the metaphor, one can find a transcript of a biological organ. One of these is the administrative body, which has the supreme function of directing and governing the corporate legal person, just as the brain is responsible for governing the physical person. Apart from analogies, the administrative body of the company is often a decisive factor in the success of the company, i.e. the achievement of its object in the best interests of its members. Therefore, with the exception of thinly capitalised closed companies, the company’s management body, given its strategic nature, should be composed of capable and adequately remunerated natural persons.

We can classify the possible functions that can be performed by any member of the administrative body, either separately or jointly, as follows: (a) management tasks, distinguishing between purely deliberative and executive tasks, and (b) non-management tasks. Each of these activities is subject to a different remuneration regime, which will be treated differently for corporate income tax purposes. These functions can be exercised simultaneously, which does not pose any problem in distinguishing between them and treating them individually; however, their exercise can give rise to ambivalence and confusion, especially in companies with non-collegiate administration: the acts of a joint and several director can have a representative and executive nature in an inseparable manner, and a sole director will always exercise representative and executive functions; which, in both cases, distorts their remuneration regime, as we shall now examine.

The starting point for the analysis is articles 217, 218 and 219 LSC, with respect to non-collegiate administrative bodies, and 249 LSC with respect to the collegiate bodies (board of directors) of capital companies; according to the wording conferred on all of them by Law 31/2014, which, as its explanatory memorandum proclaims, aims to ensure that “the remuneration of directors adequately reflects the real evolution of the company and is correctly aligned with the interests of the company and its shareholders” It limits the functions subject to remuneration to those of “management and decision-making, with special reference to the remuneration system for directors who perform executive functions“.

2.         Non-directive work

This discussion can start with scenario (b) as it is the simplest. Any activity of any member of the administrative body, whatever form it may take, who carries out an activity outside the management and decision-making tasks of the company, whether deliberative or executive, may regulate his relationship with the company by means of an employment contract or, alternatively, by means of a commercial contract for the provision of services. The remuneration conditions of such a contract remain outside the scope of the articles of association, while the company’s administrative tasks are, or are not, remunerated in accordance with the aforementioned legal precepts and the provisions of the articles of association.

In the limited liability company, the minority shareholder could challenge the agreement establishing the contract (art. 220 LSC) on the grounds of its possible unfairness; and this is without prejudice to seeking its nullity for unlawful cause (arts. 204.2 LSC and 1275 CC).

And although in the public limited company the conclusion of the contract would not require the agreement of the shareholders’ meeting, the director intending to contract himself would have to request the shareholders’ meeting to waive the duty of loyalty – given the obvious conflict of interest – a waiver that would require a resolution in which said director (managing partner) could not vote (art. 190.e and 230 LSC); a resolution that would also be, where appropriate, challengeable on the grounds of its abusivity, and, likewise, its ineffectiveness would be instable.

3. Managerial            tasks

The managerial tasks of directors are divided into (i) purely deliberative functions; and (ii) full deliberative and executive functions.

(i)         Deliberative functions only

This type of work is residual, as it can only be performed by non-executive directors in companies whose board of directors adopts the collegiate form, and in which one or several executive directors or an executive committee have been appointed. In such cases, the other non-executive directors perform merely representative or deliberative work, which, if applicable, must be remunerated in accordance with the law, the bylaws, the company’s remuneration policy, and the distribution by the board of the maximum annual amount agreed by the general meeting (art. 217.4 LSC), as will be examined below.

(ii)        Deliberative and executive functions

(a)       Simple administrative bodies

In the case of simple administrative bodies, these are the tasks of the directors, whether joint or joint and several; and in the case of collegiate bodies, those of the executive directors or members of executive committees. In addition to their representative and deliberative functions, all of them assume the management and management functions inherent to the ownership of the company, defining its operational, commercial and financial policy.

In the case of simple or non-collegiate administrative bodies, the position of director is usually free of charge. This situation is common in closed and thinly capitalised companies, where management is not professionalised, and where directors are remunerated through payroll or service contracts for tasks unrelated to the management and representation of the company, or through the distribution of dividends, or through improper attributions (loans that are not repaid, personal expenses paid by the company, etc.).

If the exercise of the directorship is remunerated, this must be stated in the articles of association, with a specific indication of the remuneration system[1] . The functions for which the director may receive remuneration are those inherent to the post, which in this case include both representative and deliberative functions, as well as executive functions. Directors will therefore be remunerated in accordance with the articles of association (art. 217.1 LSC) and with the limits established both by the General Meeting (art. 217.3 LSC) and by the generic limits in accordance with the size and financial situation of the company (art. 217.4 LSC). The maximum amount of the remuneration to be paid to the board of directors must be determined by the General Meeting[2] , “and shall remain in force until such time as a modification is approved”. Moreover, the system for setting the amount of remuneration may not encourage excessive risk-taking or reward unfavourable results, which constitutes a limit to the shareholders’ autonomy of will (Art. 28 LSC) in application of the exceptions to this principle established by Article 1.256 CC, and in protection of minority shareholders. Furthermore, as regards the maximum amount, this must be proportionate to the economic-financial parameters and the importance of the company.

The text of article 217.3 LSC seems to assume that, notwithstanding the duties common to all directors (arts. 225 et seq. LSC), in the event of a plurality of directors, they might assume different functions and internal responsibilities, and therefore their remuneration may be differentiated, leaving their distribution to the discretion of the directors themselves, and the General Meeting being the body that would settle a disagreement between them.

(b)       Collegiate administrative bodies

In the case of collegiate governing bodies, there is a dichotomy between deliberative and executive functions, which is evident from the wording of sections 3 and 4 of art. 249 LSC. On the one hand, non-executive directors will limit themselves to performing deliberative tasks by attending board meetings with voice and vote; and, as indicated above, they will receive the remuneration determined by the articles of association (217.1 LSC), the general meeting, and the board of directors itself, in the distribution (217.3 LSC).

On the other hand, executive directors shall be remunerated in accordance with the provisions of a contract detailing “all the items for which they may obtain remuneration for the performance of executive duties, including, where appropriate, any compensation for early termination of such duties and the amounts to be paid by the company for insurance premiums or contributions to savings schemes. Directors may not receive any remuneration for the performance of executive duties, the amounts or items of which are not provided for in the contract. The contract must be in accordance with the remuneration policy approved, if appropriate, by the general meeting” (art. 249.4 LSC). This contract “must be previously approved by the board of directors with the favourable vote of two thirds of its members. The director concerned must abstain from attending the deliberation and from taking part in the vote” (art. 249.3 LSC). (art. 249.3 LSC)

However, it should be clarified that, although article 249.3 would appear to articulate an escape route from the statutory regime for directors’ remuneration, our Supreme Court[3] has interpreted that the remuneration established in the contract must be subject to the general provisions established by law and the company bylaws, relying for this purpose on the literal wording of article 249 bis (i) of the LSC, which establishes as a non-delegable power of the board of directors “the decisions relating to directors’ remuneration, within the framework of the bylaws and, where appropriate, the remuneration policy”. 249 bis i) LSC, which establishes as a non-delegable power of the board of directors “decisions relating to the remuneration of directors, within the framework of the bylaws and, where appropriate, the remuneration policy approved by the general meeting“; as well as the legal provision for the distribution of remuneration among the directors in accordance with “the functions and responsibilities attributed to each director” (art. 217.3 LSC), a clarification that indicates that the remuneration of executive directors, who have differentiated responsibilities, is included in the regulatory scope of the bylaws. This interpretation would be in line with that of considering the rest of the provisions of the contract with the executive director (e.g. functions, responsibility, duration) to be equally subject to the provisions of the law and the bylaws, leaving the matter to the autonomy of the will of the board and the director, since it does not seem reasonable that this contract could contain agreements that conflict with the provisions of the law – since they would be null and void (art. 6.3 CC) – or with the provisions of the bylaws, since they would be ineffective with respect to third parties in good faith (art. 9 RRM).

4. The link theory

In a condensed form, the theory of the (single) link constructed by the doctrine of the Supreme Court from the so-called “Mahou Judgment”[4] and which to date remains constant, establishes that any employment relationship – including the special employment relationship of senior management – established between the director and the company that consists of the exercise of managerial powers will be absorbed by the mercantile relationship, thereby ruling out the possibility of invoking the labour regulations on employee rights.

This doctrine applies both to cases in which the company bylaws provide for the remuneration of the administrative body, and to those cases in which this is not the case. In any event, in the latter cases, in the absence of remuneration for the functions of administration, the existence of an employment relationship consisting of those functions must be ruled out – given that the paid nature is an essential element of employment – and this will mean that, once the administrator has left the company, he/she will not be entitled to receive any compensation or social benefits derived from his/her management duties.

This jurisprudential doctrine has been expressed in repeated rulings by the Social Division of the Supreme Court[5] , in the sense of denying the employment nature of management tasks, both deliberative and representative, as well as executive tasks, on the grounds that they are excluded from that sphere by Article 1.3.c) of the Workers’ Statute. This exclusion from employment would even include the “special employment relationship of senior management”, regulated by RD 1382/1985, since its purpose is the exercise of the “powers inherent in the legal ownership of the Company, and relating to the general objectives of the same, with autonomy and full responsibility only limited by the criteria and direct instructions issued by the person or the higher governing and administrative bodies of the Entity”, a definition that fits into the mould of the tasks of administrators and directors, both ordinary and executive; For this reason, it seems sensible to configure the contract between the company and executive directors as a commercial contract for the “provision of services”, rather than a “senior management contract”.

Finally, it should be noted that, in addition to the corporate and employment consequences, the doctrine of the link also has repercussions in the tax sphere, since the remuneration of the administrative body may only be deductible as an expense for the financial year if it is provided for in the company bylaws. However, the Judgment of the CJEU of 5 May 2022 (Case C-101/21), in application of Directive 2008/94/EC[6] , recognises the employment nature of the relationship of a director of a Czech commercial company, despite the fact that its national legislation categorically denies the employment nature of such a relationship.

This ruling, although applicable only in the labour sphere, could represent a starting point for the moderation or nuance of the “link theory”, opening the door to the specific examination of the situation of the director and his work, as well as the justification of the remuneration received, both to be able to grant him the labour law protection that he may deserve, and to consider his remuneration as a necessary expense of the company, and therefore deductible for corporate tax purposes.


[1] RDGSJFP 10.05.2023 (BOE 130, 01.06.2023) Without needing to repeat the content of a doctrine to which this Directorate General has referred on many occasions and which applies that of the Supreme Court in relation to the so-called theory of the link, it is appropriate to recall that in accordance with this construction, in the event that the remunerated nature of the position of director is foreseen, article 217 of the Capital Companies Act requires a determination of the remuneration system or systems in such a way that the control corresponding to the general meeting is not illusory (vid. Rulings number 441/2007, of 24 April, 448/2008, of 29 May, 893/2012, of 19 December, and 412/2013, of 18 June, and Resolutions of this Directorate General of 12 November 2003, 16 February and 7 March 2013 and 17 June 2014).

[2] If fixed remuneration is chosen, the wording of the articles of association could not be simpler, it being sufficient to state that: “The office of director shall be remunerated: such remuneration shall consist of a fixed amount for each financial year to be determined annually by the ordinary general meeting of the company”.

[3] It should be mentioned that the reform of articles 217, 218, 219 and 249 LSC was interpreted by the Barcelona Provincial Court (Judgment 295/2017 of 30 June), along the lines initiated by the RDGRN of 17 June 2016, in the sense of considering the contract between the company and the executive directors to be excluded from the general regulation established by article 217 LSC, due to the fact that the executive function was considered to be separate from the functions of the directors “in their capacity as such” (art. 217.3 LSC) and, therefore, the subject of a remuneration that was alien and separate from the provisions of the articles of association.  However, the STS 98/2018 of 26 February corrects this interpretation and reaffirms the subjection of this contract to the provisions of the articles of association: “The placement of the precept, its reference not to “non-executive directors”, not even to “directors in their capacity as such” (if this expression could be given the meaning that the Provincial Court and the DGRN maintain), but to directors in general, show that the statutory reservation requirement for directors’ remuneration extends to all company directors, including the members of the board of directors and, within them, the managing and executive directors, in respect of whom the main decisions of the board relating to directors’ remuneration are taken.”

On the other hand, SJM no. 7 of Barcelona 24/2021 of 9 March, following this jurisprudential interpretation, indicates even more explicitly that “The relationship between one and the other precepts (217 to 219, on the one hand, and 249 TRLSC, on the other) is cumulative in nature, as the appellant maintains. The general regime is contained in articles 217 to 219 TRLSC, which are applicable to all directors, including managing or executive directors. In fact, some of its provisions (remuneration provided for in sections “c” to “g” of article 217.2 and the development of some of them in articles 218 and 219) are typically applicable to managing or executive directors”.

[4] STS of 13 November 2008 (appeals 2578/2004 and 3891/2004)

[5] Among many others, judgments (Social Division) of 20-11-2002 (RJ 2003\2699), 9-12-2009 (rec. 1156/2009), or 24-5-2011 (rec. 1427/2010). “The ruling of 22-12-1994 (rec. 2889/1993), interpreting art. 1.3 c) of the Workers’ Statute, states that “It must be borne in mind that the activities of management, administration and representation of the company are the typical and specific activities of the administrative bodies of commercial companies, whatever form these may take, whether it be a Board of Directors, a sole Administrator, or any other form permitted by law; And so, in the sphere of the public limited company, the bodies of this type, which were included in articles 71 to 83 of Law 17 July 1951 and are currently included in articles 123 to 143 of the Consolidated Text of the Law on Public Limited Companies approved by Royal Legislative Decree 1564/1980 of 22 December, have precisely the essential and characteristic function or mission of carrying out these activities, which are fundamentally residing in these bodies, constituting their particular and specific competence. It is therefore mistaken and contrary to the true essence of the company’s administrative bodies to understand that they must limit themselves to carrying out merely consultative functions or simple advisory or guidance functions, since, on the contrary, they are responsible for direct and executive action, the exercise of management, direction and representation of the company. Consequently, all these actions involve ‘the performance of duties inherent’ to the status of company directors, and fully fit in with the ‘performance of the post of director or member of the administrative bodies in companies that have the legal form of a company’, which is why they are included in the aforementioned article 1.3 c) of the Workers’ Statute”.

[6] Directive 2008/94/EC of the European Parliament and of the Council of 22 October 2008 on the protection of employees in the event of the insolvency of their employer – OJEU No. 283 of 28 October 2008.

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