Guidelines for setting the remuneration of directors

The Supreme Court confirms that the remuneration of directors must be proportional to the importance and economic situation of the company, in accordance with article 217.4 of the Capital Companies Act (LSC).

The Supreme Court has ruled on an appeal against a judgment of the Provincial Court that had upheld the challenge to the shareholders’ meeting agreement setting the remuneration of the sole director of a limited liability company. In its Judgment 194/2025, of February 7 (ECLI:ES:TS:2025:505), the Supreme Court partially revoked that decision after finding an incorrect assessment of the company’s profits and established relevant guidelines for the application of article 217.4 LSC.

The dispute arose following the approval, in December 2016, of a remuneration of €90,000 for the sole director for 2017. Although the articles of association expressly provided for the remunerated nature of the position and the power of the shareholders’ meeting to set its amount annually, the minority shareholder (holding 49% of the capital) challenged the agreement, arguing that it was detrimental to the company’s interests and benefited the majority shareholder, who was also the director.

The Provincial Court upheld the challenge after considering that the company’s profits in 2016 amounted to only €58,306.22, a figure which, in its opinion, was not proportionate to the remuneration approved. However, the Supreme Court found a clear error in this factual assessment, as this figure actually corresponded to the 2014 financial year. The actual profits obtained in 2016 were €2,879,090.86, a figure that was decisive for the proper application of the proportionality test referred to in article 217.4 of the LSC.

The Supreme Court recalls that this provision establishes a series of guidelines for setting the remuneration of directors, including: the importance of the company, its economic situation at the time of the agreement, and the market standards of comparable companies, if any.

Although the shareholders’ meeting has discretionary power in determining this remuneration, judicial review may intervene in cases where there is a breach of the company’s interests or an abuse of majority power that distorts the legitimate purpose of the agreement.

In the specific case, the Supreme Court took into account various relevant factors that demonstrated the expansion and substantial improvement of the company’s activity, such as the refurbishment of its main asset (a hotel establishment), the expansion of its capacity, the increase in staff (from 24 to more than 100 employees), and the implementation of structural investments (new restaurants, parking, etc.). All of this, combined with the profits obtained in 2016, led the Supreme Court to conclude that there was no manifest disproportion in the remuneration set.

On the other hand, the judgment ruled out that the agreement constituted a disguised mechanism for distributing dividends or that it had a negative impact on the company’s capitalization. Likewise, the Supreme Court emphasizes that, despite the fact that the management of the hotel was entrusted to a third party, the position of director had not been rendered meaningless, as the responsibility inherent in the performance of the management body remained.