An unexpected judgment challenges an established stance on directors’ remuneration

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In June 2020, the high court of Rome issued a ruling in a delicate matter concerning the power to determine remuneration of managing directors (CEOs) in joint stock companies. The ruling in question is particularly interesting because it represents a new twist on the interpretation and consequent application of Article 2389. It poses a clear challenge to a well-established argument among legal theorists and will likely spark debate on the meaning of “special offices” held by directors, with implications for the division of power at joint-stock companies.

The facts

The case presented to the court involved a publicly owned company pitted against its former managing director to recover a substantial sum that had been given to him as remuneration in previous years. The facts were the following: the defendant was entitled to receive a certain sum as compensation at the end of his term as managing director under the condition that for 12 months following the end of his mandate he would not occupy similar positions in other publicly owned companies. If he did, he would have to return the amount received. Nonetheless, at the end of the defendant’s term, even though he did not fulfill that condition, the board of directors agreed to give him the amount initially envisaged based on his achievements in the role.

Shortly before the statute of limitation ended, the company sued the defendant to retrieve the sum pursuant to Article 2033 (undue payment), citing both the absence of causa debendi for the payment and the board of directors’ lack of power to determine the amount and then bestow the remuneration upon the managing director.

In support of the first claim, the plaintiff argued that not only had the conditional clause not been fulfilled at the time, but also that the “excellent results” credited to the defendant were relatively insignificant. The second claim concerning the board of directors’ lack of power was strongly opposed by the defendant, who instead argued that the board had full freedom to determine compensation for managing directors. The implications of this contested point were of great significance: if the matter was among the responsibilities of the board, then the resolution should have been appealed at the time and could not be opposed in a later court proceeding.

The court’s decision

The court’s decision was in two parts. Firstly, the court recognized that the sum had been given in the absence of the preconditions and accepted the plaintiff’s argument pursuant to Article 2033. Secondly, on the issue of power, the court stated that the power to determine the remuneration of the managing director rested with the shareholders’ meeting or the statute pursuant to Article 2389 paragraph 1. Accordingly, the court also established that the board’s resolution represented a violation of legal limits restricting directors’ powers. Consequently, the resolution was ineffective vis-a-vis the company which could oppose it at any time without the burden of having previously appealed the same through a separate legal proceeding.

In conclusion, the court ordered the defendant to return the undue payment with interest.

Section 2389 and its interpretation

The court’s decision to enforce the first paragraph of Article 2389 in this case is worthy of attention because it departs from well-established legal doctrine. The dispute revolves around the interpretation of Article 2389 (first and third paragraph) which provides the following:

The remuneration of the members of the board of directors and of the executive committee shall be determined at the time of their appointment or by the shareholders’ meeting.

The remuneration of directors holding special offices in accordance with the articles of the statute shall be determined by the board of directors, after hearing the opinion of the panel of statutory auditors. If the articles of the statute so provide, the shareholders’ meeting may determine an overall amount for the remuneration of all directors, including those holding special offices.

Over the years the wording of this article has proven problematic more than once, including in this case. Paragraph 1 assigns either to the shareholders’ meeting or to the statute the power to determine remuneration of members of the board of directors and of the executive committee. Paragraph 3 waives this general provision by providing the board with direct power to determine the remuneration of directors holding special offices (upon hearing the opinion of the auditors). It’s worth noting that in the wording of the article there is no explicit reference to the position of managing director and the core of the controversy we are looking at today stems from this very omission. The legal approach predominant in recent years frames the position of managing director as a special office.[1] Consequently, paragraph 3 of Article 2389 was deemed the applicable provision and boards of directors were traditionally granted full powers.

This position is not devoid of problematic aspects, especially because it does seem to create an unjustified discrepancy between the position of the managing director and the position of members of the executive committee: in fact, even though the latter is a board, its members are nonetheless the recipients of mandates, just as the managing director is. Secondly, as legal scholars and courts of merit have often pointed out, such a division of powers could have the alarming result of wresting the power to determine the most significant portions of directors’ remuneration from the hands of shareholders.

In opposition to this view, the Roman court explicitly excluded the possibility that the position of managing director falls into the category of “special offices.” Indeed, it clearly stated that filling the role of managing director does not necessarily entail attribution of a “special office” as intended in Article 2389, paragraph 3 (relying upon an alternative reading of the word “special” that is worth analyzing in greater detail).

Special offices pursuant to paragraph 3 of Article 2389

Indeed, according to this decision, the “special offices” mentioned in Article 2389 paragraph 3 envisage performances that go beyond normal management activities. In contrast, the judges consider services required of managing directors upon delegation of managing powers to fall into the domain of “normal activities.” This choice of words is quite problematic because it makes it unclear where to draw the line. For example, who should determine the remuneration for extraordinary management acts carried out by managing directors? What about remuneration for acts that are not of a management nature?

These are no clear answers to these questions in the text of the decision. Nonetheless, as far as this decision is concerned, it seems reasonable to focus on the management/non-management dichotomy. Indeed, the court cited a couple of previous judgments from the Italian Supreme Court[2] to argue toward the end of its decision that the normal activities of a director include all those activities inherent to the running of a business, without it being relevant to distinguish between acts of extraordinary and ordinary management, unless otherwise provided in the statute or articles of incorporation. Overall, the judges appear to be leaning toward the radical solution that the abovementioned “special offices” envisage solely activities that are unrelated to managing the company’s business. They do not explicitly state what they mean by this latter term, nor do they provide concrete examples. Nonetheless, it could be argued that this alternative reading of Article 2389 returns the matter of assignments, offices, and non-managerial tasks that may be entrusted to directors to the scope of paragraph 3; until now those have been unquestionably excluded from the sphere of application of the same and instead allocated to the ordinary powers of the managing body. That would represent another substantial shift in power—and one in stark opposition to the current legal thinking. It will be interesting to see whether courts develop this line of reasoning further in the future.

Going back to the judgment at hand, after making this distinction between special offices and normal management activities, the Roman court concluded that, since there is no special office implied in the functions of managing director, the applicable norm is Article 2389, first paragraph.

In this regard, it should also be pointed out that the court is not denying that the managing director may be granted a different and higher remuneration compared to the other members of the board of directors. Instead, it argues that this may be done within the framework determined either by the statute or by the shareholders’ meeting. Thus, as we can see from the conclusion reached in the judgment, any determination made by the board of directors without respecting the aforementioned procedure would be considered adopted in violation of the legal and mandatory distribution of powers among the corporate bodies and therefore ineffective vis-à-vis the company, without any need for an appeal to establish its invalidity.

Conclusion

The Roman court’s decision opened the doors to new alternative interpretations on the matter of director compensation. It’s undeniable that while this subject is much discussed in the corporate world, it relies on imperfect legislation that in turn causes severe uncertainty. Overall, it can be said that by granting powers to the shareholders’ meeting or the statute, this judgment moves in the direction of increasing transparency and reasonableness in the remuneration systems of joint stock companies—something that has been called for often in the legal world.

[1] See, in this regard, the works jurists such as Minervini, Graziani, and Campobasso.

[2] See Supreme Court February 26, 2002, No. 2861, November 5, 2018, No. 28, according to which “the director of a company entrusted with the performance of activities unrelated to the administration relationship is entitled, pursuant to Art. 2389 c.c., to special remuneration for such activities, provided that such services are outside the scope of the normal administration relationship, i.e., the management of the company, whose limit must be identified in the corporate purpose.”

 

Author:

Barbara Corsetti

26 October 2021
Thanks to Camilla Garzon for collaborating on this article

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