SUMMARY

I. Implications of the significant change of policy caused by the decision of the Fourth Chamber of the Supreme Court of February 26, 2003 and its inclusion in the new line of doctrine initiated by the decision of the First Chamber of the Supreme Court of May 9, 2001.

II. Facts stated in the decision of the Fourth Chamber of the Supreme Court of February 26, 2003, and rejection of the cassation appeal for the unification of doctrine based on lack of contradiction.

III. Interesting novelty introduced by the "general remarks" in the decision of the Fourth Chamber of the Supreme Court of February 26, 2003, on the compatibility between the posts of managing director and senior executive.

IV. Conclusions.

I. Implications of the significant change of policy caused by the decision of the Fourth Chamber of the Supreme Court of February 26, 2003 and its inclusion in the new line of doctrine initiated by the decision of the First Chamber of the Supreme Court of May 9, 2001.

The decision of the Social Chamber of the Supreme Court of February 26, 2003 (Appeal 2401/2002), known as the "Fundación Nodular" case is (hereinafter "STS decision of February 26, 2003" or STS, 4th, February 26, 2003) in my opinion, an important decision. This is so despite the fact that it makes an obiter statement by dismissing the cassation appeal for the unification of doctrine. In fact, the reason for the dismissal is the lack of contradiction between the decision being appealed (Judgment of the Social Chamber of the High Court of Justice of Asturias, of May 3, 2002) and the contrasting decision (cassation appeals proceedings for unification of doctrine always require a "contrasting decision") (Judgment of the Social Chamber of the High Court of Justice of Catalonia, of January 4, 1994).

As a matter of fact, it is not the first time that the Supreme Court establishes doctrine regarding a certain subject by means of an unusual procedure, for, the unification of doctrine is not generally applied when there are no contradictions. Various decisions come to mind in this regard, such as, the decision of the Supreme Court of June 14, 1996 (RJ 1996, 5162) concerning a dismissal due to objective reasons, and the decision of the Supreme Court of October 24, 2001 (RJ 2002, 2363) regarding the classification of stock options as part of an employee’s salary. These decisions have turned out to be crucial in the end.

The STS decision of February 26, 2003 is important because it implies a significant turn in the main criteria upheld by the Social Chamber of Supreme Court, which was contrary to considering that the same person could be managing director and senior executive employee of one company at the same time (Royal Decree 1382/1985 of August 1, that regulates the special employment relationship of senior executive employees).

Until this date, the Social Chamber had declared that it was against the duplication of both relationships, considering that it is incorrect to formalize two legal relationships (director with executive powers and a labour employee holding a high post) for the same activities (direction and management duties in the company). It consists of the well-known "link doctrine" (doctrina del vínculo), by which the commercial relationship (member of the Board of Directors with executive powers) absorbs and removes the special labour relationship.

The Civil Chamber of the Supreme Court has traditionally maintained the same position, as in the well-known decision in the Huarte case (decision of the First Chamber of the Supreme Court of December 30, 1992, RJ 1992, 10570)1.

However, the decision of the Civil Chamber of the Supreme Court of May 9, 2001, (RJ 2001/7386 Mattel case, hereinafter, STS decision of May 9, 2001 or STS, 1st, May 9, 2001), overcomes this doctrine and declares the compatibility of maintaining, in the same person, the managing director’s post and the holder of a service agreement contract with the company to carry out senior executive and management duties.

In fact, the STS decision of May 9, 2001, highlights the existence of facts which differ from the ruling issued in the Huarte case. Nevertheless, the fact is that it allows the compatibility of the position as managing director and of the holder of a service agreement contract. This agreement was indefinite and stipulated a compensation of approximately 60,000,000 Spanish pesetas in the event the company unilaterally terminated the agreement.

Thus, the STS decision of May 9, 2001, has awakened a great deal of interest, not only for the doctrine2 but also in the business and professional practise. It is a known fact that the managerial remuneration system has not been adequately regulated, the solutions which have been tested are certainly not air tight and the standard practice is not risk-free.

The STS, 1ª, May 9, 2001 is mentioned and commented by the STS, 4ª, February 26, 2003. The fact that the STS decision of February 9, 2003 has quoted -sometimes literally- some of the doctrinal comments made in the STS decision of May 9, 2001 (as with S. Sánchez Gimeno’s comment, esp., p. 1462, in the second legal grounds of the decision).

In any event, the STS decision of February 26, 2003 contains interesting comments about the current, unsatisfactory state of affairs, and as I said above, it announces or seems to announce an important change in the Social Chamber of the Supreme Court’s doctrine, similar to that carried out by the Civil Chamber of the Supreme Court in its STS decision of May 9, 2001. Although the majority opinion considers the holding of both posts (director and labour senior executive) incompatible, this new point of view which was stated in a small number of decisions will probably create a precedent. It is important to highlight, though, that the STS decision of February 26, 2003, has not been issued by the so-called General Chamber.

II. Facts stated in the decision of the Fourth Chamber of the Supreme Court of February 26, 2003, and rejection of the cassation appeal for the unification of doctrine based on lack of contradiction.

However, let us proceed with the description and analysis of the STS decision of February 26, 2003.

In this case, a managing director was a senior executive employee with a signed written contract, at the same time. The General Shareholders’ Meeting agreed to grant a retirement pension supplement or an improvement in the retirement conditions to those employees who voluntarily decided to retire at the age of sixty five. The managing director/senior executive employee was amongst the employees who benefited from this measure.

The managing director/senior executive employee demanded this retirement pension supplement or improved conditions. The company refused to pay the aforementioned supplement, and he initiated labour proceedings against the company, who alleged that the labour courts did not have jurisdiction to hear the case. Moreover, the company rejected the "legal viability" of a labour senior executive contract and the labour nature of the managing director/senior executive employee.

The aforementioned challenge was dismissed, firstly by the Social Court and secondly by the Social Chamber of the High Court of Asturias. The company was ordered to pay the supplement or improvement of the conditions of the retirement pension claimed by the managing director/senior executive. The High Court of Justice declared that the plaintiff received the wage and bonuses, not because of his status as managing director but because of his position as senior executive employee. Consequently, the Court held that the legislation governing corporations and the company’s articles of association were not applicable.

The decision of the High Court of Justice of Asturias was subject to a cassation appeal for the unification of doctrine, with a decision of the High Court of Justice as contrasting judgment.

As I have already pointed out, the STS decision of February 26, 2003 dismissed the cassation appeal for the unification of doctrine, stating that the facts and claims of both decisions, the one appealed and the contrasting decision, were different.

In particular - the Supreme Court stated that-, whilst in the contrasting decision a dismissal action was carried out, the appealed decision deals with a supplementary Social Security action in which a retirement pension supplement or an improvement in the conditions of the retirement pension was claimed from the company.

Secondly, the original action of the contrasting decision is only based in the labour senior executive contract signed whilst in the appealed decision, the original action is not only based in the senior executive employment contract but also in the General Shareholders’ Meeting agreement that expressly included the plaintiff among the employees who would benefit from the aforementioned supplement or improved retirement pension conditions.

There is, however, a third and last difference which was held to be decisive by the Supreme Court. Whenever there is a dismissal case and the Judge sitting in the Social Chamber of the Court considers that he does not have jurisdiction and refers both parties to the Civil Court Judge, he is assuming that there is not an employment relationship between the parties. Nevertheless, the Judge is not necessarily denying the fact that the relationship may produce other effects in the scope of Civil Law, where the Supreme Court has expressly stated that "the agreements must also be observed". On the other hand, in supplementary Social Security controversies, the Judge of the Social Chamber is the only authorised person (Article 2. b) and c) of the Law on Employment Procedure), thus, he cannot declare that he does not have jurisdiction and refer the case to the Civil Judge.

The reasons set out above caused the STS decision of February 26, 2003 to reject the cassation appeal for the unification of doctrine, determining that there is a legal reason for its rejection. Consequently, the decision of the High Court of Justice of Asturias that ordered the company to pay the managing director/senior executive employee the supplement or improved retirement pension conditions became final.

On the contrary, in the decision of the High Court of Justice of Catalonia, used as contrasting decision, the High Court of Justice, when referring to the Civil jurisdiction, declared itself unauthorised to resolve the managing director/senior executive employee’s claim. This person had been dismissed by the company and claimed in the labour jurisdiction the recognition of the severance payment established in the senior executive employment contract, for unfair dismissal.

The High Court of Justice of Catalonia applied the prior majority doctrine of the Social Chamber of the Supreme Court, which considered that the director’s relationship absorbs the senior executive employee relationship ("the link doctrine").

However, the STS decision of February 26, 2003, considers it necessary to make "some general remarks" before examining whether the procedural requirement of contradiction exists. (second legal ground of the judgment).

III. Interesting novelty introduced by the "general remarks" in the decision of the Fourth Chamber of the Supreme Court of February 26, 2003, on the compatibility between the posts of managing director and senior executive.

The starting point of the STS decision of February 26, 2003, is the fact that the cassation appeal for the unification of doctrine discusses "the compatibility of the position of a public limited company director, in the present case, a managing director, with the labour relationship of the senior executive, which was attributed to the plaintiff by means of a written contract".

In this context, the STS decision of February 26, 2003, makes a preliminary analysis and refers to the "most respected opinions of the commercial law doctrine, with repercussions in the area of labour law". The Supreme Court reproduces some quotes taken from doctrinal writings by legal scholars and, in particular, from the same author (S. Sánchez Gimeno) mentioned in the comments to the STS, 1st Chamber(?), decision of May 9, 2001.

In particular, the STS, 4th Chamber, decision of February 26, 2003, declares the following:

"As stated by some of the most authoritative writings in the commercial doctrine, with repercussions in the area of labour law, there is a well-known concern around the problem faced in the present discussion. The concern mainly affects the company: as it must find the way to deal with the legitimate interests of the directors effectively assuming the management of the company. This assumption implies, as could be expected, an effective and constant presence in the company, which is hardly compatible, in most cases, with performing other duties. It also implies having certain specific knowledge and experience which can hardly be transferred. The problem becomes more significant as it involves equally legitimate interests of the company itself, based on the fact that in a free market economy system, a company has to compete with other similar corporations when enticing and employing people on the basis of their professional qualifications. It is not necessary to insist in the fact that in those directors, the technical nature predominates over the politician nature; this is the reason why their designation is usually based in their professional knowledge, and not in being owner of a part of its share capital, or in the potential links they may have with important partners. The main concern essentially lies in assigning them a proportionate economic compensation and providing them with some minimum stability guarantees".

It is important to highlight the concern and the significance attributed by the Supreme Court, recognised until this date, to the "proportionate economic compensation" and the "minimum stability guarantees" of the company’s directors, as well as the current problems that the companies have in "attracting and keeping" good professionals.

The STS decision of February 26, 2003, continues by asserting that Spanish law is "insufficient" and "difficult", in the areas of labour and commercial law.

In the commercial context, the STS decision of February 26, 2003, describes the rules of the public and limited liability company law (Articles 127, and in particular, 130 of the public limited liability company Law, and Articles 61, 66 and 67 of the private limited liability company Law) as rules that "make difficult the appointment of directors who are particularly qualified and adequately remunerated".

In the labour law context, the STS decision of February 26, 2003, quotes Article 1. 3. c) of the Statute of Workers. This Article excludes from the scope of application of the aforementioned rule, "any activity limited solely to the performance of the duties of a member of the Board of Directors or member of the executive body in companies and only when his duties in a company imply the performance of tasks inherent to the post". Furthermore, it also quotes Article 2.1.a) of the Statute of Workers which defines the senior executive relationship as a special labour relationship, regulated by Royal Decree 1382/1985.

The STS decision of February 26, 2003 considers that, these labour regulations "seemed to provide an answer to" "a serious problem suffered in the commercial context": if the member of the Board of Directors "used to be limited" to the mere performance of his duties, "it would be natural to confer the management of the business to a professionally qualified person, with full dedication and with broad powers, although he should always comply with the orders received by the owner of the business regardless of how wide or general the orders may be". (Article 1.2 of Royal Decree 1382/1985).

After having stated the previous arguments, the STS decision of February 26, 2003, analyses the compatibility problems existing between the post of member of the Board of Directors and that of a senior executive employee. The decision declares that "the problem arises when we consider if the senior executive post can be assumed by someone who is already, or from that moment becomes, a member of the company’s Board of Directors".

The STS decision of February 26, 2003, asserts that "there has not been a single answer" due to the fact that "two interpretations" have been confronted: on the one hand, "the dualist or permissive view", according to which "it is possible to perform the two roles", therefore, "the member of the Board of Directors, as a senior executive, will exercise all duties, and he will be adequately remunerated, through an agreement"; on the other hand "the restrictive view" considers "the dual role described is impossible, from the moment the role and duties of a director absorb, per se, the duties attributed to a different legal title, such as that of a senior executive".

The STS, 4th Chamber, decision of February 26, 2003, states that the case law "has not provided a uniform and consistent answer" either. The STS decision of February 26, 2003, analyses, in this regard, the differences and evolution which took place in the Civil Chamber of the Supreme Court, from the STS, 1st Chamber decision of December 30, 1992 (Huarte case) to the STS, 1st Chamber decision of May 9, 2002 (Mattel Case).

The STS, 4th Chamber decision of February 26, 2003, summarizes the decisions issued in the Huarte and Mattel cases:

"The STS (1st Chamber) of December 30, 1992 (Huarte case) rejected the severance payment agreement established in a contract signed with an executive director, regarding the performance of the general direction duties, arguing that, as those specific duties were part of the tasks inherent to the member of the Board of Directors, the aforementioned contract should be regulated by the rules that govern the director relationship". However, "what the decision declares is the nullity of the severance payment agreement established in a senior executive relationship with a managing director, adducing that this agreement would breach the rules governing the remuneration of directors (lack of statutory evidence) and the principle of free revocation of this post". Nevertheless, "in order to assert the existence of those anomalies, it would be necessary to start from a previous premise, which consists in considering the senior executive tasks as part of the obligations pertaining to the post, and therefore, it would be incorrect to talk about a separate legal relationship governed by a body of rules different to the one that constitutes the legal status as director".

"However, the STS 4th Chamber decision of February 26, 2003, also sated that, a more recent decision issued by the STS (1st Chamber) decision of May 9, 2001 has come into existence" (Mattel case). This decision warns, in the first place that, the ruling issued in the Huarte case, considered "as a matter of fact, a different case"; on the other hand, in the Mattel case "it was the defendant company who established the severance payment, which by the plaintiff seconded when signing the proposal" and it is stated that "the powers and duties entrusted to the plaintiff by contract supersede those inherent to directors, as they involve senior executive and management duties". "Regardless of whether they form part of the Board of Directors, managing directors act as effective company bodies, and their relationship with the company is internal, although outside the company, directors implement the company objectives, in a position which surpasses that of directors, as they perform duties pertaining to the senior executive role entrusted to them. From a jurisdictional point of view, the Chamber deemed that it was a contract for services, governed by civil-commercial rules, thus excluding the labour regulations. The Court analysed the issue and declared that the relevant severance payment clause was valid and enforceable".

The STS, 4th Chamber, decision of February 26, 2003, moved on to examine the case law, asserting the existence of some "judicial pronouncements in the opposite sense", although there is certainly "an abundance of decisions that refer the issue to the Civil judge, after considering that the actions entrusted to the alleged senior executive are already attributed, ex lege, to the director".

However, the STS decision of February 26, 2003, also mentions the small number of decisions of the Social Chamber of the Supreme Court that contain "remarks to the opposite". The STS decision of February 26, 2003 quotes, in this sense, the decisions of the Supreme Court of October 25, 1990, (Spantax case, RJ 1990, 7714), May 13, 1991 (the well-known West Rubber case, RJ 1991, 3906), and of October 24, 2000 (Herban Motor case, RJ 2001, 1414). The Supreme Court’s decision of December 18, 2000 (Único case, RJ 2001, 819) could also have been mentioned.

The STS decision of February 26, 2003, reproduces a passage of the decision of the Supreme Court of October 24, 2000, considered to be "of great interest": "none of the events proven have stated that the employee’s duties were designed in an autonomous or independent way, and, with a complete lack of dependence, his powers could include the individual control of the company. Furthermore, no action by the Board of Directors, in which the employee may have taken a decisive part in the running of the company, is required to consider that the labour link could be absorbed by the commercial link".

Quoting a previous decision of the Supreme Court, the STS decision of October 24, 2000, adds that the plaintiff’s presence in the Board of Directors was formal rather than real ("the formal nature of the corporate position). It is important to highlight the decisions of the High Court of Justice of Madrid of October 31, 2000, and June 26, 2001, that deal with the "marginal" nature of the corporate position.

The STS decision of February 26, 2003, considers that the case law, in these Supreme Court decisions, "introduce important arguments regarding two main aspects of the problem". The first is a "practical" problem that refers to the "material justice of the case" and the second is "dogmatic and conceptual".

In connection with the "practical" aspect, the STS decision of February 26, 2003, emphasised that "it is not reasonable to leave someone who has been linked with the company through a specific agreement defenceless. This demands minimum guarantees which are provided by granting adequate stability and remuneration accordingly; this is possible if the terms of the agreement are adhered to, in other words, if one of the most deeply rooted traditional principles of Spanish Law is respected: being true to one’s word; it would then be secondary to classify the agreement as the instigator of a civil-commercial services relationship, to the judges of the civil jurisdiction, or of a senior executive relationship, subject to the judges of the labour courts".

When dealing with the "dogmatic" aspect, the STS decision of February 26, 2003, established that "whoever assumes this kind of relationship (service rendering relationship or employer-employee relationship), is contractually accepting certain limitations which do not in any way define the status of director; this manager has to follow company orders that derive from the Board of Directors. His participation in the aforementioned Board of Directors would not be essential in regard with those instructions, regardless of how generic they may be. At the same time, this person undertakes to be entirely dedicated to the management of the company and accepts non-compete clauses (commitment that he will not manage other companies). This gives rise to the creation of a figure and a legal status that cannot be confused with or supersede that of company director".

IV. Conclusions.

1.) To summarise, the STS, 4th Chamber, decision of February 26, 2003, is an important decision, although its arguments and criteria were only made obiter, due to the fact that it considers the existence of a lawful reason for rejection: the lack of contradiction between the decision under appeal and the contrasting decision.

2.) The STS, 4th Chamber, decision of February 26, 2003, appears to construe that the compatibility of the managing director and the senior executive employee is possible, setting aside the famous "link doctrine" and making ethical considerations. The STS, 4th Chamber, February 26, 2003, follows the arguments of the STS, 1st Chamber decision of May 9, 2001 (Mattel Case), which accepted the compatibility of the managing director’s position, and a service agreement contract for the purposes of exercising senior executive and management duties for the company.

The STS 1st Chamber, decision of May 9, 2001, is quoted and taken into consideration by the STS, 4th Chamber, decision of February 26, 2003. Furthermore, the STS, 4th Chamber, decision of February 26, 2003, also quotes and takes into consideration the scientific commercial doctrine, in particular, the one quoted by the commentators of the STS, 1st Chamber, decision of May 9, 2001, and especially the doctrine mentioned in SÁNCHEZ GIMENO’s comment, published in the "Revista de Derecho Mercantil".

3.) The STS, 4th Chamber, decision of February 26, 2003, is aware of the fact that the Social Chamber (4th Chamber) of the Supreme Court has issued abundant decisions that are contrary to the compatibility of the member of the Board of Directors and the senior executive employee. However, the STS, 4th Chamber, decision of February 26, 2003, mentions the "judgments decided in the opposite sense", despite the fact that sometimes, as this decision mentions, it deals with facts where the presence in the Board of Directors is more a matter of formality (or symbolic) than an actual fact, which is not the case with a managing director.

4.) Although for an exhaustive analysis reference should be made to the main part of this article, the following arguments of the STS, 4th Chamber, decision of February 26, 2003 must be highlighted:

- The "agreements must be observed".

- The problems and concerns for companies to "entice and maintain" the best corporate directors. Their need to have an "appropriate remuneration" and "minimum stability guarantees" and the "deficiencies" and "difficulties" in Spanish law in the "commercial context" and the "labour context".

- Finally, after an exhaustive analysis of the case law on civil and labour law matters, the STS, 4th Chamber, decision of February 26, 2003, asserts that the "case law" provided by the Social Chamber’s decisions (up to date they are a minority), "introduce important specific arguments related to two main aspects of the problem", one is a "practical" aspect, which refers to the "case’s material justice" and the other is "dogmatic and conceptual".

In connection with the "practical" aspect, the STS decision of February 26, 2003, emphasised that "it is not reasonable to leave someone who has been linked with the company through a specific agreement defenceless. This demands minimum guarantees which are provided by granting adequate stability and remuneration accordingly; this is possible if the terms of the agreement are adhered to, in other words, if one of the most deeply rooted traditional principles of Spanish Law is respected: being true to one’s word; it would then be secondary to classify the agreement as the instigator of a civil-commercial services relationship, to the judges of the civil jurisdiction, or of a senior executive relationship, subject to the judges of the labour courts".

When dealing with the "dogmatic" aspect, the STS decision of February 26, 2003, established that "whoever assumes this kind of relationship (service rendering relationship or employer-employee relationship), is contractually accepting certain limitations which do not in any way define the status of director; this manager has to follow company orders that derive from the Board of Directors. His participation in the aforementioned Board of Directors would not be essential in regard with those instructions, regardless of how generic they may be. At the same time, this person undertakes to be entirely dedicated to the management of the company and accepts non-compete clauses (commitment that he will not manage other companies). This gives rise to the creation of a figure and a legal status that cannot be confused with or supersede that of company director".

5.) Although we must wait for this new opinion to be confirmed, in a decision in which arguments are not made obiter, although the decision has not been issued by the General Chamber, the STS decision of February 26, 2003, has the important meaning of setting up a change of criteria by the Social Chamber of the Supreme Court.

In any event, it is advisable to proceed with caution for several reasons: firstly, because the STS, 4th Chamber, decision of February 26, 2003, provides obiter arguments; secondly, because although the facts stated relate to a managing director, the decision uses arguments that can be applied to cases where the presence in the Board of Directors is less important. What the decision argues, in this regard is that the mere "presence" of a member of the Board of Directors" is not essential. This is what can be highlighted from the "dogmatic" aspect.

6.) This article does not enter into the debate of whether the larger opening and realism showed by the Civil and Social Chambers of the Supreme Court, necessarily have to begin from the existence of two legal relationships (the corporate director relationship, and either the labour - senior executive employee- or the commercial relationship -services agreement-). Let us note, as PAZ-ARES describes, that, in purity, these two legal relationships do not coexist with each other. There is just "one legal director relationship integrated by corporate sources -law and statutes- and contractual sources -the clauses of the so-called labour or commercial contracts-".

Footnotes:

1 Regarding the position of both, the Civil and the Social Chamber of the Supreme Court, the following book must be highlighted: "Administradores sociales, altos directivos y socios trabajadores. Calificación y concurrencia de relaciones profesionales, responsabilidad laboral y encuadramiento en la Seguridad Social". A. DESDENTADO BONETE and E. DESDENTADO DAROCA, Valladolid, Lex Nova, 2000, chapter 1, pp 31 et seq.

2 Note the interesting comments made by S. SÁNCHEZ GIMENO, "Los contratos de alta dirección- civiles o laborales- celebrados con los administradores ejecutivos de sociedades", Revista de Derecho Mercantil 245 (2002), pp 1461 et seq, and by C. DÍAZ-REGAÑÓN, "Comentario a la STS de 9 de mayo de 2001", CCJC 58 (2002), pp 191 et seq.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.