Board Member Remuneration – A Conflict of Civil and Labor Law

Unknown
In accordance with Article 64 (2) of the Federal Law On Joint Stock Companies and Article 32 (2) of the Federal Law On Limited Liability Companies members of the board of directors (BOD members) are entitled to remuneration and/or compensation of expenses connected with participating in meetings of board of directors (travel costs, etc). The amount of such remuneration and/or compensation is determined by a decision of the general shareholders meeting. The amount of remuneration may be decreased for instance in the event of non-participation in BOD meetings, but only by the relevant decision of the general meeting of shareholders or participants (High Arbitration Court Ruling No. 15052/06 of 22 January 2007).

Disputes on lawsuits filed by ex-BOD members over remuneration are settled by Russian arbitration courts. Disputes over the termination of their powers may be settled by courts of general jurisdiction (Decision of Plenum of Supreme Court No. 17 of 22 November 2003).

In practice, several types of remuneration may be paid, including a percentage of the general director's salary; a percentage of the company's profit (after taxes); a fixed amount; and other types of remuneration, determined by the general meeting of shareholders or participants.

Main discussions concerning remuneration payments to BOD members are preconditioned by the conflict of civil and labor law provisions.

On the one hand, the legal status of BOD members is regulated by civil (corporate) law. BOD members are elected by the general meeting of shareholders or participants. BOD powers are determined by the law and/or the company's charter. Civil law stipulates no obligation to conclude an agreement with BOD member in order to pay his remuneration. If such an agreement is concluded then it will be considered as an agreement the type of which is not provided by the Civil Code.

On the other hand, the BOD member is considered a top manager according to Article 273 of the Labor Code. A top manager is an individual who, in accordance with the foundation documents of the legal entity, manages its activity. At first glance, this means the application of labor law to the work done by BOD member. Indeed, in accordance with Article 64 (1) of the Federal Law On Joint Stock Companies, BOD carries out general management of the company and only an individual according to Article 66 (2) of the Federal Law On Joint Stock Companies may become BOD member. Authority and BOD membership in limited liability companies are determined by its charter and may be similar to the above joint stock companies' regulations.

In addition, Article 11 of the Labor Code sets forth that labor law provisions may be applied to BOD members who have concluded labor contract with the company.

This contradiction may result in conflicts.

A labor agreement concluded with BOD member does not mean that the BOD member may be dismissed on legal grounds set forth by the Labor Code. From the point of view of corporate law BOD member's powers may be terminated early upon the decision of general meeting of shareholders or participants.

If a civil law agreement is concluded, for example, between the general director and a BOD member, such an agreement will not constitute unconditional grounds for payment of remuneration to him. In any event, the payment shall be approved by the general meeting of shareholders or participants.

Thus, in order to eliminate contradictions in the regulation of legal relations between BOD members and the company, it is not recommended to conclude labor agreements with them. Other agreements with BOD members are possible, but payment of any remuneration to them should be approved by the general meeting of shareholders or participants.