The Compensation of Board Members in the Corporation and the Possibility of Judicial Limitation

Legal Insight

January 2025

George Kefalas, LL.M. (mult), M.Sc.

Summary: A common area of tension between the management and shareholders, usually the minority, in a corporation is the level of compensation set for the members of the Board of Directors for the administrative services they provide to the company. For this purpose, the corporate law specifies a procedure for determining the compensation of Board members, while also providing the option for minority shareholders to appeal to the court for a reduction of any approved compensation. This article examines both the approval process of the compensation by the General Assembly and the criteria for its eventual determination by the court.

1. Introduction

The issue of determining the compensation of Board members is a typical case of a conflict of interests between the members and the company. This is because the Board members will seek to receive the highest possible compensation for their services, at the expense of the amount of dividends that will ultimately be distributed to the company’s shareholders. For this reason, the legislator did not leave this decision to the Board itself, but instead refers to the law, the company’s articles of association, the remuneration policy, or a specific decision by the General Assembly.

Additionally, there is the option for an appeal to the court to protect the minority shareholders in case of the approval of excessive compensations for the Board members. This possibility is another tool in the minority’s arsenal (see, among others, the right to an extraordinary audit here, and the right to shareholder information here) to protect it from arbitrary actions by the majority (see concerning the abusive actions of the majority here).

2. Conditions for Granting Compensation to Board Members

First, we must distinguish between compensations received by a Board member for organic-type services provided to the company and compensations for services provided based on a special relationship, such as an employment contract, project contract, or mandate. In the latter case, which is outside the scope of this article, the conditions of Article 109 of Law 4548/2018 do not apply, and the contract is evaluated according to the terms of the law regarding contracts between the company and related parties (see Articles 99-101 of Law 4548/2018).

Furthermore, regarding compensation for organic-type services, we must distinguish between compensations that are charged to the company’s administrative expenses and compensations that consist of a share in the company’s profits.

- Compensation Charged to Administrative Expenses

Paragraph 1 of Article 109 of Law 4548/2018 stipulates that compensation must be provided by the law, the articles of association, or the company’s remuneration policy. Otherwise, the compensation must be approved by a special decision of the General Assembly (which is the most common). As stated in Paragraph 2 of Article 131, in such cases, the General Assembly decides by a show of hands. Unless otherwise stipulated in the company’s articles of association, the decision is taken by the General Assembly with the usual quorum and majority.

- Compensation Consisting of a Share in the Profits

In this case, there must be a specific provision in the company’s articles of association that allows for the payment of compensation to Board members in this manner. If such a provision exists, the amount of compensation is determined by the General Assembly, which decides with the usual quorum and majority. The law explicitly states (Article 109, Paragraph 2) that this compensation is taken from the remaining net profits after the statutory deductions for the regular reserve and for the distribution of the minimum dividend to shareholders. It is important to note that the deduction for the regular reserve amounts to 1/20 (5%) of the net profits, while the minimum dividend is set at 35% of the net profits (after the deduction for the regular reserve and other credit items in the profit and loss statement that do not originate from realized profits). However, it is accepted that the decision of the General Assembly (with an increased quorum of ½ and a majority of 80% of the represented capital) not to distribute the minimum dividend does not affect the possibility of paying compensation to Board members from the profits.

The law also provides for the possibility for the General Assembly to allow the advance payment of compensation for the period until the next regular General Assembly, subject to approval by the subsequent General Assembly.

3. Judicial Review of the Compensation Approved by the General Assembly

Paragraph 5 of Article 109 provides for the possibility of appealing to the court, which can reduce the compensation of Board members if it deems it excessive. The provision for judicial review of Board members' compensation was deemed necessary to protect the minority, as, in general, the majority of the General Assembly tends to coincide with the management of the company.

Thus, compensation that has been paid or decided to be paid to a Board member can be reduced by the court if, in its reasonable judgment, it is excessive and minority shareholders representing 1/10 of the share capital objected to this decision. If the above conditions are met, shareholders representing 1/20 of the share capital can, within 2 months of the decision, apply to the court for a reduction of the approved compensation.

However, two critical points must be noted:

The decision of the General Assembly approving compensation for Board members cannot be annulled due to abusiveness for this reason (see Thessaloniki Court of First Instance 5455/2022, Court of Appeals of Thessaloniki 131/2023, Court of Appeals of Thessaloniki 587/2023). The minority can only request a reduction of the compensation to an appropriate level (see Thessaloniki Court of First Instance 5455/2022). It is a different issue to annul a decision, such as a decision not to distribute dividends or to distribute a reduced dividend, where the shareholder’s right to a dividend may be affected. In such cases, the validity of the General Assembly’s decision will also take into account the level of compensation granted to Board members ("compensation of dividends").

The decision of the General Assembly is subject to judicial review regarding both the compensation paid and the advance payment of compensation (Thessaloniki Court of First Instance 4465/2023).

It has been argued that, based on the wording of the law, the court can reduce the compensation approved by the General Assembly, but it cannot eliminate it entirely.

4. Criteria for Determining the Compensation Level for Board Members

The law specifies that the court decides (on the application to reduce the compensation approved by the General Assembly) taking into account, in particular, the duties and responsibilities of the member, the efforts made, the level of similar compensation in other comparable companies, and the company’s status, performance, and prospects. Specifically, the criteria considered by the courts of first instance when determining whether compensation is excessive or not are as follows:

The financial performance of the company.

The company’s previous compensation practices.

The qualifications of the Board members.

The contribution of the Board members to the increase in the company’s profits for the relevant period.

The level of compensation for directors in other similar companies.

For example, in the case of decision 176/2024 by the Athens Court of Appeals, the court ruled that the compensation charged to administrative expenses for the Board members was not excessive, concluding that: “Considering the company’s turnover, which amounted to €87,071,777 in 2017-2021, making it fourth among 16 in the field of pharmaceutical warehouses, the long-standing compensation policy of the company, and especially the duties and responsibilities of the advisors, the efforts they have made, their effectiveness, the company’s performance, and prospects, as detailed above, and noting that judicial review cannot be oriented toward the usual level of compensation but toward checking the excessiveness of the compensation in relation to the reasonable and appropriate level for achieving the business goals of this specific company, the court rightly determined that the compensation of the Board members, under Article 27 Paragraph 1 of the company’s Articles of Association and Article 109 Paragraph 1 of Law 4548/2018, cannot be deemed excessive by reasonable judgment.”

Similarly, in decision number 297/2022 by the Court of First Instance of Katerini, the court considered the Board members' participation in all board meetings, monitoring the management's decisions, involvement in their adoption, and contribution to achieving the corporate goals, as well as the fact that similar compensation was foreseen in other related companies, even in those showing losses.

5. Conclusion

Through the process outlined in Paragraph 5 of Article 109 of Law 4548/2018, the minority shareholders are given the opportunity to prevent any potential abuse by the majority, which often has every incentive to grant high compensations to management members, typically chosen by or consisting of the same people. This process adds to a series of other rights provided to protect the minority.