High Court orders company to pay unpaid bonuses to its CEO

The High Court has recently delivered judgment in the case of Keating v Shannon Foynes Port Company in which the defendant company (the Company) was ordered to pay its CEO €297,863 in outstanding bonuses. 

The directors argued that they believed themselves to be constrained from awarding performance related payments (PRPs) to their CEO, because they had to comply with the policy of the Company's shareholder (the Minister for Transport). In deciding to follow the wishes of the shareholder and to not pay these bonuses – even though they had concluded that they were in the interests of the company – the Court found that the directors had breached their fiduciary duty to the company and the Company's contract with its CEO. 

The case affirms that a director's duties are owed to the company and not to the shareholders.

Background

The main shareholder of the Company, Shannon Foynes Port Company, is the Minister for Tourism, Transport and Sport (the Minister). In 2008, Mr Keating (the CEO) formally accepted the position of CEO and entered into a written service agreement with the Company, which gave him an entitlement to a 35% PRP, if approved by the remuneration committee, having reviewed his performance in the relevant period and exercising its "exclusive discretion". The CEO submitted that the inclusion of bonus payments was "a fundamental term of the contract" from his perspective.

While the CEO received PRP in 2009, these payments were withheld each year from 2010 to 2016. Each year, the remuneration committee recommended the payment of PRP and each year the board declined. This was not because the directors disagreed with the committee's assessment of the CEO's performance, but because they considered themselves to be constrained by the policy of the Minister for Transport towards PRP in commercial state bodies.

The Company asserted that its decision not to award payment "was a bona fide, rational and reasonable exercise of its discretion in all of the circumstances". ​The Company submitted that it was precluded from discharging PRP, because it was subject to a 'directive' issued by the Minister pursuant to the Harbours Act 1996 (the legislation governing the Company), which required the Company to comply with Government policy not to pay bonuses to CEOs of commercial state and semi-state companies, of which the Company was one.

Decision

Sanfey J examined the extensive correspondence between the Department and the Company regarding PRP. He determined that there had been no ministerial 'directive' within the meaning of the Harbours Act. However, he did find that there was a Government policy in place that PRP should not be paid to the CEOs of commercial state bodies.

​​Sanfey J then went on to consider the issue of directors' duties under the Companies Act 2014 (the 2014 Act) and the manner in which the board exercised its discretion regarding the the awarding of PRPs. In particular, he looked at section 228(1) of the 2014 Act, which provides that a director must "act in good faith in what the director considers to be the interests of the company".

The 2014 Act makes it clear that the directors owe these duties to the company "and the company alone". Sanfey J was satisfied that "the position was no different prior to the enactment of the 2014 Act, and that the principle set out in Percival v Wright – that the directors do not have a fiduciary relationship to the shareholders and do not owe them fiduciary duties – applies to the present case".

He concluded that, while the Company could exercise discretion with regards to the payment of PRP and consider the Government policy (in adherence to the Harbours Act), this discretion had to be exercised within the framework of the interests of the company. The directors had made it clear that they considered the interests of the company to lie in discharging the PRP. Yet, despite this, they refused to pay the CEO and put the wishes of the shareholder (the Minister) ahead of the interests of the company. While he acknowledged that the directors were in a difficult situation, Sanfey J felt that the directors had given "undue weight to the wishes of the shareholder" and ignored the best interests of the Company.

Sanfey J further noted that the Minister's policy on PRP "was not intended to address the company’s individual circumstances, much less its best interests, but rather those of the nation and the economy in particular". He therefore found that, ​​in circumstances where the directors were under a duty to act in the interests of the company, a decision not to so act solely because of a generic public policy did not constitute a valid exercise of the directors' discretion. 

Consequently, the Court found that the directors had failed to observe their fiduciary duty to the Company and this led the Company to breach its contract with the CEO. The Court ordered the Company to pay the CEO his accrued PRP.

Comment

This case is an important reminder that directors owe their fiduciary duties to the company and not to its shareholders. While the directors in this case were entitled to exercise their discretion with regards to paying the bonus and following the Minister's policy, this discretion did not override their fiduciary duty to act in what they considered to be the interests of the company.

Having acknowledged that payment of the bonuses was in the company's best interests, the directors could not then disregard those interests in order to follow ministerial (and shareholder) wishes; particularly in circumstances where, the Court found , there had been no ministerial directive within the meaning of the Harbours Act and so, no legal impediment to making the payments.

Date published: 24 October 2022