A company’s board of directors had established an indicative framework for the annual pay negotiations which was to ensure that the CEO could safeguard the interests of the company in the best possible manner. The company was pressured financially, and it was quite essential for it to retain its key employees.
During the pay negotiations, the CEO assessed that there was some uncertainty and dissatisfaction among the employees because of the financial difficulties. Therefore, the CEO decided to give pay increases and bonuses to a number of employees without the consent of the board of directors.
After that, a dispute arose between the board of directors and the CEO who ended up being dismissed.
The company believed that the CEO was in material breach of his contract by giving pay increases and bonuses, which were in disparity with the company’s financial results, without the consent of the board of directors. The company demanded that the CEO paid damages for the direct financial loss suffered by the company, equal to the amount of bonuses paid to the employees.
The CEO denied that he had been in breach of his obligations to the company. He pointed out that the severance pay only lapsed on legitimate summary dismissal for material breach.
In support of his argument, the CEO emphasized that the pay increases and the bonus payments fell within his authority as chief executive officer. In his opinion, the transactions were not unusual, but on the other hand a loyal and operationally well-founded safeguarding of the company’s interests in retaining employees and rewarding their special efforts.
Decision of the Supreme Court
The Supreme Court was to decide whether the CEO had been in breach of the terms of his employment.
According to the Court, the provisions of the CEO’s contract are to be interpreted to mean that there is no requirement of materiality in connection with a breach.
The Supreme Court also attached special weight to the allocation of authority between the board of directors and the executive board. It was standard practice in the company that the CEO recruited new employees, entered into agreements on pay and employment terms and held annual pay negotiation meetings. The CEO was further authorized to grant discretionary bonuses to the employees.
The Supreme Court was not satisfied that the board of directors had limited the CEO’s authority relative to previous years’ pay negotiations. As the transactions were neither unusual nor particularly significant, the Supreme Court held that the CEO had not breached his obligations to the company.
The Supreme Court dismissed the claim for damages against the CEO and also granted him the right to severance pay.
iuno’s opinion
The case is interesting because it concerns the allocation of authority between the board of directors and the executive board. The distribution of responsibilities is particularly interesting when the scope of the CEO’s powers is in practice extensive, but the board of directors later wants to limit the authority.
In such cases, it is essential that the board of directors is clear about its limitation of the CEO’s authority relatively to previous practice as they may otherwise be bound by the CEO’s actions.
[Supreme Court judgment 2/2012 of 2 May 2012]