In Pat Keating v Shannon Foynes Port Company [2022] IEHC 505, the High Court (Sanfey J) held that the CEO of Shannon Foynes Port Company was entitled to  performance-related-payments for the amounts of which were approved by the remuneration committee, but which the board of directors had declined to authorise on the basis of a stated policy of the Minister of Transport, Tourism and Sport (the company’s main shareholder) that performance related payments should not be made to CEOs of semi-state entities. The court emphasized that while a Company’s directors may be required by statute to have regard to such policies, this obligation cannot override their fiduciary duty to act in what they consider to be in the best interests of the company.

Background

The defendant, Shannon Foynes Port Company (the “Company”) is a designated activity company registered under the Companies Act 2014 permitted to dispense with having “DAC” in its name. The Company is a Semi-State company that, inter alia, facilitates the flow of goods and attended tracking information throughout the Shannon Estuary. The plaintiff, Mr. Keating, accepted a position as CEO of the defendant in May 2008. In 2010, the plaintiff and defendant entered into a written service agreement which was backdated to 2008 and a further, identical service agreement in 2011. Under these contracts, the plaintiff was entitled to a basic salary and was eligible to participate in a performance related bonus scheme each year awarded at the exclusive discretion of the Remuneration Committee. The bonus was a performance related pay scheme whereby if specific performance targets were met by the CEO, the Committee could award him a payment of up to 35% of his salary.

However, between 2009 and 2017, the plaintiff was not once paid a bonus, despite it being “awarded” by the remuneration committee and the board of directors considering discharge of the performance-related bonus to the plaintiff to be in the interests of the Company. The only basis on which the bonus payment was not made was that the directors considered that they could not go against the clearly expressed wishes of the Company’s shareholders. The board considered that it was constrained in the exercise of its discretion by the expressed policy of the Minister (articulated in correspondence between the Minister and the Company) not to award such payments. Given that the Minister was the main shareholder of the Company, the board believed that it could not disregard the Minister’s wishes.

Decision

The main point of contention related to the manner in which the board’s discretion to award the bonus payment should have been exercised. The Company’s board admitted that it wished to award the plaintiff a bonus and that doing so would have been in in the best interests of the Company. In fact, the board minutes clearly indicated that the Remuneration Committee was satisfied that the plaintiff had met the performance criteria and even determined the appropriate amount of the bonus payment he should be awarded. However, it claimed that its discretion to award the payment was subject to the wishes of its shareholders and this could not be overridden. In making this claim, the board relied on s 37(2) of the Harbours Act 1996 which requires certain State companies to “have regard” to government guidelines or policy in determining remuneration or allowances to be paid to the chief executive. That section also provides that a “company shall comply with any directives with regard to such remuneration, allowances, terms or conditions which the Minister may give to the company with the consent of the Minister for Finance”.

Having reviewed the relevant communications issued by the Minister, Sanfey J found that no directive was ever issued for the purposes of the Harbours Act. However, he did accept that a government policy not to award bonuses was in place and therefore agreed with the Company that its board was obliged to have regard to this policy.

He then turned to the question of whether in light of this, the directors had exercised their “exclusive discretion” under the plaintiff’s contract appropriately. In doing so, he first examined case law in England and Wales relating to how director’s discretion to award bonuses must be exercised. The judge held that the discretion was required to be exercised bona fide and in a manner which was not irrational, perverse, or capricious. More importantly, he considered the fiduciary duties owed by the directors to the company under s 228(1) of the Companies Act, in particular s 228(1)(a) which requires the director to “act in good faith in what the director considers to be the interests of the company”. While he acknowledged that s 228(1)(h) provides for a duty to have regard to the interests of shareholders, he observed that this is merely an aspect of the duty that the director owes to the company. Ultimately, directors owe their duties to the company alone, and not its shareholders.

Reading this statutory duty in conjunction with s 37(2) of the Harbours Act, the court held that while the board must have regard to Government policy, the discretion of the board to award the bonus must ultimately be exercised in the best interests of the company. In other words, government policy is just one factor to be considered in the overall consideration of the company’s interest. The primary duty of directors is owed to the company and s 37(2) of the Harbours Act does not override this fiduciary duty. In this case, there was clear evidence that the directors of the Company considered that awarding the bonus to the plaintiff was in the best interests of the Company. The only factor that prevented the board from awarding the payment was that they believed that they could not go against the express wishes of the shareholders. Thus, the directors took a course of action which they considered was not in the best interests of the Company, solely on the basis that this was what the shareholders wanted. As Sanfey J put it, “unquestioning adherence to the wishes of the shareholders cannot constitute a valid exercise of the directors’ discretion”. This was a breach of their fiduciary duty to the company to act in its best interests.

On this basis, the court found that if the directors had exercised their discretion in a manner consistent with their fiduciary duty, they would have authorised the payment to the plaintiff. However, the judge acknowledged that this alone was not enough to find in favour of the plaintiff. This is because the directors’ fiduciary duty is owed to the Company and not to any to individual employee such as the plaintiff. The judge noted with approval the comment in Courtney, The Law of Companies that the net effect of section 224 and section 228(1)(h) of the Act is that “directors are obliged to have regard to the interests of employees and members but the recipients of the statutory favour may not themselves enforce the directors’ duty”.

However, the court found an interesting route through which the plaintiff could benefit from this duty – through his contract of employment with the Company under which the Remuneration Committee was obliged to exercise a discretion as to whether or not to pay a bonus. The court found that a failure by the directors “to exercise their discretion appropriately, particularly one where a discretion exercised in the best interest of the Company would have resulted in payment of [the bonus] …constitutes a breach by the Company of the contract which has caused damage and loss”. The judge therefore held that the plaintiff was entitled to the performance related payments under the contract between 2010 and 2016.

Significance 

Boards of State companies should consider the following:

1. As company directors, they must always act in what they consider to be the interests of the company, and not what they think (or are told) the Minister or the Department of State wants them to do;
2. an exception to this golden rule is where a specific legislative provision allows a Minister to issue a direction to the board of a State company and in such circumstances, the board must follow that direction even if they do not believe that it is in the best interests of the State company;
3. where a board apprehends that such a direction may be made which the board believes not to be in the interests of the company, it is appropriate that the board should communicate their belief and the reasons therefor, to the Minister;
4. where a board is required to take action on foot of a Ministerial direction and where the directors do not believe that course of action to be in the interests of the company, the board should ensure, first, that a formal direction has actually been made and secondly this should be clearly minuted so that there is objective justification for the board taking action which they do not believe to be in the interests of the company.

For further information contact:

Dr Thomas B Courtney, Partner and Head of Company Compliance and Governance

Joanelle O’Cleirigh, Partner, Litigation & Dispute Resolution

Suzanne Kearney, Of Counsel, Professional Support Lawyer