The area of bonus entitlements in financial institutions is still a source of controversy and litigation both in the UK and Ireland at a time when austerity programmes are being adopted by many companies. A very interesting recent case on this subject is the decision against Commerzbank1 which arose in the context of the sale of Dresdner Kleinwort’s business to Commerzbank which was announced on 31 August 2008 and completed on 12 January 2009.
In 2008 Dresdner Bank AG (DBAG) was a wholly owned subsidiary of Allianz until its sale to the second defendant, Commerzbank AG which was announced on 31 August 2008 and completed on 12 January 2009. A division of DBAG, Dresdner Kleinwort Investment Banking (DKIB) carried on the business as a global investment bank. Those who worked in DKIB were seconded to Dresdner Kleinwort Limited (DKL), a service company wholly owned by DBAG.
Each of the 104 claimants was employed by DKL and had contracts of employment with DKL. Those contracts incorporated the DKL Employment Handbook. Section 1.4 of the Handbook provided to the effect that the Company reserved the right to vary the terms and conditions of employment generally.
In a bid to retain staff in advance of the sale of DBAG to Commerzbank, a board meeting of DBAG was held on 12 August 2008 at which the CEO of DKIB, Dr. Jentzsch, explained the need to define a minimum bonus pool for 2008 for DKIB so as to ensure employee stability. The Board ultimately approved the creation and communication of a bonus pool of €400 million.
On 18 August 2008, Dr. Jentzsch made an announcement at what was known in DKIB as a 'Town Hall' meeting, guaranteeing a minimum bonus pool of €400m for 2008 to be allocated to individuals on a discretionary basis according to individual performance. In December 2008, a 'bonus letter' was sent to each of those employed in DKIB by DKL stating that a discretionary bonus for 2008 had been provisionally awarded at a specified sum, but of significance this letter stated that it was subject to a material adverse change clause (MAC clause). This letter stated that the award was subject to review and would be reduced if “additional material deviations” in actual revenue and earnings, as against the forecast for the months of November and December, were identified by Dr Jentzsch in a review that would take place in January 2009.
On 12 January 2009, the sale of DBAG to Commerzbank was completed and Dr Jentzsch was replaced. In February 2009, DBAG's board decided there had been material deviations from DKL's forecast revenue and earnings. In reliance on the MAC clause, the claimants were advised that their provisional bonuses had been reduced by 90%.
The claimants commenced High Court proceedings for breach of contract to recover the balance of their bonuses set out in the 19 December 2008 letters which they argued they were entitled to as a result of:
- the announcement of 18 August 2008 (and subsequent references to a guaranteed minimum pool), and
- the provisional bonus awards set out in the 19 December letters being subject only to the identification of "additional material deviations" from the forecast revenue and earnings for the months of November and December.
The main issue to be considered by the High Court was whether the announcement of 18 August, and/or any subsequent statements made on behalf of DKL, gave rise to a binding contractual obligation, in that the contracts of employment of each of those employed in DKIB was varied by DKL by virtue of the operation of paragraph 1.4 of the Employment Handbook to the effect that discretionary bonuses for 2008 would be determined by reference to a guaranteed minimum bonus pool. Secondly, whether the MAC clause was introduced in breach of contract and if not whether DKL was entitled to rely on it.
The court ultimately held that the announcement was sufficiently certain to be capable of giving rise to a binding obligation and that the announcement made by Dr Jentzsch was “clear and unequivocal”. There was also evidence to support the conclusion that the announcement was made with the intention of creating a legally binding obligation to those employed in DKIB. The Court referred to the fact that the guaranteed bonus pool was created to stabilise the workforce at a time of great uncertainty for both DBAG and DKIB. The related point was that the guaranteed bonus pool was created in response to the Financial Services Authority’s (“FSA”) requirement that a retention plan be put in place to address the risks posed by a mass defection of staff. The FSA had stated that DKIB’s regulated UK entities had been put on the FSA’s Firm Watchlist as a result of “specific risk posed by the planned restructuring of the Group and resulting uncertainty about the implications for the future of the Investment Bank”. The need to satisfy the concerns of the FSA pointed strongly towards an intention to create legally binding obligations. Further of significance was that the proposed guaranteed minimum bonus pool was approved by the boards of both DBAG and Allianz which approval was obtained prior to the announcement. The court was also satisfied that the contracts of employment had been varied under the Employee Handbook. Accordingly, the promise made by Dr. Jentzsch on 18 August had given rise to a contractual obligation to pay discretionary bonuses from a guaranteed minimum pool of €400m, depending in the case of each individual upon their performance.
While it was not necessary for the High Court to consider the issues posed by the introduction of the MAC clause, it did so and addressed those issues on the basis that the 18 August announcement did not give rise to a contractually binding obligation. The court held that the introduction of the MAC clause was a breach of the employees’ implied terms of trust and confidence, and was introduced simply as a means of enabling DBAG to go back on the promise made by Dr. Jentzsch as the result of pressure from Commerzbank. In any event, the court went on to say that had the respondents been entitled to rely on the MAC clause, they had failed to comply with its terms, and the use of the words "if necessary" meant the bank would have to show that there was no other option open to it other than to make reductions to the provisionally awarded bonuses.
This case has wide relevance to the financial sector since banks and institutions facing liquidity problems or merger scenarios in 2012 may well be required to honour pre-agreed bonus terms and conditions. This case will lead to more careful scrutiny of bonus terms and commitments in any future cases where bonuses are reduced or reneged upon.