The recent case of Fasi v Specialty Laboratories Asia Pte Ltd (No 2), [1999] 4 SLR 503, illustrates important principles of Singapore law on the payment of compensation to directors upon their termination. Pursuant to Section 168(1) of the Companies Act, it is unlawful for a company to provide directors with compensation for loss of office unless such payment is disclosed to the shareholders and approved by them at a general meeting.
In the Fasi Case, the plaintiff was a director of Speciality Laboratories when he was appointed managing director of the company. Under his service agreement, he was entitled to severance compensation equivalent to 24 months' salary in exchange for a 24-month post-termination, non-competition covenant in the event of termination without cause. If his employment were terminated with sufficient cause, the plaintiff would receive compensation equivalent to six months salary in exchange for a 12-month non-competition obligation.
Fasi commenced an action against the defendants for breach of the service agreement. Speciality Laboratories claimed that it had terminated the agreement with cause and that the term granting severance benefits to the plaintiff was illegal pursuant to Section 168(1) of the Companies Act, as it had not been approved by the shareholders.
The fact that the compensation was to be paid to the plaintiff for loss of office as managing director, and not as director, was not disputed. Section 168 is not restricted to payments made to company directors as directors, but extends to payments to directors as executives as well. In this respect, Section 168 is wider than its Australian, New Zealand and British equivalents.
As the Fasi Case illustrates, not every payment made to a director upon cessation of his employment is caught by Section 168. Only payments aimed at compensating the director for loss of office are covered. Payments made as a result of other considerations, even though they may be coincidental with the loss of office, are not prohibited under Section 168.
In the Fasi Case, the true nature of the severance payment was not compensation for loss of office but rather a payment in exchange for a period of non-competition by the plaintiff. The intent and object of the payment was consideration for the plaintiff's promise not to compete with the defendant's business for a specified period after leaving the company. As such, the severance compensation had not contravened Section 168 of the Companies Act and was not unlawful.
It can be argued that terms of this kind may be used to circumvent Section 168. The court in Fasi did not ignore this possibility. It observed that compensation payments would not be valid if the non-competition provision was a mere sham (ie, where the company was not really concerned with any non-competition and had merely inserted a non-compete covenant in order to circumvent the provisions of Section 168).
For further information on this topic please contact Gary Pryke at Drew & Napier by telephone (+65 531 4104) or by fax (+65 535 4864) or by email ([email protected]). The Drew & Napier web site can be accessed at www.drewnapier.com .
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