This case illustrates the importance of ensuring that any board delegations of authority (in this case in relation to the remuneration of executives) are clear and properly made and recorded. The Court rejected assertions that there had been a convention of individual directors effecting changes to directors’ remuneration or that the positions of Managing Director, CEO or CFO carried inherent authority to make such changes, without full board approval, in the absence of formal delegation by the board. Boards should regularly review their delegation arrangements (and if they don’t already have one, consider adopting a delegations manual) to ensure that directors (and other delegates) are clear in relation to what exactly they are authorised to do on behalf of the board.
Mr Jones, Mr Yeates and Mr Greig were directors of Invion Ltd (Invion). The Invion board had agreed to extend the notice period in the directors’ employment contracts to 12 months with a requirement that the directors work out this period. However, after this, the directors unilaterally amended their contracts without the approval or knowledge of the rest of the Invion board to allow resignation at will with a termination payment equal to 12 months’ salary.
Chief Justice de Jersey in the Supreme Court of Queensland rejected the following assertions by the directors that they were authorised to make the variations:
- there was an oral, un-minuted agreement in 2000 that Mr Jones (along with the other founding directors) could alone exercise the authority of the board. De Jersey CJ found that there was a total lack of written evidence of this point and that Mr Jones’ oral evidence was unconvincing and in direct contrast to the evidence of other, more credible, witnesses that matters of remuneration were to be dealt with by the board as a whole. Further, there were numerous board minutes of instances where the board (rather than a single director) authorised employment contracts and the Invion financial reports included statements to the effect that remuneration of directors is dealt with by the board as a whole;
- Mr Yeates had implied authority as Managing Director and CEO to “manage all aspects of [Invion’s] business. De Jersey CJ noted that Mr Yeates’s employment contract specified that financial and staffing issues could only be made as delegated by the board and Mr Yeates could point to no such delegation. There was also no evidence that the board had acquiesced by signing off financial reports as they had not been advised of the variations. Further, the Invion constitution conferred no relevant authority and in fact prevented a director from voting in respect of any contract in which they had a personal interest; and
- Mr Greig had authority to bind Invion to the contracts as CFO. De Jersey CJ found that there was no proper delegation of authority to Mr Greig as CFO to vary contracts and that it should have been clear to him, as an experienced businessman, that decisions of this magnitude would require the approval of the full board.
De Jersey CJ also found that the following conduct by the directors was dishonest:
- failure to inform the board of the variation to their employment contracts when advancing their case for an increase in their performance rights and following the actual amendment of the contracts;
- the means by which they secured the amendments which occurred without reference to the board and amongst themselves which was a “collegial or corporate or complicit endeavour” to avoid the requirement of board approval;
- failure to disclose the variations to the board before their resignation 6 months later, particularly in circumstances where there was doubt surrounding the ongoing solvency of Invion and where the directors themselves were the beneficiaries of a large contingent liability (in excess of $1 million); and
- failure to ensure that the 2011 annual report recorded the “termination benefit” arising from the contractual amendments.
On the basis of the above, de Jersey CJ found that:
- the directors had breached their common law and statutory duties to exercise reasonable care and diligence, act in good faith in the best interests of Invion and not to use their position to gain a personal advantage for themselves or someone else, and Invion was entitled to statutory and equitable compensation; and
- Invion was entitled to restitution for unjust enrichment (in connection with the terminations payments) on the basis that the changes to the employment contracts were ineffective.
See the case.