CEO had not breached his service agreement

A CEO's decision to pay extraordinary bonuses and salary increases was not considered giving rise to liability or constituting a breach of the service agreement. This was determined by the Supreme Court.

The Supreme Court was asked to decide whether the CEO had acted beyond his powers by deciding to pay bonus and salary increases.

The case concerned a CEO of a biotechnology company, who had decided - without consulting the board - to pay extraordinary bonuses and salary increases to a number of employees despite the company's bad financial situation. The CEO was terminated on the grounds that he had acted beyond the powers of his service agreement.

In connection with the termination, the company claimed that the CEO was to pay damages equivalent to the bonus he had paid to the employees. The CEO did not recognise the claim for damages. On the contrary, he claimed severance pay to which he was entitled under the service agreement in case he was terminated by the company "without such termination being due to the CEO's breach".

Supreme Court ruling

The Supreme Court found that, based on the wording of the service agreement, the CEO was not entitled to any severance pay if the termination was due to him having breached his obligations as the CEO of the company. This means that the claim for severance pay would not only lapse in case the CEO materially breached his obligations under the service agreement.

The Supreme Court then found that it was the responsibility of the CEO to employ new employees, agree on pay and employment terms and to carry out negotiations with the employees each year. This was normally not something for the board to be involved in. Further, the Supreme Court took into account that, from the beginning, the CEO had paid bonuses to the employees based on an estimate.

The Supreme Court found that the board had not informed the CEO that it was not his responsibility to grant bonus to the employees, and the CEO was therefore not prevented from granting bonus to the employees as he had done previously.

There were therefore no grounds for determining that the CEO had breached his obligations. The actions of the CEO were not of an unusual nature or of such importance that they required the approval of the board. The CEO was not found to be liable in damages; on the contrary, he was entitled to claim severance pay.

The content of this Newsletter is not, and should not replace, legal advice.

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