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Directors' Duties and Semi-States: How external factors should influence the Board

AUTHORs: Kate McKenna, Susanne McMenamin co-author(s): Dorothy Hargaden Services: Corporate Governance and Compliance DATE: 07/10/2022

The legal limits of ministerial powers to intervene in the board matters of semi-state companies was the focus of a recent High Court ruling.  The legal principles underlying the judgment, however, have broader application and should guide directors in balancing their obligations towards the company while acknowledging external influences on company policy.

Keating v Shannon Foynes Port Company [2022] IEHC 505 centred on a dispute concerning the payment of performance bonuses to a semi-state CEO (the plaintiff) under the terms of his service contract. The plaintiff's performance was not in dispute. Over a period of several years, the remuneration committee of the Shannon Foynes Port Company (SFPC) (the defendant) recommended the payment of bonuses to the plaintiff in recognition of his role in transforming SFPC's financial position.  SFPC's board of directors, however, refused to authorise the bonus payments in deference to prevailing government policy and, in particular, guidance issued under the Code of Practice for the Governance of State Bodies (issued by the Department of Public Expenditure and Reform).

Commercial semi-states

SFPC is a commercial semi-state company, overseeing the flow of goods through the Shannon estuary. Being a key infrastructural asset, the Shannon Estuary plays an important role in the national supply chain in Ireland.

Under a structure that is typically seen in the semi-state sector, SFPC is a private limited company governed by the Companies Act 2014.  This sets it, legally, at one remove from its parent department and shareholders. SFPC's shareholders were the Minister for Transport and the Minister for Public Expenditure and Reform. Under SFPC's governing legislation (the Harbours Act 1996), those ministers were entitled to exercise the rights and powers of a shareholder.  A representative of the Minister for Transport sat on SFPC's remuneration committee at the time that the disputed bonus payments were under consideration.

SFPC's governing legislation required it to:

  • comply with ministerial directives concerning remuneration and allowances; and
  • "have regard to" government or nationally agreed guidelines concerning remuneration and conditions of employment. 

The Code of Practice for the Governance of State Bodies, which applied to SFPC, provided that chairpersons and boards of State bodies were required to implement government policy in relation to the total remuneration of the CEO and that arrangements put in place by a relevant department or the Department of Finance for determining and approving CEO remuneration must also be implemented and adhered to.

Ministerial directives v policy

In the wake of the financial crisis of 2008, government indicated that performance related payments should not be made to the CEOs of State-owned companies. This view was conveyed to SFPC in various letters and through the ministerial representative's presence on SFPC's remuneration committee.  On the evidence, the court found that no formal ministerial directive had been made to SFPC, during the relevant period, regarding bonus payments that SFPC would have been required to comply with under its governing legislation. The court analysed various departmental communications in assessing the threshold required to constitute a ministerial directive.

The court then turned to consider the impact of external governmental policies on the company, first assessing what constituted such a policy. The court observed that a government policy was often the product of prolonged departmental investigation and research, culminating in a report with written recommendations to the minister as to the appropriate course. However, the term “policy” could justifiably be used to describe any position consistently advocated which governs a given set of circumstances which may occur in the future.  Since at least February 2011, the court found that a government policy existed against the payment of performance bonuses to the CEOs of commercial semi-state bodies. Whether the State was in a position to insist on implementation of its policy, or merely recommend that it be followed, was a separate matter.

Fiduciary obligations of directors

The court went on to give an interesting analysis of the interplay between the duties of directors of semi-state companies towards the company and their duties towards the minister under whose aegis the semi-state operated.

Section 228 of the Companies Act sets out in statute the principal fiduciary duties owed by directors to the company, previously only recognised under common law. The first duty listed (in section 228(1)(a)) requires a director to “act in good faith in what the director considers to be the interests of the company".

The court noted that it has "long been the position at common law that directors stand in a fiduciary relationship to their company and accordingly owe duties to the company. The rationale for directors being in a fiduciary relationship to the company is that they are agents of the company, and the relationship of agent and principal will give rise to fiduciary duties." 

The overriding rule is that a company director owes the section 228 duties to the company (and the company alone). The Companies Act, however, permits the directors to take into account the interests of others besides the company in certain circumstances. Section 228 allows a director to "have regard to" the interests of the shareholder who appointed the director to the board.  This meant that SFPC's board could have regard to the interests of the Minister for Transport. However, the rights of the shareholder under this provision are seriously restricted because they are only enforceable by the company and not by the shareholder.  SFPC's directors were found not to have a fiduciary relationship to the ministers and not to owe them fiduciary duties.

The court emphasised that State opted to use a Companies Act entity as the vehicle through which the defendant's functions would be undertaken. The arrangement had worked well, with the company becoming very profitable and returning dividends to the Exchequer since 2015. The State must accept the duties imposed on the directors by this corporate structure; it could not expect the directors, in the exercise of their fiduciary duties, to ignore their fundamental duty to act in the best interests of the company.

The decision

The court held that, in exercising their discretion not to pay a performance bonus to the plaintiff over several years, the directors took a course of action which they themselves considered was not in the best interests of the company, solely on the basis that this was what the shareholders wanted.  This unquestioning adherence to the wishes of the shareholders could not constitute a valid exercise of the directors’ discretion.

The particular policy against performance bonuses for semi-state CEOs was formulated in the national interests, in the extreme economic conditions of the time, rather than in the interests of SFPC or any other company or industry. The fiduciary responsibility of SFPC's directors included a duty not to take into account irrelevant matters or matters which should not inform the exercise of their discretion.

Ultimately, the court found that the directors' actions constituted a breach by SFPC of the plaintiff's service agreement which caused damage and loss to the plaintiff.

Matheson's view

Kate McKenna, EU, Competition & Regulatory Partner sees this decision as providing valuable guidance to those involved in the semi-state sector, either as a board member or from the State's perspective: "The relationship between the director of a semi-state company and the parent department(s) is nuanced, and all the more so when the company is dependent on funding or legally required approvals from departments or ministers. Semi-state directors must be alert to, and seek to ensure that the company acts upon, ministerial directives concerning the company and other legally enforceable ministerial interventions.  They also must be alert to the difference between such legally enforceable instruments and mere government policy guidelines. As regards the latter, it is appropriate for directors to have regard to various government policies, in particular the Code of Practice for the Governance of State Bodies, but there may be cases where directors should conclude that the best interests of the company override such policy guidelines. As always, it’s best practice to properly record board decisions and to seek legal advice, where appropriate. From the State’s perspective, the establishment of a semi-state company carries certain legal consequences which can act as a constraint on ministerial powers in dealing with the semi-state and this is not always well understood. A clear understanding by all parties of the basis on which a government communication is made is vital."

Susanne McMenamin, Corporate M&A Partner, observes that "this case illustrates the primacy of the duty of directors to act in the best interests of the company, even against the backdrop of a national crisis.  It highlights the limited nature of the rights granted to shareholders, employees and, most recently (under the European Union (Preventive Restructuring) Regulations 2022) to creditors, where the company only has to "have regard to" their interests".

How Matheson can help

If you would like more information on this or other corporate governance matters, please get in touch with the partners below or with your usual Matheson contact.