What may a director decide?

Date 21 maj. 2012
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It is normally assumed that the managing director of a company has wide access to decision-making. In practice, however, disagreements between the company and the director about what decisions the director may take on his own often occur. 


Company Car and Caravan

In a recent case from the High Court of Eastern Denmark, the Court ruled that a director had overstepped his competence to such an extent that a summary dismissal was lawful.


The subject of the case was a director who had approved the sale of a company car to an employee of the company for DKK 1,000 in return for the employee’s renunciation of a bonus of DKK 51,000 in order to avoid taxation. Further, the director had approved the purchase of a caravan for the private use of an employee.


The company dismissed the director with reference to the director having taken illegal decisions.


The director found the dismissal to be unreasonable and took legal action against the employer.


The High Court found that the director had violated his conditions of employment to such an extent that both circumstances, individually, justified a dismissal.


With regards to the DKK 1,000 sale of the car, the High Court, in its ruling, emphasised that the car had a significant value and that the sale price had been fixed on the condition that the employee at the same time renounced his bonus, and that the director was aware that this was done in order to avoid taxation.


Regarding the caravan, the High Court emphasised that it was the director who had approved the purchase of the caravan and that the director was aware that the caravan was purchased for an employee’s private use.


[The Eastern High Court’s Ruling of 17 April 2012, ref. no. B-2884-11]


Reasonable Wage Increases and Bonus Payments

Recently, the Danish Supreme Court arrived at the opposite ruling in a case where the director, without the approval of the board of directors, had paid the employees of the company a bonus, just as the director had granted a number of employees wage increases.


The company dismissed the director, as it was felt that the director had violated the conditions of his employment. The company was of the opinion that the bonuses were de facto gifts, seeing as they were not based on measurable criteria or the financial results of the company.


Furthermore, the company found that the wage increases granted significantly exceeded the limits specified by the board of directors at the approval of the budget.


Consequently, the company refused to pay the director a severance pay.


The director disagreed and took legal action against the company.


The Supreme Court found that the allocation of authority between the board of directors and the management of the company in practice was of such a nature that the decision-making power to a significant extent was vested with the director. In accordance therewith, the Supreme Court found that it was within the director’s authority to hire new employees, and hereunder, to carry out annual wage negotiations with employees. Furthermore, the Supreme Court considered that the director since the founding of the company in 2002 had granted employees bonuses based on estimates.


Therefore, the director had not overstepped his competence, for which reason he was entitled to severance pay.


[The Supreme Court’s Ruling of 2 May 2012, ref. no. 2/2010]


Our Opinion

The Supreme Court’s ruling shows that if a company wishes to limit a director’s right to act on behalf of the company, it is required that this limitation be communicated clearly, and in writing, to the director.  For example, this may be done by way of a director’s instruction attached to the executive service agreement.

 

In spite of directors’ extensive rights to enter into commitments, directors do not have unlimited authority. As shown by the ruling of the Eastern High Court, directors must of course contribute to the compliance with applicable law.

 
 

If you have any questions or require additional information on the above, please contact Nicolai Hesgaard, partner (nhe@mwblaw.dk), Pernille Nørkær, attorney (pno@mwblaw.dk), Pinar Gökcen, Junior Associate, (pgo@mwblaw.dk) or Sofie-Amalie Gregaard Brandi , Junior Associate, sab@mwblaw.dk.

                                                                

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis for decisions or considerations.