02 November 2006
Mannesmann re-trial and fiduciary duty
The Mannesmann Directors Bonus re-trial has opened in Germany. For the FT report setting out the background see http://www.ft.com/cms/s/4cd5d0c4-648e-11db-ab21-0000779e2340.html (subscription may be required).
It seems that in this re-trial the issue in question is whether or not the bonuses paid to the Mannesmann directors represented a breach of Fiduciary Duty. I am not familiar with the technicalities of fiduciary duty under German law, but the key question would appear to be whether or not the directors were putting their own interests ahead of the interests of the company when they approved these bonuses.
At the most straight forward level it is clear that the bonuses were in the interests of the directors; they received the Euros 57 million.
In contrast, in it is not at all clear why the bonuses were in the interests of the company. First of all there was a direct cost to the company of Euro 57 million. Secondly the controversy surrounding the payments has been damaging to the company. Thirdly it seems that there was no benefit to the company in terms of the recruitment, motivation and retention of the directors. Mannesmann was being taken over by Vodaphone and the directors were effectively redundant.
So, on the basis of this straightforward analysis, the motivation for the payments must surely have been self interest rather than the interests of the company.
How might it be argued that the payments were in the interests of shareholders?
Apparently the Mannesmann directors argue that the directors should be rewarded for increasing the size of the Vodaphone bid, thereby increasing the value of the final deal to Mannesmann shareholders. To me this argument appears weak. Directors rewards should normally be defined in advance, and then paid in accordance with the promises made. The directors should rightly expect their normal salaries and any bonuses paid under pre-agreed incentive schemes, to the extent that the performance targets under those incentive schemes have been met.
The benefit of paying a reward that has not been envisaged in advance is very questionable. It might be argued that paying such rewards now encourages people to perform in the future because similar rewards might once again be paid in this way. However this argument is poor. Firstly, in the case of Mannesmann, there was no future because the company was being taken over by Vodaphone. Therefore there was no value in establishing a future rewards culture. Secondly if people are being encouraged to perform in the future would it not be far more effective to have a pre-arranged scheme so that people know what the performance objective are, and can work towards them, and know what the rewards will be.
It seems to me that a far more plausible explanation is that the Mannesmann directors somehow understood from Vodaphone that, if the takeover where to go through successfully then, for Vodaphone the question of the legitimacy of bonus payments to departing directors would be an extremely low priority. In other words Vodaphone pragmatically recognized that the personal interests of the Mannesmann directors would be seriously damaged by the takeover (because they lose their jobs) and needed to be compensated if the directors were to accept the deal.
This kind of pragmatic thinking about the interests of the threatened directors must be very prominent in any Anglo American style contested takeover. Despite this it seems clear to me that it does amount to a breach of fiduciary duty because it is primarily concerned with the personal interests of directors rather than with the interests of the company. Vodaphone might just be able to argue that it was in the interests of Vodaphone to pay off the Mannesmann directors. Mannesmann cannot make that argument because its only justification comes from recognizing a conflict of interest between its own director’s personal interests and their duties to the company.
At the first trail about these Mannesmann bonuses the defense team continually presented such payments as normal in the Anglo American business model. They may be normal, but that does not make them right. In fact under the UK’s Combined Code the Mannesmann payments are clearly wrong because they were not required to “attract, retain and motivate directors of the required quality” (Main Principles B.1). It also seems to me that any such payments are extremely problematic under the UK notion of fiduciary duty, about which I hope to write more soon.
It seems that in this re-trial the issue in question is whether or not the bonuses paid to the Mannesmann directors represented a breach of Fiduciary Duty. I am not familiar with the technicalities of fiduciary duty under German law, but the key question would appear to be whether or not the directors were putting their own interests ahead of the interests of the company when they approved these bonuses.
At the most straight forward level it is clear that the bonuses were in the interests of the directors; they received the Euros 57 million.
In contrast, in it is not at all clear why the bonuses were in the interests of the company. First of all there was a direct cost to the company of Euro 57 million. Secondly the controversy surrounding the payments has been damaging to the company. Thirdly it seems that there was no benefit to the company in terms of the recruitment, motivation and retention of the directors. Mannesmann was being taken over by Vodaphone and the directors were effectively redundant.
So, on the basis of this straightforward analysis, the motivation for the payments must surely have been self interest rather than the interests of the company.
How might it be argued that the payments were in the interests of shareholders?
Apparently the Mannesmann directors argue that the directors should be rewarded for increasing the size of the Vodaphone bid, thereby increasing the value of the final deal to Mannesmann shareholders. To me this argument appears weak. Directors rewards should normally be defined in advance, and then paid in accordance with the promises made. The directors should rightly expect their normal salaries and any bonuses paid under pre-agreed incentive schemes, to the extent that the performance targets under those incentive schemes have been met.
The benefit of paying a reward that has not been envisaged in advance is very questionable. It might be argued that paying such rewards now encourages people to perform in the future because similar rewards might once again be paid in this way. However this argument is poor. Firstly, in the case of Mannesmann, there was no future because the company was being taken over by Vodaphone. Therefore there was no value in establishing a future rewards culture. Secondly if people are being encouraged to perform in the future would it not be far more effective to have a pre-arranged scheme so that people know what the performance objective are, and can work towards them, and know what the rewards will be.
It seems to me that a far more plausible explanation is that the Mannesmann directors somehow understood from Vodaphone that, if the takeover where to go through successfully then, for Vodaphone the question of the legitimacy of bonus payments to departing directors would be an extremely low priority. In other words Vodaphone pragmatically recognized that the personal interests of the Mannesmann directors would be seriously damaged by the takeover (because they lose their jobs) and needed to be compensated if the directors were to accept the deal.
This kind of pragmatic thinking about the interests of the threatened directors must be very prominent in any Anglo American style contested takeover. Despite this it seems clear to me that it does amount to a breach of fiduciary duty because it is primarily concerned with the personal interests of directors rather than with the interests of the company. Vodaphone might just be able to argue that it was in the interests of Vodaphone to pay off the Mannesmann directors. Mannesmann cannot make that argument because its only justification comes from recognizing a conflict of interest between its own director’s personal interests and their duties to the company.
At the first trail about these Mannesmann bonuses the defense team continually presented such payments as normal in the Anglo American business model. They may be normal, but that does not make them right. In fact under the UK’s Combined Code the Mannesmann payments are clearly wrong because they were not required to “attract, retain and motivate directors of the required quality” (Main Principles B.1). It also seems to me that any such payments are extremely problematic under the UK notion of fiduciary duty, about which I hope to write more soon.
