Reda v Flag Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Lord Millett |
| Judgment Date | 11 July 2002 |
| Neutral Citation | [2002] UKPC 38 |
| Court | Privy Council |
| Docket Number | Appeal No. 63 of 2001 |
| Date | 11 July 2002 |
[2002] UKPC 38
Present at the hearing:-
Lord Nicholls of Birkenhead
Lord Mackay of Clashfern
Lord Hope of Craighead
Lord Hutton
Lord Millett
Privy Council
[Delivered by Lord Millett]
This appeal arises out of a dispute about the payments and other benefits due to two senior executives of Flag Limited ("Flag") on the termination of their contracts of employment. The main issue is concerned with their claim to be entitled to stock options under a stock option plan which was introduced shortly after their employment came to an end. The matter is governed by their contracts of employment. No statutory rights are involved.
The Parties
Flag was incorporated in 1993 in Bermuda as the corporate vehicle for a joint venture between its principal shareholders Nynex Networks Systems Company ("Nynex"), a Delaware company and a subsidiary of the American Nynex Corporation, and the Dallah Albaraka Group of companies of Saudi Arabia ("Albaraka"), though there were some outside shareholdings. The company was formed for the purpose of developing and constructing an undersea fibre optic cable system as part of a global cable telecommunication network. Construction of a cable system linking Europe, the Middle East and Asia was completed by Flag on budget and in time in October 1997.
The first appellant ("Mr Reda") is a qualified electrical engineer. He was a senior executive of Nynex who was seconded to Flag. In 1989 he undertook a feasibility study for the global cable system which Flag eventually constructed. The study was completed in 1990. Thereafter he was responsible for the preparatory work needed to bring the project to the construction stage. He remained an employee of Nynex until 1st July 1995 after which he was employed by Flag full time.
The second appellant ("Mr Abdul-Jalil") is a qualified engineer with experience of the management of large scale construction projects. He was a senior employee of Albaraka until he joined Flag at Mr Reda's invitation on a full time basis on the 1st April 1993. He was responsible for obtaining substantial equity participation for the project.
The Executive Committee
The appellants were both directors of Flag. In 1995 Mr Reda was appointed as President and Chief Operating Officer; Mr Abdul-Jalil as Executive Vice-President. They reported to the Chairman and Chief Executive Officer, a Mr Timpanaro, who like Mr Reda had been seconded from Nynex. The three men constituted an Executive Committee which represented the two major shareholders. They operated as a triumvirate and together exercised the highest executive powers in the company.
The appellants were each employed by Flag under a contract of employment for a term of three years from 1st July 1995. The terms of their employment, as well as those of other senior employees, were negotiated by a Compensation Committee which was established for the purpose. Because the Executive Committee was discharging functions normally discharged by a single chief executive officer, the contracts of its members were negotiated as a group rather than individually and were in identical terms except for the base salary each was to receive and the position he was to occupy.
The members of the Executive Committee were each to receive a base salary, a performance-related annual incentive bonus, a performance-related completion bonus payable at the end of the contractual term and a number of specified benefits in kind. Their Lordships will refer to the terms of the appellants' contracts of employment in more detail later, but for the moment they can be sufficiently summarised as follows:
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(1) The contracts were for a term of three years expiring on the 30th June 1998, but could be terminated by Flag at any time without cause on payment of compensation.
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(2) The appellants' base salary was initially fixed at $180,000 per annum, but Flag undertook to maintain it at a level equal to 90% of the base salary paid to the Chief Executive Officer for the time being. It is this provision which has given rise to much of the difficulty and to most of the issues at first instance. It is referred to in the judgments below as "the linkage clause". Similar linkage clauses by reference to the appellants' base salaries were included in the contracts of other senior managers below them.
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(3) The appellants' annual incentive bonus was related to their individual performance and was awarded by the Compensation Committee each year. The maximum bonus was 150% of base salary in each of the first two years and 50% of base salary in the third year. Since the amount of the bonus was related to the base salary, it was also affected by the linkage clause.
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(4) The completion bonus was also awarded by the Compensation Committee and was payable at the end of the contractual term. The amount of the bonus was discretionary and was dependent on the completion of the project and its profitability.
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(5) The appellants also had a contractual right to participate in any employee benefit plans which Flag might establish for senior officers in future. It is this provision which has given rise to the principal issue in the Court of Appeal and before the Board.
The Compensation Committee regarded the members of the Executive Committee as a group rather than separate individuals, and the appellants' contracts of employment reflected this. They contained references to the principles of consistency and uniformity of treatment, as well as an express provision that no senior manager brought in from outside should be offered more favourable treatment than they received themselves.
In September 1995 a Mr Dan Petri was appointed a Director of Flag and a member of the Compensation Committee. Mr Petri was a President of Bell Atlantic International Communications Corporation ("Bell Atlantic"), a subsidiary of Nynex which later merged with its parent company. By 1997 he had become dissatisfied with Flag's management structure, and proposed that the Executive Committee should be disbanded and a single Chief Executive Officer be appointed in its place. This called for the appointment of an outside candidate of greater experience and stature in the industry than Mr Timpanaro, whose employment was terminated on 31st May 1997. Pending the appointment of a new Chief Executive Officer, Mr Petri served as acting Chairman of Flag from June 1997 to January 1998. He regarded it as his immediate responsibility to find a new Chief Executive Officer to replace the Executive Committee as quickly as possible.
The Negotiations with Mr. Bande
In September 1997 Mr Petri informed his colleagues on the Compensation Committee that he and another officer of Bell Atlantic were negotiating with a Mr Andres Bande, who had favourably impressed them as a prospective Chairman and Chief Executive Officer of Flag. Mr Bande was the Chief Executive Officer of a substantial company Sprint International ("Sprint") and a major figure in the international telecommunications industry. Because of his standing and reputation he was in a position to demand a much more generous remuneration package than Mr Timpanaro had enjoyed. Mr Petri reported to the Compensation Committee that Mr Bande was seeking an annual salary and bonus amounting to $975,000 in total, as well as a sum by way of compensation for the value of the bonus he would have received from Sprint for 1997, together with stock options to replace those he held in Sprint.
Mr Petri recommended offering Mr. Bande an annual salary of $500,000 and short-term bonus of $250,000, and a sign-on bonus of $150,000, together with participation in a phantom stock option plan which would generate $5 million in value over five years if Mr Bande achieved his business plan, and up to $10 million over the same period on a sliding scale if he exceeded it. He told the Compensation Committee that he had hoped to get away from cash bonuses, but Flag could not meet Mr. Bande's demands without a bonus unless it paid the whole of his annual remuneration by way of base salary, and he did not want to do that. He added that, while Flag did not normally pay sign-on bonuses, he looked at this as a mechanism to give Mr Bande the amount he was seeking for 1998, which would then be replaced by the phantom stock option plan in subsequent years. He commented:
"These are big numbers, but I am convinced he is worth it. In fact, our potential lenders tell us a CEO of his status and reputation in the industry is worth 25-50 basis points on the base yield, which would save us $1 million to $2 million per year."
By 15th October 1997 the negotiations with Mr Bande had yielded significantly different terms. He was now to be paid a base salary of $625,000 and an annual bonus of $275,000, making $900,000 in all, together with a sign-on bonus of $300,000 and a further $350,000 by way of compensation for the bonus he would forfeit by leaving Sprint. He was also to receive stock options, and more generous compensation in the event of dismissal without cause than that to which the appellants were entitled. These terms were incorporated in a draft contract prepared by Bell Atlantic's lawyers.
The draft contract was, however, not approved by the Board of Flag. According to the Board minutes Mr Bande's earnings and in particular his potential earnings under the proposed stock option plan were unacceptable to Bell Atlantic. The Board approved Mr Petri's proposal to renegotiate Mr Bande's contract to ensure that his earning potential under the stock option plan would be lower than previously agreed.
Mr Bande was eventually appointed Chief Executive Officer of Flag under a contract dated 11th December 1997, and took up his position on 12th January 1998. He also...
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