When ambitions, articles and duties collide

The recent case of Alkhawaja v TPL Investment Management Ltd & Anor [2024] ADGMCRI 0009 before the Abu Dhabi Global Market (“ADGM”) Court highlights the need for directors to be mindful of the overarching power of company law when seeking to implement their remuneration packages.

Introduction

In this case, the claimant, a former CEO and director of the two defendant companies sought to rely on an Incentive Letter Agreement (“ILA”) which she claimed gave her the ‘perpetual’ right to receive remuneration from certain of the companies’ projects, even after her employment was terminated. Though the ILA had been signed by herself and another director from both companies, it had not in fact been duly passed in accordance with the respective companies’ articles of association.

Moreover, the ADGM Court also found that the claimant had breached her fiduciary duty by failing to disclose the particularly unusual terms of the ILA when presenting it to her co-director for execution.

The case is a reminder for directors and executives to ensure they understand the procedural requirements laid down by the articles of association when seeking authorisation of their remuneration package, and to ensure they keep their directors’ duties in mind, especially where the remuneration package is out of the ordinary. If they fail to do so, there is a real risk that they will find their contracts are void and unenforceable, irrespective of any apparent approval.

The Claimant as an Employee and a Director

In this case the claimant, Ms Alkhawaja, was recruited to become CEO and a director of TPL Reit Management Company Limited (“TPL Pakistan”) and TPL Investment Management Ltd (“TPL Investment”) by Mr Jameel, who was a director and UBO of both defendant companies.

Under the terms of her employment contract, Ms Alkhawaja was entitled to a salary and other discrete benefits. Further, during negotiations with Mr Jameel in April 2021 before she became CEO, it was agreed that she would receive additional benefits, including (amongst other things) a percentage of revenues from certain projects undertaken by the companies. These were to be set out in a separate agreement: the ILA.

The Incentive Letter Agreement

After joining the companies, Ms Alkhawaja consulted with the companies’ solicitors, Morgan Lewis, to draft the ILA, but sought no input from in-house counsel at TPL ADGM or TPL Pakistan throughout the drafting process.

Mr Jameel did not sign the draft immediately, but did when Ms Alkhawaja threatened to resign if he did not. Mr Jameel did not read the ILA in any detail, and trusted Ms Alkhawaja’s assurance that it reflected what had been agreed in April 2021. However, the ILA in fact granted Ms Alkhawaja a right to receive a percentage of revenues from certain projects as long as those projects continued to generate revenue, even after termination of her employment (unless she was deemed to be a ‘Bad Leaver’). This was over and above the benefits that any other director was entitled to receive from the companies.

Ms Alkhawaja left her employment in acrimonious circumstances. In the negotiations that followed her resignation, the discrepancy between what Mr Jameel had understood the ILA to provide, and what had actually been drafted into the ILA, was revealed.

The question before the court was whether Mr Jameel had bound the companies contractually to the ILA, such that Ms Alkhawaja would be entitled to the incentive sums earned to date and future fees in perpetuity post-termination.  

The Importance of the Articles of Association

The ADGM Court held, per Guiness plc v Saunders 2 AC 663 and Tayplan Ltd v Smith [2012] BCC 523, a contract of remuneration between a company and its director must be authorised in accordance with the articles of association of the company. An exception applies if it can be properly evidenced that all the shareholders have consented to the contract (the “Duomatic Principle” from Re Duomatic Ltd [1969] 2 Ch 365).

TPL Pakistan

For TPL Pakistan, the articles required a resolution of the shareholders to be passed at a general meeting for the ILA to be valid. The ILA had not been discussed or authorised by shareholders at any general meeting. The Claimant sought to rely on the Duomatic principle that all the shareholders were in fact aware of the ILA. However, the court found that four out of seven of TPL Pakistan’s shareholders could not be evidenced to have given informal assent, and indeed one shareholder gave evidence that he had no knowledge of, and had not approved, the ILA.

TPL ADGM

The articles of TPL ADGM required its directors to approve remuneration packages collectively by majority decision at a meeting or by a unanimous decision if not at a meeting. There was no such board meeting to approve the ILA, nor could it be shown that all eligible directors had expressed a common view of approval.

Outcome

The ILA was deemed void in respect of both companies, having not been validly approved in accordance with the defined procedure in either of their respective articles. The ILA was unenforceable, and the Claimant would not be entitled to any of the benefits conferred in the agreement.

Breach of Fiduciary Duty

Amongst other arguments, the Claimant also tried to assert that the defendant companies were estopped from denying the validity of the ILA because, as a director and UBO of the companies, Mr Jameel had authority to bind the companies. The claimant relied on the case of L’Estrange v Graucob [1934] 2 KB 394 to assert that a contract signed by the parties is binding in the absence of fraud and misrepresentation, even if the parties have not read it.

The Court found that the principle in L’Estrange was overshadowed by the claimant’s breach of fiduciary duty, as she had failed to positively disclose the material differences between what had been initially agreed in April 2021 by email, and the actual scope and perpetual nature of the remuneration rights written into the ILA.

Key Takeaways and Conclusion

The claim for remuneration under the ILA failed, primarily because it had not been implemented in accordance with relevant company articles. Although this is a judgment of the ADGM Court and therefore not binding on English courts, it nevertheless provides some helpful reminders for directors, executives of English companies, and to English law practitioners, as follows:

1. A contract between a company and its director for remuneration must be authorised in accordance with the articles of association of that company in order to be valid and enforceable.
2. The Duomatic Principle provides an exception to this rule if it can be properly evidenced that all shareholders have given their informal consent to the contract.
3. Directors have a fiduciary duty to positively disclose and make sure that decision-makers understand any material changes to pre-agreed terms of remuneration in a contract, in particular where the benefits are unusual.

To avoid any oversight and disputes as to validity, directors and executives must conduct proper due diligence and comply with any defined procedure set out in the company’s articles of association to ensure that their remuneration is validly approved and treated as binding on the company.

If you need advice concerning director’s duties or company litigation, please contact Richard Clayman or Fiona Simpson.

about the authors

Richard joined the Dispute Resolution team in 2019, having previously worked at two leading civil fraud boutiques in the City. Richard’s experience covers a broad range of commercial disputes, with a particular focus on civil fraud cases, and disputes involving shareholders, directors and partnerships.

Charlotte is an Associate in the Dispute Resolution team. She has acted on a broad range of disputes, including cases that involve wide-ranging litigation before the High Court, civil fraud matters, applications for injunctive relief, breaches of contract and major disclosure exercises.