What is the purpose of section 27?
SECTION 27.
Question put: "That section 27 stand part of the Bill."
This section prevents a company from entering, without shareholder approval, into long-term service contracts with its directors, contracts which the company cannot terminate by notice, and makes similar provision with regard to the directors of holding companies. This basic prohibition is designed to prevent the abuse whereby the directors of a company enter into long-term service contracts with their company on terms that are set by themselves or by their colleagues on the board, with the effect that the purpose of section 182 of the Companies Act, 1963 is circumvented. That section empowers shareholders to dismiss a director from his duties as a director at any time. Such dismissal may be without notice, but the company involved run the risk of exposing themselves to substantial financial liability since, under section 182, they would not be relieved of any liability to pay compensation or damages in respect of determination of the director's appointment. This type of abuse is sometimes seen, for example, where a take-over is anticipated, or, indeed, where a director feels that there might be shareholder moves to unseat him.
In such a situation, the directors might be tempted to grant themselves long-term service contracts if they believe that either the existing shareholders or future shareholders are likely to dismiss them. The effect of doing so may be to offer the shareholders the choice between retaining the directors in question, or dismissing them and paying them substantial compensation in respect of the unexpired parts of their contracts.
The section is carefully drafted to try to ensure that it cannot be easily circumvented. For example, it applies not just to contracts of employment but also to contracts for services — that is consultancies. It also catches "topping up" contracts and thus it requires shareholder approval of any second contract of employment which has the effect of employing the director for a period exceeding five years where the duration of a second contract when added to the unexpired period of the first contract runs for a period of more than five years.
The mechanics of obtaining shareholder approval are fairly straight-forward. A written memorandum setting out the agreement incorporating the term must be available for inspection by members of the company at the company's registered office at least 15 days before the relevant shareholders meeting, and at the meeting itself. The effect of non-compliance with the section is to render void the term of the contract relating to its duration and to substitute in its place a term "entitling the company to terminate the agreement at any time by the giving of reasonable notice".
Finally, the section will not apply if the person involved is a director of a wholly owned subsidiary of any body corporate. This is because the interest of the subsidiary in that situation would be deemed to be adequately protected by any scrutiny exercised by the directors of the holding company.
That seems to be reasonable.
Question put and agreed to.