Bonuses are one of the most commonly used ways to remunerate members of board or supervisory board for their job. This way of remuneration is directly related to a profit gained by a company: the law explicitly establishes that bonuses may be paid only in case the business is profitable. Furthermore, an amount of bonuses is related to dividends paid, so it is obvious that bonuses are the form of remuneration paid to members of the board and supervisory board for their successful performance which directly contributed to positive results of the company.
In one of its recent rulings the Supreme Court of Lithuania shared its opinion on differentiation of bonuses with respect to individual members of company’s bodies. Such issue arose when the member of board of one Lithuanian company appealed to court regarding allegedly infringed rights vested in him as a member of the board, as well as violation of general principle of equality of management bodies because when assigning bonuses to the board, the supervisory board assigned to him the bonus which was several times lower than the one assigned to other members of the board. The member of the board objected to such decision of the supervisory board and sought for the bonus to be paid to him in the same amount as the one of other members of board.
The Supreme Court of Lithuania upheld the decisions of courts of lower instance and acknowledged that shareholders or supervisory board of company are entitled to differentiate bonuses to individual persons and this fact in itself is not considered a violation of the principle of equality.
According to the Court, the entity distributing bonuses is entitled to apply its own criteria and to follow them when evaluating the input and merits of each person receiving bonus. Such freedom may be restricted only by incorporation documents (the Articles of Association), decisions of shareholder or other documents which may contain other rules on payment of bonuses, for example, they may imperatively establish that all members of the board irrespective of their input are entitled to receive bonuses of equal size in comparison with other members of the board. In case of absence of such restrictions (in practice the regulation of bonuses and their payment by company’s documentation is applied in extremely rare cases), the bonuses may be distributed upon discretion of the decision-making body.
However, the Supreme Court of Lithuania also noted that a person objecting to the size of bonuses paid to him is entitled to argue that the body distributing bonuses abused its rights and violated the principle of equality, as well as to argue the criteria applied in the course of establishing the sizes of bonuses to individual members. In any case such burden of proof falls on the person, who disputes the size of bonus (the plaintiff) but not on the company – the company must provide opposite facts only if the plaintiff provides evidence allegedly proving the existence of violations.
One of the reasons proving unfair payment of bonuses is family or other close relationship between the member of body distributing bonuses and the member receiving especially high bonuses. In this particular case such issue was not examined since it was raised too late. However, the Court reserved the possibility to refer to this circumstance in other cases. It may be assumed that if, for example, the shareholder makes decision to pay especially high bonuses to a member of the board, who is his family, and smaller bonuses to other members of board, it may be treated as violation of the principle of equality.
Consequently, the case law of Lithuania clearly justifies that bonuses of the company may be paid through differentiating them under various criteria which itself may not discriminate the persons receiving bonuses and which must be transparent and reasoned. The abuse of such right is not allowed, and the person, who received bonuses, is always entitled to dispute and argue that the bonuses were distributed in violation of the principle of equality.
Audrius Žvybas, Senior Asocciate, law firm GLIMSTEDT
The article (in Lithuanian) was published on vz.lt business news portal.
Teisininkai: Audrius Žvybas