Directors’ fee increases linked to CPI – can it be determined with accuracy?

The Notice of the Hyprop Investments AGM held on 30 November contained the following special resolution (and explanatory note) which shareholders were asked to vote on:

3.2 “Resolved as a special resolution that an annual increase not exceeding inflation (as measured by the Consumer Price Index (CPI)) of the fees payable by the company to non-executive directors for their services as non-executive directors, be and is hereby approved for the period from the 2019 annual general meeting to the 2020 annual general meeting or until such fees are revised by a further resolution(s) of shareholders.”

Reason for and effect of special resolution number 3.2:

The proposed fees for the 2019 financial year were determined based on an external benchmarking exercise, with the proposed increase for the 2020 financial year being limited to an inflationary (CPI-based) adjustment.

Now, S66(9) of the Companies Act deals with the remuneration of non-executive directors for their services as directors, and reads as follows:

(9)      Remuneration contemplated in subsection (8) may be paid only in accordance with a special resolution approved by the shareholders within the previous two years.

 Several aspects from this section are important:

  1. Requiring a special resolution places this matter high up in terms of seriousness, requiring a 75% vote of approval from shareholder;
  2. The word “only” is not normally used in the Act and thus is to be interpreted as a show of strictness or limiting the available options;
  3. The word “accordance” means exactly: it must strike the right “cord”.

Taken together, the section does not allow a range of remuneration levels, but requires it to be determinable whether an individual director was paid ‘in accordance’ with the special resolution as approved by shareholders.

Put another way: the resolution specifies:

  • a method (e.g. which CPI? for which area? determined at what date?) plus
  • a range (being maximum of the CPI increase, i.e. from 0-100% of that increase)

which would result in a figure that is too vague to comply with the ‘in accordance’ provision of the section.

In our view the wording of the resolution falls foul of and does not comply with the provisions of Section 66(9).

We asked Hyprop Investments for their viewpoint and they responded by indicating that in their view the “special resolution 3.2 was fully compliant with Section 66(9) of the Companies Act.”

Seems as if shareholders did not pick up on this, as hardly any shareholders voted against the resolution…..