How easyJet example unearths tricky path threaded by company directors during COVID-19
There are many uncertainties about what the world will look like once COVID-19 dissipates. Everyone seems to expect, however, an increase in disputes surrounding directors’ duties, insolvency and the application of force majeure/frustration arguments regarding pre-existing contracts.
In what are currently uncharted waters for many, directors discharging their obligations to act in the best interests of the company will be faced with difficult decisions in respect of each of the above. Their conclusions may not always be aligned with those of shareholders.
Recent press around easyJet Founder’s spat with the Board offers the perfect illustration for a number of these coronavirus related difficulties. It has been reported that easyJet’s founder and 34% owner (along with family), Sir Stelios Haji-Ioannou, wrote to the Board insisting they cancel a £ 4.5 billion order for over 100 planes with Airbus. The letter is reported to outline in stark terms the threat facing easyJet:
"This crisis may result in the insolvency of easyJet PLC and if it transpires that a single penny from the company has been paid to Airbus between the grounding of the fleet and the date of the insolvency or any equity-raising which would prevent insolvency, I will personally sue all the easyJet directors for gross negligence and for defrauding easyJet's creditors with the favouring of one creditor (Airbus with dubious rights to these monies) over all others.”
The letter goes on to suggest Sir Stelios will convene repeat general meetings in order to oust non-executive directors. This is against the background of a 60% reduction in share value (1.552p on 11 February against 554p at the time of writing) in recent weeks and the payment of a £60 million dividend to Sir Stelios in late March.
The situation raises a number of interesting commercial and legal issues.
Payment of dividends
Grabbing a considerable amount of headlines is the suggestion that easyJet may soon ask for government support, only weeks after making a £176 million dividend payout to shareholders. Others point out that the dividend was declared and approved by 99.99% of voting shareholders at the annual general meeting - as far back of 6 February 2020 - when the full impact of COVID-19 was unknown.
The question would then become whether, having been declared, the material change in position meant the dividend should have been cancelled. The press reports that many businesses, including Kingfisher, ITV and several of the high street lenders, have done just that. easyJet’s position in this respect is different. While other companies have cancelled interim dividends or their Board announced that it will no longer recommend a dividend be paid, easyJet on the other hand had declared a final dividend with shareholder approval at the annual general meeting. This meant the obligation to pay shareholders was created and the dividend became payable on the date payment (20 March in easyJet’s case).
As dividends can only be paid from distributable profits, following consideration of the long term future financial requirements and the company’s best interests, directors will need to consider very carefully whether the current situation allows them to conclude this criterion has been fulfilled.
It is unclear to outsiders on which basis easyJet could cancel its Airbus order. It may be that only minimal amounts would be payable, but in general there are three main options facing companies in this scenario:
- Rely on a “force majeure” clause which exists in the contractual agreement. This would effectively release the parties from their current contractual obligations. Whether issues arising out of the coronavirus and the grounding of easyJet’s entire fleet are covered, would come down to what had been agreed at the time of contracting. If force majeure is not well defined, this may become a bone of contention in its own right. In case there is no clause covering a health pandemic, more general terms impacting performance of the contract could be relied on, for example provision that force majeure applies if there is a material reduction in passenger numbers due to government restrictions.
- Raise an argument using the doctrine of contractual “frustration” (i.e. automatically discharged of the contact). Unlike force majeure this would not require a contractual term, but easyJet would need to show there had been a dramatic change of circumstances beyond anyone’s contemplation following the order’s submission. Traditionally, courts have applied this doctrine very restrictively, and there may be additional difficulties relying on this position as there is no legal prohibition on completing the order - financial difficulty in making the required payment is unlikely to be sufficient.
- Reach a commercial agreement. Clearly major airlines represent repeat business for the two big airplane manufacturers Airbus and Boeing. Given the longstanding commercial relationship, a commercial settlement acceptable to all parties may be possible, perhaps delaying the order until coronavirus is not impacting the aviation industry to the extent it currently is.
Stelios’ letter is said to have raised the possibility of insolvency. Under normal circumstances, if a company is insolvent, the director’s obligations switch to being obliged to act in the best interests of the company’s creditors.
In view of the coronavirus pandemic, the provisions against wrongful trading (i.e. where the directors continue to run the business despite it being insolvent, risking personal liability) have been relaxed recently, although the exact details of how this will work remain unclear.
It is likely directors will still retain the obligation to treat all creditors fairly. When a company is insolvent, save in extreme circumstances, directors are prohibited from “preferring” a certain creditor by paying them in advance of others. This appears to be the risk Stelios was referring to in the above quote with his reference to the directors “favouring” Airbus.
Sir Stelios’ letter is a good example of a shareholder, dissatisfied with the operation of the company they own, seeking to influence the direction of the company. In simple terms, the greater your shareholding, the greater your ability to influence the company. There are a number of options for those dissatisfied with the business to seek to change path:
- Call a General Meeting – anyone owning more than 5% of the paid-up voting share capital can require the company to hold a general meeting. The removal of directors could be considered at such meeting. To actually remove the director would require a “ordinary resolution” of over 50% of the paid-up voting share capital of the company.
- Claim that they have been “unfairly prejudiced” by the actions of the directors – a right created by s 994 of the Companies Act 2006. However, the circumstances in which this provision has been exercised/considered by the courts to date are far removed from the current position. Generally, such claims are based on malfeasance by directors (for example, misappropriation of funds, dilution of shareholdings) whereas the courts are generally reluctant to interfere if the Board appears to be exercising rational commercial judgment. However, in the current circumstances, if it is genuinely an issue which threatens the very survival of easyJet, the court may be more willing to intervene.
- Another option would be to bring a claim on behalf of the company – a “derivative action” – whereby a shareholder starts the claim but does so on the company’s behalf. This right is also contained in the Companies Act (Chapter 11), and, once a shareholder starts such a claim, it must be approved by the court. The greater the shareholding of the relevant shareholder, the more likely this permission would be given, but it would also be unlikely a court would continue a claim if it is a case of a shareholder disagreeing with rational commercial judgments.
As the above illustrates, the current landscape presents a number of challenges for companies and their directors. The decisions they currently make could have serious repercussions for their business and themselves, as well as potentially leading to divisive issues arising between the company, its directors and the shareholders.
This reinforces the need for all directors to take seriously their obligations as officers of the company and obtain legal advice during that tricky journey.