Can directors still receive bonus payouts during the COVID-19 crisis?

Remuneration of board members in a Luxembourg corporate entity is usually subject to approval by and/or reporting to the general meeting of shareholder. Remuneration can take various forms, a bonus or option plan, share allocation or similar, and is often embedded in a larger framework of a policy of remuneration of board members based on different criteria. While the criteria are often set in a framework over several years, the decision to make actual payments is often taken at the occasion of any such payments. Notably, such rights to receive a payment of a bonus are often associated with a certain discretion of the company.

Payments to directors both as one off bonifications, and under bonus plans, can be problematic at a time where the economic outlook of many companies is already and/or risks to be heavily impacted by measures taken in relation to COVID-19, as, now more than usual, incentive payments that are in any way discretionary (as opposed to those arising out of contractual obligations), must be carefully balanced against the company’s corporate interest. A board must, before making or authorising such payments or proposing a payment to the general meeting of shareholders, ensure that it (i) is embedded in a global strategy of long term growth of the Company and (ii) complies with legal and contractual requirements, notably if they have any discretion in respect of amount and timing of payment. Particular caution must be applied in respect of such payments, which could in this context be considered a misappropriation of corporate assets, a criminal offense under Luxembourg law.

The sanctions for misappropriation of corporate assets go up to EUR 25,000 in fines and 5 years in prison. The offense consists in the malicious use of corporate assets or credit by a person entrusted with the management of a company for their own personal gain, be that direct or indirect. Any claim in this respect must be brought by the company itself.

In order to mitigate the risk, the deciding body should apply necessary caution, with respect to payout amounts and timing, motivation thereof, and in particular, the persons who may be implicated in the decision process. Board members should carefully assess whether they face a conflict of interest, and if so, should abstain from participating in the decision (or, as the case may be, submit the decision to the general meeting of shareholders in accordance with applicable legal provision).