Adv. Ronen Adini, who specializes in capital markets law, has sent a pre-lawsuit warning letter to the board of directors of Israel Chemicals (TASE: ICL: NYSE: ICL), the company and its managers. Adini, who represents minority shareholders in Israel Chemicals, intends to file a derivative action against the company's management and board and the company itself, arising from the outsize bonuses the company paid its managers and that were exposed by "Globes". The information was published at the demand of the Israel Securities Authority in the company's annual financial statements.
According to Adini, the Israel Chemicals board stretched accounting rules and subordinated its judgment and the good of the company to the good of its managers when it came to the bonuses paid to the managers for 2014 and 2015.
Adini claims that this was in breach of the board's fiduciary duty to the company and its shareholders.
The managers in question, who Adini is demanding should return the money paid to them, are CEO Stefan Borgas and senior managers Dan Chen, Asher Grinbaum, Nissim Adar and Charles Weidhas.
The lawsuit that Adini intends to file is a derivative action claiming on behalf of minority shareholders in Israel Chemicals that $5 million paid as bonuses to company managers should be restored to the company. The warning letter states that unless the money is returned within 45 days, Adini will file the action in the court.
The Israel Chemicals bonus story begins in 2014, when CEO Stefan Borgas and another four senior managers were (allegedly) not entitled to bonuses under the terms of their employment contracts. In Borgas's contract, the threshold condition for payment of a bonus is that the company's profit should not be less than 60% of the average for the preceding three years. This is explicitly stated in the contract and in the financial statements of Israel Corporation (TASE: ILCO), which controls Israel Chemicals.
As revealed by "Globes" last month, Israel Chemicals' performance in 2014 under Borgas's management did not satisfy this condition. Israel Chemicals should therefore not have paid a bonus to Borgas and to the company's other senior managers, but this did not stop them drawing bonuses as though the company had met the profitability target.
In 2014, Israel Chemicals reported a profit of $464 million. According to Borgas's contract, the company had to make a net profit of $724 million in order for him to be entitled to a bonus in accordance with his employment contract. What did the company do? It adjusted the profit for the purposes of paying management compensation only, so that it presented two profit figures: one, for the public, indicating a profit of $464 million, and the other, a profit of $738 million, for the purposes of calculating management bonuses. Thus Israel Chemicals managers received the desired bonus.
The argument of Israel Chemicals and of Borgas was that there were one-time items that adversely affected the financial statements and that these prevented the payment of bonuses. The question that arises, however, is whether in the reverse situation, if one-time items had boosted profits above the bonus threshold, Borgas and the other managers would have forgone their bonuses?
The following are the items that Israel Chemicals reversed in its accounts in order to increase its profit for the purpose of paying a bonus:
A $135 million provision against an arbitration ruling on royalties payable to the State of Israel;
A $62 million tax provision;
A $14 million expense arising from a strike at the company;
A $55 million write-down on overseas assets;
A $29 million expense arising from the fall in value of hedging deals on energy prices and shipping.
A similar procedure was followed in 2015, when the profit attributable to shareholders totaled $509 million while, in order to pay bonuses, it had to be $571 million. The company made adjustments raising the profit figure by $161 million, and the bonuses were paid.
The adjustments were approved by Israel Chemicals' board of directors and by its compensation committee, but were not reported in any separate notification to the Tel Aviv Stock Exchange. To be fair, the company's senior managers did agree to a 16% reduction in their success bonuses, although they would not have been entitled to such a bonus at all had the financial statements remained the same for the shareholders, the workers, and senior management.
Borgas's bonus formula is as follows: 55% is payable if the company meets certain financial targets (operating profit and net profit); 25% is according to personal performance measures (growth, savings and streamlining); 15% is according to a personal ability assessment; and 10% is discretionary. In the financial criteria category, the company's performance under Borgas's management was 37% below the threshold, but that made no difference to the board.
Borgas's bonus amounted to nine gross monthly salaries, and the bonus paid to Chen amounted to six gross monthly salaries. Altogether, Borgas's salary cost in 2014 was $3.7 million, of which $1.4 million was basic salary, $1.1 million was bonus, and $1.2 million was in the form of options.
The Israel Securities Authority refused to answer Globes' enquiries about the matter.
Israel Chemicals said it had received the enquiry and was studying it.
Published by Globes [online], Israel business news - www.globes-online.com - on June 21, 2016
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