Mike Pero gave himself a pay rise without the approval of the co-owner of his real estate business and may have to return more than $1.5 million, a High Court judge says.
Pero is the chief executive of Mike Pero Real Estate (MPRE) which was launched in 2011.
The nationwide real estate business is half-owned by one of his companies, Mike Pero Marketing, and half-owned by Mike Pero Mortgages, which he started in the early 1990s but is no longer a part of.
Mike Pero Mortgages and Mike Pero Marketing agreed in 2011 that Pero would be paid $200,000 a year for his executive role with the real estate operation.
Both Mike Pero Mortgages and Mike Pero Marketing were each able to appoint a director to the real estate company's board.
However, for 10 months in 2012 and 2013 Mike Pero Mortgages had no representative on the board as it was involved in a dispute with a former shareholder.
When Pero was the only person on the board he purported to pass five directors' resolutions involving "some element of self interest", according to a High Court judge.
Even after Mike Pero Mortgages appointed a director, Pero purported to pass a further two resolutions.
"In particular, through the resolutions Mr Pero dramatically increased his own remuneration package, provided himself with a car allowance and also authorised an additional 'brand ambassador' payment to himself of $125,000 per annum," Justice Sarah Katz said in a decision released shortly before Christmas.
Pero, who did not give evidence in the High Court on his lawyer's advice, told the Herald today that he was only seeking "fair market value" for what he was doing and had tried to raise the issue of his remuneration a number of times without response.
"I am paid significantly less than many other high performing CEOs in this industry and the [$200,000] salary... is under what half of our agents earn in annual commission," he said, stressing he was speaking personally and not on behalf of the real estate business.
In the High Court case, Mike Pero Mortgages sought declarations that the seven resolutions were unlawful and orders that all money paid to Pero or Mike Pero Marketing over-and-above the agreed $200,000 be refunded.
Mike Pero Mortgages' director Sherman Ma told the court that if the company had known Pero wished to pass resolutions it could have appointed a board member without undue delay.
One of the resolutions signed by Pero increased his base salary from $200,000 to $340,000. Another said the real estate business would pay Pero $125,000 a year for his role as a 'brand ambassador' in addition to the pay he got as chief executive.
In her decision, Justice Katz said it was "overwhelmingly clear" that the resolutions were in breach of MPRE company constitutions and the shareholder agreement.
The judge said the failure of Pero to act in accordance with the constitution rendered the resolutions invalid.
During a hearing last year, Pero's lawyer argued that when the first five resolutions were passed his client did not have the support of a fellow director. Although a second director was in place when Pero passed the final two resolutions, this board member was uninvolved in the business.
However, Justice Katz said the facts of the case "neither justify nor mitigate Mr Pero's high handed and unilateral actions in passing the resolutions".
Pero's lawyer also contended that the remuneration resolutions could effectively be "saved" by a section of the Companies Act which says that a board may authorise payment of remuneration or other benefits to a director if it is satisfied that doing so is fair to the company.
Pero sought to prove that increased remuneration he had conferred on himself was fair to the real estate company.
But Justice Katz was not convinced that particular part of the Companies Act was engaged.
"It is not open to Mr Pero to purport to unilaterally increase his own remuneration, in egregious breach [of] MPRE's constitution and the shareholders' agreement, and then seek to benefit from his own wrongful actions by arguing that he should be able to keep his ill-gotten gains under [the Companies Act] because his increased remuneration was 'fair to the company'... one way or another, MP Mortgages consent was required before Mr Pero's remuneration could be increased," the judge said.
She also said that Pero had not proven his increased remuneration was at market rates.
Pero had a personal financial interest in each of the resolutions and a "significant conflict of interest", she said in her decision.
"Although a full accounting has yet to be provided by Mr Pero, MP Mortgages' estimates that he has arranged for MPRE to overpay him, in his capacity as an executive director of MPRE, by an amount in excess of $1.5 million," the judge said.
Although Mike Pero Mortgages wanted orders that any overpayment be reimbursed, it did not want Mike Pero Marketing to sell its shares in the real estate business. It wanted to work with Pero to grow the business.
Justice Katz declared that the seven resolutions were invalid.
"I have found that the resolutions, including the remuneration resolutions, were invalid and of no effect. MPRE has paid Mr Pero very significant sums of money to which he is not legally entitled, possibly in excess of $1.5 million."
The judge ordered that Pero and Mike Pero Marketing pay MPRE all amounts received by them in excess of $200,000 a year for their services.
She also ordered interest be paid on this sum.
Pero told the Herald today he had taken legal advice when changing his remuneration and had his position independently valued.
"I then based the adjustment to my remuneration on the findings of the independent report provided to me. The same findings were cross checked (peer reviewed) two years later and considered appropriate by KPMG and relevant for my role. I feel the court have dismissed the findings of the independent experts," he said.
He did not dispute the $1.5m estimate by Mike Pero Mortgages and said it represented "about five years of salary, bonuses, vehicle running costs and performance incentives".
If necessary, he had the ability to pay back the amount.
He said the case had no impact on the day to day business of Mike Pero Real Estate.
"I have built this company from the ground up. Some people believe it has a value in excess of $20 million," he told the Herald.
"It has helped change the lives of hundreds of agents and staff, not to mention home owners and customers across New Zealand. We have introduced a fairer commission structure and brought costs savings for Kiwis selling homes. Within the company we have a family culture and we are different to the other brands. I love what I do and I'm passionate about real estate. If I had the time again would I have taken another route? Absolutely I would have. I maintain I acted in the best interests of the company and its stakeholders. I don't have the company shareholders agreement and constitution on my desk every day - I just get the job done. I am an entrepreneur and a successful business man. I work hard like 99% of all other SME business owners and I just want what's fair," he said.
Asked how he could continue to operate as a business partner of a company that had taken him to court, Pero replied: "Of course I would prefer to own MPRE outright, but shareholder differences have no impact on the service we deliver to our customers and the company continues to remain profitable".