THE DECISION to “terminate” Gavin O’Reilly’s employment at Independent News Media last month was initiated with the full knowledge of directors, the High Court heard yesterday.

In an affidavit, company secretary Andrew Donagher said the board “agreed that compensation should be paid to forestall legal proceedings, which appeared to be imminent and would have been expensive and acrimonious”.

Independent News Media (INM) believed that former chief executive Mr O’Reilly would seek interlocutory injunctive relief from the High Court to prevent his employment being terminated, and had engaged a firm of solicitors and senior and junior counsel to act on his behalf, Mr Donagher’s affidavit stated.

The affidavit emerged in relation to a legal challenge by non-executive director Paul Connolly to a payment of €1.87 million made to Mr O’Reilly on his departure two weeks ago.

Mr Connolly is taking legal action to have the compensation payment declared unlawful on grounds it allegedly breached section 186 of the Companies Act. This is because it was approved by the board on April 19th last, and paid the same day, without being put before shareholders at a general meeting.

Mr Justice Peter Kelly yesterday transferred the case to the Commercial Court and fixed it for hearing on June 6th.

Mr Donagher said the process that led to Mr O’Reilly’s employment being terminated “commenced with the full knowledge of other directors, including Mr Connolly”.

“Several issues were raised” by INM chairman James Osborne with non-executive directors concerning Mr O’Reilly’s removals as chief executive, the affidavit notes.

Mr Donagher states that Mr O’Reilly had “threatened legal proceedings in respect of the discussions relating to his removal”.

He said the board was advised about the terms of the proposed termination and that the parties were “desirous” at agreeing an “understanding . . . to avoid litigation”.

“The board agreed that compensation should be paid to forestall legal proceedings, which appeared to be imminent and would have been expensive and acrimonious,” the affidavit states.

Mr Donagher said INM was advised that it did not require shareholder approval for the payment to Mr O’Reilly.

In relation to the size of the payout to Mr O’Reilly, Mr Donagher said INM acted at all times “entirely in good faith”.

INM yesterday published its annual report for 2011, showing that Mr O’Reilly was paid €878,000 last year. This comprised a salary of €750,000, a pension payment of €101,000 and benefits of €27,000. He was paid €1.04 million in 2010.

Mr Connolly, one of two directors on the INM board representing Denis O’Brien, alleges the payment was unduly generous in the context of the company’s performance during Mr O’Reilly’s tenure as chief executive.

Mr Connolly said the INM performance in recent times had been “extremely disappointing”, with the share price falling from a high of €27.09 on June 1st, 2007 to 21½ cent on March 30th last.

The company’s pension fund deficit had also increased to €147 million in 2011, he said.

Mr O’Reilly’s position was “untenable” and he should not have been rewarded for “presiding over a period of destruction of shareholder value”, Mr Connolly said.

The judge said INM appeared to believe some discovery may be necessary and asked Rossa Fanning, for Mr Connolly, what was so urgent. INM’s annual meeting is scheduled for June 8th.

While notice of resolutions for that agm had to be provided by May 9th, and INM had said there could be no decision on this case by that date, his side still believed it might be possible to get a court decision before the agm.

Mr Justice Kelly observed, whether Mr Connolly won or lost his case, the reality was the payment matter would not be on the agm agenda.