Cobley v Forward Technology Industries Plc

This is a very unusual unfair dismissal claim. For almost 20 years Mr Kenneth Cobley, the claimant, was the chief executive of Forward Technology Industries PLC (FTI). Following a take-over battle for the company, in which he was on the losing side, the new shareholders in FTI passed a resolution removing him as a director of the company. Under an express term of his written contract of service he automatically ceased to be chief executive on ceasing to be a director of the company. His contract of service terminated. He was dismissed. His proceedings against FTI for unfair dismissal under the Employment Rights Act 1996 (the 1996 Act) have thrown up some interesting points at the intersection of company law, contract law and the statutory regime of employment protection.

Mr Cobley’s claim failed both in the employment tribunal, which notified its extended reasons to the parties on 6 March 2001, and in the employment appeal tribunal, for the reasons given by HHJ Peter Clark in the judgment delivered on 9 July 2002. It was held that the reason for Mr Cobley’s dismissal was “some other substantial reason” within s 98(1)(b) of the 1996 Act; that that reason was of a kind such as to justify dismissing him from the position which he held; and that, in the circumstances, the dismissal was fair within s 98(4).

Mr Cobley succeeded in a claim for unpaid wages, which is not appealed. No claim for wrongful dismissal was made by Mr Cobley in the employment tribunal proceedings, though we have been informed by his counsel that Mr Cobley has reserved his right to bring such a claim in the ordinary courts. The employment appeal tribunal refused to grant permission to appeal on the unfair dismissal claim. The appeal to this court, which is confined by statute to questions of law arising from the decision of, or the proceedings in, the employment tribunal, is brought with the permission of Mance LJ.

Mr Cobley started to work for FTI on 10 December 1973. FTI carried on an electronics business. It had operating companies in different countries. A sound and vision division in the UK was sold off in 1998. From 1980, until he was dismissed on 8 February 2000, Mr Cobley was the deputy chairman and chief executive of FTI. He was also a director of the company. He had a written contract of service, under which he was entitled to not less than one year’s written notice (clause 2.1) and which also provided-

“17.1

Resignation of directorships In the event of the executive ceasing to be a director of the company, his employment hereunder shall terminate automatically…provided that if the executive shall himself resign as a director…the executive may elect by notice in writing to the company…that his employment shall not so terminate but shall continue on the basis…that he shall continue to be employed as chief executive.”

Despite the reference in the clause heading to “resignation,” it is not in dispute that clause 17.1 also applied to the removal of a director against his will.

In 1998 Mr Cobley spearheaded an attempted management buy-out of FTI using a vehicle company called Summerbok. An offer of 26p a share was made with the backing of financial institutions. A scheme of arrangement was to be made.

In about October 1999 FTI was the target of a take-over bid by an American company, Crest Group. The initial offer was 28p a share. The chairman of Crest was Mr James Goodson. From Mr Goodson’s perspective the effect of the continuing management buy-out activities of Mr Cobley was to increase substantially Crest’s costs of the takeover. (Crest’s estimate of the additional costs is put at $10m.) A bidding competition took place, in which the shares in FTI rose to 50p a share.

After the successful take-over by Crest, which was achieved in January 2000, a resolution was passed by the board on 19 January 2000 for the removal of Mr Cobley as chief executive officer and as a director of FTI on the ground that he had caused a scheme of arrangement to be proposed to the former board and shareholders at great cost to the company and at a price which he ought to have known was substantially less than the company’s true value. By this time Crest had appointed a number of new directors, who controlled the board. No notice of termination or dismissal letter was ever served on Mr Cobley. Instead, an EGM was held on 8 February 2000, at which a resolution was passed by the shareholders of FTI removing Mr Cobley as a director of the company. By that time Crest had 95% of the shares in FTI. Mr Cobley was dismissed by the company from his employment as chief executive. It is not in dispute that this was a dismissal within s 95(1)(a) of the 1996 Act.

The employment tribunal reached the following conclusions.

The reason for his dismissal was (paragraph 6(A))

“…the very fact of the acquisition by Crest resulting in [his] removal as director and employee. We agree with the Respondents’ submission that new shareholders are entitled to choose their own board of directors after acquisition and that the choice of new board directors might well result in the removal of the old board so that the chief executive would not continue in place. The other directors resigned. The EGM on 8 February was called by Crest with the purpose of replacing the existing directors with its own nominees ”

The employment appeal tribunal were unable to find any grounds in law for interfering with the decision of the employment tribunal. They held that-

“20.

…It seems to us axiomatic that an employed Managing Director must also be a member of the board. That was reflected in this Appellant’s contract. Once he was removed, lawfully, as a director he could no longer continue in employment as the Managing Director and Chief Executive of the Company. The Respondent made out some other substantial reason for dismissal.

21.

Was it then open to the Tribunal to find that dismissal for that reason was fair under Section 98(4)? We think it was. Against the background of a bidding war against opposition led by the Appellant it was inevitable that he and his colleagues would cease to be directors. The new owners of the Company were entitled to appoint their own nominees to the board to replace the old board, as the Tribunal found.”

The appeal tribunal added that the position was analogous to the re-organisation of a business, as in Hollister v. NFU [1979] IRLR 238. As an experienced businessman, Mr Cobley would have been aware that, having lost the take-over battle, he was at risk of losing his seat on the board and with it his employment. The possibility of finding him alternative employment was “unrealistic.”

Mr Sean Jones, counsel for Mr Cobley, submitted that the reason for dismissal found by the tribunal in paragraph 6(A) of their extended reasons could not, as a matter of law, be “some other substantial reason” within s 98(1)(b). Changes in the share ownership of a company do not have any necessary effect on employment relationships between the company and its staff. They may explain, but cannot justify, dismissal of staff employed by the target company. The mere change in share ownership does not amount to a reason justifying dismissal. The wish of the new dominant shareholders to choose their own board is no more a justification of a dismissal than the wish of an employer, who dismisses an employee because he wants a workforce of his own choice.

He contended that it was the duty of the tribunal to investigate the underlying principal reason for the decision to remove Mr Cobley as a director of FTI. They had failed to do so. It was insufficient simply to treat Mr Cobley’s removal from the board as the reason for his dismissal as chief executive. Section 98 focused on why, rather than how, employment comes to an end. There were 2 possible underlying reasons for Mr Cobley’s removal as director, both of which were relevant to his dismissal as chief executive. Both reasons related to the conduct of Mr Cobley: either it was the reason actually given by the board at the meeting on 19 January 2000 or the reason was merely that Mr Cobley had been involved in a competing bid.

It was contended that it was significant that the first response of FTI in their notice of appearance was that “the decision to dismiss was based on the fact that the Applicant had been guilty of conduct which was so serious that it entitled the Respondents to dismiss him” for the reasons previously set out. They related to his conduct in respect of the attempted management buy-out and allegedly involved a breach of his service agreement, breaches of his duties of fidelity and good faith and breaches of his fiduciary duties

As, it was argued, both reasons related to conduct within s 98(2)(b), the employment tribunal erred in law in classifying the reason for Mr Cobley’s dismissal as “some other substantial reason” within s 98(1)(b). This in turn led to errors in the consideration of the fairness of the dismissal under s 98 (4), as discussed below.

In my judgment, there was no error of law in the decision of the employment tribunal as to the reason for Mr Cobley’s dismissal. The finding of fact in paragraph 6(A) of the extended reasons was open to the tribunal on the evidence, following the leave granted by them at the start of the hearing to clarify the reason for dismissal as “some other substantial reason”, namely “where an acquisition follows a hostile or bidding war situation the managing director/chief executive cannot remain in place.”

I am unable to accept the submission of Mr Jones that the reason for dismissal found by the tribunal cannot be “some other substantial reason” within s 98(1)(b) of the 1996 Act.

The first point for the tribunal was the purely factual question: what was the reason for Mr Cobley’s dismissal as chief executive? As was said by Cairns LJ in Abernethy v. Mott Hay & Anderson [1974] ICR 323 at 330B-

“ A reason for the dismissal of an employee is a set of facts known to the employer, or it may be a set of beliefs held by him, which cause him to dismiss the employee.”

At this point it is important not to confuse the office held by Mr Cobley as a director of FTI with his employment by FTI as its chief executive. His right under the 1996 Act not to be unfairly dismissed only applied to his employment. It did not apply to his office as a director of FTI. No general right is conferred on a director, either under the Companies Act 1985, or under the articles of association or by the common law not to be unfairly removed from the board. The shareholders are entitled to remove a director by resolution passed at a general meeting. The liability of the company to pay compensation on such removal arises only if the director has a contract of service with the company, which is terminated prematurely or without good reason at common law, or if he is unfairly dismissed form his employment under the 1996 Act.

I agree with Mr Jones that this does not mean that the reason for the shareholders’ resolution removing the director is irrelevant to identifying the reason for his dismissal from employment in proceedings for unfair dismissal or for wrongful dismissal. If, as in this case, removal from the board automatically terminates the contract of employment, it will be difficult to dissociate the reason for the removal resolution from the termination of the employment. One leads to the other. I was not impressed by Ms McKie’s concern about the possible difficulties in investigating and identifying the reason for the removal of a director at an EGM attended by many shareholders.

In my judgment, however, the employment tribunal did not fall into the error of simply finding that the triggering of the automatic termination provision in the service agreement was the reason for Mr Cobley’s dismissal. They also looked at the set of facts, or set of beliefs, which caused FTI to dismiss Mr Cobley. The new board and the new shareholders wanted a fresh board of directors. All the old board, who were non-executive directors, had resigned, leaving only Mr Cobley in office. The new shareholders resolved to remove him. The legal consequence was that his contract of service terminated. As a matter of fact it would be reasonable for the new shareholders to form and act on the view that FTI should not have a chief executive who had been voted off the board. The proposition that a change in the ownership of the shares in a company or in the control of it does not have a necessary effect on employment relationships between the company and its staff is, in general, correct, but it is always necessary to consider the facts of the particular dismissal. S 98(1)(b) focuses on the sufficiency of the reason to justify the dismissal of an employee “holding the position which the employee held.” Mr Cobley held the most important executive position in IFT. In deciding whether there was a substantial reason to dismiss him from that position on a successful take-over different considerations would apply to him than to the case of a secretary or a storeman.

In my judgment, the tribunal were entitled, for the reasons given by them, to conclude that there was a substantial reason, falling within the broad, residual range of reasons available to an employer under s 98(1)(b), for dismissing Mr Cobley from the position of chief executive. As was held by the employment appeal tribunal in Priddle v. Dibble [1978] ICR 149 at 152-153, the reasons available to an employer under s 98(1)(b) are not limited to reasons of the same kind as those spelt out in s 98(2), nor do they require consideration of the fairness of the dismissal, which falls to be considered under s 98(4) rather than at the prior stage of identifying the reason for dismissal. I would reject the attempt by Mr Jones to put a gloss on the language of s 98 in his submission that the common element in all the potentially fair reasons for dismissal set out in s 98, including “some other substantial reason,” is that continued employment would be harmful, or potentially harmful, to the interests of the employer. Harm to the interests of the employer no doubt explains the presence of most of the reasons and, in many cases, that fact would supply the justification for dismissing an employee. Mr Jones submitted that the reason found by the tribunal in this case did not involve any element of actual or potential harm to FTI. It could not therefore be a permissible reason for dismissal. It was not enough to justify dismissal under s 98(1)(b) for the shareholders or the company simply to say to Mr Cobley “We do not want you to carry on a chief executive” or “We want a new chief executive.”

The answer to this point is that neither actual nor potential harm to the employer’s interests are express or implicit requirements of a potentially fair reason in s 98. As Bristow J said, in giving the judgment of the appeal tribunal at p 152H, the question whether there is “some other substantial reason” is

“…for the tribunal to use its own common sense and experience, and, unless it can be shown that its answer is so obviously wrong that it has or must have misdirected itself, it is not for this appeal tribunal to say that it has gone wrong in law.”

For the reasons already given the tribunal did not go wrong in law and they were entitled to identify the reason as they did and to hold that it was “some other substantial reason” justifying the dismissal of Mr Cobley. In those circumstances it is unnecessary to consider the alternative reason of a breakdown in confidence and trust or the detailed submissions made by Mr Jones in his skeleton argument as to why that was a reason relating to conduct, and as to why the tribunal’s findings of fact relating to Mr Cobley’s conduct (a) were not capable of supporting the conclusion that trust and confidence had broken down and (b) were not supported by the evidence.

In determining whether the dismissal of Mr Cobley was fair under s 98(4) the tribunal was required to ask whether, in the circumstances, FTI acted reasonably or unreasonably in treating the reason as a sufficient reason for dismissing him and to determine the question of fairness in accordance with equity and the substantial merits of the case.

Mr Jones submitted that, in conducting that exercise, the tribunal had taken account of irrelevant factors, in particular the fact that Mr Cobley anticipated that FTI might seek to dismiss him, and had failed to take account of relevant factors, in particular the fact that he was a long standing senior employee with an unblemished record, that the manner of his dismissal was unfair and whether an alternative position was available, either within FTI or within the group of which it was part.

In my judgment, there was no error of law in the decision of the tribunal on the issue of fairness. Dismissal of Mr Cobley as chief executive was within the range of reasonable responses open to FTI after the take-over had been accomplished. Mr Cobley had been lawfully removed from the board and his contract of service had terminated in accordance with an express term agreed by him.

I agree with Mr Jones that the fact that an employee believes, or even knows, that he is to be treated unfairly cannot have the effect of transforming unfair treatment into fair treatment. But that is not the point at issue here. The tribunal treated as relevant to the fairness of Mr Cobley’s dismissal the fact that he would have been aware, as an experienced businessman , that he risked being removed from the board, if he lost the take-over battle. He was likely to have to go. They were the commercial realities relevant to his position as chief executive with a seat on the board and they were relevant to the issue of the fairness of the dismissal of someone in his position in those circumstances.

The fact of Mr Cobley’s long service as chief executive with an unblemished record was beside the point when he was being dismissed for “some other substantial reason” found by the tribunal: as explained above, this was not a case of dismissal for a conduct reason. If anything, his long service was likely to operate against him, as a reasonable employer was entitled to take the view that it was not practicable or reasonable in the circumstances to consider alternative employment within the company for a person previously employed as chief executive for almost 20 years.

In his reply submissions Mr Jones developed in detail the submission that “the manner of dismissal” was a factor relevant to the issue of fairness, which had been ignored by the tribunal. He contended that a dismissal can be rendered unfair by the manner in which it has been carried out. He cited Johnson v. Unisys Ltd [2001] ICR 480, in which the House of Lords decided that damages for loss, such as psychiatric injury, arising from the manner of dismissal were not recoverable in an action for wrongful dismissal. He relied on the passage in the speech of Lord Hoffmann (with whose speech Lords Bingham and Millett agreed) at p 500 C-F for the proposition that compensatory awards by employment tribunals for unfair dismissal could include compensation for distress, humiliation, damage to reputation in the community or to family life, as well as financial loss. The unfairness relied on by Mr Cobley was that, at the board meeting on 19 January 2000, a reason had been profferred for his dismissal (i.e.alleged misconduct), which was not the true reason for his dismissal. Misconduct was alleged, but never investigated. The allegation had misled him and it carried with it significant stigma.

In my judgment, the “manner of dismissal” point even assuming that it is relevant, fails on the facts. Mr Cobley was not dismissed on 19 January 2000 or pursuant to the resolution passed at the board meeting on that date. He was not dismissed until the resolution at the EGM on 8 February. There is no finding of fact by the tribunal which would support a contention that the “manner of his dismissal” on that date was in any way unfair.

I would dismiss the appeal.

I agree. On the first point, that relating to “some other substantial reason” under section 98(1)(b), it seems to me to be impossible to say either that the desire of the new shareholders of a company to create a new board of directors cannot be a substantial reason justifying the dismissal of an incumbent chief executive consequent on his losing office as a director; or that it was not open to the employment tribunal to find that that was the principal reason for Mr Cobley’s dismissal. Any analogy in such circumstances with dismissal of a company’s work-force in general, or with transfer of undertaking situations is misplaced.

As for the second point, the fairness of Mr Cobley’s dismissal, the tribunal reasoned in effect that, having lost the battle for control of the company to Crest, Mr Cobley would in all probability be asked to leave. Mr Cobley knew of that likelihood, for the very reason that it was so. The practicalities of the situation were reflected in the fact that there was already discussion of an “agreed” termination package before the formal completion of the takeover. Mr Cobley had his contractual rights under his contract of employment, but it would be unrealistic to suppose in the light of change of control that his departure from the company could be called unfair. It was within the range of reasonable responses open to FTI under its new owner.

The third and last point, relating to the “manner of dismissal” seeks to bring into account a factor which was not “the reason (or, if more than one, the principal reason) for the dismissal” (section 98(1)(a)), for that, ex hypothesi, was the para 6(A) reason, but rather a reason which had nevertheless been put forward on 19 January 2000 as supporting the resolution of that date, namely the tribunal’s alternative para 6(B) reason. In this connection Mr Jones sought to suggest that the para 6(B) reason was a mere sham or pretext and that this affected the “equity and the substantial merits of the case” (section 68(4)(b)). However, there was no finding that the para 6(B) reason was a sham or pretext. It was a genuinely held reason (see para 6(B) itself), but it was not the principal reason for Mr Cobley’s dismissal. It affected neither the reasonableness nor the equity and substantial merits of the case, which the tribunal were entitled to see rather in the considerations discussed in the previous paragraph.

I also agree.