A former CEO brought a claim alleging wrongful purported termination of employment in 2015. The termination of employment was because of alleged insider trading by the CEO.
The Supreme Court of Queensland concluded the insider trading did not make sense, the termination was wrongful and ordered the employer pay $2.7 million in damages.
- The Court had to determine whether there was a wrongful termination of Mr Lake’s employment.
The Plaintiff, Mr Lake, was employed by the Respondent, GBST Holdings Limited (GBST), as its CEO since 2001. In 2015, GBST’s board of directors decided not to renew Mr Lake’s employment contract. During a board meeting, Mr Lake’s separation package was discussed to include a salary and rent for a set period as well as performance rights under a long-term incentive scheme. Subsequently, Mr Lake sold shares in GBST and caused a GBST’s subsidiary company to enter into a residential lease, which was to Mr Lake’s advantage. Mr Lake had discussed both transactions with the Chairman of GBST’s Board prior to them taking effect.
As a result of Mr Lake’s entry into these transactions, GBST terminated Mr Lake’s employment contract, alleging fundamental and serious breaches of his employment contract giving GBST the right to summarily terminate that contract. GBST alleged that Mr Lake had breached the terms of his employment contract by not following GBST’s share trading policy and being in possession of price sensitive information at the time he was selling his shares, thereby committing insider trading. Further, GBST alleged that Mr Lake had also breached the terms of his employment contract by causing a GBST subsidiary company to enter a lease for the apartment in which Mr Lake and his family were to continue to live up to and beyond the termination of his employment, without authority or prior approval from the Board.
Mr Lake commenced proceedings against GBST seeking damages for the wrongful termination of his employment contract. He sought twelve months’ salary, the value of shares which he would have received pursuant to a performance rights contract and damages for misleading and deceptive conduct relying upon the Chairman’s failure to inform the Board about the lease or the proposed sale of shares.
GBST filed a counterclaim alleging that Mr Lake had engaged in insider trading in contravention of the Corporations Act 2001 (Cth) and sought compensation from Mr Lake in excess of $3 million. GBST also sought compensation from Mr Lake as a consequence of causing the subsidiary company to enter the lease.
What was alleged
The issues in this case were whether:
- termination of Mr Lake’s employment was wrongful;
- the alleged wrongful termination of Mr Lake’s employment amounted to repudiation by GBST; or
- Mr Lake was entitled to the separation package discussed prior to his dismissal.
There were two grounds relied on by GBST that Mr Lake had breached the terms of his employment contract: (1) that Mr Lake contravened GBST’s share trading policy and committed insider trading and (2) Mr Lake’s entry into the lease.
The Court found that these grounds were not breaches by Mr Lake and they did not warrant Mr Lake’s summary termination. There was no substance in the allegations of the contravention of GBST’s share trading policy and insider trading, as Mr Lake did not have actual knowledge of price sensitive information at the relevant time. Furthermore, GBST’s share trading policy did not require Mr Lake to obtain approval from the Board of GBST before entering into the share transaction. The date of trade was not within a period which required any approvals to trade, contrary to GBST’s assertions. Mr Lake had also provided the relevant details to the Chairman of GBST, who consented, but failed to convey this information to the Board. The Court found that the lease entered into by Mr Lake had been approved in advance by the Chairman of GBST’s board of directors and it had been agreed to through GBST’s normal arrangements.
As such, the Court concluded that Mr Lake’s conduct did not amount to breach that is sufficiently serious to allow a summary termination.
There were three claims by Mr Lake for damages for breach of contract:
- the purported termination of his termination was wrongful;
- the board failed to exercise its discretion properly by not allowing his performance rights to vest;
- he submitted that GBST underpaid him his entitlements.
The Court found that these claims for damages arose from GBST’s wrongful termination of Mr Lake’s employment contract and examined the previous negotiations between the parties to ascertain the probable result had termination not occurred.
Further, Mr Lake’s claim for damages arising from GBST’s misleading and deceptive conduct was also successful. The Court concluded that the Chairman’s conduct amounted to misleading and deceptive behaviour that led Mr Lake into error, by the Chairman’s
'failure to provide the board with the information he possessed about the entry into the lease as well as about the proposed share sales and… silence about the validity of the lease, caused Mr Lake to believe that his entry into the lease was acceptable as was his proposal to sell shares…'.
As a result the Court ordered that GBST Holding Limited pay to Mr Lake damages a sum of $2,225,205.04 plus interest subject to any variances for changes in exchange rates since the trial and costs. The following are the heads of damage:
- Damages for breach of contract for wrongful termination of his employment: $643,100 as 12 months’ salary including superannuation entitlements
- The value of the 365,177 ordinary shares in GBST as at 9 November 2015, namely $1,460,708 as damages for breach of contract; and
- Underpayment of entitlements: $121,397.04
Further, the Court dismissed GBST Holdings Limited’s counterclaim.
Implications for you
It is vital to obtain advice prior to acting on concerns regarding employees and proceeding to terminate employment. The risk associated with a poor decision can be substantial.
It is significant to remember that breach of contract employment claims can be expensive and damages which may ordered are not capped unlike statutory causes of action such as unfair dismissal.