Downer EDI had no basis to dismiss its long-serving managing director for misconduct and deny him a substantial bonus, the NSW Supreme Court has found.
The company dismissed Stephen Gillies in August 2007 after he lost the confidence of the board.
However, it later relied on alleged misconduct to justify the dismissal, based on evidence it discovered after he left its employment.
Justice Stephen Rothman said the period of the employment of the managing director had been "extremely successful for both parties".
"He was, until the events leading up to August 2007, a most valued employee, upon whom the Board had relied to build a successful business into a multi-billion dollar business", he said.
In 1997, when the Downer group of companies appointed Gillies as chief executive on a remuneration package of $400,000, the company's turnover was $145 million.
By the time he left in 2007, the company was turning over $5.4 billion, had 22,000 employees and had operations in the UK, Asia, Australia and NZ.
Gillies' contract of employment provided for an incentive/bonus plan capped at 50% of his annual salary.
This was additional to his entitlements under the company's executive share option plan.
Gillies received share options until 2000, after which the incentive was replaced with a "phantom option scheme" (POS), which Justice Rothman found was part of his employment contract.
Justice Rothman said, the POS was designed to give the managing director "all of the benefits" of a share option plan without having to issue shares or options.
This purportedly meant the arrangement didn't have to be reported to the ASX and shareholders.
The company calculated the POS on the "notional basis" that Gillies had three million shares. The bonus was based on multiplying by three million the difference in the share price at the notional grant date and the price at the notional vesting date.
The company would declare a bonus each year, and the total funds grew to more than two million dollars by mid-2005. Gillies drew from time to time on the fund and repaid some of the amounts he withdrew.
Justice Rothman said the scheme could be best described as a "salary deferral" arrangement.
Downer claimed in court that the way Gillies treated the payments he received from the company amounted to misconduct, but Justice Rothman said he wasn't satisfied that what the managing director had done amounted to misconduct or fraudulent activity that would justify Downer terminating his employment immediately.
He said that Gillies hadn't engaged in any dishonesty "in the ordinary sense".
Justice Rothman also noted that the managing director didn't derive a benefit from deferring his bonus payments and that due to this, no conflict of interest arose.
"He did not exploit his position as CEO for personal gain at the detriment of shareholders", he found.
Justice Rothman also found nothing untoward in a car loan provided to Gillies in lieu of his entitlement, which he hadn't taken up, to be provided with a fully-maintained 5-series BMW.
Justice Rothman found that when the company’s board lost confidence in Gillies, it authorised its chair to seek his resignation, but not to dismiss him.
He ruled the company made "no attempt" to instantly dismiss him for misconduct, and also rejected Downer's claim that Gillies had resigned.
As a result, the provisions in the contract of employment providing for withholding termination payments in the event of dismissal for misconduct didn't apply and the company was obliged to pay Gillies a termination payment, his POS bonus and accumulated long service leave, Justice Rothman said.
Gillies v Downer EDI Ltd [2011] NSWSC 1055 (9 September 2011)