Kenneth Cobley worked for Forward Technology Industries plc, makers of plastic assembly equipment, for 27 years. In addition to being a director he had a contract of employment for his post as Chief Executive, which he had held for 20 years.
The contract required one year’s written notice of dismissal. It also included a clause providing that:
"In the event of the executive ceasing to be a director of the company, his employment hereunder shall terminate automatically".
Cobley fought an attempted takeover by US-based Crest Group. Ultimately, he lost the battle, but not without raising Crest's ultimate acquisition costs, according to Crest's chairman. Displeased with his efforts to frustrate the deal, the new shareholders passed a resolution removing Cobley from the board of directors and from his post as Chief Executive.
No notice of termination or dismissal letter was ever served on Cobley.
Cobley took the company to an Employment Tribunal for unfair dismissal under the Employment Rights Act of 1996. He lost on the grounds that the dismissal was justified for what the Act describes as "some other substantial reason", and that it was fair.
The Employment Appeals Tribunal agreed with that decision and this view has now been endorsed by the Court of Appeal.
The "substantial reason" in the circumstances was described by the Employment Tribunal as being the fact 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 Court of Appeal noted that it was important not to confuse the role of Mr Cobley as Director with the role of Mr Cobley as CEO and employee.
Directors do not have rights protecting them in the event of a takeover, but employees do. In this case the employee rights were dealt with in the employment contract, after dismissal from the board had taken place.
The Court then confirmed that the Employment Tribunal was correct to look beyond the triggering effects of the employment contract, to the circumstances facing the new board and the position held by the employee.
The Court of Appeal said, “Mr Cobley held the most important executive position in [the company]. 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 the court’s view the dismissal was therefore reasonable.
The court held that the dismissal was fair because Cobley was not being dismissed for a conduct reason, but because of the circumstances of the takeover. He knew the commercial realities of the situation and had even been discussing a possible termination package in December 1999.
Dismissal was therefore a reasonable option open to the new board.