Industrial Relations Commission of New South Wales in Court Session CITATION : Henshaw v Sqribe [2000] NSWIRComm 279 Applicant KIM HENSHAW First Respondent SQRIBE TECHNOLOGIES PTY LIMITED PARTIES : Second Respondent SQRIBE TECHNOLOGIES CORPORATION Formerly known as Management Information Technology Incorporated Third Respondent BRIO TECHNOLOGY INCORPORATED FILE NUMBER: IRC4988 of 1999 CORAM: Peterson J CATCHWORDS : Unfair contract - s106 - termination of employment - contract providing for one month's notice of termination - notice in context of redundancy - loss of stock options - no provision made for redundancy - contract and stock option plan unfair LEGISLATION CITED : Industrial Relations Act 1996 Lavings v Barclay Mowlem Constructions Pty Ltd (unreported 15 September 1994) CASES CITED : Canizales v Microsoft Corporation & Ors [2000] NSWIRComm 118, 1 September 2000 Adams v Westfield Holdings Limited [2000] NSWIRComm 112, 30 June 2000 HEARING DATES: 10/30/2000; 10/31/2000 DATE OF JUDGMENT: 12/22/2000 APPLICANT Mr I Neil of counsel SOLICITOR Abbott Tout Solicitors SYDNEY. LEGAL REPRESENTATIVES: RESPONDENT Mr J Fernon of counsel SOLICITOR Baker & McKenzie Solicitors SYDNEY. JUDGMENT: - 10 - - 14 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION CORAM: PETERSON J DATE: 22 DECEMBER 2000 Matter No.IRC4988 of 1999 KIM HENSHAW v SQRIBE TECHNOLOGIES PTY LIMITED AND ORS Application under s106 of the Industrial Relations Act 1996. JUDGMENT 1 On 1 August 1997 the applicant, Kim Henshaw, was employed by the First Respondent, Sqribe Technologies Pty Limited ("Sqribe") a subsidiary of the Second Respondent, Sqribe Technologies Corporation of the United States of America ("Sqribe USA"). He commenced employment as the Asia Pacific Region Manager of Sales and Marketing. On 1 January 1998 he was appointed to the position of Managing Director. Following a merger between the Second Respondent and Brio Technology Incorporated ("Brio"), also of the USA, the applicant was made redundant on 30 June 1999. 2 The Amended Summons for Relief seeks, pursuant to s.106 of the Industrial Relations Act 1996, declarations that the employment contract, and the arrangement or collateral arrangement whereby the applicant participated in a stock option plan, be void ab initio, and orders varying the contract to provide 12 months' notice or pay in lieu thereof and compensation for the loss of stock options, which would have become available to the applicant between his termination date and the date of the court's order, were it not for the termination. Interest and costs are also sought. 3 The parties have agreed that the question of valuation of any stock options should await the outcome of this judgment which is limited to the question of liability as to notice/severance and the operation and effect of the stock option plans. 4 The applicant's employment by Sqribe resulted from discussions with the then Managing Director of Sqribe, Mr Jones, who had earlier offered another position to the applicant which he declined, then preferring to take up employment with the Australian subsidiary of another American corporation, Progress Software Incorporated ("Progress"). Whilst he was there employed Mr Jones again offered him a position with Sqribe, and indicated that if the offer was accepted the applicant would be allocated "options to acquire 10,000 shares in the American parent" (of Sqribe). Mr Jones said "The plan is to float the American parent and when that happens your options will become very valuable indeed". 5 It was the prospect of acquiring those options that led the applicant to accept the position. When he told his employer, Progress, that he wished to resign in order to take up employment with Sqribe at an annual remuneration of $180,000, Progress offered to match that level and to promote him to the position of New South Wales Manager. His then salary was $150,000 per annum. This offer he declined, largely because he decided to accept the inducement of the stock options. 6 The offer of employment with Sqribe was contained in a letter dated 1 July 1997 from Mr Jones which included the following paragraph: Stock Option Plan Effective on your date of commencement, you will be allocated US$10,000.00 of SQRIBE shares, which will be subject to the standard SQRIBE employee stock option offering. Further allocations may be made on the anniversary of your employment commencement date, subject to performance. The "standard Sqribe employee stock option offering" was not outlined to the applicant at the time he accepted this offer. 7 The offer of employment also provided that "(a)fter the probation period, either you or the company may terminate your appointment by one month's notice in writing". 8 Some six weeks later he received in the mail a copy of the Sqribe 1995 Stock Option Plan and an Incentive Stock Option Agreement for his signature. The Stock Option Agreement had already been signed by the Chief Executive of Sqribe USA, Ofir J. Kedar. The applicant was required to sign a copy and return it, which he did. 9 The Stock Option Agreement provided for the allocation of 10,000 of the company's common stock at a price of $1.00 per share with a maximum term of 10 years from the grant date, 1 August 1997. 10 The Recitals to the Agreement include the following: A. The Board of Directors of the Company has adopted the SQRIBE 1995 Stock Option Plan (the "Plan") for the purposes of attracting and retaining the services of selected employees (including officers and directors) who contribute to the financial success of the Company or its parent or subsidiary corporations. B. Optionee is an individual selected by the Committee administering the Plan (the "Committee") who has rendered or is to render valuable services to the Company or its parent or subsidiary corporations, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Company's grant of a stock option to Optionee. 11 The vesting dates of the options were provided by the Agreement to be as follows: · 25 per cent of the option shares on 1 August 1998 (that is, 12 months after the grant date), and · 2 and one-twelfth per cent (2.0834%) of the option shares on the first day of each succeeding month beginning September 1 1998 and ending August 1 2001. 12 Clause 5 of the Agreement provided for the accelerated termination of the option term in a number of circumstances, only one of which is presently relevant. It provided that the option term should terminate should the grantee cease to be an employee of Sqribe at any time during the option term. In that event the employee would have up to 30 days (commencing with the date of termination) in which to exercise the option for any or all of the shares for which the option was exercisable, but in no event could the option be exercisable at any time thereafter. Upon the expiration of that 30 day period the option grant was provided to terminate and cease to be outstanding. 13 On 1 January 1998 a further 5,000 stock options were granted at a strike price of $1.50 each. 14 On 20 February 1999 the applicant was provided with what was described as "his 1999 Incentive Compensation Plan". The letter of offer contained the following: Participation in the Plan is not an employment contract, nor does it guarantee an employee the right to continued employment or any right to continuation in job assignment at the time of initial Plan participation. The Plan is subject to change by the Vice President of World Wide Sales and Services at any time to reflect changes in sales emphasis and/or market conditions. Any such Plan changes will be in writing. The Company reserves the right to review any extraordinary transactions for fairness of quota assignment and other applicable adjustments (commission percentage, date of commission payment, etc.). Extraordinary transactions may involve a transfer of technology, unlimited rights of product for resell or distribution, the exchange of another company's products or a large transaction that will require future sales support over a multi-year period. SQRIBE Technologies is an "at will" employer. Either party may terminate the employee relationship at any time for any reason with one month's written notice. Once either party terminates employment, all rights to incentive compensation for which revenue has yet to be recognized will cease. SQRIBE Technologies shall have the right to recover from the employee any unearned incentive compensation paid. The following provisions also apply: 1. Superannuation will be paid out of incentive compensation payments rather than base salary. 2. Annual leave will be four weeks per year and you will be required to take it each year at times approved by your manager unless otherwise agreed to in writing. 3. Long Service Leave will accumulate in accordance with NSW legislative provisions. 4. Sick leave will remain as outlined in your offer letter. As we have discussed, Asia/Pacific results have been less than desirable. It is vital that improvements be made and that the FY1999 Plan be accomplished beginning with !1. I look forward to a successful year. J. Scott Chalmers VP, World Wide Sales and Services. Annexed to that letter was a copy of the Incentive Plan which was said to operate from 1 January 1999 and "supersedes all prior discussions and agreements regarding incentive payments for the incentive period". 15 This Incentive Plan provided for an incentive commission payment, expressed as a percentage of sales quotas. The commission rates were 3%, 4% and 6%, payable for sales achieved of the order of 0-100%, 100% to 110%, and over 110%, respectively, of the quotas. 16 On or about 23 February 1999 the applicant was advised by the Chairman and Chief Executive Officer of Sqribe Technologies Corporation that Sqribe and the third respondent, Brio Technology Incorporated, would merge. 17 A difficulty with the merger was that both Sqribe and Brio had Managing Directors appointed to their Australian operations and it seemed to the applicant at an early stage that the employment of only one of them would survive the merger. He though it likely that the other person would be favoured; this turned out to be so. However, before the choice was finalised the applicant expressed the view, both to his Brio counterpart and to Mr Chalmers, that he would be willing to consider another position with the merged entity. He raised with the latter a possibility of becoming Australian Country Manager; this was confirmed by Mr Chalmers' affidavit, but there is no indication of any thought or response having been given to it. 18 On about 2 April 1999 the applicant was advised by Mr Chalmers that his position would be made redundant and that he would finish at the end of April after which a redundancy package would be paid, the amount and timing to be decided by Brio. 19 Subsequently, after the applicant suggested that there were things necessary for him to do while the merger was settled down, his termination date was extended until 30 June 1999. While this had the practical, if not intended, effect of increasing the notice period worked from one month to three months, it was not the result of an act of generosity or even designed to reflect a fair approach to the matter of notice. Before and after 30 June there was an exchange of correspondence between the applicant and Mr Chalmers and between their lawyers. This culminated in Sqribe making an offer, which was exposed in the evidence, of a termination payment equivalent to four months' base salary plus an additional US$20,000 in response to the applicant's concerns relating to the stock options. This offer was conditional upon a deed of release being executed. It was rejected. 20 At the date of termination, 30 June 1999, the applicant was on an annual salary of A$120,000, with an incentive commission designed to give him a target salary of A$252,000. Having regard to the terms of the Option Plan, the availability to him of options, vested from the 1997 and 1998 grants, was 4,583 at $1.00 per share and 1,771 at $1.50 per share. On 12 July 1999 those options were exercised by the applicant. It might be observed that there was, in the applicant's view, no point in exercising the options earlier as the shares, being unlisted, had not had any tradeable value. 21 The evidence indicates the daily closing price for the stock on the NASDAQ exchange between 22 June 1999 and 25 October 2000 fluctuated widely. From June 1999 to 29 October 1999 it varied between a low of US$13.563 and a high of US$27.625. By 7 December 1999 it had hit the high of US$63.00. By 25 October 2000 again after a series of, to me, unaccountable variations, down to a low of US$5.906, the price on 25 October 2000 was US$8.938. This was said to reflect the market impact generally on technology stocks. On the date the applicant exercised his options, 12 July 1999, the closing price was US$19.00. The evidence does not disclose whether the applicant sold the shares and, if so, at what price. 22 In cross-examination Mr Henshaw agreed he had, in accepting employment with Sqribe, taken a risk that the shares would become publicly tradeable. He understood there was a possibility this might not be fulfilled, although he said he was assured the float was in progress. He said that in mid-April 1999 he advised "head hunters" he would be becoming available for employment. He obtained alternative employment from 15 July 1999, that is, 2 weeks after his employment with Sqribe ended, but at the date of his evidence, 30 October 2000, the applicant was unemployed. Mr Fernon also obtained from the applicant evidence of his prior employment history, which suggested a normality of stays of relatively short duration. 23 The claim is within fairly small compass: it relates to notice in the context of redundancy and the loss of stock options occasioned by the termination. While these claims are not mutually exclusive, I will deal with them, so far as I can, separately. 24 The case raises matters now quite common in cases of this kind. A senior executive will have entered employment in circumstances where no particular attention is given to the potential downside of earlier than expected termination. The notice will be, often, agreed at one month. Particularly is this so if the employer is USA-based - an "at will" approach to employment as was asserted by Sqribe. It is, of course, impossible to take a uniform approach to the very many varied circumstances which present in different cases. However, particularly when service is relatively short, it seems to me that senior executives cannot expect to be saved automatically from the consequence of their deliberate actions in entering, without demur, upon employment expressly terminable by (say) one month's notice. The problem is either that a contract of employment has been undertaken with only an expectation of long term success and continuance, which is to fail to pay regard to possibility, or with an unstated intention and understanding that the contract can later be said to be "unfair". There is also the possibility, however remote, that it was thought at the time not only usual and inevitable, but reasonable. There is, and so far as I can tell there could be, no principle which requires a provision for one month's notice to be seen as inherently unfair in the statutory sense. There must be some element or elements of the case which cause the matter of notice to be unfair or an adjunct of an otherwise unfair contract or arrangement, the remedy for which might involve consideration of the adequacy of notice. Possible examples might be the imposition of one month on an applicant for employment expressly reluctant to accept one month's notice, where the bargaining power is truly unequal; or perhaps one month being seen as inadequate after many years of service, or after movement up a promotional hierarchy. 25 What is it then that makes this contract or arrangement unfair? Mr Neil of counsel for the applicant submits that the unfairness in the matter arises in the following ways: · The respondent's failure to consult in any meaningful way about the applicant's redundancy. · The failure to give any real consideration to whether the applicant's qualities, capacities or experience fitted him for a position in the new organisation. · The notice was manifestly inadequate. · The failure to make any payment on account of redundancy. · The severance payment offered was manifestly inadequate. · The unfairness is compounded by the failure to have any real regard to the applicant's particular individual circumstances. 26 As to the Option Plan the submission was it was unfair in that: · It failed to respond to the termination of employment, through no fault of the applicant, solely to serve the interests of the respondents. · It failed to respond to the fact that alternative employment with the respondents for the applicant meant he would have retained his options. · It failed to respond to the fact that, at least as to the first grant, it was held out and operated as a substantial inducement to the applicant to take up employment with Sqribe. · It was infected with the vice of failing to respond to redundancy. · It gave no recognition to the continuing value of the applicant's work. · It gave no credit to the fact that, in relation to each grant, the applicant had served a one year waiting period. · It failed to give any protection to the contingent rights to which the applicant was entitled as at the termination of employment and was thus prima facie unfair. 27 Mr Fernon's case for Sqribe was that the contract of employment and the Options Plans were not relevantly unfair. The contract provided for one month's notice, but the applicant was afforded three months and also offered a further four months payment which he rejected. He submitted that, taking account of these relevant factors in assessing all the circumstances, the notice may be seen as reasonable. This is so however one describes the notice received and the payment offered, whether termination payment, severance or severance/redundancy payment. Taking into account the applicant's prior history of short term employment and his quick achievement of substitute employment Sqribe's offered payment was within the correct range. 28 As to the Options Plans, it was submitted the applicant left secure employment for the "hope" of options. He understood that would be subject to terms and conditions. There was also a risk the planned float would fail and that the options would not come to fruition, as indeed they had not at the first date of termination proposed for the applicant, 30 April 1999. The extended period of notice gave him both further accrual of options month by month and the opportunity to exercise them. 29 The plan which caused him to accept employment with Sqribe was designed to reward future service. It was just another form of compensation for work, accruing options monthly, no more an inducement than is salary. What is sought is payment without the work. CONCLUSIONS 30 Here there was express agreement to a termination clause providing one month's notice or pay in lieu. There was no evidence of any dispute or indeed discussion about the provision as being unsuitable. There is no suggestion of any oppression or inequality of bargaining position between the parties on this question. In those circumstances, and taking into account the agreed term was applicable to the position of Managing Director, and that the relationship was then of short duration, the question would arise, if the matter had not been one of redundancy, why the parties themselves ought not be treated as best-fitted to know what would be reasonable between them on this issue. Of course, it may be in a particular case that the seniority of the position will justify a greater period of notice. However, just as the decision on the facts in one case will not provide a necessary answer to another, this will not always be so. 31 It is apposite to reiterate the observations of Hill J. in Lavings v Barclay Mowlem Constructions Pty. Ltd. (unreported, 15 September 1994 - this extract reported at (1996) 64 IR 53 @ 65): "…the period of 'reasonable' notice to be implied in a contract of employment which is silent on the matter depends upon all relevant circumstances of the particular employment, including (but not limited to) the nature and status of the position, the degree of responsibility and authority involved, the qualifications and experience necessary, the availability of suitable alternative employment, the amount and form of the remuneration and the basis upon which it is expressed, any relevant trade custom or practice and the length of service of the employee. In the present case, of course, the contract contains express provision for notice of termination and the issue is whether it is fair or unfair in the context of the contract as a whole, the circumstances in which it was made and the circumstances of its application and operation. I should say that I do not accept Mr Kimber's submission that the fairness of an express provision for notice of termination of a contract of employment can be tested simply on the basis of whether it conforms to the 'reasonable' period of notice to be implied at law in the absence of such express provision. Proper regard must be had to the fact that the matter is governed by agreement, to all the terms of the agreement and the circumstances surrounding its making and operation …" 32 I would add in support of Hill J.'s comments that to simply test an express notice provision against what the common law would infer in the absence of a notice provision, would potentially render nugatory the very concept of a notice provision. 33 What, however, this contract did not do was make any particular provision for redundancy. Notice provisions agreed to operate in circumstances justifying termination, such as the failure to meet expectations of performance or suitability, are to be distinguished from the concept, now generally accepted in this State, that the loss of employment by reason of redundancy attracts special considerations which tend to redound to the benefit of the employee. There is, in the evidence, no hint of those special circumstances having been considered; I find that they were not. 34 I consider the terms of the contract under which the applicant performed work for Sqribe was deficient in its not dealing with redundancy and was unfair in the statutory sense. It is thus necessary to consider what variation thereto would be necessary to bring it within a fair range of terms as to afford the applicant proper treatment according to the circumstances of his termination. The applicant obtained what I think can only be regarded as a benefit from the retention of him by Sqribe for an extra two months, even though it flowed from his own suggestion. With the benefit of hindsight, that had the effect of ensuring that there was no real period of loss between jobs. That left him with 23 months of employment, 18 months of which as Managing Director, with no additional payment beyond any annual leave entitlements. That such was recognised by Sqribe to have been inadequate I would infer from its offer of an additional four months' pay. Is that offer adequate as Mr. Fernon submits? Mr. Neil submits at least 12 months' pay is justified. Taking into account all of the facts, including the nature of the position, the fact that the applicant was undoubtedly pursued and induced by Mr Jones to take up employment with Sqribe, the short period of employment, the history of shorter terms of employment together with the obtaining of employment reasonably soon after termination, I consider that six months payment at the applicant's average monthly income under the 1999 Incentive Plan would be appropriate. In that respect I would accept the evidence of the applicant that the average of his monthly receipts from the commission scheme was $4,000. 35 I turn to the options issues. The Sqribe 1995 Stock Plan expresses itself in terms which indicate it was designed to both attract and hold participants — "to create an incentive for such persons to remain in the employ of or provide services to the Company and to contribute to its success" --- "to grant……a favo(u)rable opportunity to acquire common stock.". The recitals of the Incentive Stock Option Agreement describe the purpose of the 1995 Plan to be "attracting and retaining the services of selected employees………who contribute to the financial success of the Company" ……and refer to the employee receiving the grant as "an individual ……… who has rendered or is to render valuable services to the Company…". 36 These provisions capture with some precision the circumstances of the applicant, who was clearly attracted by the offer of options, even though he was then unaware of these express purposes. It is true to say, as did Mr. Fernon, that he left secure employment for the 'hope' of a gain, but that was the purpose of the Plan in this case: to attract him. Having achieved that, the applicant was required to wait 12 months for the first vest of 25% of the grant; that is here of no consequence. He then was to accrue two and one-twelfth per cent of the grant, each month of the remaining three years of the vesting period. In ordinary circumstances I would think that was unexceptionable. It compares very favourably indeed, in this respect, with other plans which have come to attention. For example, see Canizales v Microsoft Corporation & Ors [2000] NSWIRComm 118, 1 September 2000 where the regular grants vested at one-eighth after 12 months and one-eighth each 6 months thereafter, giving a five year vest period. See also Adams v Westfield Holdings Limited [2000] NSWIRComm 112, 30 June 2000, where the options did not vest until the employee had served five years, and before that were at the absolute discretion of the employer. 37 Here there was no misrepresentation of the kind found to have occurred in Adams v Westfield; none indeed of any kind. The failure, again, of the Sqribe Plan was not to make any prescription in relation to a redundancy. Any termination, other than for theft, fraud, embezzlement or disclosure of trade secrets and the like, was to have the same consequences for the vesting of options. Any other dismissal for cause, such as poor performance (not an issue here), or any other form of misconduct warranting instant dismissal, would achieve the same vesting as a redundancy of any staff, including a Managing Director. 38 Although the applicant had an opportunity, which he did not take, to ascertain these rules before he accepted employment with Sqribe, I do not consider that should materially affect the formation of the view that the Plan was deficient and relevantly unfair. I find that the Plan was unfair and harsh, within the meaning of s.105 of the Act, in respect of its operation in this case. The rectification of that position does not require, in my opinion, an order of a relatively open-ended nature as sought. To continue to accrue option vests until an order of a court is made, introduces vagaries in which I can see no justice. If some continuing adjustment be required, it would seem to be in the area of an order for the payment of interest. 39 I am not able to find any good reason why the grant of options to vest, at least notionally, should exceed the period in respect of which a notice/severance payment is to apply on a redundancy. This was not a term contract, but one always terminable on notice. The element of contingency inherent in the employment and the offer of options causes me to consider that there should be a synchrony between the notice period and the continued 'vest' of stock options. There no other elements in the matter, such as those found to exist in Adams v Westfield, which would cause me to take any other course. 40 This view has the effect of providing the applicant with a notional vest of options at the rate of two and one twelfth per cent of the relevant grant in respect of the six months after the expiry of his notice period of three months, in respect of which he obtained vestings. 41 I indicate my intention to make appropriate declarations and orders to give effect to my conclusions. Having regard to their earlier agreement, I direct the parties to confer and report on a date to be fixed in February 2001. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.