Industrial Relations Commission of New South Wales in Court Session CITATION : Michael Thomes v Keycorp Limited [2003] NSWIRComm 459 PARTIES : Michael Thomes Keycorp Limited FILE NUMBER: IRC 5903 of 2001 CORAM: Curtis AJ LEGISLATION CITED : Industrial Relations Act 1996 Police Service of NSW v Batton (2000) 98 IR 154 Woods v WM Car Services (Peterborough) Ltd [1981] ICR 66 Armory v Delamirie (1722) 1 Stra 505, 93 ER 664 CASES CITED : Smith Ltd v Great Western Railway Co [1926] 2 KB 237 LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 Houghton v Immer (1997) 44 NSWLR 46 Chen v Karandonis [2002] NSWCA 412 HEARING DATES: 09/29/2003; 09/30/2003; 10/02/2003; 10/03/2003; 11/04/2003; 11/05/2003; 11/13/2003; 11/14/2003; 11/19/2003; 11/28/2003 DATE OF JUDGMENT: 12/17/2003 Applicant: Mr JP Phillips SC Solicitors: Baker and McKenzie LEGAL REPRESENTATIVES: Respondent : Mr MJ Kimber SC with Mr S Meehan Solicitors: Abbott Tout JUDGMENT: CONTENTS Introduction par 1 The Recruitment of Mr Thomes par 4 The Representations par 26 The State of the Company in 2000 par 28 The Telstra Deal par 53 The State of the Company in 2001 par 59 The Remuneration Dispute par 70 Constructive Dismissal par 92 Moves Against Mr Thomes par 97 The Credit of Mr Clayton par 105 The Reliability of Mr Irving par 127 The Reliability of Mr Sutton par 144 Attacks Upon the Credit of the Applicant par 153 Formal Findings of Fact par 191 - Pre Contractual Representation par 191 - Terms of the Existing Contract par 192 - Repudiation of the Contract by Keycorp par 193 - Unfairness par 195 The Relief par 196 - The Contract as Varied par 197 - Loss of Incentive Bonus par 199 - The First Year par 202 - The Second Year par 209 - Termination Payment par 211 Conclusion par 220 Orders par 221 INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION Coram: CURTIS AJ DATE: 17 DECEMBER 2003 Matter No IRC 5903 of 2001 MICHAEL THOMES v KEYCORP LIMITED Application under s.106 of the Industrial Relations Act 1996 JUDGMENT Introduction 1 In recognition of the unique nature of work as a commodity to be bought and sold, Part 9 of the Industrial Relations Act 1996 provides that if any contract whereby a person performs work in industry is unfair, the contract may be avoided and orders made by the Industrial Relations Commission to redress the unfairness. 2 The applicant Mr Thomes on 22 November 1999 contracted with the respondent Keycorp Ltd (Keycorp) to work as its Chief Executive Officer. Keycorp obtained an unfair advantage over him by misrepresenting to him before he agreed to the contract, the health of the company and the viability of its products. Keycorp obtained further unfair advantage over Mr Thomes by later denying to him his contractual rights concerning bonus payments, and by repudiating his contract and relying upon unfair severance terms. 3 This judgment considers the wrong done to Mr Thomes and the remedy which is appropriate in all the circumstances. The Recruitment of Mr Thomes 4 Michael Thomes was born in Germany on 3 September 1956. He was educated at Saarland University Saarbrucken between 1975 and 1980, graduating with an MA in economics. Prior to joining Keycorp he has enjoyed a distinguished career. His curriculum vitae (annexure E to affidavit of Brian Clayton) is included as Schedule 1 to these reasons for judgment. 5 In April 1999 Mr Thomes was appointed Managing Director South Pacific Region for Lucent Technologies. His base income was then $338,000. In addition he was to receive performance based incentive bonuses and ten per cent superannuation on cash earnings. He received $75,000 cash bonus as an incentive to join Lucent and was to receive in addition to his other benefits a further $75,000 if he stayed three years. In the financial year 1998, during most of which Mr Thomes was Vice-President and Executive Director of Siemens Nixdorf A. G. (Asia/Pacific), he earned $550,000 (Annexure E to Affidavit of Brian Clayton and Doc 372). 6 In June of 1999 Mr Thomes was contacted by Dan Dumitrescu, a principal of the recruitment firm Korn/Ferry, agents for Keycorp, who invited him to apply for the position of Chief Executive Officer of Keycorp. 7 In mid July Mr Thomes met with Mr Dumitrescu, who then said to him words to this effect (Thomes 1st Affidavit): This is an excellent and unique opportunity. These jobs only come up very rarely. Keycorp is a public company with international operations and it has achieved a reasonable size for an Australian company. It is one of the largest Australian IT companies. Keycorp is now looking for an experienced executive, who can take the company through the next phase of growth, where the company expands internationally, becomes a true multinational company and implements best-in-class processes and procedures. The company is like an unpolished gem, that needs to be polished. The full potential of that company has lain untapped. 8 After Mr Thomes said that he had only been with Lucent for a relatively short period of time and that it was not wise practice to change employment after a short time, Mr Dumitrescu said words to this effect (Thomes 1st Affidavit): These opportunities only come up every 2 or 3 years. It might well happen that, when you are ready to move on in 3 years' time, there might not be a job of the right level available for you. Considering your skills, background and experience, the position you presently hold is too low for you. The CEO position with Keycorp will more appropriately reflect your background. In addition, the remuneration level and the long-term opportunity to create wealth are far more attractive and more adequately reflect your career and professional achievements. 9 Mr Thomes had earlier revealed to Mr Dumitrescu his income in the financial year 1998. Several discussions took place between Mr Thomes and Dan Dumitrescu in the next few weeks. During these meetings Dan Dumitrescu said to the applicant words to the effect of: "Keycorp is a very solid company with world leading products and blue chip clients", and "The company is well placed to enter a period of global expansion and your remuneration will substantially exceed your present salary with Lucent." 10 Thereafter Mr Dumitrescu provided to Mr Thomes a "Candidate Briefing" (annexure A to Affidavit of Mr Thomes), which listed as an objective of the new CEO that he "Refocus business operations to become internationally competitive." The document asserts that "Keycorp stock is positioned for considerable upside benefit" and that the company "enjoyed solid revenue". It contains no mention of product or financial problems. 11 In September, Mr Thomes had a meeting with Mr Brian Clayton, the then Chairman of Keycorp. At that meeting a conversation took place to this effect (Thomes 1st Affidavit): Clayton: The founder has managed this business up to this stage, but the business has reached a size that has outgrown his capabilities. We now need a CEO with the experience of running a multinational business, a CEO who can put world class processes and procedures in place, procedures that support a global business. The only reason we struggled in the past, was that our poor procedures delayed the timely release of the new product range. Keycorp is now in the position to expand globally. Improvement of the managing and operating procedures is the only task to be achieved to be able to fully tap into the enormous potential of the company. Thomes: I have read in the press and it is known in the industry that Keycorp has performed very poorly in the past years. Why is this? Clayton: Due to a delay in the release of our new product line, sales and therefore profit have suffered. However, all problems with the product have now been resolved. The new products have been completed and have been released to the market. Shipments have been initiated and Keycorp is a global leader in its field. In addition, Keycorp's market capitalisation is undervalued. However, we have started to improve this situation. The Keycorp share price has started to rise in recent months. This is only the beginning and it is an indication that the full potential of Keycorp will be reached in the near future and the share price will soar. In order to fully exploit this situation, we need a new CEO. We will package a highly attractive, top of the industry salary package in order to attract the best possible candidate. The remuneration package will include an incentive component as a motivator for the candidate to grow the company and over-achieve expectations. The new CEO will be able to do very well. Thomes: What is the future of the present CEO of Keycorp, John Wood? Clayton: Mr Wood will be completely removed from the daily operations of the business. He will move to the US. We will maintain him on a consulting basis, so that we can tap into his knowledge. He can also report on technology developments in the US. He will report directly to me. Thomes: It is crucially important to me, that Mr Wood is totally removed from the daily business. In cases where this does not happen, when a new CEO takes over, businesses typically always run into problems, because of ongoing strong interference of the previous CEO. Clayton: I agree. John Wood will only interface with me. I see this consulting agreement as only temporary and short-term, anyway, in order to facilitate Mr Wood's transition into his new world. He will also only be a non-executive director for a limited period of time. 12 Shortly after these meetings Mr Thomes told Mr Dumitrescu that he was not comfortable with the quality of the information he had received and asked to talk to Keycorp staff. Mr Dumitrescu replied that this was not possible and that "Keycorp's position is that trust will be an elemental fact for successful future cooperation between the CEO and the Board. The Keycorp directors believe that you have to trust their representations." 13 At some time after 22 September 1999, Mr Thomes was shown Board papers of, and minutes to, Board meetings of June, July and August 1999 assembled for him by Mr Clayton. The June cash forecast was for an overdraft of approximately $17m as against a limit of approximately $21m. The July cash forecast was for a cash surplus of approximately $18m credit as at 31 December 1999. The August cash forecast was for a cash surplus of $4m as at 31 December 1999. 14 The July 1999 Board papers record under a heading "Sales forecast to December": Our revised program for delivery of K80, K78, and K23 is currently on track with these products becoming available at the end of July. We have some backlog of orders for each of these products but not sufficient to catch up with lost sales in the first half. 15 The August 1999 Board papers under the heading "Manufacturing Operations" record: The pre-production build of K78 (28 units) was completed by AEMS on 20 July and enabled us to review the test equipment and procedures. This resulted in some design changes to the test fixtures with respect to their reliability and some improved coverage in their In Circuit testing. The next pilot run of 130 units is now in progress and will be completed within the third week of August. Immediately following this run we will commence production for backlog orders. For K23, AEMS is currently building the first 50 pre-production units. 16 There was no information contained in the Board papers inconsistent with the half yearly report released by Keycorp to the Australian Stock Exchange on 17 August 1999. Part of this document was in these terms (Exhibit AX 9): DIRECTORS' COMMENTARY ON RESULTS FOR THE 6 MONTHS ENDED 30 JUNE 1999 Electronic commerce solutions group Keycorp has taken significant steps towards building its electronic commerce platform in the first half of 1999. The acquisition of Internet technology company Nobil Information Technology Corporation, the worldwide licensing of the MULTOS smartcard operating system, and the continued development of its merchant and self-service terminals all place Keycorp in a position to take a leading role in delivering electronic commerce solutions to organisations around the world. OUTLOOK FOR THE NEXT 6 MONTHS The major factors that contributed to the first half shortfall in revenue were extended contract negotiations with some customers, and delays in bringing new products to the market, particularly the K78 mobile payment terminal and Phase III of the K80 self service terminal. These factors are now largely resolved, and the company expects to report a profit for the full year to 31 December 1999. Revenue is expected to arise from a wide range of product areas, including: the sale of the new K23 internet-enabled terminals, the K78 and K80 Phase III; development and operation of Nobil's Internet payment systems; royalties from MULTOS smartcard chips; and the provision of other electronic commerce services. 17 When Mr Clayton assembled the Board papers for the information and guidance of Mr Thomes he possessed, but did not include, a copy of the report of the Managing Director Mr John Wood, the founder of the company and current CEO, dated 21 September 1999, prepared for the Board meeting of 22 September 1999 (AX 10). This report opens with the words: "The frustration of the past months in product release delays and crisis caused by component availability continued worse than I could have estimated. These caused follow-on problems with very significant revenue and deals being lost through non-performance." 18 The document later continued: "If you sum up there is $15m-$25m of revenue and $8m-$12m of margin being frittered away through operational delays and inadequate planning. This in turn is a fraction of the flow on. In the month I have spent time talking with people right across the company and every one is stretched. We would appear to be under-resourced in engineering and manufacturing operations for what we are trying to do." 19 This report by Mr Wood would have put any reasonable man on notice that the problems with the K78 were not over. They were not over until July 2001. Mr Clayton has conceded that the report was inconsistent with the predictions of the half yearly report, that the information contained therein would have been relevant to a man deciding whether he should leave secure highly paid employment to join Keycorp, and that it could have been shown to Mr Thomes and it was not. 20 In late September 1999, Mr Thomes met with John Wood. At this meeting Mr Wood said to Mr Thomes words to this effect: The opportunity to close very lucrative deals for Keycorp is high. The share price of Keycorp and therefore its market capitalisation can be multiplied many times within a short time frame. The product problem issue is overstated. It has been clearly blown out of proportion. The development process is under full control. We have orders for the products and the products are being shipped to the customers as we speak. Keycorp will be the great winner. Keycorp's potential is unlimited. There are great deals to be made. 21 Mr Wood made no mention to Mr Thomes of the significant problems the subject of his report to the September Board meeting. 22 In early October 1999, Mr Dumitrescu said to Mr Thomes, who would not then commit himself, that he really should take the representations of Mr Clayton and Mr Wood as true and factual. Because they were men of public standing and reputation they could be trusted. He added that any further questioning of their representations would be counterproductive and could lead to the loss of the opportunity. Another candidate was a real alternative. The Keycorp Board might decide to go with him. 23 Mr Thomes thereafter communicated to Mr Dumitrescu his acceptance of the position subject to agreement on remuneration. After some negotiation Mr Dumitrescu said "They now offer a remuneration package consisting of $400,000 base and an incentive component of $400,000." 24 In the course of further discussions Mr Thomes said to Mr Dumitrescu that the industry standard was typically a 70/30 split between base salary and incentive bonus. If Keycorp insisted upon a 50/50 split he would be very much reliant upon the promises made about growth prospects, the viability of products and the financial stability of the company. Mr Dumitrescu said to Mr Thomes that "the incentive targets will be easily achievable" and "Brian Clayton has told me that the Keycorp shares were clearly undervalued, would rise significantly in value and would be worth more than $20 each within one year. Brian Clayton has also told me that this is not only his own personal opinion, but this statement was based on advice that had been provided to him by external independent experts". 25 After a further meeting with Mr Clayton on 22 October 1999 at which he was reassured as to the soundness of Keycorp and its products, and that the performance parameters would be fairly agreed, Mr Thomes resigned from his position as Managing Director, South Pacific, Lucent Technologies Business Systems on 10 November 1999, signed the contract with Keycorp and commenced his employment on 22 November 1999. The Representations 26 I am satisfied that in the course of these negotiations the following representations were made by directors of Keycorp or by its agent Mr Dumitrescu to Mr Thomes for the purpose of inducing him to accept the position of CEO of Keycorp: (1) Keycorp was in a sound financial position and well placed to expand its business globally. (2) All problems with new products were resolved. (3) The new products were, in September 1999, in the process of distribution pursuant to orders already in place. (4) The directors of Keycorp believed that the share price would sharply increase in the short term and would be worth more than $20 each within one year. (5) This belief was based on advice of independent experts. (6) The primary task for which Mr Thomes was to be employed was to advise and implement efficient processes and procedures that would support global expansion. (7) Should Mr Thomes speak to Keycorp staff he could ascertain no information inconsistent with the representations of Mr Dumitrescu, Mr Clayton and Mr Wood. (8) The remuneration to Mr Thomes should he accept the position and exercise reasonable skill in his duties would be greater than $550,00 per annum. (9) That additional to the base salary of $427,500 plus seven per cent statutory superannuation of $29,925 [total $457,425] per annum, Keycorp would pay to Mr Thomes annual incentive bonuses based upon objective parameters or targets to be agreed in advance by and between Mr Thomes and Keycorp each acting in good faith. (10) That the Company would set targets, pursuant to which the incentive bonus would be paid, at a level which was "easily achievable". (11) That, performance targets having been agreed, the incentive payment for achieving these targets was to be $400,000, being $200,000 in cash and $200,000 worth of shares as "cash equivalent" in any one year. (12) That in the event and to the extent that the target was overachieved the cash component of the bonus was to be increased beyond $200,000. (13) That the company had financial resources sufficient to offer these terms. (14) There was to be no interference from Mr Wood in the day to day management of the company. (15) That the share options programme pursuant to which Mr Thomes would receive incentive payments provided relevantly that the shares allocated to him would be fully paid shares up to the value of $200,000. 27 Mr Thomes was regarded by Keycorp as an outstanding candidate. Mr Dumitrescu, Mr Clayton and Mr Wood were anxious to secure his services. I have no doubt the representations were made for the specific purpose of securing his engagement. Equally I have no doubt that were it not for these representations Mr Thomes would not have left secure and highly paid employment to join the respondent. The State of the Company in 2000 28 Keycorp was formed in 1983 as an access device provider and listed on the Australian Stock Exchange in 1987. The business of Keycorp was the design, manufacture, installation and service of machines and systems for electronic transfer of funds. This includes EFTPOS terminals, magnetic cards and readers, software by which central banks processed electronic transfers, SIM cards and maintenance contracts for these systems when in place. 29 In the calendar year 1999 approximately 80 per cent of revenue of $85.2m was provided by the sale of access terminals to the Commonwealth Bank of Australia and the Canadian Imperial Banking Corporation (Exhibit I to Thomes 1st Affidavit). The Commonwealth Bank had funded the development of the terminals which it bought from Keycorp and the terminals could only be sold to the Commonwealth Bank. Similarly the terminals sold to the Canadian Bank were designed for specific use by that bank and could not be sold other than to that bank. 30 This circumstance left Keycorp in an extremely vulnerable position. 31 Before Mr Thomes joined the corporation Keycorp determined that it needed new terminals for the general market and an increased revenue stream from annuities. It set about designing and manufacturing three new products called the K23, a fixed terminal, and K78, a mobile terminal and K80, a terminal designed for self service retail outlets. These were the "new products" of which Mr Clayton and Mr Wood spoke to Mr Thomes in his recruitment. 32 On 23 November 1999, the day after he commenced with Keycorp, Mr Thomes attended a Board meeting. The Chief Financial Officer and the General Manager Sales there presented the company's budget for 2000 based upon the assumption that three products, K23, K78 and K80 were to be "delivered from January 2000" and "performing to specification". 33 If these assumptions, inconsistent with the representations by Mr Wood, that the problems with the new products had been "overstated" and that the new products were in September 1999 being shipped to customers "as we speak", did not set off alarm bells in the mind of Mr Thomes, the events of the next few weeks certainly did. 34 Mr Thomes discovered that the new products, far from being distributed in satisfaction of existing orders were not in fact yet commercially viable. Mr Clayton has since confirmed that the product K23 was not saleable until some time in the year 2000 when the first shipments were released. The shipment of the K78, other than in insignificant numbers of pre-production units for testing, did not begin until around July 2001, and the product K80 proved unsaleable. Further, Mr Thomes was told when he met Mr Tom McDonald, the Chief Financial Officer, that the company did not have the cash to pay either the $100,000 advance on his bonus to Mr Thomes or the fee of $130,000 due to Korn/Ferry. Mr McDonald said that "It will be months before I have the cash." 35 When Mr Thomas said "How can this happen? Our cash flow forecast does not indicate such a cash shortage", Mr McDonald replied "We have exceeded our payment terms with all of our suppliers. Many payments are long overdue. You would not see this by looking at the cash flow analysis." 36 In February or March 2000, Mr Thomes met with Mr Dumitrescu to explain how it was that Korn/Ferry was not being paid. He said to Mr Dumitrescu: "What have you done to me? Keycorp is a different company from the one that I was told about. It is a catastrophe. The company is in a dire situation. The company has an acute solvency problem, the new products do not work. I do not know whether this company will be able to survive." 37 Neither Mr Dumitrescu nor Mr Wood is called by the respondent. 38 Mr Thomes was in a most invidious position. He had left one new employer within one year of his engagement at the urgings of Mr Dumitrescu, Mr Clayton and Mr Wood. He could not immediately walk out of his new position without ruin to his career. He had to stay and do his best. This he did. 39 Mr Thomes identified several key areas in which previous management had signally failed, including management of cash flow, inventory control, project management and documentation, human resources, morale, and sales forecasting. The systems and procedures successfully introduced by him are contained in paragraph 47 of his affidavit and pages 29-38 of the transcript. 40 Of particular relevance was the absence of any reliable system for forecasting sales. Mr Thomes introduced a system pursuant to which each project designed for sale was analysed for state of readiness and a probability rating applied to predict whether sales would actually occur in a given period. Similarly in relation to completed products, a probability rating was applied which graded probability of an actual sale in a given period from 90 per cent probability if an order was received, down through various grades to 10 per cent for "qualified opportunities". 41 The Chief Financial Officer and the General Manager Sales, at the November Board meeting, presented a budget for the 2000 calendar year predicting a $10m profit based on a sales forecast of $174m. Sales revenue in 1999 was $85.2m. The sales forecast for the year 2000 was not prepared in accordance with the system which Mr Thomes was to institute. He formed the view that he could not adequately revise that budget nor prepare a realistic new budget in time for the December 1999 Board Meeting. In consequence he wrote a report to the Board pointing out that the budget process was unreliable, and the revenue prediction unrealistic. He counselled the Board against unrealistic expectations. 42 At the December meeting he said words to this effect (Thomes Affidavit in Reply par 18): It's very unusual for a mature company to expect a more than doubling of its revenue within one year, even more so for a company that has had product problems in the past. The assumption that Keycorp will achieve that level of growth using the same high profit margin seems unrealistic. To go from an $11m loss to a $10m profit is unachievable. I need some time to understand the company better and review the budget in detail. I'd like three months to come up with a realistic budget. In order for the company to have a budget to work on, can we approve the November budget as an interim measure until we review it in March 2000? 43 Mr Thomes graphically made his point with slides illustrated to the meeting. 44 Thereafter Mr Thomes applied himself to the reality of the company's position and prepared a report presented to the Board Meeting of 22 February 2000. In that report Mr Thomes pointed out that the new products K78 and K23 and K80 were not ready to be sold. He forecast revenue for the calendar year 2000 of $112.8m and a loss for the year of $18.3m. 45 Notwithstanding these advices the Board by resolution at that meeting purported to "recognise" that "the probable outcome at present was break even on sales of $130m" and that the CEO should prepare a paper to address revenue strategies and expense controls to achieve such a budget. 46 Mr Thomes prepared a paper presented to the Board on 31 May 2000 in which he listed five proposals to achieve the "proposed budget (130m revenue, + or – 0)". In that paper (Annexure Q to Affidavit of Brian Clayton), he predicted that the $130m revenue forecast would not be achieved and stated that serious problems with cash flow had already stemmed from incorrect sales forecasts leading to high inventory. He pointed out the continuing problems with the K23 and the K78 which required "complete redesign". 47 In addressing expense controls necessary to achieve a break even result, Mr Thomes proposed closing the UK office, selling or closing various distribution units, reducing all expense budgets by 20 per cent and restructuring manufacturing operations in Canada. He also pointed out that even these proposals may not be sufficient. 48 Incredibly the response of the Board was to resolve that the CEO "focus on a sales target of $150m to meet at least sales of $130m and a break even result for the year" (Annexure R to Affidavit of Brian Clayton) and ignore the proposals to close down or restructure the overseas operations. 49 In a telephone conversation to Mr Clayton in early May 2000, Mr Thomes described the company as "technically insolvent" to highlight the seriousness of the cash position (Annexure H to Thomes Affidavit in reply). With failing products, endemic cash flow problems and an unco-operative Board, Mr Thomes faced huge problems. Both Mr Irving and Mr Sutton who became directors of Keycorp in early 2001 have expressed the opinion that the company as it was structured in December 2000 was doomed to insolvency without the consummation of a deal with Telstra in December 2000. 50 In or about October 2000, Mr Thomes discussed his position with Dr Keith Barton who had joined the Board of Keycorp in July of that year. Mr Thomas spoke to Dr Barton to this effect: The company is in a very bad way financially and operationally. The Board refuses to acknowledge this situation. One of the directors [Mr Wood] is interfering unacceptably in the daily operations of the company and his behaviour at Board meetings is disruptive. 51 Dr Barton replied to the effect of: I tried to resign as a director of Keycorp right after my commencement. I felt that Brian Clayton had misrepresented the status of the company to me. Also I was shocked by the true situation which I discovered after I joined. I am also surprised by the low quality and unacceptable conduct of the directors, especially John Wood and Andrew Swanson. After Brian Clayton's intense pleadings, I have only agreed to stay on as director until after the completion of the Telstra transaction. 52 Dr Barton is not called by the respondent. The Telstra Deal 53 Shortly after commencing at Keycorp, Mr Thomes formed the opinion that the company needed a strong solvent partner to survive. 54 Some time in 1999 Keycorp had entered a Memorandum of Understanding with Telstra pursuant to which both Keycorp and Telstra would each contribute intellectual property of equal value and additionally $10,000,000 cash to form a joint venture company with the purpose of performing research and development, and running payment systems operations. 55 Given the cash crisis that afflicted Keycorp in December 1999 it was obvious that Keycorp could not join such an arrangement. Mr Thomes in his December 1999 report to the Board suggested that "the Memorandum of Understanding with Telstra needs a restart". At a meeting of Keycorp directors in early 2000 Mr Thomes discussed his analysis of the company affairs. He said: The company's position is very weak. We do not have any saleable new products, our cash flow is negative, . . we must secure a strong partner, a partner that can provide us with financial stability. 56 This view was accepted by the Board members present and the search for a partner agreed. 57 At the March 2000 meeting of the Keycorp Board, the Board approved the appointment of "Salomon Smith Barney" as an adviser to help secure a potential partner. Mr Thomes had identified Telstra and Cable and Wireless/Optus as two interested parties, both matching Keycorp's profile as financially strong companies with the right technology focus. He suggested these two as optional partners to the Board at its March 2000 meeting, and the Board approved continuance of discussions with both. 58 Negotiations with Telstra successfully concluded in December 2000 when Telstra acquired 50.6 per cent of Keycorp in return for the contribution of a business operated by Telstra valued at $426m with a secure income stream. Without this deal Keycorp would have soon foundered. The State of the Company in 2001 59 An explanatory memorandum to shareholders and independent expert's report was prepared for Keycorp shareholders to vote on the Telstra deal at an extraordinary general meeting to be held on 12 December 2000. That document included a forecast "based on assumptions that the directors of Keycorp believe to be reasonable" that Keycorp – if it stood alone, would in the year ended 31 December 2001 generate a profit before tax of $20.1m. The document makes it reasonably plain that such a forecast was based upon an assumption that there would be strong sales of the K78 including a sale to NAAP of Japan worth more than $50m at a gross profit in excess of 30 per cent. This deal alone was worth $15m to the company. 60 By early 2001 it was apparent that the forecast was optimistic for the reasons set out by Mr Thomes in paragraph 56 of his second affidavit. (a) A general and sharp market decline in global demand for Information Technology products starting in late 2000 and accelerating in 2001, which affected the Information Technology and telecommunication industries generally; (b) the discovery during final testing in early 2001 that the Respondent's K78 product contained a software fault with the result that the product could not be shipped and revenue could not be earned from its sale; (c) the financial collapse of NAAP; (d) Telstra's refusal and delay in complying fully with its obligations under the vending-in deal to allow cash to flow into Keycorp; (e) the proposal by CBA that the Respondent's loan facility be reduced significantly; and (f) a delay in the introduction of the cost reduction proposed by Mr Thomes due to the 6 month duration of finalising the Telstra transaction. During this time the Respondent was contractually prevented from undertaking any changes that would lead to a change of the material value or substance of its business. 61 In consequence of these developments Mr Thomes perceived an urgent need for the Board to consider reduction in infrastructure and cost base, a new funding arrangement to accommodate a cash shortfall, and future strategy of either contraction to contain cost, or expansion by mergers or acquisition to spread costs over a wider revenue base. 62 Mr Thomes acquainted the Board with the problems at the Board meeting held on 20 February 2001. Mr Thomes said (par 65 Affidavit in reply): Sales and sales forecasts are very soft. This includes the new Telstra business. The situation has additionally been affected by the K78 problems and the collapse of NAAP. We are very short of cash and have to take immediate action. Cost reduction programs have already been initiated and will lead to short term relief. However, if sales remain weak, we will require some more fundamental decisions. We will need to brief all new directors to be able to make decisions on Keycorp's future strategy. I will table this formally at the March Board meeting. 63 At the Board meeting of 21 March 2001, Mr Thomes presented concrete solutions both short term and long term to the problems (Annexure O to Thomes Affidavit in reply) which included the closure of some manufacturing operations. It should be remembered that similar proposals were first put by Mr Thomes to the Board on 31 May 2000 and rejected. 64 On various occasions in the period from January to May 2001, Mr Thomes had proposed to individual directors and to the Board as a whole, two clear alternative future directions for the Respondent: (a) sustain the Respondent's cost structure by enlarging its business, either by buying another business or merging the Respondent's business with another or (b) reduce costs dramatically. 65 The newly appointed directors, after Mr Thomes' presentation to the March 2001 meeting, did not immediately accept Mr Thomes' proposals; they decided that they needed more time to understand the business and that two days should be set aside on 1 and 2 May 2001 to allow significant time to discuss the decisions in thorough detail. 66 After the meeting of 1 and 2 May the Board decided that they would adopt a mixed strategy involving both cost reduction and acquisition of businesses. In consequence the Board at its meeting on 31 May 2001 directed Mr Thomes to prepare a cost cutting plan and a "go forward" plan "having regard to available resources". 67 Mr Thomes prepared alternative schemes which he presented to the Board prior to its meeting on 7 June 2001. The minutes of this meeting record that: Under scenario #1 Management's initial review is that savings of $19m could be generated by containing expenses in international subsidiaries and reducing some activities in Business Units; Under scenario #2, Management's initial review is that savings of $32m (including the scenario #1 savings) could be generated by more aggressive changes, including a full contraction of international operations so that international business is conducted from Australia. The Board resolved to proceed with the implementation of scenario 1. At a Board meeting on 18 June 2001 the Board resolved also to implement scenario 2. 68 These financial plans prepared by Mr Thomes included proposals that he had put to the Board 12 months earlier. The plans were recognized by the Chairman Mr Irving as sound plans. In consequence of their implementation the company became profitable. 69 That Mr Thomes had the confidence of the Board throughout these events is confirmed by the contents of an e-mail sent by Mr G Sutton, a Board member appointed by Telstra, to Mr Ted Pretty, a senior Telstra executive, on 19 March 2001. In this e-mail Mr Sutton notes the effect of K78 problems on sales, the problem with the NAAP, the cash flow problem and the approval at a previous Board meeting of cost cutting actions proposed by Mr Thomes, who, he notes "has worked diligently on each of these issues and has been totally co-operative with us". The Remuneration Dispute 70 Keycorp's letter of offer of 19 October 1999 accepted by Mr Thomes provided relevantly as follows: Remuneration: You will be paid a base remuneration of $427,500 per annum plus statutory superannuation. This amount less the appropriate deduction for income tax and any other deductions authorised by you will be paid monthly by the Company directly into your nominated bank account. You will also be eligible for an annual performance incentive of: - $200,000 in cash. This amount is based on 100% performance and will be adjusted depending on evaluated performance against agreed parameters - up to $200,000 equivalent participation in the options programme depending on performance against agreed parameters. Keycorp will guarantee the first $100K of the cash performance incentive component in the first year and pay on joining. In addition, Keycorp will commit to 50,000 units of stock as sign on incentive. The first 25,000 on joining but exercisable after 18 months and if the stock price is above $10.50 and the second 25,000 given after the first 12 months of continuing employment and exercisable after 36 months and if the stock is above $12.50 . . . Performance Review: Objectives will be set for employees and their performance will be reviewed each year, on a date determined by the Company. At such reviews each employee will have the opportunity to discuss and make comments on all aspects of their employment and performance. The Company will keep written records of the reviews and employees will be invited to make written responses and address any concerns they may have in relation to their employment. Statutory Superannuation: You will be required to become a member of the staff superannuation scheme from your date of commencement. Your membership contributions, amounting to 7 % of your cash annual remuneration, will be paid by the Company. 71 It is the case of Mr Thomes that Keycorp, contrary to the terms of this letter, failed to negotiate in good faith and agree upon the parameters against which his performance was to be evaluated for the purpose of calculating the annual performance incentive which he was to be paid, and further that it failed to conduct any performance review in the terms required. 72 Mr Thomes first raised the issue of reaching agreement on performance parameters with Mr Clayton in March 2000, only to be told "this is not a priority right now". He raised the question again in or about April 2000 when Mr Clayton said "I don't have time for that right now". 73 After Mr Thomes had impressed upon the Board the necessity to secure a major strategic alliance in order to survive, Mr Clayton said to him "We all understand what needs to be done. Your major priority is to find a strategic partner." 74 The Board meeting held on 31 May 2000, was obviously conducted in an atmosphere of some heat. The slides illustrated by Mr Thomes dealing with the problems of the company are in evidence (Annexure Q to Affidavit of Brian Clayton). Notwithstanding Mr Thomes' documented reservations, and those of the Chief Financial Officer Mr McDonald, who forecast probable full year sales revenue of $84.5m (Annexure L to Thomes Affidavit in reply), Mr Clayton addressed the AGM on the same day and predicted full year sales of $130 million. 75 In the course of the Board meeting Mr Clayton said "We need to announce a forecast of $130 million revenue and a break even result . . .(or) the market would punish us severely". When Mr Clayton asked Mr Thomes "Are you committed to this budget?", Mr Thomes replied: Brian, you know my doubts about this budget. As demonstrated by the variation between the two revenue forecasts in the CFO's Revenue Plan, and as discussed many times and highlighted in my earlier presentations, my doubts have increased and not decreased over recent weeks. In addition, as pointed out in my Report to the Board, it has now been confirmed that the K78 needs a complete redesign. That not only has an impact on sales but will add substantial costs to our R &D budget. We would need a huge amount of luck, everything would have to go right and we would need some of the "blue bird projects" that you often mention to make those numbers… I am committed to work as hard as I can to achieve these numbers, but I do not think that they are realistic. 76 On 1 June 2000 Mr Clayton sent to Mr Thomes the following email: Michael, Now the AGM is behind us you now own, and have total responsibility for the performance against, the forecast we announced yesterday. Your MBO's for 2000 are for a breakeven result, reinvigorating the sales team and effort, managing the balance sheet, securing a major strategic alliance, establishing robust and cost-effective operational processes whilst building strong staff morale. An additional performance criteria would be to vastly improve the harmony with John. As we have discussed many times; John is a valuable asset of the corporation and we/you need to ensure we optimise his value. What I saw yesterday was not healthy. I am not going to debate who is right or wrong I simply take the view that you are the CEO and have the responsibility to protect the assets of the company. It is therefore up to you to take the lead with this relationship. I will discuss the above with you at our next meeting. Thx Brian 77 It is the respondent's contention that the email records the content of an agreement reached between Mr Clayton and Mr Thomes in a private discussion after the Board meeting held the previous day and that the terms of the e-mail constitute the parameters agreed for the year 2000 incentive bonus. Mr Thomes denies that there was any such discussion or any such agreement. For reasons to which I will come, I generally prefer the evidence of Mr Thomes to that of Mr Clayton whenever there is inconsistency between them. 78 There are however additional reasons to reject Mr Clayton's account that such an agreement was reached. The doubts expressed by Mr Thomes as to the chances of the budget being achieved are corroborated by the Board papers. It is improbable that Mr Thomes could have agreed to $400,000 of contingent income being tied to such an unrealistic goal as a break even result. In the course of the cross examination of Mr Clayton upon the supposed agreement reached on 31 May in relation to the parameters, this exchange occurred: Q. How did he agree with them? A. He did not object to them. 79 Mr Clayton asserts that he discussed the contents of the e-mail with Mr Swanson and Mr Bowra of Keycorp's remuneration committee and sent them copies. 80 No such copies are produced in evidence. Neither Mr Swanson nor Mr Bowra is called. A document has been produced however, which is the copy of an email from Mr Bowra to Mr Clayton dated 27 October 1999 [Doc 416]. In this email Mr Bowra suggested some performance objectives appropriate to the contract which Keycorp was then considering offering to Mr Thomes. The document has endorsed upon it in long hand: To: Mr M Irving; Malcolm, I don't know what Brian [Clayton] did on the job goals for Michael. I came across this when cleaning out my files and pass it on to you for what it is worth. 81 This endorsement is quite inconsistent with Mr Clayton's assertions that he discussed the June 1 e-mail with Mr Bowra and sent him a copy. When the document was presented to Mr Clayton in cross-examination he said, "I can't read it to be honest". The additional, although handwritten, script is perfectly legible. I do not believe this answer to be truthful. 82 The terms of an e-mail of 31 December 2000 from Mr Clayton to Mr Bowra, which Mr Clayton says purport to deal with both performance review and bonus payments to Mr Thomes and Mr Wood, are not compatible with any belief by Mr Clayton that the bonus payment was to be methodically linked to agreed parameters. It reads as follows: Tony, This is a Remuneration Cmtee consideration based on my recommendation. Quite honestly I am jaundiced on both given their inability to interface. I am also not impressed with the operational performance this year. Even if we discount the first half as a roll on from the issues of the previous year(s); Michael has had full control since the AGM in May and has consistently supported the financial forecasts which have not been met. As such I would not recommend a bonus nor a significant salary adjustment. I would appreciate your input. Thx Brian 83 I reject the evidence of Mr Clayton that he discussed the contents of the email of 1 June 2000 with Mr Bowra or Mr Swanson. I also reject Mr Clayton's evidence that the e-mail followed any discussion with Mr Thomes in which agreement was reached as to its terms. 84 Mr Irving became a director and Chairman of Keycorp on 21 March 2001 after the resignation of Mr Clayton. At his first meeting with Mr Thomes, Mr Thomes raised the question of his performance bonus as an outstanding issue to be resolved. Mr Irving asked that he be provided with a summary of Mr Thomes' concerns and a list of potential goals and performance parameters for the financial year 2000. Mr Thomes, shortly after this conversation, handed to Mr Irving this document (Annexure H to 1st Affidavit) which may be described as a statement of grievance: Michael Thomes Performance Incentive 2000 !.(sic) Background Joined KYC based on Board's representations (briefing paper attached), which did not indicate any of the difficulties KYC was facing. The Chairman and several other board members consistently made these representations. Contrast between KYC reality and representations was extreme. KYC reality faced in 12/1999: Technical insolvency Key product line not commercially viable, no saleable products Board and management not understanding its business Lack of integrity by former CEO and Chairman Ongoing involvement of former CEO in business, despite Chairman's commitment to the contrary 2. Goals for 2000 To protect KYC's shareholder value, goals should have been: -Save KYC from bankruptcy -Find strong strategic partner to help rebuild the company -Maintain market capitalisation and protect shareholder value 3. Goals for 2001 Relative better Share price performance than Securenet and ERG, or other tech Positive EBITDA for 2001 After Telstra alliance and new conditions, develop, execute, communicate, and implement new strategy 85 At the same time, Mr Thomes gave to Mr Irving a copy of the candidate's briefing which he said was misleading, a copy of his report to the May 2000 Board meeting and a copy of Mr Clayton's e-mail of 1 June 2001 saying "This is an e-mail from Brian Clayton. In it he sets out some goals that he has made up by himself and that I never managed to discuss with him". Mr Irving then promised Mr Thomes that he would resolve the matter after talking to Mr Clayton. 86 Thereafter Mr Thomes regularly raised the question at meetings between them, on each occasion being put off with such comments as "I have not had the time to take care of it" or "I have not been able to get hold of the directors yet". 87 On 5 June 2001 Mr Thomes met with Mr Irving and Mr Sutton. Mr Thomes was there informed his package would not change; that his performance on all the major categories agreed with the previous chairman was unsatisfactory with the exception of the Telstra deal and informed that no bonus payment for the 2000 year would be paid additional to the $100,000 paid in advance upon his commencing employment. 88 On 1 August 2001 and 10 August 2001, further meetings occurred between Mr Thomes, Mr Irving and Mr Sutton. At each meeting Mr Thomes was told that he was to receive no further payment and that Mr Clayton's parameters were not open to discussion. 89 Although Mr Irving's account of these events is in some respects inconsistent with that of Mr Thomes, Mr Irving agrees with the substance of that account. That is, that Mr Thomes at the first opportunity raised the issue with him; that Mr Thomes' contract required that Keycorp negotiate in good faith to establish agreed parameters against which his performance bonus was to be assessed; that appropriate parameters should depend on the state of the company and be realistic and achievable; that apart from the e-mail of 1 June 2000 there was no basis to conclude that any parameters had been agreed for the year 2000; that Mr Thomes maintained that he never agreed to the content of that e-mail; that by 10 August 2001 there were still no agreed parameters for the year 2001 and that Mr Irving at no time accepted that the parameters suggested by the e-mail of 1 June 2000 should not bind Mr Thomes. 90 Generally where the evidence of Mr Irving differs from that of Mr Thomes I prefer that of Mr Thomes for reasons to which I will come. The evidence given by Mr Irving on the issue of performance incentives gives me further reason to doubt his objectivity and reliability. 91 Mr Irving in cross-examination disagreed with the proposition that the performance incentives should be agreed either before or very soon after the commencement of employment and said that it would be quite unusual for this to occur. This answer leaves one wondering why the payments are described as "incentives". The contract with Mr Thompson, the CEO who replaced Mr Thomes at Mr Irving's suggestion, set out in advance and in some detail the four performance goals against which his incentive remuneration was to be measured, and the percentage weighting to be assigned to each. Constructive Dismissal 92 The correspondence thereafter passing between Mr Thomes, Mr Irving and Mr Sutton does not admit of summary without the loss of affect. 17 July 2001 Letter from Michael Thomes to Malcolm Irving. Dear Malcolm I am writing to you in your capacity as Chairman of the Board of Keycorp Ltd and as head of the Remuneration Committee. In this letter I am drawing to your attention the factual matters and concerns below, and I would request that you review and address these matters as a priority. As you may recall, after you appointment as Chairman I raised with you my concerns with respect to various representations and commitments made by the previous Chairman, that had not, at the date of your appointment, been addressed. The factual background to these concerns includes the following: (i) As part of the matters relied upon by me in agreeing to enter into the contract of employment which appointed me as Chief Executive Officer of Keycorp, I reluctantly agreed to an arrangement whereby fifty per cent of my remuneration was to be "at risk". During the recruitment procedure, I repeatedly raised concerns with respect to both the size of the "at risk" component and the lack of detail that was forthcoming, both in regard to my remuneration, but also with regard to details of the company as a whole. (ii) The recruitment process cumulated in a meeting with the then Chairman immediately prior to entering into the contract where I was urged to accept the contract on "trust". This urging was in response to my concerns as to the lack of detail on the "at risk" component of the salary. (iii) As you are aware, my contract contained the following provisions with regard to the "at risk" component of my remuneration. I was to be paid: (a) $200,000 per annum in cash. This amount is based on 100% performance and will be adjusted depending on evaluated performance against agreed parameters. (b) Up to $200,000 per annum equivalent participation in the options program depending on performance against agreed parameters. I accordingly entered the contract with the firm understanding that the "agreed parameters" would be both discussed and agreed in advance. (iv) Furthermore, as part of my decision making process in deciding to leave what for me was secure and well remunerated employment at Lucent, I relied on upon a number of representations as to the then well being of the business of Keycorp. In particular, I raised concerns with the saleability of Keycorp's products and past problems that had been experienced by Keycorp. These concerns were answered with very firm assurances that those problems "were in the past" that any such problems were due to a delayed research and development schedule. I was told that development of the products was now complete, and indeed, that products had begun to ship. The then Chairman clearly stated to me that: (a) any problems were over; (b) the only problem facing Keycorp then was the fact it needed to expand into a global business; and (c) he had received independent expert advice that the share price of Keycorp was "heading north". To my surprise, on commencement in my role as Chief Executive Officer, I discovered that: (i) The product development that was alleged to have been completed was in fact not complete at all, and the products of Keycorp were not out of the development stage. One batch of products had been shipped to a client without having been tested at all. Keycorp had to then accept the return of the product creating significant loss and damage to the reputation of the company; (ii) Keycorp was facing a serious cash crisis that placed it on the verge of insolvency. The first invoice that passed by me for payment was that for the recruitment company which had recruited me for the position of CEO. I was informed by the Financial Controller that we had "no cash" to pay the invoice. When I spoke to the Chairman about this he informed me that "we must have some somewhere" and just to "pay it some time later"; and (iii) I was subsequently informed by the Financial Controller that this was the way the company had operated for the past several years, and that it had made losses for that time. This was not the position that was portrayed to me in discussions with the Recruitment company, nor with other directors. It was held out to me that one of the major reasons I was hired was to "take the company global". I quickly formed the view that it was impossible to take a company global when it had no cash at all, no products and no appropriate resources. At the Board meeting prior to the AGM in May 2000 I presented the Board with a detailed explanation of the dire situation of the company. I pointed out that the performance projections set by the Board for the company in the financial year were close to being ludicrous. The Board then went on to commit to these goals internally and externally. The day following the AGM the previous Chairman sent me an email stating that I was totally responsible for Keycorp's performance against the set outcomes - outcomes I stressed were totally unachievable. I would note that these "outcomes" were unilaterally imposed against my views. They were not expressed as the "agreed parameters" for the purpose of evaluating the at risk component of my salary nor were they in any way agreed at all. Contrary to both the contents of the contract of employment and the representations made to me, I draw the following to your attention: (i) Despite repeated attempts to discuss and set the agreed performance parameters against which my bonus payments would be judged and awarded, the previous Chairman refused to discuss these issues. (ii) The stock options granted to me in the contract were the subject of further misrepresentations. The previous Chairman stated to me that "outside expert opinion" had guaranteed him that the share price would be in excess of $20 within the year. This was clearly a misrepresentation. Based on that misrepresentation, the offer of stock was attractive. The fact that the stock "underperformed" those "expectations" was clearly not the result of my performance, and no outside expert opinion would ever have had an "expectation" of the type represented to me. (iii) The stock granted in the program was represented to me as being of a much higher value than it actually was, and the representations as to potential growth were never achievable and made the stock appear to be much more valuable than it was, as the stock at the time was actually the hugely overvalued stock of a nearly insolvent company. (iv) Since you have taken over as Chairman, and despite repeated attempts to raise these issue with you, both directly and indirectly, the discussion has always been put off to another time. When you took over as Chairman, you promised to solve all these outstanding issues for me. In addition, you promised to make me "stinking rich". At the occasion of our first meeting, you requested a summary sheet outlining my expectations. In that summary, which was presented to you in February, I outlined all my concerns. Despite a number of attempts to discuss the issues you avoided to get engaged in a discussion. To date, no parameters have ever been agreed or even discussed. Despite my inability to discuss these important issues, I continued with my duties. To date, no parameters have ever been agreed or even discussed. I was understandably shocked when in June you said to me at the end of a discussion on other matters "By the way, you are getting nothing, not for the last financial year or for the current financial year. You have not achieved your targets. We may review at the end of the financial year and see how it all went". This current situation is clearly intolerable and in my view places Keycorp in a clear breach of its obligations to me. I believe I have been very patient in this matter, trusted the Board, especially since I have not been paid more than half my agreed remuneration for over 18 months, and especially in the light of the fact that I had left secure employment where I would have been well paid, and I would have benefited from a generous option plan. In the circumstances, I believe that the conduct of the company, through its Board, is harsh and unconscionable, and when viewed in the context of the clear misrepresentations in inducing me to join Keycorp would allow me to regard the contract of employment as terminated. It is outrageous that I was recruited on a package that was held out to be worth $800,000, to be CEO of a company which I was told had no significant problems or difficulties, and was in a position to begin to expand significantly on a global scale, to then find myself CEO of a dysfunctional operation which was on the verge of insolvency. I note that despite being treated with what I can only construe as contempt by the company, I have been instrumental in forging a major investment partnership with Telstra which has effectively saved the company from insolvency. In exchange, not only have I been paid less than half the salary discussed on recruitment, but I have been denied the opportunity to negotiate or discuss the parameters which were to determine 50% of my salary package. As I have stated above, I believe I have been patient and have tried to engage with you in regard to this matter in good faith. However, as I stated above, it is intolerable that this situation continues as outlined. Accordingly , I now provide you and the company with a period of 14 days to address the full range of my concerns . If you are not prepared to engage in this process in good faith and address what I believe to be clear and deliberate breaches of the obligations owed to me under my contract, then I will be forced to regard the employment as terminated. I await your response and an indication that you are willing to discuss these matters. I note that I will expect any resolution of these matters to be in writing. 19 July 2001 Email from Malcolm Irving to Michael Thomes Dear Michael Thank you for your letter of 17 July 2001. As a number of the issues raised therein involve the previous Chairman and retired directors it will be necessary for me to consult with them before responding. I am fully committed early next week and will then be away from Sydney on vacation and attending the Deloittes Partners conference until 4 August, therefore I cannot respond within the 14 days you requested. However, I will do so during the week commencing 6 August. 21 July 2001 Email from Michael Thomes to Malcolm Irving Dear Malcolm, I refer to your email responding to my letter of 17 July 2001. I find your response quite disappointing and unsatisfactory. Furthermore 'having to meet other directors and the former Chairman' has been used by you before as a reason to delay the process. The matters raised in my correspondence of 17 July 2001 are not new to you or the directors. When I previously raised these issues with you in early March, it took over 3 months for you to turn your mind to my concerns on the basis that you then had to discuss the matter with the former Chairman and other directors. I feel that after 20 months it is unsatisfactory, that the matter is now further extended due to you commitments next week and your Deloittes partners meeting. The issues which I have raised are extremely serious and are important to me. You would not tolerate being affectively stripped of half your remuneration and your concerns not being addressed in a timely and professional manner. In the circumstances I believe you have at your disposal both the information and the resources to address my concerns. I would ask, that you review your proposed timeframe and perhaps your priorities and ask that this matter be resolved in accordance with my letter of 17 July 2001. So that there is no confusion, it remains my expectation that my concerns are addressed by Tuesday, 31 July 2001. I remain prepared to discuss this with you and assist you in any way in clarifying any issues which you believe have not been brought to your attention. In an attempt to reinforce both the importance and urgency of my concerns, I have copied this email alone to the other directors of the remuneration committee. I trust that you have already alerted these directors of my letter of 17 July 2001. 25 July 2001 Letter from Malcolm Irving to Michael Thomes Dear Michael, Thank you for your e-mail 24 July. I have no interest in delaying "the process" as you put it. I am simply unable to deal with your issues prior to the week commencing 6 August for the reasons I have outlined. The allegations you raise, in your letter of 17 July 2001, are serious and deserve proper and deliberate consideration and I cannot assure you of that consideration on the timetable you have proposed. 25 July 2001 Email from Michael Thomes to Malcolm Irving Dear Malcolm, further to my email correspondence to you of 17 and 21 of July 2001 and our conversations of 24 and 25 July 2001, I understand that you will have the opportunity to meet with the previous chairman of Keycorp on 1 August 2001. You then have an opportunity to meet with me later on 1 August 2001, however you have stated that due to your tight schedule if a meeting cannot be arranged that we will have to meet on 6 August 2001. As you can appreciate from my personal circumstances already given to you, this is a very important issue to me which needs to be resolved. If it is your intention to turn your mind to this issue on either 1 or 6 August 2001 with the view to then having an ongoing dialogue, then I am afraid that this is totally unacceptable. I am prepared to meet with you on 1 August 2001 to discuss a firm proposal from the Board which addresses my grievances. If you are unable to place a firm proposal to me on that date, then I am reluctant to allow this process to continue. You have not indicated at this stage whether you take factual issue with any of the matters raised in my correspondence of 17 July 2001. If it is the case that you (with the knowledge that you have) wish to take factual issue with any of the matters raised in my correspondence , then I would ask that you nominate these issues now so that I can have the opportunity to produce and further information or relevant facts prior to 1 August 2001. Put simply, I do not wish to be confronted with a situation on 1 August 2001 where you then, after having the benefit of my correspondence for over 15 days, wish to engage in some form of factual debate which will only prolong the current unacceptable situation. Could you please address the matters raised in this correspondence as a matter of urgency and confirm the time at which we can meet to discuss the proposal of the company on 1 August 2001. 26 July 2001 Letter from Malcolm Irving to Michael Thomes Dear Michael, In response to our conversations and your further letter of July 25, I can only repeat what I said in my letters of July 25 and July 19, that the substance of the matters you have raised occurred before I became a Director and Chairman of Keycorp Limited and require proper and deliberative consideration involving the previous Chairman of Keycorp and the previous Chairman of the Remuneration Committee. A meeting with Brian Clayton and hopefully Tony Bowra will occur on August 1 and subject to your availability, I propose to meet with you at approximately 11.30 at the Chatswood office on that day. Until I have a meeting with the former Directors, I am in no position to identify whether I take factual issue with any of the matters raised in your correspondence relating to those Directors. However, the content of your letter which involved me (point (iv)) does not accord with my recollection of these matters. I will go into detail of my disagreement when we meet on August 1. To assist my reassessment of these issues would you please provide me with a copy of the February summary. As far as goals for 2001, which as you will recall were for the period July 1, 2001 to July 2002, these were to be based on the outcome of the May strategy meeting and the agreed 2002 budget which was presented to and considered by the Board on July 18. Your e-mail of July 17, (Canadian time) was not read by me until after the Board meeting on July 18. I plan to visit you at approximately 11.30am on August 1. You may decide whether you wish the meeting to proceed or not. 30 July 2001 Email from Michael Thomes to Gerry Sutton Dear Gerry, Further to our telephone conversation today, I wish to make it very clear to you and the Board that questions relating to my ongoing commitment to the Company are at this stage secondary to resolution of my current grievance. I find it completely unacceptable that the timeframes that I have set for the resolution of my grievance should be subject of individual's whims, holidays and partner meetings. I appreciate that you are attempting to progress this matter as quickly as possible and I do not dispute for one moment that you are doing so in a genuine manner. However, the way to resolve this matter and to ensure my ongoing commitment to the Company, is to put before me a proposal which deals fairly with the full extent of my concerns. Once this step has been completed, then we will be in a position to move forward with setting agreed performance parameters so that I will have clear and unambiguous criteria to be compare to my at risk part of the remuneration. This, after all, was what I originally wanted in my contract and I was told to "trust" the company with regard to this issue. This trust was obviously being misplaced. Accordingly, I am asking for no more or less than what I was originally promised with regard to my remuneration. I have waited well over a year and a half to have these issues addressed , and it seems the company wishes to extend even further this patently unfair situation. I remain prepared to discuss this matter with you, however I feel this matter is dragging on far too long. 2 August 2001 Email from Michael Thomes to Malcolm Irving Dear Malcolm I refer to your letter of 1 July 2001 and my meeting with you and Gerry Sutton yesterday. I wish to respond to each of the issues raised at that meeting. i) I remain of the view that point (iv) of my letter of 17 July 2001 is correct. Contrary to your claims yesterday, you have not, in my view, attempted to resolve my issues. Irrespective of your personal views as to appropriate remuneration, the fact remains that at no stage have you or the former chairman complied with the clear obligations contained in my contract of employment. These obligations require the company to negotiate and agree with me the parameters upon which the at risk component of my remuneration was to be paid. ii) You indicated that you have spoken to the previous chairman, Brian Clayton, and that he stated that there were no misrepresentations made to me to induce me to take the position of CEO of Keycorp. Further, that Brian stated that all that Brian had informed me prior to my employment was that the processes of Keycorp had to be improved, you also said that Brian had stated that he had invited me to do a full due diligence of the company. I reject this response in its entirety. Do you think that I would have been remotely interested in joining Keycorp, if I had known about the incomplete state of the products and the appalling state that the Company was in? I was never invited to do a "full due diligence". These words were never used, nor would it have been possible to do so even if such an invitation had been extended. I remind you that it was difficult for me to even meet with Brian let alone to extract any clear commitment from him with regards to the at risk component of my remuneration other than his repeated assurances and urgings that I should take it on faith that these elements would be worked out in good faith and in the spirit of partnership. There were very clearly deliberate misrepresentations made to me prior to my accepting the offer of employment as CEO of Keycorp and I consider Brian's reaction - as you reported it - to be hardly a considered nor accurate response to the very detailed issues raised in my letter. iii) It would appear from our discussions that you are now attempting to suggest that somehow the forecasts which emerged on the day of the May 2000 AGM automatically (without my knowledge or agreement or consent) became the agreed performance parameters referred to in my contract. I certainly did not regard these public statements would constitute relevant criteria for my performance review and indeed there is no logical reason why the public projections of the company, should be the sole parameters for the evaluation of my performance with regards to the payment of my remuneration. I certainly never agreed to this, nor would have agreed to this. This is even more illogical when you consider that the unequivocal direction and focus of my attention from the time I brought to the attention of the Board the fact that this was the only way to save the Company, was to urgently acquire for Keycorp an alliance partner. As you were well aware, this initiative was critical to Keycorp's survival, and consumed my attention over 8 months. This resulted in our successful partnership with Telstra - a partnership, as you know, that is the sole reason why the company now has any long term prospects. This was a Board initiative, was very clearly imperative, and the Board was at all times supportive of my attempts to source and bed down the partner. Your comment yesterday to me that my performance "did not warrant a bonus" in my view completely misunderstands the issues that I have raised and asked you to remedy. My performance has never been questioned. Put very bluntly, I left secure employment on the basis of what I now know to be misrepresentations made by and on behalf of the company. This clear wrong has been compounded by the unfair conduct which has followed with particular reference to the reluctance of both chairmen to comply with the very clear obligations to consult and come to an agreement with me with regard to the criteria for the payment of the at risk component of my remuneration. It was never my desire to allow this particular issue, which involved 50% of my remuneration, being left unresolved and it was only at the previous chairman's direct and indirect urgings to take this matter on trust that I left my previous secure and promising employment. Whilst I believe my earlier correspondence clear to the company and to the Board the importance of rectifying these issues in a timely fashion, your comments of 1 August 2001 leave me with no alternative other than to assume that either you do not accept the validity of my claims or that you do not wish to address these concerns. So that there is no misunderstanding: I regard the company as being both in breach of its obligations to me as an employee and as having engaged in unfair conduct. As a consequence, it is open to me to regard my employment as terminated by the company. If I am to act on this belief, then my current situation becomes untenable. I remain prepared to meet with you and resolve these matters with you prior to 4.00pm on Monday 6 August 2001. If these matters are not fully resolved by 4.00pm on Monday 6 August 2001 to my satisfaction, then, as noted above, I believe it is open to me to regard the company as having terminated by employment and I will advise you of the course of action which I will adopt. 6 August 2001 Letter from Malcolm Irving to Michael Thomes Dear Michael, At our meeting on Wednesday 1 August I outlined to you the results of my discussions with Brian Clayton, the previous Keycorp Chairman, and Tony Bowra, the previous Chairman of Keycorp's remuneration committee. Each of these former directors had received a copy of your letter of 17 July 2001. My advice to you was that no further information had been received at these meetings which would enable me to amend my previous advice that no payment was due to you in respect of the year ended 31 December 2000 under the "at risk" portion of your remuneration. You indicated at the meeting on 1 August that you had emails that supported your contention and, further, that I should talk with Korn Ferry, the Executive Search firm which handled your appointment (you were to advise me the name of the person involved). As you are aware, I spent Thursday and Friday last week in Melbourne which did not allow the opportunity to seek a meeting with Korn Ferry. However, I note you have not informed me the name of the person to contact. I also note you have not provided me with a copy of the emails you referred to. I now have your letter of 2 August incorporating an ultimatum to meet and resolve these matters with you prior to 4.00pm Monday 6 August otherwise you believe it is open to you to regard the company as having terminated your employment and that you will advise me of the course of action you will adopt. Because of prior commitments I am not available to meet with you until late on Monday, probably 6.00pm, but if you cannot provide the material which you alluded to at our meeting last Wednesday I do not have any basis to reconsider the decision already communicated to you. However, let me state that the company does not support your contention that it has either repudiated your contract or terminated your employment; however should you wish to resign then such resignation will be accepted in conformity with the terms of your letter of appointment dated 19 October 1999 and the attached General Terms and Conditions of Employment. 6 August 2001 Letter from Michael Thomes to Malcolm Irving Dear Malcolm I refer to your letter to me of 6 August. In this letter you have asked me to provide you with further information so that you may "verify" the statements I have made with regard to my situation. In this letter, also, you state that you see no reason to reconsider your previous "advice" to me on 1 August 2001. I find it curious and to some extent objectionable, that somehow you now believe that after the meeting on 1 August 2001 it was for me to convince you, that you should reconsider your previous position. You knew that Dan Dumitrescu was the Korn Ferry recruitment professional. You have had the benefit of the Korn Ferry briefing paper given to you in March 2001. The e-mails that I referred to are not some cache of documents yet unknown to the company. They were simply the documents that went between Keycorp, Korn Ferry and myself. I may well ask what attempts you have made to recover and inspect the materials which were clearly at Brian's disposal at the time and/or on the Korn Ferry files. I do not have access to this information as you will appreciate. In terms of my letter of 17 July 2001, the documents which I believe support my claims are all company documents. You have used the word "ultimatum". I am not in the position to issue ultimatums. I have given you and the Board ample time to consider the factual matters raised. You appear not to accept the matters raised in my letter of 17 July 2001. Malcolm, I urge you to reconsider your stance. Please use your position to actually review the correspondence, talk to Korn Ferry, and apply your own knowledge and experience to the situation. Ask yourself how it can be asserted that the Company has in any way complied with its obligations to me? Where is there any evidence that performance parameters have ever been discussed and agreed? How is it that I can go from a position where parameters are to be agreed and my performance assessed against these agreed parameters only to find myself being told some 18 months after commencement that I would be getting "nothing"? Your response of 6 August gives me little hope. It is not for me to resign. It is for you to show a preparedness to recognise and deal with my claims in good faith and address, in a timely fashion, an injustice. May I suggest that we give each other until 12 noon tomorrow to reconsider our respective positions. I am free to meet with you before this time. After this time we should then deal with the matter as we both see fit. 7 August 2001 From Michael Thomes to Malcolm Irving Dear Malcolm, I refer to the message you left for me this morning. If it is the case, that you need until Thursday to make further enquiries, then I am prepared to wait for you to do so on the following conditions. Firstly , I need a commitment from you that this matter will be given your full attention and that by 4pm on Thursday I will have the final position of the company in relation to my concerns. Secondly, if it is the case that you are making enquiries with Korn Ferry, then I would like the opportunity to have access to all the documentation kept by Korn Ferry in relation to my recruitment. I believe it is only fair that I get to review this information at the same time that you do. As I have previously stated, I believe that in my communications, verbally and otherwise with Mr. Dumitrescu, I was quite clear as to what my expectations and understandings were, and I am sure that the information kept by Korn Ferry will be supportive of my claims. Accordingly, can you please confirm that you have made the necessary arrangements with Korn Ferry for me to view their file (which I believe is more correctly the property of Keycorp any way) and that you are prepared to meet with me in good faith to resolve this matter before 4.00pm on Thursday. 8 August 2001 Email from Michael Thomes to Malcolm Irving Dear Malcolm, As you are aware, I have been very concerned with respect to you approach to the resolution of my claims. I note that in my email of 7 August 2001, I was prepared to extend the previous timeframe for resolution on the basis that I too could have access to the Korn Ferry documents. You have subsequently advised me that in your view, they remain the property of Korn Ferry, and that I would not be provided access to these documents. I find this a curious position for you to take because I know for a fact that we have paid Korn Ferry for their services. As you will recall, when I went to pay their invoice, I discovered to my horror that there weren't enough funds in the company to pay this amount, and this was in my first couple of weeks of employment. On the basis that Korn Ferry has been paid, I do not see why access could not be granted to the documents. In my discussion with you yesterday, you also indicated that you were in Canberra on 8 August 2001, and that you could not make a commitment to meet on 9 August 2001. You kindly suggested that I talk with your lawyer if I wanted. I indicated to that I was not happy with the process proposed by you, especially not with your reluctance to commit to a firm timeline for resolution. Malcolm, this matter has gone on for too long. You are aware of the issues, you are well aware of what is required to resolve these issues, you appear to be simply prevaricating and frustrating my attempts to rectify what I believe to be a grave injustice . The current situation cannot continue. If this matter is not resolved by 12 noon, on Friday 10 August 2001, I will regard the employment as terminated. 10 August 2001 Letter from Michael Thomes to Malcolm Irving Dear Malcolm, I refer to my correspondence of 17 July 2001, 2 August 2001, 6 August 2001, 8 August 2001 and our discussion today. I believe that the prior correspondence adequately sets out my concerns and the consequences for what I believe to be the deliberate path chosen by you, not to deal in good faith with my concerns. Accordingly, without any prejudice to my legal position, I regard Keycorp Limited as having breached my contract of employment and in failing to remedy this breach, I now regard Keycorp Limited as having terminated my employment. I no longer regard myself as an employee of the company. I also believe that the conduct of the company, and in particular the actions of you as the Chairman, and the misrepresentations of the previous Chairman to be unfair conduct. Please arrange for my statutory entitlements to be paid in accordance with the relevant legislation. Effective 12 noon today, I resign as a director of Keycorp Limited. With respect to my associated directorships, please provide me with the relevant documentation, which needs to be signed to effect the termination of these directorships. This information should be sent to my home address marked private and confidential. 93 Accepting this resignation Keycorp offered no severance pay to Mr Thomes, arguing that he was in breach of that term of his contract that required that he give not less than four weeks notice of termination, and that it was he who had repudiated the contract. It published the following press release: 10 August 2001 ASX Announcement to all Keycorp Group Staff Mr Michael Thomes has ceased to be Managing Director of Keycorp Limited with immediate effect. As an interim measure Mr Bruce Thompson, a director of Keycorp Limited will assume the responsibilities of Chief Executive Officer whilst a permanent replacement is found. Mr Thompson spent 32 years with Hewlett Packard before retiring as Managing Director of Hewlett Packard Australia and New Zealand last year. The company will report its audited results for the six months to June 30, 2001 on August 15. These results at the operating level before amortisation, abnormal items and income tax will be in the range of $10 million and $15 million loss as foreshadowed at the Company's Annual General Meeting in May. In addition, a provision for restructure of $3.7 million will be incorporated in the June results. This restructure, which is currently being implemented, is expected to generate savings of $15 million in the year to June 30, 2002 and $19 million in a full year. Directors plan to provide a comprehensive statement on the company's activities and forecast results for the six months to December 2001 and 12 months to June 30, 2002 on August 15. 94 It is apparent from the correspondence that Mr Irving did not seriously consider the March statement of grievance (misremembered by both men as February) which he had discarded or mislaid by 26 July 2001 when he asked Mr Thomes for a copy. The complaints of Mr Thomes were corroborated in substance by Board papers. It transpired in evidence that Mr Irving did not know that Mr Thomes had, in February 2000, prepared a budget based upon the K78 being unsaleable, forecasting revenue of $112 million. He did not know that both Mr Thomes and Mr McDonald had presented papers to the Board in May 2000 expressing considerable doubt that the $130 million revenue proposed by Mr Clayton could be achieved, although that point was raised directly by Mr Thomes in his letter of 17 July 2000. He did not know that the problems in the K78 had emerged prior to Mr Thomes' engagement. 95 In his letter of 17 July 2001, Mr Thomes to my satisfaction accurately summarizes the course of dealings between Keycorp and himself to that date. He asks that the company address his concerns and its breach of contract within 14 days, that is by 31 July 2001. This the company did not do. On 1 August 2001 and 10 August 2001 Mr Irving made clear to Mr Thomes that he did not accept the contents of Mr Thomes' statement of grievance concerning the lack of integrity of Mr Clayton, or the dire straits in which the company traded in 2000. Support for Mr Thomes' statement could be found in the Board papers had Mr Irving troubled himself to look. 96 In any event, Mr Irving had discovered for himself by the time he exchanged this correspondence with Mr Thomes that Keycorp in the year 2000 faced certain insolvency were it not for the timely merger with Telstra. Because, wrongly, he accepted the word of Mr Clayton in preference to that of Mr Thomes, Mr Irving made no attempt to negotiate with Mr Thomes upon appropriate incentive parameters for the year 2000. This failure compounded the refusal by Keycorp to honour its contractual obligations to Mr Thomes in respect of a fundamental term of his contract. By 10 August 2001 when Mr Thomes accepted the repudiation of his contract by Keycorp as having terminated his employment, a sum of over $500,000 was outstanding in respect of available incentive payments. It was the failure of Keycorp to agree upon the parameters for Mr Thomes' incentive bonus that was the real and effective cause of Mr Thomes' termination. Moves against Mr Thomes 97 Mr Thomes complains in his further amended summons for relief that his contract of employment was unfair in that it allowed the respondent to decide to terminate the applicant's employment and take steps to replace him without informing the applicant of these decisions. 98 At some time after Mr Sutton's e-mail of 19 March 2001 in which he spoke highly of Mr Thomes, and after Mr Thomes had handed to Mr Irving his statement of grievance setting out the true state of Keycorp before the Telstra merger, Mr Sutton expressed to Telstra executives adverse opinions as to the performance of Mr Thomes and his suitability as Chief Executive Officer. 99 It is apparent that Mr Sutton had the support of various Telstra executives in machinations that were then commenced to find a replacement. Various persons were sounded out as possibilities. In an e-mail of 22 July 2001 Mr Sutton stated that "We [the non executive directors of Keycorp] resolved to replace the CEO". Mr Irving, the chairman at the time, says this was not true. On this point, I prefer the evidence of Mr Irving to that of Mr Sutton. 100 Mr Sutton was the Telstra executive responsible for negotiating the Telstra deal. That he was personally embarrassed to find out that Keycorp was a troubled enterprise is apparent from his e-mail of 27 May 2001 to Mr Ted Pretty of Telstra where he says "I got us into this and it is a problem". It is not surprising that he should look for a scapegoat. Further, he wanted for himself Mr Thomes' job which would have brought to him a considerable increase in salary. In the same e-mail to Mr Pretty he directly asked for appointment as CEO. I did not believe him when he said in evidence that despite asking for the job in bold terms, he did not really want it. Mr Irving learned of this job application while giving evidence. 101 In any event no decision was ever made by the Board of Keycorp that Mr Thomes be replaced as CEO. It is the respondent's case that Mr Irving did not endorse or support any move against the CEO. In Mr Kimber's submission Mr Irving "was entitled to form the view that after the May strategy meeting the applicant was doing a fair job and that he was working with the chairman in a co-operative way to address serious issues. He was entitled to form the view, and he did, that the plan was a good one and it should be implemented and it was and they had some success". 102 Mr Kimber submitted that "given Mr Irving's view of Mr Thomes, his resistance to moving against him, his satisfaction with the plan, there's every reason to believe that if the applicant hadn't skied the towel and was prepared to talk about a compromise they could have resolved this difference and moved on". I accept these submissions as a concession by the respondent that Mr Thomes' performance as Chief Executive Officer was adequate in the circumstances confronting him. 103 In a contract such as the present however, the competence and ability of a senior executive officer is irrelevant to the right of a Board to replace that officer without consultation or notice. I accept that in some very senior offices such as CEO, commercial imperatives may override considerations of procedural fairness. A CEO has significant power to cause harm to an enterprise if he is disaffected. 104 The corollary is that although an employer, in its own interests may dismiss a CEO without warning and with immediate effect, the contract permitting such action should, in the interests of the employee, provide fair separation benefits in lieu of notice. If Mr Thomes was constructively dismissed by the respondent, the question to be addressed is not whether he ought to have been warned of the respondent's intention to remove him, but whether his contract, in the event of such dismissal, made fair provision for compensatory payments. The Credit of Mr Clayton 105 In his affidavit of 28 August 2002 Mr Clayton made the following assertions: On 21 December 1999 Mr Thomes presented to the Board his first budget as CEO. At the board meeting, the Managing Director made a presentation following a review of the budget papers and processes in which a budget showing a net profit after tax for the calendar year 2000 of $7 million on sales of $174 million was presented. At this meeting, concern was generally expressed by the Board about whether the budget results could actually be achieved, however, at the request of Mr Thomes, the budget was approved. . . . the optimistic budget presented by Mr Thomes in the December board meeting was created by him despite concerns raised by members of the Board. 106 These statements are wholly misleading. 107 Mr Thomes commenced with Keycorp on 22 November 1999. Board minutes of the meeting of 23 November 1999 record that it was the Chief Financial Officer and General Manager Sales who presented the company's budget for the year 2000 and that the budget was based upon "assumptions that K78, K23 and K80 will be delivered from January and performing satisfactorily". It was this budget that forecast sales of $174 million. 108 The Chief Financial Officer at the time was Mr Tom McDonald. He is not called by the respondent. On 17 December 1999 Mr Thomes reported to the Board that the budget forecast proposed by Mr McDonald was unreliable due to lack of exact data, that revenue projections were unrealistic "especially in context with low backlog sales funnel" and that there was doubt as to the market readiness of key products K23 and K78. 109 Mr Thomes then addressed the Board at its meeting on 21 December 1999. The slides exhibited by him to the Board are in evidence. They include material in this form: "Key figures-revenue $84m to $174m Double!!" Under a slide headed "Is the miracle possible?" he cautions that there was "no backlog of orders", that "key products (K78 and K23) are not ready for the market" and that "only 5 products support the revenue of the company". 110 Further slides indicated that one of the goals of himself and the Board should be to "manage expectations of shareholders, the investment community, the press and employees." The minutes of this meeting record that the Managing Director, commenting on matters that needed "urgent attention" raised the "general unreliability of the budget process due to lack of accurate data" and his "concern on product availability to meet sales opportunity". Not surprisingly the minutes record that after Mr Thomes' presentation "concern was expressed about whether the budget result could actually be achieved." 111 It is true that the minutes record that "at the request of the Managing Director the budget showing a net profit after tax for the year 2000 of $7m upon sales of $174m be approved". Mr Thomes says, and I accept, that as a matter of corporate governance some budget had to be in place. With the concurrence of Mr Clayton, the monthly profit and loss accounts provided to the Board during the remainder of 2000 included sales budgets predicated upon sales of $174m for the full year. 112 At the time of swearing his affidavit Mr Clayton was aware of the minutes of the November 1999 Board Meeting. The minutes were annexed to his affidavit. In evidence, Mr Clayton, unpersuasively, attempted to justify the relevant terms of his affidavit without regret or apology (at p 510). Q. But the budget presented to that meeting wasn't Mr Thomes', was it? A. Mr Thomes was in charge of the organisation for the month preceding that board meeting and he had the financial controller prepare a budget which Mr Thomes brought to that meeting. Q. But wasn't that prepared at the instruction of the board by the sales manager and the financial controller? A. It may have been. I don't recall specifically, your Honour. Q. If it was prepared pursuant to a board instruction by those two members it would be wrong to say it was Mr Thomes' budget? A. Mr Thomes was responsible for reviewing all the work done in the organisation that was presented to the board. . . . Q. But if it was prepared by the financial controller and the general manager sales it would be unfair to suggest that it was prepared by Mr Thomes, would it? A. No, not necessarily to the extent - as I just mentioned, Mr Thomes was responsible for reviewing all input to the board and he would have reviewed that budget and brought it to the board meeting, although he did express concern, as other members did. But he then asked for it to be approved so we could get on with him revising and coming up with a new forecast which, I believe, he delivered. Q. When you say it was created by him despite concerns raised by members of the board, it wasn't the board who raised concerns, it was Mr Thomes, wasn't it? A. No, it was the board. . . . Q. That is a long answer but, rather, it is not the case that it wasn't Mr Thomes who was optimistic in presenting this budget? A. No your Honour, if that's what that says, that is not what is meant by it. It was an optimistic budget; it wasn't that Mr Thomes was optimistic. Q. And it was wrong to say it was created by him? A. It was created under his management. Q. But wrong to say it was created by him? A. You could say that, yes. Q. Because the import of what you say in the beginning part of paragraph 38 is to blame Mr Thomes for being optimistic for this budget, the way it is drafted? A. That's not what was meant, no. . . . . Q. And so it would be a fantasy to think it could be made so it was hardly an optimistic budget presented by Mr Thomes? A. I would accept that, yes. Q. It is important. Do you resile from paragraph 38 of your affidavit? A. No, I do not, your Honour. My recollection of this is that in the November meeting there were some optimistic projections. The board queried those projections and asked Mr Thomes to come to the next meeting with a budget. Mr Thomes came to the next meeting with that budget. It was the same budget and he qualified it to say that he believed there were risks to it. We then approved the budget at the request of Mr Thomes who was then asked to revise the numbers as to the way he saw the likely outcome. Q. But in paragraph 38 you say that the budget was created by him despite concerns raised by the board? A. Yes. Q. Now, it was not created by him at all; it was created by Mr McDonald, was it not? A. Yes, it was. Q. And it was him, in his report to the board delivered the day before the board meeting, that he raised these serious concerns? A. I can't recall the day before, but I know Mr Thomes did raise concerns about the $174 million budget. Q. And he did it in a report to the board? A. Yes, he did. 113 That the budget was created by Mr McDonald and the General Manager Sales and was roundly criticised by Mr Thomes both before and at the December Board meeting cannot be in doubt in the light of the contemporaneous documents. Mr Clayton must have known that when he swore that "the optimistic budget presented by Michael Thomes in the December Board meeting was created by him" despite "concerns raised by the Board" that that statement could not be justified. 114 After the December 1999 Board meeting, Mr Thomes prepared a report for the Board meeting of 22 February 2000 which report he presented to the directors on 21 February 2000. In this report Mr Thomes forecast revenue for the 2000 calendar year at $112.8m and a loss of $18.3m. One of the reasons given by Mr Thomes for this forecast was that products including K78 and K23 were not yet ready for sale. It should be remembered that when Mr McDonald and the General Manager Sales were asked to prepare the 2000 budget it was to be upon the basis that the K78 and K23 would be "delivered from January and be performing satisfactorily." 115 This report recorded that in the calendar year 1999 total revenue was $130m. Although it is not there recorded, members of the Board knew that of that sum, core sales revenue was $85.2m (higher than the $84m forecast in December 1999) and the balance of $44.8m was the revenue generated by sale of a 57 per cent share of an electronics manufacturing company (AEMS), in December 1999. 116 Mr Thomes presented his revised budgetary estimate to the Board at the meeting on 22 February 2000. 117 Mr Clayton in his affidavit of 28 August 2002 says that at this meeting he said to Mr Thomes words to this effect (Affidavit p12 par 40): Keycorp could not present such a budget to the public – we cannot mislead the market. We are a public company and we have obligations in relation to our disclosure and reporting. The December budget was inflated and what you present now deflates likely budgetary outcomes. Michael, you cannot undervalue to create a false expectation in the market for when we deliver better than expected earnings. The budget must be calculated upon genuine and rational estimates as to what the likely budgetary outcomes will be, not by reacting to monthly forecasts. You are part of a public company now and not playing games with the supervisor. You must be accurate in your forecasts or you will mislead the market. 118 Mr Clayton further said in his affidavit that: [The] Keycorp Chief Financial Officer, Mr Tom McDonald and Mr Thomes [then] revised the budgetary figures presented by Mr Thomes in line with proper corporate accounting procedures to $130m revenue and a break even result. 119 I find these statements of Mr Clayton extraordinary. The minutes of the Board at the meeting of 22 February 2000 record that "it was resolved that while the budget approved in December 1999 was confirmed, it was recognised that a probable outcome at present was break even on sales of $130m". How can it be that Mr Clayton, a Chairman concerned not to mislead the market, resolves to recognize a probable outcome for the year 2000 as break even on a revenue forecast of $130m when his Managing Director and Chief Executive Officer has told him in plain terms that an appropriate forecast is $112.8 million? How is it that an alternative figure said to be $130m prepared "in line with proper corporate accounting procedures" by Mr Thomes and Mr McDonald turns out to be exactly that suggested by the Board before the exercise even commenced? What may explain the strange coincidence that $130m was exactly the same figure as the revenue generated in the previous year which included revenue of $44.8m from the sale of a business (AEMS) and also the precise figure necessary to achieve a break even result? 120 When tested in cross examination Mr Clayton asserted that the revised budgetary figures for sales were calculated "in line with proper accounting procedures" by Mr Swanson in the course of the February 2000 Board meeting by "Tabulation of the sales orders as per the sales report". 121 The relevant sales report is not tendered by the respondent. No mention is made of this exercise by Mr Swanson in Mr Clayton's affidavit and the evidence is inconsistent with his assertion that the sales figures were revised by Mr Thomes and Mr McDonald. Mr Irving, who succeeded Mr Clayton as Chairman, has said that the work of budgetary forecasting requires a great deal of consultation within Keycorp and the exercise takes "months" to complete. 122 Mr McDonald is not called. Mr Thomes says that at this February Board meeting Mr Clayton said to him "We have to have this $130m revenue and a break even result. Please prepare and present a new budget in line with that at the next Board meeting". Mr Thomes did this and presented such a budget to a subsequent Board meeting with the caution "I still do not believe this plan is realistic but here is the budget requested by you". 123 I do not believe Mr Clayton's account. The coincidences are too many, the tale too improbable. No contemporaneous documents are tendered in support. Mr Thomes' denies Mr Clayton's version of events and Mr Thomes' account is supported by Board papers. I believe the statements of Mr Clayton in paragraph 12 of his affidavit set out above, and his oral testimony in that regard cannot be accepted. 124 In paragraph 65 of his affidavit Mr Clayton asserts that the relationship with Telstra was initiated before Mr Thomes joined Keycorp, that the transaction was supposed to have around $400m as a cash component coming to Keycorp, and that "By the time Michael negotiated the deal, the cash component has gone and it was simply a vending in deal. So, his contribution again was not full standard". This attack on Mr Thomes cannot stand with the terms of the first Memorandum of Understanding (Annexure K to Affidavit of Brian Clayton) which required a cash contribution by Keycorp of $10m, which it did not have, or the fact that the second agreement was approved by the Board which included Mr Clayton as Chairman (Annexure Q to affidavit of Brian Clayton). 125 The total market capitalization of Keycorp on 30 December 1999 was $295 million (par 96 Thomes affidavit in reply). The financial statements presented to the Extraordinary General Meeting called in December 2000 to approve the Telstra deal recorded a market capitalization of $328,529,000. The suggestion that Telstra would pay $400 million for part ownership of Keycorp is ludicrous. As Mr Sutton, negotiating for Telstra at the time of the merger has said, the payment of $400 million to Keycorp was never a reasonable proposition. 126 I have concluded that the whole of the evidence of Mr Clayton is to be treated with reservation. The Reliability of Mr Irving 127 Mr Irving asserts in par 34 of his affidavit that at the Board meeting held on 31 May 2001 Mr Thomes raised with him the idea of an acquisitions and mergers strategy and that he then said to Mr Thomes: "Michael, we cannot do that, it would take anyone with any experience a nanosecond to see what a parlous state the business was in". 128 In his evidence (transcript p 646) he sought to place this statement in context: Q. Can you tell his Honour you made the remark in what context, what gave rise to you making that remark to him? A. In discussing this position Mr Thomes suggested that the solution to it was to have an acquisition strategy, or a merger; and I responded that for any discussions in relation to an acquisition or a merger the other party would realize in a nanosecond what the parlous state Keycorp was in at that time and, therefore, it would be futile to pursue that as a strategy .(emphasis added) 129 That discussions concerning mergers and acquisitions were held between Mr Thomes and Mr Irving is certain. Mr Thomes had already suggested to Board members that this was part of a rational strategy to ease Keycorp's present difficulties. 130 That Mr Irving thought this strategy was "futile" or ill conceived and impossible as is suggested by his evidence is wrong. In an email of 5 June 2001 (doc 469) from Mr Sutton, a Telstra nominee to the Board, to various Telstra executives, including Ted Pretty, Mr Sutton offers "notes from this mornings meeting with Malcolm" [Irving]. He records Mr Irving's agreement with Mr Sutton's suggestion that Mr Irving approach Mr David Moffatt of Telstra "to arrange for the [merger and acquisition] activities to be led by John Boniciolli" and Mr Irving's suggestion that a Mr Peter Pickering be appointed as new CEO "if we believe that a longer term merger and acquisition solution is viable". 131 It is apparent from the notes that Mr Sutton discussed mergers and acquisitions in some detail with Mr Irving including proposals concerning SecureNet ("we all agree this is a good deal"), Hypercom ("there is a lot of sympathy for this"), CPI and Orga. 132 Minutes of the Board meeting of 18 June 2001 reveal that mergers and acquisitions were discussed at the strategy meeting of 1 and 2 May 2001 and a conclusion reached that opportunities be explored. The minutes further reveal that Mr Thomes, upon the strongest inference in response to directions from the Board, made appropriate enquiries. 133 I set out in its entirety the relevant passage from these minutes: Investment Opportunities The Managing Director tabled the report entitled : "Keycorp Strategy Direction - Delivering on our Potential", the report by the Managing Director and Messrs Standen and Wood on the conclusions of the company's strategy meeting on 1 and 2 May 2001. The Managing Director reported that there are two opportunities for significant global mergers, namely Hypercom and Orga. He also reported that smaller merger and acquisition opportunities with CPI, LinkPoint, SecureNet and Intellect may also be available. Mr Wood reported on his recent visit to Japan, including discussions with NAAP and CTS. He also described the business of Intec, Japan which in his view offered a lower risk investment opportunity to the company than that offered by NAAP and CTS. Mr Sutton said that Telstra had a relationship with, and a small equity investment in, Intec which he believed to be a good medium sized integration firm with quality customers. During this discussion, at 1.10pm Mr Swanson left the meeting. The Managing Director tabled a report on the Hypercom opportunity. The Chairman tabled an unsolicited proposal by ABN AMRO seeking a mandate to advise the company on an acquisition of SecureNet. The Board noted the proposal. It was RESOLVED that: 1. Mr Wood would initiate discussions with Intec and continue discussions with LinkPoint 2. the Managing Director would continue discussions with Orga and call Hypercom with a view to setting up a meeting between him, the Chairman and Hypercom 3. the Chairman would continue discussions with SecureNet. 134 That Mr Irving intended his account of the conversation with Mr Thomes at the May 2001 Board meeting to reflect poorly on Mr Thomes cannot be in doubt. In evidence Mr Irving was asked this question: Q. Just let me understand the sentence. "He suggested Peter Pickering as a short term if he believed a longer term - merger and acquisition is viable". Isn't the complaint, as I understand you to level against Mr Thomes, is that he was looking for mergers and acquisitions and you pointed out to him that it was preposterous to suppose that that could happen because any merger or subject of acquisition would look at you and say it is not on? A. Yes, that is - ? OBJECTION Mr Kimber: These remarks aren't attributable to Mr Irving. 135 I have some difficulty reconciling Mr Irving's evidence in his affidavit and orally, with the resolution of the Board on 18 June 2001 that it was Mr Irving himself who was to continue discussions concerning the merger with or acquisition of SecureNet, and it was he who was to meet, together with Mr Thomes, representatives of Hypercom for a similar purpose. 136 Mr Irving, in consideration of Mr Thomes' performance bonus in 2000 saw little reason to take into account that the K78 and K23 products proved to be unsaleable. He said this (Tpt p 675.33): Q. How did you factor that in? A. The budget for access devices was fairly low. I didn't go behind the figures, but - I mean, the K78 was believed, in the latter part of 1999 that it would be certified, and it was only after a shipment that it went, but it was no[t] in the budget for $130 million and the $130 million was to reflect the K78 - not being saleable. That was the reason for the reduction. 137 Mr Irving was there obviously referring to the budget predicated upon sales revenue of $174m of which he was aware being replaced by a budget based upon sales revenue of $130 million which latter budget "was to reflect the K78 not being saleable". 138 This evidence by Mr Irving is wrong. It was Mr Thomes' budget forecast of $112.8 million that reflected the K78 being unsaleable. Mr Irving's statement that the budget for access devices was fairly low cannot stand with his awareness of, and inclusion in his affidavit, of the text of the Chairman's address to the May 2000 Annual General meeting of Keycorp to which I have already referred in which Mr Clayton asserts that successful sales of the K78 in the second half of the year 2000 will recoup first half loss "in the order of $17 million to $20 million". Nor can it stand with the statement in paragraph 9 of his affidavit that the lost sales on the K78 in the first half of the year 2000 resulted in "significant lack of revenue and ensuing losses". 139 Further, Mr Irving's statement that the 2000 budget was reduced to $130 million for "the reason" that the K78 was unsaleable cannot stand with his later evidence in the following exchange (Tpt p 715.33): Q Did you make enquiries as to what representations were made to the market and Mr Thomes as to whether those products were saleable? A The inquiries I made about K78 back in those times I was informed by the chief operating officer that the first shipment had gone and was working without any problem at all. It was the second shipment which occurred after Mr Thomes arrived – by the way, he had nothing to do with it, but where the problem started to develop. 140 The two answers demonstrate to my mind a willingness by Mr Irving to accept at face value whatever he may have been told by Mr Clayton, heedless of inconsistency, and reflect poorly upon his objectivity. I believe that Mr Irving is an unreliable witness. 141 I believe that unreliability to be also reflected in other evidence. The transcript contains this exchange between Mr Kimber and Mr Irving (p 650.1) Q So as you understand it, it was only the Board who directed Mr Thomes to cut expense, he had never come up with that idea himself? A That's correct. 142 Mr Irving became Chairman on 21 March 2001. At the Board meeting on that day Mr Thomes presented slides to the Board bearing upon his suggestions for the reorganisation of the business for the purpose of reducing costs (Annexure O to Mr Thomes affidavit in reply). At least two of the proposals, closing the UK office and restructuring manufacturing operations, had first been proposed to the Board by Mr Thomes in March the previous year. Mr Sutton who attended the meeting with Mr Irving, gave evidence that Mr Thomes suggested to the Board significant reductions in expenditure. 143 Mr Thomes' reports to the Board in February, April and May 2000 and in February and March 2001 reveal Mr Thomes' concern at the cost of Keycorp operations and his specific proposals for reduction of those costs. The statement by Mr Irving that Mr Thomes never came up with an idea to cut expenses is not only inconsistent with the evidence of Mr Thomes and Mr Sutton but also inconsistent with documents displayed to Mr Irving on 21 March 2001. The Reliability of Mr Sutton 144 Mr Sutton in evidence sought to cast the applicant's management in an adverse light by reference to cash flow because "no progress had been made to reduce operating expenses to the necessary levels to return the business to positive cash flow". This attack is unfair. The Board under Mr Clayton's chairmanship for 12 months ignored Mr Thomes' request that loss making overseas operations be closed down. The Board under Mr Irving's chairmanship delayed the necessary decisions from March 2001 until May 2001 so that the new directors could "understand the business". 145 Mr Sutton would have known that no amount of tinkering around the edges by selective redundancies was going to produce the $19 million savings necessary for the company to become cash flow positive. 146 In the email of 27 May 2001 to Mr Ted Pretty, Mr Sutton commences by stating that "I got us into this and it is a problem and it is not getting better". Mr Sutton goes on to say "There is a substantial delay in bringing new products to market, specifically the K78, a mobile EFTPOS terminal. One of the things that gave me comfort that this would be a good business was that in 2000 Keycorp was due to bring two new products to market. We knew there were some delays, but our due diligence (by PWC) gave us a very strong report on the quality of the products and the deliverability. The delays are depressing sales badly. . .". 147 After expressing opinions critical of Mr Thomes, Mr Sutton says "As a result of sales shortfalls we have a cash shortage and Keycorp is living hand to mouth". 148 This email captures the essence of Keycorp's problem. In the heady days of the technology boom, otherwise cautious executives relied unwisely upon optimistic projections by technicians engaged in research and development. When the projections failed to materialize and losses ensued, corporate culture required that blame be assigned. Unlike Telstra, Mr Thomes had been given no opportunity for due diligence before joining Keycorp. In fact it was denied to him (see par 12 of this judgment). 149 Upon appointment as CEO Mr Thomes sought to minimize the consequence of the unrealistic and optimistic projections concerning the K78 by drastic cost cutting. His efforts were thwarted by the Board under Mr Clayton and delayed by the Board under Mr Irving. 150 I have no confidence in the objectivity with which Mr Sutton viewed the performance of Mr Thomes. Mr Sutton to my mind has firmly attempted to attach the blame for the substantial losses suffered by Telstra upon Mr Thomes. His lack of appreciation of the dynamics of optimism is exquisitely reflected in his suggestion that Mr Wood, the founder of the company, the champion of optimism, the opponent of any reduction in its global vision, and the Chief Executive Officer whose failures caused the Board to search for an alternative, replace Mr Thomes "because he could do the job". 151 When Mr Sutton read Mr Thomes' letter of 17 July he took no apparent steps to investigate the assertions of fact and grievance contained therein. He despatched an email on 22 July 2001 to Telstra executive Mr Peter Whorlow. After noting that Mr Thomes "has given us 14 days to address or he will walk and presumably we will see him in court", Mr Sutton adds "should be fun. This comes just days after we (non-executive directors) resolved to replace the CEO at the last Board meeting". I have found that there was no such resolution. However the satisfaction with which Mr Sutton greeted the turn of events is apparent. I reject Mr Sutton's oral evidence to the effect that his use of the word "fun" was intended to be ironic. 152 It is quite apparent that Mr Sutton made no further attempt to investigate the merit of Mr Thomes' claim before he wrote to Mr Switkowski on 25 October 2001 that "the Michael Thomes claim is not considered serious" (Doc 481). That Mr Sutton viewed the departure of Mr Thomes from the company on 10 August 2001 as not entirely voluntary is borne out by the terms of his email of 18 October 2001 to Mr Whorlow in which one of the issues said to be under consideration was "resignation/removal of CEO and consequent legal action" (doc 479). Attacks upon the Credit of the Applicant 153 Attacks have been made upon Mr Thomes' credit by suggestions that he attempted to mislead the court in relation to his understanding of the terms "at risk", "break even result", "options" or "cash flow position". I do not find these attacks convincing. 154 At p 67 Mr Thomes rejects the term "at risk" as correctly describing that part of his income which was to exceed the guaranteed salary, preferring the term "target income". This was not unreasonable, given his immediate concessions that incentive based income was not guaranteed. 155 The transcript reveals that Mr Thomes understood perfectly well the usual meaning of "break even". At p 292 Mr Thomes conceded that he had no success in achieving an overall break even result for the year 2000. In the context of agreeing on appropriate parameters however he goes on to suggest that alternative appropriate goals may be to break even on earnings before tax; before tax depreciation and amortization, or before tax depreciation amortization, research and development. Each of these concepts may be used to best illustrate various aspects of the health of a company and bear the acronyms EBIT, EBITDA and EBITDARD, all of which appear in the financial reports to the Extraordinary General Meeting which approved the Telstra deal. 156 Similarly, the transcript at 140.41 reveals that Mr Thomes knew perfectly well how an incentive scheme based upon share options operated. He had however, given earlier evidence in his affidavit that in negotiation with Mr Dumitrescu he read the words of the draft contract which spoke of eligibility to an annual performance bonus of "-up to $200,000 equivalent participation in the options program. . .". He then had a conversation with Mr Dumitrescu to this effect: Thomes: I am concerned about the loose wording in regards to the option program, and the share allocation. I want to see the Keycorp share plan and want to understand how I can achieve the payment hurdles. It is important to me that the "$200,000 equivalent participation in the options programme" represents real value to me paid in shares. I can accept payment in shares as an alternative to payment in cash. Issuing options that I will have to pay for at a later stage is not an acceptable proposition to me. Dumitrescu: Brian Clayton cannot provide a copy of the share plan, because he would have to contact the HR Manager, and of course the HR Manager does not know as yet. But Brian Clayton has assured me, the plan is straightforward, no surprises there, and you will receive a copy the moment you have started. You will receive fully paid shares, not options. The payment in shares is a true alternative to payment in cash. He also promised to find a fair solution for the performance hurdles for the 50,000 shares. 157 In that context he gave the following evidence (tpt 142.26): Q. So you do understand how stock option schemes work, correct? A. Of course. Q. Do you say to his Honour but in this case you believed insofar as your package involved stock options that it wasn't going to operate the way that I've just set out, is that your evidence? A. My evidence is that term was in one of the final drafts of the letter of offer and it didn't reflect the discussions I had with Korn/Ferry and I said, "I do not understand what options program mean", because what we discussed is that I get shares to the value of $200,000. I don't and then Korn Ferry went back to Clayton and they came back and orally and through that letter and said to me, at least that was my understanding, the option program - that's what it's called but it also provides for the allocation or the distribution of shares, and for me it's funny it didn't make sense. That's why I asked. Because options are options, I agree with you, and shares are shares, that's why I check back and say, "Hey, you said I get shares". They came back and confirmed it's shares. So funny but if that's what it is that's what it is. 158 Mr Thomes added in evidence that in his years in commerce he had seen many different option and share plans providing different alternatives. 159 Of particular relevance in the present case is the content of an enforceable undertaking given by Keycorp in September 1999 (p92 AX10) which reveals that the remuneration package agreed with Mr Clayton in 1998 included "a once only payment of approximately $120,000 to be used to purchase 135,000 Keycorp shares through the Keycorp shares ownership plan (ESOP)". The shares were to be "purchased by way of remuneration sacrifice by RPC Employee Benefit Plan (No 2) and held on the chairman's account in accordance with the terms of the ESOP". On 20 October 1998 Keycorp was advised by Australian Stock Exchange Ltd that the purchase of shares by a director by way of remuneration sacrifice did not require shareholder approval pursuant to the listing rules. 160 An explanatory memorandum to the notice of General Meeting of 31 May 2000 relating to changes to the Employee Share Option Incentive Plan included this passage: In respect of participation of non-executive directors in employee share schemes, market practice for many listed companies in Australia shows a clear trend to the provision of significant at-risk remuneration in the form of company shares or options. 161 The respondent has submitted that it is impossible to accept an answer given by Mr Thomes at p 80.40 that he was "struggling" with the term "cash flow position" which term was well known to him. The exchange appears in the following evidence: Q. In this case you have made allegations of misrepresentation, haven't you? A. Yes. Q. You do understand what misrepresentation means, don't you? A. Yes. Q. And you say to his Honour that you were misled about important factual information before you took the job, is that right? A. Yes. Q. Now I want to know whether parts of those allegations of being misled by the company is, do you say, that you were misled by the company as to their cash flow position going into Christmas 1999? A. Sorry your Honour I am struggling with the term. It is misleading. Q. It's a fair question. Were any representations made to you before you took the job as to what the cash flow to be at about Christmas? A. Yes. Q. And what representations were made to you? A. The representations made to me were that based on the fact that the products were now ready to be shipped, the cash flow position would increase towards the end of the year. 162 To my mind it is clear that the term with which Mr Thomes was struggling was "misled" in the question and "misleading" in the answer. He had no difficulty in previous answers with the term "cash flow". Context is given to his difficulty by his evidence recorded on the previous page (79.2): Q. …Do you say you were actively misled by the company before you took the job as to what would cause an increase in the cash flow position of the company by Christmas 1999; is that part of your allegation? A. I don't know how to respond to that question because it's - I think it's a legal question, at least as I understand it. But as I understood we had a discussion whether it was active misrepresentation or incompetence or whatever. At least that was the contents of the discussion we had. Q. That is that you were given to understand that there would be an increase in the cash flow? A. Yes, based on the readiness of the products. . . . Q. So you don't assert that anyone from the company misled you about what would give rise to an improvement in the cash position before Christmas, is that right? A. No, we discussed that the cash flow position would improve based on the readiness of the products to be shipped. That is what we discussed. Q. I have given the witness a number of opportunities. I ask that your Honour direct that he answer the question as to whether he asserts that he was misled by anybody - 163 It is apparent to me that Mr Thomes, to whom English is a second or third language, was attempting to communicate that he had relied on statements that the cash flow would improve because of product sales but that he did not assert that those statements were made to deceive him or knowingly mislead him by "active misrepresentation" rather than because of "incompetence". 164 A criticism is made that Mr Thomes included in his affidavit a complaint that, upon commencing work with Keycorp in late 1999, when he asked Mr Hargreaves, the company secretary, for a copy of the stock option plan he was told the plan was not valid any more because it did not comply with current legislation. When it was put to Mr Thomes in cross-examination that Mr Hargreaves may not have used the word "invalid" and said the plan had to be reviewed because of changes in taxation legislation he readily agreed that this may have been the case. 165 Mr Thomes gave evidence that the terms of a Memorandum of Understanding called a term sheet, entered into between Keycorp and Telstra in July 2000 "contractually prevented" the implementation of any large scale cost cutting measures by Keycorp during the period of due diligence before the Telstra deal was completed. 166 It is the respondent's submission that this evidence is not only false but that Mr Thomes in cross-examination was forced to resile from it. This submission is quite erroneous. At p 92 Mr Kimber suggested to Mr Thomes that there would have been no legal impediment to large scale changes in the second half of 2000 "because you hadn't yet signed a contract with Telstra". Mr Thomes answered ". . .and whether it was part of the [term sheet] agreement or whether it is legally implied, or whether the lawyers told us, but it was generally understood both by the Board and all our people that we could not materially change anything in the company" (Tpt p 92.45). Mr Kimber later produced the term sheet agreement to Mr Thomes and this evidence was given (tpt 163.44): Q. I must say that on my reading of it I can find nothing in that document that would suggest or provide any support for what you said about an inability of Keycorp to make changes that it might well have wanted to make? A. I think I added yesterday to say, I was not sure whether that was a paragraph in the contract or whether it was the advice of our lawyers, that we could not do that. I am sorry, on Tuesday. Q. On the last occasion you gave evidence anyway? A. On Tuesday, yes. Q. Just so I understand, you spoke of large changes being closing down other businesses? A. Correct. Q. Were they the projects that you had taken to the board in the March meeting? A. In the May meeting, May board meeting, yes. Q. So whether or not during the six months currency of this agreement you could do anything with it was irrelevant because the Board had vetoed the exact same processes anyway? A. That is true but there was - anything material that which would have a material impact that Telstra would not, you know, be happy about, we could not change. 167 The term sheet agreement in clause 1 provides that "the parties aim to build a global full service end-to-end internet payments service provision business . . .(and) . . .Keycorp undertakes . . .that it shall not . . .enter any communications . . .with any third party . . . inconsistent with achievement of the relationship". Notwithstanding Mr Kimber's failure to see it, I find that the spirit of that clause prohibits Keycorp forfeiting leases, retrenching whole divisions, closing down or selling off loss making subsidiaries which manufactured component parts for EFTPOS terminals or the like. 168 The precise nature of the cost cutting measures proposed by Mr Thomes, but on hold until after the alliance with Telstra was completed in December 2000 is revealed in this evidence(tpt 93.8): A. The next board meeting after that was in February; February 2001. I presented plans for costs cutting. I was informed that due to the fact that the chairman and other board directors hadn't come into the position yet, Mr Irving was appointed to the board in March. Mr Clayton the former chairman still ran the February board meeting. We had to wait until March before we acted on his plans because Telstra should be fully informed. Q. What were the plans for cost cutting that you then advanced? A. That is the ones I mentioned before: Close down the Asian operation, close down the UK, close down the manufacturing in Canada. Q. And were those proposals then considered by the March 2001 meeting? A. Yes, they were proposed and presented to the March board meeting and the decision of the March board meeting was "Gee, this is big stuff. We need more time to deliver it, to think about it. We need a strategy meeting so that we fully understand what that all means to the company" that meeting then was set for a time in May. Q. What happened then? A. The Board approved the cost cutting measure. The Board approved these measures I had proposed and basically executed immediately, because the plans had been in my drawer for probably over half a year. The Board approved and we executed it and there were, actually most of them were completed before I left the company. Q. Did those plans require the expenditure of capital sums? A. Yes, that is the ones we talked about. 169 Mr Kimber for the respondent submits that when Mr Thomes wrote in his letter of 2 August 2001 to Mr Irving that "my performance has never been questioned" he was not telling the truth because "an abundance of contemporary evidence suggests that this is not correct". He supports this submission by reference to eight documents. Upon examination, five of these documents turn out to be e-mails addressed not to Mr Thomes but to Telstra executives, one of which includes the sentence "Michael has worked diligently on each of these issues and has been totally co-operative with us". One further document is the contentious e-mail of 1 June 2000, which speaks of disharmony between Mr Thomes and Mr Wood although Mr Clayton adds "that I am not going to debate who is right or wrong". 170 Of the two remaining documents, one is an e-mail of 20 September 2000 from Mr Clayton to Mr Thomes in which Mr Clayton expresses concerns held by the Board re "cash problems" and goes on to say "obviously cash is tight but you need to demonstrate that the company is able to continue operations by detailing your cash management plan with the actions that are being taken to generate cash . . .for the non-executive members to share your view". 171 The other is an e-mail of 30 September 2000 in these terms: "Michael, I am still waiting for the cash management report and the re-forecast for the year. Tom also owes me the minutes for the last Board meeting. Would appreciate your attending to this as a priority. Brian" 172 These emails, and the cash position, must be fairly seen in the light of the decision of the CBA in March 2000 to reduce Keycorp's loan facility from $28 million to $17 million. They are not critical of Mr Thomes. 173 According to Mr Kimber, Mr Thomes falsely swore in paras 91 and 111 of his second affidavit that he did not meet with Mr Irving on 6 April 2001, a meeting corroborated by an entry in Mr Irving's diary, now in evidence "without even attempting to suggest why Mr Irving would . . .make a false entry in his diary about such a meeting". This submission has no substance. 174 It has always been Mr Thomes' case that after giving to Mr Irving his statement of grievance shortly after their first meeting in early 2001 he received no response until a meeting in June when he was told by Mr Irving that Mr Irving had spoken to other directors and Mr Thomes was to receive no incentive payment. In his letter of 17 July 001 to Mr Irving he recounts that "At the occasion of our first meeting, you requested a summary sheet outlining my expectations. In that summary which was presented to you in February I outlined all my concerns. Despite a number of attempts to discuss the issues you avoided getting engaged in discussion. To date no parameters have ever been agreed or even discussed". 175 In his affidavit, replying to these assertions, Mr Irving agrees that upon their first meeting Mr Thomes raised the question of bonus but says that on 6 April 2001, after he had spoken to Brian Clayton and other directors, he told Mr Thomes that because Mr Thomes had not achieved his goals he was to receive no bonus. He further says that Mr Thomes in reply said that he would send to Mr Irving some material upon which he may reconsider, and that it was only then that Mr Thomes sent to him the statement of grievance and the "Candidate Briefing Report" on a date in April 2000. 176 In par 91 of his Affidavit in reply Mr Thomes asserts not that there was no meeting on 6 April 2000 but "that a conversation such as the one described there ever took place". 177 In par 111 of the reply, Mr Thomes refers to para 91 and repeats that "Mr Irving and I did not have such a meeting on 6 April 2001" (emphasis added). The diary of Mr Irving first records a meeting with Mr Thomes on 14 March and a further 19 meetings with Keycorp executives or Mr Thomes specifically prior to 6 June. It is not a meeting which Mr Thomes denies, but a meeting of a certain character. 178 The account of Mr Thomes that there was no such conversation as Mr Irving says took place on 6 April 2000 is given some support by the correspondence. In his e-mail to Mr Irving of 21 July 2001, Mr Thomes states that "When I previously raised these issues with you in March it took over 3 months for you to turn your mind to my concerns". 179 In his letter of 26 July 2001 to Mr Thomes, Mr Irving requests that "To assist my reassessment of these issues would you please provide me with a copy of the February summary". I find it improbable that without a contemporaneous note, Mr Irving recalled that a disputed conversation occurred on a particular day in the year preceding his affidavit. 180 A substantial attack upon the credit of Mr Thomes is based upon the assertions of Mr Irving and Mr Sutton, denied by Mr Thomes, that in meetings on 5 June 2001, 1 August 2001 and 10 August 2001, between Mr Thomes, Mr Irving and Mr Sutton, Mr Thomes refused to accept less than 100 per cent of his performance bonus "because no criteria was agreed". One thing which is clear is that in those meetings no offer was made by Mr Irving to either reconsider Mr Clayton's purported parameters or to pay an additional sum of money. 181 This is an important issue and it would be unsatisfactory if it were to be resolved upon impressions of general reliability from other evidence or demeanour in the witness box, although upon both criteria I prefer the evidence of Mr Thomes. 182 Either Mr Irving or Mr Sutton or both may have been under the impression that Mr Thomes wanted 100 percent of his bonus and in consequence misremember the terms of the conversation. The matter is to my mind however settled in Mr Thomes' favour by the terms of the correspondence passing between him, Mr Irving and Mr Sutton. 183 In his initial statement of grievance given to Mr Irving in March 2001, Mr Thomes did not suggest that he should receive any particular sum of money and suggested three parameters against which his performance ought be assessed. Again in his letter of 17 July to Mr Irving, Mr Thomes does not demand a fixed sum of money. His complaint is of a want of process pursuant to which he should be paid an amount to be agreed upon and that Mr Irving has at no time seriously considered this process. So much is clear from this extract: At the occasion of our first meeting, you requested a summary sheet outlining my expectations. In that summary, which was presented to you in February, I outlined all my concerns. Despite a number of attempts to discuss the issues you avoided to get engaged in a discussion. To date, no parameters have ever been agreed or even discussed. 184 In the e-mail of 25 June 2001 Mr Thomes proposes that he meet with Mr Irving "to discuss a firm proposal from the Board which addresses my grievances". Again this message is not couched in terms of a demand for payment of 100 per cent of the performance incentive. Mr Thomas asks that Mr Irving identify factual matters in issue to be discussed at such a meeting. It is clear from Mr Irving's letter in reply that he had not kept or mislaid the February or March letter of grievance, which had suggested appropriate performance parameters against which the bonus was to be measured. 185 In his e-mail of 30 July 2001 to Mr Sutton, Mr Thomes asks that Mr Sutton assist in causing the Board "to put forward a proposal which deals fairly with the full extent of my concerns". 186 In his letter of 2 August 2001 to Mr Irving, Mr Thomes complains of the failure of both Mr Clayton and Mr Irving "to consult and come to an agreement with me" regarding performance parameters and says that "there is no logical reason why the public projections of the company should be the sole parameters for the evaluation of my performance" (emphasis added). 187 Mr Thomes, in the absence of any response to date from Mr Irving said that he assumed "that you do not wish to address these concerns". This is not a demand for a sum certain. 188 The letter of 6 August 2001 from Mr Thomes to Mr Irving is plaintive. It includes these paragraphs: Malcolm, I urge you to reconsider your stance. Please use your position to actually review the correspondence, talk to Korn Ferry, and apply your own knowledge and experience to the situation. Ask yourself how it can be asserted that the Company has in any way complied with its obligations to me? Where is there any evidence that performance parameters have ever been discussed and agreed? How is it that I can go from a position where parameters are to be agreed and my performance assessed against these agreed parameters only to find myself being told some 18 months after commencement that I would be getting "nothing"? Your response of 6 August gives me little hope. It is not for me to resign. It is for you to show a preparedness to recognise and deal with my claims in good faith and address, in a timely fashion, an injustice. 189 Nowhere in this correspondence is there any suggestion that Mr Irving offered any money or any hope to Mr Thomes that his grievance would be addressed and nowhere does Mr Thomes demand anything but fair process which should lead to resolution of his grievance. The correspondence does not support any inference that simultaneously with his demands for "discussions" and "proposals" Mr Thomes was demanding payment of 100 per cent of his incentive payment as the solution to his problems. I do not believe that he did so. 190 I do not propose to address the detail of other attacks on Mr Thomes' credit. They are sufficiently answered in the written submissions of Mr Phillips SC who appeared for Mr Thomes. I find Mr Thomes to be a truthful and reliable witness. FORMAL FINDINGS OF FACT Pre-Contractual Representations 191 I find that the applicant was induced to leave highly paid secure employment to take up employment with the respondent by misleading representations made to him by directors of the respondent and its agent Mr Dumitrescu concerning: (a) the effectiveness of the Respondent's products; (b) the strength of its business (c) the probability of a large increase in its share price in the near future which probability was supported by "independent expert advice" (d) the Respondent's willingness to negotiate fairly with the Applicant criteria for assessment of the Applicant's performance for the purpose of determining the Applicant's performance bonus; (e) the Respondent's intention to conduct itself in dealings with the Applicant on the basis that the employment relationship between the Applicant and the Respondent would be based on trust and partnership; and (f) the financial benefits that the Applicant would receive as a result of the Respondent's future business success. Terms of the Existing Contract 192 I find that the contract of employment entered into by and between the applicant and the respondent on 22 November 1999 required (1) that the applicant be paid a base salary of $427,500 plus 7 per cent statutory superannuation, a total of $457,425 in his first year; (2) that the applicant be paid in addition to his base salary an annual incentive bonus based upon objective parameters or criteria to be agreed in advance by the applicant and the respondent; (3) that, the criteria having been agreed, the incentive payment for achieving those criteria was to be $400,000 made up of cash in the sum of $200,000 and the vesting of shares in Keycorp to the extent of $200,000 market value; (4) that, in the event and to the extent that the criteria was underachieved or overachieved the cash component of the bonus was to be reduced below or increased above $200,000; (5) that at the end of each year of employment the applicant's performance criteria were to be reviewed in writing and that the applicant was to have the opportunity to discuss all aspects of that review. Repudiation of the Contract by Keycorp 193 I find that in breach of the terms of this contract the respondent (1) failed at all times to engage with the applicant in good faith so as to agree upon criteria for the payment of a performance incentive bonus, (2) failed to review in writing the applicant's performance criteria at the end of his first year of service. 194 I find that these breaches of contract constituted a repudiation of the applicant's contract of employment by the respondent (Police Service of NSW v Batton (2000) 98 IR 154). It is unnecessary for the applicant to show that the respondent intended repudiation (Woods v W M Car Services (Peterborough) Ltd [1981] ICR 666). Unfairness 195 I find that because of the misrepresentations of the respondent which induced the applicant to enter the contract, and the respondent's unreasonable behaviour which brought the contract to an end, the contract was unfair in that it contained neither adequate provision for payments to the applicant in the event that the respondent failed to agree upon criteria for payment of incentive payments, nor adequate provisions for payment to the applicant upon termination of the agreement by the respondent's repudiation of its terms. THE RELIEF 196 The Industrial Relations Act 1996 relevantly provides as follows: s106(1) The Commission may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the Commission finds that the contract is an unfair contract. . . . s106(5) In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case. The Contract as Varied 197 I order that the contract be varied by inclusion of the following terms as pleaded by the applicant: (a) Should the respondent act in such a way as to wrongly bring about the termination of the contract, the respondent will pay to the applicant on the date of termination a sum equivalent to 18 months total annual remuneration. (b) Should the contract come to an end, then the respondent shall pay to the applicant all incentive or bonus payments which ought to have been paid during the course of the contract up to the date of termination. 198 The two claims must be separately addressed. Loss of Incentive Bonus 199 It is convenient that this claim be separately considered, first in relation to the 12 months between 22 November 1999, when the applicant commenced and 22 November 2000, and second, in relation to the eight months between 23 November 2000 and 10 August 2001. 200 No parameters were agreed because of the respondent's conduct. In that circumstance I am entitled to make robust findings upon the question of what those parameters ought to have been (Armory v Delamirie (1722) 1 Stra 505; 93 ER 664, Smith Ltd v Great Western Railway Co [1926] 2 KB 237 at 258, LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508, Houghton v Immer (1997) 44 NSWLR 46 at 59, Chen v Karandonis [2002] NSWCA 412 (18 December 2002). 201 It is of course obvious that the persons ordinarily best placed to make an informed judgment upon an appropriate incentive bonus to be paid to a Chief Executive Officer are the members of his Board. It is quite unsatisfactory that such an assessment should have to be made by a court. Because of the total failure of this respondent to discharge its obligations to agree upon the parameters for the assessment in this case, and because of my conclusions that those directors who gave evidence before me were not fairly disposed toward Mr Thomes, I must do the best I can. The First Year 202 When Mr Thomes commenced his employment he found that Keycorp was headed for insolvency. It had made no profits for six years and was eating up shareholders' funds at an alarming rate. Mr Thomes quickly identified the major problem of crippling overheads and proposed to the Board in March 2000 the drastic solution required in closing down overseas operations. The Board did not act on his proposals. In that circumstance the focus of Mr Thomes' energy had to be securing a cash rich partner. Mr Clayton, the Chairman of the Board, said to Mr Thomes "We all understand what needs to be done. Your major priority is to find a strategic partner". In this circumstance, with the very survival of the company at stake, I believe that the sole appropriate criteria for the determination of the performance bonus payable to Mr Thomes for the first year was to sell a merger to Telstra. This he did although the odds must have been heavily stacked against it. It was not a good deal for Telstra. 203 Mr Kimber has submitted that in the exercise of my discretion I ought not set aside the concession by the applicant that the parameters contained within the email of 1 June 2000 were reasonable parameters nor the considered judgment of Mr Irving and Mr Clayton in relation to Mr Thomes' performance against those parameters. 204 I reject these submissions. At no time did Mr Thomes concede that those parameters were appropriate or fair to his circumstance or this company at that time. They were not. On the day before the email was sent, Mr Thomes told Mr Clayton a break even result was improbable: the balance sheet could not be managed in the face of the Board's refusal to close down overseas operations which prevented the establishment of "cost effective operational procedures". A significant flaw in the respondent's case is that in the face of suggested targets of "reinvigorating the sales team" and "building strong staff morale" not one employee of Keycorp is called to give evidence critical of Mr Thomes. I have expressed at some length my reasons for rejecting the opinions of Mr Irving and Mr Clayton upon these and other issues. 205 The suggestion in the email that "an additional performance criteria would be to vastly improve the harmony with John [Wood]" is of course quite incompatible with there having been any agreement. The suggestion borders upon the irrational in circumstances where it was Mr Woods' mismanagement that got Keycorp into trouble in the first place, where it is apparent that Mr Woods never accepted Mr Thomes' authority, and where upon the uncontradicted evidence of Mr Thomes, Mr Wood attacked every proposal and every initiative of Mr Thomes. 206 Mr Wood instructed employees to work upon a project devised by Mr Wood to a value of several hundred thousand dollars in development costs after the management team had decided against the proposal, without informing Mr Thomes. Further, without consulting Mr Thomes, Mr Wood committed Keycorp to contributing a substantial sum to a development fund set up by Hitachi. 207 In the face of such interference Mr Thomes could not otherwise than maintain a strong stand against Mr Wood. It is ironic that Mr Wood reconciled himself to Mr Thomes only after the Telstra deal was effected. This deal permitted Mr Wood to obtain a substantial benefit from the sale of shares in Keycorp that were otherwise almost worthless. 208 I conclude that on 22 November 2000, Mr Thomes satisfied the appropriate criteria and should have been paid his full bonus of $100,000 in cash being the balance of $200,000 to which he was entitled under the contract and he should have been then given 23,800 (rounded to 100) shares in Keycorp at the day's closing price of $8.40 (an equivalent value of $200,000). The Second Year 209 In relation to the period 23 November 2000 to 10 August 2001, again the primary goal of management was survival. Mr Thomes had in March of 2000 proposed plans by which the overheads may be slashed and the company turned to profit. He again presented his plans to the February 2001 Board meeting and was told to re-present them to the March 2001 Board meeting when the new directors would be in attendance. As he relates the course of that later meeting the new directors said "Gee this is big stuff. We need more time to think about it", hence the May strategy meeting. After the May strategy meeting, the board approved the plans that Mr Thomes said "had been in my drawer for over a year". Most of the execution of those plans was effected before Mr Thomes left the company. The plans when implemented turned the company to profit as was conceded by Mr Irving. 210 I conclude that on 10 August 2001 Mr Thomes should have been paid his full cash bonus pro rata in the sum of $132,000 and he should have been given 115,800 shares at the day's closing price of $1.14. Termination Payment 211 The contract between Mr Thomes and Keycorp made the following provisions: Severance: i) If the Company terminates your employment [other than for misconduct], you will receive 6 months of your total cash remuneration. ii) If you are made redundant or the Company is acquired or merged and your responsibilities change significantly resulting in you terminating your employment, you will receive 9 months of your total cash remuneration. iii) In the event of i) and ii) above any unexercised Stock Options previously granted to you will become immediately exercisable by you. 212 Although Mr Thomes applied his mind to those provisions when negotiating with Mr Dumitrescu, and then agreed to them, they may now be seen to be unfair for the reasons that: (1) In negotiating the terms Mr Thomes was unaware of the ill health of the company and the poor prospects of an increase in its share price, that is, the prospect of increased personal wealth was not such as had been represented to him and the scope of his risk was greater than he had had reasonable cause to believe at the time he agreed. (2) The terms have proved to be unfair by the occurrence of subsequent events and the conduct of the respondent. 213 In the circumstances it is just that the terms governing severance be varied. I believe that a term providing that the applicant be paid 18 months remuneration is fair for these reasons: (1) Upon the evidence a position suitable to a man of Mr Thomes' seniority and experience becomes vacant once every two to three years (per Mr Dumitrescu). (2) Mr Thomes was induced by the respondent's misrepresentations to harm his long term career prospects by leaving Lucent after only seven months employment. Those prospects were further harmed by a press release issued by Keycorp on 10 August 2001 linking Mr Thomes' departure from Keycorp with the announcement of substantial losses by that company. Such losses on the evidence would not have occurred if the Board had undertaken the restructure, proposed by Mr Thomes in March 2000 rather than in June 2001. (3) In the event Mr Thomes was unemployed for a period in excess of 18 months before finding less congenial employment in Taiwan. (4) Although pleaded as a separate claim, the applicant has submitted that compensation for damage to his professional reputation and distress may fall within the rubric of the present claim. "The hurt, anxiety, loss of self esteem, the sense of indignity and the sense of outrage" felt by Mr Thomes may be fairly redressed by the extent of his public remedy. 214 The question then arises as to the amount of remuneration that should be paid in respect of the 18 months entitlement provided by the contract as varied. 215 In respect of the first six months there can be little doubt but that the remuneration should include the full value of prospective bonus with the share value paid as cash (in the event the share price did not move much in the following year). That is a total payment of $213,750 (one half of $427,500) plus $200,000 equals $413,750. Mr Clayton conceded that such an approach would be fair where irreconcilable but "genuine" differences between a Board and a Chief Executive Officer lead to his departure. The justice of this course is even more apparent when the differences arise because the Board refuses to honour the company's contractual obligations to the departing executive. 216 In relation to the balance of 12 months I believe it appropriate to have regard to the document entitled "On Target Incentive Remuneration-13 August 2001 to 30 June 2002" which comprised Schedule A to the contract of employment offered by Keycorp to Mr F B Thompson who replaced Mr Thomes. The document is as follows: SCHEDULE A On Target Incentive Remuneration - 13 August 2001 to June2002 In respect of your On Target Incentive remuneration, set out below are the targets for the initial period from 13 August 2001 to June 2002. Bonus % Activity Financial results in accordance with the Company's "banking budget" Component 1 Working capital management, particularly inventory reduction in accordance with the Company's "banking budget". 60 % Cost reductions at least at the target of $17 million for the period to 30 June 2002. For the purposes of this component, any write off or provision made in connection with the CPI, Telstra/Nobil or other similar transactions will be excluded from the calculation of the Company's financial results. Component 2 Restructure the organisation as agreed with the Board including the appointment of suitable full time executives to replace the present consultants on the Senior Management Team. 30 % Put in place a more effective manufacturing arrangement than existed at the time of your interim appointment Component 3 Enhance the relationship with the Company's major shareholder, Telstra Corporation Limited. 10 % 217 Upon the evidence of Mr Irving that the financial plans devised by Mr Thomes proved successful, (Mr Thomes' plan provided for initial savings of $19 million), I infer that the 60 per cent component of Mr Thompson's bonus related to financial targets was achieved. 218 Because the two remaining targets are more subjective ("as agreed by the Board" "suitable" "more effective" "enhance the relationship"), the same inference is not available. Nevertheless Mr Thomes, who was wrongfully if constructively dismissed, should be compensated for loss of a chance to achieve the targets. I allow 50 per cent of each of components 1 and 2. 219 In the result Mr Thomes should have been paid upon termination an amount corresponding to 100 per cent of his base salary for a 12 month period commencing six months after termination and 80 per cent of a target bonus of $400,000, the total in respect of the period being $747,500. Had he not been wrongly dismissed he would probably have earned that sum. Conclusion 220 The applicant is to be paid by the respondent moneys made up as follows: BONUS In respect of period 22 November 1999 to 22 November 2000 Balance of Cash Bonus $100,000 Cash equivalent of 23,000 shares at 10 August 2001at a closing price of $1.14 $27,132 In respect of period 23 November 1999to 10 August 2001 Cash Bonus $132,000 Cash equivalent of 115,800 shares $132,000 TERMINATION PAYMENT In respect of period 10 August 2001to 10 February 2002 $413,750 In respect of period 11 February 2002 to 11 February 2003 $747,500 TOTAL $1,552,382` ORDERS 221 Judgment for the applicant in the sum of $1,552,382.00. Liberty to apply in relation to interest and costs. SCHEDULE ONE PERSONAL DATA Name: Michael J THOMES Address: 7B Warringah Road Mosman NSW 2088 Telephone: (H) (02) 9968 1472 (M) (0413) 511 623 (W) (02) 9352 8701 Date of Birth: 13 September 1956 Nationality: German Health: Stated as good Languages: German (native); English (fluent); French and Spanish (business proficiency) EDUCATION 1975-1980 MA Economics Saarland University, Saarbruecken, Germany SUMMARY OF EXPERIENCE Jan 1999 - Present LUCENT TECHNOLOGIES (Bell Labs Innovations - Sydney Managing Director, South Pacific Region (Business Communications Systems) 1990 - Dec 1998 SIEMENS Apr 1998 - Dec 1998 Vice President & Executive Director, Global Utilities Business (Siemens Business Services) (Siemens AG - Munich, Germany) 1995 - 1998 Vice President & Executive Director, Telecommunications, Asia/Pacific Region (Siemens Nixdorf AG - Sydney) 1993 - 1995 Director, Telecommunications Network Planning (Siemens Nixdorf AG - Sydney) 1990 - 1993 National Manager, Sales and Marketing (Siemens Nixdorf Australia) 1986 - 1990 NIXDORF COMPUTER 1989 - 1990 Divisional Manager, New Markets & Government (Nixdorf Computer Australia - Sydney) 1986 - 1989 Country Group Manager International Sales and Marketing (Nixdorf Computer AG - Munich, Germany) 1983 - 1986 GERMAN PARLIAMENT, BONN Deputy Director, Foreign Affairs Office 1980 - 1983 KONRAD-ADENAUER-STIFTUNG, BONN Political Think Tank Adviser - Foreign Affairs PROFESSIONAL BACKGROUND Jan 1999 - Present LUCENT TECHNOLOGIES (Bell Labs Innovations), SYDNEY Managing Director, South Pacific Region (Business Communications Systems) Achievements: . Shifted the focus of the organisation from a hardware/product driven model, to a services culture. . Formulated a new business model for the service oriented organisation. . Formulated the strategic direction for the South Pacific region. . Analysed international programs and determined which are appropriate for implementation in this region. . Designed a new channel management strategy and model for working with resellers. . Re-focused sales managers on key accounts and business streams. 1990 - Dec 1998 SIEMENS Apr 1998 - Dec 1998 Vice President & Executive Director, Global Utilities Business (Siemens Business Services) (Siemens AG - Munich, Germany) Achievements: . Restuctured the organisation to support growth of service business streams from $250m to $1billion. . Developed and introduced new business strategies and service portfolio. . Shifted sales from Products to Consulting and Solutions. . Re-focused the organisation on key geographic regions and core competencies. . Managed the turn around to profitability within 6 months. 1995 - 1998 Vice President & Executive Director, Telecommunications, Asia/Pacific Region (Siemens Nixdorf AG - Sydney) Achievements: . Increased regional sales from $8m to $90m. . Developed lead model for Siemens' services business. . Implemented a culture change throughout the organisation, focusing on a consulting and knowledge based business model. . Received the company's highest award for best business performance 3 years in a row. 1993 - 1995 Director, Telecommunications Network Planning (Siemens Nixdorf AG - Sydney) Achievements: . Developed the concept and business strategy for the Network Planning Business. . Generated global buinsess volume of $200m. . Created Siemens global business unit "Telecommunications Network Planning". 1990 - 1993 National Manager, Sales and Marketing (Siemens Nixdorf Australia) Achievements: . Completely revised the sales and marketing strategy following the 1990 merger between Siemens and Nixdorf Computer - targeting large corporations, with a specific focus on telecommunications and large corporate networks. . Managed all sales in Australia and New Zealand, totalling US$50m with major clients in the telecom, banking, retail and government markets. . Managed all marketing and press relations. 1986 - 1990 NIXDORF COMPUTER 1989 - 1990 Divisional Manager, New Markets & Government (Nixdorf Computer Australia - Sydney) Achievements: . Developed new markets for the local subsidiary in Australia. . Redirected the company focus to large system integration business for large accounts. . Responsible for bringing in major contracts with the Department of Social Security, Australian Bureau of Statistics and Commonwealth Bank of Australia. 1986 - 1989 Country Group Manager International Sales and Marketing (Nixdorf Computer AG - Munich, Germany) Achievements: Created an international business strategy for the new Nixdorf Telecom business line. . Successfully introduced Telecommunications products into new countries - by 1988, profitable business units were operating in 8 strategic countries in Europe and Asia. . Co-ordinated business plans and strategies for subsidiaries in selected countries in the Asia/Pacific. 1983 - 1986 GERMAN PARLIAMENT, BONN Deputy Director, Foreign Affairs Office Achievements: . Analyzed global political and social events. . Developed policy strategies for the German Government. . Implemented policiesthrough Government bodies and political parties. . Co-ordinated international policy initiatives and developed a network of high level contacts. 1980 – 1983 KONRAD-ADENAUER-STIFTUNG, BONN Political Think Tank Adviser - Foreign Affairs Achievements: . Analyzed international economic, social and political trends. . Translated long-term strategies into day to day policy making. . Developed and maintained an international network of contacts in business, politics and science. 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.