Removing a Chief Executive Officer (CEO) from the board is never an easy task and one which most businesses approach with a degree of caution. Quite often the deployment of negotiation, measured risk and most importantly legal process can often lead to an amicable, managed exit. However, when the exit is entangled with grievances, accusations and a complete absence of legal process, the end result is usually either a very expensive settlement agreement or protracted litigation.
Let’s consider a recent Employment Appeal Tribunal (EAT) case, International Petroleum Ltd (IPL) and others v Osipov. It’s an example of how exiting a senior executive without following any legal process and against the background of a protected disclosure complaint, left unsuspecting individuals personally financially exposed. In this case the EAT held that the 2 non-executive directors who made the executive decision to dismiss Mr Osipov (the CEO), together with IPL, were jointly and severally liable to pay the £1,744,575.56, compensation awarded to the CEO. The EAT held that the CEO’s dismissal was contrary to section 47B of the Employment Rights Act 1996. This section deals with whistleblowing and provides that:
“A worker has the right not to be subjected to any detriment by any act, or any deliberate failure to act, by his employer done on the ground that the worker has made a protected disclosure."
The EAT, on hearing all the arguments presented at the appeal hearing, ruled that the Tribunal were correct when they held that the dismissal of the CEO was linked to his protected disclosure and as a consequence, the dismissal caused the CEO to be subjected to a detriment.
Briefly, the background of this case is that in June 2014, IPL, an oil and gas exploration company found itself needing to replace its outgoing CEO, who had resigned. Mr Timis, a non-executive director and majority shareholder invited Osipov, an existing employee, to take on the role of CEO. At the relevant time IPL were undertaking exploration operations on the African continent in the Republic of Niger. Osipov accepted the role but within days of doing so he began to find a catalogue of issues with which he had grave concerns. He raised a number of protected disclosures regarding the proposed actions of Mr Timis and Mr Sage (another non-executive director) who were acting in conjunction with advices received from a Dr Lake and Mr Matveev, the latter being 2 external consultants.
It was alleged that the two external consultants had each put forward recommendations to Mr Timis and Mr Sage which, if followed, were likely to lead to serious wrong-doing. In particular Osipov argued that Dr Lake was in breach of his consultancy agreement.
The protected disclosures
Osipov raised a total of 19 protected disclosures but only 4 of these met the criteria of a protected disclosure. These disclosures had a common theme in that Osipov was raising concerns that individuals were failing to follow proper contractual and corporate governance processes. The EAT commented that it was clear from the evidence presented that Timis had found Osipov’s protected disclosures as creating obstacles to the work being carried out in Niger. It was also held as evident that Timis sought to resolve the issue by removing Osipov from all involvement with business discussions and negotiations with the Niger Authorities and eventually simply sidelined him from his role as CEO.
IPL reasons for dismissal
IPL’s case was that the dismissal was not because of a protected disclosure but rather because Osipov failed to comply with both his contractual and fiduciary duties. Further, they argued that he was being very disruptive and hindering their business operation in Niger. They argued that the following conduct and omissions of Osipov led to a complete breakdown in trust and confidence:
- his failure to engage with the relevant officials within the Niger Ministry;
- he lacked the necessary experience and skills to perform the CEO role;
- he terminated an Advisory Agreement with Dr Lake against the wishes of the IPL Board and he also made unsubstantiated claims against Dr Lake;
- he placed his own personal interest in priority over the interests of IPL;
- he failed to visit, IPL’s Australian office and failed to raise funds as requested by the Board.
Outcome of the appeal and cross-appeal
Given the size of the compensation awarded to the CEO it was unsurprising that the two non-executives decided to appeal the decision with the EAT. In the grounds for appeal they argued that the Tribunals had erred in the manner in which it applied the law to the proceedings. However, the EAT dismissed the appeal and ruled that both Timis and Sage were jointly and severally liable. The case was also sent back to the Tribunal for them to adjust the award given by adding a 10%, uplift to the sums. Osipov also cross appealed during the proceedings that both Dr Lake and Mr Matveev should also be held liable as they encouraged Timis and Sage to sideline him. However, the EAT found that Dr Lake was not a worker and no further action was taken against him but Matveev was found to be a worker. Potentially this could now mean that IPL are held vicariously liable for his actions or compensation may be ordered against Matveev for him to pay personally. The case against Matveev was sent back to tribunal for consideration.
Personal liability for co-workers
Whilst it may be only on very rare occasions that an employee would pursue their co-worker rather than the employer for compensation, by virtue of section 47B ERA, the opportunity to do so is a real and present risk. One which, if ignored could be quite costly. Accordingly, an important nugget to take away from this case is that when considering dismissal of an employee in circumstances where a protected disclosure has been raised, always follow a fair procedure. Ask yourself the question what is the reason for the dismissal? If you have lost trust and confidence in the individual, is this attributable to the employee raising a protected disclosure? Are you dismissing because the person is slowing your business operations down due their insistence on following governance and regulatory procedures? Even where you consider your response to each of these questions is reasonable, it is still worthwhile ensuring that there is a fair reason in law to dismiss the employee. That reason must not be connected to or influenced by any protected disclosure. On a final note, bear in mind that where the protected disclosure is not the main reason for the dismissal; if it can be shown that there is a link between the dismissal and the protected disclosure, this is likely to be viewed as a detriment.