Leighton Holdings chairman Stephen Johns quit in protest after major shareholder Hochtief stared down a revolt from Leighton's independent directors seeking to reclaim management control of Australia's largest construction group, according to explosive letters obtained by Fairfax Media.
The once-cordial relations between Leighton's independent directors and 54 per cent shareholder Hochtief have become increasingly hostile since the German group was taken over by Spanish construction giant Grupo ACS in 2011.
In his letter of resignation, Mr Johns said relations with Hochtief had completely broken down and he could no longer operate effectively as an independent chairman. Fellow independent directors Wayne Osborn and former Reserve Bank governor Ian Macfarlane also resigned on Friday.
The flashpoint came when Hochtief executive chairman Marcelino Fernandez Verdes, a long-serving ACS executive and recent addition to Leighton's board, interfered with the appointment of a new independent director.
"These actions gave rise to serious concerns that Hochtief no longer supported the important principle of board independence," Mr Johns wrote.
All five independent Leighton directors, including Paula Dwyer and Robert Humphris, penned a last-ditch protest to Mr Verdes after he privately requested Mr Johns step down.
The independents also requested a special board meeting to be held on March 13, but Hochtief's representatives on Leighton's board refused to attend. Finally, they wrote a letter asking Hochtief to maintain Leighton's independence, which it had enjoyed since 2000 through a series of corporate governance protocols.
"Hochtief provided a wholly unsatisfactory response to this letter, uncommittal to the core issue of Hochtief's support of the corporate governance protocols," Mr Johns said. This culminated in the resignations on Friday.
Mr Johns wanted the full correspondence between him and Hochtief to be disclosed to the stock exchange in the interests of full continuous disclosure.
But a company announcement to the ASX on Friday merely said the three directors had resigned "following what they perceive to be a breakdown in relations with major shareholder Hochtief and their view that Hochtief no longer supports an independent board at Leighton".
Leighton said the board would convene at the earliest possible time to elect a new chairman, and the company would make a "fuller statement in due course".
Instead, copies of the explosive resignation letter - including "confidential" attachments - began finding their way into journalists' in-boxes, revealing fissures at board level in Leighton's headquarters in St Leonards not dissimilar to those being played out in Canberra.
In a second announcement late on Friday, Leighton said: "The remaining Australian directors do not agree with all of the conclusions drawn by the resigning directors in those letters. There have been a series of events in recent months which are open to interpretation." Leighton shares plunged as much as 10 per cent on Friday, abruptly ending a recent resurgence after a solid set of financial results was announced last month.
"When three directors resign in protest, it suggests that Hochtief is exerting undue influence on the workings of the board," Daniel Smith of ISS said.
Hochtief has a 54 per cent stake in Leighton, but has historically allowed a great deal of autonomy in how Leighton operates, particularly when the Australian group was at its peak.
Despite best efforts by Hochtief to fend off ACS, the Spanish group amassed a majority 54 per cent stake and has made extensive management changes at Hochtief since 2011, including replacing its CEO. ACS, via Hochtief, has the right to appoint four Leighton directors.
Friday's events seem to make a mockery of the much-vaunted "corporate governance framework" agreement with ACS in November 2010, which Leighton said would "enshrine" arrangements specifically designed to protect its independence, and the interests of minority shareholders.
"We believe ACS's agreement to provide certain governance undertakings should protect and enhance value for Leighton's many stakeholders and specifically minority shareholders," said then chairman David Mortimer at that time.
Since then, Leighton's share price had fallen 60 per cent in the next year on the back of hefty cost blowouts and several project delays - further straining relations between the Australian group and its Spanish parent.