Dismissal of a director
- John Deane
- Updated: Mon, 21st Nov 2016
Moving directors out of the business is always a sensitive process and never easy to handle. We support both the employer and individual directors on implementation of a smooth transition.
Our services for employers:
- Planning the process;
- Do you have grounds for dismissal?;
- Departing directors who are shareholders;
- Deadlocked private companies; and
- Settlement agreements for directors.
Our services for individual directors include:
Employers – planning the process
Businesses of all sizes use us to check out their plans before they are implemented and a mistake is made. When terminating the employment of a director it is worth knowing that as an employee they have certain rights and neglecting these can lead to claims against the Company.
Rights of directors
Directors, as employees, enjoy a variety of rights. These rights include the right to:
- A disciplinary procedure and the opportunity to put their case forward;
- Fair dismissal;
- Notice pay or payment in lieu of notice; and
- A redundancy payment if redundancy is in issue.
Avoiding unfair dismissal claims
In a heated situation it is easy to dismiss first and rationalise afterwards. If you think that the director needs to be cut loose, we work with you early on to mitigate the risks, often acting as a sounding board before the situation gets out of control.
Two years service implications
As with all employees if the director has at least two years service he will be able to bring a claim for unfair dismissal. Avoiding a successful claim comes down having a fair reason for the dismissal and following a fair process. You will need paper work to support board decisions.
It is easy to get the process wrong and find a claim for unfair dismissal brought by the director. We reduce your risks by planning with you how to terminate the employment of a director. We deal with the:
- Process you must follow;
- Nature and extent of any investigations to be carried out;
- Appeals made by the director; and
- Termination requirements.
Does the employer have grounds for dismissal?
Not all reasons for dismissal will be classed as fair. Often there is uncertainty and your reasons for dismissing the director fall within those grey areas. We can help clarify the position.
Gross misconduct dismissals can be instant – a benefit to employers. It covers many situations such as:
- Persistent lateness or absenteeism;
- Drink or drug related offences;
- Offensive behaviour;
- Breach of restrictive covenants; and
- Misuse of confidential information.
Evidence is needed
For a gross misconduct dismissal the employer is still required to evidence that a fair procedure is followed. This usually involves an investigation and a disciplinary hearing. It is sensible to plan for the fact that the director is likely to appeal the outcome of a disciplinary hearing.
In practice, poor performance is very unlikely to constitute gross misconduct. Usually, employers must go through a capability procedure to manage performance. This involves management time and stress. In practice, many employers compromise the director out of the business under a settlement agreement. Often this is more expedient.
A director with at least two years’ continuous service will be eligible for redundancy pay. With proper advice, redundancy can be structured to avoid unfair dismissal claims. It is possible to act swiftly and undertake the process within a week. However, the paperwork and evidence of a fair selection must be prepared and applied. We can prepare appropriate paperwork and provide the script for you to follow.
There is no right to appeal a redundancy decision unless you have included such a right in the employment documentation.
Departing directors who are shareholders
A contract for shares is separate from a contract of employment. One of the benefits of the separate legal functions is that it is possible to disclaim liability for losses on share and option rights arising on dismissal even if the dismissal is a breach of contract. We put the law into context for employers.
Review of the articles and shareholders’ agreement
Unless the articles or shareholders’ agreement provide otherwise, the general rule is that termination of the directorship does not cause the shares to be forfeited. In most cases the employer will want to take control of shares held by a departing director. The position relating to shares often requires considerable care. Issues we work through for employers are:
- What can be done if there are no express provisions in the articles or shareholders’ agreement forcing the sale of shares on departure of a director.
- In private companies what is the value of the shares of the departing director. We review the rights of minority shareholders as that forms part of the equation.
- Can agreement be reached for a company buy back of shares which is often an attractive option.
Review of share plan documentation
For those companies with employee share plans in place problems can arise over the exercise of discretion. We do provide guidance on how to classify good and bad leavers for example and how to deal with vesting.
In some cases, decisions relating to whether a departing director is treated as a good leaver or a bad leaver can bring about conclusion of a termination package. For that reason, the terms attaching to any shares rights do benefit from review and consideration.
Deadlocked private companies
Where the company is owned and controlled by two directors who are also the shareholders and they fall out – the situation is referred to as deadlock. Deadlock means that the company is frozen as there is not the majority required to pass director resolutions nor shareholder resolutions.
In many cases, there is no shareholders’ agreement in place meaning the parties have to rely on the Companies Act. Under the Companies Act there needs to be at least a 51% shareholder vote to remove a director. Obviously with a 50:50 deadlock the requisite shareholder majority cannot be furnished. Under the Companies Act no shareholder can be forced to sell his shares. Therefore at both director level and at shareholder level progress is blocked.
Deadlocks are obviously bad for business. Deadlocks are a common problem we deal with. The very nature of a 50/50 shareholder dispute requires specialist knowledge. The only way to resolve the problems is via negotiation. Our experience indicates that legal mediation can help.
50/50 shareholder exit routes
There are a variety of exit routes for a 50% shareholder to consider. Popular exits include:
- Agreeing a share buy back followed by termination of employment and or directorship – it is possible to agree staged payments.
- Agreeing a share purchase from the departing 50% shareholder and termination of employment and/or directorship – funding has to be considered.
- Issuing a petition for the winding up of the company and a cessation of its trade, often where the company is profitable and the 50% shareholder wishes to exit with surplus funds returned before the dispute escalates.
- Demerger or spin off between the shareholders – splitting the business up can be the best solution.
- Applying to the court on the basis that the other shareholder’s conduct is both unfair and prejudicial to the other, often where the other shareholder embarks on conduct with the intent to damage the value of the company, or where the other shareholder persistently refuses to vote a dividend in the hope that the aggrieved shareholder will exit on unfavourable terms. There a myriad of facts that can lead to a shareholder petitioning the court. Some will be successful, we can advise.
Settlement agreements for directors
Most director dismissals are concluded with a settlement agreement. We recommend settlement agreements because they finalise the position and are often an opportunity to re-write the terms. Protections put in place when a director joined the business are often inadequate when the director leaves – gaps can be plugged under settlement agreements.
Most important areas to consider where a director is dismissed
When we draft settlement agreements for directors we consider pointers relevant to the commercials sitting behind the departure. In our experience, the most commonly considered areas include:
- Payment terms and whether there is scope to structure the settlement payment tax efficiently;
- Non compete and post termination restrictions needed to protect the business;
- Trade secrets and confidential information and how to avoid this information getting into the hands of a competitor;
- Availability of expedient ways of managing exits such as garden leave clauses and payment in lieu of notice;
- Management of social media accounts on departure; and
- Resignation from the office as director.
For individual directors
The general rule is that if you do not have two years continuous service in many cases there is nothing that can be done to help you as you cannot bring a claim for unfair dismissal.
Where the loss is substantial you may have a claim for constructive dismissal but the risks are even greater than those for unfair dismissal as you are exposed to costs orders which are a rarity with genuine unfair dismissal claims.
Is the employer acting fairly?
The real reason for removing a director maybe that the directors no longer see eye to eye or your “face doesn’t fit” anymore. However employers use a variety of reasons to mask these. If the reason given is “unfair” the dismissal can be challenged. If a challenge is successful unfair dismissal compensation could be claimed. Most cases do not reach the Employment Tribunal or a court but directors do need to know if their case will be successful – our service includes the necessary assessment.
Reasons for dismissal which can be unfair
The scenarios we see most frequently revolve around facts such as:
- Change of management – Changes the very top of a Company either as a result of a change of ownership or the appointment of a new Managing Director or CEO can often mean a change in leadership. A change in leadership is not a fair reason for dismissal.
- Gross misconduct – With no definition of gross misconduct, employers enjoy discretion to define what they consider as gross misconduct. However, it is clear that the conduct must include deliberate wrongdoing or gross negligence.
- Incapability to perform role – At director level this can be difficult for an employer to make out. Often other staff are involved and the line between under performance of one director or many soon becomes blurred. If a director is singled out that would usually be unfair dismissal.
- Sudden change of policy – certain perks and ways of conduct may become contractual rights through custom and practice. A sudden removal of rights without consultation or warning can be unfair dismissal.
- Whistle-blowing – whistleblowing is a protected disclosure and employees are protected from suffering detriment. Employers often try to dismiss on other grounds such as poor performance, poor attitude or gross misconduct, often supported with weak or unreliable evidence. A claim for unfair dismissal can be brought in the Employment Tribunal with no minimum continuous employment requirement.
Some of the above, if proven, are fair reasons for instant dismissal in most people’s eyes. However, the position is usually not so clear cut. For instance, there may be a genuine defence. The employer may lack clear proof that supports its gross misconduct allegation.
Dismissal tactics deployed by employers
Employers use a wide range of tactics to communicate the impending dismissal, some of which will be off the record communications. There may be allegations made against you in a private email or you may have been told over the phone or in person that “it is not working out”. There may also be on the record communications such as a disciplinary action.
The communications may be relentless and the desired effect is that you feel that you can no longer work there any more. Our aim is to ensure that you do not agree to anything in haste. We act as a sounding board, providing advice to directors early on and steering them through the difficult situation to achieve the best outcome.
There are many ways we can help a director handle the dismissal. Our goal is to extract the director on the best terms. Our approach varies according to the case and the circumstances but can include:
- Responding to and defending allegations put forward by your employer;
- Drafting employment grievances and managing disciplinary, performance management claims, appeals and processes;
- Dealing with announcements to the market of your departure
Often employers will want a leaving director to relinquish their shares. There are number of ways this can be done and what is important is ensuring that you are receiving at least fair value for your shares. There are multiple business valuation methodologies. Choosing the right one takes experience.
Employers often link the share value to good and bad leaver clauses and exiting as a bad leaver is likely to mean that you only get nominal value for your shares. Our aim is to safeguard the value of your equity.
Most share option schemes will provide for what happens when someone leaves employment. Typically employee share options will lapse when an employee leaves, but share option terms often allow for an option to be exercised early for “good leavers”. We find there can be scope for negotiation on who is a “good leaver” as often share schemes provide a discretion for the employer.