Firing Senior Employees

Dismissing directors or other senior employees can be one of the most difficult situations a business has to deal with and not just from an employment law perspective. A multitude of issues (in particular internal and external communications, succession and bonus and incentive schemes) and stakeholders (especially regulators and shareholders) need to be considered.

This paper will look at the key issues that need to be considered in three sections:

• Practical Issues – this section covers how to approach the dismissal to minimise legal risk and the most important issues that need to be considered, i.e. the impact of the dismissal on bonus and incentive schemes, communicating the dismissal and succession.
• Legal Issues – this section covers two particularly important legal issues: (i) the recent case law developments on making payments in lieu of notice and when they are effective; and (ii) enforcing restrictive covenants after the dismissal.
• Regulatory Issues – this section looks at shareholder approval requirements, market notifications, information that needs to be provided to the FSA and directorships.

As these sections will demonstrate, there are a number of issues to consider. It is essential that there is a clear plan in place before any discussion is held with the individual – entering into this situation without proper planning is likely to create significant difficulties.

The seminar will not focus on fair performance management procedures. At a senior level, it is virtually unheard of for a ‘fair’ performance management process to be carried out.

The starting point is the realisation by a hypothetical company, Stellar Investments (“Stellar”), that an important member of the management team, Johann Bigg-Schott (“JBS”), is no longer performing to the required standards/no longer on-board with the new strategy and that it is in the business’s best interests for him to be exited.

To cover all of the potential issues that can arise JBS is a director of Stellar and an FSA approved person. He also participates in Stellar’s deferred bonus scheme, stock plans and a final salary pension scheme. Finally, Stellar is a publicly listed company on the London Stock Exchange.

Practical Issues

a) Making the decision to dismiss JBS

The first issue to resolve is how Stellar makes an effective decision to terminate JBS’ employment. There are two important issues to check:

• Do the Articles of Association (“Articles”) require the board of directors to approve the dismissal of a director?
• Does JBS’ employment contract state that he reports directly to the board?

The second issue is more likely to arise, but if the answer to either of these questions is ‘Yes’, there is an immediate issue. If a board meeting is required to decide on the termination of JBS’ employment, JBS (as a director) should be invited to the board meeting. Clearly, it is not desirable for JBS to be present at a board meeting in which his own dismissal will be discussed – he is likely to be disruptive and may raise various allegations in an attempt to create a whistleblowing claim. If Stellar does face this situation, there are five options:

1. Arrange a board meeting without notifying JBS or at a time when he is away and unable to attend; or
2. Hold a board meeting at which JBS is present; or
3. Hold a board meeting at which JBS is present, but require him to leave the meeting when his potential dismissal is discussed and voted on the basis that he has a conflict of interest; or
4. Secure the agreement of the board to dismiss JBS outside of a formal board meeting and then hold a board meeting to formally make this decision to which JBS is invited before JBS has been told of his dismissal; or
5. Secure the agreement of the board to dismiss JBS outside of a formal board meeting and ratify the decision after JBS has been told of his dismissal.

There is no ideal option. On balance, the best option (provided this is not in breach of the Articles) is option (v).

If the Articles do not require the board of directors to approve the dismissal of a director and JBS’ employment contract does not state that he reports to the board, the situation will be much more straightforward. In this instance, a meeting of the relevant senior managers can be held to make the decision to dismiss JBS.

b) Dismiss immediately or negotiate the exit first?

Once the decision to dismiss JBS has been taken, the next issue for Stellar to decide is whether to terminate his employment immediately and then negotiate a settlement or to try to negotiate first before terminating the employment.

Terminating the employment straight away will mean that salary and other benefits cease accruing immediately which potentially reduces the overall costs to Stellar. It can also increase the pressure on JBS to reach a prompt settlement. However there are also important disadvantages to consider:

• Immediate announcements will need to be made to clients, staff, the FSA and the market at a time when no deal has been done. This leaves JBS free (within his confidentiality obligations) to issue his own announcements (e.g. a company wide email, a press article); and

• There may also be less flexibility in terms of exercising discretions under the bonus scheme and stock plans and pension scheme and in structuring a settlement to maximise its tax efficiency.

It is important to remember that, if Stellar does not have a contractual right within JBS’ employment contract to make a payment in lieu of notice (or if it terminates the employment immediately without making the payment in lieu of notice), Stellar will not be able to enforce any restrictive covenants or confidentiality obligations in JBS’ contract because it will have breached his contract.

The advantage of negotiating a settlement before terminating the employment is that all of the various strands such as announcements, exercising discretions under the bonus scheme and stock plans, notice and any compensatory payment for loss of office can be agreed and a compromise agreement can be finalised. This provides certainty for both sides.

The principal disadvantages of seeking to negotiate first are:

• Unless strict deadlines are set and enforced, negotiations can become protracted at a time when salary and other benefits continue to accrue and when there is a need to resolve matters quickly and to move on; and

• Whilst the employment continues, JBS may decide to go off sick (for example with ‘stress’) or bring a grievance/make unhelpful announcements which may complicate matters and make it more difficult to achieve a quick resolution.

If Stellar does decide to negotiate first, it is crucial to remember that the initial discussions with JBS may not be ‘without prejudice’ as, at that stage, no genuine dispute may exist between the parties (the conversation itself actually creates the dispute). Simply stating that a conversation is “without prejudice” will not of itself mean that its contents are privileged. This means that, if a deal cannot be reached, the settlement discussion could be referred to by JBS in any subsequent litigation. In practice, this should not deter Stellar from opening negotiations with JBS if that is the preferred approach, but it should be careful about what is said. It is, for example, important that (as far as possible) any reasons for the dismissal which are given to JBS are genuine and/or are the same reasons that Stellar would seek to rely upon if the matter were to end up in court or tribunal.

c) Bonus, stock plans, pension schemes and other benefits

Golden Parachutes

The first issue to check is whether JBS has a ‘golden parachute’ clause in his contract that is triggered by the dismissal and that entitles him to receive a particular payment and/or suite of benefits if his employment is terminated. These clauses are now rare, but if this type of provision exists and is triggered, JBS is entitled to the payment as a debt, without proof of actual loss and without any deduction for mitigation.

There were, temporarily, doubts on the enforceability of standard liquidated damages clauses on the basis that the lack of any deduction of tax and NICs or any allowance for mitigation meant that the damages were really a penalty payment and, therefore, unenforceable. However, clarity was restored by the Court of Appeal, which held that the clause will be enforceable provided that the sum is not “extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach”.

Deferred bonus scheme and stock plans

In relation to JBS’ participation in Stellar’s bonus scheme and stock plans, the rules of the relevant schemes need to be checked for confirmation on the impact of the termination of JBS’ employment. Typically, the rules will contain ‘good leaver’ and ‘bad leaver’ provisions that will set out what JBS is entitled to receive.

There are three particularly important issues to be aware of:

• Often, if an exit is negotiated in advance, the reason for the termination of employment will be ‘mutual agreement’ – in some scheme rules, this constitutes a ‘bad leaver’ reason which is likely to result in JBS losing his entitlement to benefits within the schemes. Therefore, it is very important to determine in advance what discretion there is within the scheme rules to avoid the strict ‘bad leaver’ provisions. If Stellar does have a discretion, it cannot exercise its discretion capriciously. The Court of Appeal has clarified that it will be difficult for an employer to justify not exercising its discretion for vested options/benefits and it may also be difficult to lapse options or awards that would have vested during the notice period.

• If the employment is being terminated by the making of a payment in lieu of notice, it is important that the payment in lieu is effective before JBS becomes entitled to any further benefits under the schemes (i.e. benefits that are due to vest after the date on which the employment terminates). This is discussed in more detail later in the paper.

• If JBS has his contract of employment terminated in breach of contract in circumstances where an award would have vested during the notice period, he may be able to bring a claim for that award. In this context any clause in JBS’ contract that  states that no compensation is payable on termination of employment for loss of any rights under the deferred bonus scheme or stock plan or any other relevant scheme (so called ‘Micklefield’ clauses) may be relevant. However, there are concerns that such clauses may be held to be unenforceable if they came up for consideration again by the courts.

In relation to the current bonus year, the bonus scheme rules and/or JBS’ contract should make clear what entitlements JBS has on termination of his employment. The situation should be that JBS will not be entitled to any bonus if he is no longer employed (or has been given notice) on the bonus payment date, but this will need to be confirmed.

Other benefits

Depending on the terms of the benefit plans, it may be possible as part of a settlement deal to continue to provide benefits such as private medical or life insurance after JBS’ termination date. This is likely to be cheaper than to compensate him for having to arrange for his own benefits because of corporate policy discounts.

In relation to JBS’ participation in the final salary pension scheme, the pension receivable will be determined by reference to JBS’ salary and length of service.  JBS can be compensated by receiving cash compensation or by having an additional period of service accredited to the pension plan.  A service credit will require trustee approval and (to be tax free) will be subject to the annual allowance limit (£50,000 for 2011/12) and lifetime allowance limit (£1.8m currently, reducing to £1.5m from 2012/13 onwards).

If JBS was participating in a defined contribution scheme, the loss would be an amount equal to Stellar’s contributions that would have been payable during the relevant period. The position would be the same if Stellar were contractually required to make a contribution to JBS’ personal pension scheme.

d) Communications and Succession

Whichever approach is decided upon, Stellar needs to have communications in place so that JBS’ departure is announced on its terms. Communications are likely to be required for other employees, for clients, for the markets, for the press and for the FSA.

If a deal has already been agreed with JBS, the communications can be agreed as part of that deal. If, however, Stellar has decided to dismiss JBS immediately without reaching a settlement with him (or if an announcement cannot be agreed), it is very important that the communications clarify the situation, but do not assist JBS with any claim he may have against Stellar. It is especially important that announcements are not libellous or inconsistent with JBS’ reference.

As part of the communication process, it is important that both employees and external parties have confidence that the business will continue to operate effectively. Therefore, Stellar should clarify who is assuming responsibility for JBS’ role and what the longer term situation will be.

Finally, from an employee engagement perspective, there are likely to be a number of employees who worked closely with JBS, who respected and liked him and who are unhappy about his dismissal. It is important that Stellar engages with these individuals to manage their concerns, especially if they are carrying out business critical roles. However, it is also important that statements are not made in those conversations that would assist any claim brought by JBS as the individuals may agree to act as witnesses for JBS in any litigation.

Legal Issues

a) Implementing the decision to dismiss

Once a decision to dismiss has been reached, the next issue is how to implement it. Clearly, the precise terms of the contract of employment/service agreement will need to be examined in order to understand the nature of the rights of the Stellar and JBS. In broad terms, the likely options will be as follows:

• Summary dismissal for gross misconduct. Here the company relies on the executive’s own repudiatory breach of contract – this repudiation is accepted by the employer by terminating the contact with immediate effect. The consequences are likely to be threefold:

• Claims for damages for breach of contract based on the loss of salary and benefits which would have arisen during the notice period had JBS been allowed to continue to be employed during this time. This may include stock entitlements based on him losing ‘good leaver’ status. If taken to trial, a judge will consider whether there was in fact misconduct (and if so, whether it was sufficiently serious to warrant summary termination). This has the advantage of allowing the employer to rely on subsequently discovered misconduct but the disadvantage of the issue being determined objectively as opposed to on the basis of the reasonable belief of the decision maker – cf. unfair dismissal

• It may allow the employee to argue that he is released from any obligations to continue to comply with the terms of restrictive covenants – this on the basis that in fact he has not acted in breach of contract but, in purporting to terminate summarily, the employer has – with the consequence that  post-contractual restrictions disappear

• Given that the contract will have come to an end, the executive will (subject to possible enforcement of post-termination restrictions) be free to compete and will not be subject to the implied duties of loyalty and good faith (although certain obligations in relation to confidentiality are likely to survive).

• Dismissal on notice. Here the real issue is likely to be whether JBS is going to be expected to attend for work during the notice period. As to that:

• The first thing to look at is whether the contract contains an express garden leave clause relieving Stellar of the obligation to provide work during the notice period – but keeping the contract alive during that same period. Even without the existence of an express garden leave clause, it may be possible to argue that there is an implied right to send the executive home during the notice period and no positive obligation to provide him with work. However, the more senior the individual, the more difficult it is likely to be to establish such an implied right. Note also that:

• A garden leave clause may not be enforced by a court for the whole of its potential duration. In this respect, it may have advantages over a restrictive covenant in that with the latter, it is likely to be enforceable in full or not at all. With a garden leave clause the court has some discretion to reduce its length

• The existence of a garden leave clause may be a relevant to the question of enforceability of a restrictive covenant

• If a contract does have a garden leave clause and restrictive covenants, it is advisable to draft the latter so as to allow for set off of any period spent on garden leave

• In order to enforce a garden leave clause, there is still (probably) a need to show the  existence of a legitimate protectable interest (as with restrictive covenants) but it is likely that the scope of such protectable interests is wider (so as to include, potentially, the mere fact of working for a competitor)

• Dismissal with a payment in lieu. Again, the first step is to see what the contract says – is there a PILON clause? If there is not, then dismissal with a payment in lieu is likely to be unlawful (with the PILON representing damages for breach of contract) with the effect that, once again, the executive is likely to be to escape from the need to comply with the terms of restrictive covenants. If termination is to be effected using the PILON clause, it is important that its terms are complied with – so that where it provides for termination on payment of a sum in lieu, that payment should be made. Otherwise, it will be open to the executive to argue that the purported termination is a repudiation of his contract but that until he accepts the repudiation, the contract is still extant. This may in turn have consequences for entitlement to deferred remuneration/stock etc. On the other hand, if the clause provides simply for termination on making a payment in lieu, there is no requirement that the employer serves formal notice in order to achieve immediate termination. Note that the test for determining the date of the termination under contract/common law is not the same as that to be applied to determining the EDT for unfair dismissal/statutory purposes.

b) Post-termination competition and confidentiality

Both express and implied obligations are potentially in play. As to express obligations, these are likely to take the form of either restrictive covenants limiting the extent to which the executive can take up alternative employment or confidentiality obligations limiting the use of Stellar’s business information.

• Restrictive covenants – the starting point is such clauses are prima facie unenforceable as being in restraint of trade and therefore contrary to public policy to allow them to be enforced by a court. However, such clauses may be capable of enforcement is they go no further than is reasonably necessary to protect the employer’s legitimate protectable/proprietary interests. As to such interests, there are broadly 3:

1. Customer or trade connection
2. Confidential information or trade secrets
3. Stable workforce

The issue then is whether the restraint goes no further than is reasonably necessary – as to that it is a matter first of construing what the contract means and then determining whether its application would produce unreasonable results – with the effect that, if it does, then it will be void as being in unreasonable restraint of trade. The reasonableness point will depend on understanding a mix of factors such as duration, geographical or business scope. The clause must be reasonable in the interests of the contracting parties and provide no more than adequate protection for the party in whose favour it is imposed. Anything beyond that, and it will be struck down – again, cf. garden leave clause – and (subject to the blue pencil rule) will not be amended or re-written by the court so as to make it reasonable in scope. If on analysis, the covenant is really one aimed at preventing post-termination competition, it will not be upheld just as in a case where it seeks to protect a legitimate interest but goes further than is reasonably necessary to do so.

When construing a restrictive covenant, the court will assume that it was the intention of the parties that the bargain that they have struck should be a lawful one – with result that where there are two possible constructions, one leading to an unreasonable result, the other leading to a reasonable one, it will be the latter that is likely to prevail.

• Confidential information

• Contractual or equitable obligations based on a duty of confidence may well survive a repudiatory breach by an employer

• Looking at equitable duties, these are based on the duty of good faith and equitable principles of fair dealing. So where, confidential information is imparted in circumstances in which an obligation of confidence was attached, this will give rise to an equitable duty which will be breached if there is then unauthorised use of that information.

• What sort of information is likely to be regarded as confidential? In Faccenda Chicken v Fowler (1984) 3 categories were identified:

• Category 1 – information that cannot be regarded as confidential due to its trivial character of widespread availability from other sources;

• Category 2 – information which must be treated as confidential during the currency of the employment but which then becomes part of the employee’s own knowledge and skill and which can be used or disclosed after the termination of the employment;

• Category 3 – trade secrets so confidential that, even if unavoidably learned by heart, must be used only for the benefit of the employer and cannot be used for anyone else’s benefit at any time – either during or after the employment has ended.

• What about information that is taken away by the executive with a view to using it in his new business or employment? This will generally amount to a breach of the implied duty of good faith and/or may amount to a breach of an appropriately worded express term in the contract.

• If list of customers or contact or price details is taken a court will generally be prepared to grant injunction preventing the ex-employee from using it or profiting from its use.

• If the employee commits such a list to memory with a view to using it post-termination, again an injunction may follow. Contrast the position where (absent an appropriately worded non-solicitation/non-dealing covenant) an employee happens to have certain details in his head as a result of having done his job in the normal way – in those circumstances, it may be difficult to prevent him from using those details post-dismissal as there is no general restriction against canvassing former customers or clients.

• A restrictive covenant may provide a suitable means of preventing the subsequent use of confidential information. However, the device has its limits – merely by stating that a particular piece or category of information is confidential will not necessarily make it so – either it is confidential or it isn’t. The existence of a suitable clause however does have the benefit of impressing confidentiality onto the employee. An express restrictive covenant may enable the employer to protect information falling within Faccenda Category 2 above.

• Where there is difficulty in policing the use of confidential information or identifying its precise scope or separating the confidential form that which is not, a court may be sympathetic to the use of non-competition covenant which will have the benefit of providing certainty, albeit for a limited period of time. Beware of course, of the problem of too widely drawn clauses which cannot easily be tied to the potential use (or mis-use!) of confidential information.

c) Enforcement

Having identified the key clauses in the contract and obtained some evidence of possible breaches of express or implied duties, the question arises as to how to deal with them. Stellar will probably be anxious to get an injunction. To get one at the interim stage, will mean satisfying the American Cyanamid test:

• Is there a serious issue to be tried?

• Are damages an adequate remedy:

• For the Claimant if the injunction is refused;

• For the Defendant if the injunction is granted

• Where does the balance of convenience/hardship lie?

There are a number of important points to consider before making an application to court:

• Should undertakings be sought?

• Is it appropriate to make a without notice application?

• Is the client willing to get drawn in to a speedy trial process if the court so orders?
• What is it that the client is actually seeking to protect?

• What was the employee’s role and how does it give rise to the need for protection?

• To what information did he have access? Is it confidential? Does it have a shelf-life?

• What customer/trade connection did the individual have?

• Is he likely to be wanting to try to poach other employees?

• Does the time/cost justify the application being made at all?

• How good is the evidence of breach/damage?

• Has there been any delay in investigating or pursuing the claim

• What is the precise order being sought? For example – search order/delivery up/simple prohibitory injunction

Regulatory Issues

a) The FSA: Approved Persons and References

Often a departing employee will want to agree the terms of any reference the employer will give in the future and this is typically an area for negotiation.  Financial institutions must take particular care here when dealing with an employee who is an FSA approved person, as they have an overriding obligation to the FSA to provide specified information about the employee, in particular anything that impacts on their fitness and propriety.

The first issue to consider is Principle 11 of the FSA’s Principles of Business which states:

“A firm must deal with its regulators in an open and co-operative way and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice”.

This is a very broad requirement and it is ultimately for the employer to decide (taking into account the FSA’s guidance) if the circumstances in which an employee is departing require specific notification to the FSA.

The second issue to consider is the Form C which must be submitted to the FSA when an approved person leaves the company. In order to carry out certain functions individuals must be certified as fit and proper, taking into account of the following criteria:

• honesty, integrity and reputation;

• competence and capability; and

• financial soundness.

The Form C requires the employer to set out the reason for the employee leaving and to state if there are concerns about his/her honesty, integrity and reputation. In assessing honesty, integrity and reputation in the future the FSA will consider whether the employee has ever been dismissed or asked to resign from a previous job. When applying for approval from the FSA for an individual to undertake controlled functions a prospective employer must take reasonable steps to obtain sufficient information about their previous relevant activities. This will include seeking a reference from previous employers.

The final issue to bear in mind is that, if an employer suspends an employee in order to carry out an investigation it needs to notify the FSA.

How does this apply to JBS’ case?

The reason why Stellar wants to exit JBS is that he is no longer performing to the required standards/no longer on-board with the new strategy. Effectively, Stellar no longer has faith in him. Unless he has committed gross negligence or acted improperly, there is no reason to make a notification to the FSA under Principle 11 or to raise any concerns about JBS’ fitness and propriety.

In relation to JBS’ reference, as is often the case, an agreed reference may be attached to the compromise agreement, but a second FSA reference should also be included that contains all information the FSA requires for an approved person (e.g. confirmation that Stellar has no reason to doubt JBS’ honesty, integrity and reputation). This means that the FSA reference can be used if JBS is applying for an FSA-approved role and the agreed reference can be used in other cases. Stellar would just need to ensure that any agreed reference is not misleading.

Imagine some other possible scenarios:

The first scenario is that some employees have been complaining that JBS has been favouring female employees in his team and has been acting inappropriately and Stellar wants to use this to force JBS out of the company. Before doing a full blown investigation, Stellar’s Head of HR, Prudence Juris, decides to have an ‘off-the-record’ conversation with JBS (NB the earlier warning about whether this meeting will genuinely be “without prejudice”) to inform him that issues have been raised and the company proposes to carry out an investigation, but that Stellar will not pursue this if JBS agrees to sign up to a compromise agreement.

After some correspondence and posturing on both sides, JBS indicates that he may be prepared to do a deal, but wants a reference to be agreed as he feels that his reputation may have been unjustly questioned. This raises important issues:

• What can Stellar say in the agreed reference if it is for an FSA approved role?

• Does Stellar need to mention the concerns and the potential investigation to the FSA either under Principle 11 or in the Form C?

Although Stellar has been put on notice about a potentially serious issue, given that no findings have been made about this and the allegations do not really bring JBS’ honesty, integrity and reputation into question, it is not necessary to make a notification to the FSA. Of course, if JBS has been suspended, this will need to have been communicated to FSA and referred to on the Form C.

The second scenario is that concerns are raised about JBS potentially claiming expenses which were not due, i.e. falsifying expenses. In this case the situation is quite different as it goes to JBS’ honesty and, therefore, is much more likely to be a situation of the FSA “would reasonably expect notice”.

This area further demonstrates the importance of having a clear strategy before any action is taken in relation to the termination process.

b) Market notification

The Listing Rules oblige a listed company to notify a Regulatory Information Service (“RIS”) of the removal, retirement or resignation of a director “as soon as possible” and by no later than the end of the business day following the decision. The notification should detail when the change will take effect, or make clear that this is not yet known, in which case a second notification must be made as soon as the effective date is known. This notification obligation clearly arises where the director resigns, is given notice of termination or is formally put on garden leave.  It is less clear whether it arises in circumstances where the director has not been given notice, but is asked to remain away from the office whilst the settlement agreement is negotiated.  In practice, it may be best in these circumstances to try to avoid making any notification until the settlement has been concluded. However, where negotiations have been protracted and it appears that news of the director’s impending departure may have leaked to the market, a notification will need to be made.

Giving JBS the opportunity to agree the wording of the announcement can be an important part of the agreed settlement, but the overriding obligation is to make the announcement as soon as possible and this cannot be postponed just because of a dispute over wording. The principle relates to corporate transparency. Information which may affect the share price must be made public.

c) Shareholder approval

The starting point is that it is unlawful for a company to make a payment for loss of office to a director of the company unless the payment has been approved by a shareholder resolution. If approval is not obtained, the director receiving the payment holds it on trust for the shareholders and the directors responsible for making the payment will be liable to the company for the amount paid.

There are a number of instances in which information must be given to shareholders, and approval obtained, before the company makes a payment to a departing director. These are likely to be a particular concern where the company is listed, for two main reasons:

• given the current climate of shareholder hostility to perceived excessive executive pay, the proposal is almost certain to give rise to criticism and may not be approved. This may in itself frequently prevent a listed company from proposing to make a payment; and

• even where it might be possible to obtain shareholder approval, it will be inconvenient to have to send circulars to all shareholders.

However, the requirement for shareholder approval does not cover payments made in good faith pursuant to an existing legal obligation or for damages for breach of contract (e.g. a contractual ‘golden parachute’ or damages relating to a wrongful dismissal) or to settle a claim relating to the termination of employment/loss of office. Unfortunately these words are not quite as clear as they might be and whether a payment amounts to an existing legal obligation or damages is not always 100% clear, but this exception is usually used in practice and rarely challenged.

In any event, this is unlikely to be an issue for directors of wholly owned subsidiaries or most privately owned companies as securing shareholder approval should not prove difficult.  However in the case of listed companies (such as Stellar), it is likely to be impractical (or, at the very least, highly undesirable) to seek shareholder approval.

The issue of shareholder approval can create difficulties in agreeing a sum with a departing director. Sometimes company secretaries want to agree the sum in principle “subject to shareholder approval”. This is of course very unlikely to be palatable to an individual who will fear (not unreasonably) that shareholders will not approve the package. This form of wording is best avoided as it is very unlikely to be agreed.

Sums paid to directors may need to be disclosed in the company accounts and in the group accounts.  In the case of a listed company, compensation will need to be disclosed in the Directors’ Remuneration Report. This can sometimes be used as a negotiation tactic to explain to an employee why the amount offered to them is lower that the senior management might like.

d) Directorships

Finally, there is the issue of directorships. It is not usually in a director’s interest to remain on the board when they know they are likely to be removed, as they retain liability, but usually have no control (at this stage) over the company decision making process. However, in some situations there are political reasons why an individual may wish to remain on the board. It is possible in our example that JBS simply wants to be bloody minded and thinks his negotiating position will be improved he refuses to agree to resign from the board.

Stellar will need to obtain JBS’ resignation from any directorship held in any group companies. Usually the resignations will be tied up as part of the settlement agreement.  Problems may arise, however, if JBS does refuse to resign as a director. In this case it may become necessary to remove him as a director against his will as well as terminating his employment.  In order to remove JBS as a director, there are two key issues to consider:

• Although it is rarely the case, do Stellar’s Articles allow it to unilaterally remove JBS as a director?

• As it often the case, are there provisions in JBS’ service agreement which require him to resign his directorships on termination of his employment and give Stellar a power of attorney to sign the letters of resignation on his behalf if he will not do so?

If JBS cannot be removed as a director in either of the above ways, then it will be necessary to remove him by shareholder resolution.