LEGAL RIGHTS AND RESPONSIBILITES WHEN A DIRECTOR OR SENIOR EXECUTIVE EXITS YOUR BUSINESS

When a senior executive leaves the business, it can be a sensitive and challenging time for the executive and the business. As senior executives can be employees, directors and shareholders this gives additional complexity to their exit and all of these roles need to be considered.

Joanne Briscoe associate solicitor at Wilkes comments:

“As a business you will want to minimise disruption to your business, protect your business interests, limit negative publicity and reduce the risk of the executive making an employment claim against your business, which could be a time consuming and costly process”.

Employer Issues

All businesses should take appropriate steps to protect their interests when a director or senior executive is leaving the business. It is important to plan a dismissal of a senior executive to minimise disruption to the business particularly as their exit can be commercially sensitive.

As the executive is usually an employee, they will have employment rights protection. In the UK directors can also be employees. Therefore, when a business dismisses an executive it is exposed to a risk of employment claims including unfair dismissal, discrimination and wrongful dismissal/breach of contract and the business will need to take steps to minimise these legal risks.

An employer can potentially dismiss the executive by following a lawful process. The first step when considering the exit of an executive is to identify the reason for dismissing the executive and consider whether this is a fair and lawful reason to dismiss them. Are there conduct or performance issues or is the executive redundant?

An employer also has the option to have a protected/without prejudice conversation with the executive and negotiate a settlement. This can speed up the process. If a settlement is reached then a settlement agreement is prepared where the executive and business mutually agree to the executive’s employment being terminated, the executive gives up their right to issue any employment claims against the business usually in return for the business making a compensation payment to the executive. A settlement agreement can also include terms to protect any confidential information, reinforce or introduce post termination restrictive covenants and provide certainty that the executive will not issue legal proceedings against the business.

If an executive resigns the business will want to protect its confidential information and limit unfair competition. The business may be able to place the executive on garden leave during any notice period, which will remove them from the market for the duration of their notice period.

If the executive is a statutory director and/or shareholder, then you will also need to consider these roles when dismissing the executive and review the Articles of Association of the company and any shareholders agreement together with any director service agreement. If they are a director an added complication is that they are part of the decision-making process so you will have to decide who is to make the decision to dismiss.

Joanne Briscoe associate solicitor at Wilkes comments that if considering dismissing a senior executive a business should:

 

  • “ Identify the reason for dismissing the executive as this will determine the strategy for their dismissal.

  • Review the executive’s employment contract, director’s service agreement and/or shareholders agreement and company policies and procedures to determine the termination procedure.

  • Ascertain the executive’s contractual entitlements such a notice, garden leave and bonus.

  • If the executive is a statutory director or a shareholder decide whether they will be a “good or bad leaver.”

  • Review the existence and enforceability of post termination restrictions such as confidentiality and restrictive covenants preventing the executive competing with your business or using confidential information to gain a commercial advantage for themselves or for another business.

  • Consider having protected/without prejudice negotiations with the executive and then utilising a settlement agreement to formalise any agreement.”

The exit of a senior executive can be a challenging process. As an employer a business should follow a fair and lawful process to minimise legal and commercial risks to the business. The best commercial approach is often to deal with the exit through without prejudice/protected discussions with the senior executive.

If your business is planning to dismiss a senior executive the best advice is to plan ahead and seek legal advice at the earliest opportunity.

For further help and advice, please contact Joanne Briscoe Associate Solicitor at Wilkes Solicitors on 0121 733 8000 or via email at [email protected]  You can also contact any other member of the Employment Team on 0121 233 4333 or email us at [email protected]

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