Our Director, Solicitor, former in-house legal counsel and company secretary (yes, he has much experience!) David Rogers outlines useful guidance for companies considering exiting a Director.
Companies are not always clear about the fact that Directors have such a wide range of rights and obligations. For example, they are (but not always) employees; they are Directors and can often be shareholders, too.
These three roles are linked but separate and come with their own rights and obligations.
Consider each role and status
Consideration needs to be given to each role when a directorship is coming to an end. Before taking any action, as a basic starting point for considering how these separate roles are regulated in law; and what rights and obligations apply – companies and directors should first check the various agreements which govern each role:
- The Company Articles of Association (governing the directorship).
- The Directors own Service Agreement or terms (governing the employment relationship).
- Any Shareholders Agreement in place.
- Any incentive, bonus or equity scheme or agreement in place.
- In some cases, non-executive directors will be engaged as consultants, in which case the consultancy agreement terms set out in this agreement will also need to be considered.
In all cases, consideration must also be given to (and legal advice sought where necessary) the relevant legislation including:
- Companies Act 2006; and
- the Employment Rights Act 1996.
Check the Articles
Most articles of association will contain a list of circumstances when a Director will be deemed to have resigned, including instances of:
- Bankruptcy.
- Mental illness.
- Prolonged absence.
- Statutory disqualification.
Many articles of association will also contain a provision allowing the Board to unilaterally remove a Director upon agreement by the majority of the board. Ensuring the articles are reviewed by a lawyer will avoid pitfalls and potentially open up possible solutions.
What about the Shareholders’ Agreement?
If the director is also party to a Shareholders’ Agreement, then it will be vital to check if any relevant provisions apply. For example:
- Are there contractual provisions allowing the Director to re-appoint themselves as a Director?
- Are there any rights which they have to veto the proposed termination?
Check any consultancy terms
If the director is subject to a service or consultancy agreement, check whether there is a resignation of directorship clause. This may include useful provisions such as an obligation on the individual to:
- Resign as a Director upon termination of employment.
- A legal power of attorney allowing a resignation letter.
- Other relevant documents to be signed by the company in the event that the departing Director refuses to do so.
How can you protect the business of the Company?
Commercial concerns cross over legal aspects here for example you’ll need a legal /commercial risk assessment covering:
1. Commercial data and information that requires protection:
- Can you protect the information on exit of the Director?
- What systems and data do they have access to?
- Can you secure systems?
2. Competitive threats:
- Is the Director a competitive threat?
- Can you restrict their activities?
- Can you protect the business using the law?
3. Wider contractual and commercial concerns:
- What liabilities are there on exit?
- Insurance cover?
- Banking and security arrangements?
- Permissions and access?
- Regulatory and compliance requirements – will exit breach them and what are the reporting requirements?
- Service level agreements and reporting – will exit compromise you here?
- Reputation and industry – what are the optics of the exit and how can they be managed?
- Will the exit trigger:
- Equity options?
- Bonus payments?
- Who is being advised by who? Ensuring the correct parties are obtaining legal advice in the correct way will avoid wider claims and difficulties and must be checked.
Conclusion
There is a lot of law and procedure sitting behind any Director exit - this quick guide only touches some of the issues in play.
We help businesses handle exits as careful legal assessment and planning are needed to avoid pitfalls, together with smart commercial solutions - no matter the size of the business.
If you are planning an exit and need support, we can provide confidential and specialist legal advice.