Is it “just a Settlement Agreement” when shareholders and directors are involved?

As employment lawyers, we regularly receive a number of instructions (acting either for the employee or the business) to advise on exits and Settlement Agreements. Advising on this type of Agreement for employment lawyers is standard practice. However, we have recently seen an uptick in instructions where the employees were also shareholders and directors, making the Agreements and the legal risks at play, far more complex for all parties involved. 

With that in mind, what are the key considerations to be addressed by both parties when dealing with this sort of senior executive departure?   

Is the executive only ceasing to be an employee?

An individual can be an employee, a shareholder and a director of a company. Each “status” is entirely independent from the other.

If the intention is for the executive to cease to be an employee, and both parties wish to part ways on mutually agreeable terms, the correct way to formalise that would be under a Settlement Agreement. The benefit for the executive is that they usually receive a payment for compensation of loss of employment, in addition to their contractual entitlements. In return, once the Agreement is signed, the employer can rest assured that the executive cannot take steps to raise claims related to their employment or its termination at the Employment Tribunal or court.

If the intention is that the individual will continue to be a shareholder and/or a director of the company, and only their employment will end, the Agreement will not need to go into much detail on the shareholder/director point. However, thought will need to be given as to the employee’s future employment plans and how these could impact on, or conflict with, their duties as a director and/or obligations or restrictions  under any director’s service contract or any shareholders agreement.

If the individual will no longer be an employee and it has been agreed that they will resign as a Director, the Settlement Agreement will need to specify this, particularly setting out the process and timings of their resignation from directorship, ensuring that this process is in accordance with the company’s Articles of Association.

The terms of the service contract and any shareholders agreement are key.

How important are the individual’s shares?

More often than not, if an individual is to give up their shares once the Settlement Agreement is signed, the “deal” for their exit will normally hinge on their leaver status in terms of any shareholders agreement.  (with the individual wanting to be considered to be a “good leaver”), the transfer of share arrangements and in that case, the share price.

Depending on the wording of any Shareholders Agreement and/or the company’s Articles of Association, the company may need to jump through a series of hoops, including potentially obtaining investor consent, before any promises/assurances can be made to the exiting executive. This will be critical to the negotiations, and it is advisable for lawyers to be involved at an early stage. The stakes can be very high in these cases, and it is imperative that the parties’ needs and intentions are fully discussed and addressed.

Both parties should be aware of any restrictive covenant/post-termination restrictions that may apply to the individual in any Shareholders Agreement, even if this is not mentioned in any director’s service contract / contract of employment.  

It is, therefore, rarely “just a settlement agreement” where shareholders and/or directors are involved and these issues often involve complex and technical negotiations and drafting in relation to the shares. The underpinning factor is that specialist legal advice should be sought from both an employment and a corporate law perspective when dealing with these matters. BTO has a wealth of experience in doing so, with exceptional feedback and results generated for our clients.

We would be pleased to assist you or your business in negotiating terms of this nature.  If this is of interest, contact our team of employment law experts who can guide you further.

This update contains general information only and does not constitute legal or other professional advice.

Caroline Carr, Partner & Accredited Specialist in Employment Law: / 0141 221 8012 / Connect with Caroline on LinkedIn

Pauline Hughes, Solicitor: / 0141 221 8012 / Connect with Pauline on LinkedIn