Now is the time to work out how to get rid of that Director/Shareholder who is:
- Not contributing;
- Being paid too much;
- Making you hold back on growing the business because you don’t want him to benefit from your efforts
So. How do we go about removing him?
Planning – Part 1
Do you have the numbers on the Board and among the voting shareholders to remove him as an employee and director?
Contract of employment
- What is his notice period?
- Does the Board have the right to send him on garden leave?
- Are there any restrictive covenants?
- Does he cease to be a Director if his employment is terminated?
If you want to remove him as a Director and get hold of his shares you will almost certainly also want to end his employment
You will need to follow a fair procedure if you want to defend an unfair dismissal claim
Pull together as much evidence of wrongdoing or poor performance as you can
Bearing in mind the maximum award for unfair dismissal cannot be any higher than 12 months gross pay you may be prepared to take that hit and dispense with a fair process if acting quickly is essential
But – the reason for dismissal may affect how his shares are valued
Articles of Association and Shareholder Agreement
Check these documents to see if ceasing to be an employee or director of the company triggers a sale of his shares
If it does, is there a formula for determining price?
If you want to buy his shares make sure you follow the process set out in the Articles/Shareholder Agreement to the letter
Warning: Sometimes the Director/Shareholders will hold shares in the parent company with the parent holding all the shares in the subsidiary trading company. If the drafting of the documentation isn’t right, ceasing to be a director or employee of the trading company will not trigger a sale of his shares in the parent as he is not employed by or a director of the holding company. So, you could end up removing him as an employee and director of the trading company but being unable to force a sale of his shares in the parent
Planning – part 2
Once you have checked you have enough support on the Board and among the voting shareholders; checked the Contract of Employment, Articles and any Shareholder Agreement, you can then write down your timeline
Write down each step you need to take, and the time needed to take each step, to remove him as an employee and director and acquire his shares
If you comply with any notice period in his contract of employment and with the terms of the Articles and Shareholder Agreement, he won’t be able to stop you pressing ahead
Often the best option, once you have your plan in place, is to meet him, go through any evidence of wrongdoing/poor performance in outline along with your plan to deal with those issues, but suggest on a “without prejudice” basis that a deal can be done to cut short a painful and protracted process.
If that doesn’t work, put your plan into action
Things get more difficult where there is no mechanism in the Articles/Shareholder Agreement for acquiring his shares or valuing his shares
You then have to negotiate a deal – ideally a global deal whereby you buy his shares and he leaves as employee and director – or you remove him as employee and director but he remains as a shareholder
If the documentation is problematic and does not make for a quick “kill” you may want to hold fire and, in the meantime, introduce new contracts of employment and Articles/Shareholder Agreement which give you the means to achieve your aims
Cynical? Yes. But effective
Specialist Employment Lawyer and Advocate