SGS 9: Internal Disputes 2

Question 1

Is a company always entitled to remove a director? What are the caveats?

Answer 1

• Although a company is always entitled to remove a Director via OR
• Doing so can still breach the terms of Directors service contract

Question 2

What is a PILON clause?

Answer 2

• Payment in lieu of notice
• Company can pay director for notice instead of giving the required length of notice that is specified elsewhere in the contract.

Question 3

What are restrictive covenants and how can they be intertwined into a contract? What is the key concern with them?

Answer 3

• Will usually be to prevent the D from engaging in competitive employment after role as D has ended
• Key concern - that they will be prima facie void unless it
  i) Protects legitimate business interest, and
  ii) Goes no further than reasonably necessary

Question 4

What is a “legitimate business interest”. What makes it “reasonable”

Answer 4

• it is in the Company’s interest that an ex-employee doesn’t develop a new, competitive business or poach previous clients
• Reasonable: pertains to geographical scope, length of time the restriction, how broad the scope of the restriction is.

Question 5

What happens if there is a PILON clause and no notice is given re restrictive covenants?

Answer 5

If there is a PILON clause, then if no notice given, restrictive covenants still survive

Question 6

What happens if there is no PILON clause and no notice is given?

Answer 6

• restrictive covenants will be unenforceable because the Company will be in breach of the contract.

Question 7

What is a “garden leave” provision?

Answer 7

• Reduce duties/flexibility to determine role
• way of serving out notice period.
• Cannot work for another employer in the meantime.
• D = still an employee but his actions are controlled.

Question 8

Why is garden leave provision necessary?

Answer 8

• As a safeguard to prevent D entering into transactions which could be unfavorable for the company.
• It also ensures that his removal does not amount to wrongful dismissal.

Question 9

Which claims could the director make against the company?

Answer 9

1. Wrongful dismissal

2. Unfair dismissal

Question 10

What is wrongful dismissal?

Answer 10

• This is where there has been a breach of contract e.g. by insufficient notice.

Question 11

What is the required notice for directors to make a wrongful dismissal claim?

Answer 11

• Required notice: Determined by terms in contract, but subject to statutory minimum:
• 1 week’s notice if employed for 1 month – 2 years
• 1 week’s notice for every completed year of service up to a maximum of 12 years where employed for over 2 years.

Question 12

What are the options for a company if the director makes a wrongful dismissal claim?

Answer 12

• Negotiate pay off
• Garden Leave
• Summary dismissal where v. serious breach of contract

Question 13

What damages will a director who successful claims ‘wrongful dismissal’ be entitled to?

Answer 13

• Entitled to statutory damages equivalent to pay for notice period s86 ERA 1996.

Question 14

What is unfair dismissal? What must the employee show?

Answer 14

For employees only. Within 3 months in Employment Tribunal. Employee must show:
i. He was dismissed
ii. Was employed for the qualifying period of service
− Pre-06.04.2012 = 1 year / Post-06.04.2012 = 2 years
iii. He was not in an excluded category.

Question 15

For unfair dismissal, what does the employer have the burden of showing?

Answer 15

→ That it had a fair reason for the dismissal & those reasons were given, and
o Capability, Conduct, Redundancy, Statutory Illegality, Other substantial reason
→ That the dismissal was fair in all circumstances
o Fair procedure – Employee handbook/ACAS Code.
o Consistency, Equitable. Warning procedures, Offers of training, Fair hearings

Question 16

What are remedies for unfair dismissal?

Answer 16

1. Re-instatement/Re-engagement in same/suitable job
2. Compensation – 2 elements:
   a. Basic Award – [Age] x [Service] x [Weeks Pay] (cap on week’s pay)
   b. Compensatory Award – [Actual loss in wages] + [Loss of fringe benefits] – [Duty to mitigate] + [Future loss of wages & benefits] (capped at £76,574)

Question 17

What commercial considerations need to be taken into account in the settlement of employment disputes?

Answer 17

Basic right of an employee to bring a claim cannot be excluded under a contract unless:

1) Formal Settlement Agreement under s203 ETA 1996.
2) ACAS conciliation officer has taken action under s18 ETA 1996

NB – Employee must be aware of:
· s215 CA – payment for loss of office – not as of right – needs to be in the contract
· s217 CA – payment by company – requires members approval
· s220 CA – exceptions to the above req. – in settlement of any claim where in good faith

Question 18

What is the effect of TUPE?

Answer 18

• On sale of a business, the contracts of employment are now automatically transferred to the new owner
• Dismissals in connection with the transfer will be unfair unless ETO reason (economic, technical, organizational)

Question 19

What is redundancy? What does this entitle the employee to?

Answer 19

• Where an employee’s role is no longer needed by the company
• Entitled to statutory payment if worked continuously for at least 2 years
• Strict requirements & procedure

Question 20

Commercial Issues when negotiating a Settlement Agreement

From Company’s perspective

Answer 20

From Company’s perspective

1. Would want to exclude right to bring future claims
2. Want restrictive covenants to continue after contract terminates – re-state in settlement contract
3. Put clause in agreement to the effect that there will be a separate share buyback document/agreement.
4. Term to assist with the transition. E.g. Could have part of termination payment held back until the end of the handover period – continue to incentivize D to make good decisions for the Company. Could include an automatic transfer provision e.g. That when a director is removed, their shares are automatically transferred to the existing SH in the proportion which they already hold the shares.

Question 21

Commercial Issues when negotiating a Settlement Agreement

From directors perspective

Answer 21

1. D would want to be able to make claims against Company in the future, therefore would be wanting to keep the provisions wide.
2. Possibly draft the reference now – ensure as favorable as possible so that he can get future employment.
3. He will want to ensure that fringe benefits are included in the settlement figure to make it as large as possible e.g. seek to argue that the company car constitutes part of his salary which he ought to be compensated for later.

Question 22

Which considerations have to be made when making EX GRATIA payments?

Answer 22

• CA s215 and s217
• S217(1) - any payment to D made by the Company requires SH approval, unless it is a payment made in good faith E.g. by way of settlement or compromise in the event of termination of a director’s employment (s220).
• Err on the side of caution can advise the client to get shareholder approval (by way of OR), before actually making the payment