Boardroom Disputes in the time of COVID-19

The CJRS (Furlough Leave scheme) is due to come to an end on 30 June.  It has undoubtedly saved many jobs.

Despite the CJRS some businesses have already had to make redundancies and/or cut hours and pay.

It is certain that more of the same will follow once the CJRS comes to an end, and likely that some businesses will never reopen.

There will be no way of avoiding difficult decisions affecting staff – and that extends to board members who we can no longer afford or who are underperforming.

How do we remove that Director/Shareholder who is:

  • Not contributing;
  • Being paid too much;
  • Holding back our attempts to rebuild after the COVID-19 crisis?

The numbers

Do you have the numbers on the Board and among the voting shareholders to remove them as an employee and director?

Contract of employment

  • What is their notice period?
  • Does the Board have the right to send them on garden leave?
  • Are there any restrictive covenants?
  • Do they cease to be a Director if their employment is terminated?

If you want to remove them as a Director and get hold of their shares you will almost certainly also want to end their 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, or prepare for a redundancy consultation process.

As the maximum award for ordinary unfair dismissal claims 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.  That is unlikely to be necessary if there are solid grounds for a redundancy dismissal.

But – the reason for dismissal may affect how their 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 their shares

If it does, is there a formula for determining price?

If you want to buy their shares make sure you follow the process set out in the Articles/Shareholder Agreement to the letter

Choreography

Write down each step you need to take, the time needed to take each step, and who will manage the process.

Negotiated exit?

Often the best option, once you have your plan in place, is to meet them, go through any evidence of wrongdoing/poor performance in outline along with your plan to deal with those issues (or talk through your redundancy proposal), 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

Deadlock

Things get more difficult where there is no mechanism in the Articles/Shareholder Agreement for acquiring or valuing their shares

If you want their shares, you then have to negotiate a deal – ideally a global deal whereby you buy the shares and they leave as employee and director.

Or, you remove them as employee and director but they remains as a shareholder

Tactics

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?  Possibly. But effective