New legal changes mean that companies and their directors will have to radically rethink their approach when a director is forced from the company.
Previously, lawyers were brought in after a deal had been struck between the company and the exiting director – usually the lawyer was there to prepare the paperwork to implement the settlement. Provided the company could show that any termination payments were being paid to settle employment claims, such as unfair dismissal or compensation for loss of employment, then shareholder approval for the settlement was not required.
Now, as a result of parts of the Companies Act 2006 coming into force this month (Oct), settlements for loss of office and employment claims are prohibited unless they have shareholder approval.
There are, however, a number of exceptions to this general rule. For employment claims, the two exceptions that will be most commonly used, will be payments made in discharge of an existing legal obligation (such as contractual payments in lieu of notice) and payments for settlement or compromise of any claim arising from the termination of the director’s office or employment. For the latter, the board of directors will need to be able to show that, prior to making payment, an evaluation of the exiting director’s claims had been made and that a genuine value had been placed on these claims. It will no longer be possible to make payments simply because the director is a “good guy” or performed well years ago or to "soften the blow".
What this is likely to mean is that, before having initial conversations with the exiting director, the board should obtain legal advice on any claims the exiting director may have and the amount - within a range of figures - that may be awarded by a court or tribunal for those claims. Only then should the initial negotiations commence with the director, ensuring that the settlement complies with one of the exceptions.
Kim Pattullo is a partner specialising in employment law with UK law firm Shepherd and Wedderburn.