Firing the board – advice from an employment lawyer

October 2014 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

There are a number of legal and business implications that should be considered in the dismissal of a staff member, along with an employer’s own emotional tendencies towards the person involved.

The process only becomes more multi-layered when the employee in question is a board member under the UK Companies Act 2006. The stakes are higher, there are a wider range of legal implications and there can be a deeper emotional obligation. There are also other important elements that have to be thought about, such as the internal and external public and investor relations issues of making such a high profile termination.

The dismissal of board members is covered by the same regulation that applies to the regular employee; however, there is also an overlay of additional legal issues.

One of the ways a UK employer can make itself feel better about the difficult task of dismissing an employee is by offering them a substantial package. However, the Companies Act 2006 prevents the company from paying more than the employee is legally entitled to without shareholder approval. Where an employee is a main board member of a listed company, in practice, that will not be achievable. Furthermore, in all but the strict letter of the law, in this context the employer cannot pay more to the employee than the remuneration policy of the company (as published in its annual report) permits. In these days of shareholder activism, that does not leave a lot of room for manoeuvre.

There are also legal practicalities to be observed with regard to the removal of directors from the board which are independent of their employment status. In most cases, this can be done by the employee agreeing to tender his resignation – unless the director thinks he can extract considerable nuisance value from being awkward, there is little to gain and a lot to lose in terms of exposure to legal claims and obligations by remaining a board member when no longer employed.

However, where this is the case, the removal of a director from board meetings cannot be achieved that easily, unless the company’s articles of association have been amended from the default position. The technicalities of the default process are clunky. The director can be removed at a shareholders’ meeting following the procedures outlined in the Companies Act 2006, including giving 28 days’ notice to call a meeting and giving the director the opportunity to put his objections in writing and attend the meeting to put forward his point of view.

Another complication is that the director is likely to hold shares in the company. The dismissal of a board member will not necessarily result in him losing those shares. Much will depend on the terms under which the equity is held. There may be provision for the interests to be cancelled on termination or bought back at par value or fair market value (depending on the circumstances) but fairly often the employee simply continues to retain his interest in the company until such time that he becomes a willing seller. Thought therefore has to be given to the subject before the ‘button is pushed’ – as having an ex-chief executive as a major shareholder in the company is not always a great idea.

The removal of an executive board member may not just have a backlash impact on company finances or legal proceedings, but may also tarnish its reputation. With all companies, the dismissal of a director is a high profile event, and could gain extensive negative coverage in the press. It may also be reputation damaging for the dismissed executive in question as his career will be in the spotlight, which can have a negative effect on future employment.

Where the company is a listed company, the employer has no choice but to take the bull by the horns in terms of PR, as once the dismissal decision has been made, the company must promptly (and in any case by the end of the following business day) announce the departure through the regulatory information service. However, even where the company is not listed, the removal of such a high profile executive will have an impact on staff and customers, and other key relationships will need to be managed.

Removing a board member is a complicated and difficult task, and companies looking to do so (as well as executives who feel they may be on the wrong end of these decisions) should always seek legal advice before taking action to ensure the best outcome for the company and its employees.

Gareth Brahams is a managing partner at BDBF. He can be contacted on +44 (0)20 3586 3324 or by email: gareth.brahams@bdbf.co.uk.

Gareth Brahams

BDBF