A Director/Shareholder who is:
- Not contributing;
- Being paid too much;
- Holding back our attempts to build the business.
Do you have the support on the Board and among the voting shareholders to remove them as an employee and director?
Without that you can do nothing.
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.
Write down each step you need to take, the time needed to take each step, and who will manage the process.
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.
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 remain 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? Possibly. But effective.