BUSINESS LAW AND PRACTICE (SKILLS)
Unit 15
Removal of a Director and Share transfer II
Outcomes
By the end of this Workshop you should be able to:
1. Advise on the procedure to remove a director from office as a director and
terminate the employment of a director by terminating his/her service contract.
(Prep task 1)
2. Explain the difference between terminating an executive director’s service
contract and removing him/her from the office of director. (Prep task 1)
3. Explain the potential claims which might arise on the dismissal of a director as
an employee or the removal of a director from office. (Prep task 1)
4. Interpret and apply pre-emption provisions and other types of restrictions on
transfer commonly found in articles of association and explain the rationale for
those restrictions. (Unit task)
5. Complete a stock transfer form. (Prep task 2)
Preparatory Task
Please emphasise, by introduction, that:
Firstly, the most important factor always to consider is that executive directors
hold two positions in a company – the office of director and that of employee –
and that both of these have to be dealt with effectively. (How these two issues
relate is either governed by the service contract or the articles.)
Secondly, a company has to be aware that any termination of an employment
can result in the director employee having recourse to his or her acquired
employment rights.
1. Explain whether Donoghue could terminate Mr Dickson’s service contract
now, without having to pay him compensation for wrongful dismissal.
Donoghue would prefer not to pay his salary for the remainder of the
contract term.
Relevant contents of the contract are:
(i) The contract is for a fixed term of 8 years, expiring on 31 March 2024.
(ii) After the fifth anniversary of the contract, which passed on 31 March 2021, the
contract is terminable at any time on 18 months’ notice.
(iii) The company has reserved the right to terminate summarily in the
circumstances set out in clause 10. The two which may be relevant are those in
clauses 10.1.1 and 10.1.2.
If the contract is terminated on notice, this is unattractive to our client, because
they have to let Dickson work for another 18 months and pay him during that time.
, However, there is the option, instead, under clause 2.3 to make a payment in lieu
of notice (‘PILON’). This addresses the issue of Dickson’s continued working, but
will still be expensive - 18 months’ salary plus additional benefits such as
possibility of a bonus, the company car, medical insurance etc.
Exercising the PILON clause would give Donoghue a complete defence to any
wrongful dismissal claim (there was no breach) and Dickson would remain bound
by the restrictive covenants in the Agreement (this point is also an express term
in clause 2.4).
[for information, dismissing an employee and making a payment in lieu of notice
is technically a summary dismissal, actionable as a wrongful dismissal, if there is
no PILON clause. A claim would not result in any greater financial liability for the
employer if they have given the employee PILON, but the employee would not be
bound by restrictive covenants.]
Although some executive contracts would include provisions for ‘gardening leave’,
this one does not.
It would be preferable to end his contract summarily, but this may expose our
client to a claim for wrongful dismissal and unfair dismissal. (Even dismissal with
notice may still be unfair.) See next bullet point for discussion of this point.
If Dickson has committed a repudiatory breach of contract, Donoghue can
terminate the contract without notice or payment in lieu of notice. This would give
Donoghue a possible defence to any wrongful dismissal claim (Dickson breached,
not the company) and Dickson would remain bound by the restrictive covenants in
the Agreement. At common law, post termination restrictive covenants in favour of
the employer will not survive a wrongful dismissal by the employer. We would
need further information here on Dickson’s conduct over the last few months,
namely:
Has he committed any serious misconduct or breach of the agreement (cl.
10.1.1)? It would be difficult to dismiss summarily for gross misconduct.
To what extent has he neglected, failed or refused to carry out his duties
(cl.10.1.2)?
What further information that would be required and the arguments that could be
run. Note that the restrictive covenants would be unenforceable if we get it wrong
and he is wrongfully dismissed. Query whether they are important though, if he is
not very good at his job.
2. Explain whether, if dismissed now, Mr Dickson could successfully claim
unfair dismissal.
Dickson would need to argue that his dismissal itself is unfair because:
- He has a right not to be unfairly dismissed (s94 Employment Rights Act 1996
(‘ERA’).
- He is an eligible employee (i.e. 2 year’s continuous employment). Employees
can only bring a claim for ordinary unfair dismissal if they have the necessary
period of continuous employment at the time of the "effective date of
termination" (EDT) (s108(1) ERA 1996). Employees whose continuous
employment started on or after 6 April 2012 must have at least two years'
service on the EDT in order to qualify. [A one-year qualifying period applies to
anyone whose period of continuous employment started before 6 April 2012.
Unit 15
Removal of a Director and Share transfer II
Outcomes
By the end of this Workshop you should be able to:
1. Advise on the procedure to remove a director from office as a director and
terminate the employment of a director by terminating his/her service contract.
(Prep task 1)
2. Explain the difference between terminating an executive director’s service
contract and removing him/her from the office of director. (Prep task 1)
3. Explain the potential claims which might arise on the dismissal of a director as
an employee or the removal of a director from office. (Prep task 1)
4. Interpret and apply pre-emption provisions and other types of restrictions on
transfer commonly found in articles of association and explain the rationale for
those restrictions. (Unit task)
5. Complete a stock transfer form. (Prep task 2)
Preparatory Task
Please emphasise, by introduction, that:
Firstly, the most important factor always to consider is that executive directors
hold two positions in a company – the office of director and that of employee –
and that both of these have to be dealt with effectively. (How these two issues
relate is either governed by the service contract or the articles.)
Secondly, a company has to be aware that any termination of an employment
can result in the director employee having recourse to his or her acquired
employment rights.
1. Explain whether Donoghue could terminate Mr Dickson’s service contract
now, without having to pay him compensation for wrongful dismissal.
Donoghue would prefer not to pay his salary for the remainder of the
contract term.
Relevant contents of the contract are:
(i) The contract is for a fixed term of 8 years, expiring on 31 March 2024.
(ii) After the fifth anniversary of the contract, which passed on 31 March 2021, the
contract is terminable at any time on 18 months’ notice.
(iii) The company has reserved the right to terminate summarily in the
circumstances set out in clause 10. The two which may be relevant are those in
clauses 10.1.1 and 10.1.2.
If the contract is terminated on notice, this is unattractive to our client, because
they have to let Dickson work for another 18 months and pay him during that time.
, However, there is the option, instead, under clause 2.3 to make a payment in lieu
of notice (‘PILON’). This addresses the issue of Dickson’s continued working, but
will still be expensive - 18 months’ salary plus additional benefits such as
possibility of a bonus, the company car, medical insurance etc.
Exercising the PILON clause would give Donoghue a complete defence to any
wrongful dismissal claim (there was no breach) and Dickson would remain bound
by the restrictive covenants in the Agreement (this point is also an express term
in clause 2.4).
[for information, dismissing an employee and making a payment in lieu of notice
is technically a summary dismissal, actionable as a wrongful dismissal, if there is
no PILON clause. A claim would not result in any greater financial liability for the
employer if they have given the employee PILON, but the employee would not be
bound by restrictive covenants.]
Although some executive contracts would include provisions for ‘gardening leave’,
this one does not.
It would be preferable to end his contract summarily, but this may expose our
client to a claim for wrongful dismissal and unfair dismissal. (Even dismissal with
notice may still be unfair.) See next bullet point for discussion of this point.
If Dickson has committed a repudiatory breach of contract, Donoghue can
terminate the contract without notice or payment in lieu of notice. This would give
Donoghue a possible defence to any wrongful dismissal claim (Dickson breached,
not the company) and Dickson would remain bound by the restrictive covenants in
the Agreement. At common law, post termination restrictive covenants in favour of
the employer will not survive a wrongful dismissal by the employer. We would
need further information here on Dickson’s conduct over the last few months,
namely:
Has he committed any serious misconduct or breach of the agreement (cl.
10.1.1)? It would be difficult to dismiss summarily for gross misconduct.
To what extent has he neglected, failed or refused to carry out his duties
(cl.10.1.2)?
What further information that would be required and the arguments that could be
run. Note that the restrictive covenants would be unenforceable if we get it wrong
and he is wrongfully dismissed. Query whether they are important though, if he is
not very good at his job.
2. Explain whether, if dismissed now, Mr Dickson could successfully claim
unfair dismissal.
Dickson would need to argue that his dismissal itself is unfair because:
- He has a right not to be unfairly dismissed (s94 Employment Rights Act 1996
(‘ERA’).
- He is an eligible employee (i.e. 2 year’s continuous employment). Employees
can only bring a claim for ordinary unfair dismissal if they have the necessary
period of continuous employment at the time of the "effective date of
termination" (EDT) (s108(1) ERA 1996). Employees whose continuous
employment started on or after 6 April 2012 must have at least two years'
service on the EDT in order to qualify. [A one-year qualifying period applies to
anyone whose period of continuous employment started before 6 April 2012.
