The departure of a senior employee or director can create risks that extend well beyond the employment relationship. If the process is not managed carefully, it can create legal claims with commercial and reputational damage.

At Loch we often encounter claims which could have been avoided, by for example having a well drafted contract in place which contains restrictive covenants that are fit for purpose. Where there are shares involved the situation can be exacerbated by the absence of a shareholder agreement.

With the right preparation in advance, a senior exit can be managed in a way that safeguards the business’ commercial relationships, confidential information and operational stability. The key is to plan ahead, take advice and bring the legal, commercial and people aspects together from the outset.

Delivered in partnership with Diversity HR, part two of Loch’s Managing Employee Exits with Confidence webinar series explores the additional considerations that can make senior exits more complex.

Lauren McLaughlin, Employment Law Solicitor and Alice Aldridge, Employment Law Solicitor, and Emily Waterhouse, Corporate & Commercial Law Solicitor, share practical guidance on managing senior level risk and sensitive exits, succession planning and director and shareholder linked employment issues.

Missed the live webinar? Rewatch on demand here, and then download our follow up resource,  A Good Exit Checklist.

You can also catch up on part one of the series, Getting the Foundations Right and Preparing for Change, here.

Why senior exits are different

When a senior employee leaves, the issue is rarely just about dealing with another resignation, or dismissal.

Senior exits carry higher risk because the individuals have often acquired valuable corporate knowledge and experience, and they are also likely to have:

  • Key relationships: With clients, suppliers, regulators or investors.
  • Confidential information: Pricing, pipeline, strategy, financial performance, product or workforce plans.
  • Commercial influence: Team stability and customer loyalty.

In addition, there is the added complexity of the law regarding directors, fiduciary duties, protection of business interests and restrictive covenants, that can move employment issues into the High Court and unfair prejudice territory if they are a shareholder too. Senior exits can also create reputational risk, especially where allegations involve discrimination, harassment, misconduct, confidential information or shareholder disputes could come into the public domain.

Our recent poll[1] reflected how challenging these exits can feel:

Twenty six per cent said managing the exit of a senior employee, director or shareholder felt high risk and complex, while 22% had never managed one before.

To manage a senior exit effectively, employers need a clear plan that protects the business and controls risk which is well documented from the outset.

What does it take to manage a senior exit effectively?

Our experts identified five priorities for navigating a senior exit confidently while minimising the risks.

1. Get contracts and restrictive covenants right

A well drafted Contract of Employment or Service Agreement is the most important protection available to an employer when an exit is on the agenda. It should cover, among other things, notice, garden leave, confidentiality, intellectual property and post termination restrictions, clauses which extend to non-compete, non-dealing and non-solicitation of customers and poaching of key employees.

Restrictive covenants must be tailored to the business so they protect the legitimate business interest and go no further than necessary otherwise they will not be enforceable. Generic wording and template clauses which have not been tailored to the business as it is currently, or restrictions that have not been updated after a promotion are going to be harder to enforce.

Employer advice: Ensure you get it right when you recruit the person and renew the contract terms, on promotion and before issues arise, making sure restrictions are up to date and tailored to the individual’s role, seniority and the business, as it is then.

2. Check the “three hats” problem

Senior exits become more complex because the individual often holds three statuses: employee, director and shareholder – each with separate rights and obligations.

Ending employment does not automatically result in the removal of a director, or the transfer shares or termination of options. A director may continue to hold office as a director, unless they resign, are required to resign under the contract terms or are removed. If there are inconsistencies between the Contract, Service Agreement, Articles of Association or the Shareholder Agreement then that can cause significant issues.

Employer advice: Check Contracts of Employment or Service Agreements to ensure the resignation obligations, statutory removal routes and Shareholder Agreement terms are clear, aligned and enforceable before a senior exit is progressed.

3. Have a senior exit process

The first 48 hours of a senior exit can be critical, so having an exit process in place is critical.

Exercising the right if it exists in a contract to placing the person on garden leave during their notice can keep the individual bound by ongoing duties while removing them from customers, systems and colleagues. Payment in lieu of notice may offer a clean break but reduces the protection that comes with continuing employment. However, there are pros and cons to each option so taking expert advice in each situation is critical.

Employer advice: Plan carefully for senior exits in advance as changes may be needed to key documents to protect the business.

4. Review shares, options and leaver provisions

For shares and share options, employers should not assume that an employee’s rights automatically disappear when employment ends. The position will depend on the terms of the relevant share option agreement or share plan. Employers should consider whether options have vested, whether unvested options lapse on termination, whether any exercise period applies and whether the individual will be treated as a good or bad leaver. The financial consequences can be significant, particularly where the options have substantial value or form part of an EMI or other incentive arrangement.

For shares, termination of employment does not automatically remove an individual’s ownership rights. An employee who leaves may remain a shareholder unless the Articles of Association or Shareholder Agreement requires the transfer of their shares. Employers should review any good and bad leaver provisions, compulsory transfer rights, valuation mechanisms and any rights attaching to the shares. Particular care should be taken where the departing individual is also a director or minority shareholder, as disputes over valuation, management control or share transfers can quickly become contentious.

Employers should also ensure that restrictive covenants, confidentiality obligations and business protection provisions are properly aligned across employment, shareholder and incentive documentation. In many cases, restrictive covenants contained in Shareholder Agreements are wider in scope and longer in duration than those in a Contract of Employment.

Employer advice: Review Shareholder Agreements, Articles of Association or any share option documents before you progress to an exit.

5. Know when to escalate

Where there is suspected misconduct, misuse of confidential information, breach of fiduciary duty, team move activity, unlawful data extraction, customer contact which breaches restrictions, the business should act quickly. It may be necessary to suspend the person but that could expose the business to a claim so avoid knee jerk reactions and seek legal advice.

Employer advice: Seek legal advice where there are concerns like this first before taking any steps.

Next steps for your organisation

The key takeaway is that preparation is everything. Employers should review and update their Contracts of Employment, Service Agreements, their Articles of Association, Shareholder Agreements and consider each situation on its own merit.

Loch has created A Good Exit Checklist to help employers manage exits with clarity and confidence, including additional senior exit considerations.

If you missed the webinar, you can watch Part 2 on demand, and catch up on Part 1 here.

If you need support with a senior exit, employment documentation, shareholder arrangements or business protection strategy, please get in touch with our expert team at hello@weareloch.com.

[1] Poll of webinar attendees.