With the news the top dogs have left Robson Brown, Navyblue and Fuse8 in the last week, The Drum speaks to Jim Lister, head of employment group at Pannone about the legalities around getting rid of a company boss.
Where should an exit process for a managing director of chief executive begin?
One of the many advantages is that, when you’re a founder, and you really believe in your idea and you want to be a trillionaire, then you’re going to try all you possibly can not to cut anybody else into the pot. You’re going to try to keep 100% of the shares, and if you manage that then you’re never going to be sacked, because nobody can sack you. People who keep 100% of a company are in a different position.
Now what commonly happens is that people who are a co-founder, they, over a period of time cut other people in, be those venture capital companies or outside investors or business angels, or people they think are their friends. Before you know where you are, they’re putting up the equity and you no longer have controlling interest and it is then that they are likely to find themselves as exited as anybody else.
If you’re looking to exit an MD or a major shareholder or both, the first thing to consider if , who has the power to do it? In most cases, the MD has delegated authority of the board to do day-to-day hirings and firings, so it’s relatively unusual, and what you sometimes get is where the chairman or a group of disgruntled shareholders will turn up to the MD’s office and tell him to leave. I’ve even seen them handed a dismissal letter. That’s when the question has to be asked on what authority they are delivering the letter. In a limited company only the board has the power to dismiss people. Now that power is usually delegated to an MD. If it’s the MD who is being sacked however, and there’s no board resolution, then who’s doing the sacking? The answer very often is that nobody is.
I’ve sometimes had some fun where MD’s have come to me and said ‘The chairman’s given me a dismissal letter.’ I then would write to the chairman and ask for a copy of the board minute where it was resolved that the managing director be dismissed, because not only will they be unlikely to have one, but it could only have taken place at the board meeting, of which the client maybe a board member who never received an invite to the meeting. So the dismissal letter would be about as effective as a bus ticket. It works up to a point. In most companies, usually, as soon as the people who want to sack you have over 51% of the shares, eventually they are going to sack you. Even if they haven’t got a majority on the board, they can usually appoint extra board members if they want to, and then eventually they are going to get a board resolution to dismiss the managing director or whoever.
If you want to sack your managing director, what strategy cannot fail?
Make sure that you control the company. You need to look at your Memorandum of Association and you need to make sure that you control the company. If you do then you will be able to sack the managing director. You may end up paying a lot in compensation but that’s not the point. Another things to bear in mind, and this is where it gets quite complicated, you have got to be careful. A shrewd businessman who is looking to cut other people into a business that he has founded, unless he is pretty stupid, he will tell his lawyer to set it up as a ‘deadlock company’. A deadlock company is where nobody has overall control and it becomes virtually impossible to sack a managing director because you either split it so there’s 50% of the shares, or you have a position that nobody cannot appoint extra board members without the approval of other classes of share. In effect, you’ve got to be careful that the MD didn’t set it up in a way that means he can’t be dismissed. Many companies are set up that way so you cannot sack the MD.
Would this be also true of a chief executive?
It’s exactly the same. The terms managing director and chief executive don’t appear in the Company’s Act, it’s just a shorthand to describe the person who is the senior executive who is the most senior executive within the company.
Where does ‘Gardening leave’ fit into all of this?
Gardening Leave is nothing more than telling someone to stay at home during their notice period. There can be legal ambiguity if there isn’t a gardening leave clause in the contract because there is an argument that a senior executive has a right to be able to practice their skills. It’s always better if you’re going to put someone on gardening leave if there is an expressed clause in their contract. If the gardening leave is under six months and somebody isn’t doing something very ecceteric that needs to practice their skills, you can usually imply a gardening leave clause, even if there isn’t one in the contract. It’s very often done because it puts the executive on the back foot and what you, generally speaking, get is that most executives don’t actually want to sit at home for six months because they usually have other jobs, and what the company then does is say ‘we may be prepared to release you for less than your full six-month notice’ and you get their subsequent employer to subsidise their obligation to pay sometimes extensive notice. It’s quite effective. It doesn’t make it any more difficult to put someone on garden leave, and I would say in many cases that’s exactly what happens.
The only thing about garden leave is that if you put someone on garden leave, they are still employed, and very often they are still entitled to come to board meetings if they are shareholders and they may well, if there is an earn out provision or there are share options, it means that they will still be in employment. So some companies try to sack people straight away to get them out.
What is the difference with suspensions?
A suspension really is a period when someone is sent away from the business while an investigation is carried out. It only takes place in situations of gross misconduct or gross negligence. Most times when companies want a managing director out, they want them out because he is no longer perceived as being the right man or woman. That is relatively rare because that is the suggestion that they have done something wrong, which would lead to a dismissal. So suspending someone wouldn’t be appropriate if you’re making a pragmatic business decision and you think that it’s time to get someone new in. And just because someone is being poor, or because they haven’t done something in the eyes of the other shareholders, that’s a million miles away from it being gross misconduct. Mere poor performance would never justify someone’s dismissal mainly.
Should someone issue their resignation when placed on garden leave, do they lose the money they are due?
You could only be on garden leave if you have been served with notice, so you’ve been sacked in effect, but you’re serving out your notice. If you were to resign, you potentially would lose all of your pay during your notice period because although the company has sacked you, it hasn’t breached your contract if it has the right to put you on garden leave during your notice. If you were to simply walk away because you have been put on garden leave and the company had a right to do so, you’ve just lost your right to six months pay, so most people sit it out and make sure that they are getting their pay.
How does redundancy work with a managing director? Is there a certain procedure there?
It is very rare for redundancy to be relevant to a managing director, because redundancy only happens because there is a diminishing need for work of a particular kind. Chief executives or MD’s, it’s hard to imagine how a company is ever not going to need such a person. So it’s very rare that redundancy does come into effect relating to a managing director.
In your experience, when managing directors are suspended for gross misconduct, do you tend to find that this leads to legal action being taken?
My experience is that most times, with a senior executive, most times it is just a bargaining ploy and the company wants to settle. Very rarely do you ever find companies of any size go to an employment tribunal having sacked its senior man. You just don’t see it. What does it look like? The whole thing would be in the public domain and you’d be washing your dirty linen in public, companies just don’t like to do it. MD’s don’t like to be exposed in that way either. So generally speaking chief executives, managing directors, when suspended it almost always ends up in a deal.