Anecdote on a messy manager exit

About Anecdotes

Welcome to My Inhouse Lawyer’s Anecdote series. These are tales from the front line. Things our team has come across, in the practice of law, which we are sure business leaders will want to know. The purpose is really about highlighting practical gems which you wouldn’t get from AI or a web search.

Note that our Anecdotes aren’t case studies. Indeed, we don’t refer to clients, don’t share specifics and we edit the story to generalise and anonymise!

Any resemblance with real life people or events is coincidental. As they say in the movies, ‘most of what follows is true’

A messy employment & corporate tale

This Anecdote will be fascinating to any business leader who gives shares in their company to an employee.

In a nutshell, it’s a story about what happens when the employee is removed from the company, highlighting what can go wrong if the termination doesn’t follow proper process. It also shows how courts treat employment rights and shareholder rights separately.

Backstory

A company called Abacus Limited (Abacus), hired a senior manager called Tony Madeup to run its sales team.  As part of Tony’s remuneration package, Abacus offered Tony some shares in the company at the nominal value of £100, which he accepted.

Abacus’s company’s Articles contained an (unusual) provision stating that any employee:

• Who had acquired shares in the company by virtue of their employment; and
• Was subsequently removed from the company within five years of the date the Articles were adopted,

would have to sell their shares back to the other shareholders for nominal value (i.e. £100 as opposed to market value).

Unfortunately, as it turned out, Tony wasn’t a very good manager. His management style was abrasive and there had been a number of complaints from staff. After some time, Abacus decided to terminate Tony’s employment.

But Abacus inadvertently didn’t follow proper process and the early stages of the disciplinary process fell short of what was legally expected of the company.

The company also took back Tony’s shares – per the company’s Articles – for the nominal sum of £100.

What happened next?

Tony was not happy and he brought an unfair dismissal claim against Abacus.

At the Employment Tribunal, Tony won. The court found that even though Tony’s conduct towards the staff was not appropriate, and Abacus was perhaps justified in its decision to remove him, the company didn’t follow proper process.

There was then a second Tribunal held so the court could decide on what Tony would be awarded.

Key issues

Tony wanted:

• £100,000; and
• his shares back or market value

Abacus brought My Inhouse Lawyer in at this stage and our job was to resist this so far as possible. Specifically to reduce the amount of compensation for unfair dismissal because of Tony’s behaviour.

What we did

Working together seamlessly, me (on the corporate side) and Jonathan Waters (our Employment law Specialist) prepared a strategy. We then countered:

• That the Tribunal had no power to undo the share transfer and that this was a matter for the High Court. Tony resisted this approach on professional advice.
• Accepting the decision of the first Tribunal (that the company hadn’t followed due process), the Tribunal should take Tony’s behaviour into account when deciding the amount to award Tony in respect of his claim

Outcome

At the second hearing, the Tribunal gave short shrift on Tony’s claim over the shares, agreeing with MIL that it had no power whatever over the issue of the shares. If Tony wanted to pursue his claim about the shares, he’d have to take it to the High Court.

The court also took Tony’s behaviour as a manager into account as a major contributing factor when deciding the amount to award him (agreeing with MIL).

Ultimately, Tony achieved:

• One tenth of what he had claimed as an employee; and
• No shares

A thoroughly satisfactory result and a happy client