Iain Duncan Smith’s recent surprise resignation sent shockwaves to the heart of the government and the inter-party fall out that followed has left a damaging impression.
These events are a timely reminder to businesses of the importance of adopting strategies to make sure that senior individuals who choose to exit a business are able to do so without damaging trading relationships or taking business opportunities with them. It is not uncommon for business relationships to breakdown. Without appropriate protection in place, businesses could face former employees, directors or shareholders going to a competitor; stealing business, key employees and company information, and possibly even remaining involved in a business as a shareholder or director after they have left. These risks can be minimised by including appropriate provisions in key documents relating to their employment, directorship and share ownership.
Confidentiality clauses or post-termination restrictive covenants are often included in employment contracts or shareholder agreements to prevent former employees, directors or shareholders from using confidential information or doing other things that might damage a business after the relationship has ended. Restrictive covenants can be used to prohibit exiting individuals from competing with the business or poaching staff, clients or contacts for a period of time after they have left. A business can take appropriate legal action if a departing employee breaches any of these important provisions. When the exiting employee is also a director and/or shareholder, key provisions should also be put in the relevant documents allowing a business to buy back shares, or remove them from their office as a director, as soon as the employment has ended. This will remove their interests in the business and stop them from becoming an obstacle to running the company.
Every business or partnership, whether it is with friends, family or strangers, needs firm and fair exit provisions outlined at the start. Any restrictive covenants included should be carefully drafted and tailored to each individual. The courts will not enforce provisions that are unclear or unreasonable in terms of scope and duration. It is therefore vitally important that restrictive covenants are reviewed regularly; particularly as an individual’s role or responsibilities change; and any changes to the covenants should be agreed with the individual concerned. The best time to do this is on promotion or on a pay increase – a time when the individual gets something in return for agreeing to the new provisions.
Senior staff often have long notice periods, which could be anything up to six months or a year. This could also cause problems. It may therefore be wise for employment contracts to include several mutually beneficial ‘get out clauses’ to help make the leaving process easier for both parties. Businesses should consider including garden leave or payment in lieu of notice provisions in employment contracts. The last thing a business wants is a disengaged employee still at work, having access to confidential information, key staff, clients and contacts. This is particularly the case if they are going to work for a competitor.
Putting an employee on garden leave means they are still employed by the company throughout the notice period, but are not expected to attend work during that time. The company will still have control over the employee and can ensure that they are not getting up to mischief while they are working their notice. Similarly, agreeing to terminate employment immediately and paying in lieu of notice can also encourage a cleaner termination process. Both of these mechanisms can reduce the likelihood of the employee having contact with staff, clients and business contacts while working their notice period, thereby reducing the chance of the employee taking steps that might damage the business.
To sum up, businesses wanting to protect their interests should always carefully draft employment contracts and shareholder agreements on the assumption that things could go wrong. Strong exit provisions need to be written into the contractual documentation from the moment the relationship starts and should be regularly reviewed throughout.
