Iain Duncan Smith’s surprise resignation sent shockwaves to the heart of the government, and the inter-party fallout that followed has left a damaging impression. These events are a timely reminder 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 break down. 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 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. 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.
When the exiting employee is also a director and/or shareholder, key provisions should 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.
Every business or partnership 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 that any changes to the covenants should be agreed with the person concerned. The best time to do this is on promotion or at 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. It may therefore be wise for employment contracts to include several mutually beneficial ‘get out clauses'. Businesses should consider garden leave or payment in lieu of notice provisions in employment contracts. Both of these mechanisms can reduce the likelihood of the employee having contact with staff, clients and business contacts while going through their notice period, thereby reducing the chance of the individual 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.
Chris Kisby is an employment law partner at Shakespeare Martineau
