Director, partner and LLP member disputes

If you are a director, an equity partner or an LLP member, you are not simply an employee. There are usually two or three legal relationships running at once, and they end on different terms.

Why these are more complicated than a dismissal

A senior employee has one relationship with the business. You probably have several.

Your office as a director. Governed by the Companies Act and the articles. You can be removed by shareholder resolution, and removal from office does not by itself end your employment.

Your employment, if you have a service agreement. A separate relationship with its own notice provisions and its own claims.

Your shareholding. Governed by the articles and any shareholders’ agreement. This is frequently where the real money is, and where compulsory transfer provisions — “good leaver” and “bad leaver” clauses — decide what your stake is worth.

Your partnership or LLP membership. Governed by the partnership deed or LLP agreement, which will have its own expulsion and retirement provisions.

Each can be brought to an end differently, and a step taken in one can prejudice another. Resigning as a director to avoid a difficult board meeting can convert you from a good leaver into a bad one. Accepting a package that deals with employment while leaving the shares unaddressed can be a very expensive oversight.

The valuation question

Where there is a shareholding, the argument usually comes down to two things: whether you are a good leaver or a bad leaver, and how the shares are valued.

Good and bad leaver definitions are often drafted loosely, which means there is frequently room to argue. The financial gap between the two is commonly the difference between market value and nominal value — that is, between a substantial sum and nothing.

On valuation: whether a minority discount applies, which valuation method is used, and who appoints the valuer are all usually determined by the articles, and are all worth reading carefully before anything is agreed.

Unfair prejudice. Where a minority shareholder has been excluded from management, denied information, or had their interest diluted, a petition under the Companies Act is available and the usual remedy is an order that the shares be bought at a fair value. It is a powerful remedy and the prospect of one often changes a negotiation.

LLP members

Members of an LLP are generally not employees, which means no unfair dismissal claim. But you are not without protection.

Discrimination law applies to LLP members, so a member expelled for a reason connected with a protected characteristic has an Equality Act claim — uncapped, and with a separate award for injury to feelings.

Whistleblowing protection applies to LLP members too. Again, no cap.

So the absence of employment status frequently matters less than people assume. What it does mean is that the claims worth bringing are different ones, and identifying that early is most of the work.

What we do

Read the whole picture first — articles, shareholders’ agreement, service agreement, partnership or LLP deed — before anything is signed or resigned. Work out what each relationship is worth and in what order they should be dealt with. Negotiate an exit that deals with all of them together rather than one at a time. And where negotiation fails, bring the claims: unfair prejudice, discrimination, whistleblowing, breach of contract.

Because these matters cross employment, company and partnership law, they are the clearest example of why this firm is arranged as it is. A client who instructs an employment solicitor and a corporate solicitor separately pays twice and gets advice that does not join up.

Questions

Questions people ask us

I have been removed as a director. Am I still employed?

Probably, unless your service agreement provides otherwise. Removal from office and termination of employment are separate steps, and employers frequently do one without properly doing the other — which can be to your advantage.

They are treating me as a bad leaver. Can I challenge it?

Often. These definitions are usually drafted loosely and the financial consequence is large, so it is worth reading the clause closely rather than accepting the label.

I am an LLP member. Do I have any employment rights?

Not unfair dismissal, generally. But discrimination and whistleblowing protection do apply to members, and both are uncapped — so the claims available may be worth more than an unfair dismissal claim would have been.

Should I resign before the board meeting?

Take advice first. Resigning can change your status under the articles, can convert you from good leaver to bad leaver, and can weaken claims you would otherwise have. It is the most common self-inflicted injury in these matters.

What is unfair prejudice?

A claim by a shareholder whose interests have been unfairly prejudiced — exclusion from management, denial of information, dilution, diversion of opportunities. The usual remedy is an order that your shares be bought at a fair value.

The hub

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Unfair and constructive dismissal →

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