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Company Law

Analysis - guidance - compliance

26 MAR 2013

The Interaction of Corporate and Employment Provisions in Corporate Transactions

Caroline Waterworth


Solicitors acting on corporate matters for individual executives should always keep an eye on any relevant employments issues that arise in the course of negotiations; this will allow them to consult specialists or make appropriate provision. The reason for this is well illustrated by a scenario I advised on. The facts are as follows.

The Scenario

A started A Holding Limited and A Limited (A Holding Limited's 100% subsidiary). A was employed by A Holding Limited. After some time of successful trading, A Holding Limited was placed into administration and a pre-pack was arranged with a third party. Both A Holding Limited and its subsidiary were purchased. A Limited was subsequently placed into administration and the administrators of A Limited purported to terminate A's alleged employment with A Limited and not A Holding Limited who A had, prior to administration, had a contract of employment with. In any event, on receipt of the letter purporting to terminate her employment, A quit as her position within the company had become untenable.

A's Position

The Shareholder and Subscription Agreement (SSA) which A entered into with the third party following the pre-pack stated that A and the company ‘acknowledge the intention' to enter into a service agreement, in substantially the same form as A had had with A Holdings Limited prior to administration. The intention was stated to be that this would happen within 2 weeks following completion. Suffice to say, the service agreement was never concluded.

The company's new articles of association included the following definition:

‘Good Leaver means a Leaver who:

(a) ceases to be employed by a Group Company in any circumstances where the Cessation Date is on or after the third anniversary of the Adoption Date; or

(b) ceases to be employed by a Group Company where the Cessation Date is on or after the first anniversary of the Adoption Date [in a number of non-relevant circumstances].'

In order for A to qualify as a Good Leaver she had to be employed for three years after the Adoption Date and the clause provided that the employment could cease for any reason. On a strict interpretation of the clause A did not fall within the definition of a Good Leaver. Consequently, A was a ‘Bad Leaver', as ‘Bad Leaver' was defined as a Leaver other than a Good Leaver.

The effect of the interaction of the Good Leaver/Bad Leaver provisions in the Articles of Association and the lack of the service agreement raised a question as to what, if anything, was A advised at the time of the purchase of A Holdings Limited in relation to effect of the Articles of Association, the SSA and the service agreement.

Unsurprisingly, in this particular instance, the SSA was not ‘pro-Executive'; it had not been drawn in A's favour at all. As a matter of commercial negotiation, A would have been in a weak position at the time given that the third party was ‘coming to the rescue'. However, whilst there may have been significant limitations as to what A could achieve overall in the SSA there were a number of sensible precautions which could have been operated to protect A's position.

If faced with a similar predicament, the following principles could be applied:

(i)      simultaneous execution of the service agreement and the SSA rather than simply stating an intention to execute the service agreement at some date in the future which left important details ‘up in the air';

(ii)      a provision in the SSA that A would have a guaranteed period of employment (subject, if necessary, to the counter-provision that no fundamental breach of the service agreement should be committed within that time); and

(iii)     clarification of the Good Leaver provisions such that if A's employment was wrongfully terminated in the guaranteed period, A would be a Good Leaver.


With deadlines for deals often pressing, it may seem prudent and desirable to leave the drafting of an entire agreement (such as the service agreement in A's case) until the frantic pace has calmed, allowing the remaining matters to be finalised at a more prosaic pace. However, in this case, A was left unprotected. That was an upsetting experience for the founder member of the company to endure and it could easily have been avoided by the implementation of the three principles set out above. The company could have been rescued but A could also have had a more secure future.

The advice to practitioners embarking on corporate deals of a similar nature, and in particular when you are acting for an executive, is always consider the effect of one document in the transaction on the others, or, to turn it round, is another document needed in order to make the deal complete? The proposition is a trite one but when situations become involved and complex it is often difficult to take a step away from the detail to review the bigger picture for a client. However, the consequences of not doing so are significant.

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