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Published On: March 15, 2021 | Blog | 0 comments

Company Transactions for SMEs: What if a departing Shareholder is also an Employee?

Sometimes, the shareholders of a business are also its employees. This means that when they sell their shares, their employment may need to be terminated, depending on the terms of their departure.

If a shareholder is employed by the business and is exiting the business altogether, it is important that their departure is handled in accordance with the relevant employment legislation. This means that they will need to give or be given adequate notice under the contract or Section 86 of the Employment Rights Act 1996, as a first port of call.

Whatever the reason for the departure, it is always best to ensure that there are no loose ends and so a business may want to consider entering into a Settlement Agreement with the departing shareholder / employee:

  • This will ensure that the shareholder waives any and all claims that they might have against the business and therefore there will not be a risk in the future (save for very limited exceptions);
  • The business will likely pay an enhanced compensation of sorts, to be agreed between the parties, but it is often a small price to pay for ‘peace of mind’;
  • The Settlement Agreement will remind the departing shareholder of their ongoing obligations of confidentiality and perhaps any restrictive covenants and post-termination obligations that may exist in their Employment Contract or Shareholders Agreement; and
  • The company will need to make a contribution towards the employee’s legal fees is obtaining independent legal advice in connection with the Settlement Agreement.

If you do enter into a Settlement Agreement, this could also be to the benefit of the departing Shareholder in that you could structure the payment in a way that saves them on any tax payments – for example by paying part of into their occupational or personal pension. It is worth them obtaining tax advice on this point and consulting an accountant or tax expert.

With any employment implications that this would bring up, please do not hesitate to contact myself or our employment team:

020 7940 3907

*Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*

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