In the recent case of Richards & Anor v IP Solutions Group Ltd [2016] the court considered whether two founder directors were wrongfully dismissed and also the operation of a bad leaver provision as set out in the company’s articles of association. The case deals with an investor director (appointed as a representative of a private equity house) and the independent non-executive director (“NED”) summarily dismissing two founder directors in a board meeting on grounds of serious breaches by the directors of their duties as employees and directors.  The founder directors each held 30% of the shareholding in IP Solutions Group Ltd (the “Company”).  As per the bad leaver provision in the Company’s articles of association, on being summarily dismissed the sale price of the leaver’s shares was £1 in aggregate for all the sale shares.  Following their dismissal, the founder directors were notified that their 30% shareholding was to be transferred to the Company for an aggregate of £1 under the bad leaver provision.

The issues that Mrs Justice May DBE considered were:

1. If the two founder directors were wrongfully dismissed; and
2. if the Company was summarily entitled to dismiss the founder directors, was the bad leaver provision a penalty and therefore no effect?

The primary disagreement between the founder directors and the investor arose in relation to the calculation of the bonus. The bonus to the founder directors was calculated on a pre-agreed accounting model which was a complex model.  Following Q1, the finance director and the investor’s representative initially thought that the Q1 target was reached. The founder directors were paid a fixed bonus (albeit without the formal approval by the board through a board meeting). However, after further detailed calculation by the investor, it was concluded that the test had failed for Q1, but was likely to pass for the upcoming quarter. The founder directors accepted this, but instead of repaying the Q1 bonus, they offered for the bonus to be off-set in the future quarter. The investor was also not happy about the progress of the business. The investor and the independent NED planned ahead of a board meeting and summarily dismissed both the founder directors.

The main issue turned on whether (i) the directors breached their statutory duties; and (ii) if the Company was entitled to summarily dismiss them. The investor’s counsel argued that as per their employment contracts, their statutory duties were in effect a strict liability on the directors.

It was concluded that the founder directors were wrongfully dismissed. It was accepted by the founder directors that retaining the Q1 bonus breached their statutory duty, but it was not a material breach. The other breaches quoted by the investor’s counsel were also held to be insignificant.

Though it was not necessary to decide on issue #2 above, the judge set out briefly the tentative conclusions she would have reached on this issue. She considered the recent decision of the Supreme Court in the case of Cavendish Square Holding BV v. Makdessi [2015] and the reasoning of each of the justices in that case.  She concluded that the arrangement for “Leavers” as provided for under the articles of association was more akin to a primary obligation agreed between parties for distinct commercial reasons to do with a shareholder leaving the Company. On this basis the price of £1 payable for the aggregate shareholding of a person who is a “bad leaver” is simply the agreed price on transfer. Even if the transfer and pricing provisions in the articles were to be construed as secondary obligations consequent upon breach of the employment contract, there was nothing unconscionable in an arrangement arrived at between parties dealing at arms-length with the benefit of extensive expert advice. The judge concluded that “had it been necessary, therefore, I would have found that the Transfer provisions relating to a “Bad Leaver” were enforceable”.

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