Nicola McConville
Mishcon de Reya
Okay so I think what we’ll do is, is kick off. So, hello everyone, my name’s Nicola McConville, I am a partner here in the corporate team at Mishcon de Reya and I’d like to welcome you to our eighth Disputes Nightmare scenario where we provide practical insights and share our experiences on some common dispute nightmares. If you have any questions, please send them to us using the Q&A function at the bottom of your screen. So imagine it’s a Monday morning, you’ve made your first cup of coffee, you’ve fired up your laptop and at the top of your inbox is an email from the CEO of your company tendering their resignation and further, making allegations of constructive dismissal. The CEO is also the Founder of the company, they’ve built a team, they’ve lead the company through various funding rounds and their personality and identity are intrinsically linked with that of the company both internally with employees and externally in the marketplace. Things had been deteriorating for a while however and it has become increasingly clear that there is a gulf between the strategy and the direction that the investors want to deploy together in comparison with that of the CEO and not only in terms of the sort of vision and strategy of the CEO but perhaps also their skillset as well. However, nobody was anticipating the CEO to pre-empt things in this way and to resign and make such claims. So to help us address what we should do in this situation we have Peter Ogden, Managing Director of Powerscourt and Kim Wedral-Rooke, Partner and Head of Startup and Scaleup Employment Practice here at Mishcon. So Kim perhaps you would like to introduce yourself and then we’ll come to you Peter.
Kim Wedral-Rooke
Mishcon de Reya
Sure, thanks very much Nicola and welcome everybody um so yeah to sort add to Nicola’s introduction there, so my role here at Mishcon is to support founders, boards and the wider collaborators that, that work with them to help manage talent, their talent strategy here in the UK and globally and to help manage their employment law risks um and I have particular experience in working with um founders and boards to help navigate some of the issues that we are going to be talking about today in terms of addressing founder disputes.
Peter Ogden
Powerscourt
And um, morning everyone um so despite the logo behind me, I work at Powerscourt, we’re a communications consultancy. Um thank you for allowing me and inviting me to join this call. As some of you might know Powerscourt, we were once referred to as the Cities Fourth Emergency Service um but we’ve got a bit bigger since then so the special situations practice which is one of the two practices that I, that I run at Powerscourt encompasses crisis litigation and what we call high end reputation management. So this is very much integral to what we do and as we’ve all discussed um, there are a lot of examples that we can attach, we can think about over the last few years um and yeah, no I look forward to, to discussing some of the communications priorities later on in this call.
Nicola McConville
Mishcon de Reya
So we’ve had an email with a resignation and allegations. Kim what are the first few things that we should be thinking about?
Kim Wedral-Rooke
Mishcon de Reya
Great yeah thank you. So, so I guess looking at it from a, from an employment law perspective I suppose the first point worth making and it’s not so much a legal point but it’s obviously linked to the fact that you know, the, the founder Theo in this instance is an executive, is an employee so they will hopefully have some kind of employment agreement which sets out that, that relationship that they have with the company. So um, I guess the practical first step is to think about you know, what are the necessary steps, what do we need to do to sort of ensure that we’re protecting the business systems so think about whether it’s appropriate to lock down access immediately um to the systems and who do we need to speak to IT, related teams etcetera to make sure that um there’s no ability for you know, the um founder CEO in this context to do any sort of internal damage via our systems. Um and I suppose in terms of doing that we need to make sure that we are aligning with what is in the employment contract and what we have within our wider policies within the business as well um just to make sure that we’re managing any sort of risk there. So um, I think the next thing to consider is, is obviously this you know, the CEO founder is an employee and so the claim that they make in this instance of constructive unfair dismissal we need to think about what are the appropriate things as a business that we need to do to manage that particular claim and I guess just delving in a little bit of detail to what the claims are that could be made in this context. We talk about constructive unfair dismissal in a nutshell what that is is the founder CEO in this context saying effectively what’s happened with regards to the sort of misalignment between their views and that of the board or really any steps that have been taken in the meantime, so for example changes to rolls, changes to job titles etcetera, um are technically breaches of their employment contract um which are so damaging that it entitles them to resign with immediate effect from their position as an employee of the business. So, so that’s the kind of constructive unfair dismissal um component. Obviously it requires an immediate resignation um but um, what, what’s the kind of risk profile of those claims well there is a kind of capped liability perspective to such a claim um so normally it’s about a years’ salary or about 110k whichever is lower that is a successful claim in unfair, of, of constructive unfair dismissal can attract. So typically what we see is that in this context a founder CEO may well bring other claims into the mix as well so you may, you may hear allegations of whistleblowing i.e. the board has done some things that, that you know, the, the founder CEO says are um you know, either unlawful or very damaging to the business um you might have claims of discrimination as well i.e. that the founder CEO has been treated, mistreated by virtue of a certain characteristic that they have whether that’s age, their nationality um, their gender etcetera. So um these are the sort of claims that typically are included within the allegations that are brought and the reason for that usually if we look at it from a strategic perspective is that they remove the sort of constraints that a pure constructive unfair dismissal claim would have which I just mentioned a moment ago. So they are the kind of broad claims we might have here um and what do we need to do with those in the first 24 hours, well we need to make sure that we’re looking at our contract of employment um, we need to make sure that we are looking at the policies and ensuring that any steps we take are aligned to those. Um, I mentioned also the, the um, the fact that the founder CEO in this context resigns with immediate effect so one of the areas to be thinking about quite closely here is um the interplay of when is their last date of employment, what do we want to do with their notice period which would typically be set out in their employment contract given that they are saying, ‘I’m not giving you any’ um you know, what do we want to do in that regard um and might we want to think about some kind of gardening leave and enforcing that in order to try and protect some of the business interests we’ve just talked about and the final thing to think about um, from an employment law perspective um within that very short time frame is um you know, what damage in a wider context um outside of just bringing claims against the company can the founder CEO do with their position of influence, the contacts you know and the connections that they have so really think about the restrictive covenants um and what you want to do with those and, and typically founder CEO may be saying well because of the breach that I say has happened the restrictions in the employment contract don’t apply anymore. We need to think about is that right and what do we say in relation to those restrictions and how important are they. You typically have those in the employment agreement all laid out in the employment agreement but you may also have those laid out in the shareholders or investment documentation by virtue of that founder CEO’s possible secondary facts that they may have in the context of them being a shareholder of the company and Nicola maybe you want to hop on that point?
Nicola McConville
Mishcon de Reya
Yeah, no definitely I mean I think I would most definitely be going and putting my hands on those documents sooner rather than later for a number of reasons. Um, so there is a slight overlap with, with employment in terms of the role that person plays as well so if a person is a director and an employee we want to make sure that they are resigning from both of those posts um and so the wording of that resignation letter is going to be quite important as is potentially the wording both in the shareholders agreement and in the employment contract that basically ensure that those two roles are correlated so in the event that somebody resigns from one, they are regarded as resigning from both roles. The last thing that we want is somebody to resign from an employment role but still find themselves on the board with everybody else having to deal with them in, in that situation. You touched on restrictive covenants, again non-competes and restrictive covenants are really important. In shareholders agreements we have them in shareholders agreements because of the different ways of being able to enforce them so you know, in a shareholders agreement its um, you know the investors, the other parties to that agreement that can enforce those covenants in comparison to an employment situation and obviously its different law that applies to those covenants than it is in an employment situation. I’d also be looking at confidentiality provisions that again, the last thing that we want is somebody standing there with a shareholder role being able to be really disruptive in terms of communication with other shareholders and other sort of stakeholders and running sort of rogue or even more rogue um and so you know, that’s the sort of thing that I would be looking for in those corporate documents so restrictive covenants, confidentiality sort of provisions ensuring that resignation is, is encompassed across all roles that that person may have with the company um before sort of moving on to anything else but actually Peter from a messaging sort of perspective you know, the, the sort of founder CEO can be quite big characters um and so how would we you know, think about going about how to address things in the immediate aftermath?
Peter Ogden
Powerscourt
Thanks Nicola. So I am sure we have all worked on, everyone on this call has worked on analogous situations and I hope time permitting we’ll come on to talk a bit about how we can put ourselves in the best position to avoid these situations from happening but certainly my experience, you know once the Mishcon team have worked their magic it should limit the risks that these matters will become public um which gives us as communicators time to get the messaging right preferably in conjunction with the founder - so that’s the best scenario of course but that’s not always the case. So we talked about this scenario and let’s work on the basis we’re not able to keep the news private and we are forced into addressing this publicly. So what do we do? What do we do as communicators? I am going to talk about three themes if you like and the first one I talked about transparency and honesty. So in terms of I guess the, the approach that this kind of situation, our view or my view is to you’ve got to be up front. We must acknowledge the situation quickly and transparently. Don’t try and sugar coat it or wait for information to leak because a delayed response will always look worse. That’s my first message. I think that next we need to explain the situation so we need to provide a clear and concise explanation of what’s actually happened without going into the unnecessary details, the minutiae of internal you know Machiavellian, a disagreement if you like or certainly you’re blaming the founder let’s focus on the facts because that’s what really, really matters here and finally you should express concern. You need to show empathy for those people that will be affected by the founder’s actions or the situation, the instability this will create, particularly employees which are always the key stakeholder here but also customers, investors and other stakeholders. That’s my first if you like theme and the second theme is taking action. So I think we need to address the issues um, we need to outline the steps that are being taken to deal with the situation. This could be obviously removing the founder from their position and Mishcon’s team have just discussed some of the legal implications, launching an investigation etcetera, etcetera. But we also need to provide reassurance to our stakeholders so I think we need to empathise the company’s commitment to its values, to its strategy, to its future. We need to reassure um employees, customers and investors that the company is stable, a going concern and will continue to operate you know and show confidence in our business, that it isn’t just centred around one individual and ideally if possible, we need to be able to be decisive about confirming new leadership because no one likes a vacuum, we need to demonstrate that in the absence or, or with the founder’s decision to move on or being asked to move um, that we have a new leadership team in place, even interim leadership will provide greater calm to what is a worrying situation so we need to prevent a leadership vacuum. And finally, communication. I’d make the point that we know as communicators that every situation is different and requires a different response so I am only talking in principal here and again I am going to say, look I think we should be proactive. Be proactive in communicating with our stakeholders. That could be form of a press release of course, it could even be a press conference if it is particularly high profile and updating our social media channels regularly but the main thing here is about controlling the narrative. By being proactive I would argue that you are in a better position to control the narrative and prevent let’s say, the media from spinning the story in a negative light. So we need to emphasise the company not just the founder, let’s shift the focus to the company’s work, it’s mission, the talent inside the company um and of course when it comes to stakeholders, I mentioned when I first started talking um you know, internal coms is key and will set the tone for the external messaging. I am sure a lot of us have clients or perhaps we work in a company um where an internal communication is public almost instantaneously and as rule of thumb I always say to all my clients, whatever we say internally you have to assume will be leaked but some companies are more leaky than others. Now that is a challenge of course but it is also an opportunity because I would argue um, any internal announcement is basically a press release because I know it is going to be sent to you know, someone at The Sun or whatever it might be and it provides us a great opportunity to help control the narrative around the situation. So what we are telling our staff internally has to be consistent with what we want the external message to be and I’ll just conclude with my, my four minutes on, on what I think is the key objective from a communications perspective on this kind of scenario and that is to minimise the damage to the company’s reputation and restore trust with stakeholders. So I think by being transparent, by taking action, by communicating effectively we can weather the storm and move forward constructively.
Nicola McConville
Mishcon de Reya
Thank you, thanks for that. So we’ve talked about some initial sort of first steps. There’s then um, you know this will be an ongoing process. This isn’t going to be dealt with in a sort of first few days particularly with the sorts of allegations that have been made and the process that goes with dealing with somebody in this situation. I know that obviously you know, quite emotive journey, it can be quite an emotive journey particularly with some you know, sort of big personalities involved both in terms of the CEO or indeed perhaps other people on the board so in terms of moving much more towards the sort of medium term and, and how we deal with this. I mean certainly from um a corporate perspective we talked about the sort of shareholder agreements and the articles of association um, key from my perspective in those documents are looking at things like the leaver provisions so you know, this person will have different roles um, in the company both as an employee, a director and a shareholder um and I would certainly be looking at the leaver provisions but obviously the leaver provisions come down to how long somebody has been at the company but also why they are leaving and that is often influenced by what happened in the employment context. So Kim I wondered whether I could sort of hand over to you to sort of expand on you know, some of your thoughts about how this might role out in the sort of slightly sort of medium to longer term.
Kim Wedral-Rooke
Mishcon de Reya
Sure yep, no thank you. Um so I think you know obviously the founder resigns and makes these, these sort of allegations that we covered in a bit of detail earlier. Um, I guess the first point is how will we manage those um and you know, we’ve kind of taken some initial steps to, to help manage them, thinking about how we deal with the resignation, how we document that, how do we deal with notice etcetera. Um but then we need to think more broadly in terms of how can we protect the company in the best possible way here in terms of the actions we take now in the short term so one of those might be as Peter mentioned, do you want to do some kind of internal investigation here in terms of the allegations that have been raised notwithstanding the fact that the individual is no longer technically an employee of the business, it’s often good practice to consider doing some kind of internal process to demonstrate that you are taking those allegations very seriously and that you are doing something to, to sort of progress those internally and to address them. It might not necessarily be strictly in accordance with the policies and procedures that obviously only apply to employees who are still employees of the business but it’s definitely something worth thinking about as um, as a next course of action in the shorter term and obviously slightly more medium to longer term you need to be thinking about the kind of strategy for any external um, you know action that would be taken here. So obviously in this context um the founder CEO may look to bring an employment tribunal claim um and it’s worthwhile thinking about what strategically how does the company want to handle that, what’s the strategy, what’s the next steps to try and put ourselves in the strongest possible position there. Um, and then the other sort of aspect to think about is perhaps more a logistical practical one is things like you know, the return of company property. Making sure you get you know, items back that, that the individual holds and that sort of stuff um so I think they are probably the two sort of medium term considerations um that we want to have from an employment law perspective and I think touching on, on something um both of you I think mentioned earlier actually is um and I don’t know whether this perhaps falls into the first 24 hours rather than shorter term but it is certainly something to keep looking at and evolving, you know we talked about the communications piece, I think one of the areas that I often see coming up here is how the founder CEO may engage with the stakeholder based shareholders um you know, and particularly those who are sort of day to day operationally involved with the company, so those on the board and perhaps a bit more widely. So it’s really having a strategy around you know, if the founder CEO goes direct to lots of those individuals you know, what is it we are going to say, how are we going to say it and making sure that everybody is consistent across that and I think it’s a point you made Peter, but I think it’s one that does crop up so I just thought I would sort of um, reinforce that point. Er yeah, Peter I don’t know whether there’s anything you want to add to that too?
Peter Ogden
Powerscourt
Um well I think from a coms perspective you know what’s really important is getting it right early doors. I mean if you get it wrong then you are constantly fighting an uphill battle aren’t you so I would just remind I guess people what I said earlier which is about action, transparency er and, and showing leadership. Yeah, so I think those are my main messages. I think um if you get it right early doors the medium term handling does become a lot easier so we can shift, it’s about focus on other stakeholders and putting the spotlight on our business and our people so the company is seen through the prism of either like a rogue founder. That all said of course and if we talk about initial coms being key, our ability to retain our good people and demonstrating continued strategic progress. The unknown factor is of course is the actions of the founder and, and that’s a different, that’s a longer call that we’ll have to discuss on a separate blog, a separate podcast if you like. If the founder goes truly rogue over a campaign and I am sure there’s been a couple of names and a head of where that might have happened, well that’s different. That requires a long term if you like crisis communications response which is not for this call so I think get the, get the early communications right, focus on the company and get the, get the message out around leadership and strategic progress. That will be my message for the medium term notwithstanding the rogue actions of a founder could potentially make things an awful lot more complicated in the longer term.
Nicola McConville
Mishcon de Reya
Okay. So I am going to go to a question that we’ve had in the Q&A and then I am going to come back to each of us for our sort of one top tip um to deal with this sort of situation. So um, Kim I think this is possibly sort of one for you and I can contribute a little bit to it but ‘do founder directors have any different rights inferred by law um or any other mechanism beyond what is in an employment contract?’
Kim Wedral-Rooke
Mishcon de Reya
Yeah absolutely that’s a great question um. So, so they have rights that are conferred on them by virtue of you know, employment laws and statutory laws that we have attaching to employees more generally so most of that stuff will be captured in a sort of well drafted employment contract um but some of it is obviously sort of public policy related stuff so um you know, for example even if you don’t have the most robust confidentiality provisions in the employment agreement um with the founder, the law will imply that by virtue of their role and their position and their knowledge they have a duty to maintain confidentiality so um there’s definitely you know, aspects that the law will sort of come in and, and sort of bolster but I think I would always be advising to have a good solid employment contract in place. Beyond that there’s not really anything over and above what’s in there and obviously what, what a founder has by virtue of the employment claims and rights that they are able to bring um that they have in terms of statutory rights. There are other countries around the world where that is the case um you know, just by virtue of being a founder sort of executive director you do have some additional conferred rights whereas we don’t necessarily have that here um, the law will look at them as if they are any other employee as such.
Nicola McConville
Mishcon de Reya
Yeah. So I would say they don’t necessarily have um additional rights and different rights but they do have different obligations um in that being a director they’ve obviously got er sort of fiduciary and legal duties er which are owed above and beyond any employment contract and they may well also have obligations under any shareholders agreement um and shareholder documentation by reason of the fact that they own shares in a company and those agreements can also put um, you know additional obligations and restrictions um on those directors by way of example with the non-competes which have a slightly different enforceability mechanism in sort of corporate documents than they do in employment documents. Um I’m really sort of conscious of time so perhaps um we’ll just circle round and just say you know, you’re one top tip so Peter what can I come to you with your sort of one top tip um to perhaps how you avoid getting yourself in this situation in the first place?
Peter Ogden
Powerscourt
Well I would say two things to that, firstly is this is about the board, the board have got to be on top of this, simmering intentions often happen months even years in advance and a strong board with a strong chair should be able to anticipate this kind of stuff and either agree an exit plan or, or come to some kind of compromise. I think the second thing again with my PR hat on is, is a founder leading is a bone fide or potential bone fide crisis it is really important for everyone om this call take the opportunity to review their crisis coms, preparation and have a think about that to make sure there is a crisis coms plan in place so for exactly this kind of scenario, a founder going unexpectedly, how are we going to communicate with it, they would be my two messages.
Nicola McConville
Mishcon de Reya
Okay Kim what about you?
Kim Wedral-Rooke
Mishcon de Reya
Yeah so I think mine probably have a similar territory but um, make sure that you are prepared, as prepared as possible for this kind of scenario playing out so make sure that there’s a robust employment contract in place, good policies, a general framework um that, that addresses this potential scenario and make sure that you’re acting in accordance and in alignment with that and take some good advice um pretty early on I would say because it’s rare as you outlined in your scenario Nicola that you are just going to get this call out of the blue or this or this email out of the blue, you know, there is a lead up to that so I would certainly be saying get on top of that as early as possible so that we are managing the, the risks in the right way before it gets to this particular point.
Nicola McConville
Mishcon de Reya
And I think I would just sort of add to that in conclusion which I think we have sort of drawn out through the, the Q&A in this discussion is the fact that this person has multiple roles within a company and so its ensuring that you have documentation in place and governance in place to be able to deal with that so you have an employment contract in place, you can check whether it deals with the resignation as an employee also being a resignation as a director. You have a shareholder agreement in place and articles of association in place that actually work in conjunction with that employment contract and also sort of set out scenarios and processes for what’s going to happen in this instance and I think there is a whole sort of perimeter of other things that we haven’t talked about that would need to be you know, considered as well. You know, what’s going to happen to somebody’s options or you know, sort of their, their you know equity incentives. What happens if actually early on in the life of the company they might have invested into the company so they’ve also got a sort of an investor hat on as well. What happens to their investment shares, their option shares and their founder shares and I think all of that just needs to be sort of swept up and we haven’t even mentioned the tax word um as well but um, but I think we are coming to the end of our time of our flash webinar but what we will do is um to the extent that we’ve received some other questions in the Q&A, we are not going to ignore you, we will come back to you and answer those sort of privately to you um but in the meantime I would just like to thank Kim and Peter for participating and thank you all for joining.