Senior Executives on the move are understandably very focused on their new opportunity, and primarily on the terms of their new service agreement (and you can see some tips on this in our Little Book of Senior Executives Appointments & Agreements.) But often in practice the other crucial issues be forgotten or left to the last minute, and which can have significant impact on a smooth and successful transition to an executive’s new role. We highlight some of the other important issues for senior executives on the move to bear in mind when planning their departure.
- Be clear about your current obligations as an outgoing executive: Look at your Senior Executive contract early so you understand and can take advice on your obligations to your current employer, including, typically, obligations of good faith and fidelity, confidentiality, acting in the best interests of your employer, restrictions on holding outside interests, your notice period, any garden leave period, and restrictive covenants (amongst others); this will help you minimise the risk of breaches of duties to your current employer. Gather any key side letters or other documents that have amended the original contract and review them all.
- Share those outgoing obligations with your prospective new employer: Unless there is a specific provision in your contract preventing it, share with your prospective new employer, a copy or the key extracts of your current contractual obligations that are relevant to you as an outgoing executive, so they, too, understand the extent of your obligations and avoid taking any action which might unwittingly cause you to act in breach of contract. You may have agreed an express term in your contract with your current employer that requires you to do this.
- Notice periods and garden leave are often overlooked and can slow you down: Carefully consider the notice period and garden leave provisions in your current contract – even without restrictive covenants, a lengthy notice period combined with garden leave can significantly hinder the effectiveness of a senior executive move.
- Understand early your restrictive covenants and whether they are potentially enforceable or flawed, and dig out those restrictions buried in your incentive and share purchase agreements: The existence and extent of restrictive covenants in your contract should be considered early to understand their likely enforceability or otherwise, the impact on your move, and the range of options available to minimise any adverse impact. Always look at any related incentive and equity schemes or shareholder agreements you may have to see if they contain additional (and potentially more enforceable and onerous) restrictive covenants.
- Current employers are often sensible on restrictions if they see a commercial opportunity to collaborate with you and your new business: If you are leaving to set up in competition as a Founder, consider whether there is a binding non-competition clause, which will result in a period out of the market, unpaid. In an amicable exit there may be a deal to be done with your current employer and it is valuable to know your rights and limitations early.
- Beware prospective employer requests for confidential information: This may amount to confidential information or trade secrets belonging to your current employer and breach of confidentiality provisions in your current employment contract. Do not retain for unauthorised purposes (including sending to your own personal email accounts or online document sharing platforms), nor share with unauthorised third parties (such as your prospective employer or recruiter) any confidential or proprietary information or trade secrets of your current/former employer, and do not bring any of it onto the systems of your new firm. Check your contract and related policies to be clear as to what your employer regards as confidential and proprietary information that must not be used or shared without their authority. Be circumspect about requests for your current employer’s information and take legal advice if you are concerned that the information being requested may be confidential.
- Good Leaver/Bad Leaver – what are you going to lose as a Bad Leaver and can you minimise the impact? Consider the impact of your departure on any bonus, incentive and equity arrangements, and shareholder agreements, and whether you may be treated as a bad leaver resulting in forfeiture of your entitlements or discounted valuation. The timing of your last day of employment may be key and you do not want to miss out on earned awards, because of a poorly timed resignation. Consider whether you will wish to ask your prospective employer to meet all or part of that shortfall as a commercial matter, and ensure the terms are carefully drafted and clearly articulated in the draft employment contract.
- Tying up your current equity interests on exit: If you will be remaining a shareholder, watch out for the imposition of orderly market provisions in a listed company setting. In a private company setting, you may be able to negotiate retention of some or all your “sweet equity” in some circumstances. Any remaining equity which is being sold back to the employer or its employee benefit trust, will require a simple sale and purchase agreement on which you should take legal advice and consider tax advice.
- Ensure your vague equity promise from your prospective employer is actually worth something and enforceable: Be aware that general promises of equity and other incentives in the future are likely to be very difficult to enforce – it is crucially important to pin down the detail and drafting of your equity participation as part of your hiring negotiations; delaying this until after you have signed your contract or joined your new employer will normally remove all meaningful leverage in those equity discussions, and the opportunity to put in place the relevant entitlement in a clear, detailed and enforceable way will often have passed.
- Retaining outside interests or all eggs in one basket? Consider potential conflict or reputational issues arising in relation to any outside interests or non-executive directorships. Will you be able to retain these at all? If not, consider whether you may wish to seek increased remuneration to reflect the loss of these from your prospective new employer. If you are able to retain some or all of them, will the time commitment to be required allow sufficient time for these interests? If not, this will need to be carefully negotiated with the prospective employer, drawing their attention to the wider benefits of you retaining such roles.
- Working across different countries? Remember to take local employment, tax and immigration advice in those countries! If you work in multiple countries, or you are going to be working in a country that is different from your home country, it is important for you to take tax and social security planning advice and local employment law advice, as well as immigration advice (unless your future employer is arranging your work permit for you). This will include ensuring that the international tax and social security arrangements do not expose you to unforeseen and unwelcome tax/social security risks overseas, and ensure any such risks and additional costs are anticipated in your employment contract, so you are not out of pocket. It is also key to ensure that your employment contract works and is legally compliant and enforceable in all the relevant jurisdictions, so ensure you take legal advice from employment advisers in those countries.
- Do you have to tell your new employer about behavioural allegations against you? If you are moving because of any potential behavioural issues that may, rightly or wrongly, have been raised about you in your current role, take advice on whether you may have fiduciary, implied or even express obligations (eg in a candidate questionnaire) to notify your prospective employer of material information such as this that might affect their decision to hire you, and how and when best to do so in practice.
- Be wary of notifying your current employer of your plan to leave, until the ink is dry on your contract with your new employer and all conditions are confirmed as satisfied: You may be tempted to informally notify your current employer of your plans as a good citizen, but there will be a real risk this could backfire if it results in your current employer starting to hire for your replacement before you have secured your new role, and it may, in a listed environment, trigger stock exchange notifications before you or your prospective employer are ready to go public.
- D&O liability insurance protection when leaving or taking up an appointment as a Director: If you are resigning as a director, in addition to ensuring that adequate directors and officers insurance cover is maintained on your behalf, seek advice on whether you may be able to negotiate an indemnity from the Company in respect of any claims brought subsequently relating to your actions as a director. If your new role includes a statutory directorship, check that D&O insurance cover will apply (and the extent of it) for your benefit if you are exposed to any claims in your capacity as a director.
- Having second thoughts about a proposed move? If your current employer seeks to persuade you to stay after you have signed the contract with your prospective new employer, take legal advice on your risks (including potential risk of breach of contract and how to seek to reduce that risk as far as possible), and the new employer’s potential rights and remedies (and how they might support you commercially) if you decide after all to remain in your current role.
If you are a senior executive considering a move, or if you have any questions arising from this article, or for specific legal advice on particular circumstances, please contact Managing Partner Clare Murray, Partners David Fisher, Merrill April and Senior Associate Louise O’Connor, all of whom specialise in employment law issues for senior executives.
CM Murray LLP is a leading specialist employment and partnership law firm. We are ranked as Tier 1 and Band 1 in Legal 500 and Chambers and Partners for advising senior executives and are recognised as a “very strong employment law boutique. Entrepreneurial and market-leading, and a really good, friendly team.” (Legal 500 UK).