All employees, non-executive directors (NEDs) and even executive/employee board directors – even when holding shares – can be dismissed by their employer from their engagement.

In such circumstances, you will potentially have 3 different sets of legal rights which will each need to be considered:

• employment,
• board director; and
• shareholder.

Each role will be governed by different rules and usually separate documents (or underlying mandatory statutory rules or case law as the default). Often these rights and rules will be interconnected. For example, what happens with your shares will often depend on the company’s reason for your dismissal.

Sometimes, you may have to offer your shares up for sale. The price you will receive may be governed by the circumstances surrounding the reason for your dismissal. If you are deemed a “bad leaver” which is often triggered if the company deems that your dismissal is for a qualifying “cause” such as your purported misconduct or poor performance etc then you may receive a lower price than if you leave as a “good leaver”. The provisions that govern this are typically found in the company’s articles of association (its constitution) or its shareholder agreement and vary from company to company.

If you are a shareholder as well as an employee/executive director you will have (i) shareholder rights (ii) director’s rights and duties as well as (iii) often valuable employment rights which gives useful leverage. While you remain in employment, often your employment rights can be used strategically to put you in the best position to resolve any misunderstanding or negotiate the best commercial and financial exit package for your overall employment and shareholder rights.

A shareholder can be dismissed from employment and the Board of Directors even if they founded the company or group. Any shareholder or co-founder who is a C-Suite director or senior employee can be given notice of termination of employment and “fired” from a company in the same way as any other employee. Your employment rights and shareholder rights are separate but overlap in important areas.

This firing or dismissal can be for a lawful reason (redundancy, genuine conduct or performance concerns etc) or unlawful (unfair, whistleblowing or discriminatory etc) depending on the circumstances and processes deployed, and further discussed below.

There may be substantial financial consequences for the employer if the termination is not “fair” or lawful. Some founder/shareholder clients have been unfairly or unlawfully (ie in breach of the employment contract’s terms) dismissed from C-Suite employment roles as a result of a Machiavellian shareholder, investor or boardroom dispute or clash.

You potentially will have employment rights and also your commercial shareholding rights in this situation and you will need to take steps to proactively protect both sets of parallel rights.

As an overview, for the employment dismissal to be legally “fair”

1. the employer must have a fair and lawful reason for dismissal which will apply to you as an employee, regardless of your additional shareholding status.

There are only 5 lawful reasons to terminate employment in the UK being: redundancy, capacity/performance, conduct, statutory restriction (continued employment is now unlawful such a professional who has been prohibited from practising) or a catch all of “some other substantial reason” (a catch all which would cover situations like if clients refused to work with the employee etc); and

1. follow the obligatory process which applies to the reason for dismissal.

A fair dismissal process is different on a redundancy exit to a misconduct exit. If the correct procedure is not followed then the termination may be Unfair (and/or breach the other employee’s rights not to be discriminated against etc).

The employer also must comply with your contractual rights (notice length, bonus or other payments in the service agreement or other employment contractual agreements). If the dismissal is unfair and/or unlawful then there is the potential for significant compensation and damages for breaching the contractual rights (including breaches of the employment or shareholders’ agreements.)

In circumstances where the company has taken in external investment a founder is also likely to be party to a shareholders’ agreement that may give the founder the right to remain on the board while they remain as an employee or, conversely, there may be enhanced rights for an investor or majority shareholder to remove directors from the board.

Unfortunately, employers can also dismiss employees (even if they are also shareholders) unfairly or arbitrability. We have protected the rights of shareholders or co-founders who have been unfairly demoted or forced to resign from their employment (known as constructive unfair dismissal) or have been unfairly accused of misconduct (including fraud or sexual harassment.

The position with regards to your shareholding will be governed by the shareholder arrangements in place. These may set out the circumstances where an employee shareholder needs to offer up its shares for sale and what the basis for valuing those shares will be. In the absence of such provisions, generally, an employee shareholder usually is entitled to hold onto their shares and if the parties agree that the shares should be sold then they would need to mutually agree a price.

As for your employment rights, you will be entitled to payments per your contractual documents. Usually the best position is to have a negotiated termination package. If there is a negotiated exit allowing a mutually agreed termination then your overall financial package will include all contractual rights and ex-gratia payments for goodwill. Often there are agreed internal or external announcements, references or agreed termination dates. The parties can mutually agree on any commercial or financial terms during such “without prejudice” (ie off the record) negotiations to resolve a potential dispute.

The payments to an employee usually factor in the contractual rights, the employee’s losses, the financial position of the company and sometimes reputational or other commercial leverage. Employees’ losses may be considered in light of the general employment regime for compensation for loss of office or future loses.

• Employment Compensation position to 31 December 2025

Until 31 December 2026, there is a government maximum compensatory cap on the award for unfair dismissal in the UK which is parsimonious for most senior executives who are shareholders/founders. This cap is currently as of 6 April 2025 capped at £118,223, or 52 weeks’ gross pay, whichever is lower. This cap changes incrementally each financial year.

There is also a modest basic award.

From 1 January 2027, as a result of the Employment Rights Act the UK Government has announced:

• protection from unfair dismissal will become a right after 6 months of being in a job (currently, someone must have worked for their employer for 2 years before claiming unfair dismissal)
• the limit on the compensatory award for unfair dismissal will be removed. This is excellent news for senior executives who can now claim for all their employment losses without the government imposed cap referred to above.

Employees also have unlimited compensation if they are dismissed/discriminated for a protected characteristic or blowing the whistle. This is in addition to the other legal rights including contractual rights in the service agreement or employment contract and shareholders agreements. As such potential discrimination and/or protected disclosure claims (whistleblowing) are particularly important to explore if you are a Founder/Shareholder and employee as your compensation from such detriment or retaliation may be very significant.

As well as legal advice the employee would be well advised to take tax advice to ensure that they are not triggering any unexpected tax liabilities on the compensation payment or in relation to the price they receive from their shares.

Founders/Shareholders who have “employee” status have useful rights which are not afforded to someone who is merely a shareholder. Employees can raise formal Grievances which will need to be properly investigated by the employer in accordance with the ACAS Code: Code of Practice on disciplinary and grievance procedures.

This Acas statutory Code of Practice on discipline and grievance procedures provides essential guidance to employers and employees and the principles for handling disciplinary and grievance situations in the workplace. Importantly tribunals will also be able to adjust any compensation awards made in relevant cases by up to 25 per cent for unreasonable failure to comply with any provision of this Code.

Employees also have significant legal rights including matters such as suspension, fair investigations and fair disciplinary processes again covered by the ACAS Code.

Ultimately if a shareholder/employee is forced to leave employment they can seek redress (or to encourage or force the employer to negotiate) using the internal employment processes above and also the external employment processes such as ACAS conciliation and Employment Tribunal. These should be used in tandem with your shareholding rights which may have been triggered. The bargaining position of the parties is often driven by the starting position set out in the shareholding arrangements and agreements already in place and, in particular, whether they anticipate the applicable circumstances relevant to the departure of the employee.

Litigation is expensive and best avoided if possible, however if the employer (shareholders/investors) are not prepared to offer reasonable financial and commercial exit terms to leave with dignity during without prejudice or Protected Conversations to compensation for both your employment and shareholding rights then you will need lawyers to fiercely defend your rights.

You should check if you have any Legal Expenses Cover in any policy of insurance (car, home, contents etc). Although it’s possible to buy standalone legal expenses insurance, most policies are added to home or car insurance as an optional extra. Please speak with your insurer about the coverage and terms, as it can provide pay all or some of your legal fees in certain employment disputes.

Some employers will concoct a restructure/redundancy to attempt to force employee/shareholder’s from the company they co-founded or partially own. Protecting your employment rights are critical in such circumstances as they often dictate how your shares will be treated (good/bad leaver). In addition to your rights as a shareholder, your status as an “employee” provides you with useful additional weapons in your armoury against such unlawful treatment, mentioned above. In such circumstances it is vital that you seek legal advice as there are various legal tools and techniques that can provide protection for the employee in such circumstances including steps to prolong employment which often grants employee/shareholders additional rights and leverage.

Please speak to the Shareholder/Employee Disputes team: Caroline Doran Millett [email protected], Richard Pull [email protected] or Paul Dorrans [email protected]