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Alex J.
Alex J., Solicitor
Category: Law
Satisfied Customers: 3493
Experience:  Solicitors 2 years plus PQE
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Hello, I'm setting up a start up and have drafted a Directors

Customer Question

Hello, I'm setting up a start up and have drafted a Directors service agreement and Shareholder's agreement using standard templates from the web.
We've inserted a small number of custom clauses and would like to check they don't invalidate the contract or expose us to risks we've not considered.
We’ve inserted the clauses below with a couple of questions.
Director's Service Agreement
Salary and Payments
6.1 You are not entitled to a salary for your work with the Company.
Question: Can want legitimately have a Director’s Service Agreement with no salary associated with the position - our director is receiving shares instead of a salary). They may still want to claim statutory employment rights such as maternity pay in future – would these be restricted if no salary or NI contributions are being paid?
12. Absence and Sickness
12.4 In the event of a period of Sustained Absence the Company reserves the right to terminate employment.
The definition we have used for Sustained Absence is as follows:
“Sustained Absence” means a prolonged period of absence of greater than three [3] months in any twelve [12] month period, whether through ill health, injury or as the result of any other reason, whether explained or unexplained, with the exception of documented maternity, paternity, adoption, parental, and dependent’s leave.
Question: Is it OK for us to terminate employment in this situation?
20. Your Shareholding in the Company
20.1 Upon successful completion of your probationary period you will be granted a discretionary shareholding in the Company of 17% of the Company’s shares, which entitle you to the rights that are laid out in the associated Shareholders Agreement. A condition of this award is that the Company has the right to withdraw and cancel your shares in their entirety, so that you shall forfeit all shareholder rights, in the event that any of the following conditions occur:
(a) Gross misconduct;
(b) You fail to provide or work out proper notice as specified in clause 19.2;
(c) You fail to adhere to the hours you are required to work for the Business, as specified in clauses 8.2 and 8.3, or fail to make a full contribution to the Business during the hours of your employment. If this situation should arise you shall be given seven [7] days written notice of the Company’s concern and given the opportunity to redress the issue to the Company’s satisfaction, before this clause is invoked;
(d) You terminate your employment in the Business or your employment is terminated on the grounds of Sustained Absence during a period when the Business is achieving less than £150,000 per annum in net profits.
20.2 In the event that one or more of the conditions specified in 20.1 occurs, you will no longer be the legal owner of any shares in the Company and must return all paperwork relating to such shares, both originals and copies of originals, to the Board within seven [7] days so that it can be destroyed. For the avoidance of doubt, in this situation you will no longer have voting rights or rights to payments of any kind, whether for dividends, payments associated with a change of ownership in the business, or payments for the shares themselves.
Question: Can we legally withdraw shares in this situation? We’d prefer to grant the shares upfront and potentially withdraw them later in this way as it’s more tax efficient.
Shareholders agreement
9. Rights to Purchase Shares at Current Price
9.1 If a Shareholder wishes to resign as a Director then their Shares will be valued by the Business at the time of their resignation and will be offered to other Shareholders at the current rate. If none of the remaining Shareholders wish to acquire the Shares at that time then the owner of the Shares shall continue to retain all rights associated with their shares, subject to clause 16, unless these rights are restricted by their Directors Agreement, until such time as other Shareholders wish to purchase the Shares or the Business is sold. At this point the Shares shall be redeemed at the value that was ascribed to them when the resignation was submitted, plus interest charged at the consumer price index (CPI). In the event of a conflict with this clause the Shareholder’s Director’s Service Agreement shall take precedence.
Question: Is this clause going to be legally binding as it stands? Will we need to include similar language in the company’s memorandum and articles of association?
Submitted: 2 years ago.
Category: Law
Expert:  Alex J. replied 2 years ago.
Hi,
Thank you for your question and welcome.
My name is ***** ***** I will assist you.
Just to confirm - if you are intending on paying Statutory Maternity Pay - will the company still pay this even though it would not otherwise be paying salaries?
I will prepare an answer to all your questions in turn. This may take me some time so please do not be concerned if you do not here from me before tomorrow morning.
Kind regards
AJ
Customer: replied 2 years ago.

Hi AJ

My knowledge about statutory maternity pay is very limited. I thought that this was paid by the company and reclaimable from the govenment. If that's the case, then yes that is my intention. I hadn't envisaged actually making an additional payment that can't be recouped.

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you for confirming that.
I will revert to you as soon as possible.
Kind regards
AJ
Expert:  Alex J. replied 2 years ago.
Hi,
Thank you for your patience.
I will deal with each point in turn;
- You can have a director's service agreement that contains a nominal or no salary and instead gives the director a share option. This may still attract personal taxation but you would need to check this with an accountant. The position is the same as with the Maternity Pay - a company can reclaim statutory maternity pay up to 103% but you would again need to check with an accountant as to whether you can do this without making NI contributions.
- In relation to the termination provision - I would not necessarily relate this to their employment in case it brings up questions of discrimination. You should perhaps phrase it that they will lose their office as a director if they cannot work for a period of x months;
- In relation to the shares you should search for a precedent called a "good leaver" "bad leaver" clause - a bad leaver would mean that they will be forced to relinquish their shares at nominal value - "good leaver" they will be forced to sell them at a price using a pre agreed mechanism (e.g a valuation by the company accountant). What you have suggested does not really work because it talks about conditions of legal ownership - what does not work is what happens to the shares if they "cease to be the legal owner" - who becomes the legal owner. If you phrased this as an option to subscribe for shares it would me that they would not become eligible until they had met certain conditions (e.g 3 years service etc) and at which point they could then subscribe for the shares.
-CLause 9.1 of the Shareholders Agreement - you wont need similar wording in the memorandum - however you will a much much more detailed description of the procedure - for example the shares will have to be pro rata to the other shareholders and there will have to be a time limit within which to accept the offer. Also you will want to grant the remaining shareholders a power of attorney to ensure that they can execute a transfer on behalf of the outgoing shareholder in case they going missing or become un cooperative.
Also I do not think the consumer price index is a good reference point for a valuation - I would recommend appoint the company accountant as a valuer.
I look forward to hearing from you.
Kind regards
AJ

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