Business share sales and replacing directors

This article is intended to give an overview of some of the key considerations – including ensuring that the new company is not at risk of a compensation claim being brought by outgoing directors after the purchase.

It is vital that, unless the sellers are staying on and have agreed to remain as directors, they resign their role as directors and waive any claims against the company.

When a director is resigning in the context of a corporate transaction like this, the buyer will normally want to ensure that the new business company is not at risk of a compensation claim being brought by the outgoing director.

To address this there should be an acknowledgement and waiver of claims, to ensure that the resigning director releases all and any claims or rights of action of any nature against the company arising out of the termination of their office.

For example, the resigning director may be owed accrued salary or expenses for the month in which the resignation takes effect.

In business share sales, it is essential to check the company’s articles of association to ensure any special requirements or formalities relating to a director’s resignation are met. Subject to anything to the contrary in the appointing company’s articles of association, a director may resign from office at any time by proper notice to the company. 

If the resigning director is also an officer of any of the company’s subsidiaries, the buyer should also require separate letters of resignation in the same terms to be delivered by the director and addressed to each relevant subsidiary.

Notice of the resignation must be given to the Registrar of Companies within 14 days.

If the resigning director’s contract of employment is also being terminated, it is possible that they may be entitled to compensation for various contractual or statutory claims. The most likely claims are damages for wrongful dismissal, compensation for unfair dismissal and redundancy payments.

Certain statutory employment rights and discrimination claims can only be waived or settled by way of ACAS conciliation or a settlement agreement so specialist employment law advice should be sought.

Make sure you get the waiver of any claims to avoid action by directors after completion of the share sale to you. It happens often and especially when you may have a claim against the sellers of the shares under the contract for breach of warranty. The selling shareholders who were directors will look for anything to bring a counterclaim against you.

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