In July 2023, judgment was given in the case of Re Mitt Wearables, an unfair prejudice petition brought under section 994 of the Companies Act 2006. Laytons ETL acted for Koalaa Ltd (the innovative designer and manufacturer of soft sleeve prosthetics), one of the successful respondents to the petition.
The case was brought by Mr Ben Lakey (“Mr Lakey”), who had been dismissed as an employee by Mitt Wearables Limited (“Mitt”) and removed as a director, resulting in him being classified as a ‘Bad Leaver’ and his shares in Mitt being automatically converted into deferred shares carrying no dividend rights and a total value of a penny. Mr Lakey subsequently brought his petition against (i) Mr Nathan Macabuag (“Mr Macabuag”), (ii) Mr Nicholas Mellor, (iii) Mitt, and (iv) Koalaa.
Permission to appeal having been refused earlier this year, we will examine in this, and a series of further articles, several issues that arose from the case – the first of which is the documentation required where an individual is an employee, director and shareholder, and the importance of those documents being consistent with each other.
In May 2018, Mr Macabuag and Mr Lakey were working together on Mitt. Mr Macabuag had founded Mitt in late 2017 to develop and sell a new type of medical prosthesis, known as “the Mitt”. Mr Lakey was appointed as a director of Mitt in June 2018. There were 5 documents that governed the relationship between some or all of the various parties:
Mr Lakey’s Employment Agreement dated 20 August 2018;
A Founders Agreement between Mr Lakey and Mr Macabuag dated 12 September 2018;
A Founders’ Service Agreement between Mr Lakey and Mitt (“the FSA”);
A Subscription and Shareholders Agreement (“the SSA”); and
New articles.
Each document contained provisions relevant to the dispute, and particularly to Mr Lakey’s dismissal/removal as an employee/director and the treatment of his shares, not all of which were consistent.
The Judge identified in his judgment that the Shareholders Agreement and New Articles differed in substance from the Employment Agreement and FSA – with the latter two agreements providing for dismissal for serious breach including gross misconduct rather than giving it as an alternative.
Much time was spent at trial examining the various documents, with the Judge carefully considering their terms and what they meant in the context of Mr Lakey’s dismissal and removal from the business and the treatment of his shares. Time (and money) would have been saved had there been fewer documents or if the documents had been consistent in their terms.
Whether you are start-up (like Mitt) or an established company, documentation is obviously required for your employees, officers and shareholders:
All employees and workers must be provided with a written statement of employment particulars on or before their start date. This can be incorporated into a wider employment contract.
If an employee is also a director, a director’s service agreement can cover both their employment and role as a director. A director’s service agreement should include their statement of employment particulars as well as their obligations (statutory or otherwise) to the company.
If a director or employee is also a shareholder, check the terms of the shareholders’ agreement to ensure there are no inconsistencies, particularly in respect of the provisions for their removal from the business.
Having one document that covers all an individual’s roles would obviously aid in ensuring consistency. Where there is more than one document, the task is harder, but consistency should still be a key ambition. Where different documents are prepared at different times, achieving consistency may not be easy. Template documents with different purposes may be obtained from different sources. But it is important to bear in mind that inconsistent terms can lead to costly disputes, and unpredictable interpretation of documents. Deal with any inconsistencies at the drafting stage and where the documents are already in place, take advice as to how inconsistencies can be rectified.
Consistent, well-drafted documents, where everyone is clear as to their meaning, reduce the scope for uncertainty and conflict. Even where there is conflict, they can help to resolve it at lower cost. It is particularly important to be alert to this in start-up, young and small companies where it is more likely that the same individuals will fill multiple roles and be equity participants. These are the kind of businesses that can have multiple agreements that address similar rights and obligations, and which can least afford to waste money on legal disputes.
Laytons ETL are experts in advising businesses at all stages, from preparing all the documentation required on incorporation to drafting agreements when employees join, or officers are appointed/removed. And if issues do arise, our disputes team is on hand to advise on how to achieve a commercial outcome, as quickly and cost-effectively as possible.
In the next article in this series, we will consider the issues that arise when removing a director and how to avoid them.
