Expert Advice on Director Exit Agreements
When a director leaves a company other than in the ordinary course of a Director’s Service Agreement that is already in place, the terms of that departure matter. An agreement or agreements with the departing director, which we will call a ‘Director Exit Agreement’, sets out exactly what is agreed between the departing director and the company: what they receive, what they give up, and what obligations continue after they walk out of the door. Without one, both sides are exposed.
At JPP Law, we act for either the company or the departing director. We cannot act for both at the same time, because each side has distinct, and conflicting, interests. If you are a director seeking advice, we can represent you. If you are the company, we can represent you. We will be clear from the outset which party we are advising.
What Is a Director Exit Agreement?
A Director Exit Agreement is a legally binding contract or contracts that record the terms on which a director leaves a company. It typically covers payment (including any termination payment or settlement sum), the treatment of any shares and share options, post-termination restrictions (clauses that limit what the director can do after leaving, such as joining a competitor or poaching clients, which are often called ‘restrictive covenants’), confidentiality obligations, and the return of company property and data.
If the director also had an executive role, rather than being a NED, the agreement also deals with the director’s departure from any employment with the company. This is because an executive director has two separate legal relationships with a company: as an officer of the board and as an employee. Both need to be addressed properly.
When Is an Exit Agreement for a Director Needed?
You need an Exit Agreement for a director in several situations, which often arise in relation to directors who are also shareholders or option holders and are not just leaving in accordance with a Director’s Service Agreement that is already in place.
- Planned retirement or succession. When a director steps down as part of an agreed handover, a formal agreement protects both the business and the outgoing director.
- Shareholder disputes. If relationships between a shareholder director and other shareholders (often the co-founders of the business) have broken down, a well-drafted agreement provides a route to resolution and finality. See our shareholder dispute solicitors service for more.
- Performance or conduct issues. Where a director is leaving under pressure, the agreement needs to be precise about what is and is not being admitted, and what claims are being settled.
- Restructuring, funding round or sale. On a business sale or restructuring, buyer and seller often require director exits to be documented cleanly before completion and sometimes require some of the founders of a company, if it is a startup, to forfeit shares as a condition of the restructuring or funding round.
In each scenario, the stakes are high. A poorly drafted agreement, or no agreement at all, leaves the door open to future claims and disputes.
What a Director Exit Agreement Should Cover
A robust agreement deals with more than just the leaving date and the final payment. We ensure the document addresses:
- Termination payments. How much is being paid, when, and on what basis. This includes any statutory entitlement (rights the director has under law that cannot be contracted away) as well as any negotiated sum.
- Equity. If the director holds shares or options, the agreement must deal with what happens to them. In closely held companies, this is often the most commercially significant point, and any good leaver and bad leaver provisions will need to be considered.
- Post-termination restrictions. These clauses, sometimes called restrictive covenants, limit what the director can do after leaving. They must be drafted carefully: courts will not enforce restrictions that go further than is reasonably necessary to protect the company’s legitimate interests.
- Confidentiality. Directors hold sensitive information. The agreement should make clear what remains confidential and for how long.
- Announcements and references. What will the company say publicly about the departure, and what reference will it provide?
- Settlement of claims. If the departing director also holds an employment contract or is leaving as a result of a dispute, the agreement may need to operate as a settlement agreement (a formal legal document, regulated by statute, which settles employment law claims as well as any commercial claims in exchange for a payment). Settlement agreements carry specific legal requirements, including the need for the director to receive independent legal advice before signing.
Settlement Agreements and Independent Legal Advice
This last point is important and non-negotiable. If the exit agreement is intended to settle potential employment claims, it must comply with the rules governing settlement agreements under section 203 of the Employment Rights Act 1996. Among other requirements, the director must receive advice from an independent solicitor before the agreement becomes binding. If that requirement is not met, the settlement is not effective and the claims remain live. Acas guidance on settlement agreements sets out the process in more detail.
That independent solicitor cannot be the same firm advising the company. Therefore, if JPP Law has drafted the agreement on behalf of the company, a director cannot also instruct us to provide that independent advice. The director must instruct a separate, independent solicitor. We can help signpost that process, but the independence requirement is a legal rule, not a preference. Find out more about our settlement agreements for employers and settlement agreement advice for employees.
Why Directors and Companies Both Need Legal Advice
It is common for one party to draft the agreement and present it to the other as a formality. It is not a formality. Each side has distinct interests, and the document will reflect who was better advised.
For the company, the risks of a poorly drafted agreement include unenforceable restrictions, ongoing liability for claims the agreement was supposed to settle, and disputes over equity.
For the director, the risks include signing away rights without understanding them, accepting post-termination restrictions that are broader than necessary, and receiving less than they are entitled to.
Both parties benefit from proper, independent advice.
Why JPP Law?
We advise companies of all sizes, from founder-led businesses to established SMEs, on director exits. We also advise directors directly, as long as we are not already acting for the company on the same matter. We understand the commercial pressures on both sides, and we draft agreements that are clear, enforceable, and built to stand up if they are ever challenged.
If you are negotiating a director exit, on either side of the table, the right time to take advice is before terms are agreed, not after. Book an introductory call with one of our employment solicitors to discuss your situation.
