Out of the frying pan into the fire?

George Osborne‘s recent announcement of plans for a new “employee-owner” contract of employment has set the cat among the pigeons.

Initial reactions varied from believing this is the introduction of dismissal at will by the back door, – a substantial erosion of employee rights and an opportunity for unscrupulous bosses to take advantage.

Any business enthusiasm might be premature.

Sweeping aside employment rights that derive from Europe is not that easy.  There has been a long-standing and fundamental rule that people cannot contract out of their employment rights, precisely to make sure that employee protections are not whittled away.

It is also far from clear that UK’s employment regulation (already the lightest in Europe) is a cause of or contributor to unemployment, or that softening it yet further would increase employment.

Business perspective

Setting up minority shareholdings in a business is NOT a ‘low cost’ enterprise.  If it is not carefully and thoughtfully done ( and properly documented), nightmare scenarios and expensive disputes can present themselves when an individual leaves.

Without a good shareholder agreement, that is properly ‘tuned’ to the particular business, unexpected and unwanted consequences abound.

How are shares going to be valued?   Who is going to buy the employee’s shares when they leave?   What if no-one wants them, or no-one has the money to buy them?  Will the founders lose control of the company by granting so many shares they are no longer the majority shareholders?  Will existing investors agree?    We could go on……..

Employee perspective

A minority shareholder in a private limited company is in a weak position unless there is a sound shareholder agreement in place.

Shareholders’ rights

As we know from experience, the enforcement of minority shareholder rights is more expensive to mediate or litigate than any unfair dismissal claim.   We have seen founders give away too much of their company in exchange for too little and minority shareholders unable to cash in on  their investment despite the company going on to be worth money.

  Out of the frying pan into the fire comes to mind.

Is is the government going to abolish minority shareholder rights on the grounds they are red tape and impede business?  

Annabel Kaye is Managing Director of Irenicon Ltd andChristopher Head is a barrister and Director of Irenicon Limited.