The reported imminent departure of JP Morgan’s head of equity proprietary trading Deepak Gulati to set up his own hedge fund is just the latest in a spate of hedge-fund spin-outs from investment banks. For any employees contemplating a potential move, it may be helpful to be aware of the issues we often see in Team Moves and particularly in the financial services industry.
Check the contract!
You should check for any post-termination restrictions (Restrictive Covenants), usually contained in your employment Contract, handbook or confidentiality agreement, as well as specific wording in relation to your equity incentives, which can also contain restrictions. Often restrictions stipulate that you cannot solicit or sometimes even engage/employ fellow employees for a period of time. Typically the duration is six months, sometimes longer, and this period is in addition to your notice period, so you should also consider the length of your notice period. There may also be restrictions preventing you from competing or soliciting clients. Ideally you should look at the restrictions before signing the contract. However, in our experience, often this is not done until the point of termination, by which time you have signed up to the terms and it can be too late.
Is it enforceable?
So how should you approach this thorny issue if you have signed up to restrictions? Firstly the restriction may not stand up in court - this may be the case if it is too far-reaching, for example, too long. Sometimes we find that the contract is out of date and restrictions are no longer relevant to the role or if at the time the employee was too junior to justify the restrictions.
If you can establish a case for Constructive Dismissal, i.e. that the employer has acted in fundamental breach of contract, you may be able to treat the restriction as void. In practice this can prove challenging and the courts are wary of employees who have overstated their case in order to claim that restrictions are not enforceable. You should seek early advice on any potential claim and crucially, before resigning.
Confidentiality, the duty to act in good faith and the duties of a fiduciary - be aware
The duty to act in good faith or duty of fidelity can be set out in the employment contract to state that you must act with honesty and integrity towards the employer. Even if the contract does not state this, the duty can still exist. You should consider whether you have breached or are likely to breach the following:
• A duty not to compete with your employer, including in particular a duty not to entice employees away from your employer to come and work with you.
• A possible duty to disclose wrongdoing – this could involve reporting the wrongdoing of colleagues.
• A duty of confidentiality.
Recent case law has suggested that senior employees may also have a duty to report competitive threats, meaning that even the act of attending interviews with competitors could have implications.
You should also exercise caution with regards to confidential information. Confidentiality obligations go beyond the termination of employment and are also often set out in the employment contract. You must be very careful not to breach these obligations and should not send confidential information to your personal e-mail addresses or remove confidential documents from your employer. In practice we have found that employees are often unaware of the implications of sending e-mails to their personal accounts or third parties. The courts have also taken a dim view of employees who have deliberately lost or destroyed smart phone evidence and this would not be advisable. Be aware that the courts can also examine electronic data and records of phone calls that are retained by employers and employees.
Senior employees may have even more onerous duties, known as fiduciary duties, which means that there is a relationship of trust and employees must always act in the interests of their employer. Directors have fiduciary duties under the law and should seek specialist advice as to what those duties are before signing up to a directorship. For example they include obligations such as acting to promote the success of the company and the duty to exercise reasonable care, skill and diligence.
Resolution better than litigation
If you are intending to breach post-termination restrictions you should consider whether your employer may agree to change your restrictions or reach a compromise. Employers will sometimes agree to allow you to act for certain clients or may be happy to agree to the exit of certain employees or reduce the period of restriction.
If no agreement is possible, employers may resort to legal action, especially if the breach is likely to cause them to suffer loss. Such legal action can be hugely costly and you may end up facing claims for damages and injunctions stopping you from working for competitors to prevent any further breaches of contract.
If you have any concerns regarding your post-termination restrictions or other obligations please contact our Employment Law team on 0800 916 9060 to seek advice at an early stage.