Podcast S2E5 | Employment: Team Moves

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TRANSCRIPT

Welcome to a new series of The HIP Talks podcast: a collection of discussions on legal topics hosted by Hugill & Ip Solicitors. We provide high quality legal services with integrity, professionalism and respect for our clients and the community. Our solicitors have achieved outstanding results and recognitions in the areas of Dispute Resolution – Corporate & Commercial – Private Client, Probate and Trust – Family – Employment – Business Immigration and Data Privacy.

Chris Hooley  00:32
Hello, Hi, I’m Chris Hooley, Partner in charge of the Corporate & Commercial practice group at Hugill & Ip. I’m joined this morning by my partner Adam Hugill, Head of Hugill & Ip’s Employment practice group, and we’re going to discuss team moves, not least because we’ve worked together on a number of such high profile team moves in Hong Kong over the last few years. Morning, Adam.

Adam Hugill  00:54
Hi, Chris.

Chris Hooley  00:55
So let’s start by explaining what a team move actually is and why it presents both benefits and challenges to the to the parties involved.

Adam Hugill  01:03
Okay, a team move is the expression that we use to describe a situation which a number of employees have one employer move to work for a new employer. It can cover a wide variety of situations from the departure of, say two employees to the loss of a substantial part of a workforce, an entire team indeed. For example, there’s a case of UBS v Vestra, which is a UK case from 2008, where 75 employees left UBS to join Vestra. It’s another fairly famous UK case of far, in which 17 of the 40 employees defected from the company to another company Amicus and that included the former Managing Director. The common threats to all of these situations is not so much the team moving, but the fact that the entire team moves to a new employer, and that the move is alleged or coordinated as a whole. From a legal or practical perspective, team moves throw up a number of interesting issues that are much more complicated then if you’re just losing one senior employee. The problems for us arise on both sides of the coin. On one side, we’re advising companies on poaching teams from other employers targets. And the flip side is advising targets on how to protect themselves from being poached. The key issues that we need to look at are the implied duties that exist in all employment contracts of what we call good faith and fidelity. In the case of very senior employees or directors, there’s the additional duty, which we call fiduciary duties. Also, we need to look at the team move through the eyes of the tort of what called conspiracy. And we’ll also need to look at what remedies can be available to those who’ve been the target of team moves, including enforcing Post Termination Restrictions (PTR), and what we call trying to obtain springboard relief. And I think we’ll discuss this further as we go through the podcast. The historical reason behind team moves is because the poaching company wants to hire a team of people who typically have transferable skills, knowledge or relationships. And these typically involve brokers, bankers, lawyers, or insurance agents.

Chris Hooley  03:19
Adam, you and I’ve been instructed by, as you mentioned, insurance brokers, bankers, company service personnel, and actually by large numbers of them and in each case, the poacher company acquire a company saw a market opportunity to grow its business by way of poaching, rather than through a typical old style Merger & Acquisition or by steady growth. And in each case, the poacher acquired the asset at a large discount to market value. But to do that, they needed a detailed and considered strategy from the off, and that’s where both you and I have provided expertise to all those clients. They’re actually hugely different features between a team move and a typical Merger or Acquisition. The documentation is different. But most importantly, the overall strategy is completely different. That means that the risk profile for the intended acquirer – the poacher – is also more pronounced. But if the poacher does conduct itself within the law in Hong Kong, it can potentially save millions of dollars.

Adam Hugill  04:25
And from your commercial perspective, do you want to explain why that is?

Chris Hooley  04:29
Well, if the acquirer or the poacher took the long route and it was actually acquiring the operating company, the division, the practice group, that would by definition include real property, intellectual property, existing contracts and all the attendant features and assets of an operating company. Also, if there is an agreed acquisition and I say agreed, then the terms of that acquisition are discussed and agreed between vendor and purchaser, and the acquisition documents reflect what is has been agreed and negotiated. However, a team move by its very nature is highly sensitive. And it is essential that all details are kept as confidential as possible, certainly by the poacher.

Adam Hugill  05:13
And of course, certainly you don’t want anything leaking to the target before the strategy is sprung. And so following on from this, imagine a small team with members of different levels of seniority. Let’s envisage that they’re in the financial services sector and they have an established customer base. Typically, the more junior employees of the team would have the direct relationships, and the senior person in the team would have the significant influence over the junior staff. Typically, what happens is a poacher would approach the most senior team member and invite them on board usually with a generous package and invite them to bring with them that team. In which case, the poacher that usually together with the more senior member of the team would need to strategize on how this is done. From the target’s perspective, they need to be aware that there might be warning signs of a team move, although these are often ignored until it’s far too late. What typically happens is one person leaves first by resigning, in Hong Kong that resignation can be with a payment in lieu of notice by the employee as well as the employer. And then other junior members follow thereafter. It doesn’t have to happen like that. In the case of certainty moves, all of the employees have decided to resign together in a concerted plan.

Chris Hooley  06:37
Okay, Adam, but that begs one big question, which is, are the various departures part of a concerted plan? Or are those individuals simply acting on their own initiative based on friendship or their own financial self interest in following the colleague to a new employer?

Adam Hugill  06:56
The main feature of a team move is that is part of a concerted plan rather than each employee acting on their own. And so, whilst it’s certainly possible that a poacher could approach each employee individually, and it’s not known to other employees in the group that approaches are being made, typically, they are aware that they are one of a team. And indeed that’s part of what encourages people to move across.

Chris Hooley  07:27
So, from a legal point of view, what are the tactics, what are the legal tools that can be used to assist the target company?

Adam Hugill  07:40
Essentially the target company needs to defend itself from the poacher. As I said before, there are often warning signs, but these are ignored by the company. The first thing to advise is make sure that these are not ignored. When you become aware that there may be a team move taking place, so you may be the target of a team move, that it’s important that senior management gets together very quickly and prepares for the eventuality of resignations. This typically involves a coordinated effort from the CEO, if a company has senior management, in-house counsel or external counsel, and HR. The first thing to do is to pull everybody’s contracts and agreements and find out exactly what you have in place. Very often and much too late targets find out that where they thought they had wonderful contracts in place with senior management, included confidentiality provisions and post termination provisions, they haven’t actually been signed or they’ve never been fully implemented. And this puts the company on the backfoot. And so what it needs to do is it needs to act very quickly in getting all of the information together. It should try and interview anybody that it thinks is part of the team move to try and glean from them any information they have as to how the strategy for the team move has been orchestrated. And then the fairly blunt tool available to the target company is to throw money at the situation: if you can persuade the senior manager or one of the core people in the team to stay with you and not move by way of a sweetened salary or bonus package, then that might be sufficient to kill the to move dead.

Chris Hooley  09:27
Okay, so we know from settled case law, that every employee has a duty of good faith and fidelity to his or her employer. From that, the basic principles come out and I think these would be as follows: that the employee owes the employer a contractual duty of fidelity, but how far that actually extends will depend on the matter, the individual facts of each case, the more senior the staff, the greater the degree of loyalty, fidelity and diligence required. The mere fact that the activities are described by an employee as preparatory to a move doesn’t avoid there being a breach of the duty of fidelity, not least if the employee recruits or solicits another employee to act in competition. As Adam has already mentioned, attempts by senior employees to solicit more junior staff constitutes particularly serious misconduct and it certainly is a breach of the duty of fidelity for an employee to misuse confidential information belonging to his employer. The big question, therefore, is whether the activities in which the employee is engaged do affect his ability to serve his employer faithfully, honestly, and to the best of his abilities. Now, again, Adam, I think there’s been recent case law which has provided interesting comment by various members of the judiciary, perhaps you’d like to run through that.

Adam Hugill  10:55
Yes, as we say, team moves are generally led from the head of a team and that person typically owes fiduciary duties to the company, as well as any contractual duties that are in its contract. We mentioned the UBS case earlier and the judge in that case said very clearly: “I cannot accept that employees in particular senior managers can keep silent when they know of plant poaching rates upon the company’s existing staff or client base. This is even more so when they themselves are party to these plots and plants. It seems to me that this would be an obvious breach of their duties of loyalty and fidelity to their employer”. A further case, the judge went on to elaborate perhaps even more strongly to say:  “I simply did not see how one can be acting as a loyal employee when one knows that three senior employees, including oneself, may transfer their allegiance to a group of companies, which includes a competitor, and yet not only failed to divulge that knowledge, but also mislead the employer”. And so this makes it very clear that if somebody is being approached as part of a team move strategy, whilst that person remains an employee of the target company, they have very strong duties to that company that employs them to divulge the fact that they’ve been approached and to divulge the potential strategy and wrongdoing that they are part of. And so that is contractual breaches by employees in relation to a team move. In addition, there’s the issue of the tort of conspiracy. Chris, on conspiracy, what do we mean?

Chris Hooley  12:33
Thanks, Adam. Conspiracy is a tort. So we’re actually looking at a tort and the specific one here is unlawful means conspiracy, and that is the conspiracy alleged against the team, either the team members or those actually recruiting the team. Now, for that charge of conspiracy to be leveled there are I think, probably five aspects that make that up and I’ll just run through them with you. The elements that I just mentioned. The first one is common design: it is necessary to show that the defendants combined together with a common objective and in that respect, it’s actually unnecessary to show an express agreement. Defendents can join in the combination at different times. Knowledge alone is insufficient, Adam.

Adam Hugill  13:25
Okay, there’s concerted action where it’s necessary that concerted action is taken by one or more of the conspirators to further the common design.

Chris Hooley  13:33
Next is unlawful means: it is necessary that the common design is to use unlawful means that they are then used, and they cause the last complained of. In addition to be liable, the defendants must know that the means are actually unlawful. That knowledge can be actual, or what is often referred to as blind eye or Nelsonian knowledge. This requires the defendant of a firmly grounded suspicion that unlawful means are used, but to refrain from inquiry in order to avoid obtaining certain knowledge of the truth.

Adam Hugill  14:08
And then there’s intention to injure, which is very simple that the conspirators intended to injure the victim. The loss to the victim is one side of the coin, and the gain to the defendant or the poacher is the other side. And quite often the poachers gain and the victims loss are inseparably linked.

Chris Hooley  14:28
Finally, there’s damage which is obviously an essential ingredient of the actual tort. Since conspiracy is a very, very serious allegation, a high standard of proof is required. And that was emphasized in a recent judgement where the Justice there said: “a charge of conspiracy in civil proceedings is generally regarded as a grave charge, and that particularly where allegation is played against persons of hither to unblemished reputation. The standard of proof which has to be satisfied before a court can properly hold that the charges established as a high one, commensurate with the seriousness of the actual charge”. And that means that where you have a conspiracy claim, there has to be a painstaking investigation of various things, including the extent to which the defendant shared the common objective and knew that the objective was to be achieved by unlawful means. So having gone through conspiracy, why don’t we now look, Adam, at what the target company can do when it’s under attack? And what actual remedies it has? And I think that’s really your field of springboard relief.

Adam Hugill  15:44
Okay. Assuming the target company has suffered a loss, the employees have departed, and the target company wants to seek some recourse against this. The first point of call is to look at Post Termination Restrictions and see whether there are any valid restrictions in the contract that can restrict the person from starting work with the competitor. But let’s assume the scenario, the worst-case scenario takes effect where there are no Post Termination Restrictions. There are invalid contracts or inadequate contracts in place, and the employees have all left to join a competitor. When those target companies approach us, they say something must be done. And quite often, it’s not an adequate answer to say, well, it’s too late. We can’t close the door after the horses bolted. One of the powers that we do have arises into what we call springboard relief. And what that means is if the employees have committed some wrongdoing, as they exited the company, then the target company can seek relief against them usually in the form of an injunction to either prevent them from taking up employment with that new employer or to it’s asked them to sit out, so cease working for that employer for a period of time. Springboard relief was typically premised on breach of confidence. And by that we mean that the employees have taken a substantial amount of confidential information from their past employer to their new employer. The classic scenario of sticking a USB device into the back of the machine and downloading client files or strategic information, financial data, I suppose in the modern era, this is done by Dropbox or something slightly more sophisticated. And what springboard relief allows is that if that information has been transferred to the new employer, and the new employer is able to take advantage of that information to the detriment of the previous employer, ie gained a springboard, then the courts will come to the aid of the former employer and put in place an injunction that seats to negate the effect of the springboard advantage.

Chris Hooley  17:56
Adam, the length of the springboard injunction, what is one applying for and what are the Hong Kong courts? What’s their current stance on this?

Adam Hugill  18:06
Okay, so the burdens on the claimant, the target company to spell out the precise nature of the springboard that they say that the advantage has been gained the springboard that they say has given a competitive advantage to the new company. And they must prove that it’s not a de minimis or a short-term advantage. It must be a substantial advantage that the new employer has obtained. There’s a body of case law that sets out what the courts are prepared to grant in terms of injunctive relief. In the Tullett Prebon case, I believe that 12 months was granted by the courts to essentially negate the effect of the competitive advantage. In the UBS case, they approached it from a slightly different perspective, and granted the injunction until the case came to trial. So it was fully heard by a judge. But what the courts do in such circumstances is they order a speedy trial takes place. And so instead of a long laboring litigation process that can take many years, the courts force the parties to essentially put the case together very, very quickly. And I argue it a full trial with only months of preparation. So, Chris, that’s looking at things from a litigation perspective. But that’s often the last thing that any client wants to engage in. As a company, commercial lawyer, how would you advise the client?

Chris Hooley  19:30
Well, that’s an interesting question, because obviously, part of the process involves recruitment and who should be doing that. And I think that everybody in the market is now aware that recruiting a team from a competitor has become increasingly risky. So, they need to think through everything well in advance, not least because they don’t want to create evidence of a targeted plan to poach a team. So, one of the first things could be the appointment of headhunters, and that is an attempt to act or at least to be seen to be acting at arm’s length. Rather than this is in place of having a member of the target team assist in recruiting other members. So, the headhunter is actually approached, and he manages the communications with the target team members. Now that clearly reduces the level of direct involvement of the members of the target team, or indeed any individual who has recently left that team. And therefore the risk that the plan move will actually leak out into general knowledge and chatter. One of the most important things to show that this is actually a bona fide, an attempt to seek employees is that the headhunter should also seek out other candidates other than the people who actually make up the team. One headhunter should be instructed so that the headhunter can confirm to the targets that other employees in the team have been approached on are indeed, moving and as Adam said earlier, on a practice, it’s common for the senior individual to leave a team move to a new employer and then possibly in breach of Post Termination Restrictions, assist the new employer in hiring the rest of the team or specific individuals from that team. Now, clearly, that individual should have no direct contact with the headhunter or members of the target team, and those communications should be managed by an individual who is free of post-employment restrictions and covenants. And that might be the resourcing department of the relevant company. So appointing headhunters is one practical way forward. The other thing which we both of us have touched upon earlier on is to review the employment contracts of the team itself and know very, very clearly what they say. So, copies of those contracts of employment, job experience, job descriptions, etc. should be asked for may be a fact that the employees are forbidden from disclosing certain parts of their contract including remuneration details. If this is the case, the poachers should not seek out those details until absolutely necessary, in other words, the point of actually making the offer. Ideally, the poacher shouldn’t request prohibited details at all. But in reality, few employees will make an offer to a target employee without knowing their current remuneration. Also, it’s worthwhile remembering that employees who asked their HR department for copies of their employment contracts do tend to look slightly suspicious. So, having sight of the target employees contracts enables the poacher to assess what the employees can do when they join without breaching any of the stated post-employment restrictions, and how long they’re prevented from approaching certain clients, customers etc. Now, the poacher should also ensure that the headhunter gives the target employees detailed instructions on what they can or cannot do under the terms of their contracts, there needs to be a strategy and somebody needs to tell the target team at all times what they should be doing and what they cannot be doing. This clearly reduces the risk of the plan move becoming unlawful. The next issue would be the very, very careful communication of anything to do with the intended move. Adam earlier mentioned about USB sticks and information falling into the wrong hands. We’ve actually been involved in various cases where faxes have been left lying around in public places. And this it’s essential that the people involved in any communications whether they be internal with the targets, or the headhunters that these communications are limited.

Adam Hugill  24:00
And the best laid plans are often foiled by essentially stupidity by one of the team members, I suppose you’re only as strong as your weakest link. And some of the crazy scenarios we’ve seen is, as Chris mentioned, a fax that was actually sent to an old office and just appeared on the fax machine describing the team move. I suppose that doesn’t happen as much because people don’t communicate by fax. But what people do is they have WhatsApp uploaded on their work computer, their personal WhatsApp, quite often, in a team move scenario, the gang involved would have a WhatsApp group conversation. And if that’s uploaded onto the work computer, then that’s fully accessible by the employer. Sticking a USB device into the back of the machine is something which is usually very easily discoverable by IT. And what are the most ridiculous scenarios we’ve seen is where the people involved in the team move decided to celebrate them move in a local bar, before they actually tended their resignations to their employer, not realizing that one of the senior people from the employer was sat in the bar listening to everything that was being said, and immediately reported it well before the resignations took effect. And so, as I said, the weakest link tends to be the thing that foils the best laid plans.

Chris Hooley  25:23
And of course, there is then the serendipitous event like the junior AS (Assistant Solicitor) being in a meeting in a particular law firm in Hong Kong, and finding out that the entire litigation team was also in the building because they were assigning a deal and, as Adam says, the information leaks out in strange ways. But anyway, to get the situation where the team is actually moving, they’ve got to actually formally resigned. So what about the resignations themselves, Adam? What happens there in managing that particular process?

Adam Hugill  26:01
Okay, the issue is: do we resign all at the same time and everybody walks out at once? As I said, in Hong Kong because employees could buy out their own notice periods, that is something that is available to the poacher and to the team that’s moving. However, if those people have in place and enforceable Post Termination Restrictions, it’s usually the case that the most senior person has the longest restriction, and more junior people have either shorter restrictions or no restrictions at all. Then the resignations take place in a sort of layered format. There is a sort of general rule of thumb that employees should resign on their own resignation letters not use a standard template or formula. My view is that if everybody’s leaving on the same day, in a very concerted effort and intend to take an appointment with a new employee the next day, whether it’s a standardized resignation letter or not really makes no difference. The trap is sprung very quickly and the target finds out that they’re at the wrong end of a team move almost immediately. It doesn’t need to be covered up by the strategy of resigning in stages.

Chris Hooley  27:16
So, let’s now look at the enforceability of restrictive covenants. I think we’ve, we’ve touched on that before. So, the poacher obviously needs to access and look at all the terms of the contracts, but particularly Post Termination Restrictions to see number one, whether they’re enforceable, are they too restrictive and therefore void? Do they protect a legitimate interest? And can the poacher actually show that the employees were not involved in work, which is competitive? Adam, a few thoughts on that?

Adam Hugill  27:52
Yes. Restrictive covenants are the ultimate shield that the target company has against being the victim of a team move. As we say to all employers is these restrictions should be accurately drafted, they should be well thought through, they should be precise. And they should be regularly reviewed. Very often, somebody could start at a very junior level in an organization and work their way up to CEO on the same employment contract that they signed 20 years beforehand. And in that contract, it was a one side of A4 paper that said very little, because nobody thinks to review and update the restrictions. As Chris has said, a restriction is only valid if it protects legitimate business interests. A restriction can’t just by itself prevent competition. And when looking at what’s reasonable, you have to look at it from a number of different angles. The one that everybody looks at is duration. And so how long is the restriction for and people take a view that if the restrictions for a very long period of time, usually anything over 12 months, then almost certainly it will be unreasonable and unenforceable. The question is, if a restriction is for three months, six months or 12 months, would those restrictions be reasonable, and they have to be evidence of reasonableness needs to be given by the person seeking to rely on them. And the longer the duration, the higher the hurdle they’ve set themselves to justify why that’s necessary. The second angle that restrictions are looked at for reasonableness is geographical reach. And so, does the restriction simply prevent you from working in Hong Kong? Or does it prevent you from working in Asia? Or does it prevent you from working worldwide? Again, the wider the worldwide reach, the more difficult the restriction is to enforce and the higher the burden on somebody seeking to enforce it. And then the final thing is to look at the overall scope of the restriction, what it actually says. If it’s ambiguous, if it’s imprecisely worded, then it’s very likely that the court would consider such a restriction to be void. The court has very limited powers in Hong Kong to if you like redraft or purposefully interpret a restriction, which is badly put together or is for an unduly long period of time or is too wide in scope. And if a court doesn’t think that it’s reasonable, then they will simply strike down the whole restriction.

Chris Hooley  30:26
Adam, the concept of restrictive covenants, and Post Termination Restrictions being an applicable and very necessary support for the employer. But that doesn’t just stand alone because unless the confidential information is also protected to the fullest extent, then, neither poacher nor target company actually knows what’s going on. So, the poacher must check the contractual confidentiality obligations to determine what restrictions apply and identify what information acquired by team members in the course of their employment with the current employer is actually confidential. Clearly any use of that confidential information so as to reduce the potential loss that the previous employer can claim. In particular, the poacher should ensure that a departing employee does not upload confidential information belonging to their old employer on to its computer systems, again, as Adam said, basic instructions to every employee but the number of occasions when we’ve seen this happen is quite amazing.

Adam Hugill  31:36
And one of the other things that you would advise the poacher is to put into the contracts of the team that you’re poaching a clause which says that you have been instructed not to bring with you any confidential information belonging to your previous employer, and to make it very clear that the poacher does not want that information.

Chris Hooley  31:54
So having looked at the different elements that will be in the contract, the different approaches that the poacher can take, what’s the desired outcome for the target company here?

Adam Hugill  32:08
Well, the desired outcome from the target company is usually to protect against being the victim of a team move. So, as we say, the shield is Post Termination Restrictions, confidentiality provisions, and ensuring that these are well drafted and up to date. If the target company does find itself the victim of a team move, then it needs to act very quickly. Management needs to take responsibility. And they need to get to the bottom of what’s happening very quickly. As we say, when planning a team move, a sensible poacher would put in place a certain strategy, and it’s for the target to find out what that strategy is either from gathering information investigating or interviewing the people involved and pulling together, their view of what’s happening to them, then that will give them the ability to plan a strategy to defend themselves, whether that’s throw money at the problem, whether that’s promote a senior person to persuade them to stay with the organization, or whether that means that they run to the court very, very quickly and get or seek injunctive relief from the court to prevent the team from actually happening.

Chris Hooley  33:16
Thank you, Adam. I think we’ve run the course of the topic now. And there are clearly a lot of key elements involved. But I think probably the most important ones, especially to us as practicing lawyers in Hong Kong, is to ensure that there is a well thought through strategy agreed by the client, and we’re talking about the poacher here, well before anything happens and that could mean months in advance of something happening just to ensure that everybody fully understands what they should be doing and there’s no misunderstanding, as we as we say here, there are millions of dollars to be saved on the acquisition. There are also potentially millions of dollars of legal fees involved if it all goes wrong. Thanks, Adam.

Adam Hugill  33:58
Indeed. Thank you, Chris.

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