Starting Up: Legal Aspects for Consideration

UNIVERSAL LEGALATTORNEYS AT LAW

21st August 2010

TiE Mumbai

SSTARTING TARTING UUP – P – LLEGAL EGAL AASPECTS FOR SPECTS FOR CCONSIDERATIONONSIDERATION


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Choice of Entity

Funding Options

Protecting your Intellectual Property

Compliances

Contracts

Legal Strategies


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Choice of Entity

Private Company

Public Company

LLP

Partnership

Proprietorship 1 Person Venture

More persons jointly

Partnership with Limited Liability

Popular Vehicle

EstablishedStage


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Sole ProprietorshipSole Proprietorship Concern

1 Person Venture

Unlimited liability (Personal Assets may also be attached)

Limited Funding Options

Taxed at Individual Level


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Partnership Relation between persons who have agreed to

share the profits of a business carried on by all or any of them acting for all

No Separate Legal Entity

Unlimited Liability (Joint and Several)

Rights and Obligations as per Partnership DeedLimited Funding Options


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Limited Liability PartnershipSeparate legal entity

Fusion of Partnership and Company

Partner’s liability limited to partners’ contribution

Financing options limited due to lack of clarity on FDI, non-availability of other forms of financing like private placement, IPOs


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Private Limited CompanyMinimum Capital Requirements – Rs. 1 lakhMinimum Member Requirements – 2 MembersMinimum Compliance Requirements – Board and

General Meetings, Reporting required in cases like changes in directors, capital, registered office etc. and Annual filings like Annual Return and Balance Sheet

Wider Funding Options – Vehicle preferred by PEs/VCs


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ComparisonCriteria Partnership LLP Limited Company

Number of Partners/ Shareholders

Minimum 2 Persons 10- Banking 20- Non Banking

Minimum 2 Persons - no maximum unlimited

2 - 50 – Private Company7 - unlimited - Public Company

Legal Entity No Separate Legal Entity Body Corporate Body Corporate

Liability Unlimited – may extend to personal assets of Partner/s

Limited to the extent of Partner’s contribution

Limited to the extent of unpaid share capital

Compliances No major requirement Annual Returns, Financials and other returns based on events

Company Secretarial (Statutory Records, Board Meetings, General Meetings), Annual Accounts and Annual Returns to be filed

Tax Income of Firm taxed in the hands of the Firm

Similar to Partnership Corporate Taxation (around 30%)

Management Managed by the Partners Managed by the Partners Separation of Ownership and Management – shareholders, Board of Directors

Dissolution/Winding up Retirement/Dissolution of Partnership

Procedure as per LLP Act Very procedural and long drawn


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Incorporation of Private Company – Typical Process


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Funding Options


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Funding OptionsProprietorship

Partnership

Public Company

Private Company

LLP

• Main reliance on bootstrapping

• Loans from Banks and Financial Institutions

• Equity, Debt, hybrids to indian and Foreign Investors

• Possibility of Public Issue upon reaching certain scale of business

• Equity, Debt and hybrid instruments

• Easy access to foreign investments

• Partners’ Contribution (Capital, Land, Building etc.)

• Loans

• Similar to partnership

• FDI Regulations are not yet in place


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IPR Protection


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IPR Protection

Trademarks

• AdvisoryRegistration• Searches• Registration strategies• Replies and registrations

Copyrights PatentsIndustrial Designs

Post Registration• Renewals• Oppositions• Prevent unauthorized users• Protection against Passing-off• Licensing, assignment and royalty

matters

IPR Protection• Oppositions• Prevent unauthorized users and

action against the unauthorized users

• Protection against Passing-off actions

IPR Protection


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Compliances


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CompliancesCompany Law

Board and General MeetingsStatutory Registers, Filings and Other Compliances

Labour LawDependent on Nature of Business and Number of

EmployeesShops and Establishments, Provident Fund,

Gratuity


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Contracts


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What is Contract?

Offer

Acceptance of Offer

Consideration

Agreement enforceable in the eyes of law

Written Understanding between Parties


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Why it assumes importance?Outlines broad framework of understanding between

Parties

Clear-cut demarcation of roles, responsibilities and obligations

Evaluation, Identification and Mitigation of Risk

Reduce Ambiguities Recommended to have legal practitioners draft/review


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Types of ContractsContracts

IPRHuman ResourcesTransactionalCommercial

Vendors CustomersDistributionFranchise Service AgencyMarketing

Promoters/ Founders EmploymentConsultancy Non-Compete/ Non-Solicit

Shareholders Investments Joint Ventures Asset Purchase Business Transfer

Non-Disclosure AssignmentLicensing


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Contracts - Key TermsTypical terms include –

Clear Description of Parties

Scope of the Agreement

Commencement of Obligations – from date of execution or specific date

MilestonesTerm


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Contracts - Key TermsConfidential Information

Representations & Warranties

Indemnity

Limitation of Liability

Assignment/Protection of Intellectual Property


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Contracts - Key Terms

Non-Compete, Non-Solicit

Dispute Resolution

Governing Law

Amendment and Waiver

Termination – with cause, without cause


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Termination of ContractWithout cause -

Expiry of termCompletion of obligationsParties wish to move on

With cause – Breach of Contract

Obligations /consequences of Termination


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Remedies for BreachCompensation for loss or damage caused

by breach

Civil remedies Suit for specific performance or damages

Injunctions – Temporary or permanent

Suit for recovery/compensation


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Indemnity & Limitation of LiabilityLoss, damages and expenses arising from

negligence of one Party

Liability limited to direct losses, claims and expenses (as against indirect losses like loss of business, profits etc.)

Limiting Liability to a mutually agreed amount/percentage (2x the value of the Contract)


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Dispute resolution

Negotiation and amicable settlement

Escalation to Dispute Resolution committee/ senior management

Arbitration (sole/panel of 3 arbitrators)

Litigation


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Dispute resolutionArbitration

Mutually appointed arbitratorsInformal, flexible as compared to formal process of

courtsTime and Cost-effective

Litigation Formal process by CourtsFraught with delays


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Jurisdiction of courts As per mutual agreement

Place of Business /Parties

Where cause of action arises?

Neutral Venue

Jurisdiction recommended to be specified in thecontract


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Governing Law Typically place of Business/Parties

As per Mutual Agreement

Neutral Venue

Governing Law recommended to be specified inthe contract


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Binding Nature MoU (Memorandum of Understanding), Term

Sheets - not binding unless expressly mentioned

Subject to Definitive Agreement to be executed between parties – which shall be of binding nature


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QUESTIONS?


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Contact UsUNIVERSAL LEGAL

Sharanya G RangaPartner in charge

[email protected]

India Locations* Bangalore *Chennai *New Delhi *Mumbai *Chandigarh

U.S Locations *Los Angeles *New Jersey *Atlanta *Silicon Valley * Fairfax

mailto:[email protected]

Starting Up: Legal Aspects for Consideration

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Transcript of Starting Up: Legal Aspects for Consideration