The Business Journey

The Business Journey

31 January 2017

The Business Journey

David Beveridge

The Business Journey

Grasping the Legal Nettles

31st January 2017

www.macdonaldhenderson.co.uk © 2017

Grasping the Nettle – 1Shareholders

• At the commencement of business or any enterprise – bias to “doing”

• Carrying out the business (making, selling, distributing, providing)

• There is a understandable concentration on sales, cash flow management, survival

• However, it’s important that, particularly where there are a number of principals there is thought given to a shareholders agreement – this is a road map for the owners, which answers the “what if questions”

• This becomes even more important if the venture is successful – as there will be more value at stake, and, therefore – more chance of disputes arising…

Shareholders’ agreement and articles of association

The shareholders’ agreement and articles of association should cover, between them, the following constitutional aspects of the company and its day-to-day operations:

• How the company is to be managed.• The division of power between the parties and the extent of their influence over the

management of the company.• The terms on which any party can transfer its shares to a third party.• How to deal with disputes and deadlock between the parties.• The circumstances in which the shareholders agreement will terminate, including the

mechanics and implications of termination.

Articles of Association

The articles govern the day-to-day management of the company. Common provisions include:

• Those relating to separate classes of shares and their respective rights and provisions relating to the variation of those rights.

• Procedures for the issue and transfer of shares (including pre-emption rights and restrictions on transfer).

• Notice and proceedings at shareholder and director meetings (including quorum and voting).

• Appointment, powers and duties of directors (and company secretary if one is to be appointed).

• Provisions for the authorisation and management of directors’ conflicts of interest.• Borrowing powers and certain other restricted matters.

Shareholders’ Agreement

The shareholders’ agreement may contain a number of the provisions commonly found in the articles. Other provisions might include:

• Object and scope of the venture.• Capitalisation and funding (initial and ongoing) or other contributions of the

parties (for example, intellectual property rights, know-how, secondment of staff, provision of premises).

• The composition of the board and management arrangements.• Approval of business plan.• Distribution policy.• Transferability of shares in different circumstances.• Deadlock and termination (including compulsory transfer events, and drag along

and tag along rights).• Provisions for unwinding a deadlock in a 50:50 company (for example, an escalation

procedure and/or a Russian roulette or Texas shoot out clause).• Minority protection, if any (for example, veto rights on certain matters, also

known as “reserved matters”).• Restrictive covenants on the company and the participants.• Confidentiality.

It is quite normal for the shareholders’ agreement to act as the master or framework agreement for the completion of the subsidiary documentation, for example:

• A management agreement.

• Contracts for the purchase of assets and/or businesses.

• Intellectual property rights contracts or licences.

• Distribution and marketing agreements.

• Services and secondment agreements.

Grasping the Nettle – 2Key Employees

• Often attractive salary, benefits, culture is not enough, and for small companies seeking to retain strong key employees, equity sharing is on the agenda

• Simple share allotments will usually attract adverse tax consequences (with the employee taxed on the value of the shares at income tax rates)

• Options (such as EMI options) are a useful and well recognised route of HMRC approved and tax friendly sharing of equity

• However, beware of exiting employees…

Up to date and compliant employment contract must be in place and contain protections to include:

• Duties of employee• Option for gardening leave;• Restrictive covenants;• Automatic removal as a director;• Confidentiality protections• Protection of the company’s property (delivery/deletion) and

specifically intellectual property.

1. Does the company have adequate procedures in place to relieve a departing employee of his shares if he leaves the company?

2. If so, do the procedures properly and fairly take account of the many different situations which could cause such an exit? For example – death, disability, retirement (which would tend to be classed as a good leaver) or alternatively – gross misconduct, or leaving to join a competitor firm (which most would view as a bad leaver);

3. Once the leaver’s “good”/”bad” status has been confirmed, does the company’s articles of association make proper provision to set the value of the leaver’s shares – usually fair value for good leavers and a suppressed or discounted value for bad leavers?

4. Finally, is it appropriate to take account of time during which the director has held the shares – for example if the director leaves before the maturity of a buyout project, should he be classed as an “early leaver” and be penalised, even if he isn’t a “bad leaver” as defined? By the same token, should the passing of time lead to a reduction in the penalty for leaving, “time off for good behaviour” as it were?

Grasping the Nettle – 3 Major Customer Contracts

• We’d expect a contract to be in place between setting out the goods and services to be provided and the payment for the same – so far, so obvious. But what about things like limiting liability under the contract?

• Does the contract adequately cap your liability under the contract for losses due to breach of contract or negligence?

• Ideally this would be capped at the amount which the you expect to be paid or expect to earn (profit) under the contract – or at the very least, capped at the insurance levels which you have in place…

• Assuming insurance is in place and is adequate!

• Have you excluded liability for indirect or consequential losses, loss of profit and/or loss of reputation suffered by the customer as the result of any breach by you?

• If not, then the customer might have a right to claim against you for such losses – the hit could be exponential.

• These issues form part and parcel of every contract formation and review which we carry out, whether it be for a client’s customer/client and/or supplier.

• Sometimes, as might have been the case in this situation, it’s not about effecting wholesale changes to the contract (as the other party is so powerful that they will never accept any amendments).

• Rather, and in those circumstances, it's about understanding the risks and mitigating the same, whether by insurance cover, “smart” company structures and/or good contract management.

Corporate team awarded Team of the Year  in November 2016 at The Law Awards of Scotland.

Entered Legal 500 Recommended Law Firm Guide in August 2015 and now ranked as a Recommended Law Firm by The Legal 500.

Law Firm of the Year 2010 (under 50 fee earners) Up and Coming Law Firm of the Year 2010 (Law Awards of Scotland).

One of the Top Three corporate law firms in Scotland in terms of number of MBOs (management buyouts) completed in 2015/16 (Business Insider 2016 Yearbook).

Leading Advisor to Scottish Family Businesses at The Herald Scottish Family Business Awards 2012 & 2013.

A top 15 Scottish corporate law firm by number of deals completed (2012, 2013, 2014 and 2015 Business Insider).

Turnover and profits increased by 25% since a Management Buyout in 2009.

Based in the International Financial Services District of Glasgow.

KEY FACTS

Contact Details

David B BeveridgeManaging Director0141 248 4957db@macdonaldhenderson.co.uk

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