February Focus:

Business owners make sure you have a Shareholders’ Agreement – fixed prices starting from *£600. Ensure your hard work and investment are protected ACT NOW!

Call Jane on 01772 972591 or email Jane@nineteenlegal.co.uk

A shareholders’ agreement is a contract entered into between a company and some or all of its shareholders. It can deal with all aspects of the relationship between the parties, including the personal rights and obligations of the shareholders. Together with the company’s articles of association a shareholders’ agreement creates internal “rules” by which a company is governed.

Examples of areas in which disputes commonly arise and the provisions of shareholders’ agreements that are intended to deal with such matters are set out below.

Management

The directors of a company are responsible for the management of its business and are generally entitled to exercise all the powers of the company. Although directors are subject to statutory duties, including the duty to act in good faith in the best interests of the company, as a general rule they are not required at law to consult the shareholders about decisions relating to the management of the company and its business. Where all the shareholders are also directors this may not be an issue. However, shareholders who are not directors may nevertheless want to be consulted about and/or have the right to veto important decisions about the company and its business.

Shareholders’ agreements usually include provisions reserving decisions about certain matters relating to the management of the company and its business to the shareholders. For example, it is common for the directors to be required to obtain the consent of some or all of the shareholders before committing the company in relation to such matters as issuing new shares, selling material assets of the business and appointing new directors. In the event that the directors act in breach of the shareholders’ agreement, the underlying act will remain binding on the company, but the shareholders may have a claim for damages for breach of contract against both the company and any shareholder who was involved in perpetrating the breach (e.g. a shareholder who is also a director).

Departing Shareholder

The shareholders of a company may have agreed that one or more of their number will “earn” their shares in the company by working as employees of the company (whether for a fixed period or indefinitely) and the success of the business may depend on such shareholders fulfilling their obligations. In the event that an employee shareholder changes his mind and resigns, he will not automatically be required to offer his shares in the company for sale to the remaining shareholders and will therefore benefit from a windfall attributable to the value created by his fellow shareholders (whether by investment or hard work).

Shareholders’ agreements sometimes include provisions requiring any employee shareholders who cease to be employed by the company to offer their shares for sale to the remaining shareholders. The price at which the shares must be offered for sale (whether market value or at a discount) usually depends on whether the departing employee shareholder is a good leaver or a bad leaver. For example, a shareholder may be a bad leaver where he has resigned within a minimum period of time after being issued shares or he has been dismissed in circumstances in which he is guilty of fraud, dishonesty or gross negligence.

Shareholders may also be concerned about departing employee shareholders using the knowledge, experience and contacts they have acquired during their employment with the company to set up competing businesses and poach the company’s customers and employees. For this reason, shareholders agreements usually include a number of restrictive covenants which seek to restrict departing employee shareholders (or even all shareholders) from setting up in competition with the company and poaching customers and employees for a period of time after they have ceased to hold shares in the company.

Exit

Shareholders often have different ideas about what their business is worth and when is the best time to sell, and they may disagree about the timing and/or the terms of any proposed sale. However, purchasers of private companies usually want to acquire the entire issued share capital free of any minority interests and, for this reason, shareholders’ agreements commonly include drag along rights entitling the majority shareholder(s) to compel the minority to sell their shares in the company to any proposed purchaser of the shares of the majority shareholder(s).

Drag-along rights are usually accompanied by tag along rights which entitle the minority shareholder(s) to require the majority to ensure that any proposed purchaser of the shares of the majority also purchases the shares of the minority shareholder(s) on the same terms.

Deadlock

Where a company is owned in equal shares and jointly managed by two individuals, there is a risk that deadlock may arise at both board and at shareholder level. For example, one party may wish to take the business in a new direction or seek investment from a third party while the other wants to carry on business as usual.

Deadlock can be disruptive and damaging for any business, but is particularly risky for new businesses which are often working to tight deadlines and budgets. If not resolved quickly, deadlock may result in the failure of the business. In addition, unless one party has acted in breach of contract or duty the parties may not have recourse to the courts to settle the dispute. In any event litigation is usually expensive and time consuming and may damage the company’s reputation and the goodwill of the business. It is therefore important that there is a mechanism in place to resolve any deadlock as quickly and as privately as possible.

Shareholders’ agreements sometimes include deadlock resolution provisions which require the parties to use commercially reasonable efforts to resolve any deadlock in accordance with an agreed procedure and timetable and, in the event that the deadlock cannot be resolved by negotiation within the agreed timetable, provide a mechanism for the compulsory purchase by one party of the other party’s shares in the company.

 

 

January only – 15% off Annual Business Reviews

Kick your Business off to a great start in 2018. We are offering 15% discount on our Legal Health Check Service. This is a half day review of your current legal arrangements and  a look ahead to implementing secure foundations for future growth.

Health Check Fees will be refunded against agreed future work. This offer is limited to January only, terms & conditions apply.

For details em: Jane@nineteenlegal.co.uk or call 01772 972591.

 

Standard Terms do not mean “one size fits all”

Why use standard terms?

Using standard terms can eliminate the need to negotiate the ‘small print’ for each contract; instead you can concentrate on agreeing the unique commercial aspects.  The terms should be driven by the commercial reality of your business and tailor-made to reflect your business.

So what are the key provisions in standard terms and how can you can integrate them into your business?

Commercial terms

These will depend upon your business but you should always consider the following key commercial points:

Description, quantity and quality of goods and services

Delivery information (time scales, costs, late delivery, liability during transit, insurance, failure to accept delivery)

Price (including VAT, packaging, delivery, insurance)

Payment (time for payment, encouraging prompt payment, interest on late payment)

Risk (limitations and exclusions of liability)

Transfer of title to goods

Implied terms

Standard terms are designed to leave little room for the other party to negotiate.  However, they are subject to rights automatically incorporated into contracts by law.  For example:

You must not exclude liability for fraud or death or personal injury caused by negligence or defective products

You must confirm that any goods you sell belong to you, or you have the right to sell the goods, and they are free from any genuine claim by another

There are more implied terms which are primarily aimed at protecting weaker parties (particularly consumers).  Some implied terms (excluding the above) can be excluded from your contract but this depends upon whether you are contracting with a consumer or business and whether it would be fair to exclude them.  Where you trade online you will need to comply with additional laws and you should always seek legal advice before applying your terms to online trading.

General terms

General “boiler plate” terms are important yet can be overlooked as unnecessary legal jargon.  Some key general terms are:

Variation: This is essential in order for you to adapt your contracts to fit with your changing business needs.

Entire agreement: This prevents parties from relying upon something which has been said but not expressly set out in the contract. It provides certainty because the terms are in one place.

Third parties: Third parties can have rights in law to sue under a contract even though they are not a party to it. It is important to exclude this right to prevent unexpected liabilities owed to third parties.

Non-Waiver: This prevents any waiver of your rights unless done in a specific way and so you can acknowledge breaches of the contract (e. g. late payment) without accidentally forfeiting other rights (e. g. to charge interest).

Force majeure: This excuses a party from having to perform obligations or duties under a contract where it is unable to do so because of circumstances outside of that party’s control.

Unusual terms

You must draw special attention to terms which are unusual or onerous because onerous terms in an unsigned document (such as standard terms) may be held to be unenforceable unless reasonable steps are taken to bring them to the other party’s attention before the contract is made.

This will depend on the transaction but terms to watch out for include where you exclude or limit your liability and:

Penalty clauses:  You cannot penalise the other party for doing, or failing to do, something unless there is sufficient commercial justification such as costs or loss which would otherwise be incurred by you.

Charging interest on late payments: If you do not specify an interest rate in your terms then a statutory interest rate will apply to late payments.  The law on late payments has recently been amended.

Including standard terms in your contract

You must ensure that your standard terms are brought to the attention of the other party before the contract has been formed.  Standard terms should be included, or made reference to, in your business literature including catalogues, quotations, order forms, delivery notes, invoices and your website.

Where the terms are printed on the reverse of a document, the front must state that the terms are printed on the reverse and that they form part of the contract.  Equally you must cross reference the terms on the face of any document which varies the terms.

Changing your standard terms

You may vary standard terms for a single contract by referencing the variation on your order form or other document but at some point you may want to change your terms altogether and how you do this depends upon whether you are changing them for a new or existing contract.

Changing existing contracts: This will depend on what your standard terms say.  You can send the new terms to every party explaining that if they continue to trade with you after notification of those changes they will be considered to have accepted them and they will apply going forward but where consent is required, or the contract is valuable, you may need, or want, to obtain written acceptance.

New contracts: Where you want to change your standard terms for a new contract with a party with whom you have a history of contracting care must be taken to flag any variations, particularly where they are disadvantageous to the other party.

This is a general guide and you should always take specific advice.  If you would like to find out more about creating, or revising your standard terms, please contact us. As a general rule of thumb they should be reviewed as a minimum, every 3-5 years.

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