Business

There is a famous quote, “A Verbal Contract isn’t worth the paper it’s written on” this is attributed to Samuel Goldwyn, although the quote is a misreporting of an actual quote, which was praising the trustworthiness of a colleague: “His verbal contract is worth more than the paper it’s written on” and sometimes it may just be beneficial for a company to not have a signed contract.
The general view held by many lawyers is that a business should always enter into a written contract when undertaking a major project or purchase, however, often the business is potentially better off signing no contract at all, and here’s why.

In English law, a contract does not have to be a formal written contract; it does not even have to be in writing. Most contracts that SMEs enter into are based on meetings, telephone calls and email exchanges. Sometimes, these are accompanied by written purchase orders or even a company’s standard terms and conditions.

If anything goes wrong with the performance of a contract, the first thing a lawyer or a court will do is to look at what the contract says. They will examine the written evidence (contracts, orders, terms and conditions, emails, letters, and notes of meetings and telephone calls) and what anyone has to say about the communications. They will then try to piece together exactly what was agreed, where was there a meeting of the minds, between the parties.

If there is a signed contract, the court will often just look at what that says and ignore all the promises made before the contract was signed. If the contract does not in fact say what was agreed, then the parties are likely to be bound by what is in writing rather than what was actually agreed beforehand.

Take the following scenario: a purchase manager has had extensive contact with a salesman, who made an initial presentation and after that, the manager had raised various questions. The salesman answered all the questions positively and promised the world.

The contract has been sent over to sign. Everyone was busy so the contract wasn’t read carefully if at all, perhaps it was a misunderstand of the legal language and no one at the business quite understands it all. The other party has put the Company under time pressures, and the Business just signed the contract.

Later something goes wrong and the Company has its lawyer look at the contract only to discover that what the business had thought had been signed wasn’t actually what the contract says.

Usually, contracts contain clauses (normally towards the end) saying that the contract is an “entire agreement” and that no party can rely on representations made prior to signing it. What this means is that, usually, an
aggrieved party, will not be able to say that the contract was different from what was actually agreed with the salesman. The Company is bound by what the written contract says. Sometimes, it is done deliberately to trick the unwary, but, usually, the other party is just trying it on by adding clauses to the contract that are very much in their favour. They anticipate that this act will lead to negotiations on the terms and expect the other party to get back to them suggesting changes to the contract before actually signing it.

A lot of the time, clauses are added covering events that where not even discussed with the salesman. Maybe these are things that the non-breaching party simply didn’t consider crucial immediately and thought that they could come back to these issues later, they did not expect the problems to come back and bite them.

It can often be that the negotiations that led up to the signing of the written contract set out better what was actually agreed than the contract itself. If this is the case, you might be better off signing no written contract at all.

If a business is going to sign a contract, and often it is best to do so as it avoids arguments later, make sure it says what was agreed to. It should be gone through carefully, clause by clause and the signing party should consider what each clause means. If the reader is not sure, then the party should get legal advice on just what the contract says and be prepared to negotiate. If the other party is keen to get the business, they’ll usually be prepared to go to some lengths to accommodate the party.

Acknowledgement: Gary Cousins – Cousins Business Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

ADR

In the resolution of a civil dispute anyone is entitled to a fair hearing within a reasonable time, at a reasonable cost, and with appropriate independent input to ensure fairness. There are, however, circumstances in which options other than litigation may be more cost effective, quicker, or flexible, while still resulting in a fair outcome. All those involved in the litigation process need to have a proper understanding of the ADR methods available.

The term ‘alternative dispute resolution’ has no agreed definition, but clearly the phrase is used to cover the full range of alternatives to litigation potentially available to resolve a civil dispute. Whilst there have always been alternative ways of resolving disputes, the importance of ADR in the context of Litigation is a relatively recent development. ADR is now seen as an essential part of the process by which parties seek to resolve their
disputes by way of litigation, as much as an alternative process in itself.

The planning of ADR is as important as the planning of the other parts of the litigation process and requires knowledge both of the detail of ADR methods and of factors affecting tactical decisions in ADR.

There are a number of alternative dispute resolution mechanisms available to parties involved in a dispute. There are a number of ADR options available (a) negotiation which is a non-binding ADR process without third party intervention (b) mediation; executive tribunal; conciliation; stakeholder dialogue; early neutral evaluation is non-binding ADR processes with third party intervention and (c) expert determination; adjudication; Dispute Review Board; arbitration and Med-Arb these are binding ADR processes.
Negotiation is the most flexible and informal of the dispute resolution methods. Parties attempt to reach agreement on matters in dispute without the assistance of a third party. Discussions usually proceed on a without prejudice basis. If the negotiations do not succeed to settle the matter, the parties’ rights are not prejudiced.

Mediation is the process whereby parties, with the assistance of neutral third party (the mediator), identify the issues in dispute, explore the options for resolution and attempt to reach agreement. It is a voluntary, non-binding and private form of dispute resolution. The parties retain control of the decision on whether or not to settle and on what terms.

There are different styles of mediation, but the most common in the UK is facilitative mediation, in which, unlike a judge or arbitrator, the mediator will not decide the case on its merits but will work to facilitate agreement between the parties.

A representative of each party makes a formal presentation of his best case to a panel comprised of senior executives for the disputing parties and an independent chairperson. The panel then retires to discuss the dispute and the chairperson normally acts as a mediator between the senior executives. The entire process is private, confidential and without prejudice.

Conciliation is similar to mediation except that, usually, the third party will actively assist the parties to settle the dispute. The term is widely used to describe the facilitated settlement discussions that occur in the employment arena. It is also the term used in Europe to describe the function performed by judges when they hold
settlement conferences with the parties in an attempt to assist them to reach a settlement of their dispute.

This process is primarily encountered in environmental disputes. A series of meetings takes place with stakeholders/interest groups to facilitate decision-making, with the hope of avoiding future disputes.

The parties appoint an independent person to provide a non-binding opinion on the merits which evaluates the facts, evidence and law relating to a particular issue, or the whole case. The rationale is that, once armed with the opinion, the parties will be able to negotiate an outcome, with or without the assistance of a third party.

Expert determination is an informal process that produces a binding decision. An expert is appointed by the parties to determine an issue, usually of a technical nature. As an expert’s decision is an evaluation, this approach is treated as having different legal characteristics to an arbitration award.

Adjudication has been used as a method for dispute resolution in the construction industry for decades, and since the introduction of the Housing Grants, Construction and Regeneration Act 1996, parties to certain construction contracts have had a statutory right to refer disputes to adjudication.

An adjudicator usually provides a decision on disputes as they arise during the course of a contract. Typically, the decision of an adjudicator
has interim binding effect; that is, the decision is binding pending agreement of the parties altering its effect or a reference of a dispute to arbitration or litigation for final determination.

A dispute review board is a project specific adjudication process. A panel (usually of three neutrals) is appointed at the start of a project. The panel visits the site of the project, usually three or four times a year, and deals with disputes by providing an interim binding decision (like adjudication). The parties can challenge board decisions via arbitration or litigation. The board can have a preventative effect on disputes.

Arbitration is an alternative to litigation as a means of resolving disputes. It is based on the parties’ agreement: all parties must agree to submit the dispute in question to arbitration. Arbitration is a private forum in which an independent arbitrator makes an award, acting in a judicial fashion, to finalise the dispute. The
outcome (the award) is final and binding on the parties. The arbitrator focuses on the issues (fact or law) presented by the parties. The matter is referred to arbitration for determination where it is satisfied that the dispute arises under a contractual arbitration agreement (section 9, Arbitration Act 1996). The arbitrator cannot meet with each party in private.

Med-arb (or arb-med) is when mediation is combined with arbitration to resolve a dispute. In med-arb, if mediation fails in whole or on any issue, the parties may agree that the mediator becomes an arbitrator and issues a final and binding award on the outstanding matters.

Owllegal are well versed in all areas of ADR, and can assist clients in both creating the right to utilise ADR, and then using the ADR process to reduce, the time in both money and man hours to reach conclusions to business disputes.

Acknowledgement: Thomson Reuters online resource Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

Meeting

Disputes often arise between majority and minority shareholders, resulting in many instances, when the majority seek to expel a minority shareholder, but how can this be done? There are several possible ways of removing a shareholder, or forcing a sale of their shares, but care needs to be taken in each case, and a tactical approach is required, which means detailed legal advice should be taken.

Check the articles of association of the company to see if they contain drag along provisions which would enable the majority of the shareholders to force the minority to sell in the event of a buyout of the company.

Consider passing a special resolution (75% majority) to alter the articles to include provisions to force a sale of the shares, say for fair value. However, any alteration should not amount to an oppression of the minority and should not be unjust, and lead to further litigation.

Check if there is a shareholders’ agreement which contains a ‘buy-back’ clause which can be invoked if a shareholder leaves the company. This is sometimes known as a ‘bad leaver’ provision and will include a mechanism to value the shares.

Consider increasing the remuneration of the remaining directors, and reducing sums paid by way of share dividends. This may not be tax efficient but may be preferable to paying dividends to a shareholder who no longer participates in the running of the company. But take care, since you should be able to justify this course of action, define the business reason for the change.

Once you have assessed the Company’s, start negotiations with a view to reaching agreement for the purchase of the shares for fair value. First carry out a valuation of the shares. A minority shareholding will often be valued at a figure below what the shares would be worth based on a percentage of the whole. Check to see if the Articles contain a formula for valuing a minority shareholding.

Care should be taken to avoid a dispute which could end in costly litigation. A minority shareholder has the right to apply to the court claiming, ‘unfair prejudice’. The court will usually order a sale of the leaving shareholder’s shares at a determined value. Company litigation is expensive, and the costs would usually be paid for by the individual shareholders. However, the threat of such proceedings can be used to put pressure on the minority shareholder to reach agreement for the sale of their shareholding.

The company could consider bringing a claim against the departing director if it can show it has suffered some loss as a result of a breach of his duties as a director. Care should be taken, however, to check that the other directors have not themselves been in breach of their duties.

If the majority hold 75% of the shares, then you could consider the nuclear option of winding up the company. If a solvent company is wound up through a member’s voluntary liquidation (MVL), the company’s assets can be transferred into the name of Newco, which would not issue shares to the minority shareholder in Oldco.

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

Shareholder Remedies

Private Limited companies are owned by the members, these shareholders are there at the beginning when everything is hunky dory, and perhaps lodge significant funds, but if overtime these initial members are side-lined or a dispute arises between the members what can the shareholder do.

This blog post gives a bite sized overview of the three methods which shareholders may use to enforce their rights, namely (1) the presentation of an unfair prejudice petition under section 994 CA 2006; (UP) (2) the bringing of a derivative action under section 260 CA 2006 (DA) and (3) the presentation of a petition for the winding up of the company on just and equitable grounds under section 122 (1) (g) IA 1986. (WUP)

For an (UP) Claim, the members (Shareholders) of a company and persons to whom shares have been transferred (voluntarily or by operation of law) who are not yet registered as members (section 994(1) (2), CA 2006) including where they hold shares as nominees or trustees for others. Or the Secretary of State for Business, Innovation and Skills on the basis of investigations or reports (section 995, CA 2006).

For a (DA) the members of a company and persons to whom shares have been transferred (voluntarily or by operation of law) who are not yet registered as a member including where they hold shares as nominees or trustees for others (section 260(5), CA 2006).No minimum number of shares need be held but the size of the shareholding is
relevant to the court’s decision whether or not to permit a derivative claim to be brought.

For a (WUP) the list is considerably larger than the other two options and includes; The company; The directors (pursuant to a board resolution passed by a majority or unanimously absent such a resolution); Prospective or contingent creditors; and shareholders and others liable to contribute to the assets of a company who satisfy the requirements of section 124, IA 1986.

For an (UP) claim a shareholder may bring a claim for the following issues; Actual or proposed acts or omissions of the company which constitute the conduct of the company’s affairs in a manner that is unfairly prejudicial to the petitioner’s interests as a member including:

  1. Breaches of fiduciary duty on the part of the company’s directors prejudicing the interests of members
  2. Mismanagement which is serious having regard to the scale of financial loss arising and the frequency and duration of the relevant acts and omissions
  3. Improper failures to pay dividends/payment of excessive remuneration
  4. Breaches of the articles/ shareholder’s agreements
  5. Exclusion from management or failure to provide information in the context of a quasi-partnership or where the understandings or agreements between the parties render such conduct inequitable.

For a (DA) claim, then the claims are all causes of action which may be available to the company against directors, third parties as well as directors and third parties together arising from acts or omissions constituting negligence, default, breach of duty and/or breach of trust by a director or shadow director of the company (section 260(3), CA 2006).

When considering a (WUP) then a potential claim revolves around the circumstances rendering it just and equitable for the company to be wound up, the categories of which are not closed but include:

  1. Loss of substratum rendering the carrying out of the purpose for which the company was incorporated impossible and the sole remaining activity of the company is the getting in of
    its assets and winding up of its affairs
  2. Deadlock which was not contemplated by the shareholder’s when the company was incorporated (compare with deadlock built into the articles to protect one or more shareholder’s)
  3. Justifiable loss of confidence in management arising from mismanagement which is serious (for example want of probity or fraud) or confounds proper and legitimate expectations
  4. Exclusion from management or failure to provide information in the context of a quasipartnership or where the understandings or agreements between the parties render such conduct inequitable.

The relief available to the shareholder claiming under an ‘Unfair Prejudice’ (UP) cause of action would be such order as the court thinks fit to remedy any unfair prejudice, taking into account the interests of other shareholders and creditors, including:

  1. Ordering the purchase/sale of the petitioner’s shares at a price and on terms to be determined by the court
  2. Regulating the conduct of the company’s affairs for the future
  3. Requiring the company to refrain from, or to carry out, an act including amendments to the articles of association
  4. Authorising proceedings to be commenced in the name of the company (even where the requirements for a derivative action are not satisfied) (section 996, CA 2006).

Raising a (DA) claim is slightly more complex and the relief available includes Permission from the court; to bring or continue a claim on behalf of the company commenced by the applicant (section 263, CA 2006); to continue a claim commenced by the company or by another member in a manner amounting to an abuse of process which has not been prosecuted diligently where it is appropriate for the applicant member to continue the claim (sections 262 and 264, CA 2006);

However, such permission may be limited (for example until disclosure) or conditional (for example no compromise or discontinuance without permission of the court). The court may also order the member pursuing the derivative claim to be indemnified for costs where: It would have been reasonable for the company’s directors to have pursued the claim; The derivative claimant’s only interest in the claim is as a shareholder; or All benefit from the action will accrue to the company.

For a ‘Winding-Up Petition’ (WUP) claim the relief is the court ordering the “Winding up of the company.”

For an (UP) claim then the seriousness of the unfairly prejudicial conduct identified by the applicant and the interests of other shareholders and creditors, and the insolvency of the company, which will preclude the bringing of a petition unless such insolvency was occasioned by the unfairly prejudicial conduct or the petitioner is prejudiced other than by losing the value of his shareholding in some other capacity connected with his status as a shareholder.

When considering a ‘Derivative Action’ (DA) claim A court must refuse permission to bring or continue a derivative claim where a person acting to promote the success of the company would not seek to continue the claim or the proposed or past act or omission is capable of authorisation/ratification and has been authorised by the company before it occurred or subsequently ratified (section 263(2), CA 2006).

A court may grant or refuse permission to bring or continue a derivative claim taking into account; The applicant’s good faith; The importance that a person acting to promote the success of the company would attach to the claim; The likelihood of authorisation or ratification; Whether the company has decided not to pursue the claim; Whether a personal remedy is available to the member seeking to pursue a derivative claim; The views of members of the company who have no personal direct or indirect interest in the claim (sections 263(3) to (4), CA 2006)

When considering a (WUP) claim the court will consider the seriousness of the just and equitable grounds identified by the applicant and the interests of other shareholders and creditors. Whether it is preferable for there to be an orderly winding down of the company’s affairs.

Nothing is ever simple and straightforward when considering the application of the law, and an (UP) claim is no exception to this truism, and the following problems may be encountered with the claim, namely; a refusal by the petitioner of a fair offer to purchase his shares; Express provision for an exit route in
the company’s articles of association or in a shareholder agreement.; Misconduct on the part of the petitioner; Delay in presenting the petition and/or acquiescence in the alleged unfairly prejudicial conduct.

For a (DA) claim, the bars to prosecuting the claim include the fact that the bringing or defending the claim is not in the best interests of the company; and that the actions complained of have been authorised or subsequently ratified by the company.

With a (WUP) claim the claim will not continue where the is an absence of any tangible benefit to the petitioner of the making of a winding up order (for example, the insolvency of the company in the context of a shareholder’s petition); or the availability of an alternative remedy which the petitioner unreasonably refuses to pursue.

Whilst there are inherent protection for a shareholder, built into the Companies Legislation, they are perhaps of little practical consequence to the majority of shareholders, and this point alone prescribes the necessity of having a clear and well drafted shareholders agreement, which incorporates appropriate dispute resolution procedures.

Acknowledgement: Thomson Reuters online resource Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

Settling Dispute

It is always a sensible consideration when involved within a commercial dispute to consider settling, but there are many things to be aware of before a settlement is completed, below are some of the main pints you should consider when contemplating a settlement.

Why settle?

  • A settlement gives the business certainty and closure and avoids the anxiety of having to wait for a judgment from court and the uncertainty about that outcome.
  • Reaching a settlement avoids the expense of continuing with litigation. Even if the business wins in court and is awarded costs, it will rarely get all of its costs back from the other side.
  • The business should not consider it a sign of weakness to approach the other side to explore the chances of a settlement. This can be done at any time during the litigation process, even during a trial. Settlement negotiations facilitated by a neutral third party (generally in the form of mediation) are becoming increasingly popular.

Settlement discussions

  • Make sure settlement discussions are conducted on a “without prejudice basis”. This means that anything said about the dispute during the settlement negotiations or in any written settlement offer cannot be used later at the trial. This protection only applies to statements made purely in an attempt to settle the case.
  • If the business does not want to be bound by a settlement until after it has taken advice, it should make sure any oral settlement is made subject to contract, to take binding effect only on entering into a written settlement agreement.

The extent of the opponent’s resources

If the opponent does not have significant funds, it may be better to settle early rather than incurring significant costs. There is no point pursuing the dispute to trial if the opponent cannot pay the sums awarded or the business’s legal costs.

The extent of the business’ resources

Bear in mind the balance between trying to get a return on the costs already incurred, as against the risks associated with incurring further costs. Is it better to settle straight away or is it feasible to continue to pursue or defend proceedings in the hope of achieving a better result?

Cost-benefit analysis

  • Early on in the dispute, conduct a cost-benefit analysis of continuing to fight the case. The business should compare its analysis with possible settlement outcomes.
  • If an offer is made, the business should consider its present-day value, bearing in mind how long it will take to get to trial and the potential cost of litigation.

Adverse publicity and precedents

Settlement is likely to be a priority if the business:

  • Is concerned about the publicity associated with going to trial.
  • Wants to avoid setting an unhelpful precedent that may lead to further claims.

If the business knows the other side is more concerned about these factors, this can provide negotiation leverage.

Management time

Consider the strain on the business’s management team and its employees in investigating and defending or pursuing the proceedings.

Relationship with the other party

What relationship does the business have with the other party, and what relationship does it want to have with them in the future? Sometimes reaching an amicable settlement may be the best way forward for both parties.

Other commercial considerations

Are there any other commercial reasons for settling? For example, is the dispute:

  • Damaging the business more broadly.
  • Causing other losses because it is restricting the business from carrying out its normal business activities.

Instalment payments

  • If the business is owed money, and is in a position to wait for payment, an overall higher amount may be achievable through an instalment programme, although it will take longer to collect.
  • If the business owes money, and has the liquidity, offering a lesser total amount as a lump sum up front may be attractive.

Alternatives to money

  • Consider providing free or discounted goods or services instead of, or in conjunction with, money. A composite agreement may help the business reach an agreement when it would have been too far apart in terms of cash sums alone.
  • Agreeing not to do something can also be a useful tool in agreeing a settlement.

Taxation

Always take specialist tax advice and make sure it is factored into the settlement.

Acknowledgement: Thomson Reuters; Online Resource – Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Randall directly, his email address is ian@owllegal.org

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Ian Randall

Results driven Corporate and Commercial Lawyer with 25+ years of experience ensuring the legality of Corporate and Commercial transactions. Adept at drafting corporate and commercial documents, reviewing, disputing, and advising on Commercial and Corporate matters. Clear ADR: Accredited Civil and Commercial Mediator and Alternative Dispute Resolution Specialist.

Honours Degree in Law and a master’s degree in Employment Law and Practice from the University of Central Lancashire.

A member of the New York State Bar in Good Standing.

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