Blog 2 | Owllegal

Overview of Buying a Private Company

There are two principal methods of acquiring the business of UK company:

Buying the shares in the target company
Buying the target company’s business and assets

A company may seek to develop its business in many ways, including expansion by acquisition. Once a specific target has been identified, the buyer can begin to assess its value. There are various valuation methods that could be adopted, but the four most commonly used are:

Discounted cash flows
Market multiples
Net asset valuations
Dividend yields

Different methods and multiples may be used according to the target company’s industry sector. Often the price for the shares will be calculated on a “cash free, debt free basis”. Traditionally, completion accounts have been used to establish the value of the shares as at completion retrospectively, with the consideration being adjusted as necessary after the accounts have been agreed

There are two main methods of acquiring a target business that is carried on by a company:

Share purchase: This involves the buyer acquiring all the shares in the company that owns the target business or assets
Business or asset purchase: The alternative approach is simply to buy each of the individual assets that make up the target business

The two acquisition structures are fundamentally different. If the shares in a company are purchased, all its assets, liabilities and obligations are acquired (even those the buyer does not know about). If assets are purchased, only the identified assets and liabilities that the buyer agrees to purchase are acquired.

On a share purchase, there may be certain change of control provisions that will need to be addressed, but otherwise there will be no need for such third-party consents. On an asset purchase, where there is a change of ownership of the assets themselves, the consent of customers, suppliers, landlords and others may be required to the assignment or novation of existing contracts.

A seller will often prefer to transfer the company, where the seller’s ongoing liability is generally limited to the extent of warranties and indemnities it gives to the buyer. By contrast, the buyer may have reasons for preferring an asset purchase. It may be concerned about particular liabilities in the target company and may prefer to “cherry pick” assets and only assume known and quantified liabilities.

Due diligence is the information-gathering process carried out by the buyer to find out as much as possible about the target company early on in the negotiations. Through this process, the buyer aims to gain a complete picture of the target and its critical success factors, strengths and weaknesses.

The due diligence exercise generally comprises an assessment of the financial, legal and commercial status of the target. The usual pattern of events is for the buyer’s lawyers to submit a lengthy questionnaire to the seller requesting information on a wide range of matters such as the target’s tax position, its main commercial contracts and the status of the intellectual property used in the business.

The share purchase agreement is the principal contractual document relating to a share purchase. It documents the agreement between the parties to sell and purchase the entire issued share capital of the target company at a specified price and sets out the other terms governing the acquisition. Depending on the complexity and size of the particular acquisition, the agreement can often run to more than 100 pages, as much as half of which may comprise the transaction warranties.

As well as containing lengthy warranties and indemnities, the share purchase agreement deals with how the consideration for the transaction is to be satisfied, any conditions precedent that the purchase may be subject to, any restrictive covenants which bind the parties, completion arrangements and other matters such as the transfer of pension rights.

In addition to the share purchase agreement, there are a number of ancillary documents that typically accompany the share purchase agreement, namely the disclosure letter and the tax covenant.

A proposed share purchase may require various consents or approvals, and this could affect the transaction timetable. The main types of approval that may be necessary include:

Board approval
Shareholder approval
Approval of regulatory authorities or other third parties

The nature and extent of the approvals required will obviously have an important bearing on the timing of the transaction, as will the level of due diligence required.

If the transaction involves a corporate buyer and seller, it will usually be necessary for the board of directors of each party (or a duly appointed committee of the board) to consider and approve both the transaction as a whole, and the execution of the key transaction documents. Any meeting of the directors should be minuted. If the buyer and the seller are UK companies, shareholders’ approval for the transaction may be required under:

A provision in their articles of association or a relevant shareholders’ agreement
In certain circumstances, the provisions of the CA 2006

The buyer will need to give early consideration to the question of whether the share purchase will trigger the need for the involvement of any regulatory authorities. The consent of certain third parties, such as the target company’s lenders or one of its major customers or suppliers may be required where, for example, the key contractual arrangements between the target company and that third party are subject to change of control provisions.

On completion of the transaction, the buyer will become the new owner of the target company and will be keen to get on with integrating the target according to its acquisition strategy.

Acknowledgment: This blog relies heavily upon information provided by Martin Mendelssohn and Simon Howley, CMS Cameron McKenna LLP and Practical Law Limited.

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.

by Ian Randall

Extensions Of Time

Contracts

There are three key aspects to a building or engineering contract in connection with the timing of that project:

The date for completion
The mechanism for changing (extending) the date for completion
The consequences for the parties of a failure to meet the date for completion

At the outset, particularly if a project includes works by a number of different contractors, the parties must agree a clear programme or programmes setting out when the different work packages should commence and complete. Without a clear programme, they will not be able to manage the project effectively and prevent delay or allocate the consequences of any delay.

Most building contracts and engineering contain express provision for completion of the works by a certain date. Even in the case of the simplest construction project, it is usually one of the few things that the parties make sure to agree on during their negotiations.

If the contract does not include a contractual date for completion, this does not mean that the contractor can take as much time as it likes. In these circumstances, Section 14 of the Supply of Goods and Services Act 1982 implies a term requiring the contractor to complete its works within a reasonable time:

“Where, under a contract for the supply of a service by a supplier acting in the course of business, the time for the service to be carried out is not fixed by the contract, left to be fixed in a manner agreed by the contract or determined by the course of dealing between the parties, there is an implied term that the supplier will carry out the service within a reasonable time…”

What is “reasonable” is a question of fact in any given case. Delays will often occur on a project that are not the contractor’s fault or responsibility. For example, a delay may arise because the employer is unable to give the contractor possession of the site on time, or because the employer has instructed the contractor to carry out additional works (as a variation to the original scope of works.

If a delay event occurs that is the employer’s fault and the contract does not make provision for that delay, the original completion date falls away and time is put “at large”. This means the contractor is under an obligation to complete the works within a reasonable time.

Time at large results from the application of the “prevention principle”, which provides that no party may require the other to comply with a contractual obligation in circumstances where that party has itself prevented such compliance. If the employer has prevented the contractor from carrying out the works “on time” according to the original contractual completion date (and the contract does not provide for how that delay is dealt with), the employer cannot insist that the contractor meets the original date for completion.

There are two types of delay for which a contractor may be able to claim an extension of time: (a) Delay the employer caused and (b) Other delays that are not the contractor’s responsibility under the contract. The employer may have specific notification requirements, but the employer and/or the contract administrator may suspend or waive compliance with the contract’s notification requirements. They may do this expressly. Alternatively, a court may find that compliance with a contract term has been waived by silence or through the conduct of the parties. However, in practice, the parties rarely waive these notice requirements.

It is vital that the Contractor, knows the conditions precedent to make extension of time claims, under the contract, and that they adhere to these procedures, or they face the potential of losing the right to claim. Early legal advice is essential!

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.

by Ian Randall

Variation

Legal News

A construction contract will define the works that the contractor must deliver and, unless it contains provisions to the contrary, neither party is entitled to unilaterally change the scope. Since
changes will often be necessary or desirable, a contract will typically contain a mechanism to allow the employer to order a variation.

Normally a contractor will be in breach of contract for undertaking a variation and departing from the scope of the contract where no formal instruction has been
given. An employer may give the contractor permission to depart from the contract scope without instructing a variation under the contractual mechanism.

It is important to distinguish between:

A contractual instruction, which triggers a right to payment under the contract.
A permission, which merely allows the change to be made and ensures that the contractor is not in breach.

If the employer only gives permission, then the contractual variation mechanism will not have been operated and the contractor will not, typically, be entitled to payment.

The employer may give such a permission to change the scope without issuing a formal instruction for many reasons, such as:

The need to change the scope arises because of the contractor’s failure.
The contractor introduces an improvement to the scope without consulting the employer.

Whether the employer’s communication to the contractor qualifies as a contractual variation instruction (or instead merely represents a permission) depends on how the contract defines such instructions.

Contracts will typically specify that an instruction should be given in advance of the change being undertaken and that it should be in writing. While these stipulations may be typical, they are not uniform.

Some contracts provide that a written communication given after the change has been implemented will constitute a valid instruction triggering the right to additional payment. An employer can
quite easily issue a communication to the contractor intending to give permission that discrepant works may remain, while inadvertently finding that it has, in fact, issued a retrospective variation instruction providing for additional payment.

Often it will be the case that the contractor argues that the employer’s permission gives it a right to payment despite the fact that no contractual instruction has been given. The following four grounds are the most common bases on which such an argument is advanced:

Waiver. While the parties’ contract may provide that payment for a variation will only be triggered if the employer has issued an instruction in the prescribed form, the employer may waive this
requirement.

Implied promise to pay. The principle is illustrated by Molloy v Liebe (1910) 102 LT 616, PC. The employer and contractor disagreed as to whether an item of work was within the contract’s scope or extra. The contractor undertook the item of work and subsequently sued for payment. The court found that the item of work was outside scope and therefore was additional, it was nevertheless not liable to pay because of the absence of an instruction. The court found that, when the item of work was undertaken the employer must have been impliedly promised that
it would pay if it was subsequently established that it was wrong as regards the disputed scope.

Variation of the contract itself. The product that one party agrees to deliver under a contract represents one of the contractual provisions. The parties can agree to change the stipulated product in the same way that they can agree to change any other contract provision.

Collateral contract. The parties may agree that additional work is undertaken under an entirely new contract that is separate to their original agreement.

Establishing a right to be paid under one of these four grounds may superficially appear easier to establish because it will not be necessary to demonstrate that a formal contract instruction has been issued. But other challenges arise. Not least, that it will normally be the case that the employer itself has to agree to the waiver, change or extra work.

It should be emphasised that in order for any of these four grounds to be made out the employer will need to have given consent for the change to be made. Typically, therefore, they arise where the employer maintains that it has given permission but not a formal instruction. It can, instead, be the case that the employer pointedly refuses to approve any change to the works, whether as an instruction or permission. In such circumstances, the contractor will need to establish that the employer was under some form of positive obligation to give approval.

Acknowledgement: Thomson Reuters online resource Practical Law Construction Blog

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.

by Ian Randall

Settling A Commercial Dispute

Commercial

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

by Ian Randall

Served With A Winding Up Petition

Management

A Winding Up Petition is the most serious action a creditor can take against a Company; by petitioning to liquidate (liquidation is the process of bringing a business to an end and distributing its assets to claimants) the company as it is unable to meet its liabilities as and when they fall due.

Unless steps are taken to quickly deal with the petition, the petitioning creditor – which in the majority of cases is HMRC – can proceed to advertise the petition which can alert other creditors to its existence and stir them into action too. For example, when the Company’s bank becomes aware of the petition, they will take steps to freeze the company’s bank accounts.

It is unlikely for a Winding Up Petition to have been served out of the blue; ideally company directors should have identified the potential onset of formal insolvency before the petition was served. In addition, directors will now find themselves in the involuntary position of allowing creditors to force the company into compulsory liquidation instead of taking action themselves to select the most suitable option on their terms.

From the date of the petition the seven-day countdown begins to pay the amount owed or mount a defence.

If the Company appoints an IP they could propose and negotiate a Company Voluntary Arrangement (CVA). If the business appears to be viable, this offers the creditor a proportion of the debt over a longer period of time, and allows the company breathing space to turn the business around.
Apply for an adjournment of proceedings so that the Administration route can be considered.
The directors could voluntarily have the company placed into Administration – this would prevent a Winding Up Order being issued by the courts. Company assets would be valued and sold by an appointed administrator to cover some or all of the debt.
The company could simply pay all monies due to the creditor, perhaps using asset-financing as a way to raise the funds.
Where a realistic dispute of the debt is an option.
An injunction could potentially be sought to either postpone or prohibit the petition being advertised in the London Gazette. This would prevent other creditors becoming aware of the situation, an important point as the banks keep track of these adverts and would freeze all company accounts.

A company may be issued with a Winding Up Petition if more than £750 is owed to a creditor. It is likely to be a last resort for the creditor, however, as fees charged for issuing a Petition are high. Currently standing at £1,490£1,990.

This is the general timeline of events once a Winding Up Petition has been sent by a creditor:

The petition is served at the company’s registered address, and a date set for the hearing.
From this point, company directors have exactly one week in which to act, otherwise the petition will be advertised in the London Gazette, alerting banks to the situation. The bank will then freeze the company account to prevent the disposal of assets, effectively stopping all trading.
If the week passes without change, the court will issue a Winding Up Order, the company will be liquidated, and the directors will have no further influence on proceedings.
Once a Winding Up Order has been issued, company assets will be valued and sold.

The liquidator must also investigate the actions of company directors in relation to how the business was run. In some cases, the directors may face accusations of misconduct if they have continued to trade despite being aware of company insolvency issues. In these instances, directors may become personally liable for company debts incurred from the date they knew about the insolvency.

If company directors are found guilty of misconduct, the result can be fines and/or disqualification from being a limited company director in the UK – this ban can last for up to fifteen years. In serious cases of misconduct, directors could face imprisonment.

It is likely that a company will be aware that a winding up petition may be imminent, if for no other reason that someone has served a “Statutory Demand” on the Company, so it’s imperative that the company reacts quickly to the service of a winding up petition.

Acknowledgement: Information provided by Begbies Traynor Group PLC

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.

by Ian Randall

Directors’ general duties under the Companies Act 2006

Management

While the Companies Act 2006 provides that the general duties are based on, and have effect in place of, certain common law rules and equitable principles (section 170(3)), it also provides that: The general duties should be interpreted and applied in the same way as the common law rules and equitable principles.

The general duties will apply to all the directors of a company. “Director” is defined to include any person occupying the position of director, by whatever name called (section 250), which includes de facto directors, and in most instances “shadow directors.”

The codified duties are owed to the company and only the company will be able to enforce them, although in certain circumstances
shareholders may be able to bring a derivative action on the company’s behalf.

Companies may, through their articles, go further than the statutory duties by placing more onerous requirements on their directors, however, the articles may not dilute the duties except to the extent permitted by specific sections. Section 232, which prohibits a company from exempting a director from a breach of duty, will not prevent a company’s articles including provisions that have previously been lawful for dealing with conflicts of interest (section 232(4)).

Duty to act within powers (section 171) A director must act in accordance with the company’s constitution and must only exercise his powers for their proper purpose. This duty replaces the common law principles
under which directors must act within the powers conferred on them by the company’s memorandum and articles and exercise their powers for proper purposes.

Duty to promote the success of the company (section 172) Section 172 provides that a director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In so doing, the director must have regard (among other matters) to: The likely consequences of any decision in the long term.

The interests of the company’s employees. The need to foster the company’s business relationships with suppliers, customers and others. The impact of the company’s operations on the community and the environment. The desirability of the company maintaining a reputation for high standards of business conduct. The need to act fairly as between the members of the company.

Duty to exercise independent judgment (section 173) This duty codifies the principle of law under which directors must exercise their powers independently, without subordinating their powers to the will of others, whether by delegation or otherwise. It provides that a
director must exercise independent judgment.

Duty to exercise reasonable care, skill and diligence (section 174) Section 174 codifies recent formulations of a director’s common law duty of care, skill and diligence. Under section 174, a director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both: The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company.

Duty to avoid conflicts of interest (section 175) Under section 175, a director must avoid situations in which he has or can have a direct or indirect interest that conflicts with, or may conflict with, the company’s interests. That applies, in particular, to the exploitation of property, information or opportunity, and whether or not the company could take advantage of the property, information or opportunity. The duty in section 175 will not be infringed: If the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.

Duty not to accept benefits from third parties (section 176)
Section 176 codifies the fiduciary rule prohibiting the exploitation of the position of director for personal benefit. Under section 176, directors must not accept any benefit (including a bribe) from a third party which is conferred because of his being a director or his doing or not doing anything as a director. “Benefit” is not defined.

The duty will not be infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Unlike section 275, board authorisation is not permitted in respect of the acceptance of benefits from third parties.

Duty to declare interest in proposed transaction or arrangement with the company Under Section 177, directors must declare to the other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. The director need not be a party to the transaction for the duty to apply. The declaration must be made before the company enters into the transaction or arrangement. The declaration may be made at a meeting of the directors, or by notice in writing in accordance with section 184 (notice in writing) or section 185 (general notice).

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.

by Ian Randall

Contractual Disputes

Contracts

A contractual dispute is when a party to a contract has a disagreement concerning the terms or definitions. If handled poorly, contractual disputes can be costly and timeconsuming, end up in court and damage a company’s business relationships and reputation. So, what should do if you’re on the receiving end of a contract dispute involving your business?

For a contract to be enforceable there must be a “meeting of the minds” across all the required elements, offer; acceptance; capacity; consideration and intention to create legal relations; between all the parties involved. So, all parties must have a solid understanding of every term in the contract and mutually agree on them. Without this mutual agreement, the contract is not legally valid and can be contested in court.

There are therefore different steps that need to be fulfilled during the formation of a contract. This includes an offer being made, an acceptance of that offer, and a form of payment for the goods or services concerning that offer. It is during these stages that contractual disputes can often develop.

In business, a contractual dispute could involve anyone from your employees to your business partners, your clients to your suppliers.

Examples of disputes include:

Issues when a party reviews your contract
Issues concerning an offer you’ve made in a contract
Disagreements regarding the meaning of a contract’s technical terms
Mistakes and errors concerning the terms you’ve addressed in a contract
Fraud, such as party claiming they’ve been forced into signing your contract
Conflict involving your employees or business partners
Disputes where those involved in a contract do not stand by their original agreements made months or years earlier

Disputes can also involve the performance of a party’s duties, or where they have failed to perform their duties, which have been addressed in a previously formed contract. This is known as breach of contract. An example could be a seller failing to deliver goods to a buyer.

In the event of a contractual dispute arising that affects your business, the important thing is to aim to resolve the situation as best you can. It’s wise to also get the best legal support to help you find the right resolution for your business. You should aim to:

Find a resolution that isn’t timeconsuming and doesn’t affect the running of your company
Find a resolution that isn’t costly and doesn’t impact heavily on your company finances
Find a resolution that doesn’t result in the dispute going to court to avoid additional costs and time
Find a resolution that doesn’t involve more people than necessary to help keep the dispute under control
Handle the dispute with care, so not to damage previously existing business relationships and your reputation

When handled without the right skill, knowledge and approach, a contractual dispute can end badly for your business, causing harm to your relationships, reputation, company operation and finances. So, it’s important to have professional support with the right expertise to help things run smoothly, while saving you time, money and stress.

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.

by Ian Randall

Boardroom and Shareholder Disputes

Management

Boardroom and shareholder disputes can arise for many reasons.

disagreements over the direction and development of the company
poor personal relationships
conflicts of interest (because a director has interests in another business)
a lack of performance on the part of one shareholder/director, the terms of directors’ service contracts, or concern over whether the board is meeting its legal responsibilities

They can also arise because directors are stopping money getting through to the shareholders by paying themselves high salaries or keeping money in the company (for a rainy day) when shareholders think it should be paid out as dividend.

Anticipating and providing for disputes in the articles of association or a shareholders’ or partnership agreement in advance can save a great deal of time, money and aggravation.

Disputes escalate because the parties don’t find out exactly what their legal rights are at the outset, and don’t understand the options for enforcing these. The longer you put off taking advice, the more time and money you will eventually spend sorting it out, and the more it will damage your business. Act at once.

Most decisions in a company are made by the directors, by majority vote, with the chairperson having a casting vote if there is a tie. The majority on the board can therefore force through any decision that is made at board level.

If a director forces through a decision at board level, it could be challenged if the director has acted improperly. The Director has legal duties and responsibilities, owed to the company e.g. there is a duty to act in the best interests of the company. Breach these, and the Director could be made personally liable to pay over any profit they have made to the company and reimburse it for any losses it has made.

A director would be breaching those duties if:

he/she uses company property for personal use
he/she diverts a contract that the company could have won to another business of their own, without approval of the shareholders or of the independent directors on the board
he/she fails to meet the minimum threshold required of someone with the directors’ functions in the company – for example, if he/she is the finance director, but he/she fails to keep proper accounting records or monitor the company’s solvency
he/she doesn’t comply with the company’s articles of association, or he/she fails to comply with the Companies Act

Even if a director controls the board, they will be vulnerable unless they also have control at shareholders’ meetings. Some matters can’t be decided by the directors but have to be referred to the shareholders for a decision.

If an individual can cast more than 75% of the votes at a shareholders’ meeting, they can always force through any decision. If an individual can cast more than 50% of the votes at a shareholders meeting, they can force through some resolutions, but not all.

One resolution that can always be passed by majority vote at shareholders’ meetings is a resolution to remove a director from office. This power is enshrined in the Companies Act, though the director has the right of appeal. The threat of removal can
sometimes stop a minority shareholder who is on the board from taking things further.

Shareholders have significant remedies if they have been ‘unfairly prejudiced’, or it is ‘just and equitable’ that the company be wound up. Getting embroiled in any of these sorts of action is both time-consuming and expensive.

If the individual hasn’t acted properly as a director, they may still be safe. It is the company that has been wronged if the director breaches their duties, so it is the board that decides whether to take action against the director. However, it is now possible for someone else to apply to the court for permission to bring an action on behalf of the company a ‘derivative’ action. It is dangerous to assume that the director will get away with improper conduct.

The biggest danger is that any shareholder can take the director to court on grounds that the company’s affairs have been conducted in a manner which is ‘unfairly prejudicial’ to their interests. These are personal actions, not actions brought by the company, so the Director can’t stop a shareholder bringing one against him/her simply because they control the board and/or shareholder meetings.

These disputes consume time and money and are a major distraction from the business. The Director can’t use the company’s money to fund their defence and if they try, the other side may take out an injunction to stop them.

In private companies, ‘unfair prejudice’ actions are often based on a failure to fulfil the ‘legitimate expectations’ of the aggrieved shareholder about what the company was set up to do, and how it would be run. For example, if it was agreed (formally or informally) that:

the company would carry on a particular business
all would be entitled to an equal say in how the company is managed
the directors would be fair when deciding on the salaries to be paid, the amounts to be kept in the company to fund growth, and the dividends to be paid out and you act contrary to these legitimate expectations, the court may intervene

The court has a general power to wind a company up, on a shareholder’s application, if it is ‘just and equitable’ to do so. Like an unfair prejudice action, the director can’t stop this action being brought even if they control the board and/or shareholders’ meetings. An aggrieved shareholder will usually also ask that the company be wound up at the same time as they petition for unfair prejudice (see above), citing the same facts in support of each claim.

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 actin 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

by Ian Randall

Owllegal Limited

Ian Randall