I can feel from the atmosphere in the City and the number of times the phones ring that summer is over and we are all back at our desks. Also, and I have to put the headlights on to come to work. So this is the first Streetwise of the autumn.
In the July issue I dealt with some of the matters that I had addressed in a training programme for directors. The next programme is planned for later this year. Let us know if you are interested. Following the theme in the July issue, I pick another duty and give an outline of it.
Sarah Moore moved from our Nottingham office to join our corporate offering and I am delighted that she has agreed to add to this issue at article 5.
1. You can only do what you can do
There are 7 sections in the Companies Act 2006 that set out the duties of directors. Basically they are an extension of what had been the common law position although the statutory provisions tighten up some areas and some requirements that make the duties more modern...
2. Partners or shareholders?
A partnership is two or more people acting together in business with a view to making a profit. Partners do not have limited liability and a partnership is not a separate legal entity. Actions taken by it are the actions of the partners together...
3. The end of the lease
We have a great Property team that, for obvious reasons, tries to make sure that things do not go wrong. However sometimes you just cannot help the sticky stuff hitting the you-now-what. The end of the Lease is often an issue because of dilapidations and alterations that have been made to the Property during the course of the Lease. Something popped up recently that I thought I would pass on to businesses with Lease Premises and indeed landlords...
4. Getting away with less
If you owe somebody some money and you pay them part of it, it is no defence to an action for the balance that you have paid a part. However there are certain circumstances where you can offer less and get away with it...
5. Regulating Corporate Relationships
It is often the case that clients enter into business with a clear strategy and focus and it is at this stage that it can be difficult to see the benefits of entering into a formal regulatory document, because at this point in time everyone is in agreement. How many times I have heard the phrase: “we have worked together for years, what can go wrong?”...
There are 7 sections in the Companies Act 2006 that set out the duties of directors. Basically they are an extension of what had been the common law position although the statutory provisions tighten up some areas and some requirements that make the duties more modern.
It seems fairly obvious that a board of directors can only act within its powers. To find out what the powers are you look at the Articles and any resolutions or agreements that have been made subsequently. To take an extreme example of acting outside powers, if the board has no power to trade in gold bullion for example, the directors cannot resolve to do so.
Possibly more important is that the use of the power must be exercised for a proper purpose. The principle was tested in a case where the board of directors resolved to restrict the voting power of some of the shareholders at a general meeting. The power existed so the board could do it if appropriate in the interests of the Company. A majority of the directors knew that if they voted to restrict the outcome of the shareholders meeting would lead to a position where those directors could acquire a greater stake in the company and that was their motive for doing so. The Court said that it was an improper exercise of power.
The way to test if the board have acted properly is to:
- Identify the power.
- Identify the purpose for which it is given.
- Identify the motive and
- assess if the 3 are consistent with the duty to act in the best interests of the company as a whole.
When boards are considering what they should resolve all the board members must think about why they are doing it, what they are doing and make sure that they are acting in the best interests of the company and not their own best interests. And, as I said last time, minute their reasons.
Partners or shareholders?
A partnership is two or more people acting together in business with a view to making a profit. Partners do not have limited liability and a partnership is not a separate legal entity. Actions taken by it are the actions of the partners together.
A company is a separate legal entity incorporated under the various Companies Acts that have been in force over the years. Shareholders’ liabilities are limited to the price of their shares. Directors’ liabilities are only personal in certain limited circumstances.
If a partnership is sold, the buyer buys the assets which will include the book of business and goodwill. If a company is sold the buyer buys the shares. Normally, even if a shareholder is allowed under the Articles of Association to sell his or her shares separately, a purchaser would not expect to pay a percentage price of value of the company unless it bought a controlling interest.
One of the areas of law that I look after is shareholder disputes. If there is a dispute and one shareholder or set of shareholders agrees to buy out another should the sellers’ price be discounted if it is not a controlling interest? It can make a huge difference to the amount of money changing hands.
If the partnership is treated as a quasi partnership there will be no discount for a minority interest.
So what is a quasi partnership?
Mostly, quasi partnerships are companies that are incorporated by people who want to go into business together on equal terms. It has been said to be a convenient term to describe a relationship akin to a partnership but not actually a partnership. To qualify, there must be:
- A relationship of mutual confidence between the shareholders.
- An understanding that all or some of the shareholders all participate in the conduct of the business.
- Restriction on the transfer of shares.
The parties do not have to be of equal status but very often they are. The more equal the more likely it is to be a quasi partnership.
A business can stop being a quasi partnership. For example, if one of the shareholders gives up directorship for personal reasons it will cease to be a quasi partnership.
If things are going swimmingly in the business it probably does not matter whether the shareholders define themselves as quasi partners or not. These things really only come to a head if relationships start to break down. My advice to a shareholder director in these circumstances who wants to move on is “hang on in there” for as long as you can so that you do not disadvantage yourself. And get a quick solution before the company starts to suffer from its owner managers being distracted by the fight.
The end of the Lease
We have a great Property team that, for obvious reasons, tries to make sure that things do not go wrong. However sometimes you just cannot help the sticky stuff hitting the you-now-what. The end of the Lease is often an issue because of dilapidations and alterations that have been made to the Property during the course of the Lease. Something popped up recently that I thought I would pass on to businesses with Lease Premises and indeed landlords. A tenant took a Lease of an open plan office but carried out various work including the installation of partitions that were standard demountable. The configuration of the partitions was unique to the tenant resulting in a series of small offices that would suit the tenant’s needs but not necessarily those of an incoming tenant. At the end of the Lease the tenant left the partitions in place. The landlord said that the tenant had not given vacant possession and the whole thing ended up in front of a Court. Because of the nature of the partitions and their purpose, the Court said that they were the tenants and therefore should have been removed. The installation of partitions was not a breach of the Lease but leaving them behind was.
The Tenant was a sophisticate operator. I cannot believe that the parties and their professional advisers allowed things to go so far.
Getting away with less
If you owe somebody some money and you pay them part of it, it is no defence to an action for the balance that you have paid a part. However there are certain circumstances where you can offer less and get away with it.
We often have a problem where a client wants to offer some money in part payment but does not say that it is in full and final satisfaction but the creditor has been so imbued with the idea that if it accepts the money it cannot claim the balance that it refuses the payment. Sometimes a client tries to transfer the money into the creditor’s bank account. If there is no suggestion that they are in full and final satisfaction obviously the client still owes the balance. The creditor is safe taking it and claiming the rest. However, if the money is offered in full and final satisfaction and transferred on that basis what can the creditor do to protect the position if he does not want to accept that and give up the balance?
If the next day the creditor says that he does not accept it in full and final satisfaction but only on account there is almost certainly no deal. Acceptance in full and final satisfaction is a contract and if one party to the contract does not agree with the terms there is no contract. If one party to oppose contract does not agree with the terms there is no deal. There is no obligation on the creditor to return the money.
Whether or not offering the money in full and final satisfaction will work is quite fact sensitive.
Let’s look at some other situations.
- Money is offered in full and final satisfaction. The person receiving does not spot that but keeps it. Only later do they realise how it was offered and they write and say that it is not accepted in full and final satisfaction. Cashing the cheque is not conclusive evidence that the deal is sealed; it is only a rebuttable presumption. The creditor can claim the balance.
- The cheque is cashed without any comment. There is probably a done deal.
- The cash is checked and it is several weeks before there is any comment. It is probably a done deal.
Obviously, if anyone who is owed money would rather get something in the bank than return it and have the full amount outstanding. Therefore, if money is offered in full and final satisfaction my view is that you can keep it as long as you say it is not accepted on that basis but do not leave it too long and if you are in any doubt you know where we are.
The next issue will be in November and will carry on with directors duties and other snippets that that have come up.
Regulating Corporate Relationships
Following on from Christine’s introduction, I am very pleased to now be part of the Manchester community having relocated to be closer to my northern roots.
Maintaining the theme of this month’s offering, I thought I would set out some of the benefits of regulating corporate relationships. It is often the case that clients enter into business with a clear strategy and focus and it is at this stage that it can be difficult to see the benefits of entering into a formal regulatory document, because at this point in time everyone is in agreement. How many times I have heard the phrase: “we have worked together for years, what can go wrong?”
Alas, as Christine points out, there are times when there will be disputes – everyone cannot agree all of the time - and if you don’t have a clear set of rules and regulations you are likely to come unstuck if a relationship does break down.
So, what are the options? In the case of a company, the rules and regulations are set out in its Articles of Association. This is the company’s constitution and is a publicly available document, downloadable by anyone for free from Companies House. It is often the case that the Articles of Association of a company will not be amended on incorporation and in such circumstances they are unlikely to offer adequate regulation and protection if the company is more than a single director/shareholder set up.
Also, due to the fact the Articles of Association are a public document, it is not uncommon for there to be a shareholders’ agreement that will be read alongside the Articles of Association. The shareholders’ agreement remains private and can therefore contain commercial terms that may be more sensitive in nature.
It is worth noting that there is a key difference between the provisions of the Articles and the provisions of the shareholders’ agreement in the event of a breach - if a provision of the Articles is breached, the offending act is void, whereas, if a provision of the shareholders’ agreement is breached, the offending act constitutes a breach of contract in the usual way and would require the injured party to bring a claim for any loss suffered. Therefore there is a balance to be achieved between maintaining confidentiality but protecting your position on fundamental issues.
As well as having the benefit of privacy, the shareholders’ agreement can contain any arrangement between the shareholders as to how they want the company to be run, over and above what is set out in the Companies Acts.
Key things to think about in preparation of any shareholders’ agreement:
- Matters which require majority/unanimous consent of the board and/or the shareholders – generally the business of the company will be run by the directors, however there may be certain circumstances where shareholder approval should be obtained first
- Matters which can or should be delegated to a committee
- Provision of a regulatory framework to manage the process and have agreement on the way forward in the event of a shareholder dispute, including what happens in a deadlock situation?
- Provisions for the protection of minority shareholder interests
- If the agreement is to include investment provisions – what warranties are to be given by management to the investor to protect their investment
- What happens in the event of a sale of the business – can you drag someone along (if you are the majority)? Can you ensure you will be tagged along so that you are not left behind (if you are the minority)?
- Regulating transfers of shares so that a shareholder cannot sell to an unknown third party, also what happens if a shareholder becomes ill or dies?
- Regulating the dividend policy – what profits will be distributed and how often?
- Restrictive covenants – should there be restrictions on shareholders to protect the business after they cease to hold shares?
There is also a suggestion that having a shareholders’ agreement suggests stability, as it shows that you have considered the fact that disputes may arise, however, if you have a framework for dealing with those disputes it indicates that they can be dealt with quickly and efficiently, which will be more attractive to investors.
Where the entity is a partnership or an LLP, the principles highlighted above are largely the same; however, there are no Articles of Association. It is therefore essential that a partnership agreement is entered into to regulate the conduct of the partnership’s business and the powers and responsibilities of each of the partners.
We would always recommend that the relationship between shareholders/partners is documented clearly at the outset. The arrangements will need reviewing from time to time as the business inevitably develops and grows but the knowledge that you have in place a formalised framework to take the business forward can often prove invaluable.