This article was first published in the March 2018 edition of Albert Goodman's newsletter, and the original article can be found on page 10 here.

As explained by the Albert Goodman contributors, the availability of SEIS and EIS relief provides real financial benefits to investors and helps to de-risk investments in qualifying companies. However, obtaining approval from HM Revenue & Customs (“HMRC”) and issuing SEIS and/or EIS certificates is only the beginning of the story. Not only do the directors need to ensure that the company is run in accordance with company law, but they must also take great care that any undertakings do not impact the status of the shares.

Key considerations

If you are running your own company, it is likely that you have not formalised certain aspects of your business. The following areas of consideration should be reviewed before introducing third party investors.

  • The articles of association and shareholders’ agreement, this area being key to ensuring the actual share issue qualifies under the S/EIS regime;
  • Director service contracts, including consideration of employer pension contributions;
  • Internal company policies and procedures;
  • Where transactions are undertaken with existing shareholders and/or their other companies, agreements should be formalised.

Ongoing legal requirements

If the company issues shares to shareholders who have a minority interest in the company, the directors and founder shareholders will constantly need to consider minority shareholder rights.

Minority shareholders’ rights vary depending on the percentage of shares/voting rights they hold in the company, and have been summarised below.

Shareholders who own at least:

  • 5% of the issued share capital in a company have the right to call a general meeting and require the circulation of a written resolution to shareholders in private companies.
  • 10% of the issued share capital in a company have the right to call for a poll vote on a resolution.
  • 10% of the issued share capital in a company have the right to prevent a meeting being held on short notice.
  • 15% of the issued share capital in a company have a right to apply to the court to cancel a variation of class rights, provided such shareholders did not consent to, or vote in favour of, the variation.
  • 25% of the issued share capital in a company have a right to prevent the passing of a special resolution.

Private companies do not need to hold an AGM, although they can choose to do so. The AGM typically deals with matters such as:

  • approving the company’s report and accounts;
  • approving the directors’ remuneration report and remuneration policy (if applicable);
  • approving the company’s final dividend;
  • appointing or re-appointing the company’s auditors;
  • electing or re-electing the company’s directors;
  • approving amendments to the company’s articles of association;
  • granting authority for the directors to allot new shares;
  • disapplying pre-emption rights;
  • buying back the company’s own shares; and
  • approving the making of political donations.

You should also note that every shareholder of a company has the right to inspect the following documents:

  • the company’s register of members and register of debenture holders register of directors, register of secretaries and register of charges;
  • the service contracts of the company’s directors;
  • the records of resolutions and meetings of members of the company; and
  • any contract for the purchase by the company of its own shares entered into in the previous ten years.

In addition, every shareholder has the right to be provided with a copy of the following documents on request:

  • the company’s current articles of association;
  • any resolution or agreement affecting the company’s constitution that is for the time being in force;
  • any court order sanctioning a compromise or arrangement or facilitating reconstruction or amalgamation of the company;
  • any court order that alters the company’s constitution as a result of a petition brought by a shareholder on the ground of unfair prejudice;
  • the company’s current certificate of incorporation, and any past certificates of incorporation;
  • a current statement of the capital of the company;
  • the company’s last annual accounts, any strategic report, directors’ report, and auditor’s;
  • report and statement (these must be provided within seven days of receipt of the request); and
  • any resolution of members passed otherwise than at a general meeting, and minutes of the proceedings of any general meeting.

Whilst the financial injection and potentially specialised knowledge of the investor will be welcome, the clear message from this article is your company will no longer be your own to do with as you want and advice should be sought to protect you and your business.