Newcastle Solicitors

SMALL BUSINESS FAQS FROM NEWCASTLE SOLICITORS

What  are the main uses of having a shareholders’ agreement ?

Each agreement varies but one of the main uses is to protect minority shareholders.

What are typical provisions to protect shareholders’ interests?

Unless constrained by a shareholders’ agreement, shareholders with a simple majority of votes (e.g. two out of three equal shareholders) have very wide powers under company law. Without requiring any consent from the other shareholders, they can appoint new directors (perhaps their friends or family members), remove any director (such as one of the other shareholders), vote to pay themselves salaries or fees which other shareholders or directors do not get or issue more shares (so diluting existing shareholders’ ownership of the company). These are only examples. A shareholders’ agreement can provide that such important decisions can only be made with the consent of all the parties or, sometimes, a specified majority of them.

What provisions can be included to give shareholder a say in company decisions ?

Being a shareholder does not provide rights to be a director and that is usually one of the provisions of a shareholders’ agreement. Most agreements will go further by providing a list of management decisions that require the agreement of all (or a specified percentage of) the directors. Circumstances vary, but typical provisions relate to matters that are outside the usual course of the business, such as changing the nature of the business, entering into unusual contracts or contracts in which a director is personally interested, extending the company’s overdraft (which often all directors have personally guaranteed), borrowing above agreed limits, employing or dismissing staff in unusual circumstances or bringing or defending legal proceedings.

One of the most important areas is the rules that apply when a shareholder wants to transfer his or her shares, and what can happen to them when the shareholder dies. There are many alternative methods of dealing with such situations including :-

• pre-emption provisions (giving the other shareholders a first option to buy the shares)
• free transfers to members of the shareholder’s family
• for all transfers to require the consent of all shareholders.

What are other item which may be in a shareholders’ agreement  ?

• How directors are appointed and how the board will take decisions.
• Dispute resolution procedures.
• How the business will be financed and profits distributed.
• Rules on transferring shares, including what happens when a shareholder dies.
• Rules on employment of family members
• Rules restricting shareholders from competing with the business.
• Rules protecting confidential information.
• Agreements protecting external shareholders

What other legal issues may need to be considered when starting a business ?

• whether the business requires any licence (for example, to run a nursing home) and if so obtain one.
• negotiating a lease on business premises.
• health & safety assessment.
• If there will be employees, several issues arise, including drawing up a statement of  main terms of employment, or even a full-blown contract of employment
• registering with the PAYE office
• employers’ liability insurance.
• standard terms and conditions of trade.
• intellectual property, such as a business or brand name that you can protect as a trade mark; a design or invention that you can protect by registering it, or materials that you use (such as plans or blueprints) that are protected by copyright, and confidential information that you need to keep secret from competitors.
• If you expect your turnover to exceed the registration threshold, or if you wish to, you will need to register for VAT with HM Revenue & Customs.

Binding contracts

A contract needs some basic elements in order to come into existence. Those are an offer being made and an acceptance of that offer as well as an intention to be legally binding and consideration being provided. Contracts can be both oral and written. Obviously if you have your contract in writing it is much easier to prove what was agreed between the parties.

Specify at the end of the contract that the contract is to be governed by English law and make sure that both parties sign and date the contract to signify their acceptance of the terms within it.

Terms and Conditions

In order for a contract to be considered legally binding the terms and conditions of a contract must be laid out clearly and unambiguously. When a dispute arises a judge will look at the terms and conditions very carefully.

Therefore make sure that the contract is clear and understandable. If you draft a clause which you think is hard to understand, then re draft it until you are confident that it is understood. If necessary show it to somebody else to make sure they understand it. If you are still having problems then call a lawyer to assit.

Contract Checklists

If drafting your own contract the following clauses should be included. Of course each contract is different and your individual contract will need to be tailored to your needs but these are some boilerplate clauses found in most contracts.

-       Names and addresses of the parties

-       Brief description of what both parties will be doing

-       Time schedule

-       Service specification

-       Fees to be paid and when

-       Obligations of both parties

-       Dates and signatures of the parties

The main objective should be that everything is laid out in a clear manner. You should go through with the other party each term to ensure any misunderstandings are addressed and responsibilities and expectations are understood.

This article highlights some common business mistakes which threaten your business and shows you how you can avoid them.

• It is important to make sure that your business has full legal title to any assets you believe it owns. If you are operating through a licence you need to make sure that this licence is not terminable on short notice.
• If shareholders or partners of the business have the asset in their personal names and it should in fact be in the company name then make sure a transfer is made or an appropriate trust deed is drawn up
• If you have multiple shareholders then prepare a shareholders agreement between the parties which sets out how the company will be run and which will create a list of ‘reserved issues’ requiring unanimous shareholder consent before any kind of decision is carried out by the company
• Before entering into negotiations of a sensitive nature you should insist on non-disclosure arrangements being signed so your businesses confidential information is protected at all times.
• Make sure you have your own terms of business with which to conduct your business affairs under. This should enable transactions to run smoothly both with your customers and suppliers. With regard to entering into business transactions with customers you should ensure any terms and conditions are identifiable and written in clear language.
• If you are buying goods or services and agreeing contract terms make sure you consider the benefit of using milestone payments and contractual warranties and indemnities from sellers. If buying anything of significant value then carry out proper due diligence measures to make sure you are happy with what you are purchasing.
• When selling any products or services and you are granting credit then where possible try and make sure you have security over these deferred payments either by way of charge documents or personal guarantees.
• If you create any intellectual property (ie your own brand name, slogan or logo) be sure to file a registered trademark application. If your business relies or creates novel inventions then you should check the patentability of your inventions before disclosing or marketing them. Make sure all your staff have signed employment contracts which protect your intellectual property from theft and abuse.
• If you have commissioned the creation of any software, web sites or any information which falls under Intellectual Property umbrella then you must ensure you gain copyright assignments from the authors of any creations you use. It is advisable to check every trademark, slogan and design used or you are considering using to ensure third party rights are not infringed as this could result in heavy penalties.
• Make sure you check the terms and conditions of any third party services to ensure you have the legal right to any goods or services they provide you with.
• When negotiating contracts between shareholders and employees make sure to agree non-compete obligations. This ensures that your employees stay loyal to you and are not tempted to set up a similar business causing a detrimental effect on your profits. A non-poaching clause should support this clause by ensuring investments in employees are not wasted. You should also include a non-solicitation obligation in employment contracts to protect goodwill and customer base. Also include strict confidentiality obligations on people involved in the business so that if their contracts are terminated you can be safe in the knowledge that trade secrets and business ideas are kept secret. Ensure that your clauses are reasonable otherwise they may not be considered enforceable in court.
• Make sure you have contracts of employment with all your staff and proper work policy documentation.

If your business complies with the above then you will avoid the major legal problems which afflict most businesses and leave you to concentrate on making your business as profitable as possible.

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