Business / Company Law
Hylton-Potts - London Based Law Firm Helping People Across the UK since 1999
Table of Contents - Click to
- 1 Lawyers for Business
- 1.1 Business negotiation checklist
- 1.2 Our Style
- 1.3 Resources
- 1.4 More Information
- 1.5 We are the sort of lawyers that J. Pierpoint Morgan wanted.
- 1.6 BRIBERY WAKE UP CALL
- 1.7 Six principles to meet Bribery Act
- 1.8 Freedom of information requests.
- 1.9 Investigations
- 1.10 Short Summary of Advising on franchises
- 1.11 Online contracts
- 1.12 WOULD YOU LIKE TO BECOME A DIRECTOR?
- 1.13 Parting company with a director/ employee
- 1.14 Insolvency – Disclaimer
- 1.15 Entrepreneurs beware !
- 1.16 How to combat copycat rip-offs
- 1.17 Insolvency/Personal Bankruptcy in England/United Kingdom
- 1.18 Enforcing partner restrictive covenants
- 1.19 How to avoid disputes over Earn-outs and Reasonableness
- 1.20 Business prenup
- 1.21 Options for protection after a business fails.
- 1.22 Your former employee pinches the business.
- 1.23 Can I compel a partner to sell?
- 1.24 Foreign directorships and protection
- 1.25 Alternative investment: all that glitters isn’t gold
- 1.26 Will old liquidation hamper new company?
- 1.27 It’s a nice little runner I’d stake my life on it
We are better, cheaper and faster than any litigation solicitor. We are London based but operate countrywide as well as Internationally. Rodney Hylton-Potts is a member of the International, Federal and New York Bar Associations.
We are approachable, no-nonsense, commercial and street wise, and not bound by stuffy rules, so enabling us to obtain the best result for our clients.
We advise on investigations by regulatory authorities such as the Financial Services Authority.
Lawyers for Business
There are four key areas where legal advice can ensure good business and investment decisions:
1. Banking and Finance
Loan, debenture and share holder agreements can be complex documents with long term implications for the business, its owners and directors. You must be sure that the business’s viability is not threatened, and that your personal assets are not at risk. Check that any arrangements you enter into do not hamper long term plans, for example to sell.
We can help with all this, and explain and advise on factoring and alternative finance for cash flow.
We work closely with several “Business Angels” who are always looking to help finance entrepreneurs and small to medium sized companies.
Business leases are much less standardised than residential leases, and careful reading and understanding is required. We can summarise the documents for you and advise you on any restrictive conditions, and the right to pass on the lease.
3. Employment Terms
A well drafted employment contract will protect you and reduce the potential for a dispute. Clearly drafted understandable agreements in plain English is our style.
We can cover sickness absence, health and safety issues, handling of grievances, disciplinary issues and equal opportunities cases.
A contract should both protect your business and not contravene the many laws outlawing “unfair” contract terms. A written contract with terms and conditions will record exactly what you do for a client or customer, and give you the opportunity to state important matters like the timing of payments and the settling of disputes.
We can advise on and draft confidentiality and nondisclosure agreements.
Business negotiation checklist
If you are interested in learning more, click on the links on our website or give us a call on 020 7381 8111 or send an e-mail to [email protected]
Checklist for Setting up a Business Negotiation:
1. Are you clear about your objectives and your strategy for achieving them?
2. Are you clear about the key legal issues affecting any business negotiation?
a) Who are you negotiating with? [Do they have sufficient authority?]
b) Are you or they prepared to show commitment to the deal by dropping discussions with other parties? [Consider an exclusivity agreement]
c) Do you want negotiations to be kept confidential? [If so, sign a non-disclosure agreement (NDA), aka a confidentiality agreement]
d) Are you handing over business sensitive information? [Consider whether early disclosure will cause legal or commercial risks, or weaken your negotiating position]
e) Do not exaggerate or mislead the other party [This can undermine your credibility and cause legal risks]
f) Do not offer or accept bribes or inducements.
g) Might the other party try to poach employees or customers? [Consider a non-poaching agreement]
h) Take care not to enter into legal commitments by mistake [“heads of terms”, a “term sheet” or a “memorandum of understanding” or even informal, verbal commitments could be legally binding if a court believes there was an ‘intention to create legal relations’; negate this by emphasising negotiations are non-binding and ‘subject to contract’, until you are ready to commit].
Consult the experts – For more information or a free legal opinion, telephone 020-7381-8111 or email [email protected].
We draft straightforward agreements in understandable plain English. We like our clients to understand what they are signing and to avoid repetition and lengthy “mumbo jumbo”.
We are street-wise no-nonsense lawyers and understand all aspects of business and potential pitfalls and problems intimately.
Heard any of these excuses before? Rodney Hylton-Potts can help you – Contact us today – 020 7381 8111
HPLC UK Limited Company Formation form.
We are better, faster and cheaper than solicitors. For more information or a free legal opinion, telephone 020-7381-8111 or email [email protected].
We offer a fast and efficient service and are committed to a high level of client satisfaction.
We are the sort of lawyers that J. Pierpoint Morgan wanted.
“I don’t want a lawyer to tell me what I cannot do: I hire him to tell me how to do what I want to do.”
Protect yourself against scams – download “Scambusters – your guide to beating the scammers“.
BRIBERY WAKE UP CALL
The Bribery Act could make it illegal to wine and dine a client at Wimbledon. No one can say for sure what will and will not be allowed
Wimbledon hospitality tents may be quieter.
There are 150 executive boxes at Twickenham, the home of English rugby, packed out on match days.
Fuelled by a roast lunch and champagne, their occupants will cheer on and sing “swing low, sweet chariot”.
It could be a different story in future. New Laws could make corporate hospitality an offence. Flying in guests from overseas to the rugby or the tennis at Wimbledon might be construed as bribery.
The Bribery Act 2010 will have a profound impact on business. The problem is that nobody can say for sure what will and will not be allowed under the new rules.
Companies will be expected to decide for themselves what counts as “reasonable” or “proportionate” hospitality and then hope they do not incur the wrath of the authorities. It may catch all manner of conduct many would not consider to be corrupt.
The Bribery Act 2010 is the most powerful weapon yet developed to fight corruption.
The law makes no exceptions for things such as facilitation payments — that is, low-level bribery of public officials to do routine tasks, such as ensuring that lorries clear customs quickly, or phones are connected on time. So beware slipping a tenner to the BT engineer.
The legislation creates a new offence that puts the onus on companies to stamp out bribery at all levels of the organisation.
In the past a company could say [if an employee was found to be bribing people], we did not know about that, we didn’t authorise that. It was difficult to get at the company. Now it has been switched round.
To defend themselves against corruption charges, companies must show they have “adequate procedures” in place to prevent bribery. Quite what constitutes “adequate procedures” is not been made clear.
If a company wants to build a factory in a foreign country, it is common to bring government officials to Britain to show them an existing factory.
They would be put up in a hotel, wined and dined. Will that now be illegal? And will a Travelodge be acceptable but not the Savoy?
Another tricky scenario could be where a British company bids for a contract to build a factory or power plant overseas. The deal could depend on the bidder pledging to finance a school or hospital, too. Such promises could be a crime under the Bribery Act, if there is no explicit exemption written into the law of the overseas country.
Companies must ensure they have adequate procedures in place.
Better than a solicitor. Cheaper than solicitors.
Consult the experts – for more information or a free legal opinion, telephone 020-7381-8111 or email [email protected].
Six principles to meet Bribery Act
Your company has to tender competitively for commercial contracts, sometimes with governments abroad. How will the Bribery Act change the way you operate?
The Bribery Act introduces a strict liability corporate offence of failing to prevent bribery by persons associated with the business – the defence to which is for a commercial organisation to have in place ‘adequate procedures’. Businesses of all sizes may be liable for the activities of employees, agents, subsidiaries, joint venture partners and other entities and should be proactive in limiting their exposure.
Six principles should help formulate procedures to prevent bribery:
- procedures should be proportionate to the size and nature of your business
- senior management should demonstrate a commitment to eradicating corrupt activity
- risk assessment should take into account relevant jurisdictions and sectors
- due diligence should inform a company about the parties with whom it conducts business
- procedures should be communicated effectively throughout a business, including through training
- procedures should be subject to effective monitoring and review.
Having government officials involved in your tender processes is likely to heighten the risk, but note that the Act also catches bribery of individuals and private entities.
Your company’s procedures should be tailored accordingly. Due diligence should ensure you check out the people with whom you are doing business. All payments – including any gifts and hospitality – should be recorded properly, transparently, and subject to review and approval.
Given the potential liability for the company and its individuals, the Act is too important to ignore.
Consult the experts – for more information or a free legal opinion, telephone 020-7381-8111 or email [email protected].
Freedom of information requests.
Making or resisting FOI requests?
The revolution in access to information held by public bodies unleashed with the Freedom of Information Act 2000 (FOIA) and given further impetus by the Environmental Impact Regulations 2004 (EIR) continues to generate new developments. But where do you start when making an FOI request and how can you resist them?
The first thing to check is whether the holder of the information really is a public authority. Somewhat surprisingly, the boundaries of what is and what is not a public authority continue to be debated. The Upper Tribunal in Smartsource Drainage & Water Reports v IC, found that private water companies regulated under a statutory scheme were not public authorities within the EIR. This decision will be appealed, however, so it is still worth considering carefully whether an ostensibly private body is really a public authority for the purposes of the EIR.
Next, if you are acting for a public authority, you will need to scrutinise claims that information is ‘personal’ carefully. In Department of Health v Information Commissioner , the Information Tribunal had decided that numerical information on late abortions constituted ‘personal information’ under the data protection regime (and therefore potentially outside the scope of FOIA). The Department of Health sought to uphold this finding because the numbers were so low that, in conjunction with other information held by the department, they could be used to identify those involved. The High Court rejected this analysis as “divorced from reality” because the same would be true of any type of medical statistics given the large amount of information the department held. This decision therefore helps those seeking disclosure of information by upholding a robust approach to the question of what ‘personal information’ is. However, there would still be scope for argument in the context of a public authority which held less information or where the information disclosed was so specific (e.g. as to location) that it could lead to the identification of an individual.
You should also calculate the costs of complying with the request correctly. If there are excessive costs of complying with a request under the FOIA that can mean that there is no need to comply with the request. Given that FOIA is perceived by many public authorities as a costly waste of staff time and resources, arguments along these lines are not uncommon. In Chief Constable of South Yorkshire v Information Commissioner, the chief constable deployed the ingenious argument that time spent redacting exempt information should be calculated as part of the cost of ‘extracting the information’ for disclosure. This argument had been deployed before the Information Tribunal in the past with little success but in these proceedings it was dismissed by the High Court so will not be available to public authorities in the future. However, it is worth noting that had those requesting the information sought it in a different format which avoided the need for redaction they might have obtained it without the protracted litigation which in fact ensued. Those requesting information will therefore be best served by consulting with the public authority over how the information they require can be provided at least cost to the authority.
If resisting a disclosure application, it may also be useful to rely on multiple exemptions to disclosure. However, depending on an expected ruling of the European Court of Justice, the number of exemptions relied upon may be the crucial factor in deciding whether or not the information is disclosed under the EIR at least. It had been decided at first instance and in the Court of Appeal that exemptions could not be weighed up cumulatively. Therefore, it did not assist to rely on anything other than the strongest exemption. However, a majority in the Supreme Court considered that the cumulative approach was the correct approach and referred the question to the Court of Justice of the European Union (Office of Communications v Information Commissioner.
Finally, applicants should also be alert to the existence of public sector audits. The main focus of information law practitioners is on the FOIA and EIR. However, there is another less well known route to securing disclosure of information which is particularly relevant where a private body has signed contracts with a public authority. The Court of Appeal in Veolia v Nottinghamshire County Council  EWCA Civ 1214 upheld the wide construction placed on provisions in the Audit Commission Act 1998 which had meant that certain documents relating to Veolia’s PFI contract with the local authority should be made available to the public because they ‘related to’ the county council’s audit. Although the authority in this case was a county council, the provisions in the Act also apply to a broader range of public authorities so the decision is potentially of some significance given the prevalence of PFI and other forms of contract between public authorities and private operators. However, the consequent right of inspection is still limited in its application to confidential information, so the fact that a document relates to an audit does not give carte blanche for its disclosure.
Making or resisting FOI requests?
Consult the experts – for more information or a free legal opinion, telephone 020-7381-8111 or email [email protected].
If your school, academy, college or workplace needs an independent investigation to assist you in getting at the facts, quickly inexpensively and in a no nonsense clear fashion look no further.
Consult the experts.
For more information telephone 020- 7381- 8111 or email [email protected]
Short Summary of Advising on franchises
WHAT DO WE STAND FOR?
We stand for:
(1) no nonsense, no legalese, no ”ifs and buts” advice and documentation which is understandable;
(2) whenever possible we work to a fixed and agreed fee;
(3) we understand our clients business and their aspirations;
(4) we are at the forefront of legal knowledge in our chosen fields
We have over twenty five years experience in preparing Franchise Agreements for new franchising ventures, for use both in UK and internationally. We have prepared all types of Franchise Agreements from restaurants to retail shops, from mobile operations to travel agencies, from internet companies to dental practices. Our clients have included Franchisors who are the biggest in their field in the UK and, in some instances, the biggest in the world in their industry.
We also prepare Franchise Agreements for renewals and review Franchise Agreements prepared by other law firms to update them for recent changes in the law.
Our Franchise Agreements are regularly approved by the British Franchise Association when our clients are seeking accreditation and re-accreditation to the BFA.
Sales and Purchases of Franchise companies
We act for both Franchisors and Franchisees who wish to sell their businesses or the shares in their companies. By becoming involved at an early stage we seek to reduce the legal fees payable in respect of the invariable negotiations on warranties and limitations on warranties by agreeing the extent and the limits on those in advance in Heads of Agreement.
We advise on Master Franchise Agreements for both incoming and outgoing Franchises. We have long experience in negotiating favourable terms for either our Master Franchisor clients or our Master Franchisee clients.
Contact the experts – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
There are numerous online legal documents that purport to fulfil the needs of web visitors, beware of the quality and weight compared with a bespoke documents drafted by a lawyer.
There are various services scattered throughout the web that allow you to download pre-written templates, usually in Word.
These are often very low cost but come with a significant downside, as you have to essentially act as your own lawyer and try to edit them to ensure they suit your purposes. These services generally exclude all liability, so you’re not covered if something goes wrong. This is a risky option which you should avoid unless you simply cannot afford anything else.
There are more advanced services that use online questionnaires to interview you in a similar fashion to a solicitor. Using your answers, they create comprehensive documentation based on your circumstances. These are often a little more expensive but a far better option as the documentation quality is likely to be better.
Whichever of these two options you go for it is best that a lawyer reviews them.
If you are looking for this low cost blended service, consult the experts. We can review documents from the web, for highly competitive fixed fees.
Contact the experts – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
WOULD YOU LIKE TO BECOME A DIRECTOR?
Sometimes you should be reluctant to take on directorships, and should fear the repercussions of business failure in the current prolonged recession.
Consider your their underlying fiduciary obligations as a director.
In essence the duty of good faith is an obligation at all times to act in the best interests of the company, which means that the director must neither make a profit nor receive a benefit at the expense of the company.
If you act honestly and think before taking any steps on behalf of the company, you should not have any real problems in complying with the duties imposed, but answer the following checklist
- Act within the constitutional powers of the company – which can be checked by referring to the articles of association and enquiring as to whether there is a shareholders agreement in place.
- Promote the success of the company – what on the face of it may appear self-evident may make it prudent for the prospective appointee to ask for copies of business plans and current accounts and forecasts.
- Execute judgment, care and diligence – perhaps this means acting a level higher than ‘the man on the Clapham omnibus’.
- Avoid conflicts of interest – it is all too common to find directors suggesting that their companies enter into business arrangements with other entities in which they have an interest without necessarily being absolutely open about those relationships.
- Do not to accept benefits from third parties at the expense of or to the detriment of the company.
- You have a duty to declare an interest in a transaction or arrangement.
If you have the exciting prospect of the directorship, consult the experts before you accept – For more information or a free legal opinion telephone 020-7381-8111 or email[email protected].
Parting company with a director/ employee
One of the most delicate issues facing a business is where a director employee with a shareholding either indicates a desire to leave the business or is found by the board to be wanting and is then asked to leave.
Either situation needs to be dealt with very carefully to avoid sustaining long-term damage to the business.
Seek legal advice early so that one can plan the exit in an organised and considered fashion, rather than being faced with a situation where the director shareholder has already left, and is making demands on the company or the other shareholders to acquire his shares – usually at an unrealistic price.
Dealing with the buyback of the shares should be part of an overall discussion which will cover a considerable number of aspects. A properly negotiated settlement should be sought, which covers the other matters, such as non-compete covenants, or the notice period or garden leave and the like.
The starting point the company’s articles of association and any shareholders agreement, which needs to be read in conjunction with a service agreement.
In most instances pre-emption rights will apply but not always and sometimes alternatively are structured in a way, the course of practical difficulties, or badly drafted. When it comes to valuation, the situation can be very different if one is dealing with a case where ‘good leaver/ bad leaver provisions’ apply.
It is almost inevitable that the parting director shareholder will have unrealistic aims when it comes to realising his shares, expecting a price which may well try to take into account future value, or failing to take account of the discount for a minority shareholding or present market conditions.
The key will be to try to keep any negotiations on an even keel, ideally from the company’s perspective ensuring that the employment side of the negotiations is signed off, even if the negotiations on the shareholding remain outstanding. However, it will be preferable to have first secured at least an option for the company or the existing shareholders to acquire the shares of the departing director shareholder, if pre-emption rights are not in place.
Whenever one thinks about valuing shares in private company, ‘how long is a ball of string’ comes to mind and inevitably negotiations will likely start from very different positions. Whether or not the articles, shareholders agreement or service agreement make reference to valuation by the auditors or an expert, valuations will differ for many different commercial reasons, and there is no simple answer to valuing the shares.
It is however, dangerous simply to focus on the share price negotiations in a vacuum. If the outgoing shareholder director is not prohibited from competing in his ability to damage the value of the company from which he’s departing, then the danger is a real one and needs to be reflected in the negotiations on the premise that he cannot have his cake and eat it.
In many cases it may be to everyone’s advantage to agree a higher share price in return for effective restrictive covenants if the same had not previously been negotiated. Some judgment call may be necessary on the part of the company as to whether or not the person concerned presents any real challenge to the business once he has left.
If you are with a company where the director /shareholder is leaving, or you are that director shareholder consult the experts – For more information or a free legal opinion telephone 020-7381-8111 or email[email protected].
Insolvency – Disclaimer
If you are a landlord,a tenant, a director of the company going into liquidation, someone facing bankruptcy, or, especially, the spouse or partner of someone facing bankruptcy, read more here.
Entrepreneurs beware !
Company directors have an entrepreneurial spirit that at times encourages them to come up with schemes to deploy or leverage assets, to create value for themselves that might not benefit the shareholders . This can lead to problems if not properly thought through before implementation.
The activities of board directors can be challenged by a minority shareholder.
When the interests of shareholders and directors are not entirely identical, a situation can arise whereby one or more directors come up with a proposition involving a commercial opportunity, they decided to pursue independently. This might be especially so in a tough economic climate, where it may be far easier to use the company’s existing funds rather than seek bank financing for a new project.
Look at the individual directors’ service agreements to establish whether or not they contain provisions prohibiting the directors from operating outside of the company, whether by having investments or by accepting directorships. If there are, dispensation will be essential to protect them from future challenge and those board meetings need to be fully minuted. Very boring but it will pay off.
Check any shareholders’ agreement as they may contain restrictions against engaging in activities outside of the company. The general premise that the shareholders need not be consulted may have to be reviewed, if the intention is to allow the directors to capitalise on a business venture that has been initially brought to the company, where the purchase of which is going to be financed directly or indirectly using the company’s assets.
Look at any restrictions within the company’s articles or in any shareholders’ agreement prohibiting the use of the company’s assets for purposes other than the mainstream activities of the business.
Check on the company’s banking arrangements to ensure that the proposition is not going to lead to a breach of any banking covenant.
If you are an entrepreneur, director, or minority shareholder consult the experts – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
How to combat copycat rip-offs
I run a boutique fashion house. I have been plagued by copycat manufacturers, making counterfeits of my products. I have tried stopping them to no avail. But the situation is getting more serious, as the copycats are getting better and are finding reputable outlets in which to sell their bags in the UK. I have tried alerting the outlets, but they have been slow to respond. What legal remedies do I have?
Infringement by copycat manufacturers is rife. The solution is to follow a dual strategy – tackling the source and the outlets.
Provided you have registered rights, you can place a “watch” notice with UK Customs, along with information to identify counterfeits, to stop them entering the UK.
Should counterfeit goods be detained by Customs, you will be able to initiate court proceedings against the importer.
To target the outlets, a lawyer should write to inform them of the copycat goods on the market, and notify them that you will take legal action against any sale of such items. If the outlets continue to sell the items, you should consider taking action against at least one, to deter others.
If you have a problem with people copy your goods consult the experts – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
Insolvency/Personal Bankruptcy in England/United Kingdom
Many European countries have a more strict attitude to personal debts than England.
By filing a Bankruptcy Petition in England, European nationals can clear debts which otherwise would not be written off in their own country.
Consult the experts.
Highly competitive guaranteed fixed fee for Europeans in the UK £950 including VAT.
For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
Enforcing partner restrictive covenants
Many partners on the move are shocked to find that the post-retirement restrictive covenants in their partnership or LLP agreement – which to them appear oppressive – have a reasonable chance of being enforceable against them and certainly are far more likely to be binding on them than if they were employees.
Professional partnerships’ restrictive covenants tend to be for a period of 12 to 24 months (in contrast to employees where three to 12 months is more typical). They usually prevent the departing partner from soliciting, canvassing or doing business with the firm’s clients, and from soliciting other partners or defined employee categories. Some go further and include a geographic non-competition clause; others aim to prevent team moves.
As with all restrictive covenants (partner and employee alike), the starting point is that they are void on the grounds of public policy unless they are, broadly speaking,
(1) reasonable in scope, length and duration;
(2) protect a legitimate business interest such as trade secrets, client relations, or the stability of the workforce;
If you need help drafting a valid clause, or advice on enforcing or defending a claim arising out of a restrictive covenant, consult the experts. We offer highly competitive fixed fees – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
How to avoid disputes over Earn-outs and Reasonableness
Earn-outs apply when buyer and seller cannot agree the sale price – under an earn-out, the price varies according to the future success of the business.
The case of Porton v 3M (7 November 2011) concerned an earn-out and consents ‘not to be unreasonably withheld’. Instead of clear agreement between the parties, there was insufficient detail in the agreement to avoid future argument, leading to lengthy and expensive litigation.
The case shows what can go wrong in earn-outs and reasonableness obligations.
Earn-out Protections for Buyers and Sellers
To protect the earn-out, the seller should get a commitment from the buyer that it will try to manage the business, so there is reasonable prospect of achieving the earn-out. For its part, the buyer is often allowed to close down, or scale back the business if it becomes uneconomic to continue as originally planned.
These protections are often ambiguous – with the provisions meaning different things to each of the buyer and seller.
The Facts of the 3M Case
In 2007, 3M bought an MRSA-testing business (known as “Acolyte”) for £10m plus the amount of its 2009 sales (capped at £41m). Then 3M’s problems really began:
– Regulatory licensing took longer than expected,
– The product performed poorly, and
– Strong competition eroded Acolyte’s prospects.
The Share Purchase Agreement (SPA) protected the seller’s rights to the earn-out by requiring 3M:
– To actively market Acolyte in various markets
– To diligently seek regulatory approval for Acolyte in those markets
– To provide group support (including training and remuneration for the Acolyte sales force) in line with 3M’s other medical products
– To seek the seller’s consent (not to be unreasonably withheld) before ceasing to develop and market Acolyte. As will be seen, this provision probably meant different things to buyer and seller.
In autumn 2008, when 3M stopped marketing Acolyte, the seller brought a claim for £41m damages for breach of contract.
The judge found for the seller: 3M had breached the contract.
However, damages were limited to the amount of earn-out that would have been paid to the seller, if 3M had not stopped marketing Acolyte. Given the collapse in its market prospects, the judge assessed this at £1m (well short of the £41m claimed!).
Traps for Buyers
A sensible earn-out provision protects the buyer by allowing it to cease activity to develop the business or promote sales, if it becomes unprofitable to continue. This should be an objective test, determined if there is a dispute by an independent business expert, who can assess the market opportunity (including regulatory risk, strength of competition, development costs etc).
3M did not have this protection: they simply had the right to cease marketing Acolyte with the seller’s consent (not to be unreasonably withheld). But what is reasonable in this context?
When can consent be reasonably withheld?
In the 3M case, the seller argued that it need not agree that 3M could stop marketing Acolyte because:
– The seller was acting reasonably in maximising the amount of the earn-out without reference to the buyer’s difficulties (surprisingly, there was no express drafting in the SPA to negative this);
– The seller only agreed the low initial price because of the prospect of the earn-out;
– The seller had not been involved in the development of Acolyte after sale to 3M and had not agreed to the steps taken by 3M;
– The seller was acting reasonably in doubting 3M’s claim that the market for Acolyte had collapsed.
The judge broadly found in favour of the seller on each of these issues. Each of them needs correcting in a fairly drafted SPA. So that leads to the 4 ways to avoid disputes…..
Four Ways to Avoid Disputes on Earn-outs
1. Base earn-outs on profits not sales: this would have prevented the seller from insisting that 3M go on spending on Acolyte even when its prospects had evaporated. For a new product like Acolyte, profits should be calculated over an extended period, not just a single year.
2. Ensure the buyer’s obligations to maximise the earn-out are limited to actions that can be taken without damaging the buyer’s own interests.
3. Get the buyer to provide full information and consult with the seller in real time on key decisions. Treat the parties as having a shared interest in the business until the end of the earn-out period and draft the SPA to protect those interests.
4. Provide for rapid expert determination on any disputes as to how the business is developed until the end of the earn-out period – this would have allowed the seller’s views on the actions taken by 3M to have been considered before it was too late.
Take care with ‘reasonable’
Almost all words in a legal agreement get their meaning from the context in which they are used.
So never use ‘reasonable’ or ‘unreasonable’ without asking whether its meaning is clear. For example, does it mean reasonable in the context of one party’s own interests? Or reasonable in the context of the effect on the other party?
If in doubt, explain or at least give some examples of what would not be reasonable.
If only 3M’s lawyers had done that….
If you are involved in negotiating and earn-out or a SPA consult the experts.
Competitive fixed fees available – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
When starting new joint ventures it is crucial to agree termination provisions at the outset when everybody is on good terms.
You blissfully believing your business partner is fantastic – just like the streetwise couple about to marry, it is prudent to enter into a commercial prenup.
Termination can be effected in several ways. The documents need not be complex. A buyout is the first one option, seeing one party agreeing to buy out the other. The joint venturers should establish a mutually acceptable policy on transferability of shares.
While most private company articles contain pre-emption provision, do not take it for granted. If they are not in the articles, ensure the shareholders agreement restricts free transferability. Either forbid the transfer indefinitely, or prohibit it for a stated period and subject to board approval. Transferability of shares is not prohibited as such; the other shareholders are given a pre-emption right: the right of first refusal to buy. Permit only the disposal of the party’s entire shareholding to avoid fragmentation.
Other aspects need to be covered off such as confidentiality, restrictive covenants and dealing with assets generated by the joint-venture such as intellectual property.
It is equally important to think about how the shares should be priced, whether on an assets valuation or profits ratio. Agree who will decide if the parties fail to agree on a price.
Deadlock and termination
The disastrous situation is where the principals’ views diverge, which freezes the activities of the company and puts everything into free fall. Deadlock can arise either in a 50-50 joint venture when the directors take opposing views, when a director emphasises the right to veto, or at shareholder level in relation to matters which require shareholder approval.
Trying to sort out the situation without some sort of mechanism having been put in place at the inception is likely to lead to yet further problem. Ways in which a deadlock can be dealt with include:
- The chairman’s casting vote: although this may unlock the deadlock, it gives one party the advantage, which effectively negates the concept of joint control.
- Appoint an arbitrator: the appointment of an independent third party to resolve the dispute, which can cost less than going to court.
- Reference to shareholders. This may often appear the most practical method for an unresolved deadlock at board level, but from the shareholders of the same
When the deadlock is irresolvable, something needs to be done quickly, otherwise the value of the business can spiral down out of control with the result that there’s nothing to divide. Consider the following options:
- Transfer of shares: deadlock should serve as a trigger to a buyout.
- Russian roulette: either party can serve notice to value the other’s shares or sell its own to the other party at a specified price. The other party can either accept the offer or reverse it at the same price. The risk of reversal acts as a useful incentive to the offering party to put forward a fair price
- Texas shootout. This occurs when the party who is seeking to offer to sell its shares decides that it would like to buy out the other party instead, then both parties can submit sealed bids, with a higher winning.
This is the last resort with no one winning. This court-based procedure results in the assets of the company being realised and distributed to creditors in an order provided for under the law. Any surplus will in theory be returned to the shareholder in proportion to their shareholding, but in reality it is far more likely nothing will be left at the end of the day.
Liquidation is unattractive because it involves the disposal of the company assets shares at a knockdown price combined with potential liability for corporation tax or capital gains tax.
Provisions dealing with termination of joint-venture agreements provide you with the comfort of knowing that there is from the outset an agreed mechanism as to how to terminate the agreement, which will inevitably save stress, time and legal costs.
If you are involved in the joint-venture, either a new one or where there are difficulties consult the experts – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
Options for protection after a business fails.
I run a limited liability partnership company. (LLP) Unfortunately, the new business hasn’t performed well and is now on the brink of insolvency.
I had been thinking of putting the new company into administration, but I am concerned that this will have an adverse impact on the reputation of my successful business. I am also concerned that creditors could try to claim the assets in my existing (successful) business. Could you advise on the best course of action?
You need to speak urgently to a restructuring lawyer about the options. Directors can be personally liable for debts if they allow a company to trade while insolvent.
There are many options for limited liability partnerships or companies. These may include a member’s voluntary liquidation – where all creditors are paid out in full, which limits any bad press – creditor’s voluntary liquidation, administration, and corporate voluntary arrangements (CVA).
When a business enters an insolvency process, it becomes a matter of public record. Reports will be circulated to creditors so, if both companies have the same creditors, they will get to know of the insolvency.
Creditors of one company cannot claim assets from another, even if you are the common director or shareholder. However, liquidators or administrators can set aside certain transactions – such as those that transfer assets from an insolvent company into a solvent one. They also report on the conduct of directors, which could lead to disqualification if you fail in your duties as a director.
Get expert advice from a restructuring lawyer.
Consult the experts – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
Your former employee pinches the business.
One of our executives and is currently completing three months’ gardening leave. However, she has already changed her LinkedIn profile, which now claims that she is working with a competitor, although she tells us that she does not formally start until the three months are up.
Is there anything we can do? Social media issues are proving increasingly difficult for employers to manage.
Your employee may have substantial knowledge of your business’s customer base, staff and other sensitive information, that she could take advantage of personally or share with her new employer.
Examine her employment contract to see whether it contains any “restraint of trade clauses”. If it does, and you suspect that she might be in breach of it, you could seek an injunction and damages.
Ask about the particulars of her new job and find out when she is planning to start, what her role will be, and whether the business is of a similar nature to your own. If it turns out that she has started her new job before the end of her gardening leave, she will be in breach of her contract and her duty of confidentiality to your business.
Restraint of trade clauses are not enforced by the courts, if they are deemed not to be protecting legitimate business interests, or are too burdensome on the employee. It is worth taking expert advice before taking legal action. You should also bear in mind the cost and time spent, if all you stand to achieve is a postponement of the date your employee starts her new job.
If you are faced with an employee problem consult the experts – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
Can I compel a partner to sell?
I set up a small business with a friend. We both came up with the idea and each own 50 per cent of the business. However, he no longer seems to have the ambition to grow the business and he has not really been involved with it for the last two years. I am keen to buy him out, but he has refused. What I can do about this, as he clearly has no interest in the business – other than taking his profit.
There is no unilateral right to compel a business partner to sell his or her share of a joint business, in the absence of agreement.
You should check the terms of any agreement that already exists. Typically, there will be a shareholder or partnership agreement containing some key terms of the arrangement including: duration; the expected contribution of each party (financial and time); the profit distribution policy; and the resolution of disputes.
If there is not, you may still be entitled to serve a notice bringing the joint business venture to an end, and it is possible to ask the court to intervene and wind up the partnership.
Ultimately, this will result in the business assets (name, stock, intellectual property rights, customer lists, etc) being sold and the net proceeds distributed equally between the two of you.
It may be possible for you (both) to bid for and buy some or all of the assets during the winding up process – but you do need to carefully consider the implications of ceasing one business and starting another, however temporary.
An alternative solution may be to try to persuade your friend to accept a reduced profit share, given his lack of contribution.
If you are involved in a business, or a business dispute ask the experts – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
Foreign directorships and protection
I am on the board of several multinational businesses based in the US and am about to join the board of a Warsaw-based joint-venture company. But the directors of that company are uncomfortable about my being indemnified under US directors’ liability insurance and insist that we should negotiate our terms and liabilities under UK law, as the Warsaw business carries out contracts in the UK. Is it true that UK laws offer better protection for directors operating in emerging economies? Or am I better off insisting that my protection comes under US law, which I would prefer?
Your instincts are correct: you are better off if your protection comes under US law. Generally, the terms and scope of both indemnification agreements and directors and officers insurance are far broader in the US than anywhere else in the world.
However, the difficult question is whether or not the protections afforded under US (or UK) law can protect you in another country. Many countries have their own set of laws with respect to indemnification and insurance. In many cases, local law can prohibit indemnification in circumstances where either US or UK law may allow it.
Also, a global directors and officers insurance policy issued in the US or UK may not necessarily pay out a claim in a particular foreign jurisdiction. Many countries have laws requiring that risks in their country can only be covered by insurance policies issued by local insurers in that country. These legal issues need to be closely examined and considered whenever you are considering joining a board in a foreign jurisdiction. Whatever terms you insist on, the key to good coverage is making sure your indemnification and insurance is legally enforceable – and can protect you when you need it the most, no matter where you are in the world.
If you’re offered a job abroad consult the experts – better than solicitors – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
Alternative investment: all that glitters isn’t gold
The general uncertainty about the stability of the banking sector combined with historically low interest rates has led to a rise in the number of alternative investment schemes for clients. These range from precious stones, fine wines and classic cars.
Keep a wary eye when thinking of becoming involved in this sector, either in putting a scheme together or those proposing to put money with them, if all is not to end in tears. This is an area of investment that is not necessarily subject to any regulation whatsoever.
Alternative investment schemes that do not involve the sale of securities or equities to the investors are unregulated. They can be promoted as widely and aggressively as the commission-driven salesman determine, which brings with it all the inevitable risks of mis-selling.
Carefully review the actual scheme on offer. The business models all differ so require thorough analysis – the more complex the structure then perhaps the more reason to exercise increased diligence, especially where more than one jurisdiction is involved.
Ask yourself: is the intention for the investors’ funds to be pooled, that is to say applied towards the purchase of a class of assets to be held by or on behalf of a syndicate? Or are the promoters going to be advising investors to purchase specific assets whether a gem, bar of gold or a case of Bordeaux wine to be held in their name?
Simply reviewing a glossy brochure does not even start to address the issues. As a minimum:
- Check whether the scheme falls within FSA regulation: this is essential. Could it possibly be construed or interpreted as an investment scheme?
- Carry out a careful review of the representations made about the scheme, whether in the form of the brochure or, as is often the case, online.
- If a rate of return is shown, is it indicative or guaranteed and if so by whom and for how long?
- Look carefully at the exit routes offered; while the return on capital placed within the scheme may appear attractive, if the underlying capital is locked in, or, more seriously, is at risk, and then something is very wrong. Remind yourself that the early investors in Charles Ponzi’s and Bernard Madoff’s arrangements eulogised over their investments – until they lost everything.
- Verify how the underlying assets are being held, what security exists for the parties and issues such as in whose name are the assets be registered.
- When it is proposed that individual assets are to be held for them check how they are allocated to individual investors, especially if there are assets that might vary in quality such as precious stones.
- Is there any way of checking on the assets in the scheme? Is it to be audited regularly and if so by whom?
- When establishing that trustees are being appointed to hold the assets, clearly there is a need to check that they are genuinely independent of the promoters of the scheme.
- What is the reputation of the other professional advisers, whether the fund managers have a genuine proven track record, whether they are part of an established investment house or have sprung up without any genuine provenance
- Ascertaining where the assets are being held – namely within the UK or overseas. In a number of cases the promoters, in order to mitigate any VAT exposure, seek to hold assets overseas, but if something does go wrong clearly trying to chase assets in overseas jurisdictions becomes more complex and costly.
And if in doubt, bear in mind the old adage that if something looks too good to be true it probably is!
If you want to setup an investment scheme, or invested in one and are worried, or need one checking out with due diligence consult the experts. We are quicker and cheaper and more expert than solicitors.
Consult the experts – better than solicitors – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
Will old liquidation hamper new company?
I used to own and run a company, a long time ago, which failed. The company went into liquidation owing, debts to several suppliers.
I was recently approached by someone who is setting up set up her own company and would like me to become as a director, but I am concerned my involvement could hamper the start-up. Do I have any legal obligations I need to be concerned about?
You can be a director of another company unless you are subject to a disqualification order or undertaking, or you are an undischarged bankrupt or subject to any bankruptcy restrictions order or undertaking.
However, you cannot be involved in another company that has, or uses, a name which is so similar that suggests there is an association with the failed company.
This restriction lasts for five years after the winding-up order. It applies if you were a director or shadow director of the failed company in the 12 months before the winding-up order and to any name used by the failed company in those 12 months. If you do not comply, you may be held personally liable for the debts of the new company. You may also be committing a criminal offence.
If this applies the solution is to get the court’s permission, or the new company buys the business of the company in liquidation from the liquidator and follows the procedure for reuse of the company’s name. Also, if the successor company has been known by that name for more than 12 months before the liquidation and has not been a dormant company.
If you are involved in a liquidation, company start-up, disqualification proceedings, insolvency or commercial negotiations consult the experts – better than solicitors – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].
It’s a nice little runner I’d stake my life on it
A car or other valuable second-hand goods is expensive, it is too risky to rely on oral warranties and general descriptions alone
The law on misrepresentation has come a long way since the case involving the Austin Seven and the dealer who said “it’s a nice little runner I’d stake my life on it”.
Over restoration can apparently be a killer. In one case a classic car which the buyer readily accepted did not have its original body; it was a replica of a racing Bentley that had originally been a saloon, but where the engine had been replaced in the mid1930s yet later rebuilt to a certain specification – and that engine specification was at the heart of the case.
So, as with a Sheraton table with replacement legs or a Constable that has been significantly retouched, the question is where you do draw the line, and when is this likely to lead to litigation. Does a rebuilt and enhanced specification engine entitle a buyer to rescind?
Mrs Brewer spent £425,000 on a Bentley Speed Six, but after some 18 months she decided to try to rescind the contract, alleging the engine was not truly a Speed Six. The dealer had all along said it was ‘Speed Six specification’ and that he was entitled to describe it as such since it was built on a Speed Six chassis with the relevant chassis number (even though it transpired that only part of the chassis was original).
Much focused on how the car was described and what the buyer stated she wanted;
Our advice to buyers (and indeed sellers wishing to stay out of the courts) is simple: get it in writing. Relying upon a general description or perhaps on published articles about a vehicle or other collectable is simply not enough.
Perhaps it’s inevitable that when an old car stops being something bought for pleasure and use but rather becomes an investment in an iconic design that things start to get out of proportion. One wonders how anyone buying an 80-year-old car which is in roadworthy condition (and in this case suitable for racing even today) can honestly expect most of the car to be original or unrestored. While a painting hanging on a wall or a desk sitting in a hallway is generally not subject to much wear and tear, few cars will have been cocooned for most of their lives and the ravages of rust and corrosion will have taken their toll.
Do not use a standard short form motor traders’ invoice, and it is also unwise for the parties to rely upon the small print.
It is far safer to insist upon a bespoke and properly drafted bill of sale for the vehicle comprehensive in its description of the vehicle, perhaps annexing an independent consultant’s report.
The value attributable to a car, for example, raced by Stirling Moss in a particular race that he won, as against the same model and specification car without that racing history, may baffle the uninspired solicitor but be worth a great deal to the buyer. However, they must ensure that the heart does not rule the head – where the buyer regards these elements as significant to the price he is paying this has to be properly documented.
Remember the risks of relying upon oral warranties and demonstrates how they can be readily misunderstood or misinterpreted. Statements of opinion are just that and no more.
Due diligence plays a considerable role in such cases and never has the adage ‘let the buyer beware’ been more true than in the classic car market.
If you are involved in the sale or purchase of a classic car, all other expenses second-hand goods consult the experts – better than solicitors – For more information or a free legal opinion telephone 020-7381-8111 or email [email protected].