Solicitors Sheffield

Do the courts interfere with clauses expressly agreed in business contracts ?

The general approach of the English courts to commercial contracts is that businesses are on a more or less equal footing for negotiations and the court should not interfere. Some key areas where the law often intervenes notwithstanding what a contract may say are :-

• Jurisdiction – express clauses are important with business becoming more international. A clear clause on jurisdiction is very important

• Competition issues. There are laws restricting anti-competitive agreements on both a UK and European level

• Unfair Contract Terms Act 1977. This Act is best known for overriding clauses in contracts attempting to  exclude liability for death or personal injury.

When can a director be held personally liable?

If a company goes into insolvency procedure, conduct of the directors and the company’s transactions would generally be considered going back 3 years.

Directors may be held personally liable and be ordered to pay money to the company for the benefit of its creditors under several circumstances :-

• Wrongful Trading – continuing to trade or enter into contracts after the director or shadow director, knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. If a court considers there has been wrongfully trading, it can order a contribution to the company without financial limit and disqualify a person from acting as a director for up to 15 years.
• Fraudulent Trading – carrying on a business with the intention to defraud creditors or  other fraudulent purpose. Examples might be taking deposits for orders which will not be fulfilled, or giving wrong or inaccurate information to obtain credit or contracts. If a court considers there has been fraudulent trading, it can a contribution to the company without financial limit and it can result in going to prison you for up to 7 years.
• Personal guarantees – Personal guarantees may have been given by directors to obtain credit for the company. Most guarantees are on a “joint and several liability” basis, which means that there is no requirement for the lender to pursue the company in preference to the individual.
• Misfeasance - This is a breach of fiduciary duties of care legally owed to the company as a director. Examples are taking out money wrongly from the company or using company money for matters not associated with company business. If a court considers there has been  misfeasance, it can order the director to make a contribution to the company without financial limit.
• Preferences – relates to an advantage given to one creditor in preference to another which is unlawful as creditors must be treated equally (subject to there being a difference between secured and unsecured creditors). The penalties for this include setting aside the transaction, and ordering the beneficiary of the preference to refund  the company.
• Transactions at an undervalue – where a company has allegedly transferred assets for significantly less than their market value. The sanction may be to set aside the transaction and for the recipient to refund money or return assets to the company.

What steps should directors take to minimise risks of personal liability ?

• Keep accurate and up-to-date financial records  and use common sense as regards decisions and whether the company is financially stable.
• Have a clear and document business plan and financial strategy for your company.
• Do not continue to trade when your company is insolvent, unless you are certain that there is a strong possibility that your company will be able to avoid insolvent liquidation.
• If you suspect the company may be insolvent, obtain professional advice as soon as possible on whether or not you can avoid liquidation and what your alternatives are.
• If other directors do not agree with you, make your views plain at a board meeting or in writing. If at a board meeting, make sure your views are adequately minuted. Resigning from the board is unlikely to safeguard your position. Take immediate professional advice.
• Do not incur further credit when there is little prospect that you can repay it.
• Do not take deposits for orders you know the company cannot fulfill.
• Do not pay certain creditors in preference to others.

Minority shareholders and company law

Minority shareholders can generally be outvoted by the majority in relation to important decisions of a company and can therefore suffer prejudice. Much however depends on whether actions have been taken to deliberately prejudice the minority shareholder or shareholders as against the legitimate power and influence which can be used by those who have bought and paid for more shares.

The majority shareholder can be the company’s parent company, an individual or a group of connected shareholders.

Minority shareholders may sometimes feel that their rights have been ignored as often they are dispossessed of any real say in the operation of the company. The company often favours the majority over minority shareholders, for example it may comprise of non-voting shareholders.

If a minority shareholder has been unfairly prejudiced, the court has a power to make any order it sees fit. Although, there are different remedies available, the court will often order the other shareholders or the company to buy the minority shares at a ‘fair value’.

In other cases, the court may wind up the company.

How can a shareholders’ dispute be avoided ?

In short, the best way to seek to avoid a dispute between shareholders is to have a clear, well considered shareholders’ agreement. Amongst other things, a good agreement will cover:

• financing for the company
• policies on dividends, directors’ fees and salaries
• responsibility for different areas of the business
• the company’s key objectives
• necessary authority and procedures for shareholders to take certain actions such as borrowing or incurring costs
• potential future issues such as death, sale of shares and other possibilities.

What are the main issues that need to be agreed with a joint venture partner?

Issues to be considered include:

• structure of  joint venture
• joint venture objectives
• management
• finance
• assets each party will contribute
• who will work for the new venture
• how profits will be shared
• ownership of intellectual property created by the joint venture
• dispute resolution, mediation or arbitration
• exit route

Are shareholders free to transfer or sell their shares to someone else?

• A company’s articles of association commonly allow the directors to refuse to register any transfer of a share submitted to the company.
• However, they may include other, different restrictions on the transfer of shares. For example, they might require any shareholder who wants to sell shares to offer them to existing shareholders first, which is known as pre-emption, or to offer them back to the company through a share buy-back. The articles might also establish how the price for the shares is to be calculated in each case.
• Alternatively, they might provide that shares can be transferred freely between members of the same family, but any other transfers are subject to the usual directors’ powers to refuse to register a transfer, or to pre-emption rights in favour of existing members or the company (with a mechanism for establishing the price to be paid for the shares) mentioned above.

Key points for a buyer to consider on business purchase

1. consider whether it is worth seeking to negotiate  and document an exclusive agreement to “lock out” other interested parties for a set period;

2. structure the purchase to avoid paying unnecessary tax;

3. be thorough with due diligence and ask yourself whether the seller has disclosed everything relevant. Ask the right questions before you commit;

4. Be wary of employment law issues, even if buying assets only

4. Consider a retention or earn out and don’t be over reliant on warranties or indemnities, they are only pieces of paper and once money is paid over it is gone.

5. Establish with any funding sources that their requirements both of you and the seller are realistic and not deal breakers

Possible problems selling shares in a private limited company

The Market for Shares

Shareholders are sometimes ‘locked in’ to a company even though they may have found a buyer for the shares. There are a number of difficulties before the sale can be effected.

Pre-emption Rights

The Companies Articles or Shareholders’ Agreements normally contain limits on the disposal/transfer of shares. They may state that only a certain class of individuals can hold shares in the Company or take the form of ‘rights of pre-emption’ where the shares which are to be sold/transferred are normally offered to other shareholders before the shares can be sold elsewhere.

Share Value

In a classic right of pre-emption, the price is said to be at a ‘fair value’ and is paid by individuals exercising their right of first refusal. It is normally determined by an independent body.

A ‘fair value’ is not necessarily  ‘real’ value. The ‘fair value’ price includes a very substantial discount which is called a ‘minority discount’. This reflects the fact that the shareholding is minority shareholding and therefore does not have the ability to control the company.

Non-Registration

Selling a minority shareholding may become difficult in a situation where the Articles of Association have provisions allowing the Board of Directors to refuse to ‘register’ a transfer of shares. If the directors refuse to register a transfer of shares, the prospective buyer should get information from the Board regarding the reasons for the refusal to register the transaction.

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