An update on corporate and property taxes – Autumn Budget 2024

Close-up of a white magnolia flower in bloom with delicate petals, set against a bright yellow background featuring an abstract orange geometric shape

The Chancellor introduced a number of measures that impact businesses and business owners. The following are some of the key points that may need immediate consideration.

Unusually direct tax and indirect tax measures have been introduced effective from Budget Day.

Capital Gains Tax (CGT)

The main rates of CGT that apply to assets other than residential property and carried interest have changed from 10% and 20% to 18% and 24% respectively, for disposals made on or after 30 October 2024. The rate of CGT that applies to Business Asset Disposal Relief (BADR) and Investors’ Relief will increase from 10% to 14% for disposals made on or after 6 April 2025, and from 14% to 18% for disposals made on or after 6 April 2026.

Many taxpayers have been racing to exchange contracts before Budget Day and HMRC is aware of this as it is noted in the Budget press releases that the change in rates are accompanied by forestalling rules to apply to: unconditional but uncompleted contracts before 30 October 2024, and for Business Asset Disposal Relief and Investors’ Relief, where a contract is made from 30 October 2024 to 5 April 2026 and completed from 6 April 2025. In such cases disposals will be subject to the new rates of Capital Gains Tax unless:

  • the parties to the contract can demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in section 28 of the Taxation of Chargeable Gains Act 1992 (this provision provides that the date of disposal of an unconditional contract is the date of exchange rather than completion)
  • where the parties to the contract are connected, that the contract was entered into for wholly commercial reasons

Where these apply a statement must also be made where the gain exceeds £100,000.

Action point

Taxpayers will need to be able to demonstrate that there was a commercial reason for the exhanged contract.

Carried Interest

An increase in rates from April 2025 and more radical change from April 2026. For further details read our briefing on Carried Interest.

Action Point

Review the terms of any current arrangements and take advice before entering into new arrangements.

Sale to an employee ownership trust (EOT)

There is a total exemption from CGT where a qualifying disposal is made to an EOT.

Before Budget day there were five broad requirements which may have been summarised as follows:

  1. The trading requirement: most easily satisfied by the target company being a trading company
  2. The all-employee benefit requirement: the EOT must provide that all eligible employees/directors are beneficiaries who benefit on the same terms (subject to objective criteria such as time reserved)
  3. The controlling interest requirement: the EOT must hold more than 50% of the ordinary issued share capital, voting and economic rights in the company
  4. The limited participation requirement – any seller (or persons connected with him) who continues to own 5% or more of the shares in the company should not make up 40% or more of the employees/office holders in the company
  5. The no related disposal requirement – the person claiming relief (and persons connected with him) should not have claimed this relief in respect of the target company (or is group companies) in earlier years

Disposals to EOTs have become a standard method of achieving a tax-free exit and to limit perceived abuse various measures have been introduced and these include the following which have effect for disposals on or after 30 October 2024:

  • to ensure that the principle behind (3), the controlling interest, is not subverted by ensuring that the seller cannot indirectly control the company by controlling the EOT
  • to ensure that the EOT is tax compliant by requiring the trustees to be UK tax resident (particularly relevant as there is a CGT charge for the trustees, if the relief is clawed back)
  • to ensure that only the current market value of the company comes within the exemption and not that anticipated future growth in value of the shares: by requiring that the trustees only pay market value for the shares. Although well advised trustees who have wanted to ensure that they were acting within their fiduciary powers would normally have insisted on an independent market value valuation of the shares
  • the clawback increases from one to four years

Action point

For recent purchasers by EOTs it will be prudent to obtain a valuation report if one had not been commissioned.

Loans to participators – close companies

Generally, if a close company makes a loan to a participator (otherwise than in the ordinary course of a banking business) and that loan is left outstanding 9 months after the end of the accounting period in which that loan was made the company has a tax charge of 33.75% of the amount of the loan. A new targeted anti avoidance rule (TAAR) will be introduced to combat the making of short-term repayments to prevent the tax charge becoming due and payable, very shortly followed by a withdrawal of a ‘new’ loan on similar terms (known as ‘bed and breakfasting’).

Action point

Review all loans made by close companies.

SDLT

From 31 October 2024 the Higher Rates for Additional Dwellings (HRAD) surcharge on Stamp Duty Land Tax (SDLT) will be increased by 2 percentage points from 3% to 5%. Assuming that the non-resident SDLT surcharge doesn’t apply, the top rate of SDLT is now 17%. Despite a manifesto commitment to increase it to 3%, it seems that the non-resident surcharge will remain at 2%.

The flat rate of SDLT that is charged on the purchase of dwellings costing more than £500,000 by corporate bodies will also be increased by 2 percentage points from 15% to 17% (for those companies that cannot claim a business use exemption such as renting to independent third parties). If the contract was exchanged before 31 October 2024, then it will be grandfathered and protected from these new rates provided that:

  • there is no variation of the contract, or assignment of rights under the contract, on or after 31 October 2024
  • the transaction is effected in consequence of the exercise on or after that date of any option, right of pre-emption or similar right, or
  • on or after that date, there is an assignment, subsale or other transaction relating to the whole or part of the subject-matter of the contract as a result of which a person other than the purchaser under the contract becomes entitled to call for a conveyance

Action point

Ensure that no pre-31 October 2024 contracts are taken out of the grandfathering provisions.

An update on Carried Interest – Autumn Budget 2024

Close-up of a white magnolia flower in bloom with delicate petals, set against a bright yellow background featuring an abstract orange geometric shape

The headlines

Holders of Carried Interest will be relieved that in the Budget it has been announced that the rate of CGT applying to Carried Interest (as it arises) will increase from 28% to 32% but not immediately; only on or after 6 April 2025. The decision not to impose an even higher rate will have been influenced by the extensive lobbying which has been taking place to persuade the Government that, if that were to be done, private equity managers would move to favourable jurisdictions such as France, Italy and the Middle East.

However, this 32% rate will only remain in place until the Government has implemented a wider reform package in April 2026. The Government had already sought views on how Carried Interest should be taxed and this call for evidence closed on 30 August 2024.

Now a Budget document has been published which sets out Government thinking, and they will be consulting further on this until 31 January 2025.

The new proposal

The proposal is that a revised Carried Interest tax regime will apply which will sit wholly within the income tax (rather than the CGT) regime. Carried Interest will be treated as trading profits, subject to income tax and Class 4 NICs. The amount of “qualifying” Carried Interest (explained further below) subject to tax will be adjusted by applying a 72.5% multiplier.

The tax charge applying under the new Carried Interest regime will be an exclusive charge. Under the existing regime, Carried Interest has been taxed according to the nature of the relevant amount coming up from the underlying fund/ its assets. So, for example, amounts representing interest income would have been taxed as interest income; under the proposed regime all amounts will be taxed as deemed trading income.

IBCI

Income Based Carried Interest (IBCI) is already taxed as income, but the IBCI regime has not applied to employment related securities so employees/ directors who have made what is known as section 431 elections have been able to keep outside the IBCI regime. The Government now proposes that the IBCI rules will be amended so that employment related securities are not excluded from it. This will be a significant change as, previously, the IBCI regime has distinguished between the self- employed and the employed.

Carried Interest within the IBCI regime will not be “qualifying” Carried Interest. The Government is also now going to consult as to what other conditions need to be satisfied to fall within the “qualifying” category. In particular, there may be a minimum co-investment requirement and/ or a minimum time period between a Carried Interest award and receipt. These new conditions to determine whether Carried Interest is “qualifying” will be added to the existing IBCI legislation.

DIMF

The existing Disguised Investment Management Fee (DIMF) rules will remain in place.

Non–residents and Carried Interest

The deemed trade under the revised regime will be treated as carried on in the UK to the extent that the investment management services in relation to which the Carried Interest arose were performed in the UK, and outside the UK to the extent that the investment management services were performed outside the UK. As a result, non-UK residents will be subject to income tax on Carried Interest to the extent that it relates to services performed in the UK (subject to the terms of any applicable double tax agreement). This is the same as the approach in the DIMF rules.

What now?

Draft legislation is going to be published during 2025. In the meantime, we and other interested stakeholders will be working to seek to ensure that the proposals put forward by the Government can be implemented in a way which does not result in those involved in the fund management industry leaving the UK for another jurisdiction which they regard as having more favourable rules.

The Lifecycle of a Business – See you in court…? Employment claims against a company

Meeting of employees

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…

See you in court…? Employment claims against a company

Companies will have disgruntled employees from time to time. Having well drafted contracts, effective policies and procedures and good HR management can often resolve or limit issues, but sometimes employment litigation is inevitable. This article provides a brief introduction to the employment litigation process, but we strongly recommend that you get in touch with your employment legal advisor if litigation is on the cards.

Most employment litigation takes place in the Employment Tribunal and often relates to:

  • Unfair dismissal – where an employee alleges that their dismissal was not for a “fair” reason (being conduct, capability, redundancy, legal reason, some other substantial reason) or that a fair procedure was not followed. In addition, an employee can bring a claim for automatic unfair dismissal where they have been dismissed for one of ten statutory reasons (such as asserting the right to be paid at least the national minimum wage).
  • Constructive dismissal – where an employee alleges that they have been treated so badly they have no option but to resign and treat themselves as having been dismissed.
  • Discrimination – where an employee alleges that they have suffered some form of adverse treatment due to a “protected characteristic” (such as age, sex or race). Discrimination can take several forms, including direct discrimination (such as not being promoted directly because of your protected characteristic), indirect discrimination (where the employer operates a policy or practice which adversely affects a particular group with the same protected characteristic) and harassment (where an employee is bullied or harassed by colleagues because of a protected characteristic).
  • Whistleblowing – where an employee alleges that they have suffered a form of detriment or been dismissed due to raising concerns about their employer’s practices.
  • Monies owed – where an employee alleges that they have not been paid what is due to them (such as salary, notice pay or in respect of annual leave).

Compensation for employment claims varies and often depends on the type of claim and the employee’s salary. Compensation for certain claims (such as unfair dismissal) is capped (at the lower of year’s salary and, currently, £115,115). Other claims, for example, whistleblowing and discrimination are uncapped and compensation awards tend to reflect any injury to feelings and, where the employee has been dismissed, the time it will take for them to find comparable income.

Please note that there are many other types of employment claims which can be brought in the Employment Tribunal. It is also possible for employees to bring certain claims in the county court or high court. These tend to be for breach of contract and can often be valuable – in particular claims in relation to unpaid bonuses.

Who can bring a claim?

Generally speaking, all employees can bring most types of employment claims, however some claims have service length requirements. For example, at the time of writing, only employees with at least two years’ service have the right to bring an unfair dismissal claim. However, the Labour government has committed to changing this and we are awaiting the detail.

Given the current service length requirement, it is a common litigation tactic for employees to allege some form of whistleblowing or discrimination in order get a claim off the ground.

The process

The time limits for bringing a claim in the Employment Tribunal are short and employees typically need to take action within three months of the issue (for example, the alleged poor treatment or dismissal) having occurred.

Before an employee can file a claim in the Employment Tribunal, they need to first follow the ACAS early conciliation process. This provides the parties with an opportunity to see if settlement can be achieved before any claim is filed. If settlement cannot be reached, ACAS will issue the employee with a certificate which allows them to then proceed to file a claim at the Employment Tribunal.

Once a claim is filed and accepted, the employer will be provided with a copy and is required to submit a response within 28 days. It is important that an employer spends time getting its response correct as this is the first opportunity it will have to set out its position. Once the response has been accepted, the Employment Tribunal will look to list a hearing and set out a timetable leading up to it. In essence, this will require the parties to disclose certain documents, agree a bundle of relevant documents to be referred to at the hearing and exchange witness evidence prior to the hearing.

The cost of defending employment litigation can be considerable and, unlike in a court, it is not normal for the losing party to pay the winning party’s costs (so it is unlikely that an employer will recover its legal costs even if it wins). Depending on the nature of the allegations, employers may also need to consider the reputational impact of fighting a claim and attending a hearing which will most likely be in the public domain. On the other hand, depending on the nature of the employer’s business and workforce, taking a stand and fighting against the employment claim could help to avoid setting a precedent that a company will always settle.

Where parties do agree a settlement prior to a hearing, this can be documented by way of an ACAS COT3 agreement or a settlement agreement, normally depending on whether the employee is legally represented or not.

Disclaimer

This note reflects the law as at 6 September 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

The Lifecycle of a Business – Employee grievances

Employees listening to talk

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…

Employee Grievances

It is fair to say that not everything in business is smooth sailing, especially when it comes to staff. Dealing with staff grievances properly is important to help minimise workplace conflicts and improve employee relations.

Keep reading if you want to find out:

  • what could trigger a grievance
  • why having a grievance procedure is important
  • our top tips for getting the grievance procedure right.

What is a grievance?

An employee could have a grievance (i.e., a complaint) for many reasons. Common grievances that we come across include:

  • how an employee has been treated by another – this could be as a result of a series of events or an isolated incident
  • working conditions relating to hours and/or pay
  • how an employee has been managed by their line manager
  • the nature of an employee’s work – this could be because they are given work they were not hired to do, or they are being given too much or not enough.

By raising a grievance, an employee forces an employer to investigate the issue with a view to resolving the matter fairly and promptly.

Employees are generally expected to try and deal with concerns informally first of all, and many matters can often be ‘nipped in the bud’ by discussion with an employee’s line manager. Where concerns cannot be resolved informally, an employee has the right to submit a formal grievance in accordance with his or her employer’s grievance procedure.

The importance of a grievance procedure

Employers are required by law to have a written grievance procedure in place. Such a procedure will typically include the following stages:

  • submitting a grievance in writing
  • conducting a hearing (so that the employee can explain the detail of their complaint)
  • investigating the issue(s) at hand
  • delivering a written outcome and implementing any recommendations
  • giving the employee the right of appeal.

Grievance procedures should adhere to the ACAS code of practice for disciplinary and grievance procedures, which helps ensure that employers act appropriately.

Failure to follow a fair process can land an employer in hot water. Not dealing with a grievance properly could be a breach of the implied contractual duty of trust and fidelity and generally increase the chances of things ending up in the employment tribunal; in certain circumstances where the principles of the ACAS Code has not been applied, any compensatory award given to the employee could be subject to a 25% uplift.

Handling a grievance effectively

Below we set out our top tips to getting the grievance process right:

  • Consider the appropriate people to be involved and ensure decision makers are impartial. Sometimes engaging external support, such as external legal or HR advisors, will be appropriate.
  • Conduct a reasonable investigation to ensure that all the key facts are established.
  • Try to deal with issues promptly and have regard to any timescales set out in the grievance procedure.
  • Allow employees to be accompanied.
  • When making decisions, act consistently with previous decisions around similar grievances, as appropriate.
  • Keep the employee updated, especially if things are taking longer than planned and/or the employee is absent from work.
  • Take steps to keep matters confidential.
  • Take appeals seriously and consider them carefully.

Disclaimer

This note reflects the law as at 27 August 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Navigating the removal of the Bankers Bonus cap: A fine line for banks to tread

Bank Vault

The removal of the bonus cap last October 2023 marks a significant shift in the UK banking sector, presenting both opportunities and challenges for banks as employers. This policy change is poised to enhance London’s competitiveness on the global stage, aligning remuneration packages with those offered in major financial hubs such as New York and Tokyo. However, it also brings a host of employment law considerations that banks must navigate carefully.

Barclays was the first UK bank to axe the bonus cap, following the lead taken earlier this year by Goldman Sachs, JP Morgan and most recently Citi, with more UK banks expected to follow suit. In a recent article for The Banker, Head of Employment and Partnerships, Jo Keddie shared some brief insights for the banking sector, warning of the fine line to tread to ensure changes are implemented in a fair and compliant way.

In this article Jo provides a more comprehensive overview of the employment issues banks need to consider when removing the bonus cap, to ensure they don’t get caught out.

Enhancing Competitiveness and Talent Retention

One of the primary benefits of scrapping the bonus cap is the ability to offer more competitive remuneration packages in London and other banking hubs in the UK. We expect that it will help the City attract and retain top talent, as strong performers seek financial recognition for their contributions. With fewer restrictions on bonus amounts, London can now compete more effectively with other global banking centres, potentially drawing business back to the City from other European banking hubs.

The removal of the cap is likely to facilitate greater labour mobility. International banks can now transfer employees to UK-based roles without financial detriment, enhancing the UK’s appeal as a destination for top banking talent. Importantly, safeguards such as variable pay with deferral, malus, and clawback provisions remain in place to mitigate excessive risk-taking as the new changes come into effect across a growing number of banks in the UK.

How to fairly adjust remuneration packages

Historically, banks responded to the cap by raising base pay levels and introducing role-based allowances. With the cap’s removal, banks face the challenge of adjusting remuneration policies to allow for increased bonuses on top of already high salaries. This may involve phasing out role-based allowances in favour of a more flexible pay structure.

With these changes comes the potential for an increase in discrimination claims as employees. With “star performers” pressing for significantly increased bonuses, there is inevitably going to be others at various levels who have felt undervalued also pressing for larger bonuses and using the changes to secure better overall packages. When facing these pressures, banks are at risk of creating a two-tier workforce, with disparities between new hires and existing employees potentially leading to disharmony and resentment.

Contractual and Legal Considerations

Reducing fixed salaries to accommodate higher bonuses presents contractual and legal challenges. Banks must consult employees and ensure that the overall package is attractive to gain consent for pay reductions. Imposing changes without consent could lead to breach of contract and constructive dismissal claims.
To avoid contract claims, banks must ensure that discretionary bonus decisions are lawful, rational, and consistent. Building mechanisms into bonus policies that assess factors and KPIs rationally and reasonably is crucial. Failure to do so could result in costly and reputationally damaging claims.

Moving forward, bankers will be closely scrutinising how any discretionary elements (as opposed to more formulaic criteria) is being exercised in respect of their annual bonus. The case law we regularly relied on when examining the exercise of discretion, may well be revisited when determining whether discretion has been exercised reasonably with regard to all the circumstances or whether, instead, it was perverse and cannot be justified.

Failure to build in mechanisms to minimise these risks could well result in contract claims that are likely, due to the size of the claim, to be tested in the High Court. This inevitably is reputationally damaging, costly and is not a good use of management time. From experience, it also causes friction and morale issues internally amongst the affected workforce.

Addressing Discrimination and Equal Pay

Ensuring fairness in bonus distribution is crucial to avoid discrimination claims. Banks must justify any discrepancies in bonuses and ensure that changes to pay structures are not discriminatory. Historically, gender pay gaps in bonuses have been larger than in fixed pay, necessitating careful consideration of any changes to remuneration ratios.

Discrimination claims could arise if changes to remuneration and bonuses are perceived to be linked to protected characteristics such as age, sex, race, or religion. Such claims would be heard in Employment Tribunals, where substantial compensation and injury to feelings awards can be granted.

Trying to get the bonus ratios “right” for the different roles across banks will be important as will the need to try and justify different bonuses for different roles. For example, banks could set different ratios for different categories of employee and should then apply those ratios “equally” i.e. fairly to their employees doing the same work regardless of sex or other characteristics.

Reputational Risks

Mishandling the removal of the bonus cap could lead to reputational damage and costly claims. Banks must tread carefully, offering competitive bonus structures while ensuring fairness and legal compliance. Internal processes such as grievances should be followed to address perceived unfairness and imbalance. Remuneration policies must be carefully drafted and approved to maintain a competitive edge.

Conclusion

The removal of the bonus cap presents significant opportunities for the UK banking sector to enhance competitiveness and attract top talent. However, banks must navigate a complex landscape of employment law to implement these changes effectively. By ensuring fairness, legal compliance, and careful consideration of employee concerns, banks can successfully transition to a more flexible and competitive remuneration structure.

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Building Blocks of Tax – Elizabeth Small writes for Taxation

In an article for Taxation Magazine, Corporate Tax Partner, Elizabeth Small considers the recent Supreme Court decision in Centrica Overseas Holdings Ltd v HMRC [2024] UKSC 25.

Centrica (the company which owns British Gas) argued that the fees charged by its professional advisors on the sale of one of its assets was a management expense and should be deemed to be a revenue expense and therefore deductible from their corporation tax bill. The Supreme Court unanimously dismissed Centrica’s appeal and held that the expenditure was capital in nature and could not be deducted.

In the article, Elizabeth looks at the facts of the case and discusses why being able to differentiate between capital and revenue expenditure is a fundamental part of the UK tax and in this case, a holding investment company’s ability to deduct deal fees. With reference to the Supreme Court judgement the article considers the three legal tests which help determine whether something is revenue or capital in nature and sets out the principles which the court applied to reach its decision, and how early in the process the advisory fees may become costs of disposal.

Read the full article here.

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From Start-up to Exit: the Acqui-Hire

Employees listening to talk

As an entrepreneur an exit may seem a long way away when first assembling your team, but if you get that really right, you may find yourself receiving offers from buyers that would like your team for themselves. In a nutshell, that’s an acqui-hire: an acquisition which is aimed at obtaining a team.

It is otherwise a relatively loose term, and it can take different forms such as:

  1. An acquisition of the corporate entity. However, larger acquisitive corporates may well not want to buy an unknown corporate and bring it into their group, particularly if they only want certain assets and don’t want to pick up liabilities.
  2. An asset acquisition, perhaps where some IP that has been created is to be acquired alongside the team.
  3. A simple payment to release the team from terms such as non-competes, and to waive any possible claims the seller may have against the buyer, perhaps with an IP licence to prevent claims in the future that the buyer is misusing the seller’s IP.

Acqui-hires usually happen relatively early in the growth trajectory of a business (possibly during a distressed time too), but they aren’t necessarily straightforward. For example, some of the key points that start-up teams faced with the option should be considering are:

  1. What will happen to the company afterwards (assuming the corporate is not acquired)? Is it to be wound down? And if so, how long will that take? Or will there be a retained and continuing business? Linked with this, careful thought needs to be given as to what the deal means to creditors.
  2. How is the price to be structured? The buyer will want to retain the people it’s acquiring, so may seek to defer some value and link it to retention. You’ll need to think through what happens if the buyer, for example, terminates without cause.
  3. What will the price mean for any investors? For those operating in the digital assets space, this may also include people who invested for tokens.
  4. The employment proposition for those moving over. Again, it’s likely that the buyer will seek to include deferred incentives, such as options, as part of the package. In addition, visa/immigration considerations may need to be considered, depending on the circumstances.
  5. The tax treatment of the proposed deal structure. This will depend on many factors so taking early advice is crucial in order to maximise deal value.

So, if you’re being talked to about an acqui-hire, there’s a fair bit to consider, but at the very least it demonstrates what a great team you have.

Disclaimer

This note reflects the law as at 24 July 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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The impact of the new Labour Government’s “Day One” rights – Jo Keddie’s views featured in The Lawyer

Employee demonstrating

Head of Employment at Forsters, Jo Keddie, shared her views on the most significant changes that UK employers are going to have to grapple with. Interviewed for The Lawyer’s Election Special podcast, Jo discussed:

  • Individual Rights from Day 1
  • Probationary and Hiring Going forwards
  • The right to disconnect

“Giving all workers more rights from day one will be a significant shift for employers, as is Labour’s plan to do away with the two-year minimum period for bringing an unfair dismissal claim.

We expect this will result in far more litigation in the Employment Tribunal, which is already overworked with cases taking well over a year to be heard, as well as far more focus by employers on recruitment policies and dismissal strategies.

Indeed, the first impact of a Labour government may be a spike in dismissals as the employers look to remove any employees with less than two years’ service where there is any doubt over their long-term future.”

Jo’s insights were also published in The Lawyer’s 2024 election live reaction blog and Law.com’s article ‘Prime Minister Starmer: How Labour Policies Could Disrupt Law Firm LLP’s’.

For further details on the new Labour Government’s 5 key employment law changes, read the Employment team’s article here.

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The new Labour Government: 5 key employment law changes

Employment Meeting

The election is now finally over and the UK has woken up to a new Labour Government. In its campaign, the new Government made it clear that its “New Deal for Working People” would be an integral part of its future plans, suggesting new employment legislation would be introduced within 100 days.

Given the impact of these changes, we provide a summary of the 5 key employment law changes which we believe employers should be aware of. As always, the devil will be in the detail, and some of these proposals may change over time, but one thing is certain: we will all be kept very busy focussing on how best to address and implement these proposals between now and the Autumn!


1. Basic Individual Rights from Day 1

This is the new Government’s most significant change. Briefly:

  • The Government have committed to granting all workers with important rights from the first day of their employment in relation to unfair dismissal, parental leave and sick pay. Currently, these rights are typically subject to minimum service requirements.
  • By far the most significant of these proposals is in respect of unfair dismissal, where the Government has committed to removing the 2-year minimum service requirement for bringing a claim (where compensation is capped at the lower of £115,115 or 1 year’s pay).
  • A requirement of qualifying service has been part of the law of unfair dismissal since it was introduced with the Industrial Relations Act 1971. At the time, the requirement was also two years and, although the threshold has since varied, it has never been less than six months.
  • We foresee that, in the next few weeks and months, employers might consider quick dismissals before the new rules comes into effect – e.g., removing employees where there is any doubt over their long-term future. Currently, it is easier and less expensive to remove employees who have less than 2 years’ service.

2. Probationary Periods and Hiring Going Forwards

  • The Government has also referred to the need for “probationary periods with fair and transparent rules and processes”. We envisage a maximum length for these being set (to avoid employers extending probationary periods beyond unreasonable limits) and rules requiring employers to follow dismissal procedures when letting staff go and prohibiting them from dismissing employees without justifiable reasons or cause.
  • In practice, employers will likely need to upgrade and fine-tune their recruitment policies and processes to ensure that:
    • they are compliant and reduce the risk of unfair dismissal claims by their new recruits; and
    • any risks are mitigated by hiring the right people in the first place. We expect to see more careful screening by employers, more investment in psychometric or other testing to ensure a potential candidate is a good fit for the role, and far more rigour and time spent in continuous assessment of new hires during the first few months of their employment.
  • Going forwards, there will need to be more formal monitoring and feedback sessions during an employee’s probationary period, and these should be properly documented. Management will need to be focussed on areas of underperformance and conduct issues and not shy away from these matters, to ensure that any later decision to dismiss can be properly justified.

3. The Right to Disconnect

  • The New Deal states that a new “right to switch off” would provide workers with the right to disconnect from work outside of working hours and not be contacted by their employer.
  • Whilst similar concepts already exist in some other European countries (like Belgium and Ireland), it will be new to the UK so it will be interesting to see how it is adopted, given the UK’s more 24/7 culture.
  • The Government has said that employers and workers will have the opportunity to agree bespoke workplace policies or contractual terms, suggesting that the right would not be absolute. We suspect that future guidance or a Code of Practice may emerge in the coming months; in any event, employers will likely need be creative in this regard and consider practical measures such as training to respect out of hours emails, calls and cover arrangements.
  • It is likely that any ‘disconnect’ proposals which employers consider will need to be considered against other well-being initiative and existing policies, such as those relating to flexible working and leave.

4. Zero hours contracts

  • The Government has suggested it will introduce new rules designed to prevent the abuse of zero hours contracts. Initially this was thought to be an outright ban on zero hours contracts, but the Labour Party’s position has subsequently softened.
  • Instead, we understand that employers will be allowed to continue to use zero hours contracts provided they are not “abused” or exploitative (for example, where an employer does not guarantee any work, but the worker is obliged to be available for any work that is offered).
  • A new law is planned to set out the minimum standards expected, and there would be a new right to a contract that reflects hours that are regularly worked (as judged against a 12-week reference period).
  • Employers will need to review their use of zero-hour contracts to ensure that they comply with the new rules.

5. Fire and Re-hire

  • The current Government has introduced a new statutory ACAS Code of Practice on Dismissal and Re-Engagement, which is due to go into effect imminently, on 18 July 2024. Unreasonable failure to comply with this risks a Tribunal award against an employer being increased by 25%. Where this relates to a failure to meet collective consultation obligations, the potential liability could be considerable.
  • The new Labour Government appears poised to go a step further and has suggested that it will end the practice of “fire and rehire” as a lawful way to change an employee’s contractual terms and introduce a new “strengthened” code of practice.
  • Potential areas for change on fire and rehire include:
    • improving information and consultation procedures; and
    • adapting unfair dismissal and redundancy legislation to prevent workers being dismissed for failing to agree to a worse contract.
  • Whilst “fire and rehire” practices have been under scrutiny in recent times, they can, where used reasonably and with proper consultation, be a helpful tool for employers to implement necessary changes. It will be vital to ensure any future exercises comply with the new rules and anticipated code of practice.

Please do get in touch with our Employment Team if you’d like to discuss how any of these Labour proposals will impact your organisation and how best to plan for these changes.

Jo Keddie
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Jo Keddie

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The Lifecycle of a Business – Endeavours clauses

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, such as, set up, directors, funding, employment and shareholder-related matters, but now let’s concentrate on Commercial Contracts.

Endeavours clauses

An endeavours clause is a provision in a contract that requires a party to use a certain level of effort to try and achieve a specified result. These clauses are commonly used when a party is willing to attempt to fulfil an obligation without committing to do so absolutely. There are several “levels” of endeavours clauses, each of which require different amounts of effort, such that it can be unclear as to how far a party must go to try and meet the obligation.

Failure to fulfil an enforceable endeavours clause constitutes a breach of contract, which can have various repercussions, including your being liable to pay damages to the other party and termination. As such, it is crucial that you have a clear understanding of the scope of any endeavours clause before agreeing to it.

Levels of endeavours clauses

There are three “standard” endeavours clauses (“best endeavours”, “reasonable endeavours” and “all reasonable endeavours”). For two of these, case law has resulted in a fairly clear understanding of what will be required from the endeavouring party (the obligor). Accordingly, the extent of a party’s obligations will depend on the agreed wording of the clause.

Best endeavours

A best endeavours clause (for example, “The Company shall use best endeavours to deliver the Goods to the Buyer within the timescales set out in clause 9”) imposes the most onerous standard on the obligor.

Whilst not an absolute obligation, the starting point is that a best endeavours clause “means what the words say; they do not mean second-best endeavours” (Sheffield District Railway Co v Great Central Railway Co).

Essentially, the obligor must put itself in the shoes of the person to whom the obligation is owed (the obligee). Therefore, by agreeing to a best endeavours clause you commit to doing everything possible to achieve the desired result, even if it means sacrificing your own commercial interests and incurring significant costs. For example, in a case between Jet2.com and Blackpool Airport, the Court of Appeal held that the airport was obliged to open outside of its usual operating hours to accommodate Jet2’s flight times. By agreeing to use best endeavours to promote the budget airline’s flights, the airport had inadvertently agreed to open during night-time hours, regardless of the inconvenience and financial cost involved.

If you are the obligor, we recommend that you take legal advice before agreeing to use “best endeavours” but, at the very least, you should think extremely carefully about the steps that such a clause will require you to take (and the cost and practicalities of these).

Reasonable endeavours

“Reasonable endeavours” (for example, “The Purchaser shall use reasonable endeavours to obtain the necessary approvals, consents and licences by 20 April 2024”) is the least burdensome of the three standard clauses, but even so, it should not be agreed to lightly.

Case law has determined that the standard imposed by a requirement to use “reasonable endeavours” is a question of “what would a reasonable and prudent person acting properly in their own commercial interest… have done to try” to achieve the objective (Minerva (Wandsworth) Ltd v Greenland Ram (London) Ltd). This implies an objective approach based on the reasonable obligor, not the obligee as is the case for “best endeavours”.

The courts have considered the obligations behind a “reasonable endeavours” clause in minute detail. Crucially, the obligor is not typically required to sacrifice its own commercial interests and may be entitled to consider the impact on its profitability. In addition, the likelihood of achieving the desired result should be considered and once the obligor has taken all reasonable steps to achieve the objective, it is not required to continue trying.

Although less demanding than a “best endeavours” clause, this obligation is still significant and will form an enforceable commitment that may be challenging to meet. In particular, any attempt to manipulate circumstances to avoid fulfilling the obligation will likely constitute a breach.

All reasonable endeavours

The third commonly used endeavours clause is “all reasonable endeavours” (for example, “The Contractor shall use all reasonable endeavours to complete the Project by the Long Stop Date”). Whilst such clauses are commonly seen as a compromise between best and reasonable endeavours, this is not necessarily the case, and their meaning is controversial.

The courts have indicated, without deciding the point, that it is “probably a middle position somewhere between” reasonable endeavours and best endeavours. However, it has also been suggested that in meeting an all reasonable endeavours obligation, an obligor would be required to take all reasonable courses of action, thereby sacrificing its own commercial interests to comply with the obligation.

The current stance is that a court will interpret it based on the context of the contract and the parties involved. This obviously results in uncertainty as to what an obligor will actually be required to do in practice to comply with such a clause. As such, obligors should be cautious when agreeing to an all reasonable endeavours clause; it would be prudent to consider such a clause to be equally as burdensome as a best endeavours clause and to take legal advice before agreeing to such wording.

Alternative options

Over time, variations of the three most commonly used endeavours clauses have come into being. You may see phrases such as “commercially reasonable endeavours” and “all reasonable but commercially prudent endeavours”, which are used to try and soften a reasonable endeavours obligation. However, case law on these terms is inconclusive, making it unclear how the courts might differentiate between them. Consequently, including such clauses in a contract is risky and may result in uncertainty regarding the parties’ obligations. As such, it is advisable to avoid using these variations.

It is also relatively common to see terms such as “best efforts” instead of “best endeavours” and “all reasonable steps” instead of “all reasonable endeavours”. Although the courts are likely to treat these as interchangeable phrases, we suggest sticking to the tried and tested “endeavours” wording.

Practical takeaways

  • Ideally, any endeavours clause should clearly outline the steps a party must take to fulfil its obligations. For example, if one party needs to spend money to achieve the result, the contract should specify this and include the maximum amount to be spent. Similarly, if a party is required to speak to certain people within a set timeframe, the contract should list who these people are, what needs to be discussed and include a deadline for the discussions
  • Draft any endeavours clauses very carefully and seek legal advice if you are unsure about the requirements and the extent of your obligations. Failing to meet an endeavours clause may result in your being in breach of contract
  • Limit yourself to “reasonable endeavours” or “best endeavours”. Avoid using vague or diluted language as it can create uncertainty and, if the matter goes to court, you might discover that your obligations are more burdensome than you had anticipated
  • If you are the obligor, maintain an accurate record of the steps taken towards satisfying your obligations. Such evidence could be extremely helpful to you if a dispute arises

Disclaimer

This note reflects the law as at 14 June 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Josh Baxter
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Josh Baxter

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The Lifecycle of a Business – Talking Non-Disclosure Agreements

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, such as, set up, directors, funding, employment and shareholder-related matters, but now let’s concentrate on Commercial Contracts.

Talking Non-Disclosure Agreements

The use of confidentiality or non-disclosure agreements (an NDA) has come under press scrutiny over recent months, largely because of their abuse in relation to sexual harassment cases. Their use in the commercial and corporate world is, thankfully, far less sinister, but it is nonetheless important to understand how NDAs operate, when you might be asked to sign one and what you should look out for before signing one.

Why have an NDA?

In the corporate/commercial context, parties to a prospective transaction or commercial arrangement may need to disclose commercially sensitive business information to one another for the purposes of evaluating whether to enter into the transaction/arrangement. For example, a prospective investor who is considering providing funds to a tech company may insist on seeing ‘proof of concept’ or reviewing other competitive information prior to agreeing to invest. The tech company would of course be looking to protect itself against the prospective investor running off with its billion-pound idea. In a commercial scenario, a service contract will in all likelihood contain confidentiality provisions, but during the contract negotiations, a SaaS provider, for example, may need details about the prospective customer’s technical infrastructure or business processes in order to be able to tailor its service or evaluate whether it can in fact provide the service. In such a situation, it would be highly advisable for the prospective customer to seek the protection of an NDA.

An NDA aims to provide a level of protection for the party disclosing the confidential information (the Discloser) who is at risk of the information being:

  • used on an unauthorised basis;
  • misused to obtain a commercial advantage; or
  • accessed by unauthorised parties due to a failure to protect it.

At what stage is an NDA required?

A Discloser should ideally ensure that the party receiving the confidential information (the Recipient) is bound by adequate confidentiality obligations prior to its disclosing the sensitive information. Although making a disclosure prior to such obligations being in place is not necessarily fatal from a protection point of view, an NDA executed after a disclosure has already been made will need to expressly apply to any such disclosures; this could require jumping through some additional contract law hoops relating to ‘consideration’ and so should be avoided if at all possible.

What should an NDA include?

The structure and level of detail included in an NDA are generally driven by the type and sensitivity of information being disclosed (e.g. trade secrets or sensitive personal data), the reason for the disclosure, the identity of the Recipient (e.g. is it a large company with multiple employees and advisors or a single individual?), the Recipient’s standing in the market (e.g. is it a potential competitor of the Discloser?) and the timing of the exchange of information.

Some NDAs may be structured as full form agreements whereas others might take the form of a shorter form letter agreement but either way, the NDA should deal with the following elements:

What is classified as “confidential information”?

A Discloser is likely to prefer a broad, catch-all definition which identifies illustrative categories of confidential information, rather than an exhaustive or more precise definition which could result in loopholes.

However, information will not necessarily be deemed to be “confidential information” simply because it is defined as such in the NDA and attempting to capture non-sensitive information may result in the courts ruling that the NDA is unenforceable. The information in question must be worthy of some protection, for example because the Discloser may suffer damage if the information were to become commercially available to its competitors.

The parties will also need to clarify what is excluded from the definition. This will usually include information already in the public domain or developed independently by the Recipient.

What is the term or duration of the NDA?

This will depend on the particular transaction, but an NDA may endure indefinitely, for a specific term or it could terminate upon the occurrence of a particular event (such as completion of the Recipient’s acquisition of the Discloser’s company).

An indefinite term shouldn’t be included as a matter of course; the sensitivity of most confidential information will decrease over a period of time and in such a case, the courts may deem an ever-lasting NDA to be unreasonable. The parties should instead consider what would be a reasonable term in the context of their transaction/arrangement, taking into account the type of information, how long it is likely to retain its commercial significance and any security measures that the Discloser requires to be put in place.

How may the confidential information be used?

An NDA will likely detail the purpose for which the confidential information may be used, for example in the Recipient’s evaluation of a transaction.

It is also likely to include certain other circumstances when disclosure of the confidential information will not be deemed a breach of the NDA. For example, a Recipient should be permitted to disclose the confidential information if ordered to do so by a court or regulatory authority.

The Recipient’s treatment of the confidential information?

A Discloser may require the Recipient to implement certain security measures to safeguard the confidential information, which could include record-keeping obligations, protective software, restrictions on the number of physical copies that may be made and so on. The parties should try to strike a balance between the sensitivity of the information, the term of the NDA and the security measures the Recipient is required to implement, as it may be too onerous for the Recipient to be obliged to maintain costly security measures in respect of information that isn’t particularly sensitive.

The NDA may also provide that the Recipient must return or destroy the confidential information upon request by the Discloser or upon termination of the NDA. Again, the parties will need to strike a balance as the Discloser may want this requirement to be unconditional, whereas the Recipient may have a legitimate need to retain the information in case it is required to disclose it to a regulatory or other authority, or it may be impractical to destroy the information or guarantee to erase every last piece of data from all of its systems which may be stored on historic encrypted back-ups.

Consideration should be given to the treatment of information which the Recipient creates itself, but which derives from the disclosed confidential information, such as internal reports, notes, analyses and so on. This is likely to be a particular issue where the Discloser and Recipient operate within similar industries or even compete with one another. In the context of acquisition discussions which break down, the Discloser will want to ensure that these derivative materials are destroyed, lest they be used by the Recipient to develop a similar product or otherwise compete against the Discloser.

What are the remedies for breach?

When an NDA is breached, the Discloser faces the challenging task of proving the loss incurred, often complicated by questions of remoteness, foreseeability and mitigation. To address these challenges and ensure adequate protection, NDAs may include various remedies. For example, liquidated damages provisions set predetermined amounts which are payable upon breach. While, on the plus side, this enables complex evidentiary issues to be bypassed, the Discloser should take care that the agreed amount is not disproportionate to its legitimate interest, otherwise a court may rule that it is an unenforceable penalty.

Additionally, NDAs often expressly reserve the right for the Discloser to pursue equitable remedies, such as an injunction to stop the breach. In reality, it is these types of remedies which a Discloser is likely to want to pursue to prevent the confidential information from being circulated more widely, although once a breach has occurred, the damage has often already been done.

Restrictive covenants

Sometimes the Discloser requires an added layer of protection in the form of restrictive covenants to prevent, for example, the Recipient from soliciting the Discloser’s customers, employees and suppliers, particularly if they are an existing or potential competitor.

Health warning

In the main, Recipients have no intention of acting dishonourably, understand the need to enter into an NDA and are happy to comply with their confidentiality obligations. However, it is important to bear in mind that while NDAs serve as important legal tools in focusing the parties’ minds and deterring breaches through the threat of legal consequences, they are not absolute barriers against the unauthorised use or disclosure of confidential information and cannot physically prevent a determined Recipient from misappropriating your sensitive data.

Enforcement relies on the ability to detect the breach and pursue prompt legal action using the remedies provided for in the NDA. As such, it is recommended to seek legal advice to ensure that your NDA is tailored for your transaction/arrangement and includes remedies relevant to your particular circumstances, while also using those tried and tested terms that the courts have ruminated over time and time again. Using such terms helps to create certainty between the parties and their legal advisors as to what is meant by the provisions and also assists the courts, in the event of a dispute, to correctly interpret the terms of the NDA and make an appropriate order.

If you have any queries about the above or wish to discuss your NDA requirements in more detail, please get in touch with your usual Forsters’ contact or any member of the Forsters’ Corporate team.

Disclaimer

This note reflects the law as at 24 May 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

The Lifecycle of a Business – Commercial Contracts: Key Features

Meeting of employees

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, such as, set up, directors, funding, employment and shareholder-related matters, but now let’s concentrate on Commercial Contracts.

Commercial Contracts: Key Features

The principal purpose of a commercial contract is to set out the terms which have been agreed between the parties. Some of the terms may vary depending on the legal framework of the contract (for example, whether it’s a B2B (business-to-business) or B2C (business-to-consumer) contract), while others may depend on the type of contract in question (for example, whether it is a supply contract, a distribution agreement or some other type). Certain terms may be subject to negotiation between the parties, whereas some terms may be agreed extremely easily. What is important is that the parties completely understand exactly what they are agreeing and that the contract clearly sets out the terms agreed. This can reduce the risk of disagreement, and (potentially) costly litigation, at a later date.

In this article, we take a brief look at some of the key commercial terms. (Note that the legal requirements to create an enforceable contract are not discussed).

1. Consideration

This is the price payable for the goods or services. It can be calculated in a number of different ways, for example, a cost per item, payment per month, a percentage of turnover or by reference to other parameters.

If a price needs to be calculated, the calculation mechanism should be clearly expressed in a way that can be easily worked out. Including a worked example, which has been agreed between the parties, may be advisable where a particularly complex pricing mechanism applies. In such a situation, we strongly advise speaking to your legal advisors who will be able to assist you in the drafting of such provisions.

There may be different components which are either included or excluded from the price (for example, delivery costs, certain maintenance services, upgrades and so on) and it is important to ensure that the contract accurately reflects these. Separately, there is the issue of VAT; generally, if a contract is silent on VAT, a stated price is deemed to be inclusive of VAT.

The timing of any payment should also be considered and set out.

2. Services

The obligations of each of the parties to the contract and the services to be delivered will need to be agreed and included. These can be extremely detailed and lengthy and, in such a case, they may be included as a schedule to the contract.

The obligations on a party can vary by degree, from absolute obligations that must be carried out, through to a party agreeing to try to carry out certain obligations by agreeing to use “reasonable endeavours” to do so (for more information about “endeavours” clauses, please see here). In some cases, a party may have a discretion as to how and when it must meet an obligation.

The parties should think about the level of obligation agreed and the consequences of any breach. For example, where the breach is particularly serious or the obligation is so important that a breach would render the contract pointless, the non-defaulting party may want the ability to be able to terminate the contract immediately. In other cases, a refund of part of the fee, the provision of an alternative option or the remedying of the breach at no cost to the non-defaulting party may be sufficient.

3. Term

The term is the time period for which the contract applies. Contracts can be for a fixed term (for example, 12 months following which the contract will automatically terminate) or a rolling term (for example, an initial 12-month term which automatically renews for successive 12-month terms until one of the parties actually terminates the contract) or both(!) depending on the nature of the contract.

Where parties are entering into a new contractual relationship, for example, a new supply contract, it may be advisable to initially agree a short fixed term, thereby limiting the risks inherent in a new relationship. Conversely, there may be certain contracts that require consistency and continuity and so a longer term may be preferable.

4. Termination

Contracts can provide expressly for circumstances in which the parties can terminate a contract. These may apply in addition to, or to the exclusion of, any other rights of termination that arise in law.

The parties should carefully consider and agree the circumstances in which a party can terminate the agreement. Common provisions include termination for breach, if a party suffers insolvency or where there is no cause but reasonable notice is given (the length of the notice period is often set out in the contract).

There may be circumstances in which certain actions are needed to be carried out on termination of the contract or shortly thereafter. These could include, for example, having to provide final accounts, a handover process, being obliged to return certain information, etc., and any such requirements should be clearly set out in the contract.

Termination of a contract may not necessarily terminate every provision in the agreement; there may be certain clauses that the parties intend to continue even though the contract has otherwise terminated (for example, limitation of liability clauses, confidentiality provisions and restrictive covenants).

5. Indemnities

This is an agreement by one party to “make whole” another party in respect of any loss that other party suffers, either in specific circumstances under the contract or generally.

A party should consider carefully whether it wishes to give an indemnity and the consequences of the same. If an indemnity is to be included, the parties need to ensure that the wording accurately reflects what is agreed between them and the party providing the indemnity may want to include certain safeguards, such as financial caps, and ensure that the provision is tightly drafted.

6. Limitations on liability

Most contracts will contain provisions that seek to exclude or limit a party’s liability under the agreement, such as stating that a party’s liability shall not exceed a total sum of £x, specifying the type of claims a party can (and cannot) make, setting time limits within which claims can be made and so on.

These clauses are often heavily negotiated as the parties are on opposing sides of the discussion and the result will go to the level of financial protection that each party will have during the contract term.

Wider considerations are also likely to come into play as such provisions are often subject to other legal controls. For example, the exclusion of liability for certain losses may be prohibited by law or a limitation clause could be void if a court considers it to be unreasonable.

Ultimately, the terms of a contract will vary from contract to contract and the emphasis will be different depending on the substance of the commercial agreement. Taking legal advice when drafting such contracts or putting in place a template contract or set of terms and conditions is recommended and will ensure that the key terms are covered, are drafted clearly and correctly and that any “legal” issues are dealt with.

If you have any queries about the above or wish to discuss your commercial contracts or any part of them in more detail, please get in touch with your usual Forsters’ contact or any member of the Forsters’ Corporate team.

Disclaimer

This note reflects the law as at 16 May 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Naomi Trinh
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Naomi Trinh

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The Lifecycle of a Business – An Introduction to Incentive Arrangements and their Associated Tax Treatment

Working on laptop

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, such as, set up, directors, funding and shareholder-related matters, but now let’s concentrate on “Employment: 9 to 5”.

An Introduction to Incentive Arrangements and their Associated Tax Treatment

In this article, we briefly outline some of the common types of share and cash incentives provided to directors/employees, and their associated tax treatment. Such incentives are a great way for businesses to attract and retain talent, ensuring that employees are rewarded in a way which aligns with the interests of a business more generally. In essence, they allow an employee to benefit from the growth in value of a business.

References to employees in this article include directors.

Issue of shares

Employees can be issued shares in a business. This gives an employee real ownership in a business straightaway (rather than an option to buy later), often with certain voting rights and the right to dividends. Such shares can be gifted or purchased by an employee.

Income tax will normally be due from the employee to the extent that the employee pays less than the market value of the shares that are issued to them. However, if the shares are subject to forfeiture provisions which last for no more than five years, a different tax treatment can apply.

A number of elections can also be made which will alter the tax treatment in some circumstances.

Enterprise Management Incentive (EMI) share option scheme

EMI schemes can be a very tax efficient way to incentivise staff, especially where a company has the potential for growth. Under the HMRC approved EMI share option scheme, employees can be granted options over shares (i.e. the right to acquire them at a certain price in the future) having a maximum value (at the date of grant) of £250,000. As with all option plans, the hope is that the value of the shares is worth more than the pre-agreed price at the time they are acquired.

EMI schemes can also include conditionality and time frames; companies can, for example, set performance or length of service milestones which need to be met before EMI options vest.

However, although EMI options benefit from favourable tax treatment, the company in question must be carrying on a “qualifying trade” and so it is not always possible to grant EMI options; for example, the business of owning and operating hotels is not a qualifying trade for EMI purposes.

CSOP share option scheme

Another form of HMRC approved share option scheme is the CSOP, under which an employee can be granted options over shares having a value (at the date of grant) of up to £60,000.

Unlike the EMI scheme, it is not necessary for the company to be carrying on a qualifying trade and, provided that the option is exercised, broadly, no earlier than three years from the time that the option is granted, the employee will not be subject to income tax on either the grant or exercise of the option. (Note that in some situations, it is possible for the option to be exercised earlier, for example, if the company is subject to a successful takeover.) Instead, the employee will be subject to capital gains tax (CGT) on the difference between the price paid on exercise and the market value of the shares when sold. At present CGT is payable at a much lower rate than income tax so this is a significant advantage of exercising a CSOP option.

Since CSOPs must comply with a number of HMRC conditions, it is necessary to ensure that these conditions are, and will continue to be, satisfied. In addition, given that the options have to be granted at a price equal to the current market value of the shares when the option is granted, a CSOP scheme will only act as a successful incentive if the share price increases after the date of grant.

Unapproved share option schemes

As the name suggests, unapproved share option schemes are not approved by HMRC and therefore the drafting of the scheme rules can be flexible. However, although income tax is not payable when the option is granted, on the exercise of the option the employee will be subject to income tax on the difference between the price paid on exercise and the value of the shares at that point.

If the shares are tradeable at the point of exercise (for example, because the exercise is triggered by an exit event such as a takeover) employer and employee national insurance contributions (NICs) will also be due.

Phantom share scheme

Under a phantom share scheme, the employee does not hold shares or a share option, but the economic effect is to track the performance of the shares as if the employee held shares or an option over shares.

Since the employee will only ever receive cash, the proceeds under a phantom share scheme are treated in the same way as other remuneration and so are subject to income tax and to employer’s and employee’s NICs.

Cash bonus scheme

A cash bonus scheme is treated in the same way as if the employee had received a salary and so the amount received under the scheme will be subject to income tax deducted under the PAYE scheme and also to employer’s and employee’s NICs.

What happens when an employee leaves?

With all incentive plans, companies should think about what happens to a participant’s interest once their employment comes to an end. It is important that this is made clear in any scheme documentation to avoid any later dispute. Typically, schemes will have a concept of “good” and “bad” leaver. “Good” leavers are normally those who leave due to no fault of their own (such as ill health or where they have been made redundant) and will often retain some of their interest (subject to any specific HMRC restrictions) – this could be all of it or only that which has vested before their employment ends. “Bad” leavers (such as those whose employment is terminated for cause) will often forfeit all of their entitlements.

If you would like to discuss any of the points raised in this article or incentive arrangements in any more detail, please get in touch with your usual Forsters’ contact or a member of the Forsters’ Corporate Tax team or Employment and Partnerships team.

Disclaimer

This note reflects the law as at 30 April 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice. In particular, incentive arrangements and their tax treatment are complex. This note provides a brief summary of the key points only.

The Economic Crime and Corporate Transparency Act 2023 – an overview

Abstract Real Estate

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) received Royal Assent in October 2023 and aims to reform the law relating to economic crime and corporate transparency. These reforms were begun by the passing of the Economic Crime (Transparency and Enforcement) Act 2022 (ECA), which we have previously written about, but ECCTA goes further and, in some cases, amends the ECA.

As such, ECCTA is a wide-ranging piece of legislation, touching on many areas. Certain parts are already in force, while others require secondary legislation before they can take effect. This overview summarises the key provisions. More detailed notes about specific areas will follow.


Economic Crime Act


Register of Overseas Entities (ROE)

The ROE was established pursuant to the ECA and, broadly, requires the registration of overseas entities which hold UK property and such entities’ beneficial owners. ECCTA will result in several amendments to the current ROE regime. These amends generally close gaps which were left open by the ECA and as a result, ECCTA is an attempt to ensure that the true beneficial owners of UK property are registered, rather than other entities within the corporate structure. Many of the amends are now in force, but in some important cases are subject to transitional provisions that defer their practical effect until after 4 June 2024. Other measures require the drafting of secondary legislation before they can take effect.

The most significant changes expand the scope of who constitutes a registrable beneficial owner (RBO) where trusts are involved in the structure.

For example, ECCTA widens the definition of an RBO so that any corporate trustee in the chain of ownership will need to be registered, regardless of whether it was exempt from registration under the ECA. So, where an overseas entity is owned by a UK company which is then owned by a corporate trustee, the current ROE regime would only require the registration of the UK company as an RBO; however, the new regime will require details of the corporate trustee to be registered as well.

Currently, where UK property is owned by an overseas entity, which is acting as a nominee, the details of the beneficial owners of that nominee entity are required to be registered. ECCTA will close this loophole, such that the true beneficial owners of the property will need to be registered.

Another key change is that overseas entities which have not complied with their ROE updating duties or which have failed to provide additional information requested by the Registrar of Companies will not be able to register title to property at HM Land Registry and so will be prevented from buying or selling UK property until they comply.

Trust information held on the ROE which is currently protected from disclosure except to government and law enforcement is expected to become disclosable on application. Further regulations are needed on this particular change to determine who may bring such an application and on what grounds. Such secondary legislation is expected to be published later this year.

Companies House

ECCTA widens the powers and role of the Registrar of Companies and tightens the information and filing requirements for bodies corporate and limited partnerships.

Prior to ECCTA, Companies House was essentially a repository for certain information which, by law, had to be filed by (mainly) corporate entities. As such, the reliability of the register was restricted by the accuracy of the information provided, with the Registrar of Companies having limited power to query any aspects of this information, correct errors and follow up on inconsistencies. Under the provisions of ECCTA, the Registrar of Companies is better able to question the information provided and even reject it in certain cases.

Other provisions tighten requirements in relation to certain administrative details, such as registered office addresses and company names, some of which are already in effect.

Perhaps the most significant change for the majority of entities will be the requirement to verify the identity of both new and existing directors, members of limited liability partnerships, persons with significant control and certain people connected with limited partnerships. Although not yet in force, this will require such persons to verify their identity with Companies House (probably by scanning in a form of photo ID) and, in the case of directors, will preclude their being appointed until completed.

Currently governed by the Limited Partnerships Act 1907, limited partnerships will find that their information provisions and filing requirements will be quite substantially increased by ECCTA. The new provisions seek to better align these requirements with those in place for bodies corporate and so, for example, comprehensive information about the partners will need to be filed going forward.

The process of filing itself will also be more tightly regulated, with only ID verified persons or Authorised Corporate Service Providers (such as solicitors) permitted to make filings.

Strict penalties will apply for failure to comply, including fines and imprisonment. The person making the filing or causing the filing to be made could also be guilty of a criminal offence if such filings include any false statements.

Corporate criminal liability

Failure to prevent fraud

A new offence, failure to prevent fraud, has been created by ECCTA. This will hold large organisations liable for certain fraud offences which are committed by their associates (being an employee, agent, subsidiary or someone who performs services on the organisation’s behalf) if the organisation benefits from the fraud and does not have reasonable fraud prevention procedures in place. What constitutes “reasonable fraud prevention procedures” has not yet been clarified but we expect governmental guidance to be issued in due course.

The offence applies to “large” organisations only, i.e. those that in the financial year preceding the offence satisfy at least two of the following three conditions:

  1. a turnover of more than £36 million
  2. a balance sheet total of more than £18 million
  3. more than 250 employees.

Corporate groups are caught if they cumulatively satisfy two of these thresholds. Although “smaller” entities are not caught directly by the legislation, we expect that those organisations which do satisfy the thresholds, will require their suppliers and other entities involved with their businesses to evidence that they have the appropriate procedures in place, resulting in the legislation having a wider remit than appears on a literal reading.

An organisation found guilty of the offence could be liable to an unlimited fine and of course, there is likely to be significant reputational damage.

Identification principle changes

Until the coming into force of ECCTA, a body corporate could only be found criminally liable for an offence if the actual offence was committed by an individual who represented the entity’s “directing mind and will”. As organisations have grown in size and management complexity over the last 50 years, this became an increasingly difficult criteria to fulfil, with the end result being that it was usually smaller organisations that were prosecuted.

ECCTA has now amended this area of the law by putting in place a new test whereby an organisation can be found liable if a “senior manager” acting within the scope of their authority commits one of the specified economic crime offences set out in the legislation.

If found guilty, the organisation will be subject to a (potentially unlimited) fine and the individual in question may also be imprisoned.

Cryptoassets

Additional powers have been granted to law enforcement agencies so that they are better able to seize and recover cryptoassets which are either associated with illicit activity or constitute the proceeds of crime.

Money laundering

ECCTA aims to tighten legislation which deals with money laundering by providing law enforcement agencies with new intelligence gathering powers and enabling businesses to share information between themselves more easily for the purposes of preventing, detecting and investigating economic crime.

Strategic lawsuits against public participation (SLAPPs)

SLAPPs, being legal actions essentially intended to harass and intimidate the other side, have become rather a media focus, often being brought against investigative journalists and other writers. ECCTA seeks to provide the defendants of these actions with more rights and protection.

Removal of statutory cap on Solicitors’ Regulation Authority (SRA) financial penalties

The SRA is the body which regulates solicitors in England and Wales. Prior to ECCTA coming into force, the SRA was restrained by a £25,000 cap on any financial penalty it awarded; this cap has now been abolished and no limit applies.

Disclaimer

This note reflects the law as at 22 April 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice. In particular, ECCTA is a lengthy, detailed and complex piece of legislation. This note provides a brief summary of the key provisions only.

Elizabeth Small quoted in The Times on the abolition of Multiple Dwellings Relief

Abstract Real Estate 2

Tax Partner, Elizabeth Small, has been quoted alongside other industry experts in The Times’ Bricks & Mortar on the upcoming proposed abolition of multiple dwellings relief (MDR).

The article ‘Want a house with an annexe?’ delves into what the announcement means for country houses. Since 2011, MDR has made country houses with annexes, cottages and converted outbuildings more appealing and affordable for buyers as it reduced the amount of Stamp Duty Land Tax (“SDLT”) payable.

MDR differs from the usual Stamp Duty Land Tax (“SDLT”) treatment by averaging the SDLT due across the number of properties that are being bought. Therefore, instead of paying tax on the total purchase price, the tax is calculated on the lower average. As SDLT rates increase as the property price rises, MDR can produce a lower SDLT liability. The MDR is subject to a minimum rate of 1% of the purchase price.

But what is considered an additional dwelling? Elizabeth explains that it is generally considered to be “somewhere where the occupant can shelter behind their lockable front door and be able to live in reasonable comfort, so with cooking and separate bathroom facilities and windows”.

The full article can be read here. Behind a paywall.

From 1 June 2024, property transactions that have not completed will no longer qualify for MDR. If you have concerns or further questions on this topic, please contact Elizabeth Small.

Elizabeth Small
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Elizabeth Small

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The Lifecycle of a Business – Getting the most out of recruitment and motivating and retaining valued staff

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, such as, set up, directors, funding and shareholder-related matters, but now let’s concentrate on “Employment: 9 to 5”.

Getting the most out of recruitment and motivating and retaining valued staff

Our recent article talked about the steps that a first-time employer needs to take before they actually employ any staff . We’re now going to think about the next stage.

A plethora of factors is causing employers to step back and evaluate their approach to staffing; factors which have been around for a while but which, cumulatively, are having a significant impact.

First, there was Brexit, which resulted in the net migration out of the UK of a notable portion of the workforce. This was followed by COVID-19, which triggered a seismic shift in working practices, including a move towards home and hybrid working. There has also been the introduction of Gen-Z into the workforce, who have brought with them a fresh mindset and different approach to established working norms. On top of these, economic factors, including higher interest rates and the “cost-of-living-crisis”, have resulted in job applicants requesting more from their remuneration packages. All of these factors have shifted the priorities of the workforce and have changed the demands being placed on employers.

So, how can an employer ensure that they appeal to the right recruits for their business? How can an employer motivate somebody to reach their potential in the business? And how might an employer look to retain valued individuals?

We’ll consider some potential responses to these questions below.

Recruiting for your business: not just a job role

The nature of recruitment has changed steadily over recent years, with the involvement of recruiters becoming increasingly prevalent, as opposed to individuals approaching potential employers directly.

With this “middle-man” approach seemingly becoming the norm, it is important that you (as an employer) know what you are looking for. Are you looking for an individual to fulfil a perfectly sculpted job description? Or, are you looking for an individual who can grow with the business as a long term prospect? The likelihood of finding the best talent will be increased by focusing on the latter.

A high-level job specification and having an awareness of the key competencies is very important, but actually contemplating how the successful recruit will integrate with your existing workforce is paramount. Recruiters not only have on-going relationships with employers, but with candidates as well, and will be very familiar with the candidate’s personality and their fit with your business. Therefore, being able to articulate the personal specifications that you envisage the successful candidate having has become just as important as knowing what their role will entail.

Motivation: getting the best from your workforce

With the labour market becoming fairly volatile, it is particularly important that employers know how to both motivate and retain their workforce to ensure that they stay incentivised to give their time and energy to your business.

When looking to motivate an individual, the key lies in effective two-way communication. Line managers should seek to understand what an individual is seeking to gain from their role: this could include taking on specific types of work or specialist projects, for example. There might be a long term goal that the individual wants to work towards (such as a promotion or qualification), and working towards this together is likely to incentivise the individual to equally invest their time in the company when they appreciate that the company is also investing in their development.

Financial motivation is also a reality. Following the introduction of gender pay reporting and ethnicity pay reporting, there is a growing conversation surrounding pay and remuneration transparency. Although reporting is not a requirement for all businesses, much of the workforce are beginning to look towards, and expect, transparent remuneration structures.

How to keep those motivated individuals working for YOU

Motivation and retention employ similar techniques, but whilst motivation is best seen through a professional lens and can be identified as having a cohesive workforce where everybody is positively achieving their individual professional goals and the goals of the company, retention tends to take a more personal perspective and results in individuals staying at a company long-term.

Retention can result from the “perks” of a job, including a competitive benefits and remuneration package, an inclusive culture and a sustainable work-life balance. Strong remuneration and a benefits package have long been the key ingredients for retention within the job market, but the cultural aspects of a workplace are becoming increasingly significant. For example, in determining what makes a “good employer”, employees now often cite the importance of an employer nurturing diversity and allowing individuals flexibility in their working day, including flexibility of working hours and location.

The younger generation of the workforce are increasingly looking for an environment that nurtures their authentic selves which means that, if an employer is looking to retain their workforce, they would do well to allow the differences amongst their workforce to thrive and be recognised.

Disclaimer

This note reflects the law as at 13 March 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

The Lifecycle of a Business – What to think about as a first-time employer

Employee meeting

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, such as, set up, directors, funding and shareholder-related matters, but now let’s concentrate on “Employment: 9 to 5”.

What to think about as a first-time employer

A key part of any operating business is its workforce. To the untrained eye, becoming an employer appears to happen overnight; one minute there is just a company name, the next it has employees (…and much more!). But “appearances can be deceptive” and there are some non-negotiable foundations to be laid before the first employee walks through the door (or logs on remotely).

In no particular order, the housekeeping matters that you will need to have addressed as a first-time employer are: employer’s liability insurance, immigration considerations, relevant documentation and payroll and pension services.

Employer’s liability insurance

All employers have an obligation to ensure the health and safety of their employees. One way that the law ensures that this obligation is fulfilled is by requiring all employers to take out a valid employer’s liability insurance policy, covering disease and bodily injury of employees in the UK, with minimum cover of £5 million for each potential claim. Failure to have this in place on or before an employee’s first day is a criminal offence, carrying with it fines of up to £2,500 for every day that a valid policy is not in place.

Immigration

Unless an employee has the automatic right to work in the UK (i.e. they are a British or Irish national) or otherwise has a visa allowing them to work, the employee will need to be “sponsored” by their employer in order to have the right to work in the UK. Where this is the case, the employing entity will need a “sponsor licence”. To get this arranged, a comprehensive application needs to be submitted to the Home Office; this can take a few months to process, meaning that some pre-planning will be required in the event a future hire needs to be sponsored.

Documentation

There is a minimum suite of documentation that an employer must provide to new employees. This includes certain mandatory policies (such as disciplinary and grievance procedures), best practice policies (such as those relating to equal opportunities and whistle-blowing), the minimum particulars of employment and data privacy documentation.

The particulars of employment, which must be provided to an employee on or before their first day of employment, set out the bare bones of the employment arrangement, such as the names of the parties, rate of pay, commencement date, place of work, job title and so on. Typically, however, employers will provide more comprehensive contracts of employment which, if well drafted, will include bespoke clauses for the specific employment relationship, including in relation to confidentiality, intellectual property and post-employment restrictive covenants.

Employers process lots of employee and candidate data and they must provide privacy notices to the individuals whose data they will be processing, explaining how and why they will process their personal data.

Payroll and pensions

Last, but absolutely not least, employers must organise all applicable financial processes (and if necessary, appoint a payroll provider to manage the processes on their behalf). This will include setting up an auto-enrolment pension scheme for all eligible employees and making sure that all pay arrangements meet the National Minimum Wage requirements. Employers must also ensure that they are registered with HMRC (which they can do up to four weeks in advance) and that appropriate deductions for income tax and National Insurance contributions are made.

All of this might feel a little daunting, particularly alongside everything else which goes with establishing a business in the UK but, thankfully, the Forsters’ employment team are always at hand to assist and guide new businesses during these early stages…and beyond…

Disclaimer

This note reflects the law as at 6 March 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

The Lifecycle of a Business – How can a company reduce its share capital?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

How can a company reduce its share capital?

Every company limited by shares has a share capital. This is the amount of money paid to the company by its shareholders when they subscribe for their shares and consists of the nominal value of the share plus any share premium. It might total pennies or hundreds of millions of pounds.

In theory, because the shareholders of a company have the protection of limited liability and so cannot be liable for the company’s debts, a company’s share capital is the fund of last resort for its creditors. The company may make distributions of its realised profits to shareholders, but they cannot get their capital back. However, companies have many reasons for wanting to reduce their share capital. These might include:

  1. having too much share capital;
  2. having lost capital, so the share capital no longer represents the company’s assets;
  3. cancelling liabilities on partly paid shares;
  4. creating distributable reserves; or
  5. simplifying corporate structures.

For example, a company might have a substantial share premium account. It might also have significant cash, but also accumulated losses that prevent it from paying a dividend. If the share premium account is reduced, it could increase its reserves, so enabling a dividend to be paid, while not affecting the number of shares in issue.

Company law therefore allows reductions of capital subject to strict limitations. A company can reduce its share capital by a special resolution confirmed by the court (as has long been the case), but the Companies Act 2006 gave private companies access to a quicker and easier method, where the special resolution is supported by a solvency statement by the directors and the court is not involved.

A reduction of capital supported by a solvency statement is conducted as follows:

  1. The directors meet to approve the reduction and sign the solvency statement. All the directors must sign the solvency statement to confirm that:
    1. they have taken into account the company’s liabilities; and
    2. there is no grounds on which the company could be found to be unable to pay its debts and that it will continue to be able to do so for the next 12 months (or, if the company is to be wound up, that it will continue to be able to do so within 12 months of the commencement of the winding up).
  2. The shareholders approve any amendment required to the company’s articles of association (for example, because they prohibit a reduction of capital) and the reduction of capital, each by special resolution, either at a general meeting or by written resolution. The solvency statement must be signed by the directors not more than 15 days before the resolution is passed and be made available at the general meeting or circulated with the written resolution.
  3. The directors all sign a statement of compliance confirming that:
    1. the solvency statement was provided to all the shareholders; and
    2. the resolution was passed within 15 days of the solvency statement being made.
  4. Within 15 days of the special resolution being passed, the signed solvency statement, a copy of the special resolution(s), the compliance statement, Companies House form SH19 and a copy of any amended articles of association are delivered to Companies House with the necessary fee (currently £10 or £50 for same day processing, although Companies House fees are to increase from 1 May 2024 with the revised fee for registering a reduction of capital being £33 or £136 for same day processing). The reduction of capital takes effect only when the registrar has accepted and registered the filing.

Once registered, the company can then take the steps approved by the resolution, usually either by repaying the shareholders directly or crediting the amount reduced to a reserve, and making any necessary changes in its registers. The company is permitted to reduce its share capital “in any way” as long as there is at least one non-redeemable share remaining, so it has a great deal of scope to reorganise its capital under this section.

The above assumes that all shareholders are being treated in the same way. If it is intended to treat shareholders differently (perhaps to pay one shareholder out or to return capital relating to a certain class of shares) it may be necessary to consider obtaining class consents and take into account the risk of a shareholder bringing a claim for unfair prejudice.

Reductions of capital: a tax perspective

Repayment of share capital

When capital is returned to an individual shareholder without first passing through the company reserves, the repayment of capital (i.e. the amount paid for the shares, which will be the sum of the nominal value and the share premium (if any)), is treated by HMRC as a capital distribution and so within the capital gains tax (CGT) / corporation tax on chargeable gains rules. There is a part disposal of the underlying shares (some small part disposals may be ignored at the time of the repayment and, instead, the consideration in question is deducted from the allowable deductions on the subsequent disposal of the shares). Where the repayment is not “small” then it may be possible to claim Business Asset Disposal Relief (BADR) but HMRC are alive to possible abuse and may recharacterise as income under the transactions in securities (TIS) rules (and it is often prudent to seek a clearance from HMRC before undertaking the transaction where the reduction of capital is in respect of a “close” company).

If the payment goes beyond the amount paid for the shares there is an income distribution.

Distribution from reserves

If a company decides to transfer the funds from the capital reduction to its reserves, generally this is treated as a realised profit. The company can then decide to make a dividend payment to its shareholders from that profit or leave it in its reserves.

If it decides to pay a dividend to its shareholders then an individual recipient will be subject to income tax, but a corporate shareholder will generally be able to rely on an exemption from corporation tax.

Conclusion

Undertaking a capital reduction within your company can be a complex process and the best method of doing so will vary greatly depending on the circumstances of your company and your shareholders. Please contact the Forsters’ Corporate team if you would like tailored advice for your company.

Disclaimer

This note reflects the law as at 29 February 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Elizabeth Small
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Elizabeth Small

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The Lifecycle of a Business – General meetings – a step by step guide

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

General meetings – a step by step guide

While the board of directors of a company is responsible for the day-to-day, operating decisions of the company, there are various issues which, under the Companies Act 2006 (the Act), require shareholder approval. (A company’s articles of association (the articles) and any shareholders’ agreement which is in place may also set out matters which require shareholder consent.) For private limited companies incorporated in England and Wales, such approval is usually obtained by the passing of shareholder resolutions, either in an actual meeting of the shareholders or by written resolution.

Shareholder meetings

Meetings of shareholders are referred to as general meetings and any number of general meetings can be held throughout the year. Private companies may also hold an annual general meeting (AGM) once a year, at which, for example, directors may be elected, dividends declared and the annual accounts approved. Private companies are not required to hold an AGM under the Act, although their articles may provide otherwise.

Until recently, general meetings were usually held in-person but as technology has improved and become more widespread, there’s now the option to hold virtual or hybrid general meetings as well. There are pros and cons to such meetings, which pose additional factors to consider and as such, they fall outside the scope of this article.

Step 1: Calling the general meeting

General meetings are usually called by the board of directors and the calling of the general meeting, together with the form of the notice of the general meeting, should be approved by the directors.

Shareholders representing at least 5% of the paid-up voting shares in the company may also request the directors to call a general meeting. (The process for calling such a general meeting is a little different and is outside the scope of this article.)

Notice of the general meeting must be sent to all shareholders who are entitled to receive notice (plus the directors and company’s auditors (if any)) and the notice must include certain information. As a minimum, the notice must set out the date, time and location of the general meeting and the general nature of the business to be conducted. If any special resolutions are to be tabled at the meeting, the wording of the special resolutions must be included in the notice. Other, administrative information must also be provided, such as how a member can appoint a proxy to attend the meeting and vote on their behalf. In addition, the articles and any shareholders’ agreement must be reviewed to ensure that any provisions dealing with notice entitlement are complied with; this may be particularly relevant where, for example, there are different classes of shares in issue. Failure to send due notice will result in the meeting not having been validly convened.

It’s also important to consider what supporting information (if any) is required to be provided to the shareholders ahead of the meeting. For example, when an AGM is being called, a copy of the company’s annual report and accounts will need to be provided; these usually accompany the AGM notice.

Notice of the general meeting can be sent in hard copy form or, subject to certain requirements, in electronic form. Notice may also be placed on a website (again, subject to certain requirements).

Step 2: Ensure that the correct notice period is given

Under the Act, the length of notice required to be given for a general meeting called by the directors is generally a minimum of 14 clear days, although the articles may set out a longer period. (A longer period is also required where certain resolutions are being proposed.) Reference to “clear days” means that the day that the notice is given and the day of the meeting are not to be taken into account. When calculating the notice period, don’t forget about delivery. Under the Act, delivery by post or e-mail is deemed to occur 48 hours after posting or sending (non-working days shouldn’t be taken into account), although the articles may provide for a shorter deemed delivery period. So, for example, assuming that the articles are silent about deemed delivery, if notice is sent on Monday 25th March 2024, the earliest date that the general meeting can be held will be 11th April 2024.

A shorter notice period may be given if a majority in number of shareholders who, together hold at least 90% of the nominal value of the voting shares, agree. This percentage can be increased in the articles to a maximum of 95%.

Step 3: Is the meeting quorate?

The day of the meeting has arrived but in order to be valid, the meeting must be quorate. Generally, there must be two people present (and those people must represent different shareholders) for quorum to be achieved, unless the company only has one shareholder or the articles provide otherwise.

If the meeting isn’t quorate, the chair may choose to adjourn the meeting. Adjournment provisions are usually included in the articles.

Step 4: Running the general meeting

A chair will need to be appointed to facilitate and lead the meeting. This will usually be the chair of the board or another director, but a shareholder or a proxy can also take on this role. Depending on the size of the company and the nature of the business of the meeting, it may be advisable for the chair to use a pre-prepared script.

Shareholders, proxies and, usually, directors, as well as certain other persons, are able to speak at a general meeting and it’s advisable for the chair to let them do so. The chair can, however, take certain steps to stop obstructive behaviour, including adjourning the meeting and even removing the person(s) in question from the meeting, although removal should only be used as a last resort.

Step 4: Passing the resolutions

How the proposed resolutions are passed will depend on how the vote is taken and the type of resolution.

Votes can be taken on a simple show of hands (where each shareholder has one vote) or on a poll (where each shareholder has one vote for every ordinary share held). Votes will be taken on a show of hands unless a poll is specifically requested.

An ordinary resolution will be passed:

  • on a show of hands if it’s passed by a simple majority of the votes cast by the shareholders entitled to vote; or
  • on a poll if it’s passed by shareholders representing a simple majority of the total votes of the shareholders who vote on the resolution.

A special resolution will be passed:

  • on a show of hands if it’s passed by a majority of not less than 75% of the votes cast by the shareholders entitled to vote; or
  • on a poll if it’s passed by shareholders representing at least 75% of the total voting rights of the shareholders who vote on the resolution.

Step 5: Post-meeting matters

The end of the meeting doesn’t necessarily mean that the process is complete. Various formalities will need to be dealt with, for example, writing up the minutes of the meeting, making any requisite filings at Companies House and updating any registers of the company.

Written resolutions

Instead of holding a general meeting, the shareholders of private companies can also pass written resolutions for the majority of actions which require their approval. This is helpful for companies who have only a small number of shareholders and can be a much quicker way of obtaining shareholder approval. The procedure is set out in the Act and failure to follow this correctly can constitute a criminal offence.

The procedural specifics will depend on whether the directors or shareholders propose the written resolution but broadly, a written resolution must:

  • be sent to all shareholders entitled to vote on the date that the resolution is circulated (the circulation date);
  • state whether any proposed resolutions are special resolutions;
  • include directions as to how to approve the resolution; and
  • set out the deadline for when the resolution must be passed (28 days after the circulation date unless the articles say otherwise). If the resolution isn’t passed by the deadline date, it will lapse.

A copy must also be sent to the company’s auditors (if any).

If the shareholder agrees to the resolution, they must signify as such on the document and return it to the company. A written ordinary resolution will pass if shareholders representing over 50% of the total voting rights of the shareholders entitled to vote approve it. A written special resolution will pass if shareholders representing at least 75% of the total voting rights of the shareholders entitled to vote approve it.

Practical points

The steps to be taken to call and hold a general meeting are fairly formulaic, especially for companies with a smaller shareholder base. However, don’t forget to consider whether a written resolution may be a more practical option.

Thinking ahead, where possible, is advisable. Preparing the documentation required well in advance and being clear on the resolutions to be proposed and the voting process, will minimise the risk of errors and omissions.

Whether you choose to call a general meeting or circulate a written resolution, it’s important that the statutory procedure is followed correctly and that the articles and any shareholders’ agreement are checked to ensure that they are complied with. Getting this wrong could invalidate the meeting or even be a criminal offence. Your legal advisors will be able to assist if you’re unsure.

Lianne Baker
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Lianne Baker

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The Lifecycle of a Business – Dividends

Exterior of large financial building

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

Dividends

Our recent articles have referred to the payment of dividends to shareholders . In this article, we delve into how profits and retained earnings of a private company can be distributed among its shareholders by way of dividend. We discuss when and how much may be distributed and also look at restrictions that might apply to private companies (the additional restrictions placed on public companies with respect to dividends are out of scope of this particular article).

What are dividends?

Dividends are a type of distribution made by a company to its shareholders and are a way of returning some of the profits of a company directly to its shareholders. They’re generally paid in cash, but might also be non-monetary payments such as shares in the company (scrip dividends) or physical assets (dividends in specie).

Where a company declares a dividend, and that company has only one class of share in issue, it must declare and pay dividends equally on each share. Companies with more than one class of share in issue may wish to allocate different dividend rights to each class.

When can dividends be paid?

A company may only distribute dividends out of the profits available to it for any such distribution, that is, the company’s accumulated, realised profits, less its accumulated, realised losses, as they are stated in the company’s annual, interim, or initial accounts (as the case requires). In other words, the company must have sufficient distributable profits to pay the dividend.

As to timing, a dividend can be paid at any point in time but will generally be paid:

  • as a final dividend once the company’s end of year financial statements have been prepared. This usually requires shareholder approval, often at the company’s annual general meeting; or
  • as an interim dividend at any time during the financial year before the company determines its annual profits. This does not usually require shareholder approval.

Special or “one-off” dividends can also be paid as and when appropriate.

Amount of any dividend

Provided there are sufficient distributable profits available to the company to cover any payment of any declared dividend, and its constitutional documents allow it, there is no restriction as to the amount of dividend that may be declared and distributed to a company’s shareholders.

Declaring a dividend

The manner in which a company may declare a dividend (if at all) will usually be set out in its articles of association or in a shareholders’ agreement in relation to that company and these should always be checked before declaring any dividend.

There is no legal obligation on the company or its directors to declare a dividend. As such, a company may decide to use its profits for other purposes, for example, as working capital, to invest, to pay dividends at a later date (retained earnings), to cover any unexpected circumstances that might arise, to reinvest in its business for growth and expansion, or to pay down debt.

Final dividends

A final dividend usually requires the approval by ordinary resolution of the company’s shareholders (where the directors have resolved to recommend the amount of any such dividend). This approval is usually obtained at the company’s annual general meeting at which the annual accounts are also approved.

Once a final dividend has been declared by its shareholders, it becomes a debt due and payable by the company on the date of the resolution, unless some future date for payment is specified.

Interim dividends

Provided that the company’s articles of association or any shareholders’ agreement allows, the directors may decide to pay interim dividends at any time, provided that the company has sufficient distributable profits. (It should be noted that the model articles of association permit the payment of interim dividends by default.) The company’s annual and interim accounts will likely be produced at the board meeting at which the interim dividend is to be approved.

An interim dividend may be varied or rescinded at any time after it is declared and before payment is actually made and may, therefore, only be regarded as due and payable when it is actually paid.

Tax implications

The payment of a dividend by a UK company is not deductible when the company’s taxable profits are computed.

Generally, there is no withholding tax when a UK company pays a dividend (although there are exceptions for some types of investment funds).

When a company may not pay a dividend

A company’s articles of association or any shareholders’ agreement in force in relation to a company might place certain restrictions on the directors’ and/or shareholders’ ability to make dividends.

In addition, dividends which contravene certain sections of the Companies Act 2006 (the Act) (for example, one declared where a company does not have sufficient distributable profits) or common law (for example, a distribution out of capital) are classed as unlawful dividends and should not be paid.

Consequences of making an unlawful dividend

Where the directors declare and distribute a dividend in circumstances where there are insufficient profits available to distribute, they will likely be in breach of their statutory duties contained in the Act, such as their duty to promote the success of the company for the benefit of its shareholders as a whole, or their common law duty to consider the interests of the company’s creditors (rather than the shareholders) in circumstances where the company is facing insolvency (our article, “A Balancing Act – when do directors owe a duty to creditors?“, considers the circumstances when a director owes a duty to creditors following the Supreme Court judgment in BTI v Sequana). This could have various adverse consequences, including disqualification as a director.

No criminal penalties attach to the payment of unlawful dividends, but a director could be held personally liable to repay the company. For further information about this, please see here.

Paying a dividend when the company is insolvent or subsequently becomes insolvent could also have consequences under insolvency law.

Takeaways

Paying dividends can send a positive message about a company’s current financial strength and future prospects. Many investors like the income associated with dividends and so may be more likely to invest in a company that pays regular dividends.

On the other hand, a company that is still growing should carefully consider whether paying a dividend is advisable; it may be preferable to instead reinvest any profits into its future growth, pay off some debt or use the profits for working capital purposes, for example. And, as discussed above, a company that doesn’t have sufficient profits shouldn’t declare a dividend in the first place; doing so could result in the directors being held personally liable to repay the company.

The decision whether to pay a dividend or not may not be clear-cut. Directors must consider their statutory duties, as well as the financial situation of the company, its constitutional documents, and any tax implications. Speaking to your legal advisor or accountant (or both) is advisable in this situation.

Disclaimer

This note reflects the law as at 14 February 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Heather Corben
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Heather Corben

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Making your gift go further – Elizabeth Small and Oliver Claridge write for Taxation

Working on laptop

Gift aid exists to encourage individuals (which includes partnerships and sole traders) to make charitable donations.

Many taxpayers give to charity (or community amateur sports clubs, which also qualify for gift aid) from a purely altruistic perspective, but by properly utilising gift aid they can make their gift go further…

Elizabeth Small and Oliver Claridge consider how gift aid can make a charitable gift go further while also providing an element of relief to the giver – and even potentially restoring a higher-rate taxpayer’s personal allowance.

Read the full article here.

Olly Claridge
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Oliver Claridge

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Lifecycle of a Business – Protections for Minority Shareholders

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

Protections for Minority Shareholders

Minority shareholders are those who cannot, by themselves, control the direction a company will take and, as a result, may be adversely affected by decisions made by the majority shareholder(s). This article sets out some of the rights a minority shareholder may seek in a private limited company in England and Wales and those provisions that majority shareholders can expect their minority shareholders to raise.

Legislation

Legislation offers certain limited protections for minority shareholders, some of which were mentioned in our last article, ‘What are your rights as a shareholder?’. In addition to the points mentioned in that article:

  1. a shareholder can block special resolutions where they, either by themselves or with other shareholders, hold more than 25% of the voting shares in the company. This can stop key matters passing, such as changing the company’s articles of association;
  2. a shareholder can cause a general meeting of the shareholders to be called where they, either by themselves or with other shareholders, hold at least 5% of the paid-up shares that have the right to vote. Alternatively, those shareholders with 5% of the voting rights can arrange for a written resolution to be circulated. Either action will enable the shareholder(s) to put matters in front of the other shareholders for them to vote on;
  3. any shareholder can bring a claim for unfair prejudice against the company (where actions have been, or are being, taken that are, or would be, unfairly prejudicial to the shareholders, or some of them), although it should be noted that a common outcome of this process is that the court orders the majority shareholder to buy out the minority shareholder;
  4. any shareholder can bring a derivative action against a director for actions such as negligence, default, breach of duty or a breach of trust. However, bear in mind that this is an action brought in the name of the company and so any damages recovered would not go to the shareholder; and
  5. in certain qualifying cases, where a shareholder has held their shares for at least six of the preceding 18 months, they can apply to the court for the winding-up of the company, although it should be noted that the bar for success with this route is high.

Given the limited nature of the statutory protections on offer, minority shareholders often seek to negotiate contractual minority protections at the outset of their investment.

Contractual Protections

Contractual protections are usually found in the company’s articles of association and any shareholders’ agreement or investment agreement (which governs the relationship between the shareholders of a company) that is in place. They can include the following (subject to the specific requirements of the transaction and negotiations):

  1. Reserved Matters: A majority shareholder may agree a list of matters which the company cannot carry out without the consent of the minority shareholder(s). These are usually the most important matters relating to the company which would affect a minority shareholder’s position, such as changes being made to the company’s articles of association, the taking out of a substantial loan by the company, the entry into significant contracts by it or the winding-up of the company.
  2. Pre-Emption (Share Issue): Pre-emption rights on an issue of shares by the company enable a minority shareholder to avoid their shareholding being diluted by the future issue of new shares to third parties (or other shareholders), by giving the minority shareholder a right of first refusal to take up any of the new shares, usually in proportion to their shareholding at the time of issue. If a contractual protection is not included, and reliance is instead placed on the statutory pre-emption right, those holding 75% of the voting shares in the company can disapply the provision. That said, the purchase price for a minority stake can be substantial.
  3. Pre-Emption (Share Transfer): Similarly, pre-emption rights can be included in respect of a transfer of shares, giving the minority shareholder a right to purchase certain of the shares of an outgoing shareholder, usually in proportion to the shares the minority shareholder already holds in the company. However, this can again be a costly process and the minority shareholder will need to ensure they have the funds to purchase the shares.
  4. Board of Directors: A minority shareholder can, if its minority shareholding is appropriately significant (usually by reference to a percentage shareholding), request the right to appoint a director to the board and for that person to be present in order for any meeting to be quorate. If they are not able to obtain this right, they may be able to appoint an observer at board meetings so that they are aware of matters discussed by the board, albeit without having the voting rights that come with being a director.
  5. Exit Right: Tag-along rights provide an exit route for minority shareholders where there will be a change of control of the company. Here, they are able to sell their shares to the same purchaser of the majority shareholder’s shares and on the same terms. This ensures that a consistent value is paid for the shares in the company and avoids the minority shareholder(s) being left in the business with a new party. Additionally, a minority shareholder may seek to include a put option, to ensure that if a dispute arises between the shareholders, for example, they will receive an agreed value for their shares or have a mechanism in place for an independent third party to confirm the value.
  6. Information Rights: In addition to the statutory right to see certain company information, such as the company’s annual accounts and directors’ report, a minority shareholder may be able to obtain management reports throughout the year as a means of monitoring their investment in, and the performance of, the company.
  7. Dividend Policy: Having a clear dividend policy in place will help to give certainty to a minority shareholder as to when they are likely to receive a dividend from the company in respect of their investment. Without this, minority shareholders are unable to pass or block an ordinary resolution to declare dividends.
  8. Business Plan: In a joint venture scenario, a minority shareholder is likely to want to have a say in the signing-off of the annual business plan of the company, to ensure that the commercial objectives of the parties are clearly aligned.

Protections of this nature have been in the news recently with Sir Jim Ratcliffe’s investment into Manchester United. It is reported that he will have a right of first refusal for a year if the Glazer family sell their shares, but the Glazer family will be able to drag-along Sir Jim Ratcliffe if there is a full sale of the club after 18 months of the completion of his investment and provided that he receives at least $33 per share.

Conclusion

If you are a minority shareholder investing in a company, or a majority shareholder who has received a request for protections from an incoming investor, please do not hesitate to get in touch with a member of our Corporate team, who will be happy to assist you.

Disclaimer

This note reflects the law as at 2 February 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Aaron Morris
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Aaron Morris

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Lifecycle of a Business – What are your rights as a shareholder?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

What are your rights as a shareholder?

A company acts through two bodies of people – its shareholders and its board of directors. While the directors manage the day-to-day running of the business, shareholders can still exert a significant amount of influence.

The rights of shareholders are derived from the Companies Act 2006 (the “Companies Act“), the articles of association of the company (the “Articles“) and any shareholders’ agreement in place. The rights attaching to shares will depend on the class (type) of shares that you hold and will vary from company to company. It is therefore important that you fully understand which class(es) of shares you own and the rights which apply to them.

In this article we will consider the key shareholder rights that are provided in the Companies Act.

Attendance and voting at general meetings

Generally, shareholders are entitled to attend and vote at general meetings of the company. However, some classes of shares may not have this right, while others may provide weighted voting rights or a veto right over certain issues; if this is the case, it should be set out in the Articles or any shareholders’ agreement.

Subject to any specific rights set out in the Articles or a shareholders’ agreement, a shareholder’s voting power will usually depend on the proportion of shares held (where the vote is by poll); however, in some instances a vote may be taken by show of hands and in this case, shareholders with a very small shareholding may have a significant impact on the vote. In the main, resolutions proposed at a general meeting will be either an ordinary resolution or a special resolution. An ordinary resolution is passed by simple majority (i.e. over 50%) while a special resolution must be passed by 75%.

In addition, subject to certain conditions being satisfied, shareholders have the right to require the directors to call a general meeting, the right to require the company to circulate a written resolution and the right to require the directors to circulate a statement with respect to a matter referred to in a proposed resolution or other business to be dealt with at a meeting.

If you are unable to attend a general meeting, you should be able to appoint a proxy to attend the meeting and vote on your behalf.

Right to dividends

Most shareholders will have the right to receive a share of the company’s profits in return for their investment. If a company is profitable, the directors may decide to distribute profits to shareholders by declaring the payment of a dividend (usually in cash).

Although it is the directors who will recommend the payment of a dividend, shareholders may have to vote to approve it (this is usually the case with a final dividend, which is paid once the annual accounts have been drawn up; interim dividends which are paid throughout the year are usually declared by the directors). The shareholders cannot vote to pay a final dividend which is more than the directors have recommended, although they can vote to reduce the amount of the dividend to be paid.

It should be remembered that the directors are under no legal obligation to declare the payment of a dividend. For example, the directors will not recommend a dividend if the company is not profitable or if it is profitable, they may decide that the profits should be re-invested into the business.

Right to return of capital

The share capital of a company is not owned by the shareholders, but by the company. This is to protect the creditors of the company who will often have no control over how the company is being managed and operated. If the company becomes insolvent, its creditors will rank ahead of the shareholders in terms of being “paid back” and if necessary, the share capital will be used to do this. For private companies with a small amount of share capital, this might not be of much help to creditors in reality, but the principle remains.

That said, shareholders do have capital rights and if any share capital remains once creditors have been repaid (although this is unlikely in an insolvency context), this will be repaid to the shareholders, usually in proportion to the number of shares that they hold.

Right to information

Shareholders also have rights to receive certain, albeit limited information, about the company. For example, they are entitled to a copy of the company’s annual accounts and any annual report and can request to see a copy of the company’s register of members, any minutes of general meetings and the terms of the directors’ service contracts.

Pre-emption rights

Under the Companies Act, shareholders have a pre-emption right on the allotment of shares. Such rights may also be included in the Articles or any shareholders’ agreement. These rights aim to protect existing shareholders from having their shareholdings diluted, by requiring the company to give existing shareholders a right of first refusal over the allotment of new shares, usually in proportion to their current shareholding.

Pre-emption rights may also apply on the transfer of shares and if so, these and the process to be followed will be set out in the Articles or a shareholders’ agreement. Such rights require any shareholder wishing to transfer their shares to offer them first to the existing shareholders, again, usually in proportion to their current shareholding.

In determining what rights a shareholder has, much will turn on the Articles or any shareholders’ agreement. It is therefore important to check these before taking any action as a shareholder. Our next article will focus on the protections which may be afforded to minority shareholders.

If you have any queries or concerns about your rights as a shareholder, please do not hesitate to get in touch with a member of our Corporate team who would be happy to assist you.

Disclaimer

This note reflects the law as at 19 January 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Employment Law: Looking Back on 2023 and the Forecast for 2024

It can be tough being an employer: many are still grappling with the new employment landscape left after Covid (such as remote and hybrid working arrangements) and are still trying to understand the expectations of the new generation of worker, all whilst trying to keep up-to-date with a never-ending raft of legislative changes.

The beginning of a new year presents an opportunity to reflect on the year gone by and look forward to the year ahead. With 2024 underway, we reflect on the key employment law developments of 2023 and highlight some anticipated changes for you to look out for in 2024.

Employment Law Review – 2023

2023 was a significant year for employment law. The Retained EU Law (Revocation and Reform) Act 2023 created a suite of new legislation in relation to holiday, working time, TUPE and the Equality Act 2010. There were changes to flexible working and family-related rights that are due to come into effect later this year (2024). In case law, we had landmark judgments in respect of holiday pay and employment status, which offer some long-awaited clarity.

2023 – Important case law developments

Chief Constable of the Police Service of NI v Agnew – holiday pay

In the significant case of Agnew, the Supreme Court held that although an unlawful deductions claim must be brought within three months of the date the last payment was made (or where there is a series of deductions, the date of the last in the series), a gap of three months in deductions does not automatically break the “chain” and neither does a correct payment. A series is not necessarily determined by a period in time but a “common fault or unifying or central vice”. As such, a series of deductions may no longer be broken by a gap of more than three months, meaning an employee could, depending on the circumstances, make a claim in respect of underpayments which were made prior to any such gap.

This decision will have significant implications for employers across the UK. For one, it is likely to cost the Police Service of Northern Ireland £30-40 million in back pay for holiday pay claims. That being said, in Great Britain there is a two-year backstop on how far back holiday claims can go. Nonetheless, this case serves as a notable reminder of the importance of calculating holiday pay correctly.

Independent Workers Union of Great Britain v Central Arbitration Committee (Deliveroo) – employment status

In November 2023, the Supreme Court unanimously held that Deliveroo riders are not employees and therefore cannot be represented by trade unions for collective bargaining purposes. The key factor for determining self-employed status was that the riders have an unfettered right to appoint a substitute to perform their obligations under their contract and in practice.

Whilst the judgment provides clarification to employers (and a helpful reminder that a genuine right of substitution will nearly always mean that an individual is not an employee), it has received criticism regarding the potential risks it poses to vulnerable workers across the UK. The Labour Party has previously indicated a desire to reform the law on employment status and to strengthen the rights and protections for workers. With an election looming this year, this is definitely an area to watch.

Our summary of the judgment can be found here.

Boydell v NZP Limited and other – the enforceability of non-competes

In Boydell v NZP Ltd the Court of Appeal upheld an injunction and the decision of the High Court that it was permissible to sever part of a 12-month non-compete clause. Boydell was employed as Head of Commercial – Speciality Products for NZP Limited (“NZP”). NZP’s business, the sale of bile acid derivatives, is a niche area of the pharmaceutical industry. When Boydell resigned to work as head of the bile acid division of one of their main competitors, NZP sought an injunction relying on the 12-month non-compete in Boydell’s employment contract. Boydell argued that the non-compete was too wide to be enforceable, principally in that it benefitted not only NZP but other companies it its group. The Court of Appeal found that the non-compete clause was clearly directed towards the specialist activities of NZP and therefore the clause was capable of severance. Severing part of the restriction, to remove the benefit to group companies, did not change the overall effect of the non-compete because it was primarily aimed at the specialist activities of NZP. Although this case demonstrates the courts’ flexibility in their approach to construction of covenants, it is a reminder that, to be enforceable, restrictions should be tailored to the specific needs of the business.

The impact of this case may be limited given the government’s proposal to reform the law on non-compete restrictions to a maximum duration of three months (see below).

Charalambous v National Bank of Greece – the disciplinary process

In the Charalambous case, the Employment Appeal Tribunal (the “EAT”) confirmed that it is possible for a dismissal to be fair in circumstances where the dismissing manager does not hold a disciplinary hearing with the employee. Although the dismissing manager was not present at the claimant’s disciplinary hearing, the EAT found that this was corrected at the appeal stage. In upholding the tribunal’s decision, the EAT noted, perhaps surprisingly, that although it is desirable for a meeting between the employee and decision-maker to take place, direct personal communication is not a requirement.

Lynskey v Direct Line Insurance Services Ltd – menopause and discrimination

The case of Lynskey v Direct Line provides a reminder for employers to be aware of the complex issues surrounding menopause and the way in which symptoms can impact performance. It has been established in a number of tribunal cases that menopause symptoms can amount to a disability under the Equality Act 2010. Ms Lynskey was successful in arguing that Direct Line had failed to make reasonable adjustments where the requirement to meet the performance standards of her role put her at a substantial disadvantage in comparison to employees who were not experiencing symptoms of menopause.

However, whilst this case demonstrates that the tribunal may take a more holistic approach to a disciplinary process, it should not be taken as an invitation to dispense with important aspects of procedure.

Higgs v Farmor’s School – belief discrimination

In Higgs v Farmor’s School the EAT found that the tribunal had erred in its finding that Farmor School had not dismissed Ms Higgs for reasons connected to her protected beliefs. Ms Higgs was dismissed following a number of Facebook posts which the school considered to be prejudicial to the LGBTQ+ community. The EAT found that Ms Higgs’s views were protected under the Equality Act 2010 and remitted the case to the tribunal for redetermination. The EAT gave helpful guidance on the legal framework around the right to protection in respect of one’s belief or religion and the factors that should be taken into consideration when determining whether manifestation of belief was so objectionable as to justify the actions taken by an employer.

Haycocks v ADP RPO – the redundancy process

The EAT’s decision in Haycocks v ADP RPO confirmed that a redundancy appeal cannot correct a lack of consultation. How reasonable a redundancy process is will depend on the employer and the circumstances giving rise to redundancy, however this case serves as a reminder to employers of the importance of consultation at a formative stage in the redundancy process.

2023 – Key legislation

Minimum service levels

Following a year (or two) consistently peppered with strikes in the rail, health, emergency services and teaching sectors, the government has now enacted its controversial Strike (Minimum Service Levels) Act 2023, which requires minimum service levels to be maintained, even during periods of strike.

Allocation of tips

We previously provided commentary back in October 2021 on the anticipated Employment (Allocation of Tips) Act 2023. This Act gained Royal Assent in 2023, with the measures coming into effect during 2024. The motivation behind the legislation is to provide workers with fair pay and to ensure that tips are allocated fairly amongst the workforce.

Workers (Predictable Terms and Conditions) Act 2023

Continuing the pursuit of instilling fairness amongst the workforce, this Act was granted Royal Assent in September 2023 and places obligations on employers to give a minimum period of notice of shift patterns or of ad hoc work to their workforce. Moreover, eligible employees will gain the right to request a “predictable work pattern”.

Worker Protection (Amendment of Equality Act 2010) Act 2023

This Act will require employers to take proactive steps to prevent their employees from being sexually harassed at work. The Equality and Human Rights Commission (the “EHRC”) will be publishing new guidance on what proactive steps employers are expected to take. Not only should employers carefully consider the EHRC guidance (when it is published) but they should also review and amend their existing policies to ensure compliance with the new requirements.

Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023

We commented in November 2023 on the changes to holiday pay, TUPE and working time reporting which came into effect on 1 January 2024. The government has now published guidance on calculating holiday pay in line with the changes.

The Employment Relations (Flexible Working) Act 2023

The Employment Relations (Flexible Working) Act gained Royal Assent in July 2023 and was partially enacted on 11 December via the Flexible Working (Amendment) Regulations 2023. With effect from 6 April 2024, all employees will have a right to submit a statutory flexible working request from day one of their employment. We discussed the impact of this legislation here, including the changes required in the way that employers are expected to respond to flexible working requests.

The Carer’s Leave Act 2023

The Carer’s Leave Act received Royal Assent in May 2023 and allows employees who have a dependant with a long-term care need to take leave to care for that dependent. One week of carer’s leave can be taken each year (regardless of the number of dependants an employee may have). Whilst there are notification requirements on the employee, an employer cannot require an employee to supply evidence in relation to a request before granting leave. An employer can postpone a request in limited circumstances.

Extension of the protections from redundancy – pregnancy and family leave

In December 2023, draft regulations were laid before Parliament to bring the Redundancy (Pregnancy and Family Leave) Act 2023 into operation. Under the new Act, from 6 April 2024, protection from redundancy afforded to employees on maternity, adoption or shared parental leave will be extended to employees who are pregnant and returning from such leave. More details on the impact of these protections can be found here.

What Can We Expect In 2024

The bills which gained Royal Assent in 2023 are very likely to be enacted in 2024. This will mean that employees and workers will benefit from the applicable enhanced rights and employers will need to ensure their compliance with any additional policies and procedures prescribed by the new legislation and be alive to the potential claims that an individual could bring.

In addition to legislative changes, there will also be the usual changes to national statutory rates, including those for minimum wage, statutory maternity pay and statutory sick pay, which are summarised below.

Key dates to look out for include:

  1. 1 January 2024 – the changes set out in the draft Retained EU Law (Revocation and Reform) Act 2023 and the Equality Act 2010 (Amendment) Regulations 2023 came into effect
  2. 6 April 2024 – the following regulations will come into effect:
    1. Flexible Working (Amendment) Regulations 2023
    2. Maternity Leave, Adoption Leave and Shared Parental Leave (Amendment) Regulations 2023
  3. September 2024 – it is anticipated that the new rights created by the Workers (Predictable Terms and Conditions) Act 2023 will come into force
  4. 26 October 2024 – the Worker Protection (Amendment of Equality Act 2010) Act 2013 will come into force.

In addition:

  • in May 2023, the government published its response to the consultation on the reform of non-compete clauses which proposed capping such clauses at three months. This may also be something to look out for in 2024; and
  • the government’s Statutory Code of Practice on “fire and rehire” practices should be published in spring 2024.

Undoubtedly the speaking point of 2024 will be the next general election. If, as currently predicted by the polls, the Labour Party is successful, we are likely to see a number of employment law reforms designed to improve workers’ rights and protections.

April 2024 rate changes

National Minimum Wage

Category of worker 2023/2024 2024/2025
Aged 23+
    £10.42
    £11.44
Aged 21 – 22 inclusive
    £10.18
    £11.44
Aged 18 – 20 inclusive
    £7.49
    £8.60
Aged under 18
    £5.28
    £6.40
Apprentice rate
    £5.28
    £6.40

Statutory weekly cap

2023/2024 2024/2025
Statutory sick pay
    £109.50
    £184.03
Statutory maternity, paternity, adoption and shared parental pay together with maternity allowance
    £172.48
    £116.75

If you wish to discuss the above in any more detail or have any other employment or HR law related issues, please contact Joe Beeston, Partner, Remy Ormesher-Hussein, Associate or Nina Gilroy, Legal Executive, in our corporate group.

Disclaimer

This note reflects our opinion and views as of 5 January 2024 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

Lifecycle of a Business – Demystifyng the Term Sheet

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered “First Things First” and “Directors: Lights, Camera, Action!” But now, let’s consider financing your business – “Show Me The Money”.

Demystifyng the Term Sheet

You’ve considered your fundraising options, have all your records and documents in place and have an investor in mind, so now it’s time to consider the term sheet.

Your term sheet sets out the fundamental terms of the commercial deal you have struck with your investor(s). Getting it in a shape that everyone is happy with will make for a much smoother execution of your funding round, allowing it to take less time so that you can get back to growing your business.

If you’re bootstrapping your way to an early round of funding, you may think twice about reaching out to an advisor to discuss your term sheet, perhaps wanting to hold off until it’s agreed commercially. I would, however, encourage you to reach out for an initial discussion before signing up to your term sheet, even if just for another perspective on what you’re signing up for.

So, what should a term sheet include?

Valuation

The valuation will set out how much of the equity is being given to the investor(s).

The term sheet may reference the “pre-money” value, being the amount the company is valued at before the funding round closes, and the “post-money” valuation, being the company’s value after (and including) the funding.

Whatever terminology is used, it’s important to understand what you’re agreeing to give to the investor, and whether this is on the basis of the issued share capital or the fully diluted share capital (such that the term sheet may say they’re receiving 10%, but actually, on an issued basis the investor may have more, having factored in the dilutive effects of convertible instruments such as options and warrants).

Option Pool

While the detailed terms of the incentive plan may come later after closing an early round of funding, the term sheet will often set out the percentage option pool to be made available to incentivise key staff. Founders should note how this percentage is calculated (will it dilute everybody or not?).

Investor Shares

The class of shares which investors will receive should have their key rights set out. Is everyone investing for ordinary shares, or will the investors receive preference shares with specific rights?

Preference shares in this context will typically have voting rights and have a priority return over the ordinary shares on a liquidation / exit event. If applicable, the term sheet should set out this priority return (known as a ‘liquidation preference’). It’s customary for investors of preference shares to have a 1* preference, meaning that they receive their investment back first. That said, in recent turbulent markets, there are instances of investors looking for more than this.

Whether they then participate or not in the balance of any proceeds should also be set out, noting that if they are non-participating (as is common), such that they only receive their liquidation preference, they will likely be convertible or entitled to the amount they’d receive had they been ordinary shares (therefore the preference affords the investor a downside protection).

Anti-Dilution

Investors often seek anti-dilution rights, which may include a ratchet such that, if there is a ‘down round’ in the future, the investors are issued more shares in line with that ratchet. Founders should ensure that the term sheet sets out the applicable type of ratchet, and that they understand what it means.

It’s customary for the ratchet to be what is known as a broad based weighted average ratchet.

Founder Vesting

Investors will expect to see good leaver and bad leaver concepts with a vesting schedule for shares held by founders setting out a founder’s entitlement if the founder leaves the company. We would encourage founders to discuss expectations here with the investors early to ensure alignment.

Board Composition

Including who will have a board seat and against what threshold is common. Boards are typically founder-led in their early stages with more board control given up in follow-on rounds as new investors come in and as independent directors are added.

Veto Rights

Investors will typically expect to have a set of investor veto matters, for which a percentage of the investor pool has to vote in favour for the company to action the matter. There may be shareholder matters and also investor director consent matters.

Founders may also wish to seek founder consent matters, although this is not always acceptable to investors.

Warranties

While the detail of the warranties (contractual promises to investors, e.g. that you’re not currently involved in any litigation) will be in the long form documents, we would encourage founders to consider who will be giving warranties and agree this and the overall liability cap upfront with their investors. Previously, founders often had to give warranties by reference to a salary multiple, however more recently the market has moved to having only the issuing company provide the warranties.

Share Transfers

The term sheet should include reference to certain share transfer matters, to the extent they are to apply. For example, pre-emption rights (and who they are for, e.g. everyone or certain investors), drag along rights and tag along rights (and what threshold triggers these rights) and co-sale rights.

Information Rights

While investors may be represented on the board, they will typically expect to have contractual information rights to enhance the limited information a shareholder in a UK company is typically entitled to see. Setting out what investors will receive, and whether this is for all investors or for those that hold a certain percentage of the equity, will allow you to be aware of the administrative burden of complying with this moving forwards.

SEIS / EIS Tax Reliefs

If the round is going to be raising money from investors looking to obtain SEIS/EIS relief this should be acknowledged, and the founders should take advice on what this is likely to mean in terms of structuring and process for them and what the investors may expect.

For more information about these tax reliefs, see here.


Finally, it’s worth being aware that the majority of the term sheet is typically not legally binding, although it may contain certain parts which are, for example, provisions relating to confidentiality and, if you’ve agreed this with your investor(s), exclusivity for a period of time.

Please get in touch if you would like to talk about your funding round and how we can team up to achieve your objectives.

Disclaimer

This note reflects the law as at 30 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Daniel Bryan
Author

Daniel Bryan

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Ready to Raise Funds?

Being ready to raise funds is a position that every business should seek to be in even where fundraising is not an imminent objective. From a legal point of view, being ready to raise funds really just means knowing where everything is, and being able to demonstrate everything you know about your business to somebody who is taking a look at it. Plus, you want to be able to provide this information as soon as, or possibly before, it’s asked for by any potential investor.

You’re the entrepreneur and I expect that you’re all over your business plan, but, apart from that, here are some of the key things to check are in order:

  • Your Company Books – starting with a ‘fun’ one, it’s a legal requirement to keep certain statutory registers up to date, such as your register of members. Having ‘up to date’ filings on Companies House is not the same (although potential investors will be taking a look at these too) as it’s the register that shows ownership of legal title to shares. All investors will expect to see these books to check that all is as they expect.
  • Your Cap Table – your register of members should also be translated to a user friendly cap table that you’ll be able to use to consider pre- and post- money ownership percentages and dilution on a fully diluted basis (i.e. including any option holders or holders of other convertible instruments that will not be on your register of members). Having this ready will help when you negotiate your valuation with investors too. There are online providers of software to help you manage this which may be useful once you have raised funds.
  • Your Financial Records – what potential investors will want / expect to see will depend on the stage of the business, but any accounting records should be well maintained and available for review.
  • Your IP – many companies are IP rich and IP should always be considered. For example:
    • Have all consultants signed IP assignments?
    • Has anyone who has worked on IP for the business (including founders and employees) before the company was incorporated signed IP assignments?
    • Have any other IP assets been protected or what is the strategy around that? Is the company name trademarked?
    • Has open source been used and can you demonstrate that the terms of the licence don’t require your own IP to be distributed freely?
  • Your IT
    • Do you have a summary of your IT system that you could disclose, with the documentation to support that summary should anyone wish to look at the detail?
    • Can you demonstrate that you’ve thought about cyber security? It’s a podium placer for top risks to businesses and demonstrating that you understand the issue, by setting out the approach you take to mitigating the risk, will help put minds at ease.
  • Their Data – Where is the data you control or process, what is it, and how do you go about making sure you’re dealing with it lawfully? What’s expected of you on this will depend on how data rich your business is and what stage your business is at, but regardless of the answer to those, there will be an expectation that you can show that you’re on top of it.
  • Your Customers and Suppliers – Are your customer and supplier relationships documented in up to date, unexpired and fully signed contracts? You will likely need to disclose these during the investment process (considering first any particularly sensitive information and whether confidentiality provisions apply).
  • Your team
    • Are the terms of engagement of your employees, workers and consultants all in writing and have they signed up to restrictive covenants, confidentiality undertakings and, where required, IP assignments?
    • Are any incentive schemes in place and if so, are all scheme documents available?
  • An NDA – Before disclosing anything secret, consider agreeing a confidentiality / non-disclosure agreement (NDA) with proposed investors. Having a reasonable NDA ready to sign could help this process (although keep in mind that some institutional investors may require their own paper to be used, not to be difficult, but because it’s been through their own in-house legal review and forms part of their own investment process). Similarly, institutional investors look at so many initial decks that they may not have the time or inclination to be troubled by negotiating an NDA, so think about the ‘when’ of seeking an NDA too.

Having the above in mind will keep you on the front foot when going out to raise funds, whether it’s from angel investors, VCs or otherwise.

When you’re at the point of considering the terms of investment, take a look at our term sheet explainer too.

Disclaimer

This note reflects the law as at 15 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Daniel Bryan
Author

Daniel Bryan

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Lifecycle of a Business – Are You Ready to Raise Funds?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered “First Things First” and “Directors: Lights, Camera, Action!” But now, let’s consider financing your business – “Show Me The Money”.

Are You Ready to Raise Funds?

We’ve recently been discussing a company’s options in relation to third party fundraising and the various tax consequences. But what practical steps can you take to help the fundraising process?

Being ready to raise funds is a position that every business should seek to be in even where fundraising is not an imminent objective. From a legal point of view, being ready to raise funds really just means knowing where everything is, and being able to demonstrate everything you know about your business to somebody who is taking a look at it. Plus, you want to be able to provide this information as soon as, or possibly before, it’s asked for by any potential investor.

You’re the entrepreneur and I expect that you’re all over your business plan, but, apart from that, here are some of the key things to check are in order:

  • Your Company Books – starting with a ‘fun’ one, it’s a legal requirement to keep certain statutory registers up to date, such as your register of members. Having ‘up to date’ filings on Companies House is not the same (although potential investors will be taking a look at these too) as it’s the register that shows ownership of legal title to shares. All investors will expect to see these books to check that all is as they expect.
  • Your Cap Table – your register of members should also be translated to a user friendly cap table that you’ll be able to use to consider pre- and post- money ownership percentages and dilution on a fully diluted basis (i.e. including any option holders or holders of other convertible instruments that will not be on your register of members). Having this ready will help when you negotiate your valuation with investors too. There are online providers of software to help you manage this which may be useful once you have raised funds.
  • Your Financial Records – what potential investors will want / expect to see will depend on the stage of the business, but any accounting records should be well maintained and available for review.
  • Your IP – many companies are IP rich and IP should always be considered. For example:
    • Have all consultants signed IP assignments?
    • Has anyone who has worked on IP for the business (including founders and employees) before the company was incorporated signed IP assignments?
    • Have any other IP assets been protected or what is the strategy around that? Is the company name trademarked?
    • Has open source been used and can you demonstrate that the terms of the licence don’t require your own IP to be distributed freely?
  • Your IT
    • Do you have a summary of your IT system that you could disclose, with the documentation to support that summary should anyone wish to look at the detail?
    • Can you demonstrate that you’ve thought about cyber security? It’s a podium placer for top risks to businesses and demonstrating that you understand the issue, by setting out the approach you take to mitigating the risk, will help put minds at ease.
  • Their Data – Where is the data you control or process, what is it, and how do you go about making sure you’re dealing with it lawfully? What’s expected of you on this will depend on how data rich your business is and what stage your business is at, but regardless of the answer to those, there will be an expectation that you can show that you’re on top of it.
  • Your Customers and Suppliers – Are your customer and supplier relationships documented in up to date, unexpired and fully signed contracts? You will likely need to disclose these during the investment process (considering first any particularly sensitive information and whether confidentiality provisions apply).
  • Your team
    • Are the terms of engagement of your employees, workers and consultants all in writing and have they signed up to restrictive covenants, confidentiality undertakings and, where required, IP assignments?
    • Are any incentive schemes in place and if so, are all scheme documents available?
  • An NDA – Before disclosing anything secret, consider agreeing a confidentiality / non-disclosure agreement (NDA) with proposed investors. Having a reasonable NDA ready to sign could help this process (although keep in mind that some institutional investors may require their own paper to be used, not to be difficult, but because it’s been through their own in-house legal review and forms part of their own investment process). Similarly, institutional investors look at so many initial decks that they may not have the time or inclination to be troubled by negotiating an NDA, so think about the ‘when’ of seeking an NDA too.

Having the above in mind will keep you on the front foot when going out to raise funds, whether it’s from angel investors, VCs or otherwise.

Disclaimer

This note reflects the law as at 15 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Daniel Bryan
Author

Daniel Bryan

View profile

Lifecycle of a Business – Fundraising in a Tax Effective Manner

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered “First Things First” and “Directors: Lights, Camera, Action!” But now, let’s consider financing your business – “Show Me The Money”.

Fundraising in a Tax Effective Manner

Last week, we discussed some of the fundraising options for a company. While the considerations set out in that article are important, fundraising decisions are often tax-driven and no discussion would be complete without considering these tax consequences.

The general picture

Traditional investing by a UK tax resident in the shares of a UK company comes with an income tax charge on any dividend for investors, along with a capital gains tax (CGT) charge on the gain they make when they come to sell. Shares are generally acquired out of post-tax income and any capital losses may typically only be set against capital gains.

Issues for start-ups

Investors will want a return on their capital: either reliable dividend income or long-term capital growth or, ideally, both. However, many start-ups simply do not envisage profits for many years, and when they do start to generate profits, paying out dividends may not be a priority; often, they will need to plough the profits back into the business instead. Coupled with higher risks of failure (and so capital losses for investors), the tax system recognises that investors need to be enticed into investing into start-ups and other early-stage businesses.

Investment schemes

To give smaller and newer companies a level playing field there are a number of investment schemes that give investors enhanced tax breaks when they introduce new capital into the business by subscribing for shares. The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust Scheme (VCT) each encourage investors to finance smaller companies.

  • EIS was created to give direct tax relief to investors who subscribe for shares in small companies
  • VCT was designed to spread investment risk over a number of companies; investors invest in the venture capital trust, which will then buy shares in a number of qualifying companies
  • SEIS was designed to help new companies and start-ups

Tax breaks

These schemes give investors a varying number of tax breaks, which can include:

  1. Deferral of capital gains on assets sold to finance an acquisition of qualifying shares – meaning more money can be spent acquiring more shares and a tax bill delayed
  2. Income tax deduction on a percentage of the value of the investment in the year that it is made
  3. CGT relief on the gain made in the qualifying shares
  4. Ability to set any losses against income

This makes investing in eligible companies much more attractive, as investors can benefit significantly if values rise, but also have valuable tax benefits if the companies fail. This attempts to make higher risk small companies that need funding to grow, succeed and thrive a more enticing prospect compared to safer, more reliable, established companies.

Investee company conditions

Following perceived abuse of the schemes, new rules were introduced in 2018. These put in place a two-part condition, which requires the investee company to:

  1. Intend to grow and develop over the long-term (e.g have plans in place to increase revenue, customer base and number of employees (i.e. an SPV for a specific project would not meet this test)); and
  2. Have a significant risk of loss of capital to the investor greater than the net return (risk here is the commercial risk of the company failing in the market), i.e. the company must be significantly likely not to deliver a return for the investor.

In addition, there are a number of other conditions which the investee company must meet to enable investors to benefit:

SEIS EIS VCT
Type of company Unquoted (can be listed on AIM) Unquoted (can be listed on AIM) The VCT itself must be listed on the London Stock Exchange or on any other EU regulated Market, i.e. not on AIM. At least 70% of the VCT’s investments must be in unquoted companies (can be listed on AIM)
Ownership / subsidiaries The company must not be controlled by another company and must not have any subsidiaries that are not 51% or more subsidiaries The company must not be a 51% or more subsidiary of any other company and must not have any subsidiaries that are not 51% or more subsidiaries The VCT itself must not be a close company. Broadly this means that the VCT company must not be controlled by five or fewer shareholders or any number of directors
Assets The company must have no more than £350,000 in gross assets The company must have gross assets of less than £15 million before the EIS share issue and less than £16 million afterwards The companies that the VCT invests in must have gross assets of less than £15 million before the VCT share issue and less than £16 million afterwards
Employees The company must have less than 25 employees The company must have less than 250 employees (500 if the company is “knowledge intensive”) Each company that the VCT invests in must have less than 250 employees (500 if the company is “knowledge intensive”)
Time limits / restrictions No previous EIS or VCT investments can have been made. The company must be less than three years old EIS cannot apply if it has been more than seven years since the company’s first commercial sale (ten years if the company is “knowledge intensive”) Subject to some exceptions for “follow up investments”, VCTs cannot invest if it has been more than seven years since the target company’s first commercial sale (ten years if the company is “knowledge intensive”)
Trade The company must be trading, not have previously carried out another trade and must not carry out an excluded trade* The company must be a trading company but must not carry out an excluded trade* The VCT’s income must derive wholly or mainly from shares or securities. The VCT must distribute by way of dividend at least 85% of its income from shares. No more than 15% of the value of a VCT’s total investments can be in any one company. At least 70% of the companies invested in must be trading companies but must not carry out an excluded trade*
Limits No more than £250,000 per group can be raised in any three-year period (for SEIS to apply as mentioned above the company must not have any subsidiaries that it owns less than 51% of the shares in – this is the group for these purposes) No more than £5 million per year can be raised from any combination of SEIS, EIS and VCT. No more than a total of £12 million (£20 million if the company is “knowledge intensive”) per group can be raised from any combination of EIS, SEIS and VCT No more than £5 million per year can be raised from any combination of SEIS, EIS and VCT. No more than a total of £12 million (£20 million if the company is “knowledge intensive”) per group ca be raised from any combination of EIS, SEIS and VCT
Location Must be a UK resident company carrying on a trade in the UK or an overseas company with a UK permanent establishment carrying on a trade Must be a UK resident company carrying on a trade in the UK or an overseas company with a UK permanent establishment carrying on a trade

*Carrying out an excluded trade means that more than 20% of the company’s business and excluded trades include:

  1. dealing in land, commodities, futures, shares, securities or other financial instruments
  2. dealing in goods other than in the course of an ordinary wholesale or retail distribution trade
  3. financial activities, such as banking or insurance
  4. leasing assets for hire
  5. receiving royalties or licence fees (save for intangible assets)
  6. legal or accountancy services
  7. farming / woodlands and timber production
  8. property development
  9. nursing home or hotel management or operation
  10. producing coal or steel
  11. shipbuilding
  12. energy generation or supplying or creating fuel
  13. providing services to a connected person conducting an above trade

Investor conditions

There are also conditions for the investor themselves to meet:

SEIS EIS VCT
Type of shares acquired Newly issued ordinary shares Newly issued ordinary shares Shares in the VCT can be bought on the open market, however second-hand shares will not entitle you to up front income tax relief
Payment for shares Cash only Cash only Cash only
Tax avoidance The subscription for the shares of the company must not form part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax The subscription for the shares of the company must not form part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax
Period of ownership to qualify for CGT relief on sale Three years minimum Three years minimum Five years minimum
Connection The investor cannot be an employee of the company or any qualifying subsidiary during the period of three years commencing with the date the shares are issued (a director position is acceptable but compensation must not be excessive). The investor must not have a substantial interest in the company The investor must not be connected to the company (i.e. either alone or with associates owning or entitled to acquire more than 30% of the share capital, voting power or assets or any subsidiary on a winding up OR being an employee of the company or its group (can be a director but must not receive excessive compensation)) VCT cannot have more than 15% of its total investments in any one company

Investor benefits

Provided that these conditions are met, the investor can receive the following benefits:

SEIS EIS VCT
Annual investment upon which investor can obtain tax relief £200,000 £1 million
(£2 million if at least £1 million is invested in knowledge intensive companies)
£200,000
Percentage of investment on which income tax relief can be claimed 50% 30% 30%
Income tax relief on dividends? No No Yes
CGT relief on initial investment 50% capped at £100,000 100% N/A
Type of CGT relief on initial investment Deferral Deferral N/A
Gains exempt from capital gains when investment sold? Yes, if income tax relief was received Yes, if income tax relief was received Yes. The VCT itself is also exempt from corporation tax on chargeable gains
Relief for capital losses against income Yes Yes No
Inheritance tax (IHT) Any investment made in a SEIS-qualifying company held at the time of death is exempt from IHT after it has been held for two years Any investment made in an EIS-qualifying company held at the time of death is exempt from IHT after it has been held for two years No relief from IHT as holding shares in an investment company

The capital gains deferral for EIS and SEIS allows an investor to defer their gain from the sale of any asset by spending the proceeds on EIS or SEIS shares. You must make the investment between one calendar year before and three calendar years after you sell the asset.

A bit of maths

An investor sells an unrelated capital asset for £140,000, making £100,000 of profit. Usually, this £100,000 would be subject to CGT. However, he invests the full £100,000 of profit into a company that qualifies for EIS. His CGT on the £100,000 is therefore deferred.

In that year he obtains £30,000 worth of income tax relief. His net investment cost is therefore, £70,000.

If you have any questions around any of the above or wish to discuss your options further, please contact our Tax team who would be delighted to assist.

Disclaimer

This note reflects the law as at 6 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Olly Claridge
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Oliver Claridge

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Lifecycle of a Business – So, you need to raise funds for your business?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered “First Things First” and “Directors: Lights, Camera, Action!” But now, let’s consider financing your business – “Show Me The Money”.

So, you need to raise funds for your business?

It is likely that at some stage after setting up a business you will need access to finance from third parties. You may have approached friends and family for loans and initial investments while your business was in in its earliest stages, but now be seeking a more significant financial boost as it grows. This could be prompted, for example, by a need to purchase a new property, recruit more employees, support cashflow, service existing debt or even to acquire the shares or assets of another business. Here, we will summarise some of the more common financing options available from institutional lenders and professional investors and the advantages and disadvantages of each.

Debt financing

If your business has a reasonable credit rating and is performing well, high street banks and institutional lenders may be willing to grant you a loan. Like a personal loan, you will be required to pay this back with interest over a period of time together with any fees payable.

A loan can be advanced by a single or multiple lenders (called a bilateral or syndicated loan respectively) and can be tailored to the needs of your business. There are several types of loan available, such as an overdraft that allows your business to withdraw more funds than it has available, a revolving facility under which a business can draw down, repay and then re-borrow amounts up to a certain limit or a term loan that is repayable after a set period of time, either in instalments over the life of the loan or in one bullet repayment at the end of the term.

A key advantage of debt financing is that it does not require you to give up a share of your business to another party, although lenders can impose control through different means. Depending on the size of your business, the nature of the lender and the amount of funds being lent, the loan documentation may include restrictions around how your business is operated and limits on the expenditure it is allowed to make and dividends it is permitted to pay during the term of the loan. Your business may also be required to give covenants to do and not do certain things, including for example, periodically providing the lender with detailed information about its financial status and/or undertaking not to incur further indebtedness or grant security over the business assets to a third party. Breach of the terms of your loan will allow the lender to accelerate and demand repayment and ultimately enforce any security or guarantee it has the benefit of.

A lender will usually wish to take security over your business’s assets (such as premises, intellectual property or money owed to you by customers) or shares in case you fail to repay your loan (in much the same way as your mortgage provider can take possession of your home if you don’t keep up with repayments). Additionally, some lenders may require you to provide a personal guarantee (either unlimited or capped at an agreed amount), guaranteeing the amounts to be repaid by your business under the loan agreement. This would mean you could be forced to liquidate private assets if your company defaults on its loan.

You will need to ensure that your business has sufficient funds to meet periodic interest payments and ultimately repay the capital lent to you, as well as the ability to meet any additional criteria a bank may wish to impose, such as financial reporting or insurance requirements. It is advisable to take legal advice if you are taking on debt financing to fully understand what you may and may not do for the term of your loan and the scope of any security package, and to ensure that you have enough flexibility to run your business.

Equity financing

Equity financing requires you to give up a share of the ownership of your company in exchange for funds. As well as cash, other benefits may also follow, for example, industry expertise and a broader investor base.

Private equity

Private equity funds or ‘houses’ use a combination of funds raised from institutional investors and their own cash to invest in specific sectors. Generally, they will subscribe for a large number of shares in a company, deploy industry knowledge to maximise its value and then, usually after a period of between five and seven years, ‘exit’ or sell their shares to another investor or list the company on a public market.

The structuring of a private equity transaction can be complex and is often tax-driven, but, in most instances, a private equity fund will incorporate a ‘stack’ or sequence of companies through which it will ultimately invest in a target company. The fund will subscribe for shares or loan notes in ‘Topco’, alongside a management team who will assume a minority share. If the private equity house requires additional funds to make the acquisition, debt will be provided by banks or other institutions to companies lower down the stack. Once any debt has been repaid, profits are then distributed upwards to the private equity fund and management team at the top of the structure.

Whilst it may seem daunting to give up a large share of your business, private equity houses can offer you the benefit of industry expertise, often through a dedicated management team, who are themselves incentivised by their shareholding to grow the business. Some businesses see the management model as a key advantage of private equity, preferring to develop closer personal relationships with a small group of individuals than dealing only with large institutional lenders.

That said, using private equity can be both time-consuming and costly at the outset and often involves a large number of legal documents. You will need support from various professional advisers, including lawyers and external consultants to market your business effectively to private equity funds. Once you have agreed upon your chosen investor, you and your lawyers will need to negotiate the acquisition agreement, which deals with the sale of shares in the business to the private equity house, and a suite of equity documents, which will govern matters such as the distribution of profits through the investment structure and the parties’ decision-making powers. For example, a private equity house is likely to request that the business doesn’t carry out certain matters without its consent or the consent of directors it appoints to your board.

Venture capital

Venture capital funds generally look to invest in young companies with an innovative business model or product. They usually subscribe for shares in an investee company and expect board representation, in exchange for which they will offer strategic guidance to the business for the term of their investment.

Whilst venture capital investments are typically less structurally complex than private equity investments, they tend to follow a sequence of funding rounds which can take a number of months or even years to complete, subject to how successful the business is. Initially, a venture capital fund might support a new company with ‘seed’ fundraising alongside wealthy individuals or ‘angel’ investors, allowing the business to meet set-up costs, such as hiring a premises and purchasing equipment. Once this seed investment has been made, the venture capital fund, sometimes accompanied by additional corporate investors, will provide more cash through several fundraising rounds, each of which is aimed at providing finance for certain purposes, for example, to meet employment expenses, carry out R&D projects and expand into new markets. The venture capital fund will eventually choose to realise its investment through a sale to another investor or private equity fund.

As with private equity, venture capital requires you to be comfortable with handing over a large equity stake in your business to a third party. It also requires time and considerable effort will be spent in marketing your company to prospective venture capital funds and achieving financial results once the fund parts with its money.

IPO

If your business is already achieving consistent financial results and you are seeking to broaden your shareholder base, an initial public offering might be worth considering. Also referred to as an ‘IPO’ or ‘float’, this is when a private company converts to a public company, is listed on a stock market and issues shares to the public for the first time. There are a number of public markets across the world, each with different eligibility criteria and continuing obligations requirements. These range from markets focussed on smaller start-up companies to those aimed at the large multinationals that we have all heard of.

As well as lawyers to help guide you through the IPO process, draft the various documents required and ensure your business’s compliance with the applicable rules for the relevant market, there will be various other professional advisers that you will need to instruct should you embark on a float. In particular, most IPOs will require the ongoing involvement of a professional adviser to ensure that the company complies with your chosen market’s requirements. Such advisers have different titles depending on the market in question, for example, a sponsor, corporate adviser or nomad (nominated adviser).

An IPO can be expensive and time-consuming and your business will be subject to additional scrutiny and reporting requirements, but it can also offer your company a wider and more varied shareholder base, incentivise your employees and increase both the profile of your business and the liquidity of your shares.

Final thoughts

Ultimately, choosing a source of financing that is best for your business is a very personal decision and worth careful consideration. The choice you make will depend on the amount that you want to raise, whether you want to dilute the ownership of your business, the costs involved and the stage that your business is at in its lifecycle.

If you have any questions around any of the financing options explained here, please contact our Corporate or Banking team who would be delighted to assist.

Disclaimer

This note reflects the law as at 6 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Lifecycle of a Business – Money, Money, Money: Directors’ Duties and Financial Accounts

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Money, Money, Money: Directors’ Duties and Financial Accounts

We’ve recently written about the general duties of directors which are set out in the Companies Act 2006 and in that article, briefly mentioned that other, more specific duties and obligations may also apply, including, for example, in relation to a company’s financial accounts. Broadly, the directors of a company have to be satisfied that the annual accounts provide a true and fair picture of the company’s financial position before they are approved and filed at Companies House. But how can they do this and why is compliance important?

What is the duty?

A Company’s financial accounts must be approved by the company’s directors and filed at Companies House each financial year. However, by law, the accounts must not be approved unless they give a true and fair view of the financial position of the company, including its assets and liabilities. If a director is not convinced that the information contained in the accounts provides a true and fair view, the accounts should be investigated and any necessary adjustments made.

The words “true” and “fair” can be considered at face value when considering the company’s accounts. In other words, do the accounts show a picture of the company which is, in the context of the directors’ knowledge of the business and the necessary application of accounting rules, an accurate reflection of what has happened during the relevant financial period and the situation at the end of the year? If a director thinks something material is missing or that something has been described in a misleading way, they should add a disclosure or make a correction. “Fair” is also important as it implies balance.

The accounts can be approved by a majority of the directors and once approved, one director needs to sign the balance sheet, directors’ report and any strategic report being submitted to Companies House. For this reason, the approval decision should be made at a formal board meeting and documented in the minutes. Any discussions and any dissenting views that have been expressed by any director should also be recorded in those minutes. Recording such matters is particularly important; if approved annual accounts do not comply with the statutory requirements, every director who knew that they did not comply or failed to take reasonable steps to ensure compliance, or to prevent the accounts from being approved, commits an offence.

Objective professional judgement must be applied during the preparation of the accounts and when considering whether the accounts give a true and fair view. Although directors can delegate the preparation of the accounts, they cannot abrogate their responsibilities and simply defer to others in relation to the accounts’ content and approval. They must be open to challenging other members of the board on the decisions being made. A lack of awareness will not provide a director with any defence in a breach of duty claim.

Incorrect accounts?

Directors have a legal duty not to file false information at Companies House. Knowingly or recklessly delivering information or making a statement to the Registrar of Companies that is misleading, false or deceptive is a criminal offence and can lead to fines and/or imprisonment.

To commit such an offence, a director has to have:

  1. knowingly or recklessly submitted false information; or
  2. failed to take reasonable steps to secure compliance with the requirements or prevented the accounts or report from being approved.

This means that if the accounting records are not reasonably accurate, every director (as well as any other officer, including the Company Secretary, Head of Finance and shadow directors, who have taken part in the production of the accounts for filing) may be criminally liable. It also means that any director who was careless about the legal requirements may be personally guilty of an offence. A director could also be liable to compensate the company for any losses it suffers as a result of an inaccurate report.

Repeated failure to comply with filing duties or conduct which makes the director in question unfit to be concerned in the management of a company could result in the individual’s disqualification from acting as a director of a company for up to 15 years.

An honest mistake?

We are, after all, only human and mistakes do happen. On this basis, inadvertently filing inaccurate information is unlikely to cause a breach and any inaccuracies which are discovered may be corrected using Companies House’s second filing service.

True or on time?

Where directors find themselves caught between the duty to file the accounts on time and not knowingly or recklessly filing documents which are misleading, false or deceptive, it is worth noting that filing accounts which are materially incorrect is much more serious than filing them late.

That said, Companies House does issue fines for late filings and there is no guidance as to how directors should deal with this situation. It should therefore be assumed that Companies House is not going to look too kindly on a company which finds itself in this position and so it is important for directors to get up-to-speed with the company’s activities and financial position in plenty of time before having to approve and arrange the filing of the accounts.

Failure to submit accounts can result in Companies House striking off the defaulting company from the company register. There is a detailed and fairly lengthy process for this and also plenty of adverse consequences for all involved in the company, including assets becoming the property of the Crown, disqualification of directors and directors being liable for company debts, not to mention the reputational issues at stake.

Practical steps

  • Ensure that robust processes of verification are in place prior to the release of any information.
  • Practise good record-keeping by documenting decisions and the decision-making process. Ensure that the approval of the accounts (as well as any discussion and challenge) is set out in formal board minutes – it is difficult for a director to prove that their duties have been exercised if there is no permanent record of the decisions made.
  • If a director has not, or cannot, satisfy themselves that the accounts reflect a true and fair position of the company’s financial position, they should not approve the company’s financial statements.
  • Being completely up-to-speed on your duties and obligations as a director is of prime importance and the role of a director should never be taken lightly. You should seek professional advice if required. This could be legal, financial or other advice relating to a particular problem or situation. Directors are not expected to know everything, but they are expected to do what is needed to ensure that they are discharging their duties appropriately.

Disclaimer

This note reflects the law as at 27 October 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Consider the following options… – Elizabeth Small writes for Taxation

Tax Partner, Elizabeth Small, has written for Taxation on the tax consequences of the different ways of owning and operating a hotel.

When recently sipping a coffee in a hotel lobby, I was pondering (being between books) that there are a number of ways in which a hotel might be owned and operated and that each of these will have a raft of different tax consequences. In the following scenarios I am going to assume that the freehold to a Brighton hotel is owned by ‘HotelCo’, a single purpose entity which is ‘property rich’. The scenarios to be explored are:

  1. UK tax resident friends and family own the shares in HotelCo (in this scenario, a UK tax resident company) which owns the freehold interest and operates the hotel;
  2. HotelCo is a non-resident company, owned by non-resident persons, and has leased the hotel to ‘Opco’, a wholly-owned subsidiary which operates the hotel (as explained further below, little turns on where the central management and control (CMC) of OpCo is or indeed where OpCo was originally incorporated);
  3. HotelCo is rebranded as LandlordCo (again it is nonresident both in terms of CMC and incorporation) and lets the property to a third party branded hotel tenant, ‘LeaseCo’;HotelCo is rebranded as ‘NRHotelCo’ (obviously non-UK tax resident) and enters into a hotel management agreement (HMA) with a third party branded company, ‘HMACo’.

The full article can be read here.

Elizabeth Small
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Lifecycle of a Business – Directors are best-placed to make the commercial decisions

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Directors are best-placed to make the commercial decisions – ClientEarth v Shell Plc

We recently wrote an article about the general duties of directors as set out in the Companies Act 2006 (the Act). As mentioned in that article, section 172 of the Act sets out the duty to promote the success of the company for the benefit of the members as a whole and includes a non-exhaustive list of factors that the directors should consider when making any decision.

The recent case of ClientEarth v Shell Plc confirmed that a director’s general duties are those as set out in the Act, “incidental” duties do not apply and the courts will not seek to interfere with the commercial decision-making of directors, provided that they are acting in good faith.

What was the case about?

ClientEarth, an environmental law charity and a shareholder in Shell Plc (Shell), sought to bring a derivative claim against Shell’s directors on the basis that their management of the risks posed to Shell relating to climate change was in breach of their general duties as directors.

Although a director’s statutory duties are owed to the actual company and therefore, it is the company itself that must bring any claim for breach of those duties, it is possible for shareholders to bring a derivative action on behalf of the company, provided that the court gives permission. Initially, the court makes this decision based on papers only, i.e. there is no oral hearing.

Among other points, ClientEarth alleged that Shell’s directors had failed to ensure that the company had a measurable and realistic pathway to achieving net zero by 2050 and that as such, the directors were in breach of their section 172 duty to promote the success of the company for the benefit of the members as a whole and also their duty to exercise reasonable care, skill and diligence (section 174 of the Act). ClientEarth also argued that six further duties relating to climate change (including, for example, “a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion”) apply to directors of companies like Shell. These “incidental” duties are at no point mentioned in the Act.

What did the High Court decide?

The High Court refused permission for ClientEarth to bring a derivative claim, but granted the charity leave to exercise its right to an oral hearing to reconsider the decision, which it took advantage of. At the oral hearing, the High Court again dismissed ClientEarth’s application for permission to bring the derivative claim against Shell.

The High Court was of the view that ClientEarth had no evidence to show that a reasonable board of directors could not have decided that Shell’s net zero strategy was achievable.

Shell’s directors had put in place a net zero strategy and just because the directors’ chosen strategy did not align with ClientEarth’s view on what the strategy should encompass, this did not mean that the directors were in breach of their general duties. Directors of a company, especially one as large and complex as Shell, have many competing considerations to take on-board when making commercial decisions and these would not have been taken into account by ClientEarth.

The judge made clear that the directors of a company are best-placed to make commercial decisions with a view to promoting the success of the company for the benefit of the members as a whole and that the courts would be loath to interfere with that.

The “incidental” duties suggested by ClientEarth were not relevant and represented an attempt by ClientEarth to impose “specific obligations on directors as to the management of a company’s business and affairs”.

The fact that ClientEarth had a very small number of shares in Shell (27) was also relevant. Even with the support that the charity had garnered from other shareholders, they still represented a very small minority of the Shell members, the vast majority of which had supported the company’s net zero strategy. The judge considered that the charity was possibly pursuing its own agenda – to advance its own climate change policy – rather than seeking to bring the claim for the benefit of Shell.

What does this mean?

The case made very clear that the general duties of directors are those which are set out in the Act and that “incidental” duties do not apply. Such “incidental” duties would impede the directors’ freedom to make decisions. In addition, the judgment repeated the long-established principle that the management of a business is a matter for the directors acting in good faith, not the courts. Consideration and weighing of the non-exhaustive list of factors set out in section 172 of the Act “is essentially a commercial decision, which the court is ill-equipped to take, except in a clear case”.

While a positive takeaway for directors, this is not to say that directors have a completely free rein to act as they choose. The general duties set out in the Act most certainly have “bite” and directors will need to be able to show that they have considered, and complied with, such duties in relation to their decision-making, actions and inactions.

Record-keeping is important, particularly where decisions are complex or controversial, and while directors cannot absolve themselves of responsibility for the final decision, professional advice should be taken in matters which are outside a board’s usual remit.

Disclaimer

This note reflects the law as at 16 October 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Will lease extension be deemed a disposal for tax purposes? Elizabeth Small and Lucy Barber write for Taxation

Exterior of large financial building

Tax Partner, Elizabeth Small, and Head of Residential Property, Lucy Barber, have answered a reader’s question for Taxation on lease extensions.

In the article, entitled ‘Will extension be deemed a disposal for tax purposes?’, the reader asks:

“A client owns the freehold of a block of flats in London and granted a 99-year lease for one of the flats to a lessee some years ago. A premium was received which was subject to tax under the usual part disposal principles. The lessee now wishes to extend the lease to 999 years and a further premium of £10,000 will be paid. I understand that the premium is relatively small as there is little difference in value between a 99-year lease and a 999-year lease. It seems that the transaction will be deemed for tax purposes as a disposal of the old lease by the lessee and the grant of a new lease by the freeholder.”

Elizabeth and Lucy explain that typically, the extension will be outside the terms of the current lease and therefore it will be treated as though there was a surrender of the old lease and the grant of the new longer lease. Sometimes, it may be possible to ameliorate this by ensuring that there is not a surrender and regrant, and instead grant a reversionary lease which takes effect at the end of the term of the existing lease. A supportable valuation of the reversionary freehold interest and the value of the lease surrendered will be key to determining the tax impact, and awareness of these issues is key to ensure that a proportionate tax result is achieved.

The full answer can be read here.

Lucy Barber
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The Lifecycle of a Business – What are my duties as a director?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

What are my duties as a director?

Whether you’re the sole director of a small owner-managed company or the CEO of a multinational enterprise, you’ll be subject to various duties and obligations and it’s imperative that you’re aware of these before you’re appointed and remember them throughout your directorship (and in some cases, after it ends as well). For further guidance as to what to consider before becoming a director, see here.

What are a director’s duties?

The general duties of a director of a company are set out in the Companies Act 2006 (CA 2006) and all directors must abide by these. These are discussed in more detail below.

In addition, a company’s articles of association (the articles) may include additional obligations and further duties are set out in other legislation and case law which may be relevant, for example, health and safety law, environmental law, accounting requirements and so on. It’s also worth bearing in mind that where a director is an employee of the company, they’ll also be bound by the terms of their contract of employment.

General duties of directors

Set out in the CA 2006, the general duties should be considered by directors whenever they make any decisions or act (or decide not to act) in their capacity as a director. The duties are owed to the company, not to, for example, shareholders. More than one general duty may apply at any given time and breaching one duty to comply with another is no defence.

Further guidance about what directors should and shouldn’t do to comply with these duties can be found here.

  1. Duty to act within powers (section 171, CA 2006) – Directors must only act in accordance with the company’s constitution (i.e. the articles) and exercise their powers only for the purposes for which they’re conferred. This latter part will depend on the circumstances in question but basically directors mustn’t exceed the scope of their powers.
  2. Duty to promote the success of the company for the benefit of the members as a whole (section 172, CA 2006) – Probably the most significant of the general duties, this should be at the forefront of every director’s mind when making company-related decisions. The provision includes a non-exhaustive list of factors which directors should consider, including the likely long-term consequences of any decision, the need to act fairly between members, employees’ interests and the impact on the community and environment. This latter point is highly topical with ESG being an important consideration for many businesses. That said, this doesn’t mean that a company’s actions must only be beneficial to the environment and we’ll cover this in more detail in a future article.
    It’s not always necessary for the board to fully document their discussion of these various factors although board minutes should always record that they’ve at least been considered. However, where a decision is or may be contentious, then it’s probably worthwhile to include more detail as to the factors considered and the reasons behind the end-decision, so that there’s a paper trail should questions arise at a later date.
    The legislation doesn’t define “success”, although for most businesses it’s likely to mean long-term profitability. However, for some companies, charities for example, this may not be the objective.
  3. Duty to exercise independent judgement (section 173, CA 2006) – Directors must make their own decisions after taking into account the circumstances and any relevant factors. This isn’t to say that external advice can’t be taken; in fact, in some situations where specialist expertise is required, a director could be in breach of their duties by not taking such advice, but the director has to come to their own decision after taking any such advice into account. Nor does this duty prevent delegation; this wouldn’t be feasible unless the company was very small, but delegation doesn’t absolve any director of responsibility.
    This duty can cause difficulty between board members and a junior director may find it difficult to openly disagree with a more experienced member of the board, but taking a collective line simply because it’s expected rather than because you agree with it, would be a breach.
  4. Duty to exercise reasonable care, skill and diligence (section 174, CA 2006) – There are two levels to this duty – objective and subjective. A director must use the care, skill and diligence that would be expected of any director in making a decision (objective). However, if that director has a particular skill or expertise, then that will also be taken into account (subjective). So, for example, if a director has 20 years of experience as an accountant, they’d be expected to bring that expertise to bear in relation to reviewing the company’s accounts.
  5. Duty to avoid conflicts of interest (section 175, CA 2006) – A director must avoid any situation in which they have or could have a direct or indirect interest that conflicts, or could conflict, with the company’s interests. If, for example, a director holds directorships in a number of companies, his use of information regarding the property, for example, of Company A for the benefit of Company B would be a breach of this duty.
    Case law has provided that this duty continues to apply even after a director has resigned (see here). An obvious example of this is where a director resigns from Company X to work for Company Y and uses the information he acquired while a director of Company X to further Company’s Y’s business.
    Often, the company’s articles will permit the independent (i.e. non-conflicted directors) to authorise any such conflict although you must ensure that there is still a quorum (minus the conflicted director) to do this. The articles of a company may provide for a different quorum for directors’ meetings to approve any conflicts. Failing that, the members may be able to authorise.
  6. Duty not to accept benefits from third parties (section 176, CA 2006) – Essentially an anti-bribery duty, a director mustn’t accept any benefit if it’s given because of their position as a director or in relation to their acting (or not acting) as a director in a certain way. “Benefit” isn’t defined and so common sense is required here. Clearly, a director involved in the tender process for a large piece of work shouldn’t be accepting gifts from one of the bidder entities, although accepting a working lunch invitation from your legal advisor to discuss a transaction that they’re advising you on is probably fine. A company’s articles or anti-bribery policy may include further detail as to what’s acceptable.
  7. Duty to declare an interest in a proposed transaction (section 177, CA 2006) – Any director who has an interest in a transaction which the company proposes to enter into must declare that interest as soon as possible. For example, if Company E intends to acquire the shares of Company F and a director of Company E is a shareholder in Company F, this must be declared to the board of Company E. The declaration need only be given once.

What happens if a director is in breach?

A breach of any of the above duties can have various, potentially serious, consequences. As mentioned, the duties are owed to the company and so it’s the company who’ll bring any claim against a defaulting director. That said, members are, on occasion, able to bring a derivative claim on behalf of the company.

Remedies may include damages, the granting of an injunction to stop the director from acting in a certain way or requiring the director to account for profits. Directors in breach may also have their employment terminated and be disqualified from acting as a director in the future. The damage to a person’s reputation should also not be underestimated.

While resigning from your position as a director may seem like a sensible option if there’s been a breach or if you’re not happy with the decision-making of the rest of the board, care should be taken as such a step may not solve the problem and in certain situations, could make it worse.

You should take legal advice as soon as possible if you think that you may have breached or are in breach of a duty or if you suspect that another director has done so.

Disclaimer

This note reflects the law as at 5th October 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Lianne Baker
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Lianne Baker

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A Guide to Employing Domestic Staff

The maze of UK law requirements for new employers (including those employing domestic staff such as housekeepers, nannies and gardeners) can feel daunting to navigate. However, it is important to consider the legal fundamentals as this will reduce the risk of any claim and help ensure that the new relationship works for both parties.

This overview will highlight the key concerns that a new domestic employer should be aware of and will give some pointers to help you start on the right footing.

Status

The first question to consider is how a staffing arrangement should be structured – should the individual be employed or engaged as a self-employed contractor?

‘Employees’ provide their services personally and are controlled by an employer in terms of working arrangements, hours, annual leave, etc. For example, a full-time housekeeper who is required to work Monday to Friday 9-5, would most likely be considered an employee. Employees (as opposed to ‘self-employed contractors’) receive the best employment protection and are entitled to paid annual leave, sick pay, national minimum wage and protections in relation to dismissal. Their salary should also be subject to deductions for tax and national insurance through a Pay As You Earn (PAYE) system.

‘Self-employed contractors’ have greater autonomy in their roles and their arrangements are normally more informal. For example, a gardener who provides services for five hours per week at times he/she chooses would most likely be considered a self-employed contractor. Self-employed contractors generally do not benefit from employment protections and are typically paid gross.

In our experience, an employment arrangement is the most common and the guidance below will assume an employer-employee arrangement.

Contracts

It is a legal requirement to deliver certain information to a new employee either on or before their first day of employment. Including details of their place of work, rate of pay and working hours, and is typically set out in a contract of employment. Well-drafted contracts go beyond this minimum level of information and contain bespoke clauses, for example, setting out the employer’s expectations of the employee in relation to confidentiality and restricting an employee’s ability to discuss matters relating to their employment on social media.

A comprehensive contract can also set out what happens at the end of the relationship, to ensure that all parties are fully informed and to help avoid an unfair dismissal claim.

Policies

There are certain policies that an employer must have in place, including a disciplinary and grievance policy and procedure. In addition, there are other policies which we always advise our clients to have in place, as they help both employers and employees to better understand what is expected of them, such as a sickness and absence policy and a discrimination and anti-harassment policy.

Getting the admin right: payroll, pension, insurances

We strongly advise our clients to seek the assistance of a payroll provider however big or small their workforce is. Payroll will help with ensuring that employees get paid the correct amount and in a timely manner. This is a task that can become more complex when instances of sick pay, family leave (for example, maternity or paternity leave) and overtime arise.

All employers must establish an autoenrollment pension scheme (which employees are entitled to opt-out of), which both employer and employee will pay contributions in to.

Employer’s liability insurance is also mandatory. This primarily provides insurance where an employee brings a personal injury claim against the employer in the course of their employment. Failure to have a valid policy in place can not only be costly but is also a criminal offence.

Right to work checks

It is important that clients check an employee’s right to work in the UK before their employment starts (for example, by checking that they have a UK passport or other visa/work permit). Failure to do so could result in fines of up to £60,000 per employee.

Accommodation

It is not uncommon for domestic employees to live at their place of work, whether in a separate dwelling or in a dedicated space within the same house as their employer. These arrangements need to be clearly documented, normally in a service occupancy agreement. It is important that such agreements make clear that an employee’s right to reside is linked to their employment and that, in the event their employment ends, their right to reside also ends.

For advice on employing domestic staff in the UK, please contact Joe Beeston or Nina Gilroy.

Disclaimer

This note reflects the law as at November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.


Moving to the UK – Everything you need to know

Moving to the UK is an exciting life event whether it be a short-term move for work to explore business prospects or a more permanent relocation with the whole family; the UK offers an eclectic range of options to live, work and learn, from the cityscapes of London to vineyards in the English countryside and historic university towns in-between. Setting up life in a new country can feel daunting too and it can be difficult to know where to start.

Moving to the UK

The Lifecycle of a Business – Staging a Coup – removing a director from office

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Staging a Coup – removing a director from office

Every company is run by its directors, but what can the members do if they are unhappy with how the directors are performing – can they kick a director out and replace them? It is a fundamental principle of company law that ultimately the members decide who is appointed to run their company, but how does this work in practice?

If members are dissatisfied with a director and the director will not resign, the first place the members should look is the company’s articles of association.

Companies have a great deal of scope to determine how directors are appointed and removed, and every set of articles will set out how this is done. The articles will usually provide that directors leave office automatically in certain circumstances, for example if they are bankrupt, physically or mentally incapable of fulfilling their duties, or if they fail to attend board meetings. Bespoke articles may contain provision for them to be removed by notice from a certain majority of members, by ordinary resolution, or by the rest of the board. The model articles, and their predecessor Table A, do not contain such provisions, so if the director’s office is not automatically terminated and the articles can’t be amended, how can they be removed?

Where there is no convenient method provided for in the articles, statute provides a long-established fallback option. This is currently found in section 168 Companies Act 2006, and enables the company to remove a director by ordinary resolution at a meeting. This power cannot be excluded or fettered by anything in the company’s articles (although there are some ways to avoid it, as mentioned below). Because removing a director in this manner is the ‘nuclear option’, and the interests of both the director and the members are engaged, there are a number of requirements that must be followed for the removal to be effective.

Firstly, unlike almost all other company resolutions, the resolution must be passed at a general meeting of the company – a written resolution will not be sufficient.

Secondly, special notice of the intention to move the resolution must be given at least 28 days before the meeting at which it is moved, and the company must give its members notice of the resolution either at the same time the meeting is called, or where that is not practicable, at least 14 days before the meeting.

The notice of the intention to move the resolution must also be sent to the director in question when received by the company, and they have the right to protest against their removal. This includes the right to be heard at the meeting, and to make written representations (of reasonable length) to be circulated to the members. This is to ensure that directors get the opportunity to make their case to the members – who, of course, may be swayed by their oratory and decide to keep them in office.

Only an ordinary resolution is required and so a bare majority of the votes at the meeting is sufficient to pass it and remove the director from office. It is wise for members seeking to remove a director to ensure that they will have sufficient support in attendance (in person or by proxy) at the meeting to carry the resolution – if that can be shown, the director may see the writing on the wall and agree to resign without the indignity of being removed.

While the provisions of section 168 cannot be excluded by the articles, there are scenarios where there will be no purpose to going through the process. The director may be directly appointed by members with a particular right to do so under the articles, and if they are removed could immediately be reappointed. The articles may also contain weighted voting rights for certain members, which could validly be exercised to prevent removal.

Members should also note when considering whether to remove a director that this will not affect any other rights that the director has – for example, they may have a claim for a breach of their employment contract. If the director is also a member of the company, they may also have a claim for unfair prejudice after being removed, or a contractual claim for breach of any shareholders’ agreement if, for example, the others have agreed to vote against a certain director’s removal and fail to do so.

It is also worth noting that the resolution must be put to the members in order to be passed, and a director may be reluctant to assist in calling the general meeting that might result in their defenestration. Members should take note of their powers under the Companies Act 2006 to compel the directors to call a general meeting, and to call it themselves if the board fails to do so -this is a further method of letting a director know they are doomed to be removed – and facilitate an orderly departure.

Finally, members should be wary of what will happen to relationships in the company after a director has been removed at a possibly ill-tempered meeting, especially in smaller companies where there are clear factions in the membership and an uncertain majority. Once disgruntled members realise they can remove directors, they can acquire a taste for it!

Disclaimer

This note reflects the law as at 28 September 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Andrew Neave
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Andrew Neave

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The Lifecycle of a Business – Sole directors – is this still a problem?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Sole directors – is this still a problem? Fore Fitness and Active Wear

Every company has directors to run their affairs and take decisions – but how many do you need? And what are the consequences if your company doesn’t have enough?

There is no need for a company to have a large board of directors. Section 154 of the Companies Act 2006 (the CA 2006) provides that a private company needs just one.

However, the CA 2006 is not the only consideration. The shareholders have a great deal of freedom to adopt rules suitable for their own business in the articles of association. The Model Articles do not include any restrictions on the number of directors, but bespoke articles often do. If the articles set out a minimum number of directors and there is a vacancy, the remaining directors are usually only allowed to act to appoint further directors to bring the board up to its minimum number, or convene a general meeting for the shareholders to do so. If the board tries to act when it doesn’t have enough members, those acts will not be valid, and the directors will be in breach of their duties to the company.

However, the reforms of the CA 2006 were intended to ensure that a company could operate very simply, appointing a sole director and adopting the Model Articles, which under Model Article 7(2) permitted that sole director to exercise all of the company’s powers alone without any regard to the Model Articles regulating decision-making, provided no other provisions of the articles required a minimum number of directors. This is practical, avoids the absurdity of a sole director having to hold a meeting with themselves, and was, until quite recently, considered uncontroversial. Model Article 11(2), which sets the quorum for meetings of the directors at two, was not thought to be inconsistent with Model Article 7(2) – it is patently a provision relating to directors’ decision-making at meetings, so a sole director could safely ignore it as the Model Articles instructed them to do. As a result of these reforms, many companies operate with sole directors under the Model Articles.

Fore Fitness

The decision in Hashmi v Lorimer-Wing (also known as Re Fore Fitness Investments Holdings Ltd) therefore came as an unwelcome shock to many practitioners, as it was decided that the Model Articles were internally inconsistent, and did not permit sole directors to act alone, despite section 154 of the CA 2006.

The judge in Fore Fitness held that the amended Model Article 11(2) in that case, which provided that certain directors were required to form a quorum, was actually to be interpreted as a provision that required the company to have a minimum number of directors, and so Model Article 7(2) did not apply and a sole director could not act. This analysis would apply in the same way to the unamended Model Article 11(2). According to the judge, if a company wanted to operate with a sole director, it was free to amend its articles to permit this.

As a result, the validity of any decision made by a sole director under the Model Articles was called into question!

Re Active Wear

The subsequent decision in Re Active Wear Ltd redressed the balance somewhat. The judge indicated that he did not agree with the reasoning in Fore Fitness, that Model Article 11(2) was plainly a provision relating to directors’ decision-making (falling under that section in the Model Articles and being relevant only to meetings of the board), and held that a sole director could act where the unamended Model Articles applied, or where amended Model Articles were not inconsistent with Model Article 7(2). There should be no need for previous decisions to be ratified. However, the judge was deciding the case before him relating to the appointment of administrators on its particular facts and could not overrule Fore Fitness.

Where are we now?

So, where are we now, and how has this been dealt with in practice? Unfortunately, the Court of Appeal has not yet had the opportunity to clarify the position.

As such, while many companies will take sufficient comfort from Active Wear to avoid incurring the costs and inconvenience of ratifying historic actions, the fact that Fore Fitness has not yet been overruled means that some doubt remains over decisions taken by sole directors operating under the Model Articles. The prudent option is to consider and mitigate the risk by amending the articles to make clear that the sole director can act alone, or to appoint further directors – of course there is a cost and inconvenience in doing so, but companies will find that many of their counterparties, especially on larger transactions involving commercial lenders, are also adopting a cautious approach, and will insist on amendments to the articles or additional directors being appointed.

While it is impossible to predict when (and if) the Court of Appeal will eventually overrule Fore Fitness, it is worth bearing in mind that there will doubtless be thousands of small companies with single directors and Model Articles wholly unaware of these conflicting rulings and conducting business as usual today without any idea that their acts are of questionable validity. If the Court of Appeal does not rule in line with this commercial reality (and, we would humbly suggest, with the plain reading of the Model Articles) there will be enormous scope for decisions to be unpicked or challenged, and day-to-day company decision-making will be made needlessly more onerous until the law can be changed.

Disclaimer

This note reflects the law as at 19 September 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Andrew Neave
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Andrew Neave

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The Lifecycle of a Business – Appointing Directors

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Appointing Directors

The board of directors of a company is responsible for setting company strategy and managing the company on a day-to-day basis. Before they can engage in these important tasks, directors need to be appointed correctly, so that they have the necessary authority to act on behalf of the company. This article covers when directors might be appointed, how to appoint them correctly and what happens when directors are appointed incorrectly.

How many directors?

The Companies Act 2006 provides that private companies must have at least one director, while public companies must have at least two and, in both cases, at least one director must be a natural person, i.e. not a body corporate. (Recent case law has complicated the minimum number of directors issue somewhat for private companies and this will be discussed in our next article.)

While the legislation sets out the basic requirements for the number of directors, a company’s articles of association and any shareholders’ agreement must also be checked as these might include further requirements.

Eligibility

There are various eligibility conditions for directors.

  • To be a director, you must be at least 16 years old; there is no maximum age for directors
  • Any legal person (including, for example, a company or LLP) may become a director (subject to the natural person requirement)
  • A person may not be a director if they are an undischarged bankrupt or certain other bankruptcy-related issues apply to them or if a court has disqualified them from acting as such under the Company Director Disqualification Act 1986.

In addition, any person who has been a director of a company within 12 months of that company going into insolvent liquidation may not in the next five years serve as a director of a company with a similar name to the insolvent company.

The Economic Crime and Corporate Transparency Bill includes provisions that a director’s identity must be verified before they can be appointed. Although not yet law, it seems likely that this will come into effect in the not-too-distant future.

When might directors be appointed?

On incorporation

Directors will need to be appointed as part of the company’s incorporation process.

To incorporate a company, a Form IN01 (Register a private or public company) must be submitted to Companies House and this will include the names and particulars of the company’s first directors, who will be deemed to have been appointed from the date of incorporation.

For further detail about incorporating a company, see here.

Post-incorporation

Directors will also need to be appointed during the life of the company. For example, you might want to change the incorporation directors, appoint more directors, replace a retiring director or change the directors following the acquisition of the company.

Subject to the minimum number of directors requirement set out in the Companies Act 2006, the appointment of directors post-incorporation will be governed by the company’s articles of association and any shareholders’ agreement and so these will need to be checked.

Usually, the articles of association will provide that the directors and members have the power to appoint additional directors. They may also include other requirements, for example, by stipulating a minimum or maximum number of directors or providing that a specific member has the right to appoint a certain number of directors.

If the company’s articles of association are silent as to the appointment of directors and there is no shareholders’ agreement or other document containing relevant directions, the members will have to appoint any directors by ordinary resolution.

Notification of any change to the directors of a company should be sent to Companies House within 14 days of the change.

What happens if the appointment of a director goes wrong?

A person’s acts as a director are likely to be valid even if their appointment was not valid, provided that the person was acting in good faith.

Where a person has assumed the responsibility of acting as a director but their appointment was not carried out correctly, the director is likely to be deemed a de facto director. In certain circumstances, a de facto director will be treated as if they were a director validly appointed. For example, the general duties owed by directors under the Companies Act 2006 also apply to de facto directors.

If you are concerned that a director may not have been appointed correctly, the company and the director should take legal advice.

Conclusion

Although appointing a director is not a complex process, it does need to be carried out correctly to avoid potential problems later down the line. It is important to check the company’s articles of association and any shareholders’ agreement to ensure that the correct procedure is followed and ensure that only eligible persons are appointed.

Disclaimer

This note reflects the law as at 14 September 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

The Lifecycle of a Business – Becoming a Director – What to Consider

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Becoming a Director – What to Consider

In England and Wales, every private company limited by shares is required to have at least one appointed director who is responsible for undertaking the day-to-day management of the company.

For some, being appointed as a director can be a key milestone in terms of career progression, whilst for others it is seen as an administrative matter to be dealt with as part of the establishment of a new business venture or tax planning.

In all cases however, the role of a director should not be taken lightly. All directors are subject to various obligations and duties. Here we set out some of the issues that you should think about before becoming a director.

Key duties and obligations

The Companies Act 2006 codified various general duties of directors which had previously been dealt with under common law. Briefly, these are:

  1. To act within powers.
  2. To promote the success of the company.
  3. To exercise independent judgement.
  4. To exercise reasonable care, skill and diligence.
  5. To avoid conflicts of interest.
  6. Not to accept benefits from third parties.
  7. To declare any interest in a proposed transaction or arrangement with the company.

In addition, duties can be owed to other parties in certain circumstances, for example, a duty to creditors when a company is insolvent.

Personal liability

Due to their unique position and the importance of complying with the various duties imposed on them, directors can be made personally liable in some situations.

Personal liability can arise not only where one of the duties or obligations outlined above has been breached, but also where the company is found to be in default of other legislation. Common examples include directors being personally liable to repay dividends which have been unlawfully declared by a company, directors being found liable for the debts of the company in the event of fraudulent trading, financial penalties in respect of the company failing to make certain filings at Companies House and directors being liable for certain environmental matters.

Breach of certain duties may also lead to the director being disqualified from acting as such.

In certain circumstances, there may be potential protections available to a director in (or allegedly in) breach. For example, the Court may grant relief if it considers that the director has acted honestly and reasonably and ought fairly to be excused in all the circumstances, the director may have the benefit of an indemnity from the company which will reimburse the director for the costs incurred in respect of certain claims and litigation brough against them (provided that they are successful) and companies may also offer directors’ and officers’ insurance cover (D&O Insurance).

Executive or non-executive?

Executive directors are usually employees of the company and will be responsible for the day-to-day management of the business, whereas non-executive directors tend to have a supervisory role and will not be involved in the company’s day-to-day operations. It is usually larger companies that have a mixture of the two.

As an executive director, your employment contract will include additional duties and obligations and breach of these could result in a claim against you by the company for breach of contract (as well as potentially also being a breach under the general duties mentioned above).

This is not to say, however, that non-executive directors have an easier/less onerous role. Usually they will have a letter of appointment setting out what is expected of them and legislation does not differentiate between the two roles; the general duties and obligations owed by directors apply equally to executive and non-executive positions.

To read more about how non-executive directors can help a company and the issues to consider before becoming one, see So You Want To Be A Non-Executive Director.

Specific knowledge or expertise

Having specific knowledge or expertise will be a factor in determining your obligations as a director. For example, if you are appointed as the Finance Director, you will be expected to have a higher level of knowledge and understanding of financial matters than, for example, the HR Director.

In addition, while there is a general duty that all directors will exercise a minimum standard of skill and care, that standard will be raised if you have any particular skill or expertise.

Shareholder-directors

If you are both a shareholder and director of the same company, you will be wearing two different “hats” and will need to be careful how you approach decision-making as a director. Sometimes it can be difficult to ascertain whether director-shareholders have carried out their duty as a director or whether they have done so while acting in their interests as an owner of the company. Shareholders can make decisions purely in their own interest, but this is not possible for a director, who must promote the success of the company for the benefit of its members as a whole. Acting for the benefit of members as a whole can conflict with what a particular individual shareholder wants.

A shareholder-director should know what they may and may not do as a director without notifying the other shareholders and whether notification is required in advance of any action. Disclosure and evidence of decision-making for shareholder-directors will be important.

Size of the board

The permitted and actual size of the board of directors in question will also be a factor to consider. Understand the minimum and maximum number of directors that are permitted to be appointed. A minimum of one director is required to register a private company and two for a public company, but otherwise, there is no statutory limits to the number of directors. However, the company’s articles of association may specify a minimum and maximum number of which you should be aware.

Having too few members on the board could put the company at risk if a director resigns, whereas it can be difficult to get a larger number to agree on decisions (plus a greater number will also incur more expense for the company). A larger company may require a greater number of directors than a smaller company to accomplish all the work it requires and provide greater diversity of backgrounds and viewpoints for decision-making purposes.

Minimising risk

There are various steps which you should take before being appointed as a company director. Following these will help to reduce any risk associated with becoming a director and ensure that you are comfortable with your appointment:

  1. Do your homework

    Make sure you have undertaken appropriate research on the company and its business. Ask to review minutes of recent board meetings and ensure that you are fully briefed on any key commercial challenges, litigation and the financial health of the company.

    If possible, spend some time at the company before your appointment. Speak to members of staff and other members of the board to gain more “inside knowledge” about the company and its operations. It’s a good idea to continue to do this once you are appointed.

  2. Clarify your role

    Ensure you fully understand what your position as a company director entails. Will you be an employee with an employment contract? Do you have the appropriate skills for the role, particularly if you are being appointed for your expertise and experience, and can you dedicate the time required? Being a board member is not just a matter of turning up to board meetings. You will need to read board papers and contracts and may need to attend meetings with lawyers, accountants and so on, as well as spend time considering the actions that you think the board should take.

  3. Information sharing

    If you do not have day-to-day oversight of specific parts of the business, be clear about how information will be shared with you and who has any specific responsibility for particular tasks. As a director, burying your head in the sand and ignoring an issue is not an option.

  4. Contractual protection

    Companies are not permitted to grant directors exemptions from liability in respect of their negligence, default, breach of duty or breach of trust and indemnities in respect of such matters will similarly be void. However, companies can indemnify directors against certain costs associated with particular types of litigation and claims which may be brought, provided the directors are successful. You should discuss this option with the company and understand fully if and when you will be covered by an indemnity.

  5. Insurance

    Most companies will take out third party D&O Insurance. Potential directors should check whether the company has such a policy, and ensure that they are comfortable with the scope of cover.

  6. Take professional advice

    Make sure that appropriate professional advice is sought when required. This could be legal, financial, or other advice related to a particular problem or situation. Directors are not expected to know everything, but they are expected to do what is needed to ensure that they are discharging their duties appropriately.

    Being completely up-to-speed on your duties and obligations is paramount. If you think it necessary, take legal advice before your appointment so that you are fully aware of your duties and obligations and ensure that going forward, the board receives refresher training on a fairly regular basis.

Disclaimer

This note reflects the law as at 5 September 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Christine Dubignon
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Christine Dubignon

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The Lifecycle of a Business – Registers, Records and Filings

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina.

On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So, First Things First…..

Registers, Records and Filings

Depending on the type of entity that you’ve set up (for further information about the different options available in England and Wales, see here), you will need to make certain filings and maintain various records throughout the entity’s life. In this article, we focus on the principal corporate records and filings relevant to a private limited company incorporated in England and Wales. Bear in mind that other registrations and filings will or may be needed too, for example, with HM Revenue & Customs for tax purposes and HM Land Registry if property is held, but these are outside the scope of this note. Overseas entities may also be required to be listed on certain registers in the UK (the most notable currently being the Register of Overseas Entities if they own UK real estate) but again, this is outside the scope of this article.

The main corporate registers and records that are relevant for private limited companies incorporated in England and Wales fall within two categories – those maintained by Companies House and those maintained by the company itself.

Companies House

Companies House is the government body responsible for incorporating and dissolving companies in England and Wales, as well as for collating the various filings required by such companies and making the information available to the public. It also deals with the incorporation of limited liability partnerships (“LLPs“) and the filings required by LLPs and limited partnerships.

Searches of entities on the Companies House register can be made free of charge and certain information can be obtained within seconds, while some historical information can be obtained for a small fee. Companies House can be an incredibly useful source of information, although it must be considered that, unlike the Land Registry, it does not guarantee the accuracy of its contents, and not all of the information obtained from its registers will be up-to-date. For example, details of any share transfers will only appear on the public register when the next confirmation statement is filed – so the record could be a year out of date.

Companies House registers

Central public register

Companies House maintains a central public register of all companies incorporated in England and Wales. Incorporation of a company cannot take place without Companies House’s involvement and it is only when you have submitted an application for registration (on Companies Form IN01 ) to them, have paid the appropriate fee and they have provided you with a certificate of incorporation that your company will be in existence. This can be done on a same day basis, and in any case usually within a day or so.

Once incorporated, your company will be listed on the central public register at Companies House and searches can be made against it in respect of certain information – its registered office, names of directors and annual accounts, for example.

PSC register

A company is required to maintain a PSC (people with significant control) register and also to file the information publicly at Companies House.

Essentially, the PSC register is a record of the beneficial owners of the company. For more information about PSCs, see here.

It is important to bear in mind that a company’s PSC register must never be blank. If the company has no PSCs, it must make a statement to that effect. If a company is unable to complete the PSC register, official wording must be included depending on whether the company is still investigating whether it has any PSCs or knows it has a PSC and is trying to confirm their details.

If any details change about a company’s PSCs, the company has 14 days to update its own register and a further 14 days after that to update Companies House.

Companies House filings

Companies House filings are made using specified forms – for example, an appointment of a director is form AP01, a change of details is form CH01. The gov.uk website can be helpful if you are in doubt and of course, your legal or accountancy advisors will also be able to assist.

Most forms can be filed online, and this is always faster. Paper forms can still be used, but inevitably many are rejected for minor errors that are impossible with online filing (typos in the company name or number being the main culprit).

Certain filings, such as a change of company name, may incur a fee. While fees are small, the filing will not be processed unless it is paid.

Event-specific filings

Certain events during a company’s life will require filings to be made at Companies House so that the public register can be updated. This includes (among other matters) changes to the company’s officers, its constitutional documents, its share capital, and basic details such as address, principal activity or financial year end. The deadlines for making such notifications vary and so you should make sure that you are aware of, and comply with, the various time periods. Filings should be made as soon as possible (preferably immediately) after the change is effected to avoid any risk of missing the filing deadline.

Most filings are only notifications of events that have already taken place, but certain changes only take effect upon filing. For example, if a company wishes to change its name and passes a resolution accordingly, Companies House will need to check that the name is not the same as one already on the register and that it otherwise complies with the regulations. Only once it has done this will it issue a new certificate of incorporation on change of name. A change of the company’s registered office will also only take effect once the register has been updated.

Annual filings

Each year, a company must file a confirmation statement with Companies House which either confirms that all required changes have been filed or sets out any changes which have taken place since the last confirmation statement date.

Every company must also file annual accounts, whether or not the company has been active.

Company registers

The company is also required to maintain its own registers at its registered office, the majority of which must be available for public inspection. Such registers include (most importantly) the register of members, the PSC register, a register of directors (and company secretaries, if applicable), a register of the directors’ residential addresses (which remains private and is not available for public inspection) and a register of charges (if created before 6 April 2013).

The register of members is a crucial document as it provides key evidence as to who are the shareholders of the company. It is therefore extremely important that it is kept up-to-date. For private companies, this is not usually an onerous process as the shareholders are unlikely to change on a regular basis, but this does not mean that it can be ignored and company’s officers should not be blasé about its maintenance.

Copies of the directors’ service contracts, a record of resolutions and shareholder meetings and adequate accounting records must also be kept.

A company may also choose to maintain a register of applications and allotments, a register of transfers and/or a register of debenture holders, although these are not required by law.

There is an option for private companies to elect for the information contained in some of the above registers (the register of members, the register of directors, the register of directors’ residential addresses, the register of company secretaries and the PSC register) to instead only be available on the central public register maintained by Companies House, thereby avoiding the need to keep their own separate registers. However, few companies have chosen to use this system as it puts more information about the company’s shareholders into the public domain.

Failure to comply

A failure to comply with any of the various record and filing requirements, will constitute a criminal offence by the company, its directors or both, although prosecutions are rare. If a company fails to file its annual accounts, it will also be warned and eventually struck off the register and dissolved.

In addition, it is an offence for any person knowingly or recklessly either to deliver a document to Companies House or cause one to be delivered or to make a statement to Companies House that is misleading, false or deceptive in a material particular.

As such, to the extent that you are unclear as to any of these obligations, taking advice from your legal or accountancy advisors is recommended. The gov.uk website also provides guidance.

The future?

The Economic Crime and Corporate Transparency Bill (the “Bill”) is currently wending its way through Parliament. As currently drafted, the Bill could have quite a significant impact on Companies House processes and powers. It proposes requiring all directors and PSCs to have their identity verified before they can be appointed as such and also gives Companies House more power to decline and query information provided to it for inclusion on the register.

How far Companies House will take these powers remains to be seen although there has been some suggestion that it does not currently have sufficient resources to enforce the new powers as meticulously as the Bill permits and that it may be some time before we actually see an upsurge in investigative activity.

Disclaimer

This note reflects the law as at 2 August 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

The Lifecycle of a Business – A Guide to Setting Up Business in England and Wales

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina.

On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So, First Things First…..

A Guide to Setting Up Business in England and Wales

Setting up a business in a new jurisdiction can be both an exciting and daunting prospect. From getting to grips with the corporate requirements to considering the tax consequences to understanding the registration and filing requirements, there will be plenty to think about and many decisions to be made, but once you’ve determined on the best corporate structure and understand the tax position, what other issues need to be dealt with? Many of these will depend on the legislation and business practice in the country in question, as well as the type, sector and size of the business.

Here, we provide a guide to setting up a business in the UK. (For the purposes of this guide, we have assumed that your business will be set up as a private company limited by shares, but most of the points below will apply regardless of the type of business entity. For more information about the types of entity available, see here.

Lawyers

  • From the initial setting up of the business through to exit, you will require legal advice at all stages of the business’s lifecycle in the UK
  • Ensure that you instruct responsive, pragmatic UK lawyers with the correct expertise and experience to be able to assist you as you set up your business and going forward

Accountants / auditors

  • All UK companies must keep accounting records and, depending on the size and nature of your business, you may be required to file annual accounts with the Registrar of Companies. These accounts may also need to be audited
  • As a result, you may need to instruct accountants and auditors (although this will depend on the type of business entity and its size)

Banking and finance arrangements

  • You will require a business bank account in the UK and so will need to set this up with a bank of your choice
  • Consider too whether you will need to take on any third party financing in relation to your business and if so, whether this will be obtained from a UK bank or other finance provider. Remember also that various grants are available, such as R&D grants, which your business may be able to apply for
  • Bear in mind too that if your business borrows from UK non-residents, there may be withholding tax obligations that have to be considered and possible exemptions claimed
  • It may be possible to claim a tax deduction for interest paid but there are complex rules that will need to be considered, especially where the borrowing is from connected persons

Directors

  • Where a UK company has been incorporated to run the business, directors will need to be appointed. Under English law, a company must have at least one director although the company’s constitutional documents may specify a greater number. In addition, at least one director must be a natural person
  • While there is no requirement for directors to live in the UK, all directors must fully understand their duties under English law and there may be tax consequences if board meetings are not held in the UK. A general set of directors’ duties is set out in the Companies Act 2006, but directors’ duties can also arise under other legislation and at common law. Failure to comply with these duties can have serious consequences, including personal liability and disqualification as a director, and may also constitute a criminal offence. In addition, if the majority of directors don’t live in the UK, the company may become dual resident in another country for tax purposes

Tax

  • Without delving too much into tax legislation (our Tax team are happy to assist if further information is required), once you have decided what form your business will take you will need to ensure that the business is appropriately registered with HM Revenue & Customs, the UK’s tax authority, so that the appropriate tax returns are filed and taxes can be paid
  • You’ll also need to engage an advisor to ensure that you are compliant with all day-to-day tax requirements, such as VAT and PAYE. Your legal advisor or accountant should be able to assist here

Property

  • Do you need any office, factory or other premises? You will need to decide where you want to be located and whether you intend to purchase or lease the real estate. There are likely to be tax charges (VAT and stamp duty land tax (SDLT)) on the acquisition of any such premises

Intellectual property (IP)

  • Do you own any trade marks, design rights, domain names or other IP? Consider protecting these by registering them
  • Have you any inventions that require patent protection and which are not already so registered in the UK? Ensure that any patent application is made as soon as possible as it can be a lengthy process

Employment

  • You may need to hire staff so consider which recruitment agencies you would like to work with and the terms of employment you can offer. Once you have recruited, you will need to check an employee’s right to work and enter into appropriate employment contracts with your new employees. The terms of these may depend on factors such as their role, experience, responsibilities and so on
  • In addition, you will need to put in place various policies and possibly compile an employee handbook
  • Employment law in the UK is complex and there is a myriad of legislation surrounding the rights of workers and employees, covering matters such as health and safety, discrimination, dismissal, minimum wage and so on. You will need to take legal advice to ensure that you are in compliance
  • If you have set up a company in the UK, are any of the directors also employees? If so, the company will need to enter into service agreements with them
  • You may already have a successful business set up elsewhere in the world and wish to take advantage of the opportunity to second employees from that jurisdiction to your new business in the UK. There are various factors to consider here and you should take UK legal advice to ensure that immigration laws are complied with and that such arrangements are put in place correctly
  • Do you have any consultants or contractors working for the business? Ensure that adequate consultancy agreements have been entered into with them. In the UK, the line between a consultant/contractor role and employee can be very easily crossed and this will, among other things, result in different tax and national insurance contribution liabilities being taken on by the business. It is important that you take legal advice about this if you are intending to engage consultants or contractors
  • You will also need to choose suitable payroll software or engage a payroll services provider to deal with the payment of your workforce and ensure that the correct deductions for tax, national insurance contributions and pension payments are made. In addition, you will need to consider what, if any, insurance-backed employee benefits (such as private medical insurance and permanent health insurance) need to be introduced

Pensions

  • There is an obligation under UK employment law to automatically enrol most workers in a workplace pension scheme and so you will need to find a pension scheme provider and set this up
  • Workplace pensions also have their own set of laws and regulations, the applicability of which will depend on the size of your business, the number of employees, its structure and so on. You should obtain UK legal advice about this

Insurance

  • What insurance cover will you need? Certain insurance cover is required under English law for businesses, while other policies may be recommended or available but are not obligatory
  • You may want to speak to an insurance broker to find out more about the cover available, what the different policies offer and the premiums

Data Protection

  • Data protection is likely to affect various aspects of your business, including employment, suppliers and customers and your business will need to comply with the relevant UK laws, including the Data Protection Act 2018

Regulatory and compliance

  • Is your business regulated in any way under UK law, for example, does it fall within the financial services sector, energy or life sciences? You will need to apply for the appropriate licence or registration if this is so
  • The English legal framework also covers matters such as marketing and advertising standards, consumer protection laws and websites, some or all of which may apply to your business. You will need to ensure compliance where relevant and are likely to require legal advice to ensure that nothing slips through the net

Commercial arrangements

  • Assuming that new commercial arrangements will be entered into with, for example, suppliers, distributors and possibly, customers, you may need to establish relationships and discuss terms with various third parties
  • These commercial arrangements should be formalised in written contracts or terms and conditions. Bear in mind that even if intra-group arrangements are to be put in place, it is advisable to document these in writing

Forsters LLP is a full service law firm and has the length and breadth of experience to assist you with all of your corporate, business, employment, tax and real estate needs and queries. If you require any more information or would like to discuss your situation, please speak to your usual Forsters’ contact.

Disclaimer

This note reflects the law as at 25 July 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Lianne Baker
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Lianne Baker

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The Lifecycle of a Business – Setting up a Family Investment Company

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina.

On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So, First Things First…..

Setting up a Family Investment Company

Family investment companies, or “FICs” as they are commonly known, have become increasingly popular over recent years and are now widely used by wealthy individuals for succession planning purposes. They offer a number of tax advantages over trusts, and are also popular with international clients from jurisdictions that do not recognise trusts, and who may feel uncomfortable with involving a professional trustee company in their affairs.

From a legal perspective an FIC is just like any other private limited company. In April 2019 HMRC set up a unit to look into FICs and their use by wealthy families, which gave rise to concerns that HMRC was considering taxing FICs in a different manner to other companies. However, the unit was disbanded in the summer of 2021 having found no evidence that FICs were being used for tax avoidance purposes, and whilst future changes to how FICs are taxed and regulated cannot be ruled out, for the time being at least it seems that HMRC will continue to treat them in the same manner as other companies.

An FIC is simply a company that holds assets that would otherwise be held by family members personally. FICs can be used to hold a wide variety of assets, including cash, investments and property. Detailed tax advice needs to be taken before an FIC is established, but assuming the decision is made to use an FIC, set out below are some of their typical characteristics.

  • Funding the FIC – FICs can be funded either by way of shareholder loan or equity, but probably the most popular way is by using redeemable shares. The advantage of this is that it allows the individual setting up the FIC to extract funds from the company in a tax-efficient manner should the need arise.
  • Voting shares – In addition, the individual setting up the FIC will usually be granted voting shares. These tend not to carry any economic rights (such as rights to dividends or capital on a winding-up), but they give the individual complete control over all shareholder decisions, such as the appointment of directors, amendments to the company’s articles, and so on. The individual setting up the FIC will usually act as the company’s director (sometimes with his or her spouse acting as a second director), which gives him or her control over the company’s day-to-day decision making too, such as how funds should be invested and when dividends should be paid.
  • Alphabet shares – The final class of shares that are typically used are shares that carry economic rights but no voting rights. Each child of the individual setting up the FIC will usually be granted their own class of share (hence the term “alphabet shares”), but each of these classes tends to have identical rights. Crucially, however, having multiple classes of shares means that dividends can be declared on only one class of share at a time, thereby enabling the individual who set up the FIC to channel funds to whichever of his or her children might need them at the time (whether for a deposit to buy a house, set up a business, pay for school fees, and so on).
  • Transfers of shares – As its name suggests, an FIC is an investment company owned by, and established for the benefit of, the members of a family. As such, the articles of association of an FIC will normally contain very tight restrictions on the transfer of shares, which are designed to ensure that ownership of the company remains within the family. Typically, transfers of shares are only permitted to blood-line descendants of the individual setting up the FIC, or sometimes blood-line descendants of that individual and his or her spouse together. Great care needs to be taken in considering whether spouses of children, adopted children (and adopted grandchildren), illegitimate children (and illegitimate grandchildren), etc. should be able to hold shares – the answer will be slightly different depending on each family’s circumstances.
  • Pre-emption rights – Typically, pre-emption rights on the transfer of shares will not be included in an FIC’s articles. This is for two reasons – first, because the list of who can hold shares is usually very tightly defined (see above), and therefore there is no need to include further protection by including pre-emption rights; and secondly, because if an adult child of the individual who set up the FIC wishes to transfer their shares in the FIC to their own children (i.e. the grandchildren of the individual who set up the FIC), it wouldn’t be appropriate for other shareholders to be able to intervene and prevent that transfer by exercising pre-emption rights.

These are just some of the ways in which FICs differ from normal trading companies in the way they are set up, though there are many others and expert advice should be taken if you are considering using an FIC. Forsters has significant experience in establishing FICs, whether for nuclear families living in the UK or extended families living across the world. To find out if a family investment company is the right approach for passing on wealth to your family, please do get in touch.

Disclaimer

This note reflects the law as at 19 July 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Alastair Laing
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Alastair Laing

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The Lifecycle of a Business – Private or public company?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina.

On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So, First Things First…..

Private or public company?

When setting up a UK company limited by shares, a decision will need to be made about whether to incorporate as a private limited company or a public limited company (PLC). Most UK companies are incorporated as private companies. However, that is not to say once a private company always a private company. A private company can, subject to satisfying certain requirements at the relevant time, re-register as a public company under the Companies Act 2006 (Act).

The main reason why a public company is incorporated is for the ability to offer shares to the public, which a private company is prohibited from doing. If a company is seeking a listing of its shares on a stock exchange then a PLC will be required either by converting an existing private company into a PLC or setting up a new PLC holding company in the group structure which will list. However, there is no requirement for a PLC to have its shares listed on a stock exchange and a PLC can be unquoted and its shares not traded.

The main differences on incorporation of a private and public company in England and Wales are:

  • a PLC requires a company secretary and at least two directors whereas a private company only requires one director;
  • a PLC requires a trading certificate to commence business or trading or exercise borrowing powers whereas this is not required by a private company;
  • in order to obtain a trading certificate, a PLC must have a minimum allotted share capital of a nominal value of at least £50,000/EUR57,100; and
  • shares in a PLC must be paid up as to a quarter of their nominal value and the whole of any share premium. In effect, on incorporation a PLC must have £12,500 paid up in nominal value for its shares. Shares in a private company can be issued nil paid and a private company can be set up with a minimal amount of share capital, e.g. one share of £1 nil paid.

Previously, the minimum allotted share capital amount of £50,000 meant that there was certain comfort that one was dealing with a company of substance when dealing with a PLC. The amount of £50,000 was enacted in the Companies Act 1985 but has not increased over time and is not a barrier to setting up a PLC in today’s money terms.

Once incorporated there are several differences between an unquoted PLC and a private company. This article does not focus on the differences between a listed PLC and an unlisted PLC or private company nor does it address any tax considerations.

Key on-going differences between an unlisted PLC and a private company

In addition to requiring two directors and a company secretary on an on-going basis, some other key differences are:

Shareholder resolutions and meetings – A PLC is required to hold an Annual General Meeting (AGM) each year whereas a private company is only required to do so if required by its articles of association (Articles). A PLC must give 21 days’ notice of an AGM, unless all the members entitled to attend and vote agree to a shorter period. A private company must give 14 days’ notice of an AGM unless its Articles specify a longer period.

All meetings of a private company can be held on shorter notice than 14 days if agreed by a majority in number of the members entitled to attend and vote at the meeting and holding 90% (or a higher percentage specified in the Articles not exceeding 95%) of nominal value of the shares entitled to vote. PLCs have a higher threshold – general meetings of PLCs (not AGMs) may be held on shorter notice if agreed to by a majority in number of the members entitled to attend and vote at the meeting and holding 95% of nominal value of the shares entitled to vote.

Private companies can pass written resolutions of its members whereas PLCs cannot and must convene a meeting.

Share capital – The regime around share capital matters is more onerous for a PLC. As highlighted above a PLC’s shares must be paid up as to a quarter of their nominal value and all of any share premium (except for shares allotted pursuant to an employee share scheme).
Private companies, in addition to disapplying statutory pre-emption rights on the allotment of new shares, can exclude the operation of the same in relation to all or specific allotments of shares. PLCs can only disapply these statutory pre-emption rights. Furthermore, directors of private companies with a single class of shares, have the general power to allot shares whereas PLC directors require shareholder authority to do so.

There are strict rules for a PLC if it proposes to issue shares for non-cash consideration. An independent valuation of the consideration must be obtained in advance of the allotment and be sent to the allottee. Shares cannot be issued: (i) if the consideration is an undertaking for services to be performed or work to be done for the company or any other person; or (ii) otherwise than cash, if the consideration includes an undertaking which is or may be performed five years after the date of allotment.

PLCs are also limited in share reconstructions and re-organisations. Share buybacks and redemption of shares are not allowed out of capital, whereas these are permitted by private companies. Private companies are further permitted to reduce their share capital by means of the solvency statement procedure under the Act unlike PLCs.

The financial assistance regime, whereby a company is prohibited from giving financial assistance directly or indirectly for the purposes of the acquisition of its shares, no longer applies to private companies but is still applicable to PLCs.

On a serious loss of capital, directors of a PLC must convene a general meeting to discuss what steps must be taken within 28 days of one of them becoming aware of a PLC’s net assets falling to half or less of its called-up share capital. The meeting must take place no later than 56 days after the date of the director becoming aware.

Accounts and accounting records – A private company must file its accounts at Companies House within nine months after the end of the relevant accounting period, whereas a PLC must file accounts within six months. Accounting records must be maintained for three years by a private company and six years by a PLC.

A PLC must lay annual accounts and reports before a general meeting and is required to circulate the accounts 21 days before the meeting. Private companies are not required to lay accounts before a general meeting but are required to circulate copies to members no later than the date for filing of accounts or, if earlier, the date it files the accounts.

Takeover code – The UK Takeover Code applies to a PLC with its registered office in the UK and where its place of central management and control is considered by the Takeover Panel to be in the UK, Channel Islands and Isle of Man. Unless a private company has, in the previous ten years, had its shares listed/admitted to trading, issued a prospectus or otherwise had its securities subject to a marketing arrangement or prices quotes for a certain period, the Takeover Code will not apply.

The more onerous rules and obligations applicable to a PLC may have cost consequences and can affect a company’s ability to carry out certain share capital transactions. Given this, then unless a PLC is required at the time of incorporation or in anticipation of an offer of shares to the public or listing on a stock exchange, private companies are usually incorporated rather than setting up as a PLC.

Disclaimer

This note reflects the law as at 11 July 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Dearbhla Quigley
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Dearbhla Quigley

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The Lifecycle of a Business – Which business structure should I choose?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina.

On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So, First Things First…..

Which business structure should I choose?

There are several options when it comes to choosing a business structure and the right one for your business will depend on a number of factors. Choosing the correct structure is an important decision as it will affect the way that your business is organised, your and your business’ legal obligations and tax position, filing requirements and your personal liability to third parties. It is therefore important to take professional advice about the best option for you and your business but it is also worthwhile to remember that the structure you choose is not set in stone and can be changed as the business develops.

When thinking about which business structure will work for you, it may be helpful to consider the following:

  • What type of business is it? For example, is it labour or capital intensive, is it involved just in the domestic market or internationally, does it undertake a regulated or non-regulated activity, is it innovative or established, etc.?
  • Who owns the business?
  • Who do you want to manage the business?
  • What is the tax position of each structure?
  • How risk averse are you? Is personal liability a potential issue?
  • What are the costs involved in setting up and running the structure?
  • What formalities do you want to deal with? Is a structure with increased formalities worthwhile at this point in your business’s lifecycle?
  • Are you happy for certain information to be made public?
  • Are exit strategies important to you, for example, are you likely to want to sell your business in the future?

Below are the most common forms of English business structure and their main characteristics. (It does not cover structures in other jurisdictions, including Scotland.) A table showing the main points is included at the end of the note for easy reference.

Sole Trader

  • A sole trader runs the business as an individual in their own name; the business is not a separate legal entity.
  • The individual receives 100% of any profit but also bears 100% of any loss and is responsible for all debts and liabilities of the business.
  • A sole trader makes all of the decisions relating to the business.
  • There are no incorporation or ongoing filing requirements although a sole trader will need to inform HMRC that they are self-employed and may have to register for PAYE. VAT registration may also be required. Note that some trades may require other regulatory obligations to be fulfilled.
  • A sole trader pays income tax and makes national insurance contributions through self-assessment and is individually responsible for paying these.

General Partnership

  • General partnerships are governed by the Partnership Act 1890 and any partnership agreement put in place between the partners.
  • Two or more persons own and run the business together with a view to making a profit.
  • A general partnership is not a separate legal entity to its owners.
  • Any profits will be shared between the partners and all of the partners are personally responsible for any losses, debts and liabilities of the business. As a result, a third party could reclaim the whole of any debt from one single partner.
  • To protect the partners, it is crucial that a partnership agreement is agreed and put in place setting out how the ownership, profits and liabilities are to be divided between the partners and how decisions are to be made. A mechanism for dealing with disagreements between the partners or deadlock situations should also be covered.
  • A general partnership has no incorporation or ongoing filing requirements, although it may be registered for VAT and, if it has employees, PAYE.
  • General partnerships are ‘transparent’ for tax purposes; tax liability falls on the partners who are taxed on their share of the profits or losses of the general partnership.

Limited Partnership

  • Although limited partnerships are primarily governed by the Limited Partnership Act 1907, the partners are generally free to agree a partnership agreement setting out their relationship to each other and how the business will be managed and administered. Putting in place a partnership agreement is highly recommended.
  • Two or more persons own and run the business together with a view to making a profit.
  • Two categories of partners are required – at least one general partner and at least one limited partner.
  • The general partner is responsible for managing the business and making any business-related decisions and will also have unlimited liability for any debts or liabilities of the limited partnership. As a result, it is common for the general partner to be a company with limited liability.
  • Limited partners provide the capital but cannot take an active role in the management of the business. As a result, their liability is limited up to the amount of capital that they have contributed (which is often nominal). Any limited partner who does take part in the management of the business will lose their limited liability status.
  • Registration of the limited partnership at Companies House is necessary and there are some ongoing filing requirements. Typically, the VAT registration of a limited partnership is achieved by the general partner being VAT registered.
  • Limited partnerships are tax transparent with the individual partners being charged income tax on any profits.
  • Due to the limited liability afforded to the limited partners, tax transparency and asset protection measures, limited partnerships are often used for fund investment purposes, particularly for real estate ventures, although a limited partnership may be a collective investment scheme (CIS) for regulatory purposes unless a relevant exemption applies.

Limited Liability Partnership (‘LLP’)

  • Although LLPs are primarily governed by the Limited Liability Partnership Act 2000, the partners or members can put in place an LLP agreement which can override many of the statutory provisions. Putting in place an LLP agreement is highly recommended.
  • Unlike the business structures discussed so far, an LLP is a legal entity separate from its owners. It can therefore enter into contracts in its own name and can sue and be sued. The partners or members have limited liability up to the amount of any capital contribution they have made.
  • At least two ‘designated partners’ must be appointed to deal with the LLP’s administrative obligations, including making any necessary filings at Companies House. Failure to appoint two designated members means that all of the partners will be deemed designated members.
  • LLPs must be incorporated at Companies House and comply with ongoing filing requirements. As a result, certain information about the LLP is publicly available, although the LLP agreement is a private document. An LLP can also be VAT registered and if an employer, will need to register for PAYE.
  • An LLP is transparent for tax purposes with the partners being individually liable for any tax charged on the income profits and gains.

Limited Companies

  • Limited companies are separate legal entities to their owners – the shareholders or members.
  • It is possible for one individual or entity to own 100% of the shares in a private limited company.
  • A limited company has limited liability either by shares (which is usual) or by guarantee (primarily used by not-for-profit organisations); each member’s liability is limited to the nominal value of their shares (plus any premium paid) or the guaranteed amount.
  • The rules for incorporating and running a company in England and Wales are primarily set out in the Companies Act 2006 (‘CA 2006’). A private company must be incorporated at Companies House and is subject to various ongoing filing requirements. As a result, a lot of information about a limited company is publicly available. A limited company can also be VAT registered.
  • A limited company’s articles of association, together with the CA 2006, set out its constitution and detail how it will be managed and run. Private limited companies may also have a shareholders’ agreement in place which provides further detail and protections for the shareholders, particularly for those holding a minority of the shares or where the shareholders have equal voting power. Shareholders’ agreements are usually private documents and are not publicly available.
  • Default model articles of association can apply although these can be amended by the shareholders to ensure that they reflect the true management and governance of the company.
  • Limited companies can be either private limited companies or public limited companies. Private limited companies cannot sell their shares publicly, for example, on a stock exchange, although a public limited company can. As a result, public limited companies have many more compliance requirements than private limited companies, but even private limited companies are heavily regulated compared to the other business structures referred to here.
  • The day-to day management decisions of a private company are made by its directors, who can also be shareholders. Directors have various duties and obligations, breach of which can lead to civil and/or criminal sanctions.
  • The CA 2006 provides that the shareholders are responsible for certain decisions and the shareholders’ agreement may also provide that certain matters require shareholder approval.
  • Any profits are kept by the company, which then declares a dividend to be paid to the shareholders.
  • Limited companies are ‘opaque’ for tax purposes; they are taxed separately from their shareholders. The company will itself be liable for corporation tax, while its shareholders who are UK tax resident individuals will pay income tax on any dividends they receive.
  • In terms of an exit strategy, selling a company or business is relatively straightforward compared to the other structures referred to. The assets and business of a company can be sold separately (an asset sale) or the entire company can be sold (a share sale). That said, exit strategies can be complex and have significant tax consequences and so legal advice should always be sought as soon as possible.
 

English business structures
  Sole trader General partnership Limited partnership LLP Limited company
Separate legal entity? No No No Yes Yes
Tax Individual Transparent Transparent Transparent Opaque
Liability Unlimited Unlimited Limited for limited partners
Unlimited for general partner, unless it is a limited company
Limited Limited
Profit 100% to individual 100% to partners, subject to any partnership agreement 100% to partners, subject to any limited partnership agreement 100% to partners, subject to LLP agreement 100% to company, which pays dividends to shareholders
Management Individual Partners General partner As set out in the LLP agreement, although 2 designated members required Directors deal with general management, subject to articles and shareholders’ agreement
Incorporation and filing requirements None None Some filing requirements Yes Yes
Minimum number of owners 1 2 1 limited partner and 1 general partner 2 1
Primary legislation None Partnership Act 1890 Limited Partnership Act 1907 Limited Liability Partnership Act 2000 Companies Act 2006
Primary documents None Partnership agreement Partnership agreement LLP agreement Articles of association
Shareholders’ agreement

DisclaimerThis note reflects the law as at 4 July 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Olly Claridge
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The Property Tribunal determines the issue of VAT on Staff Costs

The First Tier Tribunal (FTT) yesterday handed down its judgment in the matter of Various Lessees of Battersea Reach and St George Wharf -v- St George South London Ltd (and others).

The decision is likely to have important consequences for landlords and managing agents, and it should resolve the longstanding uncertainty following the decision in Ingram v Church Commissioners [2015] and HMRC’s subsequent clarification of the VAT treatment for the supply of services made by managing agents.

Lessees in two large multistorey mixed-use developments next to the river Thames had argued that staff should be directly employed in a way which would not attract VAT. They suggested that a change in employment would achieve the stated objective and not cause any significant cost or disruption to the service provided and that it was unreasonable for landlords to refuse to do so.

The tribunal found in the landlords’ favour, determining that, in deciding not to employ site staff directly, the landlord acted reasonably. They concluded that “…both the management and tax risks involved in changing the arrangements for the employment of staff were such that it was not unreasonable for a landlord to refuse to do so.”

The lessees had suggested that there were different models which could be implemented that would enable the landlords to benefit from a VAT saving on staff costs. However, the lessees had failed to show these “were realistically capable of being implemented” or “make a coherent initial case as to an alternative course for the landlord to adopt and for the Tribunal to consider either at the outset of the application or at any time thereafter.”

In the circumstances, the VAT on staff costs included in the service charges was deemed to be reasonable, and the lessees’ application was dismissed.

Forsters was led by Senior Associates Ryan Didcock and Emma Gosling, and Partner Natasha Rees, acting for the freeholder and associated landlords, with counsel Philip Rainey KC and Carl Fain of Tanfield Chambers (property), Nicola Shaw KC and Sam Brodsky of Gray’s Inn Tax Chambers (tax), and Michael Lee of 11 Kings Walk Chambers (employment).

Analysis of Supreme Court’s decision in Moulsdale v CRC: Elizabeth Small writes for Taxation

Exterior of large financial building

Corporate Tax Partner, Elizabeth Small touches on the Supreme Court’s decision in Moulsdale v CRC, concluding that taxpayers using anti-avoidance provisions against HMRC and arguing for a wide construction of the anti-avoidance rules are never going to gain much traction with the courts.

Small touches on the fact that Mr Moulsdale thought it was worthwhile going all the way to the Supreme Court (Moulsdale trading as Moulsdale Properties v CRC (Scotland) [2023] UKSC 12) to argue this point (disagreeing with HMRC’s assessment that he should have charged VAT) where he, trading as Moulsdale Properties (Moulsdale):

  • purchased office property (paying VAT on the purchase price) – the price was over £250,000 so the property was an item subject to the capital goods scheme;
  • exercised an option to tax over the property (recovering as allowable input VAT most of the VAT paid on the purchase price); and
  • in 2014, sold the property without charging VAT?

Read the full article here.

Elizabeth Small
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Elizabeth Small

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Forsters’ Partners receive continued recognition in the Spear’s Corporate Lawyers Index 2023

Six Forsters’ lawyers have been listed in the Spear’s Corporate Lawyers Index 2023:

The index recognises the highest calibre of corporate lawyers advising high net worth individuals, with significant expertise in high-value transactions.

The full index can be found here.

Christine Dubignon
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Christine Dubignon

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What is the future for non-competes?

Restrictions preventing an employee from joining a competitor or setting up in competition for a period (typically between 6 – 12 months) after their employment has ended (a “non-compete”) is a common, albeit at times controversial, feature of UK employment contracts.

But changes appear to be afoot and it seems likely that non-competes as we know them may look a little different in the future.

Used appropriately – such as limiting their application only to senior employees or to those with access to highly confidential information and trade secrets, and then only for a reasonable period – a non-compete makes complete sense. It allows an employer to safeguard its position, preventing parts of its business from being diverted elsewhere, which other post-employment restrictions (such as confidentiality obligations and non-solicitation restrictions) cannot always fully protect.

Conversely, used inappropriately or abusively (as can often be the case), a non-compete arguably prevents free trade, restricts the labour market and innovation and, on a personal level, has a detrimental impact on an individual’s ability to earn a living. The ‘standard issued’ non-compete can, fairly regularly, result in hard working and innovative individuals taking time out to avoid any alleged breach and/or dispute with their former employer, despite the fact that such non-compete might actually be unenforceable. Perhaps the State of California, where non-competes have been banned for some time, is a good place to find evidence for these stifling of free trade and innovation arguments: Silicon Valley has, after all, essentially been built by employees leaving large tech firms and launching their own startups, as they are generally free to do albeit ostensibly in “competition” with their previous employer.

It is because of this tension that the UK government previously consulted on the use of non-competes and associated reforms. The consultation (called: “Measures to reform post-termination non-compete clauses in contracts of employment”) looked, in particular, at:

  • whether employers should be required to pay employees during a non-compete period (with such periods being limited in duration); and
  • the idea of banning them altogether.

Unfortunately, despite that consultation closing just over two years ago, we are still awaiting its outcome. That said, since the closing of the consultation, there have been some interesting developments in the non-compete area in other jurisdictions.

The most significant development has perhaps been in the US. Following an executive order to all agencies by Joe Biden to increase productivity, the US regulator, the Federal Trade Commission (“FTC”), has recently outlined plans to ban US employers from using non-competes or relying on existing non-compete provisions. The proposed new rule would categorise a non-compete as an “unfair method of competition’. However, the draft rule does provide for a carve-out in the context of a corporate transaction where a shareholder stays on with the business as an employee.

The fact that just weeks after the FTC outlined its plans, the UK Competition and Markets Authority reminded employers to avoid anti-competitive behaviour (such as wage fixing and agreements not to employ others’ employees) might suggest that we are keeping an eye on what is going on across the pond.

Anecdotally, some employment lawyers in the US believe that the proposed FTC rule is too vague, generating more questions than it answers. They anticipate that, following comment from various stakeholders, the rule (in the event it is passed) will be narrowed – for example, to create further exemptions for senior level executives (i.e. still permitting the use of non-competes in respect of their employment).

That said, other commentators believe a carve out for senior employees could be counter to the overriding executive order designed at increasing productivity, noting that such employees typically generate growth and innovation so restricting them would not achieve the order’s aims. There is also concern that having such a carve out would lead to ‘satellite’ litigation about an employee’s seniority and/or whether an associated non-compete is enforceable.

But perhaps recent developments north of the border, in Canada, will help reassure US lawyers. In 2021, the province of Ontario introduced a similar law (through the “Working for Workers Act”) banning the use of new non-competes (but not those already in existence), unless it is agreed in the context of a corporate transaction (similar to the FTC’s carve out) or for senior employees holding specific positions (for example, Chief Executive Officer, Chief Finance Officer or Chief Legal Officer).

Perhaps it is too early to tell whether the Ontario position strikes the right balance, but it does highlight that this topic seems to be firmly on the agenda in many countries and that changes here in the UK seem likely, especially given the current status in the US. It will certainly be interesting to see whether and how international developments such as those in the US and Canada inform or contribute to the debate here in the UK.

More generally, perhaps one could look closer to home to see how other European countries create a fairer non-compete environment. One of the points the UK government consulted on was the need to pay employees during any non-compete period and both France and Germany (for example) have adopted this model for some time. The financial consequences really focus an employer’s mind as to which employees they need to restrict, and this seems to strike a good balance between giving employers the ability to subject an employee to a non-compete (and pay them) where circumstances require whilst addressing the personal financial impact on the employee. Arguably, such model would be even fairer if the paid non-compete could only be used for senior employees, adopting the concept from Ontario.

So, is there a future for non-competes? I believe so, but perhaps in a different form to what we are familiar with in the UK. Such changes are still up for debate and might, in practice, be informed by any conclusions of the FTC. But in any event, any changes will likely result in a degree of uncertainty and further questions, keeping both employers and lawyers busy. For example:

  • how would garden leave provisions be considered in light of any ban or restriction on the use of non-competes: are they a non-compete through the backdoor or a standalone contractual provision?
  • will employers try to be more creative in their use of breach of non-solicitation and non-dealing covenants to try and reach the same outcome as a non-compete?
  • if non-competes are faded out or restricted in different jurisdictions, how will global companies who grant stock/equity under global plans that tend to be linked to non-competes work? For example, will we see a move away from global harmonised plans to a country specific approach?

Watch this space, as they say…

Joe Beeston
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International Bar Association Tech M&A conference – Key Takeaways

Forsters attended the International Bar Association Tech M&A conference in Berlin on 23 and 24 March. While the Tech sector is being impacted by global macroeconomic conditions, there was a lot of optimism. Here are our key takeaways:

  1. The Tech M&A market has seen exponential growth for two decades, with 7 * growth in deal volumes. This has slowed down recently but the market is by its nature innovative, and so there remains a very positive outlook in the medium to long term. In particular, periods of instability are typically followed by a surge in M&A and investment activity once stakeholders gain confidence that valuations have stabilised, and there is a sense that there is a lot of ‘dry powder’ out there.
  2. Like in the UK, Founders of early stage companies across multiple countries are faced with a market of lower valuations and have been slowing their spend to extend existing cash so far as possible. Investors have been even more selective on where they place their money, with some moving away from the typical 1* preference as a way of balancing risk (though a mention of 8* having been proposed is concerning).
  3. Cybersecurity is a top 3 risk to businesses, with a range of solutions for stakeholders to consider when looking to protect themselves, such as checking that standards and measures have been implemented and monitored, insurance, and technical diligence, alongside legal diligence and warranties on deals. This should be considered on all deals involving data and secret information, not just those with a significant amount of personal data involved. Cybersecurity is a c-suite level conversation for businesses.
  4. Employee incentive schemes remain an important way of rewarding management and employees across the globe, with many taking the form of share/stock plans and phantom share schemes.
  5. Data remains a big topic. Tech businesses with international reach need to be on top of their obligations across various data protection frameworks and need an understanding of how they operate together, considering transfer impact assessments, the UK and EU data frameworks, the US executive order, and more.

A Balancing Act – when do directors owe a duty to creditors?

On 5 October 2022, the Supreme Court handed down its long-awaited judgment in the case of BTI v Sequana. The decision, described as “momentous” for company law, has provided much-needed clarification on the duty owed by company directors to creditors.

Understanding your duties as a director is a precondition of the role (for a general overview of your general duties, see here), but being aware of the transition between acting for the benefit of a company’s members and its creditors is even more significant given the current economic uncertainties.

In summary, the key points to come out of the recent decision are:

  • The creditors’ duty is engaged later in the insolvency process than previously thought.
  • Directors should weigh the interests of the company’s creditors against those of its shareholders, engaging in a balancing exercise where these interests come into conflict.
  • The closer a company is to insolvency, the more significant the interests of its creditors become.
  • It remains crucial that directors continue to keep themselves fully informed and up to date with company affairs, documenting the reasons for significant decisions affecting the company.
  • As soon as it becomes apparent that a company is facing financial difficulties, the directors should seek independent legal advice.

Background

In 2009 the directors of a company called AWA paid a dividend of EUR 135 million to its sole shareholder, Sequana SA (“Sequana“).

  • At the time the dividend was paid, AWA was solvent on both a balance sheet and cash flow basis but had a contingent liability of an uncertain amount which related to the clean-up costs of a Wisconsin river. Consequently, there was a real risk that AWA might become insolvent in the future, although insolvency was not imminent, or even probable, at the time.
  • The clean-up costs were much higher than anticipated and AWA entered insolvent administration, albeit almost ten years after the payment of the dividend. BTI (as assignee of AWA’s claims) sought to recover the dividend from AWA’s directors on the grounds that they had made the payment in breach of their common law duty to have regard to the interests of the company’s creditors.
  • Both the High Court and the Court of Appeal rejected this claim. The Court of Appeal found that the creditor duty was not triggered until a company was either insolvent, on the brink of insolvency or probably headed for insolvency. Since AWA was not insolvent or on the brink of insolvency in 2009, BTI’s claim failed.
  • BTI appealed this decision to the Supreme Court, arguing that the real risk of AWA’s future insolvency triggered the directors’ duty to act in the interests of the company’s creditors rather than its shareholders. They lost (again).

The Supreme Court considered whether such a creditor duty exists, the point at which the duty is engaged and how the duty operates once the trigger point has been reached.

What is the creditor duty?

Directors are subject to various statutory and common law duties, with the main statutory duties being set out in the Companies Act 2006 (CA 2006). Generally, these duties are owed to the company, and not to the shareholders. Possibly the most over-arching of the statutory duties is the duty for directors to promote the success of the company; directors must act in the way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

So, where does the creditor duty come in? The creditor duty actually stems from a common law rule that a director’s duty to promote the success of the company is modified where the company is facing insolvency, such that the interest of the company’s creditors must be considered rather than the interest of its shareholders.

This common law duty is reflected in section 172(3) CA 2006, which states that a director’s duty to promote the success of the company is subject to any enactment or rule of law requiring directors to consider or act in the interests of the company’s creditors, i.e. in an insolvency situation, the directors must consider the creditors’ interests rather than just the shareholders’.

Although the existence of the creditors’ duty is not in doubt, uncertainty has arisen in the past as to when the creditor duty would be triggered and how this duty interplays with the duty to members. The Supreme Court has now shed some light…

When is the creditor duty triggered?

The majority decision of the Supreme Court found that the creditor duty arises when the directors know or ought to know that the company is:

  1. actually insolvent (either on a balance sheet or cash flow basis);
  2. bordering on insolvency, i.e. insolvency is both imminent AND inevitable; or
  3. likely to go into insolvent liquidation or administration.

The Supreme Court held that, upon the occurrence of one of these trigger events, the board should become mindful of the interests of the company’s creditors alongside the interests of the shareholders. Prior to the judgment, it had been suggested that the duty to creditors, once engaged, would completely override the interests of the shareholders, i.e. the interests of the shareholders and creditors were mutually exclusive. The Supreme Court however did not consider this to be the case; instead, the interests of the creditors should be weighed against the interests of the shareholders, with the directors engaging in a balancing exercise where these interests come into conflict. However, the nearer towards insolvency the company tips, the more significant the interests of the creditors become.

This creates, in effect, a sliding scale following the point of engagement of the creditor duty. The more serious a company’s financial difficulties become, the more weight the directors should place on the interests of the creditors until such time as insolvency becomes inevitable and the creditors’ interests override those of the shareholders entirely.

Practical implications

The Supreme Court’s judgment makes clear that the creditors’ duty is engaged later in the insolvency process than previously thought, i.e. when insolvency is imminent AND inevitable, not simply likely to happen. Given this later point of engagement, the board must continue to focus on the shareholder interest and even when the creditors’ interest comes into play, the shareholders’ interest may still be of relevance on the sliding scale basis. Directors should remain mindful of the need to reasonably consider the interests of both creditors and shareholders and undertake a balancing exercise where they begin to differ.

Such a balancing act will need to be undertaken throughout the insolvency process. One can envisage, for example, that when the creditor duty first kicks in near the start of the process, that the interests of creditors and shareholders may well be fairly equally aligned, whereas the nearer the company moves to actual insolvency, the wider apart they may become. What may be a sensible and reasonable step for all stakeholders early on, may not be so further down the insolvency line.

The judgment also raises an important issue in relation to the significance of a directors’ knowledge at the point of insolvency. Although refusing to reach a definitive conclusion as to whether directors are to be judged on whether they knew (or ought to have known) that the threshold for engaging the creditor duty has been reached, it was observed that directors are obliged to keep themselves fully informed and up to date with company affairs. This should not come as a surprise to any director, but a gentle reminder is always worthwhile. While directors cannot run a business single-handedly and will need to delegate certain aspects, this is not an excuse for a director to deny all knowledge.

The Supreme Court also acknowledged that insolvency is not a straightforward process and that the financial position of a company can fluctuate significantly before insolvency becomes inevitable. It is advisable to make and retain a written record of decisions made and why, including any key points of debate and the conclusions reached. This should be standard protocol at any board or board committee meeting, including when the financial position of the company is strong, but becomes even more important when times for the business are not so good.

Further considerations:

  • Ratification – Shareholders, acting unanimously, can usually ratify the directors’ breach of duty but they cannot do so if the company is insolvent. As such, shareholders cannot ratify a breach of the creditor duty.
  • Groups of creditors – The Supreme Court emphasised that it is the general body of creditors whose interests must be considered by the directors. How this will pan out where there are different creditor groups (e.g. secured and unsecured creditors) remains to be seen and further case law may be needed to resolve the potential conflict here.
  • Start-ups – Often, start-ups will be balance sheet insolvent simply because they need to spend a lot of capital. Although it is arguable that the creditor duty will apply to this type of technical insolvency, the balancing act concept should help here. We consider it unlikely that the courts will view the test as meaning that start-ups can’t take risks, always assuming that decisions have been made properly.

Summary:

Although the Supreme Court decision clarifies that the duty to creditors kicks in later down the line than previously thought and potentially enables directors to try and “rescue” the company without having to be too cautious about falling foul of the creditor duty, the practical implications for company directors do not appear to have changed too much. It remains the case that directors should:

  • continue to pay close attention to the operation, including the financial position, of the business
  • document significant decisions made by the company and the reasons for them
  • obtain independent legal advice as soon as it becomes apparent that the company is facing financial difficulties

Disclaimer

This note reflects our opinion and views as of 13 January 2023 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

An Analysis Of The Trends Of Private Equity Investment In Sport – Stuart Hatcher speaks to Law in Sport

Private equity has had its eyes on the sports world for a long time says Head of Corporate, Stuart Hatcher, in his latest article recently published on Law In Sport.

In the article, Stuart reveals the high level trends, the current challenges being faced and why sports appeals to private equity.

It is safe to declare that private equity is only just starting with sport, and that perhaps we are at a new round of evolution in sport finance, in sport ownership, in sport overall – a sport investment 2.0 if you will.

The full article was published on Law in Sport on 25 November 2022, and can be found here, behind the paywall.

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Forsters to attend IBA Annual Conference 2022 in Miami

A team from Forsters, consisting of Partners Craig Thompson, Andrew Head and Howard Gill, as well as Senior Consultant, Mark Prevezer, and Senior Associate, Sarah Bool, will be attending the IBA Annual Conference 2022 in Miami.

Renowned for being the most prestigious event of international lawyers, the conference will bring the world’s largest legal community together in Miami, from 30 October to 4 November.

Sarah Bool will also be speaking at the event on Wednesday 2 November at 9.30am, discussing ‘the future trends for real estate in the post-pandemic world’, covering all topics including:

  • Tokenization of real estate projects and commercialization through crypto currencies.
  • Metaverse as a new submarket in the global real estate market? What are the real perspectives for this incipient new world?
  • Suburban vs urban areas
  • Conversion of downtown areas (former office areas) into residential areas
  • What to bear in mind in new office developments. Lessons learned from the pandemic
  • Hotels’ new developments and trends

Football and Money #2: The property play – Stuart Hatcher spoke to Private Equity News

Financiers looking to gain more of a profit from the football clubs and stadiums that they own are turning their sights towards using the land for real estate in a bid to produce more revenue out of the already existing locations.

Corporate Partner, Stuart Hatcher, spoke to Private Equity News on how the increased activity of Football Clubs renting out space to companies whilst the teams are away has generally become more popular. Adding that even lower-league English teams are joining in.

The article was published on Private Equity News on 24 October, and can be found here.

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Freeports key to hydrogen hubs – Elizabeth Small writes for Property Week

Corporate Tax Partner, Elizabeth Small, has written for Property Week’s Legal and Professional section on the benefits of siting “green” hydrogen production plants in Freeports.

Freeport-based green hydrogen sites could serve as accessible international hydrogen exportation points and provide a clean fuel for maritime use, while also benefitting from the various Freeports tax incentives, including an exemption from stamp duty land tax.

In Small’s opinion: “If the freeport status does its job of creating a dynamic high-growth cluster, there is a happy side effect in the attraction of the many experts, investors and innovative businesses that will be vital to the hydrogen ecosystem.”

To read more about the benefits of Freeports and how they may be used for a net zero future, click here.

This article was first published in Property Week on 24 August 2022 and is available to read in full here, behind their paywall.

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Private equity wants its slice of the pie more than ever before – Stuart Hatcher writes for FT Adviser

Corporate Partner, Stuart Hatcher, has authored an article for FT Adviser entitled “Private equity wants its slice of the pie more than ever before”.

In one of the latest FT Adviser publications, Stuart gives advice to anyone involved in the asset and wealth management sector as he establishes that private equity is here to stay.

Whilst including a number of hallmarks and factors that make the sector appear appealing from a private equity perspective the article additionally conveys elements to consider for any advisers who may deciding if a private equity exit is right for them. Moreover, the certainty that market will remain active with a continued focus on private equity is expected, with several speculations as to what is to come in the future.

You can read the article in full here, on the FT website.

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The Register of Overseas Entities is Go! What does this mean for lenders?

The register of overseas entities (the Register) which was created pursuant to the Economic Crime (Transparency and Enforcement) Act 2022 (the ECA) went live on 1 August 2022. As such, overseas entities can now apply to Companies House to register, although property transactions will not actually be affected until 5 September 2022. So, what does this mean for lenders? Here, we provide an update and suggested practical steps.

Who must apply to the Register?

Any body corporate, partnership or other legal entity which is governed by the laws of a country outside of the UK (an overseas entity) that:

  1. owns a UK freehold interest or a lease exceeding seven years (a Qualifying Estate) which was acquired after 1 January 1999; or
  2. intends to acquire a Qualifying Estate,

must apply to the Register.

(Overseas entities that do not own or intend to acquire a Qualifying Estate may choose to be listed on the Register, but this is not a legal requirement.)

In addition, any overseas entity which has disposed of UK property since 28 February 2022, must provide certain details to Companies House. This is the case even where that overseas entity no longer owns any UK property although how this will be monitored and enforced in reality remains to be seen. Given the complexity and size of the exercise in registering overseas entities which currently own UK property, one could be forgiven for thinking that extending the notification obligations to overseas entities which no longer hold any UK property may well be a step too far.

Upon registration, Companies House will confirm due entry in the Register and provide the overseas entity with a registration number.

What information must be submitted to the Register?

An overseas entity is required to provide certain information about itself (including its name, country of incorporation or formation and registered office) and identify its registrable beneficial owners (or confirm that it does not have any) to the Register. Such information must, on an annual basis, be updated or confirmation given that no update is required.

Where the overseas entity does not have any registrable beneficial owners, it must instead give details of its managing officers.

Details of any disposition of UK property made since 28 February 2022 must also be provided.

The information to be submitted in the application for registration must be verified by a UK-regulated agent and their details must also be provided. Various service providers such as accountants and law firms can apply to take on this role but in so doing, will also take on various risks and responsibilities. It remains to be seen how many choose to do so.

Although the Register will be publicly available, certain information, such as the residential address and date of birth of individuals will be kept confidential.

What is a registrable beneficial owner?

Essentially, a beneficial owner is anyone who:

  • holds, directly or indirectly, more than 25% of the shares or voting rights in the overseas entity
  • holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity
  • has the right to exercise, or actually exercises, significant influence or control over the overseas entity
  • has the right to exercise, or actually exercises, significant influence or control over the activities of a trust, and the trustees of such trust meet any of the conditions specified above in relation to the overseas entity.

There is a specific carve-out in respect of share charges which provides that the rights attaching to the charged shares will be held by the chargor if the rights (other than the right to exercise them for the purpose of preserving the value of the security, or of realising it) are exercisable:

  1. in accordance with the chargor’s instructions; and
  2. (where the shares are held in connection with the granting of loans as part of normal business activities) only in the chargor’s interests.

As such, a lender will not be deemed a beneficial owner solely because a share charge has been granted to it.

Property transactions and legal charges

Much depends on when the overseas entity became the registered proprietor of the Qualifying Estate.

Where an overseas entity acquires a Qualifying Estate on or after 5 September 2022, HM Land Registry will refuse to register title to the property unless the overseas entity is included on the Register. As such, to acquire any UK property on or after 5 September 2022, the overseas entity must be duly registered.

Where an overseas entity acquired a Qualifying Estate on or after 1 August 2022 but before 5 September 2022, HM Land Registry:

  1. will register that overseas entity as the proprietor of the Qualifying Estate without the overseas entity being on the Register; but
  2. will place a restriction on title in the land register, which will prevent the registration of any relevant disposition of that property (i.e. a transfer, grant or assignment of a lease for a term of seven years or more, or the grant of a legal charge) unless the overseas entity is listed on the Register (or an exemption applies).

Where an overseas entity was already the registered proprietor of a Qualifying Estate prior to 1 August 2022, HM Land Registry will place a restriction on title in the land register. Such restriction will take effect from 31 January 2023 (the end of the six-month transitional period) and will prevent the registration of any relevant disposition of the property unless the overseas entity is listed on the Register (or an exemption applies).

From a lender’s point of view, this means that where an overseas entity became the registered proprietor of a Qualifying Estate:

  1. on or after 5 September 2022, the overseas entity will need to be on the Register in order to be able to register a legal charge at HM Land Registry;
  2. between 1 August 2022 and 4 September 2022, the overseas entity will need to be on the Register in order to be able to register a legal charge at HM Land Registry; and
  3. prior to 1 August 2022, a legal charge can be registered at HM Land Registry without the overseas entity being included on the Register until 31 January 2023, although an application to register must have been made by this date and details of the legal charge will need to be disclosed at the time of application.

Enforcing a registered legal charge however, is a different story as it falls within one of the exemptions. Where a secured creditor (or a receiver appointed by the secured creditor) exercises its power of sale under a registered legal charge or a disposition is made by a specified insolvency practitioner in specified circumstances, the lack of registration by the relevant overseas entity will not prevent such sale or disposition.

What is the deadline for registration?

As mentioned, any overseas entity acquiring a Qualifying Estate on or after 5 September 2022 will need to be on the Register before the acquisition can be registered at HM Land Registry.

Although an overseas entity which acquires a Qualifying Estate between 1 August 2022 and 4 September 2022 will not need to be on the Register for the purposes of the acquisition, it will need to be registered if it wishes to make any relevant disposition of the land and it must in any event have applied for registration by 31 January 2023.

Any overseas entity which held a Qualifying Estate prior to 1 August 2022 is required to apply to register by 31 January 2023.

Non-compliance

The penalties for non-compliance can be severe and failure to register or to comply with the annual update requirements will prevent the completion of property-related transactions. In addition, failure to register on time or to comply with the annual update requirements are criminal offences.

For more information about the Register and how it will affect lenders, see our previous articles.

What should lenders be doing now?

The main effect on lenders is the ability to register a legal charge at HM Land Registry

  • Be aware that overseas borrowers which currently own UK property should now be applying to register and will have until 31 January 2023 to do so, although if they acquired the property between 1 August 2022 and 4 September 2022, they will need to be on the Register to make a relevant disposition of that property. You may want to amend their ongoing obligations in the facility documentation to ensure that they provide you with confirmation that such registration has taken place and evidence that they have complied with their annual update obligations.
  • Any facility agreements and related security documentation which are currently being negotiated for completion before 5 September 2022 should include an obligation on the overseas entity borrower to apply for registration promptly after completion, to comply with the Register’s annual update requirements and to provide you with evidence that they have done so.
  • If you are currently dealing with any facility agreements and related security documentation for completion on or after 5 September 2022, you should ensure that the overseas entity borrower is listed on the Register prior to completion. Failure to do so may hold up completion as HM Land Registry will not be able to make the appropriate entries in the land register, including registration of any legal charge over the Qualifying Estate. The documentation should also include undertakings that the borrower will comply with the Register’s annual update requirements and provide you with evidence that they have done so.

Important dates

28 February 2022: details of any relevant disposition of land since this date must be disclosed to Companies House

1 August 2022: Register becomes effective although the property-related provisions are not yet in force

5 September 2022: property-related provisions take effect.

31 January 2023: end of transitional period. Restrictions on title placed on the land register for overseas entities which owned UK property prior to 1 August 2022 take effect

Disclaimer

This note reflects the law as at 11 August 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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Here endeth the wait: Register of overseas entities goes live – an M&A update

The register of overseas entities (the Register) took effect last week with UK property-owning overseas entities now being able to apply to Companies House to be listed on the Register. To do so, various information must be supplied by the overseas entity about itself and its beneficial owners (or, if it doesn’t have any, its managing officers).

We have previously published various articles about the Register, including its effects on corporate transactions (see here) but essentially, overseas entities which own UK property are required to be listed on the Register and will not be able to purchase or dispose of such property unless they are so registered (this is due to the fact that HM Land Registry will not make the appropriate entries on the land register unless the overseas entity is listed on the Register). Overseas entities which owned UK property as at 1 August 2022 will have until 31 January 2023 to apply to the Register.

Register “Live” Date

The Register went live on 1 August 2022 and is now accepting applications, however the land restrictions will not take effect until 5 September 2022. This is to allow overseas entities which intend to complete the acquisition of a UK freehold interest or a lease exceeding seven years on or after this date to apply to the Register in advance so as to prevent registration delaying completion.

UK-Regulated Agent

To apply to the Register, the information about the overseas entity and its beneficial owners (or managing officers) must be verified by a “UK-regulated agent”. This requirement is pursuant to obligations brought in under regulations recently published. Businesses such as law firms and accountancy firms can apply to become a UK-regulated agent but with guidance on the verification requirements having only been made available last week, many will still be researching what the role involves and the potential risks of having agent status.

Effect on M&A Transactions

As discussed previously, the Register will not affect share acquisitions/sales in the same way as it will affect property transactions for the simple reason that share deals do not require amendments to be made at HM Land Registry. But this does not mean that the Register can be ignored completely.

Share purchase agreements will usually include a warranty pursuant to which the seller will confirm that the target company has complied with all applicable laws. Where a buyer intends to acquire the shares in an overseas target company which owns UK property, such a warranty will catch the target company’s registration obligations under the Register. Even without this warranty, a buyer is unlikely to want to purchase the shares in a target company which is in breach of its statutory obligations. Failure to comply with the registration requirements also has severe consequences so should be avoided at all costs.

Where a buyer intends to purchase the shares (or equivalent) in an overseas target company which owns UK property, there are now two options available:

  • Option 1: the target company applies for registration now with details of its current (i.e. pre-completion) beneficial owners. These details will need to be updated in 12 months’ time under the Register’s annual update requirements and it is at this point that details of the new beneficial owners will be provided. This option is likely to be requested by the buyer if, for example, they want to sell the property post-completion, especially if the property sale is to take place on or shortly after 5 September 2022. The buyer may ask for a specific warranty in the share purchase agreement that the target company is listed on the Register. If exchange and completion is not simultaneous, the buyer may also want to see registration as a completion condition and include an undertaking that the target company will not remove itself from the Register before completion. However, if completion of the transaction is imminent, the parties may not have the time to wait for registration to take effect and so this option may not be viable.
  • Option 2: no application to register is made until completion has occurred at which point the target company applies for registration with details of its new (i.e. post-completion) beneficial owners. Such application must be made by 31 January 2023 but bear in mind that the property cannot be disposed of on or after 5 September 2022 unless registration has occurred. If this option is followed, the seller should make a disclosure against the compliance with laws warranty to notify the buyer that registration has not yet taken place. Bear in mind that where the target company has disposed of UK property since 28 February 2022, details of the disposition will need to be disclosed as part of the application and so the buyer will need to ensure that it has sufficient detail of any such disposition to comply.

Disclaimer

This note reflects the law as at 10 August 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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Forsters’ Corporate team recognised in Spear’s Corporate Lawyers Index 2022

Forsters’ Corporate team have been recognised in Spear’s Corporate Lawyers Index 2022:

The index features the top advisers, which are selected by the source of peer nominations, client feedback, telephone and face-to face interviews, data supplied by firms, as well as information gathered by the Spear’s editorial and research teams.

The full Index can be found here.

Stuart Hatcher
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Divided We Plan: Alastair Laing and James Hamilton write for STEP Journal Plus

Partner, Alastair Laing, and Associate, James Hamilton, both in our Corporate department, have authored an article for the STEP Journal Plus entitled ‘Divided We Plan’.

In their article, Alastair and James outline the considerations for succession planning and the division of wealth in family offices.

The article highlights that a vast amount of generational wealth is predicted to be passed down over the next 25 years and includes an in-depth review of details regarding the structuring of assets through generations, the complicated nature that may occur regarding the division of assets, private equity fund investments, property matters and disparities in value.

You can read the full article here.

‘Divided we plan’, Alastair Laing and James Hamilton, STEP Journal Plus, July 2022.

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Funding a Wine Estate or Winery

Making wine is expensive. You need the land, the labour and specialist plant and machinery plus long-term capital to support expansion and maintenance. It takes five to ten years for a new vineyard to start selling wine so sufficient capital will be needed in the early years.

Where that money comes from is important. Are you borrowing it? From whom? What is the loan secured on? A range of assets can be used for security, not just land itself; some require more bespoke financing than others. The right finance can make a huge difference to the amount you can borrow, the interest you pay and how much flexibility you have over the operation of the business.

Generally, land is the easiest asset to secure and, in recent years, money has been reasonably cheap. However, high street lenders will not usually lend against agricultural property, meaning you need to approach the handful of specialist lenders in this area. Larger and more established vineyards with a trading history meanwhile are increasingly using asset-based lending, which is borrowing against receivables generated by the business as well as land, plant and machinery. This often provides more flexible working capital than vanilla loans secured against just the land.

As with any financing, it is often helpful to approach a specialist broker who can find the right lender for your business and its borrowing needs.

You will need a solicitor to act on your behalf. Lending terms can be onerous and it is important to take legal advice to understand them in the context of running the business day to day. A good lawyer will explain potential defects in your security to your lender and give solutions, rather than simply identifying problems.

Lenders will look at assets in the round and demand adequate security for the debt, like (in the case of companies) a debenture creating fixed and floating charges over all assets or a share charge from the shareholders over the borrowing entity.

Buying plant and machinery on hire purchase terms can make sense from a balance sheet point of view. Sophisticated creditors provide overdraft facilities (secured and unsecured), and legal charges can be left in place for short notice lending too. Collateral can also come from outside the business. Personal guarantees from beneficial owners or from trustees can be especially helpful for young businesses. Remember that trustees’ guarantees should be limited to trust assets and personal guarantees should be capped. Parent company guarantees can have implications for the wider group.

Ultimately a vineyard is a collection of assets and approaching it as a straightforward land purchase is not always the answer. Forsters’ Banking & Finance team knows about complicated real estate finance and asset-based lending. They will work closely with you and the Rural Land and Business team to understand the wider project. Combining these two elements allows us to advise on and structure the most suitable form of finance for you.

Expert Insights

“With rising temperatures, improved technology, and increasing demand for wine and land suitable for vines, there is a real sense that vineyards in the UK are now, for some, a viable option. C. Hoare & Co. has funded both acquisitions and serious investment in existing businesses. As a 12th-generation family business, we take a long-term view well beyond the usual rolling five-year strategy, and with the cost of capital at a near-historic low, the timing couldn’t be better. We recognise, however, that vineyards need the right team on the ground, as well as favourable soil, aspect and climate conditions – we all know it only needs one unexpected frost to wipe out an entire season. This places winemaking some way up the risk spectrum, and it won’t be for everyone, but we have been on journeys with a number of well-advised customers and feel we offer a flexible approach.”

Simon Collins – Head of Landed Estates Group, C. Hoare & Co.


Vineyards and wineries

A great bottle of wine is a wonderfully elegant, simple thing. But the process of making it is complicated. Small variables in soil, climate, management and markets can make the difference between a great year and an average one.

An image of grapes growing in a vineyard.

The rewarding yet responsible role of a resident management company director: Christine Dubignon and Samantha Tomczyk write for EG

Corporate Partner, Christine Dubignon, and Residential Property Senior Associate, Samantha Tomczyk, have authored an article for Estates Gazette entitled ‘The rewarding yet responsible role of a resident management company director’.

The article was first published in EG on 10 May 2022, and can be read in full below.


Some apartment buildings will have resident management companies that deal with the management and maintenance of the building. RMCs may be established by the original developer of the building, or may be set up by leaseholders themselves, either as part of a right-to-manage claim whereby the leaseholders take over the landlord’s management obligations in the leases using a right-to-manage company or following enfranchisement by the leaseholders, whereby they collectively purchase the freehold of the building from the landlord.

RMCs may themselves be party to leases of the apartments, with specific obligations in respect of managing and maintaining the building, or they may instead be responsible for performing all or some of the obligations of the landlord. Managing the building will require keeping the communal areas, structure and exterior of the building properly maintained and in good repair and condition. This will involve entering into service agreements with contractors and other suppliers, as well as employing staff (for example, concierge, security, cleaners and gardeners, etc) and insuring the building in its full reinstatement value. The costs of these services will be charged to leaseholders through their service charge, in accordance with the terms of their leases.

RMCs will usually be responsible for demanding, collecting and recovering service charges from leaseholders, as well as dealing with all accounting matters, such as preparing budgets at the start of each service charge year and final accounts at the end of each year. Where a leaseholder is in breach of their obligations under their lease, the RMC may be responsible for enforcing these obligations (particularly if it has received a complaint from another leaseholder), which could include taking legal action against the leaseholder.

Setting up an RMC

RMCs are English limited companies, and the usual incorporation requirements will apply. Directors will need to be appointed, shares will need to be issued (unless it is a company limited by guarantee) and articles of association (the key constitutional document detailing how the company is to be run) need to be adopted.

Where the RMC is limited by shares, typically each leaseholder will be given a share in the RMC which will be “stapled” to their apartment. This means that on a sale of an apartment, the share automatically transfers to the new owner and prevents a third party without any interest in the property from acquiring an interest in the RMC.

Where a company is limited by guarantee, leaseholders will become members of the company and their details will be noted on the register of members (no share certificates will be issued). On the sale of an apartment, membership automatically transfers and the membership register should be updated accordingly.

Directors’ duties – as established by the Companies Act 2006:

  • To act within their powers (ie in accordance with the constitution of the RMC)
  • Promote the success of the company for the benefit of its members as a whole
  • Exercise independent judgment
  • Act with reasonable care, skill and diligence
  • Avoid conflicts of interest
  • Not to accept benefits from third parties
  • Declare interests in any proposed transactions or arrangements with the company

While shareholders/members have certain rights as a matter of law and under the articles of the RMC, if leaseholders really want visibility and input into the management of the RMC (and therefore management and maintenance of the building) they need to be appointed as a director.

Individuals may be invited to act as a director (often by reference to a specific set of skills they possess) or, more frequently, they tend to put themselves forward for appointment because they regard it as their contribution to the community of the building.

However, directors of RMCs are not generally paid (although there may be scope for reimbursement of out-of-pocket expenses), and the role can carry some risk.

The role of a director

Directors must ensure that the RMC complies with any legal obligations it is subject to. These will include not only lease terms, but also broader legal obligations under landlord and tenant law.

For example, ensuring that service charges are reasonable and where the RMC intends to carry out works costing more than £250 per leaseholder or they intend to enter into an agreement with a contractor for more than 12 months costing more than £100 per leaseholder in any 12-month period, then they must follow the section 20 consultation procedure prescribed by the Landlord and Tenant Act 1985, including consulting with all leaseholders and obtaining tenders. RMCs will also need to comply with relevant health and safety legislation, including obtaining a fire safety risk assessment for any communal areas, implementing its recommendations and ensuring it is regularly reviewed. Where the RMC is also the landlord, it will need to enforce leaseholder covenants and consider carefully any applications for consent, particularly where granting consent would be a breach of an absolute covenant.

Directors of RMCs, like all directors, are subject to the specific duties set out in the Companies Act 2006 (see above).

Directors can be made personally liable for a breach of these duties, so it is imperative that they have proper regard to them when making decisions. In particular, the obligation to “promote the success of the company for the benefit of its members as a whole” can be very complicated in practice as it requires directors to consider the impact of decisions they make and actions of the RMC on other leaseholders and their tenants.

Directors need to ensure they are able to objectively justify any decision that may appear to benefit some leaseholders (especially themselves) over others – for example, when prioritising maintenance work which might benefit some apartments more than others.

Individuals also need to be aware of the inherent conflict that may exist by virtue of them being a leaseholder, shareholder/member of the RMC and director of the RMC too.

Practical considerations

Acting as a director of an RMC can take up significant time and an individual will need to be comfortable that they can balance the role with any other commitments they have. They will need to be available to attend board meetings, consider papers and issues relating to specific matters and liaise with other leaseholders and third parties. Directors should consider whether it is appropriate to seek external advice or support, such as passing day-to-day responsibility for management to third-party managing agents or seeking input from professional legal advisers.

Directors need to be prepared to be able to make difficult decisions, for example, if the RMC is required to enforce provisions of leases against leaseholders or if there is a dispute between leaseholders. These decisions may mean that directors find themselves in direct conflict with other shareholders/members of the RMC, who are also their neighbours.

Directors will need to be fully up to speed with the articles of association governing how the RMC is to be run (and, most importantly, how decisions of the board of directors are to be made), the leases and any obligations which the RMC is specifically responsible for, and any other legal obligations of the RMC.

If appropriate, advice and support should be sought from lawyers or managing agents. Consideration should be given to any relevant processes and policies if not already clear. These could cover matters such as the protocol to be followed should a leaseholder require consent under their lease for alterations, assignments, underlettings, pets, etc, how to deal with leaseholders who are in breach of their leases or if a dispute has arisen (either between leaseholders or where leaseholders disagree with directors’ decisions), or the establishment of committees for larger projects.

Directors should ensure that any money of the RMC (for example, in respect of its share capital and subscriptions or any income received, for example, from ground rents or lease extensions if the RMC is also the landlord of the building) is held separately from any service charges received, ideally in separate bank accounts. The RMC is required to hold any service charges received on trust for the benefit of leaseholders and to only use such funds as provided for in the leases, so having separate bank accounts should ensure the funds of the company are not mixed with service charges.

Given that directors can be held personally liable for a breach of their duties, RMCs should consider taking out a directors and officers’ insurance policy, which will protect directors from any claim brought against them in respect of actions they may take as a director.

The role of a RMC director can be demanding and stressful but it can also be very rewarding and give those who embrace the responsibility more control and influence on the running of their building.

A corporate re-domiciliation regime edges ever closer

Earlier this year, we wrote about the government’s consultation requesting views on whether foreign-incorporated companies should be able to re-domicile to the UK without any loss of, or impact on, their legal identity (the Consultation). The publication in April of the response to that consultation (the Response) has made clear that the government intends to put in place such a regime, although no timescale has yet been given and the Response suggests that it could be some time before we see draft legislation.

The Response

With 40 respondents, the Response may not be particularly compelling in showcasing public opinion on the issue, but this may have been (at least partly) down to the fact that views were requested at an extremely early stage of the process with only a high-level overview of how the regime might work in practice being provided; presumably to allow the government to gauge opinion before tackling the detail.

What is clear is that the majority of respondents were broadly supportive of a corporate re-domiciliation regime, although it was noted that such a regime is unlikely to be enough on its own to attract overseas companies to the UK. That said, respondents were of the view that such a regime would provide a number of advantages to the current ways in which a company can relocate to the UK.

One-way or two-way?

Interestingly, although probably to be expected, the Response indicates that a two-way regime is favoured, i.e. the regime should permit overseas companies to re-domicile to the UK and UK-incorporated companies to re-domicile to other jurisdictions. This would provide flexibility for companies, allowing them to change their mind about their domiciliation in the future. It is also considered an incentive for overseas jurisdictions to permit re-domiciliation to the UK on a “playground”-type basis, i.e. an overseas jurisdiction is less likely to permit its own domestic companies to re-domicile to the UK if the UK does not permit re-domiciliation to that jurisdiction.

Eligibility criteria

In terms of the criteria likely to be required to be satisfied by an overseas company wanting to re-locate to the UK, much more detail is needed but an economic substance test is probably off the table. The government was leaning away from this even at the Consultation stage and the responses received were in a similar vein.

The Response indicates mixed views on financial reporting requirements. The Consultation suggested that one set of financial accounts should be provided by an overseas company wishing to re-domicile to the UK, but some respondents considered this to be too lenient, suggesting that a company should evidence a longer track record, while others were of the view that start-ups should not be penalised.

Tax

With questions surrounding group taxation, tax residency, stamp taxes, VAT and loss importation to name just a few, the tax aspects of the new regime are likely to cause headaches, not least for the civil servants involved in its design and implementation. That said, if the government follows the Response, it is likely that companies which have re-domiciled to the UK will be treated as UK tax resident by virtue of the fact of their re-domiciliation, rather than on the basis of the location of their central management and control.

Conclusion

What is clear is that we can probably expect to hear more about this new regime over the coming months and possibly years, and also to see further consultations as the plethora of detail for such a regime is ironed out at Whitehall. However, on the basis that respondents are, understandably, requesting flexibility, “predictability and certainty”, and a balancing of “simplicity of design with sufficient rigour and appropriate checks”, I suspect they will also need to accept that they will simply have to wait for it.

Disclaimer

This note reflects our opinion and views as of 21 June 2022 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.


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Lianne Baker
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Buying a vineyard or winery

Buying a vineyard or a winery involves acquiring a bundle of assets. Land is at the heart of the transaction, but you may also be buying crops, buildings, subsidies, goodwill, and intellectual property. Overlaid with that is how you are buying them – trading businesses may be sold as corporate transactions or “share sales” rather than a direct purchase of the underlying assets.

This article focuses on the assets you are acquiring and what terms your purchase contract might need to address.

Land

First and foremost, when buying either bare land to plant vines or an existing vineyard, you are buying land. Whether the soil is good for growing grapes is only one factor in determining the whether the land is right. Land is a complicated asset and when purchasing it for a vineyard you need to consider questions like:

  • Are there restrictions that could stop you growing vines on it? For instance, does it have the right planning consents for its current or proposed use? Can you sell the wine as well as make it, or host wine tastings and weddings?
  • Are there any third party rights that could affect operations? For example, is there a public footpath through the middle of the vineyard, or are there historic footpaths that could be registered in future?
  • Are you inadvertently taking on other liabilities you were not expecting, such as claims from the seller’s employees or environmental contamination?
  • What is planned in the area? For instance, is it next to a proposed new housing estate, or is HS2 or a new bypass going to plough through it?
  • Where does the water come from? If you have abstraction licences or a private water supply, are you able to use those for the business, and what obligations are you taking on?
  • Is there proper access to the public highway?
  • How much tax are you going to pay on the acquisition – what are the rates of SDLT and VAT?

Due diligence by your solicitor will answer these questions and more. Armed with this knowledge you can adjust the price, if necessary, and negotiate sensible provisions into the contract to protect you against the risks.

Expert Insights

“The purchase of a vineyard is a new opportunity for clients to find a real connection with land and a chance to create a legacy investment. The best sites are hard to find, hard to acquire and the journey is often full of headaches and heartaches – you have to be resilient. Vines are a long time in the ground, therefore it is important to take site selection and preparation very seriously!”

Rupert Coles – Director, Rupert Coles Ltd

Buildings and equipment

Turning to production, wineries need premises to lay down bottles, keep expensive kit, house people on site and, increasingly, entertain visitors and customers. From bats to asbestos, there are nuances with bricks and mortar. A good surveyor is important if you want to understand the potential liabilities and costs of upkeep or conversion of the farm buildings.

Complying with the planning regime is critical. Three areas come up most: use, development, and listed buildings. Whether or not the site has the right consents in place for your proposed use must be checked by your solicitor – the planning rules are not straightforward, and many wineries will require specific consents for retail and leisure.

Around 400,000 buildings in England are listed, including a surprising number of old agricultural barns. Carrying out unauthorised works to a listed building without consent is a criminal offence so cannot be taken lightly, and there is no limitation period for enforcement action, so you could have to put right unauthorised works carried out by the seller. In the most serious scenarios, you may decide that the seller has to apply for consent for unauthorised works themselves before completion, and you might keep back some of the sale price as a retention to deal with the risk.

Less severe but more common in draughty, old buildings are missing building regulations certificates and potential failure to comply with the Minimum Energy Efficiency Standards (MEES), where Energy Performance Certificate ratings of F or G render a building unlettable. Again, you need to understand how this will affect your use of the site prior to exchange.

Viticulture also requires specialist equipment, much of which is valuable and hard to remove. If it is included in the sale, a key point to check is whether the seller is able to sell you everything you think you are buying – nemo dat quod non habet, literally meaning “no one can give what they do not have”, is a long-established principle but one that can easily be overlooked where equipment is held on hire purchase terms. Assuming it is owned and included, there may be accountancy elements to address in the contract such as capital allowances elections, and having an experienced accountant to work with your lawyer is essential.

Crops

Most vineyards will be brought to the market in early spring and contracts are often exchanged in early summer – a quick sale where efficient solicitors have a sales pack ready can exchange in under a week, though most more substantial sales will take six to ten weeks. Most sales will then complete within a few months, either before or after the harvest.

If completion takes place before harvest, then the contract ought to deal with the grapes. Growing crops form part of the land and will be included in the sale by default; if they are, the seller may well require you to pay for them and any other items of what is known as “tenant right” based on a valuation at completion, particularly if completion is close to harvest.

It is more common for the seller to want to keep the current crop. They will then need holdover rights to harvest and store the grapes. A good contract will set out costs, liability and insurance in that period, together with a provision allowing you to keep or sell the grapes if the seller fails to remove them – otherwise you are left as an “involuntary bailee” and will have to follow a notice procedure before you can do anything with the grapes.

Many vineyards will be situated within a larger farm and not all the land will be under vine. The remainder, and indeed the field margins, will often be used for grazing or for more conventional arable crops. While the crops may be dealt with alongside the grapes, it is not unusual to purchase cattle or sheep with a farm and an ingoing valuation or price adjustment may be required for livestock and deadstock.

Growing grapes is still agriculture and the land is, therefore, eligible for agricultural subsidies. These can be lucrative but complicated, particularly as the Common Agricultural Policy fades away post-Brexit in favour of Environmental Land Management Schemes. If buying, you need to decide whether to take the entitlements to the subsidies, in which case the documents need to make provision for the transfer process and set out an agreed price.

The brand

Judging a book by its cover may be frowned upon, but judging a wine by its label is often wise. Name, logo, recipe and method are vital so they need to be properly registered, protected and enforced so no one else can steal or benefit from your intellectual property. You should also consider licensing your name and brand overseas. In the digital wild west the opportunities and pitfalls are bigger than ever.

The contract can cover whether any intellectual property is included, both in the strict sense of copyright in label design and registered trademarks, but also in the looser sense of farm names. It is not uncommon to ask a seller to stop using a farm name in future and to transfer website names and social media handles to you at the point of completion.

Finally, where you are buying the business, you also need to consider the goodwill and, potentially, any book debts. This angle is where it becomes important to use lawyers and agents with corporate experience, as the transaction will become more akin to a merger or acquisition than a single asset purchase.

Expert Insights

“The wine industry in the UK continues to grow and the demand for English wine and consequently vineyards continues to outstrip supply in key areas. A high profile product more often produced in well-established and attractive settings means there is increasing interest in the concept of wine tourism. Wine trails and tasting sessions alongside local, seasonal produce are becoming more mainstream options for tourists in the UK enabling well-advised and forward thinking operators to capitalise on this.”

Andrew Chandler – Head of Rural Agency, Carter Jonas

In summary

It will hopefully have become clear that there is no “standard” purchase – every acquisition will have terms unique to the property and business – and, as a result, you need a lawyer who can pre-empt each potential issue and offer you a solution. If you are interested in buying a vineyard or winery, please do get in touch.


Vineyards and wineries

A great bottle of wine is a wonderfully elegant, simple thing. But the process of making it is complicated. Small variables in soil, climate, management and markets can make the difference between a great year and an average one.

An image of grapes growing in a vineyard.

Vineyards & Wineries

Forsters are delighted to be launching our Vineyards & Wineries practice. The cross-departmental team draws upon our strengths from across the firm, a combination of expertise that is rare if not unique in the market. The increasing number of vineyards we look after complements our exceptional book of landed estates, and is testament to our ability to look after landowning clients, whatever their business and whatever challenges they face.

Learn more

Shareholders speaking up – Aaron Morris writes for CGI

Corporate Senior Associate, Aaron Morris, writes for CGI’s G and C Digital Magazine, discussing if supply chain challenges and ESG concerns will drive an increase in shareholder activism.

The article, entitled ‘Shareholders speaking up’ was first published in CGI’s G and C Digital Magazine on 19 May 2022.


Will supply chain challenges and ESG concerns drive an increase in shareholder activism?

As the 2022 AGM season kicks-off, the ever-changing global situation means that shareholders are, more than ever, taking a keen interest in the way in which their companies are being run. In turn, businesses are increasingly facing the challenge of balancing the need to increase profits – especially after a tumultuous couple of years for many – while acting in a way that demonstrates that their business is morally and ethically attuned to the world in which we live.

These factors, along with the government opening up the economy after two years of restrictions, mean that we are likely to see a rise in shareholder activism this year; a continuation of a trend seen over recent years, as reported by IR Magazine. At its core, this relates to shareholders exercising the rights attached to their shares or using their position as a key shareholder of a company to influence changes in how the business is run and the policies it pursues. They may do so by, for example, privately exerting pressure on the board, or putting resolutions to or raising other matters at general meetings.

ESG and sustainability issues are becoming more pressing in the minds of shareholders and are increasingly being used by them as a way to hold businesses to account. The number of environment related issues raised at AGMs is likely to go up following the COP26 summit at the end of last year, as investors will want to start seeing clear objectives for implementing longer term environmental strategies. Greater diversity – particularly ethnic diversity – on boards of directors also continues to be an important topic and, while some progress has been made, there is still a long way to go. Other issues, such as employee wages, are also likely to feature, with Legal & General Investment Management joining other shareholders of Sainsbury’s in pursuing wage increases for staff. This will be particularly pertinent in light of the cost of living crisis.

Impact of the war in Ukraine

Investors would have watched on in disbelief as events unfolded around the Russian invasion of Ukraine, and it seems certain that these actions will lead to an increase in shareholder activism – to the extent they have not already done so. Shareholders are likely to be concerned with any activity a company has in Russia and with Russian owned companies, especially following government-imposed sanctions. The impact of failing to cease business in Russia has already been felt by companies such as Coca-Cola who, due to their slow actions, faced calls on social media for a boycott.

Investors will be conscious of the operational implications that ceasing business in a particular country can have, but also the severe reputational damage that can result from not acting quickly enough. This is particularly true in light of the atrocities in Ukraine. However, as Andrew Edgecliffe-Johnson, the US Business Editor for the Financial Times reports, ‘With the exception of the oil and
gas giants with multibillion-dollar ventures in Russia, most companies’ principled statements have so far come at a pretty low cost.’ While a minority have withdrawn from Russia completely, he said ‘most have just suspended operations, halted new investments or curtailed the range of products and services they offer,’ and due to the facts that have come to light, ‘the prospect of a quick resolution that lets western brands feel fine about returning to the shopping malls of Moscow now look increasingly remote.’ It will therefore be interesting to see the extent to which shareholders push for a complete withdrawal from Russia and how this process will be managed.

The conflict in Ukraine, the COVID-19 pandemic and the after-effects of Brexit are affecting supply chains in a number of industries because of problems such as staff absences through illness and a lack of resources. The renewed lockdowns in China have further exacerbated the issue as the country pursues its zero-COVID policy, resulting in non-essential factories having to suspend production and cargo ships having no option but to wait outside ports. In an article published by Reuters, Foxconn – which makes iPhones for Apple – recently reported that its revenue could reduce by up to 3% this year, which it has put down to the cost of resources. Additionally, Russia and Ukraine produce
the majority of the world’s supply of sunflower oil of which we are starting to see a lack; this is having a knock-on effect on the manufacture of products requiring this ingredient.

Supply chains and deglobalisation

During supply chain disruption, the idea of deglobalisation reappears as companies and countries realise how dependent they are on certain suppliers.

In respect of both the supply chain issue and a possible move towards deglobalisation, activist shareholders are likely to be vocal about the increase in costs as a direct result of demand exceeding supply and delays in the worldwide transportation of goods and resources. Deglobalisation is arguably another determinant of the rise in costs and prices as it leads to a decrease in competition. Shareholders will therefore be keen to see directors adopting policies to counteract this to protect distributions and the value of their shares. There may be a push for raw materials to be supplied from different locations where possible, for manufacturing to be moved to regions deemed more stable and dependable, for funding to be invested in research and development in an attempt to find alternatives and for companies to stockpile goods as part of a contingency plan. As an example, the BBC has reported that Edible Oils has started to increase its production of other oils as a replacement for sunflower oil. Where expenses cannot be kept down, we may also see a move towards cost-saving measures which could include redundancies. Management teams who are unable to meet the challenge of offsetting rising operating rates may also find that shareholders refrain from approving directors’ remuneration packages as a result of poor performance; they may even seek to replace them with a new executive team.

Twitter purchase

Finally, in the United States, we have seen a different kind of shareholder activism through Elon Musk’s purchase of Twitter. Musk initially bought a 9.2% stake in the company to become its second largest shareholder. After his first launch of a takeover was met with Twitter passing a ‘poison pill’ provision, he has since had a $44 billion bid accepted. Such shareholder activism is seemingly being undertaken so that Musk can start to effect changes in the way Twitter operates, particularly with regard to free speech. Takeovers of this size are unlikely to be discussed at AGMs in the UK, but there are some examples of investors pushing for the sale of a company following poor performance. For example, the Financial Times reported that Phase 2 Partners, the US-based hedge fund, is applying pressure to the board of TP ICAP to sell, following a drop of 45% in the company share price over the past year and concerns about the existing governance and ownership structure.

This article has highlighted just a few of the areas in which shareholders are likely to apply pressure, but the current global political and economic position is unlike many seen before, it will be interesting to see what issues arise from shareholder activism at this year’s AGMs.

Aaron Morris
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Special Purpose Vehicle (SPV) Sales – The Key Issues

A significant number of property purchases continue to be undertaken as corporate transactions, with the buyer acquiring the shares in the target company (Target) which owns the property, the Target generally being a special purpose vehicle (SPV).

The parties will often agree a heads of terms which assumes an asset deal but gives the parties an option to “convert” to a corporate deal before completion if terms can be agreed.

Notwithstanding the benefits of a corporate deal, which we have written about previously, such a transaction raises various additional issues and workstreams which will need to be addressed in order to reach a successful completion and which will generally, also lead to higher transaction costs for both parties. In order to reduce the risk of time and money being wasted, we consider here some of the key issues which the parties should consider at the outset of a transaction in order to establish whether or not a corporate deal is viable.

1. Is the Target truly an SPV?

When a Target is purchased, a buyer will effectively acquire all of its assets and liabilities – not just the property which it owns. Liabilities can include obligations to pay tax or risks associated with historic contracts which have been entered into by the Target. If the Target has been in existence for a significant period of time or undertaken a range of activities in addition to owning the property, this will not only make the due diligence process more complicated but may significantly change the risk profile for the buyer. Before undertaking any significant work, a buyer should seek reassurance that the Target is a “clean” SPV and undertake a high-level due diligence exercise to verify the same before incurring any significant costs.

2. Fundamental tax issues

A buyer will be extremely concerned to understand the tax profile of the Target and what tax (if any) might be due. A high-level tax due diligence exercise should be undertaken to identify any major issues, including:

  • If the Target is offshore, has it always been managed and controlled appropriately and if not, are there any questions around its tax residency which could have financial implications?
  • Is there any “pregnant” corporation tax liability in the Target? If the value of the underlying asset has increased significantly since it was originally acquired, any transfer of the property out of the Target after completion could result in a corporation tax liability.

3. How has the price been calculated?

If the parties have agreed to consider a corporate transaction after terms have been agreed for a property deal, the price will typically have been agreed by reference to the value of the property. Thought will need to be given as to whether the price is fixed or whether an adjustment is to be made by reference to any other assets and liabilities of the Target, such as cash deposits, the right to receive historic rent arrears or tax refunds, or sums payable to third parties under existing contracts.

The parties should identify and agree in principle how any major items are to be dealt with as early as possible in the transaction process. This could require the parties agreeing to formally transfer the right to receive certain sums from the Target to the seller or for cash deposits to be distributed out or applied against any existing debt prior to completion.

It is not uncommon for there to be a formal price adjustment mechanism incorporated into the purchase agreement. The value of the property will generally be fixed, but to the extent there are any other assets or liabilities, the price will be adjusted with a balancing payment made by either the buyer or the seller. Such a price adjustment can be complicated, requiring agreement of specific accounting policies and principles between the parties and the preparation of a pro forma set of accounts. This can take a significant amount of time and will need to be dealt with in parallel to the legal transaction documents to ensure there are no delays.

4. Who will provide the warranties?

In a corporate transaction, the buyer obtains protection through the provision of warranties and indemnities from the seller. These are effectively confirmatory statements which the seller provides in the purchase agreement (for example, that the Target has no liabilities save as disclosed, that the Target is an SPV, that all tax of the Target has been paid up to date, and so on). If any warranty proves to be untrue, the buyer can bring a claim for breach of warranty against the seller.

SPVs are often part of a broader corporate structure and sale proceeds will generally be distributed out to the parent company or ultimate beneficial owners immediately following completion. The buyer needs to be comfortable that it will have recourse against a person of suitable standing in the event of a warranty or indemnity claim, with any additional security requirements (such as a parent company guarantee or cash retention) being requested as soon as possible.

5. W&I policies

The past decade has seen an almost exponential growth in the use of warranty and indemnity insurance policies (W&I Policies). These are a third party insurance policy taken out by the buyer or seller to provide insurance in the event of a warranty or indemnity claim under the purchase agreement. They are most commonly taken out by the buyer allowing it to bring a claim under the policy in the event of a breach of warranty or an indemnity kicking in, while the seller benefits from a £1 cap on its liability (unless it has fraudulently concealed information). Although W&I Policies can be a convenient device, their cost can be significant, and the parties should agree at the outset who is to take out the policy and how any costs are to be borne.

For further discussion about W&I policies, see here.

Conclusion

Although corporate acquisitions of property often present many potential advantages to the parties, they undoubtedly involve additional time, effort, and costs for all involved. Considering some fundamental questions at the start of a transaction will not only allow matters to progress as quickly and efficiently as possible but will also reduce the risk of a “fatal” issue arising at a later stage.

Disclaimer

This note reflects our opinion and views as of 26 May 2022 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

Christine Dubignon
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English football regulator may be constrained by conflicting aims: Stuart Hatcher speaks to City AM

Corporate Partner, Stuart Hatcher, has spoken to City AM in their article entitled ‘English football regulator may be constrained by conflicting aims, says legal expert’.

Following the announcement of the Government’s plans for an independent football regulator, Stuart has said it might be “rendered toothless by conflicting aims”.

“It’s going to be a big call for a regulator to remove a club’s licence, because that means they can’t play football any more and potentially goes against trying to protect a club.”

This article was first published on City AM on 2 May 2022. You can read the full article here.

Stuart Hatcher
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The Register of Overseas Entities – 5 steps lenders should be taking now

There has been a plethora of recent articles about the Economic Crime (Transparency and Enforcement) Act 2022 (the “ECA”) and its provisions which deal with the register of overseas entities (the “Register”), but given that the Register is not yet in force and there is no suggestion as to when it will become effective, how concerned should lenders be?

Is it really worth spending time and effort considering the new regime when we don’t yet have all the details as to how it will work in practice?

The simple answer to this is yes. We know that the Register is on the legal horizon and given the speed with which the ECA received Royal Assent (after it was essentially written off last year), we can expect that the setting up of the Register will be fairly high on the list of government priorities. On this assumption, it would be sensible for lenders to take certain steps now to ensure they are adequately protected when the Register takes effect.

So, what are the five main steps that lenders can take now, before the Register is in place?

  1. Get up-to-speed on the relevant provisions of the ECA. Understand what the Register is intended to achieve, to whom it will apply and how it will work. Read our client briefing note on how the Register will affect lenders and get in touch with your usual Forsters contact if you would like specific training or have any questions about the Register.
  2. Be mindful of your current clients and security portfolios already in place. Where an overseas entity acquired UK property before 1 January 1999, it will need to apply for registration once the Register opens. Such entities will have six months to apply for registration.
  3. Consider whether it would be sensible to inform any of your clients about their potential registration requirements. Although ensuring registration compliance is not a lender’s responsibility, it may be prudent to encourage certain clients to begin collating the information that will be required for registration.
  4. Ensure that the documentation for facilities which are currently at the negotiation stage include the necessary comfort and protections that you, as a lender, will require when the Register takes effect. You will want to ensure that the overseas entity has a contractual obligation to apply for registration within the required time period, undertakes to complete the annual updates as required and sends evidence to you that they have so complied.
  5. Ensure that you periodically check to see whether a date has been announced upon which the Register will open. We will provide an update on this, but it is also likely to be published in the press and on the gov.uk website.

Disclaimer

This note reflects our opinion and views as of 26 April 2022 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

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The Register of Overseas Interests and Corporate Transactions

We may not yet know when the register of overseas entities (the “Register”) to be set up under the Economic Crime (Transparency and Enforcement) Act 2002 (the “ECA”) will become effective, but we can be fairly certain that it will be in the not-too-distant future.

While the expected effects of the Register on real estate and finance transactions have been well-documented, will the new regime also be a factor to consider in corporate transactions?

The answer is yes, but possibly not to as great an extent.

The Register – the basics

Essentially, any overseas entity which owns UK property will be required to apply for registration. Various actions in relation to the property, such as its disposal or the registering of a charge against it, will be prohibited unless registration has occurred. The details of the beneficial owners of the overseas entity will need to be provided as part of the registration process and annual updates will be required to confirm if there have been any changes.

For a full overview of the Register, please see our briefing here.

The PSC Register

The PSC register has been around since 2016 and has become an accepted part of company administration. At this stage, there appears to be a fair amount of overlap between the PSC register and the Register. It is therefore arguable that the Register is simply a way of levelling the playing field between the information requirements expected of both UK and overseas entities, although admittedly with a focus on overseas entities which own UK property.

Corporate sales and purchases

In the case of a corporate sale or purchase, it is the shares in the asset-owning company which are sold and purchased, rather than the underlying asset itself. (For further information about the differences between asset and share deals in a property context, see here.) As such, the direct owner of the asset does not change. So, where the asset is a property, a share sale requires no change in the title to be registered at HM Land Registry.

However, no purchaser will want to acquire shares in a target company if it has not complied with its statutory obligations and the potential sanctions of failing to comply with the Register’s requirements are severe, so we can expect to see specific reference to the Register in share purchase agreements (“SPAs”) going forward. The extent of these references will depend on the timing of the transaction.

Let’s consider the case of a UK property owned by an overseas entity (the “Target”). The shares (or equivalent) in the Target are to be sold by the current shareholders.

1. Exchange/completion before the Register takes effect

The Target and its beneficial owners cannot be registered in the Register before completion and so there will be no need to incorporate Register-related provisions in the SPA. Applying to register the Target and its new beneficial owners will be a post-completion matter for the purchaser and Target to deal with once the Register is open. They will need to bear in mind that there is a six-month window once the Register is up and running (the “Transitional Period”) in which the application can be made.

2. Exchange/completion during the Transitional Period

If exchange/completion of the transaction is to occur during the Transitional Period, the parties will need to decide who is responsible for registration. Assuming completion will take place before the end of the Transitional Period, the seller could argue that registration is of no concern to it and that the purchaser should apply for registration post-completion, whereas the purchaser may demand that it be dealt with by the seller/Target before completion. In a straightforward structure where the beneficial owners can be easily ascertained the actual application to register should be quite straightforward (although we have not yet seen the form that Companies House will require) and so in reality, this may not be a significant issue for either party.

Where the seller agrees to apply for registration before completion, the purchaser may require comfort in the form of a warranty that registration has been achieved. Although likely to be caught by a compliance with laws warranty, expressly referring to the Register may assist with focussing the seller’s/Target’s minds. The purchaser will also expect to see evidence of due registration.

Where the transaction comprises a split exchange and completion, the purchaser may require the inclusion of a condition that registration will be completed, and that the Target will not remove itself from the Register, prior to completion.

3. Exchange/completion after the Transitional Period

If exchange/completion is to take place after the end of the Transitional Period, the Target should already be registered, assuming that it has held the property for some time. In this instance, we can expect to see warranties confirming that the Target is duly registered, the information on the Register is correct and any annual updates have been correctly made. Again, this will arguably be caught by a compliance with laws warranty, but purchasers may require express comfort.

If exchange and completion of the transaction is not simultaneous, the purchaser may require the Target to comply with any updating requirements that arise between exchange and completion or a repeat of the above-mentioned warranty on completion and comfort that the Target will not remove itself from the Register prior to completion.

Registration of charges at Companies House

Some of us can remember a time when charges against overseas entities were routinely sent to Companies House for the sole purpose of receiving the rejection letter as evidence that an attempt to register the charge had been made. This is no longer required, but query whether the practice will re-instated now that more overseas entities will be registered. Time will tell.

Disclaimer

This note reflects our opinion and views as of 25 April 2022 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.


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Why acting as an RMC director carries some risk: Christine Dubignon and Samantha Tomczyk write for Property Week

Corporate Partner, Christine Dubignon, and Residential Property Senior Associate, Samantha Tomczyk, have authored an article for Property Week entitled ‘Why acting as an RMC director carries some risk’.

Resident management companies (RMCs) are owned by leaseholders to deal with their management and maintenance needs.

RMCs are required to have directors, who are responsible for their day-to-day management. Christine and Samantha highlight to readers that acting as a director “is usually an unpaid role and does carry some risk”.

In their article, they explain the key risks one faces when acting as a director, from time commitments to personal liability.

The full article can be read here.

So, you want to be a non-executive director? Stuart Hatcher writes for ePrivateClient

Corporate Partner, Stuart Hatcher, has written for ePrivateClient on what to be aware of when thinking about non-executive directorships for private companies.

In the article, Stuart highlights key questions and matters to be considered by anyone thinking about taking on a non-executive director role, as well as those already undertaking one. He also gives practical insights for how private companies can make best use of non-executive directors in their organisations.

The article was first published on ePrivateClient on 13 April 2022, and is available to read in full here.

Stuart Hatcher
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Stuart Hatcher

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Economic Crime (Transparency and Enforcement) Act 2022: What does the Register of Overseas Entities mean for lenders?

The ECA received Royal Assent on 15 March 2022 and covers three main areas – the creation of the Register, amendments to the unexplained wealth orders regime, and amendments to the sanctions regime. This note provides a brief overview of the Register, how lenders will be affected, and some practical steps lenders may wish to take.


Download this briefing in PDF format

Download in PDF format


Overview of the Register

UK entities are already obliged to disclose their beneficial ownership information pursuant to the PSC regime. However, the ECA requires Overseas Entities which have acquired a Qualifying Estate in the UK since 1 January 1999 to register their details and the details of their beneficial owners (essentially any legal person who can exercise control or influence over the Overseas Entity) on the Register.

Any Overseas Entity that intends to acquire a Qualifying Estate is also required to register.

(There is no need for an Overseas Entity to actually own the Qualifying Estate before registration; any Overseas Entity may apply to join the Register.)

All Overseas Entities holding a Qualifying Estate need to apply for registration on the Register within the Transitional Period. Failure to comply with the registration requirements by the end of the Transitional Period is a criminal offence.

Upon registration the Overseas Entity will be allocated an ID number and provided with evidence from Companies House confirming their registration. Companies House has not yet given details as to how this will work in practice.

The information included on the Register must be updated annually (or confirmation provided that there is no update). Failure to comply is a criminal offence.

What does this mean for UK land transactions?

During the Transitional Period the Land Registry must place a restriction on the title to any Qualifying Estate owned by an Overseas Entity and acquired on or after 1 January 1999. This restriction will take effect after the Transitional Period and will prevent the registration of any Relevant Disposition of Land unless the Land Registry has seen evidence that entry to the Register has been made, or that an exemption applies. This means that legal title will not pass unless the restriction on title has been complied with.

What does this mean for lenders?

The main focus for lenders is the potential impact of the ECA on (i) the registration by the Land Registry of a legal charge granted over a Qualifying Estate; and (ii) a lender’s ability to enforce such a charge.

  • The grant of a legal charge: is a Relevant Disposition of Land and as such, in order to register the legal charge at the Land Registry, the Overseas Entity which holds the charged Qualifying Estate will need to be registered on the Register.
  • Enforcement of registered legal charges: the ECA provides a number of situations in which a Relevant Disposition of Land will be registered by the Land Registry, notwithstanding the non-registration of the relevant Overseas Entity on the Register. These include where a secured creditor (or a receiver appointed by the secured creditor) exercises its power of sale under a registered legal charge and a disposition made by a specified insolvency practitioner in specified circumstances (although the actual meaning of “specified insolvency practitioner” and “specified circumstances” are yet to be provided).

The ranking of legal charges could also be affected by the Registrar of Companies’ ability to put in place a charge securing payment of financial penalties imposed for non-compliance with the ECA. The details of such a charge and how it will rank against other charges will be set out in regulations still to be published.

At present the legislation does not refer to any requirement to register legal charges over a Qualifying Estate against the Overseas Entity at Companies House.

What steps need to be taken?

Where an Overseas Entity is the borrower or the grantor of a legal charge over a Qualifying Estate, the “compliance with laws” clause in the finance documents is likely to cover its obligations under the Register, but specific provisions should also be included to focus borrowers’ minds on the need for compliance.

The required steps will depend on when the legal charge was or will be granted.

Scenario 1: Legal charge already registered at the Land Registry (since 1 January 1999)

  • Lenders should be mindful of which of their clients and security arrangements will be affected by the new registration requirements and consider whether to remind any of their clients about the registration obligations under the ECA.

Scenario 2: Legal charge to be entered into prior to the Transitional Period

  • Lenders should ensure that appropriate obligations are included in the finance documents, for example, undertakings that the Overseas Entity will apply to be duly registered within the Transitional Period, comply with the annual update requirements and provide the lender with evidence of such registration and compliance.
  • The ability to grant a Registrable Lease should also be considered, for example, by including an undertaking that where such a lease is to be granted to an Overseas Entity, they will apply to be duly registered within the Transitional Period.

Scenario 3: Legal charge to be entered into during or after the Transitional Period

  • A legal charge is a Relevant Disposition of Land and so can only be registered at the Land Registry if the Overseas Entity is registered in the Register.
  • Ideally, the Overseas Entity in question should be registered in the Register before the finance documents are entered into, but in any event, the finance documents should include a provision, such as a condition precedent, requiring the Overseas Entity to be registered in the Register before a drawdown request is made (and within the permitted timeframe), obliging the Overseas Entity to comply with the annual update requirements and requiring the Overseas Entity to provide the lender with evidence of such registration and compliance.
  • The ability to grant a Registrable Lease should also be considered, for example, by including an undertaking that such a lease will only be granted to an Overseas Entity which is duly registered in the Register.

GLOSSARY

Some of the terminology used in this article explained:

ECA: the Economic Crime (Transparency and Enforcement) Act 2022.

Overseas Entity: any body corporate, partnership or other legal entity which is governed by the laws of a country outside of the UK. This therefore catches entities based in the Channel Islands and the Isle of Man.

Qualifying Estate: a freehold estate in land, or a Registrable Lease.

Register: the register of overseas entities created pursuant to the ECA and to be managed by Companies House.

Registrable Lease: a leasehold estate in land granted for a term of seven years or more. (Note that this is not the same definition as used in the Land Registration Act 2002).

Relevant Disposition of Land: a transfer of a freehold interest, the grant or assignment of a Registrable Lease, and the grant of a legal charge.

Transitional Period: six months from the date of the registration requirements coming into force (a commencement date for these provisions under the ECA has not yet been stipulated).

Disclaimer

This note reflects the law as at 7 April 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.


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