The Lifecycle of a Business – Endeavours clauses

• 18 June 2024
• News

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.

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

• 29 February 2024
• News

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.

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

• 23 February 2024
• News

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.

The Lifecycle of a Business – Dividends

• 15 February 2024
• News

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.

Lifecycle of a Business – Protections for Minority Shareholders

• 7 February 2024
• News

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.

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

• 23 January 2024
• News

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.

Lifecycle of a Business – Demystifyng the Term Sheet

• 5 December 2023
• News

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.

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

• 21 November 2023
• News

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.

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

• 6 November 2023
• News

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

• 27 October 2023
• News

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.

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

• 16 October 2023
• News

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.

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

• 5 October 2023
• News

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.

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

• 28 September 2023
• News

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.

The Lifecycle of a Business – Appointing Directors

• 14 September 2023
• News

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

• 1 September 2023
• News

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.

The Lifecycle of a Business – Registers, Records and Filings

• 2 August 2023
• News

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

• 25 July 2023
• News

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<?li>

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.

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

• 19 July 2023
• News

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.

The Lifecycle of a Business – Private or public company?

• 11 July 2023
• News

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.

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

• 4 July 2023
• News

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.

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.