How to remove a director, the right way

You’re facing a dilemma:

One of the directors in your business isn’t quite pulling their weight or you’ve had a bit of a disagreement. The relationship isn’t really working and keeping the director on might cause irreparable damage to your business and potentially, the people within it. Although you’ve tried to talk things through, he or she refuses to resign. The situation is complex – the director is also a shareholder in the company.

What should you do?

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Photo by Nik Shuliahin 💛💙 on Unsplash

The decision is easy, right? All you have to do is remove the director at Companies House. Well yes, that will need to be done, but that’s the last piece of the jigsaw. There’s a whole lot more to do before you get to that.

The first thing to know is that directors don’t automatically qualify as employees of a company and so usually, they are employed under a contract to ensure this is the case. Your go to document to check the detail relating to termination should be the Directors Service Agreement (it’s a form of employment contract), which will also contain salary information, details on duties, responsibilities etc. If there is no contract or the contract makes no mention of what to do in the event you wish to terminate the directors’ employment, you should consult a lawyer to help you navigate the matter. Not following the correct process here could give rise to a potential unfair dismissal claim if the  dismissal was not for a potentially fair reason and/or no fair procedure was followed before dismissing and if the director has been employed for more than two years.

The next step is for you to consult your company’s Articles of Association to understand the key circumstances under which a director can be removed. The Articles will provide further procedural information including how a director can be removed i.e., by unanimous decision. If the Articles make no mention of this, it is possible under law for the shareholders to remove the director from his or her position by an ordinary resolution of members, a decision which will have to be made in a general meeting of shareholders by a simple majority i.e., requiring more than 50% of the votes.

We don’t like to bore you with the provisions, but the Companies Act does say you’ve got to follow a few rules to remove a director. If you don’t, it could render the resolution invalid. One of the most important parts of the legislation in this area is to ensure you provide special notice to the company detailing the shareholder’s intention to propose the resolution at least 28 days before the general meeting. You’ll also have to let the director know so that they can attend the meeting to negotiate their position, if they wish to.

If the director is a shareholder, you should also take a look at your Shareholders’ Agreement, which may include provisions dealing with decision making and removal of directors. It should also include details of how the shares should be dealt with after the director has been removed.

If you’ve reached a majority decision and assuming all the relevant procedures and requirements have been followed, the next step would be for you to remove the directors’ details from your Companies House listing. You definitely shouldn’t take this step first. It’s super important to work through the Directors’ Service Agreement, Articles and Shareholders Agreement before making any changes at Companies House – they’re ultimately the key documents that govern how you run and protect your business and of course, how you do things the right way.

Neelam Narshi

Tend Legal, London

Legal Subscriptions. The ideal solution for your business?

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If you’re in business, it’s likely that you could find yourself forking out for legal bills when you’re least expecting them. You might need help with getting your employment practices right and keeping them that way or alternatively, supplier or sales contracts that need reviewing or drafting on a regular basis. If so, a legal subscription for your business can make it affordable for you to get the right legal advice whenever you need it. That’s the key – whenever you need it. No need to shop around for quotes or researching the best lawyers for the job. The best bit – our packages are Netflix style ‘all you can eat’ packages – so you can make use of our services whenever you like.

We are right there on hand, for a fixed monthly fee to help you with whatever you need. We’re also doing away with charging by the hour, to give you more certainty on the cost of good quality, affordable legal help.

What could a legal subscription include?

There are a lot of things a legal subscription could include, but you might not necessarily need it all. Our subscription packages are tailored specifically to your needs, so our first step is always to learn more about your business and how it works before we plan ahead.

The good news is that our subscriptions include any of the areas of law we cover. You can check out the full list of areas here: https://tend.legal/expertise/. Chat with one of our team to learn more.

Document Review

All of our subscription clients ask us to review their legal contracts on a regular basis. It’s a big part of what we do. Our legal team can help review all types of legal agreements and contracts, for example, employee contracts right through to more complex investor agreements.

Contract Negotiation

As part of a subscription plan, we’re always happy working with third parties, often lawyers on the other side of a transaction to negotiate the terms of an agreement.  Whether it’s a contract drafted by us or the lawyers on the other side, it’s important that the contract is fair and balanced. Some of the core things to consider here include;

  • What are the parties working to achieve?
  • Is the agreement clear?
  • Are your rights clearly reflected in the agreement?
  • Is the agreement fair and balanced, to reduce the length of time the negotiation will take?
  • Will there by other things to consider i.e., if the businesses operate globally or data protection?

Advice whenever you need it

Most of our customers choose us because they know we’ll be there when they need us, allowing them to get on with running their business. Ask us any legal question and we’ll find the answer. Better still, we use Slack and Teams to ‘chat’ with our clients on a regular basis.

Drafting new agreements

There will be a range of issues that require drafting of contracts and letters. Whether that’s a letter to chase an unpaid debt or the drafting of a funding agreement, we can help you avoid any issues in the future. We’ll make sure all your agreements are structured and drafted for success.

Reviewing your business/growth plans

Not all of the work a lawyer will do will be focused on helping you to navigate the daily legal issues and problems you might face. If your business is growing or scaling or if you have ambitious plans to, it’s always a good idea to talk your ideas and plans through with us. Our job is focused on supporting the growth of your business, as well as ensuring you are in compliance with the minefield of laws and regulations you might not have originally considered (or be aware of!). We like to think of ourselves as your external in-house legal team, supporting your every move as you flourish.

Fixed fee

Our fixed fees start from £500 per month and will vary depending on your needs, but once we’re agreed on a monthly fee – that’s it, you’re ready to go. We carry out regular reviews of all our subscriptions with our clients on a regular basis and we’re always happy to chat through your options. Our only focus is to work closely with you to ensure you get what you need from us.

Relationships

The most important part of our subscriptions are the relationships we build. We take (and have!) the time to get to know you and your business – that’s important to us and we know that’s important to you. A team of friendly and approachable lawyers, ready to help take your business to the next level – that’s our goal!

For more information on our subscription product, please visit: https://tend.legal/packages/

Companies House Reforms – Update

In February, Companies House released their most recent White Paper, ‘Corporate Transparency and Register Reform.’

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Photo by Kevin Matos on Unsplash

Companies House, the UK body that operates a flexible corporate registration framework allowing hundreds of thousands of companies to be formed each year and managed with relative ease is due to experience its biggest shake-up yet. The idea, as Robert Lowe, Vice President of the Board of Trade, introducing the Joint Stock Companies Bill to Parliament on 1st February 1856 put it, is that we ‘should not throw the slightest obstacle in the way of limited companies being formed…and when difficulties arise, to arm the courts of justice with sufficient powers to check extravagance or roguery in the management of companies, and to save them from the wreck in which they may be involved.’

To summarise the reforms, Companies House are coming down hard on fraudulent ‘shell’ companies and partnerships that allow criminals to appear ‘legitimate’ and commit crimes, corruption, including money laundering, fraud and identity theft. The government has big plans to end this ‘abuse.’

It turns out work is already underway behind the scenes at Companies House to put this plan into action enabling improvements in user experience and its own digital capabilities. Companies House plan to release legislation on this topic soon.

Here’s what we know so far

  1. Companies House are dead set on maintaining the integrity of the register of companies and the UK business environment. They’re arming the Registrar new powers to enable this which will include the power to query suspicious appointments or filings and, in some cases, request further evidence or reject the filing altogether. Companies House will also look to share data with law enforcement, government bodies and the private sector if they suspect anything untoward.
  • If we’re (or anyone else is) setting up, managing and/or controlling your company, we’ll need to ensure our own identity is verified with Companies House. This aims to prevent any anonymous filings.
  • The introduction of data suppression will allow for personal information that is public on the register to be suppressed if you’re able to provide sufficient evidence that the information remaining public puts you at risk of harm.
  • There are plans to improve the financial information on the register, which will ultimately lead to better financial management practices within SMEs, encourage digital reporting and helping the government’s efforts to combat economic crime.

The overall idea here does not in any way suggest that it will be more difficult to register and manage a company, but it most certainly introduces a few hurdles that will impact how things are done moving forwards.

The UK is a powerhouse for start-ups with up to 2000 companies formed each day. Long may that continue!

Tend Legal, London

Legal challenges for growing technology businesses, uncovered.

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Photo by Tyler Lastovich on Unsplash

There are a number of challenges that could impact your business if you operate in the tech sector. The following is a top list of critical legal issues that you should make top priority if you’re looking to scale your business in the right way:

Data

Inevitably, as a technology company, you are likely to be collecting data about your customers, suppliers, partners etc. This can be great for marketing or other purposes but it does pose some genuine legal concerns that are worth thinking about. Securing and protecting data are high on the agenda for corporate risk and breaches can be headline makers. It could be extremely detrimental to your business if data is leaked or stolen and there’s a chance it could impact the integrity of your business as far as the goodwill of your customers is concerned. An expensive price to pay! One of the most important things to think about include hosting your data with a secure provider, with adequate firewall protections or reviewing any third-party systems you use to ensure they are compliant. If you don’t, the Information Commissioners’ Office could penalise you, imposing thousands of pounds in fines.

In addition, GDPR rules were published a few years ago and even now, companies are struggling to get to grips with what their obligations are. In short, GDPR rules exist to provide individuals with more control over how their personal data is collected, stored and used. If your business provides goods or services in the UK or EU, regardless of whether your business is located in the UK or EU or not, GDPR applies. For online businesses which often operate globally, this can be particularly challenging. Here are just some a few things to think about when thinking about how to remain GDPR compliant:

  • Understand your data

Know what data you’re collecting, why you’re collecting it, whether you are keeping it or removing it, whether the data was consented to, whether the data includes any sensitive information etc. We’d recommend keeping a log of all of this from day one!

  • Keep your privacy policy updated

This one sounds pretty straightforward, but when you identify all the different types of data collected, stored and used and the source of each bit of data – it can get quite tricky!

  • Appoint a Data Protection Officer (DPO)

If you’re collecting a large amount of data, then this is a legal requirement.

  • Keep your data protection policies and procedures in constant review.

The last thing you want to do is to get bogged down with your head in spreadsheets or documents trying to keep on top of all your data sources etc, but it’s the right thing to do. The consequences can be severe if you are found in breach of your GDPR obligations.

Cap table and stock options

Our advice here is to not rely on a verbal agreement about ownership or shares with your employees. In the early days of a business, it’s very common to hear about informal agreements about share ownership in a company etc, but as the company grows – not having this in writing can turn out to be quite problematic. It’s important to ensure a record is kept of all the company’s securities such as stock, convertible notes, equity grants or warrants, who they are owned by and what was paid. This is usually in the form of a cap table.

It’s common to also want to grant stock options to employees or anyone else working in your business to incentivise them. Stock options are a really great way of rewarding your team for the growth in the value of your company and are considered an alternative to cash bonuses, for example. There are a number of various schemes available in the UK and your choice will depend on a number of factors, which all require specialist advice. Some of the agreements you might need will include;

  • A stock option plan

This is the main plan that should be adopted by your business to issue stock options. It covers the key terms and conditions of the stock options and provides further detail about the stock options that you are planning to issue to your employees. There will be things that you’ll need to make sure are included here that may not be included in the stock option agreement

  • A stock option agreement

This document is connected to the stock option plan. The detail contained within the document will be very specific i.e., who owns the shares, how many shares are being made available for the employee to purchase at what price. It will also include details of the vesting schedule i.e., you might want the employee to continue their employment with you for a specific period of time before all or parts of the options become available to them.

  • An exercise agreement

Typically, this will normally be included with the stock option agreement and provides details about how to exercise the option. This will need to be very clear, so that your employees know how they can take advantage of purchasing stock in the future.     

Expanding internationally/operating cross border

If you are thinking about expanding globally, you’ll be faced with a number of challenges. Some of those might be operational but other considerations will include tax, legal – including regulatory and compliance. You might find that you need to create a new/foreign legal entity and this will also require tax considerations and planning. You might also be looking for a physical location and hiring; all of the rules for doing so can differ depending on the jurisdiction you intend to operate in.

IP rights

If you’re a technology company, you’ll want to think about protecting your IP, which includes any trademarks, design rights and patents. You might want to trademark your name or patent your technology. Whatever it is you’re thinking about doing, you’ll need to make sure you are registering your IP wherever you are operating. If you protect your logo in the UK but also operate in the US, you shouldn’t assume that your logo is protected there too. You can limit your filing to the UK, EU or global – so these are all options available to you. It’s not just a matter of protecting your IP though, as you might be limited in what you can do in other countries if the same or similar IP rights already exist out there.  

If you are fundraising, you may also want to ensure that shareholders and employees waive intellectual property for the company. If not, it could put off potential investors if they realise that the IP doesn’t actually belong to your business.

Fundraising/investment

The scope of this section merits an entirely separate blog in its own right, but we’ll cover off a few of the important things to think about very briefly here.

In the early stages of a fundraise, there can be a lot of negotiating involved. Negotiating with employees about IP or shareholders about the right kind of investment to opt for- there’s no shortage of things to discuss here. However, one of the most important things for you, as the business owners, will be setting the company valuation. Your investors will usually conduct their own valuation exercise, but you’ll want to ensure you are in agreement with that price. Usually, this involves seeking the help of professional business valuators, but you’ll also want to ensure that your interests are protected especially if this is the first set of a series of investments you wish to secure in the future. Lawyers can usually get involved in those early discussions with your investors, and that can be really handy to ensure you’re approaching things pragmatically and professionally.

You’ll also require support in reviewing all the investment paperwork thoroughly, explaining the meanings of clauses and how they could impact you. If you’re staying on in the business, this might alter the scope of your negotiations Vs if you’re exiting the business, so a legal expert guiding you through the process is an essential part of the transaction.

Our team at Tend Legal are well versed in the technology space, having worked with both ambitious entrepreneurs in tech start-ups right through to some of the most successful technology companies in the UK, operating globally. We’re always on hand to support our customers, identifying critical legal issues before they arise and helping you to make good, informed decisions about your legal options.

Neelam Narshi

Tend Legal Limited, London

Your UK remote employees working abroad – what’s the law?

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Photo by Kornél Máhl on Unsplash

**Real talk alert***

We’ve all done it at some point. We’ve all dreamt about working abroad for longer than a week or two. Just think, that favourite beach hut, sipping on your favourite beverage, the sun shining bright, that feeling of warmth on your skin, the sound of the sea and you tapping away at your laptop. Yup – I’ve been there, too! Ok – I’m getting carried away here, but you get the point.

What are the legal & tax implications of allowing your employees to work remotely overseas?

Turns out (as with most things in business) there’s quite a bit to think about, especially if employees are going to be working abroad for prolonged periods. How long is too long? It’s difficult to say and the rules very much depend on the country in which your employee is working but let’s take a quick look at some of the legal & tax implications if you find your business in this situation:

Local employment law rights

Your employment contracts might stipulate that the governing law is England & Wales. Despite that, it is possible for your employees who work abroad to acquire local employment rights in their host country, which could result in inequality between your UK based employees and those working abroad. Sounds like it could quite quickly become an administrative nightmare, if you’ve more than a few employees in a number of different locations.

The kinds of issues you might find yourself having to deal with could relate to holiday entitlement and pay, minimum wage, paternity or maternity leave, health and safety rights and other rights such as termination which can vary quite a lot. The differences in any rights largely depend on the country in question but often, it’s really the termination rights that can be the most challenging – especially as some countries offer employees greater protection against dismissal, for example. As a result, you could quite easily find yourself having to deal with employees who seek to rely on their enhanced rights in the host country.

Permanent establishment

Can the employee’s location be considered a fixed place of business in another country, in which the business of your company is wholly or partly carried on? Potentially, yes. This might not be an issue if you’ve already set up a corporate base in the country in question but if you haven’t and your employee is out there country long enough, your business may become subject to various local income and corporate tax implications which could be more onerous than the tax payable in the UK i.e., corporation tax and VAT.

Right to work

Did your employee enter the country as a visitor on business but then switched to remote working out there for a prolonged period? That’s quite a common scenario. It may be the case that you need to ensure the employee has the right to work in the country and you might be required to make local filings or seek a right to work visa to ensure all local immigration rules are being followed. There could be quite significant penalties for your employees and your business if you get this wrong and it could severely impact an employee’s ability to visit, live and work in the host country in the future.

Data protection

Have you thought about the data protection implications if your employee spends a lot of time in a specific country and what that might mean for your data? Did you think that by accessing data in the host country, your employee could be transferring data in a way that might not be compliant with GDPR? Again, the rules depend on the country in question, but it’s vital that, as an employer, you ensure there are appropriate monitoring processes in place for all data that is being ‘transferred’ outside of the UK and what impact that might have.

Overall

The advice in relation to your employees working abroad is very simple. It’s important to seek expert legal and tax support in the host country as soon as you are aware that an employee is planning on working abroad.

We know a lot of businesses who use global HR solutions for distributed teams, which is a great way to handle things, but it’s still important that you have the right experts overseeing things to ensure your business and employees are always fully compliant.

Neelam Narshi, Tend Legal

London

Who’s making the contract?!

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Photo by Gabrielle Henderson on Unsplash

A recent High Court decision highlights the importance of being clear about the parties to a contract.

The High Court recently found a builder to have verbally entered a contract with a homeowner in his personal capacity, rather than as an agent of the company which he later purported to have been representing (Diane Lumley v Foster & Co Group Ltd and others [2022] EWHC 54 (TCC)).

Background

This case involved a builder, Mr Foster, who had arranged to carry out building work during a meeting with the customer at her home. When the customer later brought a claim against the builder for defective works, he tried to argue that the contract was with his company, which had gone into liquidation (making the claim worthless). However, the parties had no written contract and Mr Foster had made no mention of the limited company at the meeting.

The Court noted that the question of who was party to the contract turns on what a reasonable person would conclude, if given the relevant information and disregarding the parties’ private thoughts. In the absence of any reference to the company at the time that the contract was made, Mr Foster had failed to make it clear that he was not intended to be personally bound by the contract and, therefore, it was reasonable to conclude that Mr Foster had entered the contract on his own behalf.

Why is this case significant?

Where there is a dispute over the identity of the parties to a contract, the court won’t take into account the parties’ subjective beliefs, but will consider what a reasonable person would think.

Whilst the courts may not have determined any ground-breaking points of law in this matter, it’s a useful reminder of the importance of making clear who is intended to be bound by a contract.

It’s particularly important to ensure that the intended party is made clear in circumstances where the contract is made verbally or where a company uses a trading name or operates as part of a group of companies.

We always recommend putting a contract in writing and making sure that it includes the names of the parties clearly and accurately.  If you trade through a limited company, make sure you include the full company name, not just a trading name.  

Setting out these details at the start can avoid confusion and potentially save time and money later, should a dispute arise. Get it wrong, and you could find yourself personally liable under the contract, as Mr Foster did.

If you need any advice on this issue or need assistance in preparing a contract, please get in touch.

Tend Legal

Thinking of selling your business?

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Follow our 7 point plan!

Rule 1: Timing is everything

It’s pretty tough identifying the right time to sell your business. Sell up too soon and you might not have a chance to increase the valuation of the company or worse still, sell up too late and you might miss the boat altogether.

You might decide it is the right time to sell your business if, as your business grows and the value of it increases, the level of risk goes up and with it, the chances of failure. If you think there’s a risk that carrying on could result in a decrease in value (a common side effect of growth!), now might be a good time to bite the bullet and sell. Risk isn’t the only factor at play, though. You might be approaching retirement or you’re simply losing interest in the business – all very valid reasons to sell.

On the contrary, you might choose to wait it out. If there’s a lot of work (and growth!) left to do and you’re still passionate about it– hanging on might be the best option. Often, founders or owners wait to sell until their business reaches peak market value but that can also be risky work!

The other thing to consider is that the decision may not just be a commercial one, but an emotional one too. Selling up might mean exiting the business altogether or alternatively, you might continue working in your business in one capacity or another. If you’re giving away control, you’ll have to be ok knowing that others will be making the decisions – not you. The truth is, it can be difficult letting go of something you’ve invested all your time and energy into. It’s your ‘baby’, after all. You built it from the ground up – we get it. Ultimately though, it’s down to you to sit down and work out the pros and cons of selling up Vs not. The ball, as they say, is entirely in your court.

Rule 2: Put together a pitch-deck

Most of the biggest brands we know and love have one thing in common: an awesome deck. This is your business’ most powerful tool to secure investment. The most important piece of advice here is to tell a story. What was the problem? How did you go about solving it? What was the outcome? How does the solution solve the problem? What are the results? Yup – you guessed it. This is the standard Dragons’ Den drill and stories sell!

It’s super important that your pitch stands out. With the sheer volume of pitch-decks landing in front of investors these days, your deck will have to be pretty compelling for it to turn heads. Get creative!

Rule 3: Get a valuation

Most business owners seek the help of experts to value their company. At a very high level, beyond tangible assets, valuations may also be based on:

  • Commercial and industry expertise
  • The current market, positioning and future potential
  • The company’s performance, reputation and its competitors
  • The value of your customers
  • The team
  • Your products and roadmap
  • Legal and regulatory framework

It’s not uncommon for your business to have multiple different valuations from the experts you use. Our advice would be to contact a few valuers, which should give you a good ballpark indication of the value of your business.

Rule 4: Draw up Heads of Terms

So the deal is agreed in principle, the next step is to draw up a letter of intent or an offer letter. These are commonly referred to as Heads of Terms and are legally binding unless stated otherwise.

These terms will identify some of the core issues i.e., the intended structure of the deal, the price, the timetable etc. If the Heads of Terms aren’t binding on the parties, then you may decide not to spend too much time putting this together, but either way, getting a solicitor to draft the agreement could significantly help your negotiating position.

Rule 5: Due diligence

As part of the process, the buyer’s lawyers will request information about your business, which will need to be kept confidential. It’s likely that you’ll need a watertight NDA to help ensure everything you share with the buyer is kept under wraps. This is an essential step and often one that is missed if you’ve not instructed a lawyer before sharing information with the other side.

Expect a period of dialogue during due diligence where investigations are carried out on your business. An example of some of the questions that can arise include: Are there outstanding debts from customers? Are there any ongoing claims against your business? Do all employees have employment contracts?

A legal expert can assist to draw up a disclosure letter as part of the sales process, so that your liability to any risks is limited. Being transparent about your business risks early on in the process, avoids the risk of the buyer lodging a claim against you later on or requesting that the purchase price is reduced if things that should have been disclosed weren’t.

Rule 6: Signing the sale agreement

The buyer’s lawyers will usually send your lawyers a sale agreement. As the seller, you’ll want to ensure that you get the right legal support to ensure that the sales agreement reflects your position correctly and protects you from any claims that could arise following completion.  Your goal will be to make sure your potential liabilities are limited as much as possible from the outset.

Rule 7: Other matters to consider

If you’re selling the business’ assets Vs shares, then you’ll need to follow a formal consultation process with your employees before completion. It is typical for a business to start this process following exchange of contracts.

The timescales for selling your business can vary and just as would be the case if you were selling a house, the process can take around 8 weeks.

Think carefully about your tax obligations, also. For a limited company, it is likely that you’ll have to pay Capital Gains Tax and Corporation Tax on any profit you make from selling your business, though we do recommend you touch base with your accountant as you may be able to take advantage of tax relief schemes available on some of the gains you make upon sale.

Tend Legal, London

#FreeCuthbert #Round2

M&S Vs Aldi. They’re at it again but the culprit this time is….. wait for it……Aldi’s copycat light up gin! Ima-GIN-e that?!? Starting yet another battle before the last one is even resolved!  The M&S legal team seem to be clocking up the hours, that’s for sure!

Photo by Marques Thomas @querysprout.com on Unsplash

What’s all the fuss about this time?

M&S are taking Aldi to court over a bottle of gin. The shape of the bottle, the strikingly similar graphics, the floating gold leaf flakes, the light feature etc etc (you get the picture!). Are M&S just ticked off because Aldi are selling their version for £6 less than theirs? Yes, of course. That’s not all, though. M&S claim that customers are being misled to believe that Aldi’s gin is the same standard as theirs. We can definitely think of one way to resolve that, but we’ll reserve judgement until after the Christmas break. Seriously though, it’s a matter of reputation and it’s clear M&S do not enjoy being associated with Aldi in any way.

Also, we can’t work out why M&S have singled out just Aldi, but that’s a blog for another day.

What do M&S want?

An injunction, to stop Aldi doing anything further to infringe any of its protected designs. It doesn’t end there, though. M&S want Aldi to hand back any products that they think are in breach and want an investigation into any damages they may be owed.

What was Aldi’s official response?

They’re Colin their lawyers. Makes sense if you ask us.

Tend Legal, London.

Why death provisions in Shareholders’ agreements are important

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Photo by Brett Jordan on Unsplash

It’s never easy dealing with the aftermath of events (Including emotional) and business-related admin when a shareholder in your company dies.

When a shareholder dies, it is usual for his or her shares to pass to whomever inherits the shares through his or her will (or through the intestacy rules if there is no will) unless there is a specific provision in a Shareholders’ Agreement.

Some of the most important issues that could arise if shares do pass through a will or intestacy could include:

You lose control of the company’s ownership and direction

The shares could pass to anyone – even someone you don’t know. These third parties may not share the same goals for your business and may not understand your company’s vision. This could be highly problematic for you when you try and drive the business forward and make business decisions. If the shareholding was significant and came with voting rights, the third parties could effectively be in control of your business.

There is good news, even for the darkest of topics. You can be very specific in your Shareholders’ Agreement as to who your shares should pass to in the event of your death. You can go further to include provisions that indicate that any inherited shares do not come with any voting rights or rights to become a director of the company, for example.

A lawyer can advise the company on general death provisions, but it is recommended you seek independent legal advice individually, as the Shareholders in your company, to ensure your own interests are completely protected.

You may not be able to afford to buy out the deceased’s shares

You may have agreed to include a provision in the Shareholders’ Agreement that requires your shares to be transferred to existing Shareholders on your death or alternatively, transferred to existing Shareholders if anyone who inherited your shares decides to sell their shares, for example.

If the Shareholders don’t have any upfront capital to purchase these shares, it can be quite problematic. If existing Shareholders can’t afford to buy the shares, they could be offered out to a third party (even a competitor!), which brings us back to the first point, above.

There are a few things you can do to prevent this from happening, though.

  • Get a shareholder protection policy

This is a type of life insurance policy taken out on the Shareholders. Here, the remaining Shareholders are the beneficiaries in the policy, so if a shareholder does die the remaining Shareholders can buy out the deceased’s shares.

  • Get an agreement in place to ensure the smooth transition of shares.

This is usually a cross option agreement that all Shareholders will enter into. All Shareholders take out a protection policy on either themselves or each other and they agree to fully cooperate with any claim upon the death of a shareholder. This is all put in writing in an agreement.

  • Agree in advance how shares will be valued in the event of a Shareholders’ death.

It’s common for privately held companies to incorporate provisions for how shares will be valued if a shareholder dies and they have the right to purchase those shares. Often, Shareholders’ Agreements will include formulas or will agree on calculating a fair market value given by an independent valuer at the time of a Shareholders’ death.

Plan ahead

We know this is a topic nobody wants to discuss. Starting a business is supposed to be fun, but being in business also means you need to take any action necessary to protect you and your business in advance. Planning ahead is key.

If you’re thinking about getting a Shareholders’ Agreement or would like to have your current agreement reviewed, we’re always on hand.

Tend Legal Limited, London