Corporate law encompasses many different disciplines. Clients often refer to Corporate law as Company law or Contract law. Whether you are just starting out or have been in business for a while, if you are an entrepreneur, director or shareholder, you have to deal with corporate law issues on a regular basis.
Start- ups
If you just set up a new business, as a limited liability company, you will need to think about the following:
- Memorandum & Articles of Association: Memorandum of Association must be filed in order to incorporate a new company. It is a statement that the initial subscribers wish to form a company under the Companies Act 2006, have agreed to become members and, in the case of a company that is to have a share capital, to take at least one share each. The memorandum does not contain any constitutional rules of the company and once the company has been incorporated, it cannot be amended.
- Directors: appointment and register of directors, conflict of interests, directors’ service contracts, non-executive directors, removal of directors, directors’ loan agreements, directors’ duties
- Issue of shares: majority and minority shareholders, share certificates and register of shareholders
- Company’s Secretary and Administration: Persons with Significant Control Register
- Shareholders Agreement
Shareholders Agreement
Shareholder Agreement must be compliant with the Companies Act 2006. It can be majority or minority biased. The main advantage of a Shareholder Agreement is that in addition to enforcing shareholder rights against the company under its constitution it allows individual shareholders to enforce their rights under the agreement against each othe. All provisions in a typical shareholder agreement are important as these will regulate relationship between the shareholders.
For example consent or veto rights. It is common to provide that there are certain matters which require either unanimous consent of the Shareholders or the consent of a particular majority. Sometimes one Shareholder may have a veto right over a decision that particularly affects him or her. It is also possible to differentiate between matters which require the approval of a particular majority (e.g. two thirds or 75 percent) and those requiring unanimous consent. Another approach (less common) is to split responsibility for such matters between the Board and the Shareholders – less important matters require the approval of a particular majority of the Board and more important matters require the approval of a particular majority of Shareholders.
Other provisions which are of no less importance relates to share transfers, deadlock in decision making process, right or an obligation to sell the shares.
It is common to restrict the free transfer of shares. Some or all of the following principles may be used. Pre-emption Rights: no shares can be sold unless they are first offered to other Shareholders pro rata. Exceptions are usually made for Transfers to a company 100% controlled by a Shareholder or to a trust for the benefit of that Shareholders’ immediate family. If the directors cannot reach agreement or if a shareholders consent is not obtained for a matter over which they have a veto right there may be mechanisms to resolve the deadlock. Deadlock: once a deadlock has taken place there is usually a period to resolve the deadlock and if it cannot be resolved then provisions will allow for an exit. For instance the Company may be wound-up, or shareholders may be able to serve a ‘Roulette Notice’ in which they offer either to buy the other shareholders’ shares or to sell their own shares at a given price, or a majority shareholder may have a ‘call-option’ allowing them to purchase the other shareholder’s shares. Tag and Drag: Drag rights confer a right on a specified majority of the shareholders (usually by reference to their aggregate shareholdings) to require the remaining shareholders to offer their shares for sale to a third party proposing to acquire a specified percentage of the issued share capital of the company. Tag rights confer on the minority shareholders a right to require that shareholders selling such specified percentage of shares to a third party procure that that third party also makes an offer to purchase the minority shareholders’ share
Joint Venture
A joint venture (JV) is an alternative business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This may be a new project being entered into together or some other joint business activity.
Under English law a joint venture has no specific meaning and the commercial arrangement between the parties can take a number of different forms depending on what the parties are trying to achieve. Sometimes a JV will be formed by means of a contractual agreement between the parties (where the parties prefer such a simply, relatively loose commercial arrangement). Alternatively the parties might wish to have a more formal, tighter structure, in which case they might decide to form a new JV company with the parties being the shareholders.
Loans & Finance
Loan Agreements
Loan Agreements regulate the making of term loans from one party to another. These agreements contain a number of provisions including clauses on interest and repayments, and detailed provision for representations and warranties, covenants and undertakings.
Secured Lending – the pitfalls
The legal issues surrounding the taking of security are complex, and there are various legal forms that can be used, for example, a chattel mortgage (a mortgage over tangible and moveable property, such as plant and machinery or vehicles), fixed and floating charge, pledge, lien and assignment by way of security. Security over shares is different again, and can be achieved by way of a legal mortgage, an equitable mortgage or an equitable charge.
There are a number of issues that need to be addressed in order for a lender to enforce its security, such as:
- The loan agreement must contain a right of enforcement (including detailed provisions regarding when and how a lender can enforce its security). Ideally the enforcement provisions should be tailored to reflect the nature of the secured asset.
- The lender must formally demand repayment.
- There must be some agreement as to how the lender takes possession of the secured assets (or in some cases, ownership must pass in order for the security to be valid – for example, in the case of a legal mortgage of shares).
- The loan agreement must contain a power of sale in relation to the secured assets.
- The security may be invalid unless registered at Companies House and in the borrower’s company registers.
- If an individual or partnership provides security over chattels, the requirements of the rather arcane Bills of Sale Act (1878) must be complied with.
- The loan agreement should dovetail with the proposed security arrangement and must contain a right of enforcement (including detailed provisions regarding when and how a lender can enforce its security). Ideally the enforcement provisions should be tailored to reflect the nature of the secured asset.
- The lender must formally demand repayment.
- There must be some agreement as to how the lender takes possession of the secured assets (or in some cases, ownership must pass in order for the security to be valid – for example, in the case of a legal mortgage of shares).
- The loan agreement must contain a power of sale in relation to the secured assets.
- The security may be invalid unless properly perfected and registered at Companies House and/or on the relevant company/asset registers.
- If an individual or partnership provides security over chattels, the requirements of the rather arcane Bills of Sale Act (1878) must be complied with.
In view of the complexity of taking security, you are strongly advised to take legal advice to ensure that the proposed security is valid and enforceable in the event of default in repayment.