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Selling or buying a business

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Selling a Business From a Buyer’s and Seller’s Perspective

Seller’s Perspective

Share Sale

If a shareholder sells his share in a company, he will no longer be a shareholder in the company. It is usual for a buyer to demand some warranties from the seller. A warranty is a promise or assurance from the seller that indemnifies the buyer and makes him liable after the sale has been completed. Warranties are normally used to ensure that the position which the seller is portraying of the company is accurate.

 Asset Sale

With an asset sale, the buying company will simply buy the desirable asset from the seller. This will not include any potential liabilities of which the buyer will become liable for, unless the seller can negotiate with the buyer to take these over.

Purchase Price

If the sale is to be a share sale, the shareholder who will be the seller, will normally receive the purchase price of the shares directly. Alternatively, when the sale is to be an asset sale, the purchase price will be received by the selling company. The owners of the company in an asset sale then have to work out the best way to extract this money from the company in a tax efficient manner.

Tax Clearance

It is expedient for the seller to have an Accountant check with the HMRC whether “clearance” will be given in relation to the structure of the deal. If this is not done, the seller may be stung for additional and unexpected tax liabilities after the deal has been completed.

 Buyer’s Perspective

The buyer will normally always prefer to buy the assets and goodwill of the company separately rather than buying the whole company. This way he has ultimate control over what he is buying and is not taking on any liabilities or potential liabilities.

If a buyer is to purchase a company through a share sale it is imperative that they conduct a thorough due diligence exercise. A buyer will always take warranties from the seller and may also receive certain indemnities; however, these will not always completely cover the buyer and are only as good as the seller who gives them. Even when the warranties and indemnities are to be used by the buyer, it can be a very costly litigation exercise to recover monies from the seller.

Retention

It is sometimes recommended for the buyer to keep hold of a part of the purchase price as guaranteed security against any potential liabilities which may crop up after completion. This is called a retention.

 Due Diligence

Before a buyer enters into a share sale, a thorough and comprehensive due diligence exercise should be completed. This will include an investigation into the legal, accounting and business practices of the firm. This can sometimes be a costly exercise and is one of the disadvantages to the buyer of a share sale over an asset sale.

 Why would a buyer choose to buy shares rather than assets ?

There are several reasons why a buyer may chose to purchase a company through a share sale rather than conducting an asset sale. These include:

  • Certain contracts with suppliers or customers may not be transferable. Certain licences and consents may also not be transferable and could potentially remain with the company. If these contracts are key for the buyer in their decision to buy the company, they may opt for a share sale.
  • There may be certain tax advantages for completing the deal as a share sale such as the ability to reduce tax losses in the future by setting them against future profits which may have the effect or minimising tax liabilities.
  • If the company occupies leasehold premises or if the landlord is withholding his consent to an assignment of the lease it may be of benefit to complete the transaction as a share sale.

Stamp Duty

When shares are purchased by the buying company, there is a duty to be paid by the seller at a rate of 0.5%. This will need to be paid and a stock transfer form completed before the transfer can be registered in the company’s books.

This guide courtesy of solicitors you may wish to contact if you are buying or selling a business.

Make the glass half full not half empty

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Managing staff, xmas parties, bah humbug ?

With economic conditions very tough and in all probability going to get worse, it is easy for lawyers to simply focus on strict employment law and we all know about the christmas party cases that end up in the employment tribunal.

However, when advising small clients who do not have their own in-house HR department, should lawyers do more to help clients in this respect, in managing situations so they do not become employment law problems ?

A recent survey carried out by Pitney Bowes suggests that nearly 50% of small firms will cancel the annual Christmas party this year.

 On the face of it this could be a blow to staff morale but like most things in business or in life, a glass half full approach may be adopted instead of the half empty approach. This is a classic type of situation where good advice, perhaps not strictly legal advice, can lead to a less negative outcome.

It’s all about communicating with your staff, explaining the position early, reassuring them as much as possible that there are sound reasons for cancelling the party and including them in information which may show that you are taking the right steps to safeguard their futures.

Think creatively as well, you can still perhaps make small gestures or have a smaller get together in the office or even suggest that if the staff are able to contribute towards a party, you will meet them half way. An approach of “it’s cancelled, sorry” at the last minute is not the way to go in these situations, and dealing well with this type of situation creates the right habits for dealing with the more formal and difficult times when you have to deal with employment law issues such as discipline or dismissal. In summary, get the communication right, look at the options and be as open and positive as possible with your staff.

Director duties

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Responsibilities of Directors

In the UK there is only a legal requirement for individuals wishing to be a director to hold any qualifications in a few narrow professions, such as an investment company. In most industries, almost anyone can be a director; directors can even be other limited companies. The list of people who cannot become a director include:

  • Auditor of the Company;
  • People disqualified from such a position by the Court;
  • Undischarged bankrupts (Court’s permission is required).
  • And any individual under 16 years of age.

A director has a duty to the Company he is serving rather than the shareholders; these duties are enshrined in the Companies Act 2006. If a director is unsure of his responsibilities it is critical that they take legal advice to ensure they are not breaching any of their duties. A basic outline of their duties are to:

  • Promote the long term success of the Company;
  • Declare any direct or indirect personal interest in any transactions;
  • Avoid any conflicts of interests which may harm the Company;
  • Not to accept benefits from third parties which may harm the Company’s interests;
  • Always use independent judgement;
  • And to act within the constraints laid out in the Company’s constitution.

It is the overall duty of the director to promote the long term success of the Company as a whole rather than the short term benefits for the shareholders. Other stakeholders have to be considered by the director such as employees of the Company and creditors owed money by the Company.

It is possible for a director to have private dealings with the Company to which he is a director of however some restrictions apply. A director may only have private dealings with his own Company if the Company’s Articles of Association permit and all information relevant to the transaction and the Director’s interest has been submitted to the board. The Companies Act 2006 has a provision which will catch any transaction that is valued at over £100,000 or 5% of the assets of a company. If the transaction falls within these criteria there is a separate procedure that will need to be followed.

If a director believes that there is any chance of a conflict of interest arising in any potential transaction of the Company it is advisable for them to disclose this to the board of directors. It is a criminal offence for a director not to disclose a conflict of interest so it would be advisable for any director who believes that there is a chance of a conflict of interest to declare it.

It is a general rule that service contracts to directors should be approved by the board. If the service contract is for a period of 2 years or longer then it will also have to be approved by the shareholders of the Company.

It is a further duty of the director to ensure that the Company files a record of the past years’ financial results at Companies House, this record is usually called an ‘annual return’. There are penalties for failing to file annual accounts at Companies House. Although this responsibility may be delegated to the Company Secretary, if there is someone fulfilling this role, ultimate responsibility still lies with the director.

It is imperative that before accepting their role as a director, the party has carefully examined the Articles of Association of the Company as this document will contain all the duties and restrictions which the director will have imposed on him. It should not just be assumed that every Company will have standard Articles of Association.

It is not only the Companies Act 2006 to which a director can be seen as breaching, a director may also be held personally responsible under for example, the Health & Safety at Work Act if he has failed to ensure workers’ safety in the workplace.

There are various penalties to which a director could be found to suffer, these include disqualification from being a company director for a determined period of time, becoming personally liable for the Company’s’ debts for example.

A director may still be seen as liable even after he has left his role with the Company if they still exert influence over the board. If the director has no lingering authority within the Company than he would not be liable for any problems arising after he has left the Company, however, resignation aside the director would still be liable for any issues which occurred whilst still holding a directorship in the Company.

This advice is provided by Jonathan Green of Darlingtons Solicitors, providers of high quality, cost effective commercial law advice for businesses of all types and sizes.

Joint venture tips

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Joint Ventures – 14 tips

Joint venture can describe any alliance between businesses. Here are some useful tips about joint ventures :-

  1. Joint ventures are usually structured by forming a new limited company for the sole purpose of the joint venture. This allows the businesses entering the joint venture to be limited in their liability should the joint venture not go as planned. If the limited company set up for the joint venture becomes insolvent, the businesses would only be liable for the amount that they had paid for their initial shares.
  2. There are however some tax consequences to think of when setting up a limited company for this purpose, especially if assets are to be transferred into the joint venture. If this is the case a partnership or in particular a limited liability partnership may be more fitting.
  3. Any assets transferred into the joint venture could be liable to pay stamp duty and capital gains tax if the value of the asset has increased since being bought. There are ways to avoid this, however, such as by allowing the joint venture company the right to use the assets rather than owning the assets outright.
  4. It is crucial that a business selects the right partner for any joint venture. The perfect joint venture partner would be a business with complementary strengths. When entering a joint venture with a partner it is critical that a business has in mind the end-game of the arrangement, it is ideal therefore for objectives to be drawn at the outset that suit both parties.
  5. With large businesses potentially in a dominant position already, a joint venture has the potential to raise some competition issues which may need to be investigated by the Office of Fair Trading. This will be the case if the creation of the joint venture leads to it having a significant market share. A joint venture will normally only arouse the suspicions of the Office of Fair Trading if the collaboration leads to the joint venture having more than 25% of the combined market share. Competition law outlaws some forms of alliance in any circumstances and this will remain the same for cases involving joint ventures, these include, fixing prices or agreements being in place to share markets in certain ways.
  6. During the negotiations prior to the forming of a joint venture it is fairly standard that both parties will sign a confidentiality agreement. This will restrict the parties from disseminating any confidential information which they may come in contact with in the course of negotiations. It is also common for a memorandum of understanding to be signed at this time in the negotiations. The memorandum sets out both parties commitment to the joint venture and the points the parties fundamentally agree on.
  7. Due diligence will need to be carried out by both parties to the joint venture to ensure that the other party is able to enter the joint venture itself and that they can live up to the commitments they are making to the joint venture. Generally due diligence is conducted to ensure the validity and legality of any agreements entered into.
  8. If the joint venture is created through a new joint venture company, the new company should have articles of association and a shareholders’ agreement should also be drafted.
  9. There are several implications to consider with regards to the transfer of employees in relation to a joint venture. One option would be to transfer a whole business into the joint venture including all employees. All contractual rights of the employees will continue as at before the transfer and be fully protected. The employees may be able to claim for unfair dismissal in this scenario if the transfer changes the circumstances under which they are working. If the business and all employees are to be transferred to the joint venture, TUPE regulations should be considered. A further option would be to ask the employees to resign from their positions before taking up new positions within the joint venture.
  10. The businesses entering into the joint venture may have separate intellectual property which they will move into the joint venture. The most common way of getting around this would be for the business which owns the intellectual property to grant or sell their intellectual property to the joint venture through a licence. A licence will be granted to the joint venture and this will specify certain rights and restrictions on the use of the intellectual property. A licence ensures that if the joint venture doesn’t turn out to be as successful as hoped that the holder of the intellectual property is protected.
  11. A business’ degree of control in a joint venture will depend solely on the outcome of negotiations between the parties. The outcomes of these negotiations are usually put in writing. If a new joint venture company is created, these can generally be found in a shareholders’ agreement. A similar document can be drafted if the joint venture is to be formed using another form of company structure. Considerations will need to be put in place if there is a deadlock between the parties on key decisions.
  12. Businesses in a joint venture will want to receive the same accounting information as they currently receive for their own company. The most expedient way of receiving this would be to have a member of the business appointed as a director of the joint venture. Equally the rights of the business to receive this information can be entrenched in the shareholders agreement.
  13. If a joint venture is pursued through a new joint venture company, profits can be taken through dividends if the cash flow of the new joint venture company allows. If the joint venture is structured through a partnership, both businesses will automatically share the profits as per the Partnership Agreement.
  14. The most common way of ending a joint venture is for one of the parties to buy the other party out. It is crucial that from the beginning of the joint venture there are plans in place for what is to occur at termination. This may be provisions such as the process one party has to follow to purchase the others or how the assets of the joint venture are to be split.

Many thanks to Jonathan Green of Darlingtons Solicitors for this article. If you are considering any form of joint venture in business or require commercial law advice, Darlingtons can help.

Family charters

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Family businesses

To put the importance of family businesses into context :-

  • there are approximately 3 million family businesses in the UK
  • these account for over 30% of the UK’s gross domestic product
  • they constitute 65% of the 4.5 million private sector businesses
  • family businesses are estimated to employ 9.5 million people and to generate £47 billion in tax .

BDO Research

BDO are a well known accountancy practice. Their research also suggests that :-

  • only 24% of UK family businesses make it to a 2nd generation
  • 14% continue through past a 3rd generation.
  • Family businesses that do make it through several generations can result in over 20 people potentially being directors or shareholders or with certain rights the family is likely to increase in size and typically by the third generation could involve over 25 people
  • Family charter documents can help in preventing friction and confusion which may be a primary reason why family businesses do not survive. These documents are typically less formal than shareholder’s agreements and may not have the same binding effect in law, but they are useful

Checklist for family charter considerations

  • Choice of  managing director
  • Which family members will be employees
  • Who should be directors
  • Selling shares
  • In-laws position in family business
  • What influence should non-directors have on decisions
  • Should a non-family member or more than one be brought in to help prevent disputes
  • What happens if there is a dispute between family members in relation to the business?
  • Long term business strategy
  • Dividend policy
  • Mechanisms to resolve disputes
  • Whether the charter should be legally binding.

Employee’s privacy rights, employer’s legal rights

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Is it lawful to monitor employee’s electronic communications at work ?

As a starting point we would recommend a very high degree of caution is exercised. Employers may well rightly perceive risks to their business and have legitimate reasons for considering monitoring employees. However, aside from issues of staff morale, this is a highly complex area of law where there are many different laws to be aware of. Getting it wrong can be catastrophic, there are some significant criminal as well as civil penalties for breaching the law. In short, be very wary and be clear as to any legitimate business imperatives for even considering monitoring, and document this. Then you will need to consider whether consulting and advising with your employees in advance of any monitoring is potentially advantageous in that the employees knowledge of possible monitoring will in itself protect your business interests (such that you may not even monitor in practices) as against possible damage to staff morale.

The starting point, in terms of the legal framework is that personal data and are involved and consequently, the Data Protection Act 1998 (DPA 1998) applies.

Other pieces of legislation that employers will need to carefully consider and comply with are :-

  • The Regulation of Investigatory Powers Act 2000 (RIPA 2000).
  • The Telecommunications (Lawful Business Practice) (Interception of Communications) Regulations 2000 (SI 2000/2699) (Telecommunications Regulations 2000).
  • The European Convention on Human Rights (ECHR) as applied by English law by virtue of the Human Rights Act 1998 (HRA 1998)

 

It is also very important to remember basic employment law principles and the express and/or implied duty of trust and confidence between employer and employee inherent in every employment relationship, since monitoring can easily be considered to be a breach of this duty. Other aspects of employment law which may come into play could also include :-

Why monitor e-mail and internet use?

There are undoubtedly some major risks to any business as a reulst of the huge and everb increasing use of and reliance on electronic communications, internal systems for data and management and not least the internet and email. Legal and/or practical risks for employers

  • Potential damage to reputation
  • Possible loss of business
  • Harassment and discrimination.
  • Defamation
  • Loss of confidential information and trade secrets.
  • Inadvertent or deliberate contract agreements, admission or breaches due to inability to control all email exchanges by staff
  • Copyright issues.
  • Increased system vulnerability and possibly hacking

Is there a right to privacy at work ?

Human Rights law is starting to be applied in a wide variety of different legal areas and employment law is no exception. The Human Rights Act does include a right to respect fopr privacy, so in principle this does apply to the work environment also. There is an increasingly complex intersection in many cases between wide ranging legal rights when balanced against other more specific laws and contradictory other legal principles.

The Human Rights Act 1998

There is no easy solution to the Human Rights issue, there are undoubtedly risks. Consequently, from an employer’s perspective, it is fundamentally important to adopt a proportional, documented and objective approach to the issue of balancing possible business needs for monitoring as against the employee’s rights to respect for privacy. It is important to ensure also that employment contracts, policies and procedures flag up the issue from the outset of employment.

 

In an important 2007 case regarding monitoring an employee’s telephone, e-mail and internet use (Copeland v United Kingdom) the European Court of Human rights made it clear that employer’s would find it very difficult to defend a privacy breach claim where -:

  • They do not have a clear information technology (IT) policy.
  • Employees are not advised that they may be monitored.

The case also makes clear that even if the employer has all the right policies and procedures in case, the core issue will then still be proportionality and the balance between the employer’s legitimate needs and concerns and the employee’s right to privacy. There is consequently no easy answer.

Article 8 is not an absolute right and is subject to exceptions which can make it legitimate to overrule the right and these include :-

  • Prevention of disorder or crime.
  • Protection of health or morals.
  • Protection of the rights and freedom of others.

The Employment Practices Code

As if there are not enough other legal aspects and issues to take into consideration, it is also necessary to take this code into consideration also. We do not propose to go into detail on this code here, but reference should be made to Part 3 of the code with offers guidance on monitoring at work and specific good practice recommendations. Failure to comply with the code will not automatically result in a breach of the Data Protection Act, the code is taken into account as regards possible enforcement and employers should be aware of it and take steps to comply.

Core principles of the Employment Practices Code

  • Privacy rights do in principle apply at work, even if employees are advised of possible monitoring.
  • If monitoring needs to be undertaken an impact assessment ought to be carried out.
  • Employers should bear in mind at all times the need to act proportionately.
  • Employees should be given sufficient information about monitoring
  • Information obtained via monitoring should be strictly controlled and data obtained kept safely and highly confidential

 

Unlawful/illegal monitoring

 

A discussion of workplace surveillance also requires consideration of RIPA 2000, which regulates certain types of monitoring, and the important thing to know about this is that breach of the provisions may give rise to significant criminal as well as civil sanctions. RIPA essentially deals with intercepting communications and therefore is at the much more serious end of the monitoring spectrum.

What monitoring is covered by RIPA 2000 ?

This is a topic in itself. For further advice and information, please get in touch with us.

Electronic communications generally

There are many reasons for seriously considering the need for a comprehensive electronic communications policy, not least because having such a policy really is a prerequisite for protection should a business take the decision to implement some form of monitoring. To recap some of the risks associated with electronic monitoring of employees, these include :-

  • constructive dismissal claims
  • discrimination claims
  • defamation risks
  • staff morale issues
  • harassment claims
  • claims for breach of the contract of employment
  • possible fines, civil and/or criminal liability

Bribery Act Research

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Ernst & Young Bribery Act Research

Ernst & Young, one of the UK’s leading accountancy practices, have researched the business sectors who should be particularly careful to comply with the Bribery Act and generally are most susceptible to bribery and corruption.

The research has found that the most vulnerable sectors, in order, are :-

  • oil and gas sector hardest
  • life sciences
  • consumer products

Other sectors which are vulnerable, in no particular order, are banking, technology, property, asset management.

The basis for the findings is by way of analysis of the US Foreign Corrupt Practices Act, which has been in force for some time and therefore provides a very good benchmark.

Ernest & Young stress that there should be no insinuation that there are any evidential reasons to suggest a higher propensity for corruption within companies in the sectors concerned, they are simply examining factors such as the markets in which those companies need to operate which do include countries where there is a different cultural attitude.

Commercial mediation

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Commercial mediation

Commercial Mediation is appropriate to any commercial dispute whether that dispute is between supplier and customer or two trading or business entities. Commercial mediation applies more to the nature of the dispute than the status of the parties.  Thus a commercial mediation may be appropriate to resolve a dispute between house owner and builder or supplier of goods whether to commercial or private buyer. In a sense commercial mediation is suitable for any dispute other than a personal or family dispute.

What is Mediation ?

Mediation is the process of facilitating discussions between parties to a dispute who are seeking to resolve it without litigation. Litigation in no way impinges on the right of the parties to seek a mediated settlement so long as they both consent.

Important elements of a mediation

  • Central to mediation is the concept of “informed consent.” All parties need  to understand the process and the reason for trying mediation and of course to agree to trying it. They also need to appreciate that there is no fixed procedure and to some extent it will depend on the mediator.
  • Mediation is “party led”. As neither the protagonists nor the mediator can impose anything on anyone, the parties are motivated to work together to resolve issues and reach agreement.
  • No Party may impose demands on another.
  • Confidentiality –  Mediation discussions or documents prepared for the mediation meeting are inadmissible in any subsequent court or other contested proceedings save for a finalised and signed mediated agreement.
  • The mediation process offers a full opportunity to call legal and other expert information and advice. Legal representation via solicitors is not required but in cases involving complex legal or technical issues, and even though the parties have signalled their desire for a negotiated settlement, it may be prudent to do so.
  • Neutrality– A mediator has an equal and balanced responsibility to assist each mediating party and should not favour the interests of either party, nor should the mediator favour a particular result in the mediation.
  • Cost- One element that mediation offers is the safety, unlike litigation, of knowing what the mediation will cost. The mediator will quote a fixed price to be paid jointly by the parties, usually up front.
  • After the event – Having voluntarily resolved the issues, the likelihood of compliance by both parties is enhanced and the potential for preserving the relationship is kept alive.