The Legal Blog
A Shareholders’ Agreement can protect your position as a shareholder and provide certainty for
All too often clients don’t consider the need for a shareholders agreement when things are going well and only contact us when there is disagreement between shareholders which is usually too late to be resolved amicably and can be devastating for the shareholders and the continuity of the business. A well drafted shareholders agreement will prevent costly legal disputes and disruption to your business.
What is a Shareholders’ Agreement?
A Shareholders Agreement is a contract between the shareholders of a company in which the shareholders agree their rights and obligations. The company itself would usually be a party as well so the shareholders can enforce their rights against the company as well as the other shareholders.
Most companies will have standard Articles of Association which set out the rules governing the company and the rights of shareholders and directors. However these are usually basic and don’t give appropriate protection to individual shareholders. The articles will also be filed at Companies House and available to the public. A shareholders agreement has the added benefit that it is a private agreement and not available for public viewing.
Every shareholders’ agreement will be different and should be tailored to meet the specific needs of the shareholders and the business. The commercial team at Aquabridge set out below a brief explanation of a shareholders’ agreement and a summary of key terms usually included.
Dispute Resolution and deadlock provisions
Agreements may contain a mechanism for resolving disputes, such as referral to a third party expert or arbitrator, or a buy-out mechanism whereby one shareholder (or a group of shareholders) buys the shares of the other at a price determined in accordance with the agreement in the event of a deadlock.
Reserved Matters – right of veto
The shareholders will undertake not to carry out, and prevent the company from carrying out, certain matters without prior shareholder consent. These will vary between agreements but typical reserved matters include altering share capital, transferring shares and changing the articles. Key business decisions such as changing the nature of the business, incurring debt and pay rises over a certain level can also be included.
A veto on decisions relating to reserved matters would provide protection to, for example, an investor shareholder who had a minority shareholding. Without the reserved matters there is a risk the investor’s rights could be affected by the majority taking actions such as changing the articles, diluting the investor’s shareholding by altering the share capital and changing the nature of the business.
The reserved matters can be split into key matters which may require the consent of all shareholders and other matters requiring a percentage of shareholders to consent.
Restrictions on shareholders preventing them from competing with the business or enticing away customers, suppliers or employees while they are shareholders and for a period after they cease to be shareholders are important protections for the business.
Drag Along and Tag Along
If an offer is received for the entire share capital of the company a drag along clause will allow the majority shareholders to drag the minority shareholders along i.e. force the minority shareholders to sell as well. This will be useful for a majority shareholder as the shares may be more attractive to a potential buyer if they can buy the entire share capital.
The opposite of this is the ‘Tag Along’ clause. Should the holders of a certain percentage or more of the shares wish to sell all their shares to a 3rd party, the tag along clause gives the minority shareholders a right to compel the majority shareholders to procure that the 3rd party offers to buy the minority shareholders shares on the same terms as the offer to the majority shareholder i.e. the minority shareholders can ‘tag-along’ to the deal.
This prevents a majority shareholder from selling his shares and leaving the minority shareholders with a new and potentially uncooperative majority shareholder.
Compulsory transfers – Good Leaver and Bad Leaver Provisions
Shareholders agreements commonly have provisions forcing shareholders to sell their shares on the happening of certain events. Depending on the event the shareholder will be either a good leaver or a bad leaver and the share price will be adjusted accordingly. Common good leaver events will be death or disability and common bad leaver events will be competing with the business or disqualification as a director.
Requirements as to the payment of dividends such as the payment of interim dividends or linking dividends to a percentage of annual profit can also be included.
We often see situations where employees are issued shares at an undervalue as an incentive to contribute towards growing the business. A shareholders’ agreement can include provisions that ensure the new shares will only entitle the new shareholder to growth in the value of the company from the date the shares are issued.
For more information on how you and your company could benefit from a shareholders agreement contact Simon Letts, a solicitor in our corporate department, on 01394 330 683 or firstname.lastname@example.org
If you die without leaving a Will then the rules of intestacy determine who benefits from your estate when you die. Note immediately that there is no recognition of a common law spouse and the definition of children does not include step children.
· If you leave a spouse who survives for 28 days and NO children or other descendants
o The surviving spouse receives all assets
· If you leave a spouse and children or other descendants
o The surviving spouse receives personal belongings
o The surviving spouse receives a legacy of £250,000
o The balance of assets pass 50% to the surviving spouse and 50% to the children or other descendants at 18 years.
· If you leave no spouse or children or other descendants there is a list of people who benefit in turn
o Brothers and sisters or their children
o Brothers and sisters with whom you share one parent or their children
o Uncles and aunts or their children
o The Crown.
It is important to distinguish between assets that are in your sole name and assets that you hold jointly, like bank accounts.
In the majority of cases, assets that you hold jointly pass to the surviving joint owner. If you own your home or other property as tenants in common this is not the case.
When two or more people own a property together then they can decide whether they will own the property as joint tenants or tenants in common. What is the difference and the implications of choosing one over the other?
What is the difference between joint tenants and tenants in common?
Joint tenants - If you hold a property as joint tenants, the people who are the joint tenants all own the whole of the property. If you are joint tenants then on the death of one of you, his or her interest in the property would automatically pass to the survivor joint tenant or tenants without any further action. The surviving co-owner would then own all of the property and on their death it would form part of their estate. This is known as the "right of survivorship".
Tenants in common - If you hold the property as tenants in common, the people who are tenants in common own a specified share in the property – it can be 50:50 or 10:20:70. If the property is held as tenants in common, a person’s share of the property can be passed to another person or a trust, either during your lifetime or under a Will.
Why would you choose one over the other?
· If you want a property to pass to the surviving co-owners then joint tenants is a simple way of owning the property.
· Sometimes it is necessary to be tenants in common. Here are some examples:
o If you wish to leave your part of the property to a third party in your Will – your children for example when you have remarried or formed a new relationship
o If you wish to protect your property from payment of care fees but this must be in conjunction with a Will often through a Property Protection Trust in a Will ( https://www.aquabridgelaw.co.uk/wills-and-probate-solicitors ) or by direct gift during lifetime. There is a myth that just being tenants in common is sufficient.
o If you wish to be able to deal with your part of the property separately during your lifetime, for example making a gift to a person or a trust.
There are also differences in treatment for inheritance tax and the necessity to apply for a Grant of Probate.
We are regularly asked questions about SSP so here are some helpful tips to understand how SSP works and what you should be looking for.
What's the entitlement?
The most important step when any employee is, or has been,
away from work unwell is to check their contractual provisions concerning sick
pay. Ascertain whether there is any
entitlement to contractual sickness pay (whether it be express or
discretionary) or whether there is an entitlement to SSP only.
Then consider whether there are any circumstances which would justify payment of full pay for a period of time, even in the event there is no contractual entitlement to it. Commonly, you should consider whether full pay for periods of sickness has been implied into the employee’s contract through custom and practice over a period of time.
Where there is an entitlement to SSP, remember:
- SSP entitles employees (who earn, on average, not
less than the weekly Lower Earnings Limit) who are away from work unwell to
receive a minimum weekly payment (currently £89.35 per week);
- SSP is taxable and subject to National
- Entitlement to SSP will be triggered where there
is a period of incapacity for work. A
period of incapacity for work is four or more consecutive days and can include
days on which the employee is not required to work (such as weekends);
- Generally, the entitlement is to up to 28 weeks
SSP in any period of incapacity for work but periods of incapacity for work can
be linked depending how far apart they take place;
- Days of incapacity must be full days on which no
work is done – if an employee leaves part way through a day having worked some of the day, this is not counted as a day of incapacity for SSP purposes. Similarly, there is no top-up system where an employee is on a phased return to work and
is working their normal days but at shorter hours;
- SSP is not payable for the first 3 days of the
period of incapacity for work (these are 'waiting days') but is payable from
the fourth day;
- SSP is only payable for qualifying days which
are usually set out in the contract of employment.
If you have any queries in relation to SSP, discretionary sickness pay or sickness absence generally please contact Amy Leite.
A Property Protection Trust is a type
of trust that is suitable for couples concerned that one of them might need long
term care in the future.
Having this trust in your Will is intended to help protect your home from an assessment to long term care fees. The half share of the family home belonging to the first person to die, passes into the trust. This type of trust is also known as a life interest trust. The survivor is then the sole beneficiary which means that they can benefit from the share of the house in the trust during his or her lifetime. On the survivor’s death the share of the home in the trust usually passes to the children.
Mr and Mrs Harris own their house in joint names and have other joint savings. Mr & Mrs Harris want to:
- Ensure that their respective half shares of the
house ultimately pass to their children;
- Ensure the survivor has the protection of living
in the property for the remainder of their lifetime. If a direct gift of the half
share of the property was made to the children and not through the trust this
makes the survivor vulnerable to a child’s personal circumstances – death,
bankruptcy, divorce or falling out;
- Ensure the survivor can move to another property
as he or she chooses;
- Ensure that if the survivor requires long term
care, at least half the property is ring-fenced for the children.
If Mr Harris dies first and Mrs Harris requires long term care, Mr Harris’s half share of the property is retained in the property protection trust created by his Will and this half of the property cannot be subject to a capital assessment for the purpose of paying care fees. On Mrs Harris’s death, the Property Protection Trust automatically terminates and the half share of the house transferred subject to the trust passes to the children.
Unfortunately, having problems with a franchise or franchise agreement is not uncommon at some stage on your franchise journey. Franchise problems can arise for a number of reasons whether due to additional obligations imposed on the franchisee, the franchisee being unable to make ends meet or because the franchisee does not think the franchise lives up to what was sold to them at the outset.
In these circumstances there are a variety of things a franchisee should or should not do... these are what we consider to be the most important dos and do nots.
- Go on social media or the internet making allegations about the franchisor or name calling;
- Seek to rally the rest of the network against the franchisor without having taken legal advice;
- Tell the franchisor you are terminating the agreement without have taken advice on your right (or lack of) to do so;
- Just stop paying your franchise fees without taking advice;
- Stop communicating with the franchisor altogether.
If you do these things you may well find your franchise agreement is terminated for breach and you are on the hook for damages as a result of your actions and breach of the franchise agreement. You may also find your conduct makes it more difficult to reach a swift and amicable resolution of your problem with the franchisor and limits the options the solicitor may identify for you.
- Prepare a chronology of events which highlights why you are unhappy;
- Go through your paperwork and pull together any email evidence, your franchise agreement and any sales material that you received about the franchise;
- Consider ways the issue might be capable of amicable resolution and what your ideal outcome is;
- Above all else - take legal advice on your position before making any decisions or seeking to extract yourself from the franchise. Ensure you receive advice from a franchise specialist who has dealt with many franchise cases.
Early advice on your position will help you understand your options, risks and possible solutions. It will also prevent you from making costly mistakes which may be hard for a solicitor to undo once it is too late.
Amy Leite, Franchise Solicitor t: 01245 206341 e: email@example.com
One of the most commonly used employee share schemes is an Enterprise Management Incentives Option (EMI option). An EMI Option is a type of employee share option that enjoys favourable tax treatment.
What are the key business benefits of employee share schemes?
The main benefits are financial and motivational:
- Tax and NICs savings Some types of share scheme attract particular income tax and national insurance contributions (NICs) advantages that can help reduce a business’s employment costs. Corporation tax relief may also be available.
- Employee retention They can help to recruit, retain and motivate high-calibre staff, and align shareholder and employee interests.
- Conserving cash There may be less pressure on salaries if a business offers a share plan.
- Employee performance incentive They can act as an incentive for employees to meet key business and financial targets.
- Succession planning Ownership of a business can be gradually transferred to its employees, rather than to new outside shareholders, through awards made under employee share plans.
Which companies can grant EMI options?To qualify to grant EMI options, a company must be an independent trading company with:
- Gross assets of no more than £30 million.
- Fewer than the equivalent of 250 full-time employees.
Certain trading activities will not qualify and there are detailed rules relating to the independence requirement, the trading requirement and the shares that can be used for EMI options.
What shares can EMI options be granted over?
EMI options can be satisfied by:
- Newly issued shares.
- The transfer of existing shares from a shareholder.
Who can be granted EMI options?
To be eligible to be granted an EMI option, an employee must work for the company for at least 25 hours per week, or if less, 75% of their working time.
Employees cannot be granted EMI options if they (or their ‘associates’) have a ‘material interest’ in the company whose shares are used for the scheme, or in certain related.
EMI options can only be granted to employees. They cannot be granted to non-executive directors or consultants.
When can an EMI option be exercised?
EMI options must be capable of being exercised within:
- Ten years of the date of grant.
- A period of 12 months after the option holder’s death.
Otherwise, there are no restrictions on the exercise provisions that can apply to EMI options, and this flexibility means that they can be used for exit-only arrangements (where an option can only be exercised on an exit event, such as a share sale or listing) period.
If you would like to arrange a free consultation to discuss the benefits of EMI options with one of our senior corporate lawyers, please contact Kieran Lowe on firstname.lastname@example.org or 01245 673072.
Aquabridge Law and its affiliates do not provide tax or accounting advice. This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your own tax and accounting advisors before engaging in any transaction.
If you are thinking of buying or selling a leasehold property, make sure you understand the terms of the lease as it can impact your plans:
- A short lease can impact the sale price of your property
- If you’re buying, mortgage companies won’t lend on properties with less than 70 years remaining on the lease, some lenders can require more
- Lease issues can hold up the sale or purchase of a property which can cause problems, particularly if you are in a chain.
On the upside, lease issues can be resolved with proper legal advice and, of course, the Conveyancing Team at Aquabridge Law will be very happy to help you.
Often a flat owner may not be aware of the issue until it is too late so it is important that you consider these issues prior to putting your property on the market, or making an offer to buy a leasehold property.
In law, a flat owner has the right to buy a new lease and we can help you through this process, explaining the costs and timescales required and liaising with your landlord throughout. Typically you would need to cover the costs of the valuation of the lease, the cost of the lease itself and the landlord’s legal fees.
If you have owned the property for at least two years, you are entitled to apply for 90 years plus the remaining term of the current lease. So, for a lease granted in the 1980s on a 99 year term, you would end up with a new lease term of around 150 years. As well as improving the value and appeal of your property, a new lease can often mean that ground rent is reduced; good news whether you are planning to stay in the property or planning to sell it.
If you are selling and don’t want to go through this process yourself, you can assign your right to a new lease to your buyer as part of the sale contract. They can then apply for the new lease without waiting for two years.
Extending your lease can be a complicated process and take time to complete the valuation and subsequent negotiations with the landlord. The Aquabridge team have helped many clients with lease extensions, either as a standalone legal process, or as part of the sale of a leasehold property.
Make sure you know the length of your lease, and seek solid advice on how to deal with it before it starts to become an issue. Call Sharon at Aquabridge on 01394 330680 to discuss how we can help.
We frequently come across questions from our employer clients about giving or asking for references. This highlights how many employers remain unsure about the rules for references.
The Basics - Obtaining a reference
Although it is very common to do so, a new employer is not obliged to take references for employees. You can rely on information from the employee, the application and/or the CV if you wish. If you do choose to request references, remember:
- Offers of employment can be made conditional upon receipt of at least one satisfactory reference. If an employer fails to make an offer conditional and the offer is then withdrawn on the basis an unsatisfactory reference is received the employee can have a claim for breach of contract.
- To avoid arguments over whether a reference is ‘satisfactory’ consider stating that the offer is “subject to receiving a reference(s) that is satisfactory to us/the Company”.
The Basics - Giving a reference
Generally, there is no legal obligation to give a reference. However, policies on when and in what circumstances a reference will be given should be consistent to avoid allegations of discrimination. Here are a few points to consider when giving references:
- An employer has obligations to both the new employer and the former employee when giving a reference.
- If a reference is given it must be true accurate and fair and must not give a misleading impression. There is a duty to take reasonable care when preparing a reference.
- References should include an appropriate and properly drafted disclaimer.
- References can be given in a personal capacity or on behalf of a company employer. If a personal reference is to be given it should not be on company headed paper.
- It is a good idea for Employers to have a reference giving policy to set out who in the company can give company references and what information they should contain.
- Providing a reference will generally involve processing personal data and be subject to the Data Protection Act 1998.
If you need any help with references, Amy Leite, Aquabridge’s Employment Lawyer can advise on deciding to give a reference, wording or disclaimers. Contact Amy on 01245 206341.
1. If my franchise isn’t working out I can just walk away
This is rarely the case. Once the franchisee has signed a franchise agreement it is very difficult to just walk away from it without significant risk of a claim by the franchisor. A franchise agreement is generally for a fixed term of 5 years and there isn’t usually an option to walk away or give notice to terminate the agreement on the basis it is not working out. There are some limited common law rights that can assist a franchisee in trying to get out of a franchise agreement but specialist advice is required to see whether these rights apply in the circumstances.
2. Even if I do breach the agreement what can the franchisor do if I have a limited company which has no money!
Again, it is rarely this straightforward. Most, if not all, franchise agreements which have been drafted by a solicitor will contain a provision tying an individual, guarantor or principal into the franchise agreement personally. This means the franchisor can usually pursue the individual personally under the terms of the franchise agreement.
3. As I am a franchisee rather than an employee I can work whatever hours I want
Usually this is not the case. The franchise agreement will often refer to minimum opening hours which are usually contained in the operating manual. Remember, opening hours are just the hours the business is to be open or accepting calls and enquiries; franchisees must plan for the marketing, record keeping and admin tasks that are part of being a business owner.
4. The post termination restrictions in my franchise agreement are not enforceable as no one can lawfully stop me earning a living
This is not always correct, post termination restrictions such as those which prevent the franchisee being involved in a competing business and prevent solicitation of customers are generally enforceable if they are reasonable. There are many legal tests we look at to establish how reasonable a clause is and whether they are enforceable – specialist advice must be sought as these are costly to get wrong!