Find answers to some of the most frequently asked questions:
Find answers to some of the most frequently asked questions:
One comment we often hear is that many deals are not happening because the potential buyer is not able to raise the cash. We have looked behind that comment in a separate publication but what can the owner do to sell his business when packs of funded purchasers are not racing over the horizon with bags of cash?
One type of sale that we are seeing now more than ever is the so called VIMBO. In this form of management buy-out, the sellers of the business essentially sell to existing management over a period of time (which could be up to 7 or 8 years or longer). The sellers will take some of the consideration up front but leave the rest to be paid over time. The company essentially self-funds the sale over this period. Third party debt funding may or may not be a feature of a VIMBO but the buyers will usually be required to put down some of their own cash. The sellers meanwhile will retain an interest (ordinary shares and preference shares/loan note instrument) which allows them to exercise a level of control in the business in order to protect their deferred consideration.
Some of the advantages of a VIMBO for sellers are:
Not all businesses will suit this model though. In order to make a successful VIMBO there needs to be (as a minimum):
Where these circumstances align, a VIMBO can be a very convenient way for business owners to sell their business in the absence of cash rich trade purchasers knocking down their door.
The main reasons for updating the articles of a limited company formed before 1 October 2009 are:
In the case of group companies, putting in place similar articles across a number of subsidiaries may also have significant administrative advantages.
Most of provisions that were in the memorandum of association of such companies are now deemed to be provisions of the articles under the Act. We would therefore suggest that the opportunity is taken to update the articles to include provisions of the memorandum which are to be retained. For example, the statement that the liability of members is limited should always be retained, whereas it may make sense to dispense with the objects clause (except in the case of charitable companies).
Regulations made under the Act have introduced new forms of model articles of association for the three most common types of companies, namely:
The general approach taken with the model articles was to avoid duplicating provisions of the Act, particularly in relation to resolutions and meetings of members, and so a certain level of knowledge of the Act is assumed.
The model articles for private companies limited by shares were drafted with “small, owner-managed companies in mind” and only intended to cover matters relevant to the majority of such companies. As such, a number of assumptions were made in these articles (for example, that the company will not wish to appoint a secretary or alternate directors, and will not wish to issue partly paid shares) which may or may not be relevant.
A partnership (or “firm”) is formed by two or more persons carrying on a business in common with a view of profit. The Partnership Act 1890, which still applies today, provides that a Scottish firm has separate legal personality from its partners, enabling it to enter into contracts and hold property in its own name. However, it should be noted that the partners of the firm are personally liable for the debts of the firm.
The Limited Partnership Act 1907 extended the 1890 Act, allowing for the registration of limited partnerships. A limited partnership is a firm in which one or more partners are general partners (who manage the firm and have unlimited liability) and one or more partners are limited partners (who are not involved in the management of the firm and have limited liability).
Partnerships and limited partnerships are treated as transparent for UK tax purposes by HM Revenue & Customs.
Like a Scottish firm, a Scottish limited partnership has separate legal personality from its partners. The fact that a Scottish limited partnership offers a combination of limited liability (for its limited partners), tax transparency and separate legal personality, has made it suitable for some specialised purposes:
To set up a Scottish limited partnership, a form LP5 must be filed with the Registrar of Limited Partnerships at Companies House in Edinburgh. As there can be difficulties relying on the statutory scheme, a limited partnership agreement should be put in place. This is a private agreement that will be confidential to the partners.
A Limited Liability Partnership (LLP) is a hybrid corporate entity that offers the flexibility of a firm and the limited liability of a company.
An LLP is formed by two or more persons (the “members”) with the purpose of carrying on a business with a view to profit under the Limited Liability Partnerships Act 2000. An LLP has separate legal personality from its members and will normally be treated as transparent for UK tax purposes by HM Revenue & Customs.
The main difference between a firm and an LLP is that the partners of a firm have unlimited liability, whereas the members of an LLP have limited liability. The liability of each member of an LLP is limited to an amount agreed with the other members and the LLP subject to the proviso that, on the winding up of an LLP, a member could be required to make a contribution under the provisions of the Insolvency Act 1986 in certain circumstances (for example, if the court found there had been wrongful trading).
Many professional services firms – including accountants, architects, surveyors and solicitors – have converted from firms to LLPs in recent years, and it is becoming an increasingly common choice for other professionals, for example, dental, medical and veterinary practices.
To set up an LLP, a form LL IN01 must be filed with Companies House along with the required fee. While a tailored LLP agreement is not required, if no such agreement is put in place by the members and the LLP then simple default rules will apply which may not be suitable in all circumstances.
An LLP must have at least two designated members at all times. These designated members have additional responsibilities including appointing an auditor (if required), signing the LLP’s accounts and annual return and delivering them to Companies House, and notifying Companies House of certain changes to the LLP and its membership. The ongoing filing requirements for LLPs are similar to those of companies.
A person can become a company director provided they are at least 16 years old and are not disqualified from being a director through the operation of other companies legislation. Please note that from October 2015, it will no longer be possible to appoint corporate directors (i.e. you cannot appoint companies as the directors of other companies).
There are a number of legal duties owed by a director that are now embedded in statute and these can be summarised as follows:
As well as the above duties, all of which are set out in statute, a director also owes a duty of confidentiality to the company. This duty is linked to those to promote the success of the company and to avoid conflicts of interest.
As the above duties are owed only to the company, generally only the company can enforce them. Nevertheless, it is possible for this power to vest in the shareholders so as to enable them to enforce these duties on behalf the company. This is known as a “shareholder derivative action” and such an action can only be brought under certain circumstances.
Generally, remedies for a breach of one of the duties may include an interdict (or injunction), setting aside of a transaction, restitution of profits, restoration of company property and/or damages.
There is more than one type of director and a directorship may take one of the following forms:
For the avoidance of doubt, both non-executive and executive directors owe the duties that are referred to above.
There are, however, other circumstances where a person who has not been validly appointed as a director may nevertheless be considered to be acting as a director and so bound by the same legal duties. These are:
The shareholders (members) of a company have the right to remove a director by ordinary resolution. This right is enshrined in law and means that a simple majority, over 50%, of the shareholders may remove a director but the articles of association of companies (the rules of the company) can be amended so as to “entrench” a director through means of weighted voting rights and/or entitlement provisions. It must be noted that a director removed by shareholder resolution does not lose any right he may have to compensation and damages.
It may also be possible to remove a director by other means, for instance through specially drafted provisions in the articles of association of the company or other contractual agreement between the parties.
The company would require to deal carefully with any such director’s employment position and consider this at the same time as the person’s office as director is under consideration.
An earn-out is a seemingly straight forward idea and is an arrangement for the purchase of a company or a business where payment of at least part of the purchase price is deferred and calculated by reference to the future performance of the company or business being acquired. Earn-outs are often used as a management incentive where owner-managed businesses are sold and the managers continue to work for the business following the sale. They are also commonly used where the business being bought is fairly new but has significant growth potential. They are also commonly used to bridge a “price gap” between the seller and the buyer.
Most commonly, earn-outs are calculated with reference to profits but it is also possible to calculate earn-outs with reference to turnover, net assets or, depending on the nature of the acquisition, any other appropriate financial measure.
Some advantages for the buyer include:
Some advantages for the seller include:
Generally, there is potential for a number of conflicts during the earn-out period as both parties may disagree as to how best to maximise profits. Earn-outs are open to manipulation by the buyer or the seller (if they remain in day to day control post-acquisition).
Some disadvantages for the buyer include:
Some disadvantages for the seller include:
When entering into discussions that involve a sale with a material earn-out element of price, both seller and buyer would be advised to raise “control” issues early so that these can be considered carefully before signing off on heads of terms.
The company secretary is an officer of the company and is, most commonly, the person tasked with ensuring the operation and organisation of company activities. Depending upon the type of business conducted by the company, the work of the company secretary will vary.
The company secretary can be an individual or it can be a body corporate, for instance, another company.
No formal qualifications are needed to be the company secretary of a private company. For public companies, however, the directors of the company must ensure that the secretary has the necessary knowledge and experience to fulfil the role of secretary, and has one of the qualifications set out by the Companies Act 2006.
Unlike for directors, the companies legislation does not set out any statutory duties for the company secretary, however, many duties are implied by reason of the company secretary being an officer of the company. Please note however that, as an officer of the company, the secretary may be liable for any breaches of various provisions of the companies legislation.
It depends. Public companies are required to have a company secretary. If, however, your company is a private company, a company secretary is only required if the articles of association (the rules of the company) expressly require a secretary (NB it would be possible to amend the articles so as to remove any specific reference to the company having a secretary but there would be no need to amend the articles if they only refer to the duties of the secretary).
Nevertheless, a private company that chooses not to have a company secretary should consider ensuring that another party has the task of carrying out the role and functions of company secretary.
As we say above, there are no statutory prescribed responsibilities which relate specifically to the role of secretary.
This will vary greatly from company to company and certainly between public and private companies. In many small private companies, a company secretary will have only a very limited role; more or less simply occupying the office. In large private companies and certainly large public companies, the role of company secretary would traditionally include the following tasks:
Joint ventures are simply collaborative commercial arrangements between two or more parties and are commonly based on one of the following legal forms:
A joint venture can be used either as a vehicle to take advantage of an opportunity which might not be 100% suitable for your business, for example, joint ventures allow parties to:
However, with proper planning and preparation, these potential downsides can be substantially mitigated by setting out clearly at the outset how the joint venture will be run, how decisions will be made and how profits will be shared.
Issues of tax, risk and the nature of the project will drive the optimum legal structure and so there is no definite answer – it depends. Each structure has its own benefits, for instance:
It is important to consider the following:
Yes, but how will depend on the circumstances surrounding the termination and on the terms of the joint venture arrangements. A negotiated exit may be achievable. If, however, there is a dispute, the joint venture documents may provide for a compulsory sale or purchase of a party’s interest or worse, if the relationship has completely broken down, it may be most appropriate to wind-up the joint venture.
We recommend that the parties should draft into the joint venture documentation default, deadlock and exit provisions so that the parties’ intentions are clear from the outset and so that the parties have certainty that there is a clear procedure to bring the joint venture to an end on a fair and orderly basis if it is not working out.
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