Directors & Shareholder Claims: 1

How to break the deadlock – 8 tips

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Boardroom and shareholder disputes can arise for many reasons. When they do, it’s important to understand the legal rights of all parties and the options available as well as the consequences of allowing things to get worse. However, there are some options which can make life easier:

  • If you are a minority shareholder in a company, what happens if you have a disagreement with the majority shareholder, or a group which has more control?
  • How do you solve the problem, or even avoid a dispute?
  • In the first of a series, here are seven important pointers to be aware of:

1/ Minimal Influence

In company law, a minority shareholder (anyone with 49% or less) has minimal influence over the management of the company or the distribution of its profits.  The standard constitution of a company and rules under the Companies Act give little protection to a minority shareholder.

Differences can and do arise as the business evolves and personal circumstances change:

  • there may be differences on strategy or the direction of the company
  • power struggles and poor personal relationships may develop
  • shareholders may wish to retire or disagreements occur on service contracts and remuneration.

There are ways in which the minority shareholder’s interests can be protected, either by agreement with the other shareholders or as a last resort by taking action through the courts.  It is easy for entrepreneurs to preference the initial brokering of a deal, and getting the new business up and running, over longer term, but equally important considerations.  But it’s always advisable to consider these scenarios at the beginning.

2/ Shareholder Agreements

A shareholder agreement is a must for a private company, especially where there are a relatively small number of shareholders who also manage the business. These don’t always arrive without (you) the minority shareholder/s pressing for one. You need to proactively pursue this as part of the start up, or failing that, you should put it at the  top of the agenda.  In a Shareholder Agreement, the majority shareholder usually gives up some rights to the minority.

The process of preparing the Agreement helps shareholders address points which could become potential problems. This encourages the key players to work through the issues early, when everyone is positive and communications are still good.

It’s much more straightforward and economic to deal with this as part of the start up, rather than risk the expense and uncertainty of going to court later.  All concerned will know where they stand where there is a Shareholder Agreements. It reduces the risk of conflicts arising or getting out of hand.

An existing businesses can certainly set up a Shareholder Agreement at whatever stage in its evolution, for example when one of the main shareholders is considering retiring or their circumstances have changed.

It is also worth remembering that a Shareholder Agreement

  • is confidential
  • doesn’t have to be filed at Companies House
  • sits behind the company’s public face
  • is a private document between the shareholders.

 

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3/ Points to Cover

A Shareholder Agreement can go a long way to ensuring disputes are avoided or at least, provide the mechanism that allows them to be settled quickly. An agreement identifies shareholders’ specific responsibilities and outlines how and where disputes are to be resolved. For example, it can specify forced buy/sell provisions during a dispute and even include a formula or other means to determine the transaction price.

Amongst other things, the Agreement can cover:

  • key objectives
  • financing and borrowing
  • dividends, directors’ fees and salaries / profit distribution
  • controls on the appointment of Directors
  • major expenditure
  • exit mechanisms – for shareholder deaths, misconduct, divorce, incapacity, etc.
  • fair valuation process for transfer of shares
  • succession arrangements – insurance of key persons
  • dispute resolution

The Shareholder Agreement gives minority shareholders a say in the business and some security. Without one, the minority would have little impact on decisions regarding the company and protecting their interests.

4/ How to enforce my rights as a shareholder?

Negotiation is the key, this should be explored first, rather than threatening legal action. However it is important to know your legal rights, and the provisions of the Company constitution.

  • How do these apply to your position and the other interested parties?
  • It may be necessary for you to obtain details or documents as part of the process, which the company is reluctant to provide.
  • Take legal advice early on as to the pros and cons, the likely outcome, and the likely timescales and costs

Even where proceedings are issued, frequently a solution is reached through negotiation. This is usually much quicker and cheaper than having a decision imposed by the court. However, it may be necessary to exercise leverage by relying on your strict legal rights to achieve any progress.

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5/ Solutions

There are various options, including:

  • proposing a resolution at a general meeting which redresses the situation
  • complaining to the police of any criminal acts
  • asking the board of directors to take action in the company’s name against an individual director (because the shareholders can’t sue in the company’s name)
  • using a mediation service to settle a dispute.

6/ Mediation

A mediator will be someone who is experienced in this area of law.  If agreement is reached with the help of the mediator, the compromise can be recorded in a legally binding document which can be enforced in the court, if one of the parties breaks it. The advantages of mediation include its relative cheapness compared to going to court, privacy (there is no public record) and speed.

If it isn’t desirable or possible to achieve an accommodation where the aggrieved shareholder stays in the company, other solutions include:

  • the other shareholders buy out the aggrieved shareholder at a fair price
  • the company buys back the aggrieved shareholder’s shares at a fair price
  • Make a reasonable offer to the aggrieved shareholder.

7/ Further Options

Where the Company refuses to cooperate, further options include:

  • applying to the court for an order that the company is acting or has acted unfairly (an “unfair prejudice” action under s.994 Companies Act 2006)
  • applying to the courts for the company to be wound up under s.122 of the Insolvency Act 1996
  • suing the directors for negligence by means of a Derivative Action under s.260  of the Companies Act 2006:

The courts encourage settlement of all disputes, including shareholder disputes. Where the majority has made a reasonable offer to the aggrieved minority shareholder to buy them out on reasonable terms, it is unlikely that the majority will have acted ‘unfairly’. Then it wouldn’t be ‘just and equitable’ to wind the company up. It is essential to take advice on the terms of any offer you make.

If you offer to go to mediation or alternative dispute resolution, you are also unlikely to have acted unfairly. However if the company is in financial difficulties a creditor may issue a petition under S.122 of the Insolvency Act, irrespective of the shareholders’ wishes.

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8/ Finally

Where the Court decides that a minority shareholder has been oppressed or unfairly prejudiced and the appropriate remedy is for the majority buy the minority shares, this is often done at a “fair value” i.e. fair market value, without deduction for a minority discount.

Where the majority gives an undertaking to buy the shares of the aggrieved minority at fair value, usually the court will adjourn the unfair prejudice petition.  However, the fundamental battle ground is frequently

  • the basis of the business valuation
  • the underlying assumptions
  • the data and criteria on which it is based.

The valuation of a private company is an area of potential significant difference between the parties. These can be quite complex disputes, but qualified and experienced legal advisors and valuation experts hired early in the process will help you through this potentially sensitive and difficult area.

jpsykes23@outlook.com

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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Disclaimer

LINKS

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

 

 

 

 

 

Update: Professional Negligence Pilot

Adjudication Scheme Re-launched

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My original post on the Scheme is here at

https://jpaulsykes.com/2015/02/05/new-professional-negligence-pilot-adjudication/

The Pilot has now been expanded and revised, my review is at

http://www.luptonfawcett.com/index.php?cID=2287

The Scheme Pilot Pack Documents are at:

Professional Negligence Bar Association: Professional Negligence Adjudication Pilot Pack – Launch date 25 May 2016.

Disclaimer

jpsykes23@outlook.com

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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M&S’s Break Clause Dispute: wider contract implications

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See my blog on the Supreme Court’s recent decision:

http://www.luptonfawcett.com/blog/mandss-break-clause-dispute-broader-contract-implications/

  • Contract interpretation
  • Implied terms
  • Necessity
  • Break clauses

This updates last year’s wordpress piece:

https://jpaulsykes.com/2015/01/06/supreme-court-gives-ms-permission-to-appeal/

 

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Santa’s Lawyer: World Exclusive

Unauthorised Interview!christmas-1015324_1280

 

 CAUTION:  Broad minded, consenting adult’s supervision required:
Spoiler Alert Especially “next to last ” Q&As

In the run-up to Christmas, everyone knows Father Christmas and his elves are extra busy, but we managed to track down one of the unsung heroes of Santa’s Kingdom

*Father Christmas’s Lawyer*

We asked him, or her (because of the extreme sensitivity of the position, we were asked to keep the lawyer’s identity confidential!) to fill us in on a few secrets.

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Here is the exclusive and previously unseen, unheard and unheralded low down on crucial legal issues that Father Christmas currently faces!

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THE TRANSCRIPT

Q1: In times of increasing regulation and potential litigation, how do you defend Father Christmas – He faces accusations of setting a bad example, putting his life and the lives of others at risk through breaches of health and safety laws?

A1: Well, thank you for asking me and showing such an interest. This is a big thrill for me, I love my work, being Father Christmas’s lawyer, and answering all the questions that everyone has around the world at this special time.

Q2: Landing a sleigh on the roofs of houses and climbing down chimneys to deliver sack-loads of questionable gifts – is that a good example for Santa Claus to set for children everywhere?

A2: But it’s not just at Christmas time – this is a 365 day a year operation in the law offices at Santa’s Grotto back home. Of course we have 24/7 remote access for Father Christmas whenever he might need any legal advice or counsel.  But the thing is, Father Christmas never really needs any advice because, well he’s omnipotent. And omniscient. He’s all knowing. He knows everything – I’m not saying he’s a “know all”, he’s just great to work for!

Q3: You haven’t really answered any of my questions – these are serious issues and Father Christmas has to come clean.

A3: I’m sorry, it really is appreciated and what a great first question. It’s certainly a pleasure to be here, and may I say a big “Happy Christmas!” to you and all your subscribers!

Q4: There is a growing charge sheet: Santa Claus is accused of promoting drunk driving, speeding, breach of the Highway Code, reckless endangerment by flying livestock without a permit and climbing down chimneys.

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A4: I want to pick you up on some conflation in your questions. You are talking about Father Christmas and Santa Cluas interchangeably, as though they were one and the same, and that there is only one of them. And that he (or she) exists.  So am I in fact – that’s great! Now that might be your perception, and the presumption behind your question. I’m happy to go along with that. But no warranty is intended or to be implied, you must rely on your own searches or enquiries. No liability is accepted, and the usual exceptions and limitations apply (see rider).

 

Q5: Are you saying that there is a turf war going on – the public have a right to know?

A5: Well I appreciate the insight, and I know how much you love a scoop! Having said that, I have to be mindful not to disclose any details of any historic confidential settlement of any joint venture, or ventures, existing or not, known or unknown, all names rights, territorial and exclusivity protocols between the various jurisdictions and entities. I hope you understand.

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Q6: He flagrantly refuses to wear a seatbelt or crash helmet!

A6: But as you well know, Father Christmas has magical powers. He’s been doing this for centuries. He’s very expert, and he does what he does – you know?

Q7:  OK, I can see you aren’t going to be drawn, but what about some specifics? What about, say the Work at Height Regulations 2005? Isn’t Father Christmas in contempt of Parliament and of RoSPA?

A7: I’m so glad you asked me that. You know, it isn’t reasonably practical for him to avoid working at heights. The defence of necessity is an obvious response, but Santa adopts best practice and a safe system of work. This is regularly checked, updated and monitored. The sleigh has protective rails to prevent a fall. A descent mitigation system operates so that in the unlikely event Father Christmas has an accident, he is protected. Plus, he can fly.

Q8: What about occupier’s liability – isn’t it an imposition that people visited by Father Christmas, maybe on an unsolicited basis have obligations thrust on them without consent? Shouldn’t they be worried that Father Christmas could sue them?

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A8: Householders have duties to all visitors, to take reasonable steps to make sure that the area is safe and in particular that Santa and the reindeer are not injured, or the sleigh damaged. Your roof needs to be in good repair and the chimney mustn’t pose a risk of injury. However, if you don’t have a roof or chimney, or the roof is in disrepair, or your chimney is blocked, or ablaze, don’t worry; this will all have been subject to rigorous hazard analysis ahead of time. Father Christmas knows all about your home and its environs. This is just basic for him. No, that’s not creepy.

Q9: But a question all children want answering – how does Father Christmas get in?

A9: Father Christmas can get past even the most challenging obstacles. Obviously I am not at liberty to disclose how exactly, but Father Christmas makes sure that all the good little boys and girls get their presents. Some grown-ups just stay awake to let him in on Christmas Eve. Others assume he gets in through a door, a window or even an air vent.  As a last resort Father Christmas uses his magic key, but I guess you knew that already?

Q10: What if Father Christmas was breathalysed? Anecdotal evidence suggests he takes an alcoholic drink at almost every other house – doesn’t this make him unsafe on the roads and in the air. Couldn’t he be arrested and banned?christmas-1070830_1280A10: We are well aware of our duties and responsibilities, for example for every pilot the limit is 20 milligrams per 100 millilitres of blood.  In England and Wales for drivers it’s s 80 milligrammes of alcohol per 100 millilitres of blood, 35 microgrammes per 100 millilitres of breath or 107 milligrammes per 100 millilitres of urine.

Q11; You seem to be over- familiar with that, which isn’t reassuring. Does Father Christmas have an on-board breathalyser?

A11: The average human could be over the limit after a wee dram of whisky, tot of rum or snifter of port. Even too much brandy butter on a mince pie is risky for pilots. But it should go without saying that Father Christmas is an exception.

Q12: Are you saying he is a substance abuser?

A12: I can’t disclose personal medical details, but your question makes a lot of assumptions; who’s to say that Father Christmas’s blood stream is the same as ordinary mortals? At this time of year it could be running on 100% undiluted sweet sherry – I couldn’t possibly comment. But you just have to ponder the prejudices and assumptions underlying your questions to reveal their underlying fallacy.

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Remember everyone, Father Christmas supports responsible drinking for all the good people out there, fundamentally though, he embodies the “Spirit of Christmas.”

Q13: Aren’t you just an apologist for an international criminal racket? Santa flouts Regulations against importing merchandise or animals without permits.  Shouldn’t Santa and his reindeer be arrested, kept in quarantine or even destroyed? Santa’s sacks of toys would also be confiscated as he circumvents customs and imports them illegally, and let’s not get started about the serial Data Protection offences.

A13: I think you are over reacting. Don’t forget, Father Christmas is a supernatural being, transcending cultural, theistic, legal and international norms.  His actual whereabouts (intended plural) at any given time are an undisclosed secret. Although there are various authorised outposts including in Lap Land and the North Pole, Santa’s Kingdom is protected by International Reciprocal Treaties.

 

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Q14: Isn’t it time that an International Arrest Warrant was issued against the fugitive, Father Christmas?

A14: Father Christmas has never been arrested or tried. He would have to be arraigned before a court of his peers. I doubt Jack Frost, Mother Nature, Neptune, the East Wind and the Green Man are ever going to agree to give these defamatory accusations any legitimacy. On a procedural basis, however, the unique off shore nature of Santa’s business centres provides no address for legal service of any proceedings. No applications for alternative service against Santa have ever been upheld. In any event, Santa obviously has a magic hour glass so that any proceedings would effectively be, or be construed as being out of time.

Q15: It has been rumoured that Rudolph is taking legal advice on a number of claims – exploitation, equitable accounting; breach of copyright, unauthorised image use and failure to pay Royalties on merchandising. How do you respond?

A15: I speak entirely hypothetically, because I am not going to breach client confidentiality or privilege. Firstly, I can neither confirm nor deny that Rudolph is a red nosed reindeer, known to my client. Secondly, we rely on universal legal principles, recently reaffirmed in the UK, that an animal has no legal personality, and cannot bring any action.

Q 16: Really, isn’t that anti-equality?

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A 16: Absolutely not. Mr Justice Snowden in November this year in the Chancery Division of the High Court dismissed a claim for damages brought by two dogs. Amongst other things, this was on the basis that CPR Part 2.3 (1) defines “Claimant” as a person who makes a claim, and a dog is not a person.  How could a dog, or a reindeer give instructions to bring any legal proceedings, let alone sign a certificate of truth, give an undertaking, pay court fees, give security for costs, or comply with an order of the court?

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Q17: But what if Father Christmas was sued, say by the Elves for breach of Working Time Directives?

A17: The elves would never sue Santa, he is their spiritual Father, and they love him, even when he’s feeling grumpy. All insinuations are denied and Santa’s Workshop adopts a progressive full participation, grant aided Share Ownership scheme and cooperative partnering philosophy. So the Elves own the business.

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Q18: What about Father Christmas’s personal liability for all of the risks that he runs?

A18: There are unresolved questions, which I’m not going to comment on here regarding the existence or otherwise of any relevant Declarations of Trust, Corporate Constitutions and business matrix. Whether Father Christmas is a sole trader, a partner (whether with Mrs Claus or otherwise as an LLP Member), an employee, director, shadow director from 26 May 2015 under the Small Business, Enterprise and Employment Act 2015 so that the general duties of directors under sections 170-177 of the Companies Act 2006 apply, or a Registered or Unregistered charity, Unincorporated Charitable Association, Community Interest Company, Club, Credit  Union  or unregulated spiritual being is best left for others to ponder. But if you sue him, I can assure you the outcome is assured – your ass is grass!

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Q19: There are unconfirmed reports of an Anti-Trust, Monopoly and Cartel busting consortium being launched with backing from The Grinch and Scrooge Enterprises. They are petitioning in the United States for interventions under the Racketeer Influenced & Corrupt Organizations Act (RICO).  What’s your reaction?

A19: Any jurisdiction, liability, locus standi, causation, quantum and limitation would be denied. Preliminary issues include whether any claim was against Father Christmas or Santa Claus, or Santa’s Grotto. Fundamental issues of fact and law, not to say theology, natural laws and physics would need to be explored and proved. You shouldn’t overlook the fact that if he exists, he will undoubtedly have diplomatic immunity, as will all his manifestations, subsidiaries, servants, agents and employees. All are Envoys of the Winter Wonderland and Santa’s Grotto which are non-justiciable and impervious to any such moves by the misguided entities you mention.

Q20: What if Wizzard  or Slade, and Mud and a vast number of other British groups from the 70’s and other less eclectic decades (from a popular music perspective) all brought a Class Action for passing off against Father Christmas and an account of profits? Might he go bankrupt?

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A20: I think it more likely that he has a theoretical claim against them. Moreover, even if there was any claim, it would be very difficult to empanel a jury or identify an impartial Judge who wouldn’t recuse themselves for either being on or off the Nice List.

Q21: How do you respond to critics like Dr Nathan Grills of Australia’s Monash University who says Santa’s “rotund sedentary image” has had the effect of making “obesity synonymous with cheerfulness and joviality” around the world?

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A21: Father Christmas is certainly a role model for his unfailing generosity, devotion to duty, get up and go and can do attitude. It is worth noting that the European Court of Justice has this December again ruled that obesity can be classed as a disability, so employers and individuals alike are best advised to avoid discriminatory behaviour.

Q22: Father Christmas has a reputation for being popular with the ladies; but what when it goes further? Witnesses report seeing Mommy Kissing Santa Claus, under the mistletoe, tickling Santa under his beard. Won’t this be traumatic for the children – would Daddy be able to sue Santa Claus for intermeddling in marital harmony?

 

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A23: Well this is a horny old chestnut isn’t it? It’s true that Santa does have to have his wits about him, if he is to avoid being propositioned by the over-amorous. He has 20 million households to service in the UK alone. Santa has regular situational and observational training a la Jason Bourne and the Sioux, equipping him to handle anything that might arise, whether he’s being asked to fill his boots or empty his bulging sack, or otherwise importuned when about his lawful business.

Q24: There must be a putative claim to come out of the closet?

A24: It is highly doubtful that there could be any legal claim, even in theory: most jurisdictions have eliminated the tort of “alienation of affection” as a matter of public policy, either by statute or court opinion. Even where the tort survives in theory, “eulogistic commendation of the res vendita”, has only ever made Father Christmas more committed to ensuring satisfaction guaranteed.

Q25: What do you say to people who say Santa Claus doesn’t exist – how do you prove he does?

A25: There have been few legal cases on the subject, not surprisingly, because of the difficulty for example of conflict of laws, cross border and jurisdictional issues, identification evidence and other jurisprudential matters. How are you going to serve Santa Clause with any proceedings, or prove service, not least if you assert his non-existence?

Q 25: Your having a giraffe, right?

A25: Nevertheless – No. There have been some interesting cases. One that was before my time and which I call to your attention, which I don’t necessarily rely on as setting a precedent or having any basis in reality, but which you may nevertheless think might be of at least persuasive authority:  Judge Michael Musmanno of Allegheny County, Court of Quarter Sessions of Pennsylvania in 1936 reportedly opined 

In re: The Legality and Authenticity of Santa Claus

“….Santa Claus is a reality recognizable by the law and he will be protected in this court against all aspersions and insinuations to the contrary…. Santa Claus is the symbol of amiable kindness; he is the token of smiling charity he is the badge of all that is cheerfully benevolent in the make-up of man. The best judge is he who walks with Santa Claus.

On weighing all the evidence in the case, which was made up of the testimony of the season, the attestations of the human heart, and the exhibits presented by Mother Nature, the Judge declared:

“… after listening to the rosy-cheeked laughter of the December winds laden with the glittering snow, each flake a pattern of beauty and harmony, we conclude and find that Santa Claus is a reality. We find further that without him life would be dull and cheerless, and that with him the heart is merry and the spirit gay, as life should be….” 

Q26: So you quoted that from memory, but there must be dissenting opinions!?

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A26: Yes we learn it by heart at Santa Law School. Who could disagree with that judgement?  By the way, before answering, and the last thing I want to do is to influence your reporting in any way: you are aware that I am Santa’s

 Appointed Representative Solicitor Extraodinaire

I enjoy his full authority in this and all jurisdictions. Accordingly he relies on me to make preliminary recommendations on everyone, boys and girls, and grown ups  viz a viz their “Yuletide Expectation Present Status” (YEPS). This is colloquially known as the Good List / Naughty List.

Father Christmas knows if you have been bad or good!

Ho Ho Ho! Merry Christmas to One and ALL!nicholas-206279_1280

  • Under Licence
  • patents pending

(As revealed in conversation)

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Shareholder & Boardroom Disputes: Tips (3)

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In the third in a series of articles, read my piece in the link below on:

  • Boardroom Disputes
  • Shareholder Agreements
  • Unfair Prejudice Petitions
  • Derivative Claims
  • Winding up on “Just & Equitable” Grounds

jpsykes23@outlook.com

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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How (not) to cut red tape

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Wholesale changes to UK Companies legislation

Despite its cryptic title,

The Small Business, Enterprise, and Employment Act 2015

(SBEEA 2015), impacts extensively on all Companies: large, small and everywhere in between. Directors, company secretaries, shareholders (trustees and beneficial) and all stakeholders should be aware. The Act was brought in to effect on 26 May 2015 –  the timetable for change is robust.

The intention as ever is to make the UK more efficient and hospitable to business and to cut red tape. It seeks to achieve this laudable aim by amending, and adding extensively to the Companies Act 2006, (CA 2006) which at some 1300 sections, 16 schedules and seemingly endless guidance and over 70 statutory instruments was itself already reputedly the longest ever Act of Parliament, introduced under the then Government’s ‘Think Small First’ mantra.

 SBEEA 2015 joins the Deregulation Act 2015, squeezed through in the last weeks of Parliament, in pursuit of the Government’s Red Tape Agenda, so that the further ‘simplified’ company law regime is now governed amongst other provisions by:

  • The Companies Act 1985
  • The Companies Act 1989
  • The Companies (Audit), Investigations and Community Enterprise Act 2004
  • The Companies Act 2006
  • (SBEEA 2015)

That legislation only deals with companies that are going concerns. Regarding insolvent companies, applicable legislation includes:

  • The Insolvency Act 1986
  • The Company Directors Disqualification Act 1986
  • The two Insolvency Acts of 1994
  • The Insolvency Act 2000
  • The Enterprise Act 2002
  • Deregulation Act 2015
  • Extensive delegated legislation, regulations and statutory instruments

A company registered before the CA 2006 applied is an ‘existing company’. A ‘company’ is one that is registered under that Act.   There remains therefore two parallel universes for directors, shareholders, other stakeholders and practitioners to grapple with. Describing the further legislation as ‘simplification’ is paradoxical.

SBEEA could helpfully have been named “The Companies Act (Amendment) Act 2015. It introduces a series of major changes. Here we examine some of the key changes and the implications for businesses.

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  1. Business-to-Business contracts

The transparency of payment practices will be increased through a new reporting obligation on the UK’s largest companies. Notwithstanding the Act’s title, directed at “Small Business”, this provision exclusively affects “large” companies (including large LLPs) as defined by CA 2006; s.3 of SBEEA introduces a new power for the Secretary of State to require companies to publish information about their “payment practices and policies” regarding business-to-business contracts. These will apply to contracts for goods, services or intangible assets and may include information about standard and non-standard payment terms, processing and payment of invoices, applicable codes of conduct or standards, disputes relating to payment of invoices and about payments owed or paid by the company due to late payment of invoices, whether in respect of interest or otherwise.

The objective is to ameliorate the imbalance of power between large and small companies in negotiating fairer deals. Abuse of power will also be highlighted by large companies.

 

  1. Bearer Shares Abolished

Already effective 26 May 2015: Section 84 of SBEEA inserts a new section 779(4) of the CA 2006, prohibiting the creation of bearer shares, and irrespective of whether the company’s articles permit this. Schedule 4 of the Act sets out transitional arrangements for the mandatory cancellation or conversion of existing bearer shares.

  1. Changes to filing requirements and registers

Due to come into force in April 2016: SBEEA removes the requirement to file an Annual Return with Companies House. Instead, a company must provide Companies House with a confirmation statement that it has provided all of the information it was required to provide during the period covered by the statement. his statement must be provided every 12 months, within 14 days of expiry of the previous 12 month period. For new companies, the first statement should be provided 12 months from the date of incorporation of the company.

The Act also introduces the option for companies to elect to keep information on a central public register, rather than keeping and maintaining their own separate registers (such as the Register of Directors, Register of Members etc.) The aim of this is to reduce the administrative burden on companies by only requiring one register to be updated and maintained rather than several.

  1. New obligation to register persons with ‘significant control’ (“PSC”): This requirement is due to come into force from 1 January 2016

Details of all entities or persons with ‘significant control’ over a company must be identified and kept on a public register. It is vital to carefully consider how the rules will impact on your company, and it is important to note that PSCs may not appear on the register of members as, depending also on changing circumstances, they may include creditors, funders, commercial counterparties and investors etc.

A company will need to review various aspects when deciding its PSCs:

  • existing registers;
  • articles of association;
  • shareholders’ agreements;
  • financing agreements; and
  • other commercial agreements

Specified conditions of significant control:

a. shares – more than 25% shareholding (directly or indirectly)

b. voting rights– more than 25% of voting rights (directly or indirectly

c. board control  – to appoint or remove a majority of the board of directors (directly or indirectly)

d. significant influence or control over the company – (the meaning of this is currently unclear and is to be set out in statutory guidance)

e. trusts and partnerships – influence or control being exercised over a trust or partnership (T or P) where T or P itself satisfies any one of condition 1-4 in relation to a company

Details to be included for individuals include:

  • Name
  • Address
  • Date of birth
  • Nationality
  • Date of registration of the interest, and
  • Nature of the interest

Small Business, Enterprise and Employment Act 2015

Although details are awaited, this is likely to prevent someone holding the beneficial interest in shares ‘hiding behind’ a nominee shareholder.

  1. Ban on Corporate directors

Effective 26 May 2015; s. 87 of the Act inserts a new section 156A in CA 2006, requiring all directors to be natural persons and prohibits the appointment of corporate directors.

Any appointment made in contravention of this section will be void and it will be a criminal offence to breach this section. Until now, the rule has been that at least one Director of a Company has to be a human being, but the others or some of them can be Companies.

A new section 156B gives the Secretary of State the power to make regulations setting out the exceptions to the general requirement that directors must be individuals, but the details are yet to be revealed. If this power is exercised it must include the compliance process, including registration requirements, and must require that the company has least one individual who is a director.

The transition period for companies with corporate directors is dealt with in a new section 156C of CA 2006. This provides that after one year of section 156A coming into force, any remaining corporate directors will cease to be directors (subject to any exceptions set out in regulations made under section 156B).

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  1. Shadow directors

Effective 26 May 2015: Section 89 of the Act amends section 170(5) of CA 2006 to provide that the general duties of directors (as set out in sections 170 to 177 of the CA 2006) apply to shadow directors where and to the extent they are capable of applying. The Secretary of State also has the power to make regulations concerning the application of general duties of directors to shadow directors (section 89 (2)).

Section 90 of the Act also amends the definition of shadow director in section 251 of the CA 2006. Section 251(2) currently provides that a person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity. Section 90 expands this provision to make it clear that directions or instructions given in exercise of a function conferred by or under legislation is not sufficient to meet the definition, nor is any advice or guidance issued by a Minister of the Crown.

Similar amendments are made in respect of the definitions of shadow directors contained in the Insolvency Act 1986 and in the Company Directors Disqualification Act 1986.

  1. Disqualification of directors

A new approach for liquidators, administrators and administrative receivers will be introduced on reporting misconduct by directors. There will also be two new grounds for disqualifying a director in the UK:

  • where they have been convicted of a company-related offence overseas; and
  • where they have instructed a disqualified director.

The range of matters a court must consider when disqualifying a director is expanded to include:

a. the nature and extent of harm the misconduct has had; and

b. the director’s track record in running failed companies.

The Secretary of State can seek compensation from a disqualified director where misconduct resulting in their disqualification has caused identifiable loss to creditors.

The time limit to apply to court for disqualification of an unfit director of an insolvent company is increased to 3 years from the date the company becomes insolvent (previously 2 years).

  1. Registration of directors

The Act removes the requirement to provide Companies House with a ‘consent to act’ from the person appointed as director (either in the form of a signature or, where the appointment is made online, the provision of certain personal identification information). This is replaced by an obligation on the company to provide a statement that the appointee has consented to act. This applies to both appointments on incorporation and further appointments after incorporation.

There is also a new application process to remove names from the register of directors where consent was not provided.

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  1. Access to finance

The Act includes a range of measures that are intended to improve the ability of small and medium businesses (SMEs) to access finance and seek loans away from their banks. For example, banks will, if requested, pass on details of SMEs they turn down for a loan to online platforms to match them with alternative finance options.

10. Red tape

Regulations affecting business will be reviewed frequently to ensure they remain effective. A target for the removal of regulatory burdens will be published in each Parliament.

An independent ‘Small Business Appeals Champion’ will be appointed for non-economic regulators. This role is designed to ensure  theat business needs are taken into account through a straightforward complaints and appeals process.

11. Employment

Zero hours contracts will not have exclusivity clauses stopping individuals from working for another employer. However, it has been suggested that this is relatively cosmetic, as no machinery for dealing with offenders or penalty is introduced.

12. Conclusion

The main corporate aspects of the Act are aimed at:

  • Increasing transparency of who controls UK companies
  • Deterring and sanctioning those who hide their interests
  • Simplifying company filing requirements to reduce duplication and improve flexibility in companies’ dealings with the Registrar
  • Amending the directors’ disqualification regime to strengthen the rules that prevent an individual from acting as a director where that individual has committed misconduct

Whilst these objectives are laudable, it appears that numerous provisions do not have essential specific details of the rules or exceptions yet decided, often where there is a criminal sanction for any breach.

The cost to business of familiarisation, implementation and compliance with these provisions, including where they are incomplete or based on shifting sands, is likely to have been substantially underestimated. Estimating direct savings is notoriously difficult and the costs of familiarisation are frequently higher than anticipated.

Further analysis of the Act and its application to Directors will follow. Meantime, manufacturers of red tape are unlikely to appear on the endangered species list any time soon.

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The Battle of the Forms: Part 2

  • Tips
  • 15 Practical Steps

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In Part 1 “Terms Agreed – but whose terms?” http://wp.me/p4DFLr-8x we examined the perennial problem of the steps necessary to include your companies’ standard contractual terms and conditions (T&Cs) in to a contract.

This was the issue recently covered by the Technology and Construction Court in the case of Transformers & Rectifiers Ltd v Needs Ltd. In that case, neither party to the contract had done sufficient to ensure that their T&Cs were drawn to the attention of the counter party. The court applied the law deciding that in a sale of goods contract where neither the seller’s nor the buyer’s terms and conditions have been incorporated, the relationship is governed by the implied terms of the Sale of Goods Act 1979. Accordingly, the seller of the goods will not be able to exclude or limit its liability for defective goods, which a seller can normally restrict by contract subject to the reasonableness test in the Unfair Contract Terms Act 1977.

In the preliminary discussions between parties, a “battle of the forms” can arise when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own terms. A typical example is where, e.g., a Buyer offers to buy goods from the Supplier on its (the Buyer’s) standard terms and the Supplier purports to accept the offer on the basis of its own standard terms. In this scenario, the battle is often won by the party who fired the “last shot”, i.e., the last party to put forward T&Cs that were not explicitly rejected by the recipient.

A business should ensure that its terms are incorporated into its contracts. To achieve this, terms and conditions should be provided with and/or referred to in pre contractual documentation, such as quotations and orders. A business that relies upon printing their terms on delivery notes or invoices (post contractual documentation) runs the risk that it will not be able to rely upon those terms if there’s a dispute.

Below are a series of practical steps that could be considered to gain the advantage, the key theme being that parties must be clear about the terms on which they are doing business. Although these steps won’t guarantee your company’s standard T&Cs prevail, they may give you an advantage. There is no single overriding rule that trumps all in battle of the forms cases, but the following should help:

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Negotiating Tips:

“Prevail clauses”

Consider including a “prevail clause” in your T&Cs, stating e.g. that your standard T&Cs are incorporated in to the contract to the exclusion of any other parties’ T&Cs, and that your standard terms prevail. This won’t necessarily succeed alone, e.g. where the other side makes a counter-offer, your standard T&Cs including the prevail clause will be by-passed and won’t form part of the contract. This is because your T&Cs will have effectively been rejected by your counterparty and replaced by their counter-offer.

“Prevail clauses” are still used, including as a means to pressurize the other side in to taking the line of least resistance, and accepting the standard terms as a fait accompli. However, a belt and braces approach is safer. Where the other side aims to rely on such a clause it is perfectly reasonable to reply by reiterating that your T&Cs apply.

  • Written records should be kept of all contract negotiations. Ideally, minutes of meetings should be signed by all present.
  • Emphasize that no contract can be agreed until any disputed terms are ratified. Stipulate which terms are outstanding.
  • A contract can be concluded verbally. Ensure that any meetings or telephone calls are confirmed as being conducted on the basis of your company’s T&Cs, or “subject to contract”; to prevent any agreement before a written contract is signed.

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Practical Steps

  1. Always send the other side a clear and legible copy of your T&Cs together with your order/acknowledgment / supply forms and state clearly on the face of your order/acknowledgment that you rely on those T&Cs.
  2. When writing to the other side to agree an order, include a copy of your T&Cs with the letter or email. Stipulate that you are offering to contract on those terms.
  3. Don’t take for granted that your T&Cs apply. Although you may have been doing business with the other side for several years, don’t assume that a court will accept it’s on notice of your standard T&Cs. Whenever you enter into a contract, ensure that your T&Cs are included.
  4. If you send a purchase order/invoice electronically, make sure you don’t omit the back page setting out your standard T&Cs. Ideally, attach a copy of your T&Cs as a separate document.
  5. Actively bring the counterparty’s attention to your standard T&Cs.
  6. Alert the other party on the front page of your pro forma documents such as purchase order/invoices, email or letter footers, to your standard T&Cs and where they are found, e.g. on your website, and / or as attached.
  7. Clarify in writing that your T&Cs are the only terms upon which you are prepared to do business.
  8. Avoid a battle of the forms. If the other side responds with their T&Cs, clarify by return firstly that you don’t accept their terms and secondly, your T&Cs represent the only contractual provisions on which you will proceed.Respond to / reject counter-offers.
  9. If the counterparty replies to your offer ambiguously or doesn’t accept your offer, the court may later treat their communication as a counter-offer, which if it is treated as the last shot, could prevail.
  10. Contracts can be concluded by performance. Avoid premature acceptance of the other side’s T&Cs by conduct. E.g., terms of a contract can be finalized by one side unintentionally accepting the terms of a draft agreement before formal approval or signature. This could be by supplying or paying for the goods or services, accepting delivery of goods, or acting otherwise in line with the terms of the counterparty’s draft contract.
  11. Be aware that if one side proceeds without a clear written agreement and performs the contract, they risk a deemed acceptance of the other party’s terms.
  12. Fire the last shot in the “battle”! The other side’s T&Cs could prevail if they were the last shot, or where they were sent to you and, they weren’t rejected, answered with a counter offer, or where the contract was performed without more.
  13. A tactic that worked in B.R.S v Arthur V. Crutchley Ltd was where the supplier delivered whisky to the buyer’s warehouse. The delivery note set out the supplier’s T&Cs. However, the buyer’s warehouseman stamped it  “Received under [the buyer’s] conditions”.      The Court’s decision was that the warehouseman’s rubber stamp constituted the last shot of the battle. The buyer’s T&Cs prevailed. The stamp represented a counter-offer which the supplier was taken to have accepted by its performance in handing over the goods.
  14. The safest policy is to identify and resolve any dispute about T&Cs directly in negotiations with the other side. However, there may be the temptation not to jeopardies a prospective deal or future custom by risking controverersy. This involves what may be a greater risk down the line of the T&Cs being unclear, with an argument as to whose apply, or whether neither applies.
  15. Specifically negotiating the terms avoids the uncertainty of putting this off. If the seller’s T&Cs are accepted, then agreed variations can be set out in a side letter. On the up-side, when agreement is reached in this way, everyone knows where they stand legally. The down-side is that negotiating the contractual terms may be costly and time consuming. 

A well drafted set of terms and conditions will take into account the manner in which a business operates, and what it hopes to achieve. Your legal adviser should take the time to understand your business to ensure that your contracts achieve what you want them to.  

Advice at the beginning can avoid pitfalls down the line, which could be expensive and involve court proceedings.

 Cases:

Transformers and Rectifiers Ltd v Needs Ltd [2015] EWHC 269 (TCC).

British Road Services Limited v Arthur Crutchley & Co Limited ([1968] 1 All ER 811).

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What price Justice? Magna Carta invoked after 8 centuries

Court fees rocket by up to 622% (e.g. from £1,315 to £9,500)

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UK Government celebrates this year’s 800th anniversary of Magna Carta by

  • increasing Court fees at a stroke by up to 622%
  • reducing access to Justice for all but a privileged few and big business
  • damaging our legal system
  • for commercial cases, making England a profoundly uncompetitive place to resolve foreign disputes, to the delight of our competitors.

The Ministry of Justice is imposing plans to raise revenue from the courts system by introducing a new structure for fees for bringing money claims over the value of £10,000. The announcement can be found here, with the fee hike starting on 9 March 2015 (subject to approval by the House of Lords this week):  

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/396887/cm8971-enhance-fees-response.pdf 

Under the new scheme a levy of 5% is charged to issue a money claim of more than £10,000.

The fee increases for money claims mean:

  1. The fee for claims from £1 to £9,999 will remain unchanged.
  2. The fee for claims from £10,000 to £199,999 will be 5% of the claim.
  3. The fee for claims £200,000 and above will be fixed at £10,000.
  4. There will be a 10% discount on fees for claims from £10,000 – £99,999 filed electronically.
  5. A fee to issue a £190,000 legal claim is currently £1,315. From 9 March 2015 this fee is now £9,500, which represents a rise of over 622%.*

The changes are opposed by a wide array of consumers groups, business, lawyers and judges who condemn the changes as unconstitutional, a threat to access to justice, and ill conceived. An application for Judicial Review to challenge the new fees is being prepared.

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The Civil Justice Council

Representing Judges, says the effects of implementing such major increases could be dramatic in terms of:

  • acting as a barrier to entry to the justice system through pricing many court users out of the courts;
  • reducing access to justice for those litigants for whom court fees form a significant cost element of the overall process;
  • making alternatives to the civil process a far more attractive proposition, undermining the very intention behind the court fee increase and so risking significantly reduced fee income, critical to funding the courts and the justice system;   
  • having a disproportionately adverse effect on some groups e.g. small and medium enterprises, low income individuals; and
  • undermining equality before the law. 

The Law Society has collected case studies from solicitors showing what impact the increased fees would have on ordinary people seeking justice. 

  • Claimants suffering from serious personal injury or clinical negligence will be deterred from claiming compensation, with catastrophic results for them individually, society at large, and the public finances.
  • One case study found that a young girl with brain damage due to a failure by doctors to diagnose meningitis as a toddler will now require £10,000 to mount any fight for a secure financial settlement. That is even before the work involved and cost of obtaining the medical records and obtaining reports from medical expert witnesses
  • The development of case law will b e impeded.
  • Civil Justice isn’t just for those people who bring cases to court, it effects everybody in terms of the Rule of Law – where wrong doers are held to account. This is a Public Good, which is being undermined.
  • Some SMEs are forced to begin legal proceedings when buyers delay payment, as these actions can have a devastating impact on the cash flow of the business.
  • Similarly, a pensioner with limited financial means could be forced to begin legal proceedings against a financial adviser who gave them bad advice, leaving them with little to no funds in their retirement.
  • One concerned a pensioner with a claim against a financial adviser for the loss of his entire pension fund, for which the fee for applying to begin court proceedings will increase from £910 to £5,000
  • Few people can afford the extra £8,000 court fee  they would need to make a £190,000 claim, particularly if they are elderly or have been out of thoure workforce for some time due to personal injury. Such fee increases can actually be prohibitive, and this will deter people from starting claims altogether, thereby denying them access to justice.

http://www.lawsociety.org.uk/policy-campaigns/parliamentary-briefings/documents/Court-fees-joint-parliamentary-briefing/

I am also concerned about the evidence base that the MoJ used to come to its decision to increase court fees. The department claims that 90% of money claims will not be affected, but it is clear to me that the potential impact is much more serious than anticipated.

 A further debate will be held in the Lords this week, and subject to clearing that hurdle the fees will come into force on 9 March.

Law Society president Andrew Caplen said:

‘The government appears to be on a mission to turn the courts into a profit centre, amounting to a flat tax on those seeking justice. People whose lives have been turned upside down by life-changing injuries suffered through no fault of their own may no longer be able to afford to access the courts to seek compensation to fund their care. 

‘As well as affecting those who have been injured, the increases may leave small and medium-sized businesses saddled with debts they are due but unable to afford to recover.’

The fees are designed to raise £120m a year to help the government cover the cost of funding the court service in England and Wales.

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Magna Carta

Objectors to the fee increase are applying for Judicial Review of the decision,  contending that it is unconstitutional. Magna Carta, or Great Charter, was an attempt by England’s Barons to limit the Crown’s power. It was signed by King John on 15 June 1215 at Runnymede. Many of the clauses dealt with specific issues and grievances raised by the Barons. However, Magna Carta described vital legal principles, including that no ‘freeman’ could be punished except by lawful judgment of his peers, or by the law of the land.

Clause 29 of Magna Carta states:

‘We will sell to no man, we will not deny or defer to any man either Justice or Right.’ 

Lord Denning described Magna Carta as

the greatest constitutional document of all times – the foundation of the freedom of the individual against the arbitrary authority of the despot.

In this anniversary year, Magna Carta is relevant in the 21st century.  In a 2009 committee debate, Tom Brake, Liberal Democrat MP for Carshalton and Wallington, raised this argument in relation to a number of statutory instruments which introduced a change from partial to full recovery of court costs in civil proceedings:

We are now proposing to sell justice to people and make a profit out of it, because the objective behind full cost recovery is to charge so much in cases where there is no fee remission that we make enough profit to pay for fee remission

The rule of law is a public good, to the extent that it affects those people who do not go to court because, hopefully, they follow the rule of law, as well as those who do go to court. If people feel that justice in this country is only available to people on benefits and those with lots of money, we are cutting out a lot of people from the rule of law.

A Tax On Justice

Making the swingeing changes proposed amounts to selling justice, contrary to Clause 29 of Magna Carta.

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Furthermore, the proposals for enhanced fee charging in commercial proceedings will substantially undermine England and particularly London’s attractiveness as a centre for international litigation. Research conducted for the Ministry of Justice by the Centre for Commercial Law Studies at Queen Mary shows that the proposed fees would make court fees in London the most expensive in the world. The only jurisdiction that charges issue fees comparable to those proposed is the Dubai International Financial Centre.

For example in the courts of New York, (London’s strongest competitor), it costs as little as $400 to issue a claim. Foreign attorneys will not be slow to seize on any significant disparity in court fees to the cost of the United Kingdom economy, as the UK Government negates Magna Carta.

Whilst there are other alternatives to a state funded court system for resolving legal disputes, (such as Alternative Dispute Resolution, the pilot scheme for  adjudication of professional negligence claims, and the newly proposed online “low value” [up to £25,000] ebay type civil dispute court) these are either substantially dependent for their effectiveness  on the traditional civil court being readily accessible as a fall back, or a pale shadow of what we have assumed to be due process and natural justice providing remedies to right wrongs.

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