Brexit: Legal “to do” List for your Business

Contract and Commercial Litigation Priorities

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Following the English High Court’s ruling on 3 November – Read my piece in the link below commenting on the due diligence and risk analysis steps businesses need to be taking now

http://bit.ly/2fpcBcb

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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.

paul.sykes@luptonfawcett.law

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?

 

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INHERITANCE DISPUTES: NO WILL? NEW INTESTACY RULES APPLY

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The Inheritance and Trustees’ Powers Act 2014

For anyone who dies without a Will after 1st October 2014, new rules apply. Up to two thirds of adults don’t have a Will, and thousands of people die “intestate” every year. The Inheritance and Trustees’ Powers Act 2014 (“ITPA 2014”) follows a six year investigation by the Law Commission.

Many people don’t get round to making a Will, are put off, or don’t know that key events in life like getting married or a civil partnership can revoke an existing Will. The intestacy rules then apply. These fix the distribution of a deceased’s estate once debts and liabilities, funeral expenses and costs of the administration of the estate have been paid

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KEY CHANGES

(References to “spouses” and “marriage” include same-sex spouses and civil partners respectively).

a/ If you are survived by a spouse and children

The spouse takes all the assets in joint names, all your personal possessions, the first £250,000 outright, and half the remainder. The other half of the remainder goes to the children equally at 18.

Previously, a surviving spouse would receive a statutory legacy of the first £250,000; any remaining amount would be split in two. Half went to the surviving spouse as a “life interest” reverting to the children on the surviving spouse’s death. The other half went to the surviving children immediately.

b/ If you are survived by a spouse but no children or grandchildren

The spouse takes the whole estate, even if your parents or brothers and sisters survive you. Extended family will no longer have an interest. Previously, the spouse had to share the remaining estate (after payment of a £450,000 legacy to the spouse) with the deceased’s parents (if living) or full siblings (and their descendants). Under ITPA 2014 the spouse receives the whole of the estate. Most would regard this as fairer to the spouse and usually what the deceased would have wished.

c/ If you don’t have a spouse but you do have children

The remaining rules are unchanged, so the children share the estate equally between them.

d/ If you don’t have a spouse and you don’t have children

Remaining family members inherit the whole estate (equally between them if there is more than one, e.g. you have two surviving parents) in the following order:

  1. parents
  2. brothers and sisters of the whole blood and the offspring of any predeceased
  3. brothers and sisters of the half blood and the offspring of any predeceased
  4. grandparents
  5. aunts and uncles of the whole blood and the offspring of any predeceased
  6. aunts and uncles of the half blood and the offspring of any predeceased and,
  7. finally, if there are none of the above then the estate goes to the Crown.

For someone whose parents were not married, if both names are on the birth certificate, then they are both parents for the purposes of inheritance.

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WINNERS & LOSERS

  • Children of wealthy families where a parent dies intestate will receive less under the new rules than before. Spouses are the main beneficiaries of an intestate’s estate under the new Act.
  • Where there are no children, other relatives of the intestate individual (like siblings, parents and cousins), will no longer automatically inherit part of their estate.

FAMILY PROVISION

Certain family members and dependents can apply to the court for a share (or larger share) of a deceased’s estate under the Inheritance (Provision for Family and Dependants) Act 1975 (“IPFD 1975”) where they can prove there is no “reasonable financial provision”.

Although making a Family Provision claim can make a difference, this depends on litigation, which can be expensive. It is preferable to consider any potential claims when making a Will because decisions taken then can stop such disputes arising once it’s too late.

The 2014 Act does make a number of amendments to IPFD 1975 permitting close family and dependants of the deceased to make a claim for provision from the estate where they have not been provided for.

Classes of claimant will be extended to include any person who was treated by the deceased as a child of the family, not only in relation to a marriage or civil partnership, but in relation to any family in which the deceased had a “parental role”.

Changes also apply where someone is treated as being “maintained” by the deceased. Previously, a person would be treated as being maintained by the deceased if the deceased was, otherwise than for full valuable consideration, making a substantial contribution towards that person’s reasonable needs. Now, the words

“otherwise than for full valuable consideration”

are deleted. This prevents a claim failing where there was some give and take economically in the household.

WHAT IS NOT COVERED

  • The intestacy rules don’t recognise a deceased person’s step-children, only their natural, adopted or illegitimate children.
  • Whilst the rules give some protection to married couples and civil partners, both partners or co-habitees should have a Will to ensure that their wishes are carried out.
  • Entitlement under the Intestacy Rules only applies to couples who are married or in a civil partnership. Other couples who are co-habiting have no protection. Anyone who is co-habiting with a partner who wants to provide for them on death must make a Will. If not, your estate passes to your relatives or, failing that, to the Crown – unless your partner can make a claim for financial provision to be made on the ground that they were financially dependent on you.

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MAKING A WILL OVERRIDES THE INTESTACY RULES

  1. People should still always make a Will rather than rely on the Intestacy Rules. These are only a fall back where there is no valid Will, and are inevitably rough and ready, often very different to what the deceased may have wanted or assumed would happen.
  2. Making a Will not only ensures that your wishes are complied with, but it can also help to minimise the tax burden when you die. In addition, Administration in an Intestacy can be slower and more expensive.
  3. For unmarried and co-habitating couples, having a Will is equally, if not more important, as the rules for an unmarried surviving partner are unchanged; under the current and the revised intestacy rules, they are not automatically entitled to any of the estate.
  4. Often a Will saves surviving relatives an enormous amount of time, expense, uncertainty and possible disputes and litigation.

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Paul Sykes is a Contentious Trust and Probate Specialist registered with ACTAPS

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Arbitration: Pros & Cons

 

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Why Arbitrate?

1              The aim of this briefing is to identify the relative advantages and disadvantages of Arbitration as a means of dispute resolution. Arbitration is, justifiably, an increasingly popular method of dealing with disputes, but arbitration is not ideally suited to every situation. This note compares the main features of arbitration with litigation and ADR,  and pinpoints key issues in deciding the most appropriate dispute resolution forum.

2              Typically, the question of whether or not to arbitrate arises at two key stages:

  • When negotiating a contract. The parties may decide to include in their agreement an arbitration clause to cover disputes that arise in the future. Inevitably, the arbitration clause is one of the last terms to be agreed, and there may be a temptation to rush matters to get the deal finalised. Given the far-reaching consequences of agreeing, or failing to agree, an arbitration clause, this temptation is best resisted. It is vital that the pros and cons of arbitration are given proper consideration at the time of contracting.
  • When a dispute has arisen. The decision at this stage is, in one sense, easier because the features of the particular dispute, and its suitability for arbitration, will be clearer. However, it may be more difficult to conclude an agreement to arbitrate if one party has an interest in delaying matters, or perceives a tactical disadvantage in arbitrating.

3              If the parties do decide to enter an arbitration agreement, it is important that it is carefully drafted; further advise as necessary should be taken on individual circumstances.

Arbitration compared with litigation

4              Arbitration can have several advantages over litigation. However, it is important that each perceived advantage is examined carefully in each particular case to assess its weight.

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Enforcement

5              Ease of enforcement is probably the most important factor in favour of arbitration. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) provides an extensive enforcement regime for international arbitration awards. There is no real equivalent for enforcement of court judgments.

6              If you opt for arbitration principally because of the advantageous enforcement regime, it is important to ensure that you draft the agreement with this in mind. This will usually involve ensuring that the arbitration agreement is in a form that will be recognised as valid in both the seat of the arbitration and the country of enforcement.

Certainty

7              Like a choice of court clause, a well-drafted arbitration agreement introduces a welcome degree of certainty with regard to the forum for resolving disputes. This is particularly attractive where there is a cross-border element to the dispute: the need to consider, or take advice on, the complex rules of private international law governing jurisdiction can be entirely sidestepped.

8              In litigation, disputes over jurisdiction can be expensive and (once appeals are factored in) extremely time-consuming. By contrast, a carefully drafted arbitration agreement should minimise the chances of jurisdictional disputes. Furthermore, if the parties agree to institutional arbitration, or agree that a certain set of rules will apply to their arbitration, this will also ensure a degree of procedural certainty and predictability (By simply referring to the applicable arbitration rules, the parties can inform themselves of what steps they need to take, and when.

9              Of course, disputes relating to jurisdiction and procedure can and do arise in arbitration just as in litigation. But the chances of such disputes can be eliminated or minimised by carefully drafting the arbitration agreement.

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Flexibility

10           A significant advantage of arbitration is the ability to tailor procedures to the needs of a particular dispute. There is great scope for the adoption of innovative, effective and efficient procedures. For example:

  • The parties are generally free to agree a suitable procedure, and are able to influence the procedure much more than is possible in court proceedings.
  • Similarly, the tribunal will give directions that are fine-tuned to the particular dispute so as to ensure its speedy and efficient determination.

Expertise

11           The parties in an arbitration can choose their tribunal. For example, where a dispute raises technical or scientific issues of fact, the parties can choose a tribunal with the relevant technical expertise. Similarly, where a dispute turns on a point of law, they can appoint a lawyer or lawyers. Choosing wisely can save time and money.

Privacy

12           Litigation is rarely private. For example, in England, court trials are usually open to members of the public. The mere fact that a party is involved in English court litigation can be ascertained by a search of publicly available information, and most judgments are publicly available. More importantly, non-parties are permitted to obtain copies of any statements of case, judgments or orders in English litigation (unless the court makes a special order to the contrary – see CPR 5.4C).

13           The relative privacy of arbitration is an attractive feature to many commercial parties. Arbitration hearings are usually held in private, and the fact that a party is involved in arbitral proceedings is not usually in the public domain. Furthermore, English law has also recognised an implied duty of confidentiality which prevents the disclosure to third parties of most documents produced or disclosed in an arbitration, including the statements of case and award. This is in stark contrast to court proceedings.

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14           Note, however, that the precise scope of the duty of confidentiality, and the exceptions to it, may be a matter of argument. If privacy and confidentiality is a particularly important factor consider including an express confidentiality clause in your arbitration agreement.

Neutrality

15           Another important feature of arbitration is the ability of the parties to refer their disputes to a neutral forum. This factor is likely to be particularly important to commercial parties, wary of referring disputes to the “home” courts of their contracting partner. The consensual nature of arbitration means that the parties can ensure that the composition of the tribunal, as well as the seat of the arbitration and the location of any hearing, are neutral. By their choice of the arbitral seat, the parties can also ensure that their arbitration is subject to modern, effective and supportive arbitration law.

Cost

16           Although arbitration is often perceived as being cheaper than litigation, this is not always the case. The parties must pay the tribunal plus any administrative costs (for example, room hire), which may represent a relatively substantial outlay when compared with the cost of court proceedings. The parties must also undertake the practical arrangements and organisation for any hearing.

17           To a large extent, the relative cost of arbitral proceedings depends upon the attitudes of the parties and the tribunal. An experienced tribunal and co-operative parties will often be able to devise procedures that minimise costs. By contrast, where arbitration is conducted as if it were court litigation, or where the tribunal unthinkingly applies the procedure set out in institutional rules without any attempt to modify them, costs can escalate. Do not assume that arbitration necessarily equals cheaper.

 

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Delays

18           Again, this perceived advantage of arbitration is one that needs to be assessed carefully. It is true that, compared with lead times to trial in court, arbitration often represents a speedy method of dispute resolution. However, if the parties opt for a three-man tribunal consisting of three busy and popular arbitrators, there may be a substantial delay before any hearing can be accommodated. Also, because arbitrators’ powers of coercion are much more limited than the courts’, there is greater opportunity for deliberate delays and breaches of procedural deadlines.

19           This works the other way, too: if your chosen strategy is to delay the “day of judgment” for as long as possible, then arbitration may be your best option. It is probably fair to say that institutional arbitration offers the greatest safeguards against delays.

Finality

20           A court judgment will very frequently be subject to appeal(s). By contrast, the opportunities for appealing or otherwise challenging an arbitration award are very much more limited. This is frequently perceived as an advantage to the parties – though, of course, this is questionable if the arbitrator determines a dispute wrongly.

Predictability

21           Although national arbitration laws vary to some extent, there is a significant degree of harmonisation. Many countries have adopted the UNCITRAL Model Law; others (like England, Wales and Northern Ireland) have arbitration laws based upon its provisions. There is, therefore, a degree of certainty and predictability with regard to arbitration law that may not apply to the procedural law of national courts.

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When is litigation preferable to arbitration?

22           Notwithstanding the factors identified above, there are certain situations in which litigation will usually be preferable to arbitration. The following analysis focuses primarily on litigation in the English courts: the position may be different if you are seeking to compare arbitration with litigation in a foreign court, in which case advice from a competent foreign lawyer is advisable).

Multiparty disputes

23           The right to arbitrate derives from the arbitration agreement. There is, therefore, no power to join third parties unless all the parties, and the third party, agree. Although joinder may well result in overall savings in costs, parties will often refuse to agree to it for obvious tactical reasons. This means that in multiparty situations, arbitration can be a cumbersome and inconvenient procedure, which carries a risk of inconsistent findings and which may prejudice the chances of settlement.

24           For similar reasons, arbitration cannot easily accommodate class action litigation. ( Note, however, that class arbitration is recognised in the US (though subject to certain restrictions).

Recalcitrant parties

25           Arbitral tribunals’ coercive powers are much more limited than that of a court. Although national courts can sometimes intervene to enforce arbitrators’ procedural orders, delays are still a more distinct possibility in arbitration than in litigation. Some institutions have taken steps to deal with this, but deliberate delaying tactics may be more difficult to combat in arbitration than in litigation.

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Summary determination

26           In principle an arbitral tribunal can determine claims and defences summarily. However, in practice they may be less willing than a court to do so. For example, English courts tend to be robust in disposing of meritless claims or defences on a summary basis. An arbitral tribunal is less likely to adopt such an approach. Therefore, if your claims are simple, involving only one defendant, and are indisputably due, you may prefer to issue court proceedings and apply for summary judgment.

No precedent

27           An arbitration award is for most purposes confidential to the parties. Furthermore, although persuasive, it does not give rise to any binding precedent or res judicata vis a vis other parties. Where, therefore, a final and generally binding ruling on the meaning of a standard form contract is required, litigation in court will be preferable.

Irrelevant evidence

28           The tribunal or parties may decide whether or not to apply the strict rules of evidence. If they decide not to, there is a greater chance of the introduction of prejudicial or irrelevant material. However, this is not usually a problem in practice.

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Arbitration compared with ADR

29           The term “ADR” encompasses so many and varied procedures that it is difficult to generalise about its relative advantages and disadvantages. For present purposes, the following general points may be stated.

 

30           ADR (in particular mediation) enables the parties to reach solutions that are not based on a “win/lose” paradigm, and that promote continuing relationships. As such, ADR may save time and costs by cutting through the legal or technical rights and wrongs, and focusing upon the solution. The flexibility and goal-oriented nature of ADR will be attractive to many parties.

31           However, unless the parties reach a settlement, ADR will not give rise to any binding judgment or award. Parties may withdraw from ADR before reaching any settlement, or the ADR may conclude without any settlement being reached, giving rise in such cases to wasted costs. Furthermore, and by contrast with arbitration, there is at present no statutory regime in support of ADR. Parties who are not comfortable with this relative lack of structure may prefer to arbitrate or litigate, or possibly to adopt two-tiered or hybrid procedures.