We have identified a number of issues that business owners may find surprising. To demystify some default company law rules we have created a series of videos.
All limited companies are subject to rules, including the Companies Act and their own articles of association. Business owners are often unaware of the effect of those rules. In many cases, these can be varied to suit your business and personal circumstances. Our video series explores some of the key issues. If you would like help to understand your position, and the changes you could make, please contact us.
We work with families and businesses to get their affairs in good order. We review ownership and management considerations now and for the future. We work with a variety of different business entities but most commonly, we are advising companies with a share capital and there can be some surprising things which arise out of our discussions with clients about their shareholdings.
What can be overlooked is the fact that we are not starting with a blank sheet of paper. The Companies Act imposes many default rules, as will the company’s own regulations. We have considerable flexibility to amend the position to reflect the needs and requirements of business owners, but before we can move on with future planning, we need to confirm the position as it is now.
What are your share rights?
A share in a limited company is a bundle of different rights. There are three main features; voting rights, income rights and capital rights. The default position is that issued shares will have equivalent entitlements pro rata to the number of shares held. You may wish to consider variations to those rights.
We have seen situations where clients are mistaken about the rights attaching their shares in the company. You should check you company registers and the position filed at Companies House and we can provide guidance if you have any doubts.
Can you control the ownership of shares?
It is not unusual to find that shareholders believe they have greater flexibility to deal with their shares than is the case. They also mistakenly believe they have rights over other shares in the company.
If a shareholder has gifted shares to their spouse, what is the position on divorce?
If a business owner has given some shares to an employee and that employee has just handed in their notice and we know they are going to a competitor, what are the parties’ rights?
Without specific rules in place that deal with what should happen in those circumstances the original shareholder will be left to try to negotiate a deal if they wish to buy the shares back.
It is also surprising to a lot of people that there may be rules in your company documents which mean you can't do what you would expect to do with your shares in your Will. Are you aware of rules in your company documents that may mean that other people have a right to block a certain bequest?
We can address these and other situations as part of a review of the company's articles and any shareholders’ agreement.
Who can make decisions in your company?
Business owners may be wearing two hats - as a shareholder and as a director. They don't know the rules regarding decision-making and they don't know that they are different whether they are in a shareholder meeting or a board meeting. Mostly, it does not matter, but when things go wrong, it can be very important.
Voting rules are different in shareholder meetings and at board. A majority shareholder may find themselves outvoted by their fellow directors.
The default rules can be adapted to suit your requirements. We can help by providing examples of typical operational and governance decisions. You can then consider who should have authority in respect of those and other issues relevant to our business and with the comfort of having agreed and documented your roles and responsibilities, you can put the agreement away and get on with making a success of your business.
Why are your articles of association important?
Every company has its own articles of association. It is set of rules which deals with the operation and management of the company. If for example there is a dispute or a party leaves the business, the first port of call to determine the parties’ rights and obligations will be the articles. So it is important to understand what they say.
Do your articles give the chairman a casting vote, which effectively means if there is a dispute between the directors, the chairman gets the final say? Is that what you want?
The articles may also contain rules about the transfer of shares. Knowing what they are before you get to a situation where you want to transfer your shares can obviously be really helpful, and allows you to make sure they are appropriate for you.
Having the right rules in place is important and the time to do it before it becomes an issue. If you don’t know where to find them, the articles are on the public record at Companies House. So you and indeed anyone else, can locate them. We can help you navigate your way through the rules, explain what they mean, how they affect you and the options available to you.
Why do you need a shareholders’ agreement?
All companies are required to have a public set of rules, its articles of association, which are filed at Companies House. There is no legal requirement for a separate shareholders’ agreement and it can often address similar issues to those found in the articles.
So what is the value of the shareholders’ agreement?
A shareholders’ agreement is an a personal arrangement between individual shareholders and the company at a given time. This means that you may address commercial, confidential or sensitive issues that you would not want to put in a public document. Typically this may include covenants restricting the parties activities whilst they are shareholders and
It is important to look at your articles and shareholders’ agreement together to ensure there are no inconsistencies or gaps. It also enables you to make informed decisions about what provisions sit where.
If you have a shareholders’ agreement in place the document will only ever capture a moment in time. If circumstances have changed, in particular alteration to the ownership structure, the position may well need to be updated so it is always best practice to review your arrangements on a regular basis.
