Time to Grasp the Legal Nettles – • Are you and your fellow shareholders afraid to ask yourselves the “what ifs”? • Is your key employee an agent’s phone call away from leaving the building? • Are you afraid to look at your best customer’s terms of purchase for fear of what you’ll discover? If so, it’s time to grasp the nettle and think on how to deal with these (and other) business challenges in 2017.

1. The Business Journey
The Business Journey
31 January 2017

2. The Business Journey
David Beveridge

3. The Business Journey
Grasping the Legal Nettles
31st January 2017
www.macdonaldhenderson.co.uk © 2017

4. Grasping the Nettle – 1
Shareholders

5. • At the commencement of business or any enterprise – bias to “doing”
• Carrying out the business (making, selling, distributing, providing)
• There is a understandable concentration on sales, cash flow
management, survival
• However, it’s important that, particularly where there are a number of
principals there is thought given to a shareholders agreement – this is a
road map for the owners, which answers the “what if questions”
• This becomes even more important if the venture is successful – as
there will be more value at stake, and, therefore – more chance of
disputes arising…

6. Shareholders’ agreement and
articles of association
The shareholders’ agreement and articles of association should cover, between them, the
following constitutional aspects of the company and its day-to-day operations:
• How the company is to be managed.
• The division of power between the parties and the extent of their influence over the
management of the company.
• The terms on which any party can transfer its shares to a third party.
• How to deal with disputes and deadlock between the parties.
• The circumstances in which the shareholders agreement will terminate, including the
mechanics and implications of termination.

7. Articles of Association
The articles govern the day-to-day management of the company. Common provisions
include:
• Those relating to separate classes of shares and their respective rights and provisions
relating to the variation of those rights.
• Procedures for the issue and transfer of shares (including pre-emption rights and
restrictions on transfer).
• Notice and proceedings at shareholder and director meetings (including quorum and
voting).
• Appointment, powers and duties of directors (and company secretary if one is to be
appointed).
• Provisions for the authorisation and management of directors’ conflicts of interest.
• Borrowing powers and certain other restricted matters.

8. Shareholders’ Agreement
The shareholders’ agreement may contain a number of the provisions commonly
found in the articles. Other provisions might include:
• Object and scope of the venture.
• Capitalisation and funding (initial and ongoing) or other contributions of the
parties (for example, intellectual property rights, know-how, secondment of staff,
provision of premises).
• The composition of the board and management arrangements.
• Approval of business plan.
• Distribution policy.
• Transferability of shares in different circumstances.
• Deadlock and termination (including compulsory transfer events, and drag along
and tag along rights).
• Provisions for unwinding a deadlock in a 50:50 company (for example, an escalation
procedure and/or a Russian roulette or Texas shoot out clause).
• Minority protection, if any (for example, veto rights on certain matters, also
known as “reserved matters”).
• Restrictive covenants on the company and the participants.
• Confidentiality.

9. It is quite normal for the shareholders’ agreement to act as the master or framework
agreement for the completion of the subsidiary documentation, for example:
• A management agreement.
• Contracts for the purchase of assets and/or businesses.
• Intellectual property rights contracts or licences.
• Distribution and marketing agreements.
• Services and secondment agreements.

10. Grasping the Nettle – 2
Key Employees

11. • Often attractive salary, benefits, culture is not enough, and
for small companies seeking to retain strong key
employees, equity sharing is on the agenda
• Simple share allotments will usually attract adverse tax
consequences (with the employee taxed on the value of
the shares at income tax rates)
• Options (such as EMI options) are a useful and well
recognised route of HMRC approved and tax friendly
sharing of equity
• However, beware of exiting employees…

12. Up to date and compliant employment contract must be in place
and contain protections to include:
• Duties of employee
• Option for gardening leave;
• Restrictive covenants;
• Automatic removal as a director;
• Confidentiality protections
• Protection of the company’s property (delivery/deletion) and
specifically intellectual property.

13. 1. Does the company have adequate procedures in place to relieve a departing employee of
his shares if he leaves the company?
2. If so, do the procedures properly and fairly take account of the many different
situations which could cause such an exit? For example – death, disability, retirement
(which would tend to be classed as a good leaver) or alternatively – gross misconduct, or
leaving to join a competitor firm (which most would view as a bad leaver);
3. Once the leaver’s “good”/”bad” status has been confirmed, does the company’s articles of
association make proper provision to set the value of the leaver’s shares – usually fair
value for good leavers and a suppressed or discounted value for bad leavers?
4. Finally, is it appropriate to take account of time during which the director has held the
shares – for example if the director leaves before the maturity of a buyout project, should
he be classed as an “early leaver” and be penalised, even if he isn’t a “bad leaver” as
defined? By the same token, should the passing of time lead to a reduction in the penalty
for leaving, “time off for good behaviour” as it were?

14. Grasping the Nettle – 3
Major Customer Contracts

15. • We’d expect a contract to be in place between setting out the goods
and services to be provided and the payment for the same – so far, so
obvious. But what about things like limiting liability under the contract?
• Does the contract adequately cap your liability under the contract for
losses due to breach of contract or negligence?
• Ideally this would be capped at the amount which the you expect to be
paid or expect to earn (profit) under the contract – or at the very least,
capped at the insurance levels which you have in place…
• Assuming insurance is in place and is adequate!

16. • Have you excluded liability for indirect or
consequential losses, loss of profit and/or
loss of reputation suffered by the customer as
the result of any breach by you?
• If not, then the customer might have a right to
claim against you for such losses – the hit could
be exponential.

17. • These issues form part and parcel of every contract formation and
review which we carry out, whether it be for a client’s customer/client
and/or supplier.
• Sometimes, as might have been the case in this situation, it’s not about
effecting wholesale changes to the contract (as the other party is so
powerful that they will never accept any amendments).
• Rather, and in those circumstances, it's about understanding the risks
and mitigating the same, whether by insurance cover, “smart”
company structures and/or good contract management.

19. Corporate team awarded Team of
the Year in November 2016 at
The Law Awards of Scotland.
Entered Legal 500 Recommended
Law Firm Guide in August 2015
and now ranked as a
Recommended Law Firm by The
Legal 500.
Law Firm of the Year 2010
(under 50 fee earners) Up and
Coming Law Firm of the Year
2010 (Law Awards of Scotland).
One of the Top Three corporate
law firms in Scotland in terms of
number of MBOs (management
buyouts) completed in 2015/16
(Business Insider 2016
Yearbook).
Leading Advisor to Scottish Family
Businesses at The Herald Scottish
Family Business Awards 2012 &
2013.
A top 15 Scottish corporate law
firm by number of deals completed
(2012, 2013, 2014 and 2015
Business Insider).
Turnover and profits increased
by 25% since a Management
Buyout in 2009.
Based in the International
Financial Services District of
Glasgow.
KEY FACTS

20. Contact Details
David B Beveridge
Managing Director
0141 248 4957
db@macdonaldhenderson.co.uk

21. THANK YOU

22. The Business Journey
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