‘The Sting’ – Don’t Be Sold What You Already Have!
I wanted to take this opportunity ‘to get off my chest’ a set of circumstances that really annoy me – and which this ‘grumpy old Solicitor’ (specialising in British company / corporate matters) sees repeatedly in the marketplace. I hate seeing people fall for a con!
My ‘gripe’ is that there is a surprisingly large business advisory industry in the U.K. that seeks to actively market the sale of ‘Shareholders Agreements’ to early-stage ventures and diverse owner/managed businesses – being effectively, quasi-partnerships of entrepreneur individuals, coming together to found and/or develop businesses within the shell of a limited liability company.
At best, these ‘business advisors’ are inexperienced and/or inexpert – but many of them are completely unqualified, unauthorised, unregulated (and in reality – incapable of providing any redress) laymen as regards British company law – and their skill sets are more focussed upon 21st century web-advertising (and the like).
The strange aspect of legal agreement preparation is that unlike (say software – with which legal drafting otherwise has many similarities), a relative layman has difficulty in knowing ‘whether it works or not’ at the point ‘they pay their money’.
The ‘proof of the pudding’ is (often) in the eating – when one or other interested party wishes to enforce what they believe is a legal (and practically useful) document, often sometime in the future and that is often when one wishes they were not subject to the adage ‘you get what you pay for’.
Call me old fashioned, but when I’m feeling unwell – I would generally opt to discuss matters with a doctor or a pharmacist – whom I had some comfort are medically trained, experienced and relatively expert in their field (being authorised, regulated and insured). I don’t tend to take steps in relation to my health on the basis of a ‘health advisor’ who was trying to sell me a ‘magic potion’ over the internet!
Endlessly, the shysters in my legal sector will seek to tell the early stage venturers or diverse owner/ managers – “You absolutely MUST have a shareholders agreement” (which I would advise you to read as – “We have a ‘Word’ document of dubious provenance and extremely doubtful legal effect – which with our limited word processing skills we can make minimal amendments to – e.g. add your individual names and your relevant company name at the appropriate place where 'blanks' appear in the template we have – and then charge you (only) several hundred pounds for the privilege).
By the time that ‘shareholders agreement’ is actually considered by a legally qualified, authorised, regulated (and insured) Solicitor – attempting to deal with the ‘real world issues’ which have arisen under it – This Solicitor all too often has to inform the individuals involved that they have bought little more than ‘poor quality toilet paper’, which needs to be completely disregarded (in terms of seeking to help those who paid for it), and that regrettably – they don’t (in practice) have any realistic redress against those who sold them this garbage.
‘The Legal Reality’ – You ALREADY have a ‘Shareholders Agreement’
The first fact that those who have any involvement with a British limited liability company need to realise - is that I can guarantee (with 100% certainty) that they ALREADY effectively have a ‘shareholders agreement’ from the day that they formed their company (and that ‘perhaps’ the fact that this wasn’t discussed with them - when they bought ‘another shareholders agreement’ might lead them to reflect that they were ‘taken for mugs’ by being sold something they already had.
The position stated above is because every limited liability company formed in the United Kingdom HAS Articles of Association by virtue of incorporation (even if they are only the default ‘Model Articles’ provided by the Companies Act legislation), and Articles of Association ARE a format of 'shareholders agreement'.
A limited company’s Articles of Association should be freely ascertainable and accessible from a company’s filing record, publicly available from Companies House’s website.
Look and find yours – usually the first item in a company’s filing record:- https://beta.companieshouse.gov.uk
Articles of Association provide rights available to, and bind with obligations upon, the various interested shareholders, directors and the relevant company (and recognise that the identities of both shareholders and directors may and do often change over time).
For various technical reasons, Articles of Association are a much more effective way of creating the vast majority of the relevant rights and obligations (which are advisable to exist / be created between the various interested parties in a company) - than seeking to do so in private shareholder agreements (although ‘uninitiated draftsmen’ continue to produce the same often largely worthless documents – absent any initial or ongoing consideration of what the relevant company’s Articles of Association might provide).
The technical advantages are largely the reason why public companies don’t have shareholders agreements (but are run pursuant to their Articles of Association) – and Articles of Association are the appropriate way (in the first instance) to set out the governance rules (rights and obligations) of a private company – especially with various diverse shareholders – as is the common situation seen.
That’s not to say that many company’s articles are appropriate for the companies in which they are being used – After all, if you paid less than GBP £50 for a company, there isn’t going to have been a lot of legally qualified thought (read ‘NONE’!) given as to whether the ‘shelf Articles’ are appropriate for your use.
Often they merely contain relaxations – so as to allow for the operation of (say) a ‘one man’ or ‘husband and wife’ company. They are very rarely appropriate for ‘a multi-stakeholder / quasi-partnership’ type of ownership structure.
Non-company lawyers habitually find Articles of Association quite difficult to comprehend - but I would encourage anyone involved with a limited company to initially set aside some time to seek to read and understand their existing Articles; before discussing with someone with appropriate legal experience and expertise - whether they are appropriate for the company structure in your specific circumstances (and in particular – whether they could be made much better) – long before some ‘snake-oil salesman’ seeks to sell you a ‘shareholders agreement’.
The lack of accessibility/complexity is largely a result of Articles (habitually) having to be consulted as / when / if there might be ‘contention’ between certain of the shareholders and/or the directors, representing the company – when the necessary level of detail is highly advisable (so that interested parties are restricted from seeking to avoid the Articles’ provisions; and much can be effected without the need to go to court).
My view is that Articles should be treated as an ‘insurance policy’ (or the foundations of good governance) – prepared as a means of encouraging amicable and constructive co-operation between shareholders and the board of directors (potentially the same – but ‘wearing different hats’) – often forming the ‘back-stop’ to which stakeholders will have to turn – should circumstances arise in which the interested parties are having difficulty in ‘playing nicely with each other’.
A good set of Articles should be capable of being prepared on the instruction of the board – with the aim of achieving that stated goal – and then ‘tucked in everyone’s bottom drawer’ – only to be consulted should contention arise between the various interested parties.
What shouldn’t happen is that they should be completely ignored – largely by virtue of the ignorance of the supposed business/legal advisor (or who – at best – recognises that they don’t have the legal knowledge or drafting skills to prepare them).
A skilled Solicitor (with expertise and experience in British company law) should be able to prepare a set of Articles on the basis of being instructed by the Board of Directors of the relevant company to produce a prudent & sensible set of governing documentation relevant to the specific circumstances of the company – which are designed to produce ‘equitable’ (i.e. fair and reasonable) outcomes for all of the stakeholders in the company (while reflecting sensible commercial arrangements either proposed by the Solicitor or instructed with regard to – e.g. (say) (un-)vesting arrangements for (very-)early leaver(s) from the venture etc.).
In the first instance, it’s arguably best to keep the drafting to a single class of (Ordinary) Shares (for all envisaged shareholders in the company) – as investors (in particular) find this (habitually) easier to understand. However, ‘one size does not fit all’ and a skilled legal professional should be examining the various stakeholder interests and proposing ‘fair and reasonable’ structures to reflect an equitable position.
In addition, Articles should be designed to ensure appropriate flexibility of board of directors actions (without abuse of shareholders), encourage a small / manageable shareholder base – through pre-emption on transfer (and leaver provisions to ensure no ‘sleeping partners’ are being carried by the ongoing management); and ensure that the company can be administratively simply and fairly sold – through exercise of a ‘drag-along’ provisions and right to exercise ‘tag-along provisions’ etc. (all of which are commercially advisable provisions for a private company with potentially – a relatively large and/or growing shareholder base).
This draftsman tends to include a few notes [by way of wording in square brackets] within the text of draft Articles to potentially assist the comprehension of the text – but it is generally best to ‘page-turn’ with a qualified Solicitor to discuss any aspects/issues – once the stakeholders have had an opportunity to read and consider the relevant draft.
‘The Gloss’ – Have a Shareholders Agreement (If You Want/Would Benefit From One)
Only after the advisability of (variations to – or more likely) new Articles of Association has been discussed and appropriately addressed – should the issue be addressed of whether an envisaged separate (and private) ‘shareholders agreement’ for appropriate interested parties is needed and/or advisable.
Whether there should be some agreement between the company and certain (or all) of the shareholders depends upon the particular facts – But there are arguments (after the position on Articles has been dealt with) for a relatively short shareholders agreement to be prepared (a 'wrap-around' in my parlance); - including aspects such as private agreements as to (say) restrictive covenants (upon ‘Executives’), dividend policy, and certain other management and operational matters.
This draftsman tends to use a ‘template’ shareholders agreement designed to ’wrap around’ (i.e. work in tandem with appropriate Articles) – but most shareholder agreements are largely designed for circumstances other than a quasi- partnership – e.g. they are requested by a material investor (if minority) shareholder and/ or venture capitalist – say which has ownership of a substantial proportion of the shareholding (but not control of the board by numbers – i.e. a MBO situation) etc.
This draftsman tends to prepare such a document (if deemed desirable or appropriate) with large sections – ‘Schedules’ - that the interested stakeholders can complete themselves – reflecting men of business agreeing upon their commercial plans.
If you want to discuss any of the above – Please do not hesitate to contact me.
However – If someone tells you that you ‘need’ a Shareholders Agreement (and doesn’t make any mention of your Articles of Association) – Be wise to the con!
Regards
Dan.Johnson@EquitableLaw.com
+44 (0) 7788 537 187 = U.K. Cellular / e-Telephone
http://www.EquitableLaw.com
Please feel free to schedule the proposed conversation with me via: - https://calendly.com/danielrobertjohnson
No comments:
Post a Comment