It's the end of the tax year . . .

 = "It's like déjà vu all over again" - (c) Yogi Berra (Not the one with Boo-Boo!)

No point 're-inventing the wheel'! :-

 http://entrepreneurhandbook.co.uk/guide-to-contract-negotiations-with-investors/

How to Create Investment Contracts, Negotiating with your Investors

Having found an investor proposing to invest in your business, your attention needs to turn to the documentation that you are likely to need to reflect your agreement.

Firstly – Make sure that you have a clear understanding of the outline terms of investment (prepare a non-legally binding ‘Heads’ or ‘Term(s) Sheet’ – that you both agree with).

At the very least, your investor is going to want to see that their ownership interest (in shares) is properly documented as issued in the investor’s name.  This (in itself) involves a certain amount of paperwork- although it is not unheard of for an investor to subscribe to shares merely on the basis of the broadly standard constitution of an English limited liability company (i.e. the Companies Act’s – ‘Model Articles of Association’).

However, if your investor is to hold a minority stake, and / or not be ‘hands-on’ (i.e. actively involved on a frequent basis) with the company in which they are investing, it is likely that they will seek some element of agreed investment documentation to protect their interests.

As a founder of the business – you want their money, such that you may find yourself presented with a ‘take it or leave it’ proposition.

The worst thing you can do in such a situation – is simply accept the terms on offer, particularly if you are not to consider them in any detail (with the aim of seeking to know what you are agreeing to).

Budgeted investment contract review

The problem is that in early-stage / venture capital type investment transactions, the sums of money being invested are generally quite modest and do not leave much of a budget for legal advice on the proposed investment contracts.

Accordingly, an investor’s initial position is generally to resist the founders taking legal advice on investment documentation – largely because it is the investor’s money which directly or indirectly is likely to be paying the legal fees.

However, as a founder you should seek to persuade the investor that such an attitude is counter-productive, and that it is much better for you to gain a full understanding of (and agree to) the detail of the investment documentation you are proposing entering into – if a sound on-going relationship is to be created between you.

Lawyers (like many other in service industries) tend to base their charges upon the amount of time which they spend considering and advising upon matters that they are consulted in relation to.  Experienced lawyers should be able to agree with you an (estimated or) budgeted fee for work to be undertaken (in light of what interested parties consider to be sensible for the work).

Having set your budget for legal review, make sure that you get the maximum value out of the legal advice you receive.  For example if your budget only buys a limited amount of time from your legal adviser, make sure that they take you through the documentation (on a ‘page turn’ basis) so that you fully understand the terms which you are being asked to agree to.  A good adviser should know and have seen the format of such documentation before, know what is reasonable market practice (and what is not), and know the issues which need to be explained to you.  If there are any commercial / legal terms which you have objection to, often the most effective way to resolve the issues is to discuss matters directly between the founder and the investor – with the hope that a compromise position can be found.

As founder you need to be aware that an investor has a range of legitimate protections that they will reasonably require in the documentation (e.g. that their likely minority position will not be abused by your continuing majority control of the company in which they are investing).

Certain other provisions might seem unfair to you at first glance, but with appropriate revisions and careful drafting, you may well be able to accept them.  Falling into this class of provisions might be the well-known “leaver provisions”, whereby if a founder were to leave the company at some point in the future, your shares become capable of re-acquisition by the company etc.  The investor will want to know that you will continue to be actively involved in the business – thereby protecting their investment on an on-going basis.  If you cease to be involved in the business in the future, it is arguably fair that you should potentially receive the value which you have created to that point in time, but arguably not that you should be able to continue as a ‘sleeping partner’ in the business.

Having accepted that the investor may well have legitimate reasons for wanting appropriate documentation, interested parties should then aim for the documentation to be drafted and settled efficiently and cost effectively.  Legal documentation (in the writer’s opinion) should generally be drafted on a basis of being fair and reasonable.

Generally, the investor’s lawyers will prepare the documentation (although it is possible for the company to give instructions for the lawyers to prepare what is intended to be market practice documentation – which is intended to assist with the taking of investment, and which are designed to be sensible even-handed documents between the parties).

Generally, the investment documentation will comprise (i) articles of association and (ii) an agreement (often variously described by a combination of the words ‘investment’, ‘subscription’ and/or ‘shareholders’ agreement).

Articles of association

Every company has articles of association – often comprising the Companies Act’s ‘Model Articles’ (with small amendments), which are generally adopted by default upon incorporation.

Articles of association can be considered as akin to a ‘club constitution’ – legally comprising a binding agreement between the company and the shareholders from time to time.
Such a document can be quite impenetrable to a layman – and largely for this reason, in certain early-stage investments, specifically drafted articles of association are not prepared.

However, if new articles or revisions to the articles of being proposed, you should treat this document as the primary document which you first review.

Lack of familiarity with articles often means that people choose not to read that document – and for this reason (and the reason that certain share-based rights are more easily enforced through the articles of association) – many of the more onerous provisions in investment arrangements are often included in the articles.

‘Subscription and shareholders’ agreement

The other document which is generally utilised as part of the investment arrangements is a separate written agreement – generally a much more accessible document (for those who deal with the same) – and prepared in the format of a private agreement between the founder and the investor (generally with the company also a party).

Model documentation

The internet has assisted such arrangements in many ways, including the fact that early-stage venture capitalists – and others active in the market – now have easy access to basic documentation which is considered to be market standard.  One example of this is the early-stage venture capital documentation produced by the British Venture Capital Association (BVCA) and which is widely available on the internet (Click here for a Copy).

Before you enter into investment contracts and arrangements, it may be useful for you to try and review the articles and the investment agreement at the link above, so that you can understand the type of arrangements which you may be subject to.  Please note however that the documentation set out above is quite detailed and complicated, and there are a number of less accessible but nevertheless widely recognised documentation (often based upon the above documents) that lawyers can easily gain access to.  Use of standard (or recognised) documents greatly assists with a rapid and efficient investment, and hence – one drafting approach is to ensure that a particular set of model documentation is used in preparing drafts and then reviewed by lawyers (with the amendments proposed made to the standard documentation clearly show).  This removes a lot of time from the consideration process, so that the detail can be focused upon by those who review the documentation.

The above review only “scratches the surface” of the subject – but we hope that it gives you an understanding of the process and documentation you are likely to need to be subject to.  If you would like to discuss matters further, please do not hesitate to contact the writer so as to do so.

 

Solicitors' Duty of Care To Third Parties (The High Court Rules On ‘The QPR Case’)

It’s not often that I blog about published law cases, but (through self-interest) I found myself reading in the last few days (and thought that I would share my thoughts upon), the recent High Court ruling in the case of Caliendo v Mishcon de Reya (a law firm), in which the High Court considered a professional negligence claim by selling shareholders against a firm of solicitors acting for a company on the sale of that company's shares, based on an express or implied retainer - or - alternatively an assumption of responsibility.

As a regular attendee of West London football matches (though thankfully - for my own mental health - not a Queens Park Rangers fan), the case allowed me to enjoy a certain amount of schadenfreude – in wryly observing that those historically interested in personal ownership interests in QPR seemed to manage their own personal affairs as poorly as they managed the club (and that’s ‘justifiable fair comment’ as any ‘Hoops fan’ will tell you!)

I remind you that company affairs at QPR can have a somewhat 'unique' character :-

http://news.bbc.co.uk/1/hi/uk/4149692.stm

None of the interested parties seems to come out of the circumstances (which form the basis of this case) with anything approaching credit.  

QPR fans (or working private practice Solicitors) interested in the fuller details can read the full case transcript here :-

http://www.bailii.org/ew/cases/EWHC/Ch/2016/150.html     

The claim arose from the sale of the claimants' shares in the company owning QPR.

The first claimant, the ‘well known’ (at least to QPR fans), Mr. Antonio Caliendo was a director and chairman of the relevant company (holding his shares through the second claimant).

It was common ground that the law firm acted for the company.  However, the claimants alleged that they had also (expressly or impliedly) retained the firm to act for them; or alternatively that the law firm had assumed a responsibility to do so.

When you stop and consider matters, it might be considered somewhat strange that in a transaction in which (effectively) an individual sold shares to third parties – that the selling individual was not formally legally represented.  However, under modern English company law – the former general prohibition(s) upon a company providing ‘financial assistance’ for the sale of that company's shares have been 'swept away' – and it’s not unusual for shareholder(s) to feel that their 'underlying' company should ‘pick up the legal bills’. 

The outcome of the case is effectively recording that (in such circumstances) while a law firm might undertake a retainer to ensure that the transaction occurs – that law firm may not have a responsibility to the underlying selling shareholder(s) (as was found to be the case in these circumstances).       

The court found that while there was no express or implied retainer, the law firm had nevertheless assumed a limited responsibility to the shareholders, and therefore owed them a limited duty of care.  That duty was characterised as a duty to exercise reasonable skill and care in the negotiation and execution of the transaction documents, but only in so far as (a) the claimants' interests were aligned with those of the company and (b) the claimants were not advised by their tax and financial advisors.

The selling shareholder claimants in these circumstances were represented by ‘tax and financial advisors’ (whose 'pockets were (presumably) not deep enough' to satisfy the claimants complaints about the terms of the resulting ‘deal’ negotiated, settled and documented with the subsequent majority owners of QPR, Mr. Flavio Briatore and Mr. Bernie Ecclestone).  

I say absolutely nothing further - but pause momentarily for a wry smile to myself (and trust that you may join me). 

More ‘unpleasant’ for a working private practice solicitor is to note that the claimants realising that they had no practical 'come-back' for the 'sub-optimal' outcome of their deal, then chose to pursue the ‘deeper pockets’ of the relevant law firm (or more accurately – that law firm's professional indemnity insurers).      

The decision demonstrates that the circumstances in which the court will imply a solicitor's retainer are narrowly drawn.  A retainer will not be implied unless the parties' conduct is consistent only with the defendant having been retained as the claimant's solicitor. In this case, the law firm had acted for the first claimant on previous occasions, but this was not conclusive, as they were specific retainers in relation to separate matters.  In relation to the relevant share sale transaction, the claimants had instructed other professional advisers, which was a factor pointing against the existence of an implied retainer of the law firm.

The judgment also indicates that, even where the court declines to imply a retainer, a third party may be able to establish, on the facts, that the solicitor assumed responsibility to them and therefore owed them a tortious duty of care.  I would suggest that this was therefore rather a ‘narrow escape’ for the law firm involved.

I would ‘preach’ this (of course) but the golden rule to take out of this sorry set of circumstances, is if you are going to deal with a valuable asset that you own – be prepared to spend some sensible professional legal fees (say - netted out of your received proceeds) on receiving some sensible legal advice and assistance that you can rely upon from an authorised and regulated Solicitor - meaning a professional adviser who is qualified, experienced, expert (and insured!) – Failing which, at least ensure someone is formally ‘looking out’ for your interests (even if you are not paying them).

'You know where to find me' (but if you don't - my contact details are):-

Dan.Johnson@EquitableLaw.com

+44 (0) 7788 537 187  (U.K. Cell. Tel.)

March 2016

Restrictive Covenants In Employment Contracts: Brief Note

This brief note provides a simplified overview of the law in this area.

You should talk to a qualified, authorised & regulated Solicitor for a complete understanding of how it may affect your particular circumstances.

This brief note explains what restrictive covenants are, when they are likely to be enforceable and how they can be used in employment contracts to protect a business’s interests.

What is a restrictive covenant and when will it be enforceable?

• A business can use restrictive covenants to protect its interests by restricting an employee’s activities for a period of time after their employment has ended.
• A restrictive covenant will only be enforceable if it protects a legitimate business interest, otherwise it will be regarded as an unlawful restraint of trade. The only recognised business interests are:
• trade connections (including the relationship between the business’s customers and its workforce); and
• trade secrets and confidential information.
• If a business has a legitimate business interest to protect, the restriction will be enforceable, provided it is no wider than is necessary to protect that interest. The covenant must be limited in terms of the restrictive activities themselves, and also apply:
• for a limited time; and
• within a limited geographical area (if appropriate).

Ensure restrictive covenants are drafted carefully

Restrictive covenants must be drafted carefully so that they:

• Accurately reflect each employee’s role.
• Reflect the circumstances of the business.
• Go no further than is necessary.

A business should regularly review contracts that include restrictive covenants and check whether they need to be updated (for example, if the employee’s role has changed).

Non-solicitation restrictive covenants

Customers

• A business can include a covenant in an employee’s contract preventing them for soliciting customers after they have left the business they worked for. This type of covenant will be particularly useful if the employee has a strong relationship with certain customers.
• Generally, the covenant should be restricted to customers that the employee had contact with during a specified period before they left. There are a number of factors the business should consider when trying to establish the length of this period, including:
• the amount of time it would take for the employee’s successor to gain influence over the business contacts;
• the employee’s seniority within the business;
• the extent of the employee’s role in securing new business;
• the loyalty (or otherwise) of customers in the particular market; and
• the length of similar restrictions in the employment contracts of competitors.

Potential customers

A restrictive covenant that attempts to extend the restriction to potential customers will be harder to enforce. However, it may be possible to protect an interest in genuine prospective customers if they are accurately defined.

Other employees

A restrictive covenant preventing a former employee from poaching a business’ existing employees is likely to be enforceable, as the stability of the business’s workforce is a legitimate business interest.

However, the covenant should usually be limited to those employees at the same level as the former employee and those more senior to them. Any clause that attempts to prohibit the poaching of employees will need to consider:

• How long the former employee’s influence over the other employees will last.
• The roles of the employees over whom the influence exists.

Non-dealing restrictive covenants

• A restriction on the solicitation of customers can be extended to cover not only enticement or interference (where active steps are taken by the former employee), but also the provision of services where no active steps are required (for example, where the customer approaches the former employee). This is known as a non-dealing covenant.
• This type of covenant has a clear advantage as it avoids the need to prove that the former employee made an approach, which is usually difficult to show. However, it does broaden the prohibition and consequently may make it more difficult to enforce.
• The enforceability of a non-dealing covenant will depend on the interest the business is trying to protect (for example, enforcement may be more likely if the business can establish a substantial personal connection between the former employee and the business’s customers).

Non-competition restrictive covenants

• Employees are prohibited from disclosing confidential information amounting to a trade secret (for example, a manufacturing process) after they leave your business. A business can also include express confidentiality provisions in their employment contract to protect the information. Therefore, additional restrictive covenants may be regarded as unnecessary, and non-competition restrictions in particular can be hard to enforce.
• However, there are circumstances in which a non-competition restriction is likely to be enforced. For example, where the former employee’s influence over customers or suppliers is so great that the only effective protection is to ensure they are not engaged in a competing business in any way.

For further information or to discuss specific aspects or issues, please feel free to contact :

Dan.Johnson@EquitableLaw.com 

Principal & Business Law Solicitor

U.K. Cell. Tel. +44 (0) 7788 537 187

 

New Year = New Promises . . .

Sadly, the Festive Season is often the 'last straw - which breaks the camel's back' with regard to many personal relationships (and as a Solicitor, I generally experience each and every year a 'spike' in requests for referrals to associated legal experts specialising in divorce law and related family matters in the first few weeks of January).

Included within the above referred to habitual unfortunate circumstances are broken engagements, which can be very painful and confusing for those involved.  On top of all the emotional distress, the interested parties have to decide who keeps what from certain assets which have been bought with thoughts of a shared future together.

This year I was party to an initial discussion relating to a 'difference of opinion / understanding' over the ownership of a (valuable) engagement ring.

It was educational (for me - at least) to learn that the legal position for engagement rings is relatively clearly governed - by a near fifty year old statutory provision,  section 3(2) of the Law Reform (Miscellaneous Provisions) Act 1970, which specifically states:

The gift of an engagement ring shall be presumed to be an absolute gift; this presumption may be rebutted by proving that the ring was given on the condition, express or implied, that it should be returned if the marriage did not take place for any reason.

Although it may well seem unfair, this legislation would appear to be intended to keep such disputes out of court - by providing that unless there was an agreement to return the engagement ring if the wedding were not to occur — which a court could imply if (say) the ring is a family heirloom — a fiancée (or fiancé) is under no obligation to return an engagement ring (regardless of who it was who 'called off' the engagement).

This position can be particularly unpleasant if one party seeks to keep a ring, and the other party is solely responsible for a loan taken out to finance acquisition of that ring.

In the hope that it might help people in the future, I make this blog post inviting people to think about their possible agreements upon engagement.

I suspect that few people actively consider the legal aspects of pledging your love with an engagement ring, but in not doing so - people risk 'possession being nine tenths of the law'.  

Happy New Year everyone . . .   

   

Loan Arrangements - Safe & Settled -v- (Potentially) Acrimonious & Vague!

Having spent some considerable time over recent weeks seeking to assist businessmen with the 'issues' which have arisen - when they (thought they had) 'agreed' a large loan arrangement on the back of an old menu in a restaurant - I wanted to put on record that settling and documenting proposed loan arrangements (ideally - before they are entered into) is always a worthwhile step - if only to save a long term friendship from considerable strain!   

The 'trick' to reasonably rapidly settling the terms of a loan arrangement and / or documenting the same (in a manner which is 'usable' in the future) - is to use a sensible template loan docment which is a compromise between conciseness and completeness.

I frequently settle & document loan arrangements in a wide range of amounts & formalities - and can relatively rapidly adapt my (see my front-piece extract - below) template document to client's arrangements.

Please feel free to contact me directly to discuss any aspects / issues where a conversation might assist you.

Regards

Dan.Johnson@EquitableLaw.com

(+44 ) 7788 537 187 (U.K. Cell. Tel.)

Enterprise Investment Scheme (EIS) - Recent Changes

'No' To Acquisitions -v- 'Yes' To Growth Capital

The relevant EIS related legislation (which supports H.M. Government's efforts to encourage SME investment) has recently changed slightly (late in November 2015 - as the U.K.’s second budget this year finally (!) obtained Royal Assent).

While ‘the devil is always in the detail’ (you should always refer directly to the relevant legislation - which is not easy to follow, not least because it changes all the time in a convoluted fashion – by virtue of attempts to comply with EU rules etc.), those involved in small business finance should be aware of the following.

The relevant legislation contains a test relating to the ‘use of money’ raised - which provides that the money raised by the share issue must be employed for the purposes of a qualifying business activity (broadly, a qualifying trade, preparing to carry on a qualifying trade if the trade is commenced within two years, or research and development from which it is intended that a qualifying trade will be carried on) (section 174, ITA 2007).

For shares issued on or after 18 November 2015, employing money on the acquisition of an interest in a company, a trade, or goodwill and intangible assets employed for the purposes of a trade, will no longer satisfy the use of money raised requirement (paragraph 11, Schedule 5, Finance (No.2) Act 2015).

Accordingly, it is now highly unlikely that a transaction can be structured so that EIS reliefs can attach to monies which are used in a merger or acquisition (M & A) transaction - historically a useful 'sweetener' to such deals which well briefed legal advisors had been able to offer their clients.

As regards any subscription proceeds which can be characterised as being used for ‘growth' or 'development' capital (such funding being -  of course - what the legislation is intended to encourage), it should still be possible to satisfy HMRC that the relevant shares are (to be) issued in order to raise money for the purpose of a qualifying business activity.

For shares issued on or after 18 November 2015, the legislation expressly includes the additional requirement that the shares are issued to promote the business growth and development of the issuing company (paragraph 10, Schedule 5, Finance (No.2) Act 2015).  

This requirement is now made explicit to reflect state aid requirements.  The European Commission's state aid guidelines support the provision of tax incentives for the expansion stage of smaller businesses.  Hence the new explicit requirement that shares are issued to promote the issuing company's business growth and development.

Always remember that there a host of other tests (e.g. parent / subsidiaries structures – need particular care) which need to be satisfied for EIS reliefs to be available to investors – such that it is always wise to have the settled investment structure ‘blessed’ by someone with a knowledge of the legislation, and ideally – obtain advance assurance from HMRC’s relevant small business team(s) that EIS reliefs would appear prima facie seemingly to be available.   

Please feel free to directly contact me to discuss any of aspects of, or issues relating to EIS (if you wish to do so).

It goes without saying – but Equitable Law would of course be delighted to discuss assisting with the taxation aspects of funding transactions involving EIS.

Regards

Dan.Johnson@EquitableLaw.com

+44 (0) 7788 537 187 (U.K. Cell. Tel.)

Offshore Tax Structures For Everyone ! (?)

Today's 'The Times' (Thursday, 12th November) business section contains an article about a small Welsh town whose businessmen are proposing to copy various e-commerce multinational business and adopt offshore tax planning structures - so to minimise the tax they pay.

http://www.thetimes.co.uk/tto/money/tax/article4611746.ece#commentsStart

I suspect that the U.K.'s taxation authority (HMRC) may be 'surprised' as to how many times I've seen relatively small businesses proposing to structure themselves in precisely such a manner!

For example, I am aware of numerous G.P.s - whom (after having been handed responsibility for their entirely publicly funded budgets) appear to show no embarrassment in terms of seeking to remunerate themselves with minimal responsibility to pay any tax! 

The U.K. Government has really got to 'get a grip' on this issue - as it is simply not fair.

Until then, please feel free to discuss your tax saving issues with me . . .

Regards

@DanRJohnson