Closing a limited company

Although a limited company can be established in a matter of hours in the UK, and for as little as £50-£100, closing down a limited company is considerably more complex. The best method applicable to closing down a limited company depends on whether that company is solvent or insolvent (i.e. whether it still has outstanding debts).

If you are unsure how to close down your company, or what method to use, it is advisable you speak to a professional (this may be an insolvency practitioner or a solicitor specialising in the field).

If the Company has Outstanding Debts

If the limited company has outstanding debts then it may be applicable to consider liquidation as a method of closing the company. Liquidation involves a ‘liquidator’ being appointed to wind up the affairs of a company. It does not necessarily mean however, that all creditors of the company will be paid, even once the company ceases to exist.

There are three types of liquidation that are used to close a limited company.

Members’ Voluntary Liquidation

This is where the company shareholders decide to put the company into liquidation themselves. This is used where the company has enough assets to pay off all its outstanding debts. The shareholders appoint and pay a liquidator themselves.

Creditors’ Voluntary Liquidation

This is similar to the scenario above, except that the company will not have enough assets to pay off its debts. With this method it is the creditors who appoint and pay the liquidator. If the company has any assets they may pay the liquidator out of these.

Compulsory Liquidation

This is where the court serves an order for the company to be closed. This is usually because someone who the company owes money to has petitioned the court. The court will then appoint and pay a liquidator, although they will recover these costs from the sale of any assets which are still owned by the company. It is possible for the directors of the company to apply for an order on behalf of themselves or the shareholders (often because they do not want to, or are unable to, fund the cost required for a voluntary liquidation).

If your limited company is unable to pay off its debts it should cease trading, otherwise the directors may be liable for the company’s debts. The company is said to be insolvent. At this stage, there may be a possibility that a negotiation between the company and its creditors (or the people the company owes money to) could mean that the company can continue trading. It is important that you speak to a professional before assuming this will always be the case.

If the Company Does Not Have Outstanding Debts

Dissolution is a cost-effective, easier method of closing down a limited company where that company does not have any outstanding debts. (Please note that in certain situations it can also be used to close down companies which are insolvent).

Where a company wants to close down using this method, the first step is for that company to cease trading. All the money the company owes, whether to third-parties or to the directors/shareholders, should be repaid.  The company should then apply to HM Revenue & Customs in order to cancel its VAT registration. The next step is for the company to inform its staff, issuing them with a formal notice and sorting out their final payroll. Although the directors of the company may wish to resign at this point, one director should remain employed in order to sort out the closure.

The next step in dissolution is to prepare a final set of accounts which will need to be submitted to HM Revenue & Customs. As this may not be practical to do straight away, you will need to contact the HMRC and inform them that the final accounts will be sent shortly.

It is worth noting that the company cannot close down until its corporation tax has been paid, and any assets (money/equipment) left after all the debts have been paid is distributed amongst the shareholders.

Once these requirements have been complied with then the directors can complete an application to Companies House to have their company struck off. In order to do this, the company must have complied with the following additional requirements: it must not have traded within the last 3 months, the company name must not have been changed in the last 3 months, the company must not be the subject of any legal proceedings and the company must not have made a disposal for value of property or rights. If these requirements are satisfied, the striking off application (DS01) can be completed, with the majority of the directors signing it, along with submitted a £10 fee Companies House.

David Swede - head of the commercial law team at Darlingtons

If you need advice on closing your company, contact me for cost effective and practical help and assistance. I’ve helped many companies shut down in the best way possible, protecting the directors and shareholders and where necessary liaising with Insolvency Practitioners.

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Mergers and acquisitions

Mergers and acquisitions is a legal and business term that refers to the aspect of corporate strategy, financing and project management of buying, selling or restructuring different legal entities. Mergers and acquisitions are particularly relevant to rapidly expanding businesses that want to establish themselves in new business fields or geographical locations without creating brand new legal entities such as companies or entering into joint ventures. In modern times, the formal distinction between the terms “merger” and “acquisition” has become less significant, as particularly in business sense both create the same result. For clarity, however an acquisition happens when a business buys another business, taking full control over it. A merger is when a business partially absorbs another business, ultimately not fully controlling it but sharing the decision-making with the old owner.

What are the main commercial advantages of mergers and acquisitions?

  • Expansion of business know-how and processes. By acquiring or merging with another business, you can expand your current knowledge about a particular field. With acquisition or merger, you will get access to already experienced workforce and efficient processes in place.
  • Cost-effectiveness – in long term, acquisition or particularly merger might be cheaper than building entirely new unit with brand new infrastructure and human capital. .
  • Expanding into new markets – acquisitions and mergers offer great way of reaching new audiences and markets. You can buy or merge with a well-known brand in another country and gain access to new customers.
  • Business portfolio diversification – businesses that specialise in certain aspects such as import and wholesale of certain goods can easily acquire retail distribution chains to diversify their operations and decrease chances of business failure.
  • Business Power – merger with another business of a similar or bigger size can help your brand not only to look more global and strong but also actually provide increased financial capabilities of joint budgets.
  • Monopolisation – so long as you comply with the EU laws you may want to take over your competitors and dominate certain market.
  • Speed of Growth – some projects require more expertise and power than when first anticipated. In such cases, it may be more time-efficient to acquire a new business with the requisite capacity than to recruit and build the necessary resources internally.

Share vs Asset Acquisition

There are two main methods of acquisitions, namely share purchases and asset purchases. Despite achieving perhaps similar business goals, both have significantly different legal implications.

  • Share Acquisition

Here, majority of shares of the target company are purchased by the acquirer. The target company remains separate legal entity preserving its all assets, liabilities, employees and obligations. Major advantage of share acquisition is that all client contracts need not to be novated or assigned. In fact, the clients do not need to be informed of the acquisition.

  • Asset Purchase

With asset purchase only a specific part of the target company is bought by the acquirer. All assets, liabilities and obligations of the target company remain with it, which can be advantageous to the buyer. On the other hand, any relevant contracts with clients need to be novated and require their consent. Some clients might not be happy with the change and terminate their contracts. It is also important to note that although employees automatically do not transfer if certain conditions are met the employment continuity is preserved under the Transfer of Undertakings (Protection of Employment) Regulations. For instance if an employee worked in the acquired business unit for over 36 months and TUPE applies it would mean that his employment with you is going to continue and not be counted from start.

Mergers and Acquisitions: Deal Checklist

It is important to make sure that you speak to relevant professionals including lawyers and accountants about due diligence of any merger or acquisition deal.

Some of the points to worth to remember about during acquisition or merger process include:

  • Checking that the target business is actually fully owned by the people that you are dealing with.
  • Checking whether there have been or are any legal disputes.
  • Analyse legal obligations and liabilities with customers, suppliers and employees.
  • Consider the legal consequences of acquisition or merger on employment and client contracts.
  • Ensure that all key facts about the target business are legally warranted by the seller. Your lawyer should request that in a formal written statement. Normally, warranted things include records about debtors and creditors, state of assets, audited company’s accounts or legal disputes.
  • Ensure that the contract includes an indemnity clause in respect of any potential liabilities that may arise out of undisclosed things. This may include lawsuits or unexpected tax bills.

Reena Gokani - corporate solicitor and M & A expert

If you are considering either a merger or acquisition, Darlingtons offer a highly practical, commercial and cost effective approach at charge out rates which are highly advantageous when compared with City law firms. Contact me for further information or advice.

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Sale of Goods Act summary

Sale of Goods Act

What is it?

The Sale of Goods Act 1979 (SOGA) aims to provide protection for consumers buying goods when their purchases are not quite what they paid for. The Act regulates the relationship between the seller and the buyer and ensures that the goods sold fit their description as well as their purpose and if they do not the seller is under an obligation to correct the wrong by providing a refund or replacement.

Some useful terminology

Goods: these are tangible assets with the exception of land and currency. Goods can be existing or future (yet to be manufactured), specific (agreed at the time of the contract) or unascertained (goods of general description such as a bag of wheat)

Contract for the sale of goods: an agreement whereby the seller agrees to sell goods and the buyer agrees to buy them for a price

Express terms: these are the terms of the contract specifically agreed between the seller and the buyer (such as a delivery date or address)

Implied terms: these are the terms of the contract which are not expressly agreed but are implied to the contract either by the means of statute, previous dealings between the parties or customs in the particular trade

Conditions: are the major terms of the contract, they are the essence of the contract and their breach can bring a contract to an end

Warranties: these are terms of a contract of a minor importance and if they are breached the contract remains in place but the injured party can claim damages

Main provisions

Subject matter of the contract: goods as described above

The price: it might be stipulated in the contract, or implied by the course of dealings between the parties. Otherwise it must be reasonable and can be agreed at valuation of the goods

Time: time is not of the essence unless the contract specifies otherwise (i.e. provides the time of payment etc.)

Sale by description: when goods are sold as described (such as through distance selling where a customer only reads a description or sees a picture as opposed to actually seeing the goods) then there is an implied term that the goods will match the description

Satisfactory quality and fitness: there is an implied term that the goods sold are of satisfactory quality if the seller sells the goods in the course of a business (such as shop). This means that the goods are of a reasonable standard, which includes:

  • Safety
  • Appearance and finish being free from defects
  • Fitness for all purposes for which the goods are supplied (such as that running shoes are appropriate for running)

If any of the above was drawn to the buyer’s attention before the contract was made or if it was revealed when the buyer has had an opportunity to inspect the goods him or herself then the implied terms do not apply.

Fitness for purpose: if the buyer has made a purpose of his purchase known to the seller before the contract was made, then the buyer is under an obligation to make sure that the goods are appropriate for this particular purpose. This provision applies if it is reasonable for the buyer to rely on the seller’s expertise (such as buying motorbike gear from a specialist motorbike shop rather than an online trader who also sells mainly garden equipment).

Buyer’s rights

If the goods bought do not meet the satisfactory quality or fitness for purpose provisions, the buyer might be entitled to return the goods and receive a full refund or, depending on the type of goods, to have the goods replaced or repaired.

Right to reject faulty goods

The buyer has got the right to reject the goods if they are faulty but he or she must do so in a reasonable time (preferably immediately but can be up to a couple of weeks after receiving the goods). If the buyer rejects the goods he or she is entitled to get their money back.

Right to have the goods replaced or repaired

In certain circumstances depending on the nature of goods subject to the contract, the buyer has got the right to ask to have their goods repaired or replaced. The replacement or repair should not cause the buyer too much inconvenience and it is usually the seller who covers the costs of delivery or any transportation. The buyer can request replacement or repair at any time up to six weeks after receiving the goods.

A consumer has got six years from the date of purchase to make a claim as to any fault at the time of purchasing the goods.

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Dissolving a business partnership

Dissolution of a business partnership largely depends on the type of partnership in question. There are three types of partnerships, namely general, limited, and limited liability partnerships.

Dissolving a General Partnership (No agreement)

What is general partnership?

  • General partnership is the most basic legal form of partnership available. For general partnership to exist there need to be at least two people running a ‘for profit’ business. General partnerships do not offer protection against personal liabilities. Therefore, each partner is responsible for the debts of the entire partnership.

How to dissolve a general partnership?

  • Dissolution of a general partnership can occur in a number of ways. Dissolution can be agreed between the partners (although, it is not required for all partners to agree and only one partner can trigger the dissolution), ordered by the court of relevant jurisdiction or triggered by one of specific events. Such event could for instance be death of a partner in general partnership. Also in the case of partnerships with no agreement in place, partnership dissolution occurs when one partner decides to leave the partnership. Therefore, any disputes in general partnerships can be fatal to it.

Are there any potential consequences?

  • Dissolving a partnership also involves a number of liabilities and obligations. In the case of general dissolution, partners will need to ensure that the process is handled diligently. All partnership’s assets will need to be collected and any financial liabilities cleared. If the remaining partners intend to stay in business, they will quite likely need to set up an identical partnership to take over the business affairs of the old partnership.

Dissolving a limited partnership

Dissolution of a limited partnership can be initiated by the general partners. There are some differences between dissolution of a general partnership and limited partnership.

When dissolution of a limited partnership is not possible?

  • Limited partnerships cannot be dissolved in the case of following circumstances:

 

  • a limited partner serving a notice of intention to dissolve – this can only happen if there is a prior agreement between the partners.
  • when a limited partner offers his share in the partnership as security for debt finance – this can only happen if there is a prior agreement between the partners.
  • when a limited partner dies or goes bankrupt.
  • when a limited partner is considered not to be mentally capable.

Dissolving a partnership with agreement in place

 

Having spoken about various dissolution ‘trigger events’, that can occur with no partnership agreement in place, it is worth to consider how dissolution can be achieved when partners are legally bound by the agreement.

  • Firstly, if the other partners intend to stay in business and continue trading, you must ensure that when you leave you discharge all of your responsibilities in full. It would be a breach of partnership agreement and a duty of care to leave the other partners with liabilities that they could not meet themselves without you.
  • Secondly, the agreement will likely stipulate specific valuation processes to be used to determine value of the partnership upon dissolution. Based on the valuation, you should negotiate the best deal possible for yourself.
  • Finally, the procedure for termination of the partnership agreement and therefore dissolution of the partnership should be included in the agreement itself. If it is not dissolving a partnership is as easy as serving a notice on the other partners and informing all those that are doing business with the partnership.

Assets

Importantly, before dissolving a partnership, partners should transfer assets that are in the name of the partnership. The reason behind this is simple. All assets that remain property of the partnership when it is formally dissolved become what is known as bona vacantia. In other words, they become ownerless property and as such belong to the Crown. The Treasury Solicitor is responsible for dealing with the collection of assets from dissolved companies and limited liability partnerships. Property in this context includes cash, leaseholds, freeholds, and any goodwill such as intellectual property.

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Pre-emption rights for shares

Pre-emption rights for shares are the rights for an existing shareholder of a company to be offered new shares in that company before those new shares are then offered to non-shareholders publicly. These rights state that new share issues have to be offered to existing shareholders at the same price (or a more favourable price) as they would have been offered to a non-shareholder. The main reasoning behind this is to allow existing shareholders the right to prevent the dilution of their stake in a company by being able to purchase the new shares; if they decide not to proceed with the sale then they are agreeing to this potentially happening.

Company law (in the form of the Companies Act 2006) and listing rules state that pre-emption rights are required for publicly traded companies. It is possible for private companies to exclude the requirement of pre-emption rights, providing the correct procedures have been followed. Pre-emption rights arise on the transmission, transfer and allotment of shares. Listing rules requirements do not apply to companies which are listed and incorporated abroad. This is mainly due to the fact that the pre-emption rights principle is not internationally and universally recognised.

What Shares do Pre-emption Rights Apply to in a Company?

All shares in a company have pre-emption rights apply to them, apart from 2 exceptions. The first exception involves the shares which are allotted to employees under the company’s employee’s share schemes. The second exception is where the shares involved are shares which carry a right to participate only up to a specified amount in a distribution of capital/dividend.

Pre-emption Rights Under the Companies Act 2006

Under this Act, new shares must be offered in existing shareholders in proportion to their present holdings, before they are offered to any other person. This offer must be in writing. Additionally, the company must allow the shareholder up to 21 days to contemplate the offer and then either accept or reject it.

Pre-emption rights under the Act will not apply to a company where a private company’s articles exclude them, or provide another alternative arrangement. They will also not apply where the company involved passes a special resolution stating their exclusion, or where shares are issued for non-cash consideration. It is common for a company to exclude the pre-emption rights granted by statute, and instead make their own provisions.

It is important to check whether there is a shareholders agreement in operation, as this will contain its own provisions for pre-emption rights, and therefore should be consulted first. It is often the case that the company itself is also bound by this agreement.

Pre-emption Rights Concerning the Transfer/Transmission of Shares

The pre-emption rights that are relevant here are not governed by statute. They are however, normally detailed in private company’s articles.

Pre-emption Rights Concerning Allotment

These can arise either in a shareholder’s agreement, in a company’s articles, or through the use of the Companies Act 2006.

A Waiver of Pre-emption Rights

In order to be effective, a waiver of pre-emption rights needs to be signed by all the shareholders of a company. This will have the effect of wavering any rights they might hold in relation to the company issuing new shares to somebody else (i.e. a third party).

It is therefore important to understand the consequences of signing a waiver of pre-emption rights relating to the company you work for/are dealing with, so that you know what you are doing before you give up those potential rights.

Contact me if you have any issues regarding pre-emption rights and shares, I have a lot of experience in this area.

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Lottery syndicate agreement

Lottery Syndicate Agreement

What is a lottery syndicate agreement?

A syndicate is a collection of people, businesses or entities who organise themselves for a common purpose. A lottery syndicate agreement is where people group together and enter lottery draws to maximise the chances of winning. The situations in which people get together to form lottery syndicates necessarily mean that members will be friends, colleagues or associates. It is important to follow the correct procedures in setting up a syndicate so that the situation does not turn sour upon a win. Failing to do so can lead to the breakup of friendships, the end of working relationships and the loss of money in some cases.

Why have one?

A formal lottery syndicate agreement puts a set of rules or regulations in place so that everyone knows where they stand. It can clearly define those who are members and their entitlement to any win. It can also be beneficial for tax purposes, meaning that all members need not necessarily pay tax on any win.

Those who sign up to a lottery syndicate are entering into a legally binding contract. The terms and conditions of the agreement bind each member of it, which can be referred back to if any disagreement occurs at a later stage. If every member has read the terms and conditions or rules of the agreement then, in theory, they are less likely to disagree with each other anyway. If the rules need to be amended in any way, shape or form this can be done providing that all members are aware of such a change and agree to it.

What to include

Within the lottery syndicate agreement the following should be contained:

  • The name of each member;
  • The numbers they have selected to be entered;
  • The amount that each member agrees to pay; and
  • The subsequent share of the winnings that each member is entitled to.

How to distribute winnings

The way the winnings are distributed is entirely up to the members of the syndicate. They may agree to split the winnings amongst them in equal shares, but alternatively the winnings could be partially donated to charity, paid into a trust fund or contributed towards future ticket purchases. The important thing is for the exact method for distributing the winnings to be clearly expressed in the lottery syndicate agreement so that no member is in the dark about what their entitlement is.

State which draw

It is important to agree end stipulate which draws the syndicate is to be entered for. Firstly which competition, be a local raffle, the National Lottery or Euromillions. Secondly, if the competition is run on various days, the ones which the syndicate is to be entered for (e.g. every Saturday’s National Lottery).

Members’ stakes

If a member has not paid their stake and the syndicate wins then major disputes can be generated amongst its members. It is best to stipulate in the agreement how and when each member should make their payments and the consequences of failing to pay. It may be decided that anyone who fails to pay their stake before a draw takes place is excluded from a share of any winnings resulting from that draw.

Who is in charge?

It might be useful to appoint someone to manage the syndicate, their name and duties can be provided in the agreement. They can then become responsible for the essential tasks of the syndicate including checking that members have paid their stakes, collecting and distributing any winnings and updating the agreement itself. They should add new members to the agreement and remove those who no longer want to be part of it.

How to draw up agreement

Syndicates are free to draw up their own agreement; the above advice may be useful in doing so. Alternatively, a form can also be downloaded from the National Lottery website which can be filled out by the syndicate members.

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UCTA – Unfair Contract Terms Act

UCTA

What is it?

The Unfair Contract Terms Act 1977 (UCTA) regulates the terms which can be included in certain contracts. Usually businesses are allowed to agree whatever they want to, and the law does not restrict what can be put in a contract. However, in certain circumstances UCTA restricts the terms which are deemed valid when they are unfair. In particular, UCTA sets out a number of rules dictating when a business is allowed to put an exclusion clause in a contract which is intended to exclude or restrict their liability.

An example of an exclusion clause would be:

‘Slippery Floors Ltd. takes no responsibility for any injury sustained on our premises.’

What does it apply to?

UCTA applies to almost all contracts as long as they involve attempts to limit or restrict business liability. Hence, private sales between individuals are usually not regulated by UCTA. Private sales between individuals would include the sale of a second hand car or a chest of drawers. It also applies to notices which attempt to exclude liability, even where there is no contract in place.

What does the Act prohibit?

A contractual term is deemed not to be valid if it seeks to exclude or restrict liability for, amongst other things:

a.    Negligently caused death or personal injury;
b.    Fraud;
c.    Loss arising from defective goods or negligence of the distributor where goods are of a type ordinarily supplied for private use or consumption;
d.    Negligently caused loss or damage, unless the term is reasonable;
e.    Misrepresentation, unless the term is reasonable.

What is meant by negligence?

In the context of this Act, negligence means breach of one’s duty to:

a.    Fulfill an obligation created by a term of a contract;

b.    Take reasonable care; or

c.    Take all reasonable care to see that a visitor is safe in using one’s premises that they have been permitted or invited to enter.

What is meant by reasonableness?

If a party to a contract wishes to exclude liability they must prove that the term which gives effect to that exclusion is reasonable. In determining reasonableness the court looks at a number of factors, including:

Parties’ relative bargaining powers – if one party is a multinational producer and distributor of timber and the other is a self-employed Italian woodcarver then the latter will be in a much worse position to make demands regarding terms;

How practical it is to source the product elsewhere – if the woodcarver was buying pine the court may decide that he could have simply chosen another source whereas if it were Snakewood then there may not be another choice;

Parties’ relative insurance positions – the multinational company would most likely have insurance to cover small losses whereas the woodcarver would not;

Terms usual in trade – It would not be usual when selling wood to exclude liability if the wood is kept in a workshop, such a term might be found unreasonable;

Knew or ought to have known of existence of terms – if the terms appear in a one page contract that is signed by both parties then a court is more likely to find them reasonable as opposed to if they appeared on a website, the address for which was printed on a schedule annexed to the contact;

Goods manufactured to special order – if the woodcarver had ordered a very rare wood cut into a precise shape it would be more reasonable for the seller to include certain exclusion clauses than for the sale of a 2 x 4 of pine;

Reasonable to expect compliance with any conditions – an exclusion of liability upon touching wood with anything other than silk would most likely be found unreasonable.

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Fiduciary duties

In broad legal terms, fiduciary duty is an obligation on one party to act in the best interest and good faith of another party. Fiduciary duties are foundation behind the idea of good faith and confidence. Fiduciary relationship can only exist when one person trusts the other and the other fully accepts the duties and obligations that come with that trust. The duties in fiduciary relationship include loyalty and reasonable care for the assets in the entrusted person’s custody. It is not enough to think highly and with respect of another individual or generally trust in their good character, to form a fiduciary relationship. Although, there is no case law clearly defining boundaries of fiduciary relationships and particular circumstances in which such relationships arise, it is commonly understood that that relationships between lawyers and clients, brokers and principals, trustees and beneficiaries, administrators or executors of estate and beneficiaries of the estate are fiduciary relationships.

Directors’ Fiduciary Duties

As a director you are effectively an agent of the company that you are representing. You are therefore placed in a position of trust.  The idea behind it is simple:  the directors should act within their powers and in the best interest of the members of the company. The most common breaches of directors’ fiduciary duties involve directors who act in their own best interest by i.e. diverting business opportunities away from the company, using the company’s premises and assets to own benefit or accepting bribes. Directors who honestly believe that they have acted in the best interest of the company and can prove that they have exercised sufficient level of care will not usually be held in breach of their fiduciary duties. This specifically however does not apply to directors who fail to disclose their personal interest in proposed or existing transactions.

Fiduciary Duties of Trustees

Trustees owe fiduciary duties to the beneficiaries of a trust. These include duty of loyalty, integrity good faith and honesty. Trustees should never allow their own personal interest to prevail over the interest of beneficiaries. Trustees should avoid any potential conflicts of interest and account for any profits made by them in their capacity as trustees. It is not advisable for trustees to purchase the trust property and in some cases such transactions are automatically void.

To avoid breaches of fiduciary duties, the trustees should act in accordance with the trust document. In the absence of such or in the case of discretionary trusts, the trustees should act in a way that will offer the best monetary returns with the least amount of risk involved, to the beneficiaries.

Remedies

A breach of fiduciary duty may give rise to a civil action. Some of the remedies that may be available include:

  • Damages – if the beneficiaries can demonstrate consequential loss resulting from the breach of fiduciary duty they may be entitled to damages.
  • Injunction – it is an equitable remedy available to court’s in certain circumstances, in particular in matters concerned with breaches of confidence.
  • Void transactions – it may be possible to make some transactions void. For example a transaction in which the personal representative leases or mortgages the estate property may be set aside by the beneficiaries. They may also seek restitution.
  • Account of profits – this is particularly relevant to company law. A director who diverts business opportunities away from the company or profits by not disclosing his or her personal interest in proposed or existing business arrangements, may be forced to account for profits made from such dishonest activity.
  • Disciplinary proceedings – in the case of professionals such as solicitors there may be disciplinary actions associated with breaches of fiduciary duties.
  • Criminal punishment – if the breach of fiduciary duty is criminal in nature (i.e. fraud) it may result in criminal sanctions being imposed.

If you are a director and need advice on any aspects of fiduciary duties or a shareholder or other beneficiary of a trust and feel that a director or trustee are in breach of their fiduciary duty we can help. Get in touch with me for further advice.

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Exit strategy – start thinking about it early

Plan Your Exit  

Your business may be owned by a limited company or some other entity which has a corporate identity which entitles it contract on its own behalf or it may be owned by you personally or in a partnership which has no legal identity. In the latter case the person or persons owning the business and wanting to sell must contract in their own names. In the case of individual owners there is no choice. Any sale will by definition be an asset sale.

A business owned by a limited company has two principal approaches to a sale

Limited Company Sales

To some extent your exit will depend on the rules adopted by the shareholders when you and your fellow shareholders set up the company.

If one shareholder wants to sell is he or she entitled to compel the others to do so?

Can those who do not want to sell prevent the others or any one of them from selling?

Such issues will be resolved quickly if the shareholders agreement or the articles address them and I have touched on this in an earlier article. In this Article I am assuming that the shareholders of a company or the individual partners are of one mind. The scope is, however much narrower for individual owners.

The sale a business owned by a company is achieved by a sale of the shares in the company. Technically the ownership of the assets does not change. They are still, after a sale, the property of the company. It is the shares in the company which change hands.

As a limited company you have two principal choices when you decide to sell. Do you sell the company or does the company sell its business and assets. These are known respectively as a corporate sale and an asset sale.

David Swede – Commercial Solicitor

This post raises more questions than it answers but these are the types of issues that should be considered with legal advice tailored for you.

If you are planning an exit from a business, it’s imperative to take advice as early as possible, usually to consider the issue even when you set up the business. I have decades of experience of advising on exit planning, so get in touch with me, I can save you a lot of stress and money at a later stage by getting it right in the beginning.

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Exit strategy

Everyone goes into business with the objective of being successful, but sometimes things do not go as you may have planned or you may simply want to try something new or retire and therefore it is wise to have an exit strategy in place.

When should I start thinking about my exit strategy?

It is best to start thinking about your exit strategy at the start of the business even though this may seem counterproductive and the best way to achieve this is :-

  • to discuss the issue with any business partners or shareholders
  • consider commitments about notice periods if you work day to day for the business
  • ensure the position is recorded in any shareholder or partnership agreement
  • review the position as circumstances change
  • consider pre-emption and/or family succession issues

. As with anything, careful planning yields the best results and a good exit strategy will help you get the best value for your business and help you achieve the best possible outcome, particularly as when the time comes to exit the business it may be unplanned. Furthermore, the better you have planned for your exit the greater the chance it will be at a time suitable to you, ideally when the business is doing very well, when you have maximised your profits and the market conditions are favourable. You can always change you exit strategy as your business progresses.

Another reason why it is good to consider you exit strategy at the very beginning is because later down the line there will be some factors which are out of your control, such as the legal structure of your business. For example, if you are running a company, the rules of your business will be governed by your Articles of Association and if these are too restrictive it could make the business unattractive and therefore you may be unable to sell it off. Alternatively, if you are in a partnership, you partnership agreement will determine the rules for exiting the partnership. It is also worth bearing your exit strategy in mind when leasing property. If you enter into a long lease without a break clause then you will be responsible for paying rent throughout the term of the  lease, accordingly, you should always try an negotiate a break clause within the first few years of the lease and obtain permission to assign the lease to another party.

What types of exit strategies are there?

If you are involved in a partnership then it is likely that your exit strategy is going to be to leave the partnership and allow the remaining partners to continue with the business but issues of course arise as to valuing your stake in the business, whether it gets paid yto you immediately, whether you can simply stop working or contributing to the partnership and possibly liability for any debts.

 If you are a sole trader, unless your business is extremely lucrative, you will probably close your business and pay off any existing liabilities. Alternatively you may have started your business with the intention of passing it on to a member of your family, usually children, and therefore your exit strategy may be relatively simple. However, there is always the chance that your children may not be interested in taking over the business.

The most common business exit strategy is to sell the business. Businesses are usually sold when the owner wants to retire, but not all business owners have this luxury. So, who should you sell the business to? You may have a few options as to whom you sell your business to and each option should be considered on its own merits, but usually the interested is likely to be another businesses or a private investor. You may decide to sell your business to someone else in the same trade, although you should be weary that someone in the trade will have a good idea of the value of the business and will scrutinise all the details. A trade purchaser may also wish to merge the business with his own.

You may sell your business to a manager or your employees, which is known as a management buyout. You could also float your business by selling your shares on to the stock market, which can be very profitable, but is only likely to be relevant for large successful businesses. The equivalent for a smaller company or business would be to sell shares in the company to private investors or a venture capitalist.

The actual exit procedure will depend upon which exit strategy is suitable for your business taking into account its legal structure. Nevertheless you will have to go through certain procedures such as valuating the business, identifying buyers and negotiating and completing all the legal paperwork. Accordingly, it may be prudent to obtain specialist advice from an accountant, solicitor or financial adviser.

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