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John Leyden of Carbon Accountancy

 

Carbon Accountancy

John Leyden

" I have worked with Shainul on a range of issues for clients over the last few years - including shareholder agreements, corporate structuring and legal disputes and employment matters.  I have always found Shainul approachable and commercial.  The team at Fortune Law are responsive and helpful and I never have any hesitation in recommending Fortune Law to my clients."

Despite attempts in both the UK and the USA, the previous owners of Liverpool FC, Tom Hicks and George Gillett, were unable to prevent the Royal Bank of Scotland (RBS) from selling the club to New England Sports Ventures (NESV) (the owners of the Boston Red Sox) for the tidy sum of £300million.

Their first attempt to block the sale involved the removal of independent directors from the Boards of KOP Football (Holdings) Limited and KOP Football Limited, the two companies which owned the club. 

RBS, which had financed the purchase of the club in 2007, was due to receive repayment of its £280million debt (along with Wells Fargo) on 15 October.  Calling in that debt would effectively push the two companies into administration.  As a result, the FA would punish Liverpool by docking them nine points in the Premiership league table, a further hit to the club's poor start to the season, which would affect its value accordingly.

You've come up with a great idea and believe you have what it takes to make it as an entrepreneur.  You have time, ambition and a newly-incorporated company to exploit it.  What you lack however is the cash to fund the business.  You've missed out on this season's Dragon's Den and the bank manager hasn't been persuaded to give you a loan in the current economic climate.  All is not lost, however. 

You do have one or two contacts with some spare cash who are potentially willing to invest in your business.  You call up and arrange a meeting with them.

What should you prepare prior to the meeting? Read on to learn more about the areas you should consider when raising outside finance.

1.      Sign an NDA

The last thing you want is for your potential investor is to feign disinterest at your idea and then exploit it themselves.  The idea might just be the tip of the iceberg too: you will potentially have an unused (and unregistered) brand name and confidential information regarding the identities of your target customers and suppliers.

A non-disclosure agreement (or confidentiality agreement) would allow you to safely disclose that information to the investors without concern that they may steal your idea.

2.      Draft a detailed business plan

Describe the idea, explain who you are, what you plan to sell or offer, why and to whom.

Include realistic forecasts for when the business will become profitable and what  net profits you hope to achieve after the breakeven point.  Give a genuine estimate of a future sale price if that's what you will intend to do. 

Show the results of your market research identifying your target customers. Prepare an appropriate marketing and sales strategy.

Who will form your management team and personnel? What are their credentials?

Where will you base your operations and will you outsource production and other services?  Do you have contracts in place already? What about information systems and IT?

3.      Shares and Control

Your investors will want shares in your company which will give them both rights and a degree of control.  What management control are you willing to sacrifice for their cash?

Most people think of 51% as the requisite shareholding to retain control. However full control can only be kept with 75% of the issued shares with voting rights attached.  If your investors take more than 25%, you will not be able to change the company's name, alter its Articles of Association, reduce its share capital or voluntarily wind it up, without their consent.

The crucial Shareholders Agreement will precisely define the relationship between shareholders to prevent dispute at a later date.  It is a useful tool to protect minority shareholder investors and inject unanimity in decision making but it can also make life easier for you by dealing with matters such as exits and when individuals can sell their shares and to whom.

4.      Directors

Perhaps you would rather your investores did not get involved in the day-to-day running of the business, but they may have expertise they can offer.  They may even have contacts to help the business achieve its goals.

If they want a seat on the board, perhaps ensure that the Shareholders Agreement secures your place as Chairman on the Board thereby giving you the casting vote.  Make sure you avoid being outnumbered on decisions made, because although a 51% or more shareholding allows you to fire a Director, this will not be practical if the Director is an investor too.

5.      Return on Investment

Exit provisions may need to be built into the Shareholders Agreement, especially for circumstances where a dispute has arisen between you. The investors may also want preference shares, giving them more likelihood of a dividend and a higher ranking for a return of capital in the event that the company goes insolvent.  The more generous the package you give away at the outset, the more you could lose in financial gain from the growth and success of the business.

6.      Intellectual Property

Do you have a brand name you want to register as a trade mark?  Does your product have a unique design or have you discovered an inventive process which you wish to protect?  Perhaps you want to retain ownership of the intellectual property in your own name, rather than the company's, and licence it to the company for a fee.  This would protect your interests in the long run if the business struggled or flourished.

The above is by no means a full list of matters to consider.  You may also need to consider:

•  taking a commercial lease of premises
•  employing key individuals under employment contracts and including a staff handbook or policies and employment liability insurance
•  your obligations under the Data Protection Act 1998
•  terms and conditions for the supply of your goods or service
•   terms of use and a privacy policy for your website
•  limitations you may be subject to under advertising legislation and codes of practice
•  the need for insurance to protect yourself against claims from customers
• putting in place an IT system and/or support service
•  tax, in its variety of forms, such as VAT, income tax or national insurance

For further information or advice on private equity, intellectual property or commercial matters, do please call us on 0207 440 2540 or email us at enquiries@fortunelaw.com.

The past few years have been a rough ride for many small businesses as consumption and credit have dried up and many have gone under as a result.  If your company is on the verge of insolvency, what are the risks for you as a Director?

Fraudulent Trading

This is when business is carried on with the intent to defraud creditors, or for any other fraudulent purpose. 

If it appears to a liquidator, in the course of the winding up of a company, that fraudulent trading has taken place, it can apply for a court declaration ordering anyone who was knowingly party to the fraudulent business, including the Directors, to make a contribution to the company's assets.

There is a requirement of "actual dishonesty, involving... real moral blame" (Re Patrick and Lyon Ltd [1933] Ch 786).

Fraudulent trading is also a criminal offence and can result in a person's disqualification as a Director.

Wrongful Trading

This occurs when a company has gone into insolvent liquidation and at some point before the commencement of its winding up, a Director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into such insolvent liquidation. 

A liquidator may apply to the court for an order that the Director make a contribution to the assets of a company, but only if the company is worse off as a result of the continuation of trading.  The application must be sanctioned by the company's creditors, the court or the liquidation committee.  It is a defence that the Director took every step he ought to have taken with a view to minimising the potential loss to the company's creditors. 

There is no requirement of dishonesty and wrongful trading is not a criminal offence.  It is, however, grounds for disqualification as a Director.

Misfeasance or breach of fiduciary duty

If, during a winding up, it appears that a Director (or any officer or  person who has been concerned, or has taken part, in the promotion, formation or management)  has misapplied or retained, or become accountable, for any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty, the court may order the Director to repay, restore or account for money or property with interest or contribute such sum to the company's assets by way of compensation as the court thinks just.  The application may be made by the Official Receiver, liquidator or any creditor.

The above are the main risks for Directors in a struggling company, although there are a number of other fraud and misconduct offences, common law duties and public company matters which may need to be considered.  You may also have given a personal guarantee under which creditors can pursue you.

If you would like further information on your duties and as a Director, please call us on 0207 440 2540 or email us at enquiries@fortunelaw.com.