Corporate Services Blog

An agreement between two companies to work together can take a number of different forms. One could be a stand-alone joint venture as a partnership of equals in a newly set-up, limited company.

Another could be a company taking a minority shareholding in an existing company. Alternatively two companies could remain separate and use a simple contractual co-operation agreement.

This month, I want to highlight the main issues to be considered when two companies come together in a limited liability company in which one party has a minority shareholding.

In such cases the legal relationship between the participants and also between them and the company – which in law is a separate legal entity – is typically governed by two documents: the articles of association of the company (‘the articles’) and, usually, a separate shareholders’ agreement (‘an agreement’).
A minority shareholder will be concerned to reduce the risk of possible abuse by its majority partner shareholder of its power, especially when it has no presence on the company’s board of directors. It will therefore seek to agree
a set of rights and protections to address this risk. This might include the right to veto major decisions and an exit route from the partnership.

Having agreed these areas it is then necessary to find the best way to protect them using the articles and an agreement.

Simply put, the articles are the company’s official rulebook. They regulate the rights of the shareholder in relation to the company and are subject to company law and statute.

In contrast, agreements regulate the personal aspects of the relationship between individual shareholders and are governed by the ordinary rules of contract. In addition the articles are a public document; an agreement generally is not.

A typical way in which minority shareholders may be protected in the articles is if the company’s shares are divided into different classes with special rights attaching to those held by the minority shareholder. These rights can be recognised in the articles, be used to block particular resolutions and can only be changed with the consent of the holders of that class of shares.  Another way is the weighting of voting rights for minority shareholders on particular matters.

An agreement can also be used to set out matters which seek to protect minority shareholders.

It is common to specify in the agreement that in the event of conflict between it and the articles the agreement is to prevail.

Importantly, an agreement must not seek to limit a company’s statutory right to change its articles or, for example, increase its share capital. Such limits
are likely to be held to be unenforceable against the company and/or its directors.  Whether or not the decision is made to include the protections in either one or the other only or in a combination of both, the key aim is to ensure that each of their provisions are compatible.

For further information contact Peter Billyard on (01635) 521212, or peter.billyard@clmlaw.co.uk

Peter Billyard, a corporate services lawyer with Charles Lucas & Marshall, reports on new legislation which will make business backhanders a thing of the past.

The Bribery Bill is a major piece of new legislation that is currently in the final stages of its passage through Parliament. Its aim is to modernise and consolidate the law on bribery and corruption in the UK which currently consists of common law offences and legislation which dates back to between 1889 and 1916.

The Bill is designed to raise the awareness of bribery by all types of businesses although it is expected to have greatest impact on large companies in ‘high risk’ areas such as defence and construction. It will, however, cover not only payments made in multi-billion international defence contracts but also smaller companies where informal ‘backhanders’ or gifts might be offered by existing or potential suppliers.

The current law on bribery is commonly considered to be unsatisfactory. This is illustrated by the fact that the UK has so far failed successfully to prosecute any bribery case against a company.

The respected international think-tank, the Organisation of Economic Co-operation and Development (OECD), has been a particular critic. It heavily criticised the judicial handling of the recent investigation into bribery allegations against BAE Systems.

For some years the Law Commission has been working on proposals for reforming the existing law on bribery. Its first report in 1998 was eventually followed by a full report and draft bill in November 2008. This has formed the basis for the Bribery Bill which received its first reading in the House of Lords in November 2009.

The Bill creates two general offences of bribing and being bribed, together with a specific offence of bribing a foreign public official.

Significantly for companies (and partnerships), the Bill also introduces a new, corporate-only offence of failing to prevent bribery.

However there is a defence for a company if it can show that it had implemented adequate procedures to prevent such conduct taking place. The government has said that it intends to publish non-statutory guidance on ‘adequate procedures’, which are not defined in the Bill. It is expected that the majority of cases brought before the courts will be under the corporate-only offence.

The Bill covers offences which take place in the UK or by British individuals or corporates abroad. Maximum penalties for individuals are 10 years’ imprisonment and an unlimited fine. Companies will be liable for unlimited fines. The practical implications of the Bill, when passed, for all commercial and public sector organisations is that they should specifically prohibit bribery in any form within the organisation.

Larger companies will be advised to additionally implement systems to counter bribery, to include codes of conduct, training and guidance together with risk management and auditing of compliance and also consider introducing such clauses into their commercial contracts.

For smaller companies and owner-managed businesses in ‘low risk’ sectors it is to be hoped a correspondingly low key, proportionate response to the Bill will suffice.

For more information contact Peter Billyard on 01635 521212 or peter.billyard@clmlaw.co.uk

Peter Billyard, corporate services lawyer at Charles Lucas & Marshall, reviews the Companies Act and explains the final wave of changes which take effect from I October.

A frequent lament of smaller, private companies is the seemingly never ending increase in red tape they face in the form of new and more onerous laws.

The 2006 Act became law on 8 November 2006 but its sheer size and complexity has meant that it has been phased in over a three year period. The last tranche of changes take effect on 1 October.

Companies Acts are designed to set the framework in which companies with limited liability must work and have been around for some 150 years. The 2006 version aims to make it easier to set up and run a company both now and in the future – especially for smaller private companies.

One of the main changes on 1 October 2009 is that of so-called ‘Model Articles’ for newly incorporated companies.

These will replace ‘Table A’ articles.

A newly set up company can choose to adopt the model articles on their own, adopt them with adaptations or have a tailor-made set of articles.

The articles of association, are, in effect, a company’s internal rule book.

Most companies are, understandably, focussed mainly on running the business in hand and their articles tend to be of little more than academic interest to them.

They usually only assume importance when a company turns its mind to certain corporate housekeeping issues, or more commonly, when a shareholder dispute has developed.

But it is surprising how frequently these events occur.

The 2006 Act has made a number of other changes which affect the articles of companies. While none of these changes require an existing company actively to amend its articles, many companies are doing so in order to take advantage of more favourable provisions that have been introduced.

Indeed the Department for Business Enterprise and Regulatory Reform (still known by many under its previous moniker as the DTI) specifically advise that companies should carry out periodic reviews of their articles to ensure they are up to date with company law.

For more information contact Peter Billyard on 01635 521212 or peter.billyard@clmlaw.co.uk