Monthly Archives

November 2018

When shareholders cannot agree – Texas Shootout or Russian Roulette?

By | Food for thought, news, Problem Solved

As promised, this week we’re focusing on what happens when there’s an irresolvable deadlock between a company’s shareholders who have an agreement with one of these provisions.

When shareholders simply cannot agree, and the conflict is deemed irresolvable, one of the parties may serve a notice offering to purchase or sell at a specified price.

For example, A and B each hold 50 shares in Comp Ltd. They fall out.

Russian Roulette

A serves notice on B offering to transfer all A’s shares in the company to B at a price specified by A.

B must accept A’s offer and buy A’s shares at the stated price or must sell all his shares to A at the same price per share.

Texas Shootout

Also called a Mexican shoot out. It is a variation of a Russian roulette provision where typically A and B submit sealed bids to an “auctioneer” and the party who makes the higher bid buys the company at that price.

Both Russian Roulette and Texas Shootout only really operate fairly if the parties are of approximately equal financial strength, the shares of the other are affordable, and neither has a unique role in the company.

If Russian Roulette or Texas Shootout are not going to be appropriate mechanisms, a shareholders agreement can also provide for a valuation of the shares and a sale to the remaining shareholder(s), or to the outside world.

But what if A and B don’t have a shareholders agreement? We’ll explore that next week.

Lord Hain – A Speech Too Far. A Cato Solicitors Behind the News Special

By | Criminal, Food for thought, news

If you cast your mind back a couple of weeks, you’ll remember Lord Hain exercising his “parliamentary privilege” to name a businessman who’d been granted an injunction, preventing the Telegraph from publishing a story about him.

And, to be honest, Lord Hain’s words were less like a speech, and more like an elephant blundering about in the rose garden of our constitution.

We give our Judges, not politically appointed Lords, the power to make these decisions.

And, lest we forget, these Judges’ decisions are made not just after hearing all the details of the case argued, but also after many years of study and discipline in law, striving to make fair, legally sound decisions.

Imagine I have told you I am going to publish an article which falsely accuses you of being a thief.

I put it around everywhere that an article about a thief is going to be published soon and many people are looking forward to reading it.

They do not know you are my victim. You go to court to stop me.

At the first Hearing, the Judge decides it is not clear whether what I have written is justified and grants you an injunction until a full decision about the case has been made.

Parliamentary Privileges

Is it fair to you if a Lord or an MP uses Parliamentary Privilege to name you?

There has been no in-depth comment from the media about whether Lord Hain gets away with this playing the supposed “trump card” of “Parliamentary Privilege.” (Who would think the BBC has a ££multi-million news organisation to look into these matters?)

Let’s look at things a little more closely…

“Parliamentary Privilege” is based on the 1688 Bill of Rights which says:

The Freedome of Speech and Debates or Proceedings in Parlyament ought not to be impeached or questioned in any Court or Place out of Parlyament.

Note it says “ought not”, not “shall not”, so not a complete exemption to say whatever you want.

Is Hain as above the Law as he thinks?

Firstly: contempt of court.

There are many different types of contempt of court. They are sometimes grouped together into the following two main categories:

  1. Contempt by disobedience. For example, disobeying or breaching a court order or judgment, or breaking an undertaking given to the court.
  2. Contempt by interference. For example, disrupting court proceedings or the court process itself (known as “contempt in the face of the court”) and interference with the due administration of justice.

An intentional act in breach of a court injunction by one of the parties to those proceedings who is bound by that order constitutes a civil contempt, which is punishable by the court.

In a case called Attorney General v Times Newspapers Ltd and another in 1992 the Court distinguished that type of breach from a prohibited act by a third party, who may be a stranger to the litigation.

Criminal Contempt

If somebody who is not involved in the proceedings breaches an order they may be acting with criminal contempt because that act constitutes a wilful interference with the administration of justice.

I am not aware of any law which states Parliamentary Privilege definitely gives immunity from criminal contempt.

Secondly: the House’s own Rules.

You can find the relevant Rule here: https://www.parliament.uk/documents/publications-records/House-of-Lords-Publications/Rules-guides-for-business/Companion-to-standing-orders/Companion-to-Standing-Order-2010.pdf

and it says (my emphasis):

The privilege of freedom of speech in Parliament places a corresponding duty on members to use the freedom responsibly. This is the basis of the sub judice rule. Under the rule both Houses abstain from discussing the merits of disputes about to be tried and decided in the courts of law

In this case proceedings were before the court and interfering with its decision to grant an injunction without the permission of Speaker is a breach of the Rules.

Hopefully Hain’s conduct will be referred to the House and the Court that made the order he breached, as a criminal contempt, and to the Attorney General.

We enjoy living under the rule of law – no person should abrogate to themselves the power to make decisions which we have agreed lie with the Judges. Hain’s conduct is not righteous; in reality it tramples on the constitution and thus on our hard-won freedoms and privileges.

What do you think about it all?

John

Shareholder agreements – the often unknown effects

By | Food for thought, news

As my father once told me as I was growing up, “strong fences make good neighbours.” Even if you lived in the house next door to your brother or sister, you would probably want a fence between you to mark the boundary. And in a company context, a shareholder agreement performs much of the same function.

Many boardroom disputes arise from one party or another believing that they are putting more time and effort into the business.

A clear written understanding of what is expected from each director/shareholder, together with an ADR resolution framework, can help to resolve these problems – in other words, a “shareholders agreement”.

Here are just some of the things worth including in your shareholder agreement:

  1. Regulating investment
    Quite often one person puts in more money than another. Failure to agree expectations regarding investment can be fatal to a company’s long-term future.
  2. Pre-emption rights
    A shareholder agreement can provide that shareholders have to offer their shares to each other first and prevent people ending up working with somebody they do not know.
  3. Exit
    Shareholders agreement can clarify the vision everyone has for the company and build a consensus, but also provide for an exit procedure which does not involve litigation lawyers 🙁
  4. Deadlock
    If a majority doesn’t exist – e.g. a company run by two people on a 50-50 basis – then deadlock provision in a shareholder agreement can prevent catastrophe.
  5. Deadlock provisions
    Texas Shootout and Russian Roulette, which we’ll look at next week.

Disagreements and personal differences

By | Food for thought, news, Problem Solved

A good company board is one of the keys to a well-run business, and if it’s doing its job, it should identify key issues that need to be resolved for development to take place, generate a constant flow of ideas and engage in regulated decision making.

That all sounds beautiful, positive and progressive, but as we all know, it doesn’t always turn out that way.

The personal dynamism that the board relies upon can turn into disagreements which, if left to fester, can crystallise into acrimonious disputes.

Pushing disagreements under the carpet

If left underneath the surface these disagreements can undermine the smooth functioning of the board and thus the company’s performance and, ultimately, could threaten the company.

In the infinitely variable play of human conduct, disagreements can arise over strategy, financing of the company and remuneration, conflicts between Directors’ interest in the company and outside interests.

Most of these conflicts are underlined by:-

  1. Lack of a shareholders agreement;
  2. Personal differences.

So, what can you do about these conflicts?

Well, as they say, prevention is better than cure, so it would be my suggestion to work extremely hard to create a culture that minimises the two things that cause most conflicts.

Here are just a few ways to do that:

  1. Clarifying authority, roles and responsibilities;
  2. Establishing regular board meetings with an orderly process;
  3. Meeting outside the business – combining meetings with team activities;
  4. Ensuring the flow of full information to all board members;
  5. The Chairman being wise enough to draw out disputes between parties and drawing the poison (chair needs to be able to encourage Directors to reach a consensus during this process);
  6. Incorporating Alternative Dispute Resolution into the company’s culture.

Our next blog will look at how having a shareholders agreement, although it sounds dull and legalistic, can be an enormous help in preventing and resolving disputes.

John

Let’s talk about the boardroom – Derivative Claims

By | news

Don’t worry, I’m not going to start talking about Lord Sugar and his latest gaggle of wannabes (although maybe that’s a subject for another Blog!).

Instead, I want to spend some time over the next few weeks looking at boardrooms and shareholders, and some of the legal framework that governs how those things operate.

And first up, I want to talk about Derivative Claims.

What is a Derivative Claim?

In law, only the person with a claim can enforce it.

So, if Mr. Blogs owes YOU a debt, YOU are the only person who can bring an action in the Courts against Mr. Blogs to recover that debt (although you can assign it but let’s not worry about that here!).

But if Mr. Blogs owes the debt to Comp Limited then the law allows another person to enforce the claim.

(This also applies to other situations, such as beneficiaries of a trust; if you’d like to know more about that please contact me).

For example, if the Directors of Comp Ltd are not prepared to take action, a shareholder can bring a “Derivative Claim.”

Such claims are now regulated by Part 2, Chapter 1 Companies Act 2006 where Section 260(1) defines a Derivative Claim as being proceedings by member of the company in respect of a cause of action invested in the company and seeking relief on behalf of the company.

Say Mr. Blogs owes the debt to Comp Ltd but he is “best friends” with the Directors and they do not want to bring a claim against him – what can the shareholders do? Bring a Derivative Claim.

Once the claim is issued it has to go before a Judge for permission to continue.

The shareholder will then have to file enough evidence to establish a case and convince the Court that the Derivative Claim is appropriate and brought in good faith and it’s the type of claim that company would have brought if it was being properly directed.

If you’d like to know anymore, please contact me and I’ll gladly talk you through how it all works.

John

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