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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

Why wasn’t Anjem Choudary charged with Treason?

By | Criminal, news

You may recall that back in 2016, Mr. Anjem Choudary was jailed after drumming up support for ISIL. He was charged and convicted under Section 12 of the Terrorism Act 2000:-

A person commits an offence if—

  • he invites support for a proscribed organisation, and
  • the support is not, or is not restricted to, the provision of money or other property…

On sentencing Mr. Justice Holroyde said:
I must sentence you on the basis that any link between your words and the actions of others is an indirect one, and that your offences are therefore not the most serious example of their kind. Given the timing of your communications, your high standing, the size of the audience to which you were addressing your lectures, and the likelihood that those audiences would include impressionable persons who would be influenced by what you said, the indirect link is nonetheless a serious one.

The Judge also stated it was likely Mr. Choudary would continue to spread his message but drew our attention to the fact that Section 12 cannot allow an indeterminate sentence.

As a result, Mr. Choudary is being released on licence halfway through his sentence.

He can be recalled to serve the rest of his sentence but people are asking why he was not charged with Treason in the first place as well as the Section 12 offence.

The Treason Act was written in Norman–French in 1351, and you can find the current incarnation on the government legislation website here:

http://www.legislation.gov.uk/aep/Edw3Stat5/25/2/section/II

Not so easy to follow, is it?

In summary it means you are only guilty of High Treason if you plan the death of the King or his wife or his elder son, violate the King’s daughter, etc. or levy war against the King or help the King’s enemies.

(Petty Treason was abolished years ago, so “High Treason” is now just typically known as “Treason”.)

As I’m sure you’ll agree, this definition is fairly archaic, and perhaps not broad enough, but the Law Commission says there are suitable offences within the statute books and they have no current plans to update Treason Law. However, as political commentators are rightly pointing out, it is the only act on the statute book which recognises the betrayal of our country as an offence.

The offence used to be punishable by being hanged, drawn and quartered, but since 1998 it only attracts life imprisonment.

The law is still applicable and can be used, but updating its language would give less room for Defendants to argue whether they had committed an offence or not.

If it had been updated, and Mr. Choudary had been charged and convicted of Treason, the Judge could have sentenced him to life imprisonment, and we would not now be having to release a dangerous person back onto the streets.

What are your thoughts?  Should the definition be updated?

John

Death Penalty for Kotey and Elsheikh?

By | Criminal, news

Kotey and Elsheikh were part of the ISIS Army and were stripped of their British citizenship after alleged involvement in the execution of civilians.

Currently, they’re being held by Syrian Democratic Forces in Eastern Syria – an organisation that enjoys most of its military backing from the USA, who have been coordinating information on foreign fighters, together with governments involved in the anti-ISIS coalition.

The general protocol is that these sorts of prisoners are returned to their country of origin for trial.

However, the US probably believes that Kotey and Elsheikh were part of the group that killed the American Journalist James Foley and consequently, they want them tried and punished in America.

Doing the best I can with the information available on the web, it seems that the US approached the Home Secretary, Sajid Javid, with a request for Mutual Legal Assistance (MLA) under the arrangements between the USA and the UK.

In considering the request the Home Secretary decided the UK did not need to seek assurances from the USA that the two would not suffer the death penalty if convicted.

If you are interested in reading the home office MLA guidelines, you can find them here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/415038/MLA_Guidelines_2015.pdf

Interestingly, you can read on page 15 that:

“Possible grounds for refusal include: the risk that the death penalty will be imposed for the crime under investigation.”

From his comments it seems clear the Home Secretary consulted the Government’s Human Rights Guidance contained in the “Overseas Security & Justice Assistance” (OSJA) document.

He said that there were “strong reasons for not requiring a death penalty assurance …” (see item 9 (b) on page 22 of OSJA)

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/583304/OSJA_Guidance_2017.pdf

Mr. Elsheikh’s mother is now seeking judicial review of the Home Secretary’s decision.

It is likely that she will be alleging that it is violation of his right to life, and the Home Secretary has agreed to suspend the MLA while the case is before the court.

As soon as that judgment is available I’ll share my thoughts and findings with you.

John

Sir Cliff – privacy invaded?

By | Criminal, Food for thought, news

It’s unlikely that you missed the High Court judgment on Sir Cliff Richard’s case vs the BBC?

It was definitely an intriguing one. But even more intriguing was the BBC’s coverage of it.

Do take a read of the BBC’s summary here where you will find this line:

“The BBC said journalists acted in good faith and it is considering an appeal.”

Good faith. Covers all manner of sins, doesn’t it?

There are a couple of key Articles that come into play here:

  1. Article 8 of the ECHR:

“Everyone has the right to respect for his private and family life, his home and his correspondence.”

  1. Article 10 of the ECHR:

“Everyone has the right to freedom of expression.”

Where these two rights conflict (as in Sir Cliff’s case), the Court has to perform a difficult balancing exercise.

In this case, in making the decision of the Court, the Judge balanced the scales more heavily onto Sir Cliff’s side because of the following reasons:

  1. The consequence of the disclosure to him;
  2. The public interest in identifying a person who is only being investigated is not strong;
  3. The degree of drama and sensationalism added to the report by helicopter views of the inside of Sir Cliff’s home by the BBC;
  4. The BBC, through its journalist, Mr. Johnson, did not get the information about the search in a straightforward manner.

That last point is key. Did Mr Johnson’s behaviour constitute acting in ‘good faith’? Mr Justice Mann clearly didn’t think so.

Here are some points that Mr Justice Mann brought up in his judgment that the BBC unsurprisingly omitted from their coverage:

  1. At a meeting on the 15 July 2014 between the Police and the BBC Mr. Johnson exaggerated his knowledge about the investigation of Sir Cliff.
  2. When Mr Johnson was contacted by his source Mr Johnson was probably aware that the original source of the information was Operation Yewtree, or possibly the Metropolitan Police. His contact was someone in a police force, or someone associated with a police force. He was not being informed officially, and had no reason to suppose that his tip-off was sanctioned by anyone in authority.
  3. When Mr Johnson contacted Miss Goodwin he mentioned his source in general terms and said it was, or the information came from, Operation Yewtree, and he also gave further details which reasonably led her to suppose he had a reasonable amount of detail.
  4. Miss Goodwin and Supt Fenwick went into a meeting with Mr Johnson concerned that he already had a story that he could and might well publish, and retained that concern in and thoughout the meeting, reinforced by what Mr Johnson said.

In order to prevent that they confirmed and offered information, and, crucially, offered to alert him to the forthcoming search. They did not volunteer anything. Had it not been for their concern (or fear) of publication they would not have offered him anything, or at least nothing worthwhile, and would not have provided details of the search.

As for ‘good faith’? You can make your own mind up, but it seems odd that a supposedly impartial broadcasting organisation chose to gloss over the high number of implicit criticisms that Mr Justice Mann made throughout his judgment.

You can read the full judgment here:

Do you have a view on the case?

Ben Stokes Verdict

By | Criminal, Food for thought, news

No doubt you were aware of the Ben Stokes trial last week, with the England cricketer eventually being found “not guilty” of affray.

The question is: was the jury right to acquit him?

Here are the four main decisions they had to make:

  1. Did he use threats and violence to another person?
  2. Did he believe that it was necessary violence to defend himself or another?
  3. Was the force he used reasonable in the circumstances?
  4. Was his conduct likely to cause “a person of reasonable firmness present at the scene to fear for his personal safety?”

It is that final line that a significant proportion of the “affray” charge hangs on, but another important question is why the CPS did not charge Mr Stokes with assault.

We don’t know the answer to this question, but it seems likely that had that charge been brought from the very beginning, there could well have been a very different outcome to this case.

All we know is that the barrister advising the CPS at the beginning of the case did not consider an assault charge as appropriate, and unless we see the evidence and papers she considered, we do not know why.

What we DO know is that the barrister who brought the case in front of the court did apply to amend the indictment to add assault charges, only to be told it was too late by the Judge.

When the CPS were questioned on the subject, they gave an answer that gave very little away:

“We selected the charge of affray at the outset in accordance with the code for crown prosecutors. Upon further review Upon further review we considered that additional assault charges would also be appropriate. The Judge decided not to permit us to add these further charges. The original charge of affray adequately reflected the criminality of the case and we proceeded on that.”

As I said – giving very little away.

We can only speculate as to what the actual truth behind the failure to bring an assault charge is, but maybe a more honest answer might have been:

“We did not select assault because we forgot to tell the first barrister about the video tapes shown on the TV so she didn’t have the full facts”

(I make no allegation because we do not know what the reason was.)

In addition, there has also been a lot of questioning around why Stokes’ teammate Alex Hales wasn’t prosecuted, despite video footage seemingly showing him kicking somebody.

The CPS gave no explanation for this and the police gave another political type of statement which, again, tells us nothing:

“Early investigative advice was sought from the CPS in relation to Alex Hales’s involvement and a decision was made at a senior level to take no further action against him”

Again, I make no allegation, as we don’t truly know, but…

How do you feel about the fact that these organisations (the police and the CPS) that WE fund are simply not prepared to give us the facts when things go wrong?

In this case, it just feels like everyone knows that there’s something not quite right, but we’re not allowed to really question it!

John

Wildly Astray Intuition

By | Food for thought, news

I’m sure like me you were incredibly heartened by the Thai Cave rescue. It was a horrendous situation, but the bravery of the divers must be commended.

However, I have seen a few people describing the exercise as a ‘miracle’.

I have little doubt that the Thai government relied heavily on weather experts and flood hazard assessments carefully worked out to make a probabilistic risk assessment regarding the boys’ rescue.

All of us possess a super computer – it’s a fast, intuitive mode of thinking. It feels comfortable because it renders decision making fast, easy, intuitive.

In our ordinary lives it works well.

If we met a group of scientists trying to work out how to get a group of young boys out of a flooded cave 2 ½ miles under the surface of the world, we might not expect them to use their “intuition”.

Intuition reliably goes wildly astray when dealing with complexity and uncertainty.

Some solicitors (like us) – with some awareness of how the mind works, and its frailties – use a technique called “decision analysis” as a slow logical check on intuitive decision making; just like scientists check their intuitive decision with tried and trusted mathematical models and techniques.

Decision analysis is a tool used to value the multiple financial outcomes possible in litigation by looking at all of the possibilities, attempting to give an accurate judgment on the possible outcomes (what lawyers do anyway) to translate the client’s expectations into realistic probabilities.

It has to be admitted, that the assignment of a probability (in terms of a number) to a possible future event presupposes a frequency of similar events in the past which given an indication of their probability, and a lawyer is unable to work with those types of statistical models.

We work with precedent and evidence as applied to the facts to try and obtain the same result.

Here’s an example if you want to dig further without getting bogged down in legal jargon. It’s not strictly a legal video, but illustrates the point well:

https://www.youtube.com/watch?v=7OoKJHvsUbo

We normally draw up a decision tree by hand on intuitive modelling to start with and then begin to refine it.

We can then factor into it the facts we can prove, the facts which are doubtful, and the rule of law that applies in each scenario and thus build up a comprehensive picture for the client.

Costs recovery in law is only about 70% on a very good day. It is often unlikely that a client’s financial expectations will be met in a court of law and it is good for them to have an overview of outcomes based on agreed probabilities before they become committed.

The Best Bit of Advice About Litigation that no-one will ever tell you

By | news

By October 1939, on Germany’s western border, the Allies could have mustered 96 French divisions, 19 British, 22 Belgian and 10 Dutch, together with about 5,000 tanks and 1,000 aircraft.

 

While the German army was in Poland, the Germans kept 25 reserve divisions on their western border and virtually no tanks. This force would not have been able to withstand an Allied advance for more than a few days.

 

With the hindsight of history, the Allied forces should have invaded and occupied Germany, cutting off the German army from its supplies and prevented the Second World War?

 

The Germans took a huge gamble when they invaded Poland – they gambled the Allies would not attack.  They were right.

 

You do not know what your opponent is going to do!  You do not know the moves they are going to make!

 

What all potential litigants must do, as soon as a dispute looms, is go through a pre-action preparation routine (click the button on our website headed “seven questions to ask your solicitor”) and get all the divisions and power you can muster to the border as soon as possible. This is not necessarily to fight. You may be in a better position to mediate when your opponent can see the strength of your preparation and the advance of your position.

 

There is no general answer regarding whether you do this in secret or openly, or at what stage you show your preparation; it depends very much on the type of dispute.

 

For example, generally speaking, if we were helping a client plan a “boardroom coup,” we have to consider that the Companies Act 2006 does not really allow for surprise tactics.

 

For example, special notice is required for a resolution to remove a Director and a resolution to appoint somebody in their place; it is necessary to give notice of a board meeting to all Directors; a Director’s expulsion cannot be smuggled in behind “AOB.”

 

In that case it would be desirable to run through the initial steps (“seven questions…”) to understand whether your objectives are legally achievable, the impact they will have on the company and stakeholders and the company’s reputation and future governance and the range of possible responses you can expect from your opponents and how you will react.

 

So, for a “boardroom coup,” you would usually want to make preparations as secretly as possible before launching your invasion.

 

Former Solicitor Phil Shiner tries to offload assets before declaring himself bankrupt

By | news

Disgraced former solicitor Phil Shiner tried to offload assets worth nearly half a million pounds to family members before declaring himself bankrupt, it emerged today.

The Insolvency Service said in a notice that Shiner, the former director of human rights firm Public Interest Lawyers, gifted away his assets before asserting he would be unable to pay creditors.”

Not only has Mr. Shiner disgraced the profession by his conduct, he also seems to have been embarrassingly oblivious of the ordinary powers of a trustee in bankruptcy.

You cannot avoid your creditors by making gifts or entering into dodgy deals or stuffing it all in your pension before you go bankrupt.

Otherwise we could all borrow a very large sum of money, gift the house to the partner, take a loan from our mate with a sufficiently large interest rate clause to swallow up our income, put the rest of the spare cash, if any, into the pension, and with one bound – your own bankruptcy petition – you are free.

When a person has been declared bankrupt, certain types of antecedent transaction (a transaction entered into by the bankrupt before the start of the bankruptcy) may be challenged under provisions in the Insolvency Act 1986 (IA). Collectively, these are known as reviewable transactions.

The various ways in which a transaction may be challenged are:-

 

  • Transactions at an undervalue (section 339);

 

The bankrupt transferred an asset to someone else as a gift for no consideration or for significantly less than the asset’s true value.

 

  • Preferences (section 340);

 

Any transaction that put another person in a better position than the bankrupt’s other creditors.

 

  • Excessive pension contributions (section 342A);

 

Speaks for itself really, but the trustee in bankruptcy must show an intention of the bankrupt to put assets beyond the reach of creditors and an unfair prejudice to creditors.

 

  • Extortionate credit transactions (section 343);

 

The terms of a loan require the bankrupt to make grossly exorbitant payments or otherwise contravene the ordinary principles of fair dealing.

 

  • Transactions defrauding creditors (section 423).

 

Any transaction the bankrupt enters into as an undervalue in order to put assets beyond the reach of their creditors and frustrate their creditors’ claims.

Mr Shiner also seems to have been blissfully unaware of the presumption he was not acting in good faith when transacting with an associate or person who had notice of his bankruptcy.

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