You have had a brilliant idea, the business plan is agreed and now you're ready to start the business. Here are a few tips to ensure that your first few months go smoothly, you protect your interests and minimise risk to your business.
1. Shareholders' agreement: Who owns the company? This may sound obvious but without documenting certain additional protections like pre-emption rights, ownership may change without you knowing let alone your approval! Often, private limited companies are chosen to limit the liability of the shareholders (i.e. the owners) to the amount, if any, unpaid on the shares held by them (which can be as little as zero). If there is more than one shareholder, it is highly recommended you consider a shareholders' agreement for the following reasons:
a. What happens if a shareholder leaves or dies? Should existing shareholders have the right to purchase shares on key events? If so, what should a 'fair' price be? Negotiating this ahead of time is likely to result in significant cost savings.
b. What happens if communications break down between the shareholders? You can set out here "deadlock" provisions to help the company move forward when there is a stalemate in decision making.
c. Who can appoint directors and what are the requirements for directors' meetings such as a certain person must be present for a valid meeting to take place.
d. Minority shareholders who otherwise have little control in the business can be given veto rights over fundamental decisions.
e. The Articles of Association are a public document so you can include enforceable confidential terms in the shareholder's' agreement.
f. Restrictions on the issue of new shares can be included to avoid dilution of an existing shareholder.
g. Restrictions on the transfer of shares should be set out so that any share transfer must first be offered to existing shareholders. At the same time, you may wish to carve out certain permitted transfers to next of kin including on death.
h. Do you want minority shareholders to be able to block or delay a sale? If not, you may want to include 'drag along' articles, enabling the majority to force the sale of a minority stake (at the same price).
i. Do you want majority shareholders to sell their shares without the minority also being made an offer at the same price? If not you may want 'tag along' articles so that a buyer has to make an offer for all the shares.
j. Finally, it is helpful to set out the rights to distributions and capital. For example, should there be unanimous approval to declare any dividends? Can dividends be paid out in different proportions to shareholders? If so, who needs to agree to this?
2. Data protection: Given the level of fines the Information Commissioner may levy on companies, it is no surprise that data protection is a hot topic for all businesses. Before you begin dealing with personal data, you will need to assess whether you have a "lawful basis" for processing the data and whether its collection is "necessary" for such purpose. If you are happy to proceed, you must then have the necessary data protection policy and privacy notice in place. This will detail what personal data is being collected, the reasons for collection and the data subjects' rights under legislation. There is also a fee to pay to the Information Commissioner unless you are exempt and additional requirements for particularly sensitive personal data.
3. Terms of business: you may consider that you have trusted relationships with your suppliers and customers. However, it is sensible to consider whether written terms are a worthwhile investment to help reduce your risk:
a. Certainty of terms: contracting parties, term, description of goods/services, pricing, timings, delivery and acceptance are just a few terms which should be written down to provide certainty and therefore avoid disputes between the parties. Furthermore, lack of certain terms could void a contract which can be problematic when claiming for any loss. You could opt for a standard set out terms and conditions which is attached to any order form/email or have more bespoke terms if the business relationship is high risk (i.e. due to value or otherwise).
b. Limitation of liability: without a contract, your liability may be unlimited in amount but also you could be liable for all losses including losses which may not have been foreseeable. This may seem unfair but is a real risk for transacting parties.
c. Pricing: you can include terms which set out specific payment due dates (normally by reference to an invoice) and also include that "time is of the essence" meaning that non-payment may result in termination. You can also set interest rates due on late payments or require that payment be made in advance, and allow for price increases by references to inflation or the retail or consumer prices index.
d. Termination: we often receive queries regarding a parties' right to terminate. Setting out written terminations events and valid notification processes means both parties understand their rights and post termination obligations like returning materials, destroying data and confidentiality.
4. Website design: most businesses now have a website which is an important client facing space which may be of real value to the company. A lot of time and effort is required to create the website and it is extraordinary how often the customer does not actually own the full rights to its own website and/or domain. Sometimes the creator provides a licence only to use the website which the creator continues to own. If you opt to have a website created, ensure that you sign a website development agreement which includes terms to confirm that full ownership rights belong to you and that ownership of the domain is transferred to you or the company. A website and domain name can be critical for a business and so full ownership is paramount. Ownership by the creator should be avoided as the value is in the ownership rights and if this is not transferred to you or the company, the creator could die or leave the country without any ability for you to then transfer ownership.
5. Share registers: it is a legal requirement for private companies to maintain a register of members (i.e. shareholders) as well as directors and 'persons with significant control'. Failure to do so can result in extra costs, delay or even abortive transactions if you ever want to sell shares in the company. This is especially important if the company ever carries out a share buyback. Private companies have the option of electing to keep the information that must be entered in its register of members on a central register maintained by Companies House which may be worth considering for some companies.
In a recent episode of our podcast, The Legal Lounge, corporate solicitors talk about the importance of putting a shareholders agreement in place at the outset of a new business partnership. They explain the differences between directors and shareholders, and how a shareholders agreement can detail how a shareholder can be part of the management of the business, you can listen to this here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.