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Going through a ‘business divorce’

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Going through a ‘business divorce’

Due to stress, lost clients, pressure, long hours or personal conflicts some SME business relationships can sour over time. But where do you stand if you co-own a business with your partner and you are facing a shareholder dispute? Louise Hebborn, Commercial Partner at Stephensons Solicitors LLP, discusses a shareholder’s legal rights.

There are 5.6 million small businesses[i] in the UK and 96% of these employ fewer than 10 employees[ii]. Sometimes for a variety of reasons the relationship between SME shareholders falls apart – partners can disagree over the direction of a company, the amount taken out in shareholder dividends or the performance of the board. One business partner might feel aggrieved or frozen out and then decide to bring a shareholder dispute case against another.

Here we highlight how to deal with shareholder conflict and explore how a resolution can be achieved to protect the future of the business.

Louise Hebborn

Louise Hebborn

Shareholders’ agreements

Although all business owners, whether they are family, friends or colleagues, start out trusting each other and believing everyone is working towards the same objectives, sometimes over time this can change. That is why it is important to draw up a shareholders’ agreement, a contract between the shareholders of a company, so that everyone knows where they stand from a legal perspective if relationships breakdown.

The purpose of the document is to protect the shareholders’ investment in the company, regulate the day to day running of a business, establish a fair relationship between the shareholders and agree how the business is run. One key point to bear-in-mind is that these terms are private between shareholders and the company, and there is no requirement to file these with Companies House.

While there is no obligation to have a shareholders’ agreement in place, it is strongly recommended to give all parties peace of mind. They are essential to protect an SME’s future and must be reviewed regularly and amended, especially when business ownership changes.

The protection

Understandably not all business ownership is split 50 / 50. There are likely to be minority and majority shareholdings, with various percentages. The terms of the agreement can be drafted in such a way to protect those minority shareholders from being outvoted or prejudiced or allow majority shareholders to act without the entire decision of all shareholders.

It is important to ensure that the agreement is drafted correctly and clauses such as ‘drag-along right’, (DAR) which enables a majority shareholder to force a minority shareholder to join in the sale of a company and ‘tag-along right’ (TAR) the contractual obligations used to protect a minority shareholder, usually in a venture capital deal and other such phrases are considered and where appropriate included.

Unfair prejudice

Unfair prejudice is the procedure by which a minority shareholder, who is the victim of ‘unfairly prejudicial’ conduct by the majority shareholder, can bring court proceedings. However, what constitutes unfair prejudice will depend on the circumstances of each case.

However, some types of behaviour in SME cases are common. For example, actions taken to freeze one shareholder out, either out of management or possibly out of the company. This can occur when the founding shareholders/directors may no longer share the same vision, or one might consider that they are effectively carrying the other.

The remedy for unfair prejudice is often an order than the minority shareholder be bought out of the company but may be the just and equitable winding up of the company depending upon the circumstances.

Act early

If you or a business partner decide to bring a shareholder case forward, try and acknowledge what it is you want to achieve. Do you want to resolve the dispute and stay working in this company?  Or do you want to take your partner to court and potentially irrevocably harm your relationship?

It is prudent to seek advice in the early stages of a decision like this and assess your options. Firstly, a solicitor will determine if you have a shareholder agreement in place. Do not agree to resign as a director, or volunteer to leave the role in the company, as these actions can have an impact on the value of your shares and remove an element of the claim you might have for unfair prejudice.

Seek legal advice first and don’t settle or agree to anything without getting professional guidance.

A compromise

A negotiated separation through mediation is the smoothest way to exit a shareholder business agreement and minimise legal costs, without damaging relationships or reputation.

Mediation is confidential and without prejudice, which means both parties are free to negotiate with the mediator to agree a joint settlement. The role of the mediator is to act as a trusted, independent person who has the ear of both parties and can encourage communication.

The mediator will not make decisions or force an agreement but helps both shareholders to reach a compromise. If a resolution is agreed, it’s worthwhile including it in the shareholder agreement to try to avoid future disputes.

Moving on

It is nearly always the best outcome for both the company and the shareholders to resolve disputes quickly and without the need to forge ahead with litigation. These situations are often sensitive and professional external mediation can often defuse disagreements in the early stages.

If negotiation is unsuccessful and a claim is brought forward one common feature of this type of case, is that the aggrieved business shareholder tends to do something drastic designed to harm a former partner. For example, setting up a competitor company, re-directing work away from the company or removing assets. This is often done as an act of retribution and usually results in a counter-claim being brought against them when pursuing their claim for unfair prejudice.

To prevent a shareholder dispute careful succession planning is key, spend time drawing-up a water-tight shareholder agreement and put in place corporate structures to help avoid disputes.

[i]https://www.fsb.org.uk/media-centre/small-business-statistics

[ii]https://www.merchantsavvy.co.uk/uk-sme-data-stats-charts/

Business

Sunak to raise business tax to pay for COVID-19 support – The Sunday Times

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Sunak to raise business tax to pay for COVID-19 support - The Sunday Times 1

(Reuters) – British finance minister Rishi Sunak is set to increase a tax on business to pay for an extension to COVID-19 support schemes in the budget next month, The Sunday Times reported https://bit.ly/3ujaBcU.

Sunak, in his speech on March 3, will announce he is increasing corporation tax from 19 pence in the pound and will outline a pathway where it rises to 23 pence in the pound by the time of the next general election, the report said. The move will raise an expected 12 billion pounds ($16.8 billion) a year, the report added.

According to the report, at least 1 pence is set to be added to the bill for business from this autumn, at a cost to business of 3 billion pounds, with further rises in subsequent years.

Allies of Sunak clarified he would not increase corporation tax higher than 23%.

These measures will be helpful in paying for an extension to the furlough scheme, VAT cuts and business support loans until at least August.

Unlike the 2010 Conservative-led government, which pursued spending cuts to rebalance the economy after the global financial crisis, Sunak is expected to defer most of the toughest decisions about how to pay for that support in his budget speech.

“The corporation tax hike will be higher than expected and the extension of the support schemes will be longer than most people expect,” the newspaper quoted a source as saying.

Insiders indicated the stamp duty holiday on property purchases would also be extended in line with the other coronavirus support measures, the report said.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

($1 = 0.7136 pounds)

 

(Reporting by Vishal Vivek in Bengaluru; Editing by Lincoln Feast.)

 

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Foxconn chairman says expects “limited impact” from chip shortage on clients

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Foxconn chairman says expects "limited impact" from chip shortage on clients 2

TAIPEI (Reuters) – The chairman of Apple Inc supplier Foxconn said on Saturday he expects his company and its clients will face only “limited impact” from a chip shortage that has rattled the global automotive and semiconductor industries.

“Since most of the customers we serve are large customers, they all have proper precautionary planning,” said Liu Young-way, chairman of the manufacturing conglomerate formally known as Hon Hai Precision Industry Co Ltd

“Therefore, the impact on these large customers is there, but limited,” he told reporters.

Liu said he expected the company to do well in the first half of 2021, “especially as the pandemic is easing and demand is still being sustained.”

The global spread of COVID-19 has increased demand for laptops, gaming consoles, and other electronics. This caused chip manufacturers to reallocate capacity away from the automotive sector, which was expecting a steep downturn.

Now, car manufacturers such as Volkswagen AG, General Motors Co and Ford Motor Co have cut output as chip capacity has shrunk.

Counterpoint Research says the shortage has extended to the smartphone sector, with application processors, display driver chips, and power management chips all facing a crunch.

However, the research firm predicts Apple will face a minimal impact, due to its large size and its suppliers’ tendency to prioritise it. Apple is Foxconn’s largest customer.

Foxconn is looking at other areas for growth, including in electric vehicles (EVs), and Liu said their EV development platform MIH now had 736 partner companies participating.

He expected it would have two or three models to show by the fourth quarter, though did not expect EVs to make an obvious contribution to company earnings until 2023.

Liu also said the company was still looking for semiconductor fab purchase opportunities in Southeast Asia after not winning a bid to take over a stake in Malaysia-based 8-inch foundry house Silterra.

(Reporting by Ben Blanchard and Jeanny Kao; Writing by Josh Horwitz; Editing by William Mallard and Ana Nicolaci da Costa)

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EU seeks alliance with U.S. on climate change, tech rules

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EU seeks alliance with U.S. on climate change, tech rules 3

By Sabine Siebold and Kate Abnett

BERLIN (Reuters) – Europe and the United States should join forces in the fight against climate change and agree on a new framework for the digital market, limiting the power of big tech companies, European Union chief executive Ursula von der Leyen said.

“I am sure: A shared transatlantic commitment to a net-zero emissions pathway by 2050 would make climate neutrality a new global benchmark,” the president of the European Commission said in a speech at the virtual Munich Security Conference on Friday.

“Together, we could create a digital economy rulebook that is valid worldwide: a set of rules based on our values, human rights and pluralism, inclusion and the protection of privacy.”

The EU has pledged to cut its net greenhouse gas emissions to zero by 2050, while President Joe Biden has committed the United States to become a “net zero economy” by 2050.

Scientists say the world must reach net zero emissions by 2050 to limit global temperature increases to 1.5 degrees above pre-industrial times and avert the most catastrophic impacts of climate change.

The hope is that a transatlantic alliance could help persuade large emitters who have yet to commit to this timeline – including China, which is aiming for carbon neutrality by 2060, and India.

“The United States is our natural partner for global leadership on climate change,” von der Leyen said.

She called the Jan. 6 storming of the U.S. Capitol a turning point for the discussion on the impact social media has on democracies.

“Of course, imposing democratic limits on the uncontrolled power of big tech companies alone will not stop political violence,” von der Leyen said. “But it is an important step.”

She was referring to a draft set of rules unveiled in December which aims to rein in tech companies that control troves of data and online platforms relied on by thousands of companies and millions of Europeans for work and social interactions.

They show the European Commission’s frustration with its antitrust cases against the tech giants, notably Alphabet Inc’s Google, which critics say have not addressed the problem.

But they also risk inflaming tensions with Washington, already irked by Brussels’ attempts to tax U.S. tech firms more.

Von der Leyen said Facebook’s decision on a news blackout on Thursday in response to a forthcoming Australian law requiring it and Google to share revenue from news underscored the importance of a global approach to dealing with tech giants.

(Additional reporting by Foo Yun Chee; editing by Robin Emmott and Nick Macfie; editing by Jonathan Oatis)

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