New look for Gardner Leader

We have refreshed our branding at Gardner Leader.  For more details please have a look at this blog post by Derek Rodgers.  Please also have a look at our new website.

Online legal services at Gardner Leader

We have a range of online services at Gardner Leader including a comprehensive HR service for employers, online wills and powers of attorney, and e-quotes for conveyancing.  We believe that legal services have to be accessible and convenient. Some people will prefer the traditional face to face approach while others would rather do the legwork themselves from the comfort of their own home. Our online services enable clients to combine the best of both worlds with internet convenience backed by advice from our solicitors when required. For more details click here.

Essential information about the Bribery Act 2010

The first three articles in our series about the implications which the Bribery Act 2010 will have for all businesses have now been published and can be read here.

Bribery Act 2010

 

We are publishing a series of articles on the Bribery Act 2010 and what it will mean for every business on our related blog by Derek Rodgers – read them here.

What are ‘Good Leavers’ and ‘Bad Leavers’?

‘Good Leaver’ and ‘Bad Leaver’ provisions are usually linked to pre-emption rights in either the company’s articles of association or in a shareholders agreement.  They can take different forms, but most commonly will provide that the price payable for the shares of a departing shareholder will depend upon the circumstances of his departure.

They operate where the pre-emption rights include mandatory transfer provisions which force a shareholder to offer his shares to the other shareholders in certain situations such as death, leaving the company’s employment, bankruptcy or breach of a shareholders agreement.  Usually if the situation does not arise from any ‘fault’ on the part of the outgoing shareholder such as death or where employment ends by retirement or due to ill health, he will be classified as a ‘Good Leaver’.  In other circumstances, such as dismissal for gross misconduct or bankruptcy, he will be classified as a ‘Bad Leaver’.  The provisions will usually then specify that the price which a Bad Leaver can demand for his shares is significantly less than that which a Good Leaver will be able to demand – Good Leavers will normally get market value, Bad Leavers often just a nominal amount.  As with any provisions in articles of association or shareholders agreements, these provisions must be carefully drafted.

What are ‘tag along’ rights?

‘Tag along’ rights are provisions in a company’s articles of association or in a shareholders agreement which are designed to ensure that minority shareholders are not excluded when there is a sale of a controlling interest.

Small shareholdings in private companies give little power and are unlikely to be saleable on their own.  The best chance of realising their value is by participating in a sale of the whole company.  If the majority shareholders can sell a controlling interest without involving the minor shareholders, those minor shareholders could be left with a worthless shareholding. Tag along rights work by prohibiting a sale of a controlling interest unless the purchaser is willing to buy all the share in the company on the same terms.

See also ‘Drag Along‘.

What are ‘drag along’ rights?

‘Drag Along’ rights are provisions in a company’s articles of association or in a shareholders agreement which can be used to force minority shareholders to accept an offer from someone who wants to buy the whole company.

As a third party purchaser is unlikely to want to buy anything less than 100% of  private company, the wishes of the majority to sell their shares could be thwarted if one or two minor shareholders refused to accept. Drag along rights usually work on the basis that if a specified majority of the shareholders want to accept, and the purchaser is offering the same terms to all shareholders, dissenting shareholders can be forced to accept as well.

See also ‘Tag Along rights‘.

Can a company buy its own shares?

A company is permitted to purchase its own shares provided it complies with the provisions of the Companies Act 2006.  The Act lays down detailed rules which must be carefully followed.  The requirements differ according to whether the company is a public limited company (‘PLC’) or a private limited company, and whether the purchase is a ‘market’ purchase or an ‘off-market’ purchase.  If the rules are not followed the purchase will be void and the company and its officers will have committed an offence.

The financing of any purchase is closely controlled – the company may finance the purchase out of distributable reserves or the proceeds of an issue of new shares or (in the case of a private company) out of capital.  If financed out of capital, there are additional requirements to advertise the proposed purchase and a specific timetable which must be followed.  The proposed contract for the purchase of shares must be approved in advance by means of a special resolution.  The shares must be paid for in full when they are bought back – deferred payment is not permitted.

This is a very brief summary of very detailed rules.  Specific advice should always be sought prior to a share buyback.

What are pre-emption rights?

Pre-emption rights may be found in a company’s articles of association or in a shareholders agreement, or may be applied by law. They give existing shareholders a right of first refusal where it is proposed to issue new shares or transfer existing shares.  This allows the existing shareholders (assuming they have the resources to pay for the shares which are offered to them) to avoid their percentage shareholding being diluted by the issue of new shares or prevent an outsider gaining a stake in the company through the transfer of existing shares. Pre-emption provisions may kick in automatically on the occurrence of certain events such as death or bankruptcy to force a shareholder to offer his shares to the other shareholders. It is vital to ensure that pre-emption rights are carefully drafted.

What are the ‘articles of association’ of a company?

Every company must have articles of association.  The articles of association set out the basic constitutional rules of a company covering matters such as the proceedings of directors and shareholders, the transfer of shares, quorums for meetings, conflicts of interest, arrangements for proxy voting, classes of shares, etc.

For companies incorporated on or after 1 October 2009, the default articles of association will be the Model Articles.  For older companies, the default articles were a version of Table A.  Many companies either replace these entirely or modify them in order to ensure that their articles suit their needs.  For example, it is common to add pre-emption provisions to set out what happens when a shareholder wants to transfer shares so that the other existing shareholders have first option to buy them.   The articles may also be modified to give different rights to different classes of shares.