Business Break Ups

Alexander Kleanthous

The three types of business structure

• Partnership • Company• Limited Liability Partnership

Importance of break up planning

• Most shared businesses will split up• Usually no problems• More likely to have a problem if there is no

agreement• The problem is likely to be worse• Particularly acrimonious when family and

friends are involved

The position of individuals

• Partnership– Partners– Not employees

• Company– Shareholder (aka member)– Director– Employee

• LLP– Member (? Employee)

The plan

• The default rules• Different forms of agreements• Disputes

Default rules

Partnership Act 1890

• Duty of good faith– Fiduciary duty– “the highest standard of honour”– Includes a duty to speak

• Right to participate in management• Majority decisions in ordinary business

– Deadlock = status quo• No new partners unless unanimous

Partnership Act 1890 (2)

• No expulsions by majority unless unanimously agreed

• Equal shares in capital and profit and equal share of losses

• Duty to give full information on request• Full access to books• No private profits• No competition

Partnership Act 1890 (3)

• Partnership at will – terminable on notice• Otherwise – by agreement or by the court

Companies Act 2006

• With limited exceptions, Company can make its own rules

• Articles of Association – Table A• Directors

– management unless overruled by shareholders

– majority decision– fiduciary duties

Shareholders

• 75% majority for eg:– Change Articles– Disapply pre-emption rights– Voluntary liquidation

• 50% for most including to remove a director

Minority shareholder protection

• Unfair prejudice– The main remedy for shareholders– That the affairs of the company are being

conducted in a manner that is unfairly prejudicial to any of its members

– Very broad but does have limits– Petition to the court – usual order that major

shareholder or co. buys out minor– Cannot be excluded by agreement

Minority shareholder protection (2)

• Pre-emption• Ability to block votes if holding enough

shares• Various rights of inspection and notice

– But no right of access to books and records generally

• Right to demand audit – 10%• No general right to buy shares

Limited Liability Partnerships Act 2000

• Much of the Companies Act is applied• Unfair prejudice rules are applied but can

be excluded by agreement• No automatic duty of good faith (probably)• Default provisions:

– Equal shares in capital and profits (bears own losses)

– Right to take part in management

Limited Liability Partnerships Act (2)

• Unanimity for new member or assignment of interest by member

• Majority decisions for ordinary matters (unanimous for change in nature of business)

• Access to books and records• Duty to give full information on request• No competition• Account for benefits received

Agreements

Partnership Deed

• Name• Capital and partnership property• Profits and losses• Accounts• Management and decision-making

– Management committee– Terms of reference– How to break a deadlock

• Admission of new partners

Partnership Deed (2)

• Retirement and death– Compulsory retirement– Limit on retirements?– Time for payment of capital?

• Expulsion• Outgoing partners – detailed provisions• Post-termination restrictions• Dissolution and winding-up

Articles and Shareholders Agreement

• The difference between the two• Class rights for shares (eg capital,

dividends, voting)• Management including voting rights

– How to break a deadlock• Composition of the Board • Dividend policy

Articles and Shareholders Agreement (2)

• Transfer of shares– Restrictions– Pre-emption

• Compulsory sale eg if dismissed (Good/Bad Leaver)

• Drag along and Tag along• Restrictions on shareholders including post-

holding restrictions• Deadlock resolution

LLP Members’ Agreement

• Similar ground to Partnership Deed• Can insert express duty of utmost good

faith• Can contract out of unfair prejudice

jurisdiction

Disputes

Dispute resolution

• Always try to reach an agreement• Negotiation• Mediation

Partnership claims

• Damages – Eg breach of duty

• Injunction– Eg preserve the situation, enforce restrictions

• Declaration– Eg that a partnership has been dissolved

• Winding up• Account

– Who owes what to whom?

Company claims

• Employee claims eg salary, unfair dismissal

• Injunction– Eg to prevent unlawful actions, enforce

restrictions, enforce share rights• Damages• Unfair prejudice petition• Derivative claim

A company break up

• A owns 60%, B owns 40%• A and B are the only directors and

employees• They fall out• A wants B out• B wants to get out

A wants B out

• Dismiss as employee• Dismiss as director• Buy his shares

B wants to get out

• Can resign as employee and/or director– NB entrepreneur relief

• Shares– No automatic right to be bought out– Rights per Articles/Shareholders’ Agreement– Unfair prejudice claim if has grounds

Limited Liability Partnership

• Like Partnership– Damages– Injunction– Declaration

• Like Company– Unfair prejudice – unless excluded

Dealing with a dispute

• An agreement almost always helps• Negotiated settlement usually best for both• Early advice essential for both

– Can’t always backtrack on actions taken eg dismissing/resigning

• Disputes – especially unfair prejudice – “often lengthy and expensive”

• But best to avoid the dispute by a properly drafted agreement

Any questions?Future topics of interest

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