Business CMA Flashcards
If there’s an outside investor in your client’s limited company, what can you do to protect your client?
- Loan (with a higher interest than a bank would give) + preference shares.
Adv. for your client:
Can pay preference shares when they want and at the same time hold all the ordinary shares. So, outsiders wont have voting rights.
Disadv. for your client:
Frank and Mary might want some security for the loan + your clients might not receive dividend payments for a long time as it’s going to the investors’ preference shares.
Adv. for the investors:
Don’t have to wait until dividend it paid.
Disadv .for the investors:
No voting rights + wont benefit from the direct profit of the company’s increasing success.
- Loan + ordinary shares + preference shares.
As long as the investors hold less than 25% of the ordinary shares between them - as it would remove the investors’ powers to block special resolutions (75%).
But, it’s unlikely the investors will accept this as they firstly want their investment to grow with the success of the company, and, since they said they don’t wanna be involved with the day-to-day running of the company (as directors), they will surely want a say as shareholders.
If an outside investor is investing in your client’s limited company, how can you stop them from removing them as director?
Legal background:
- Shareholders can remove directors by ordinary res.
- Shareholder meeting can be called if they have more than 5% of the voting rights.
- Although it’s usually one vote per shareholder, if they have more than 10% of ordinary shares, they can call a poll vote.
How to mitigate it:
- Enter shareholder agreement to say they cant remove or appoint other directors.
- In the company’s Articles, add a Bushell v Faith clause, which gives extra weight on the voting rights of the director they’re tryna remove.
- Provide for a fixed term in your clients service contracts, so if they were terminated early the company would have to pay them damages.
