Business Law and Practice. Flashcards
The Partnership Agreement will include:
- Commencement and duration
- Partnership name and place of business
- Partnership Property
- Capital, Profits and Losses
- Drawings / Salary
- Accounts
- Dissolution of the Partnership.
What are the duties, powers and restrictions on Partners?
- Work input and roles; any limits on the authority of partners
- Partnership decision making
- Incoming partners
- Retirement/expulsion of existing partners
- Non compete / other restrictions
Is the Partnership Act modern?
No! Partnership Agreements are vital.
Common provisions in Partnership Agreements - commencement and duration
Commencement and Duration
- Although a partnership commences when s1(1) PA 1890 is satisfied, it is useful for the agreement to set out a date on which the partners agree that the particular rights and obligations contained in the agreement will commence. If the Partners start working together prior to the commencement date then the default provisions of the PA 1890 will apply until the commencement date of the agreement.
The agreement may have a fixed term or may continue until terminated in accordance with its provisions.
If the agreement has a fixed term but the partners continue in business after the expiration date of that term without entering a new agreement, they are presumed to be partners on the same terms as before (s27 PA 1890).
Common provisions in Partnership Agreements - Partnership name and place of business
- The partnership name must not include ‘limited, ltd, LLP, PLC, or Public limited company’, or be offensive, the same as existing trademark, contain sensitive word or expression or suggest connection with government without permission. Place of business should also be set out as well as the nature of the business.
Common provisions in Partnership Agreements - Partnership Property
As a partnership does not have a separate legal personality, each partner is deemed to own a share in the property belonging to the partnership. An individual partner does not have a right to any particular asset.
The default provisions in the PA 1890 are:
* Whether or not a particular asset is partnership property is a question of fact, depending on the intentions of the partners when they acquired it. This subjective element can be difficult to prove, so it is sensible for partners to agree which assets are partnership property to minimise the potential for dispute later.
Common provisions in Partnership Agreements - Shares in income and capital profits and losses
Default provision in PA 1890 provide that subject to express/implied agreement between the partners, all partners are entitled to share equally in the capital and profits of the business, and to contribute equally towards the losses of the business. This is the case even where the parties have contributed capital unequally although if the partners have contributed unequally there might be implied agreement that they are entitled to withdraw their capital unequally.
Extremely important that there is an express provision in the agreement setting out the profit sharing ratio (PSR).
Common provisions in Partnership Agreements - Drawings and Salary
Partners own the business and may take ‘drawings’ of income profits. The partnership agreement should set out how much each partner may draw in any given period. In the absence of agreement, s24(1) PA provides that all partners are entitled to share equally in income profits.
In some partnerships the partners may intend that each receives a salary in addition to an income profit share. This must be expressly set out in the agreement as the default position is that there is no entitlement to salary.
Common provisions in Partnership Agreements - Work input and roles; limits on authority
Under PA every partner may take part in the management of the business but are not required to do so.
The partnership agreement should therefore set out the requirements for each partner in terms of the work they do for the business.
Commonly, the agreement will state that all partners must devote the whole of their time and attention to the business.
The roles of partners and any limits on their authority should also be clearly defined.
Common provisions in Partnership Agreements - Decision Making
The agreement should deal expressly with decision making and management.
All partnership decisions must be decided by a MAJORITY, other than the following which require unanimity under the PA:
- Changes to nature of partnership business
- Introducing new partner
- Varying rights/duties of partners.
Common provisions in Partnership Agreements - Incoming Partners
Under PA unanimous consent of all p’s required for new partner to join.
Whilst this may be what the partners themselves want, it is still advisable to include an express clause in the PA requiring written consent of all partners, to avoid any doubt as to whether consent was in fact given.
Common provisions in Partnership Agreements - Expulsion
Under PA - partner cant be expelled by majority vote unless ALL of the partners have expressly agreed that a majority can do this. This effectively means that in the absence of prior agreement, it is impossible to expel a partner, unless they agree to their own expulsion (highly unlikely).
The P’s should therefore agree expulsion provisions in advance, otherwise it will be impossible to remove a partner without dissolving the partnership.
Common provisions in Partnership Agreements - PARTNER LEAVING
PA - Effect of P leaving is that partnership is dissolved!
If 1 remains - they become a sole trader.
This is usually a ‘technical dissolution’ meaning that new partnership is formed by the remaining partners who continue the business and does not lead to the winding up of the business. However it is open to any of the partners to apply to the court to have the old partnership wound up (ie sale of assets for repayment of partnership debts and for the distribution of assets/liabilities amongst partners).
PA - To prevent dissolution when partner retires, the partnership agreement should state explicitly that the partnership will continue as between the remaining partners and should contain details of how a partner can leave (which may include a provision in the event of death) or be expelled without the partnership being wound up. This would usually include a mechanism for the remaining partners to buy out a departing partner’s share and for the calculation of the value of such share.
Common provisions in Partnership Agreements - Non-compete clauses
Common for a Partnership Agreement to contain express clause preventing current partners from competing with the firm. This is implied by default under s30 which states that if a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, they must account for all profits made by them in that business.
Common provisions in Partnership Agreements - Restrictions on outgoing partners
The partners may wish to also put limitations on the powers of outgoing partners to compete with the partnership after leaving. No default clauses in the PA.
Restrictions on outgoing p’s can be provided for in the agreement by using;
- Non-compete clauses: prevent former partners competing with the business;
-Non-solicit clauses: prevent former partners from soliciting business from the partnership’s clients;
-Non-dealing clauses: Prevent former partners from entering into contracts with clients, former clients, or employees of the partnership.
These clauses are known as restraint of trade clauses and only become enforceable if they are reasonable re duration/geographical area/scope and are necessary for protection of a legitimate business interest of the partnership.
Common provisions in Partnership Agreements - Dissolution of a partnership
A partnership can be dissolved in a number of ways under the PA 1890:
- Automatic dissolution (subject to voluntary agreement) under:
1. expiry of fixed term;
2. completion of specific venture;
3. death or bankruptcy of any partner.
- Dissolution of partnership by notice from any partner. Applies where there is no fixed duration of the partnership.
- Dissolution of partnership if the partnership business becomes unlawful.
- Dissolution by the court as a last resort.
If Partnership is dissolved, the relationship ceases and any partner can demand assets of the business are released. Since automatic dissolution is undesirable, it is important to ensure that the partnership agreement deals with when a partnership may be dissolved and the effect of this, as detailed above in this discussion on partners leaving.
Common provisions in Partnership Agreements - Collecting in and distributing assets on the dissolution of a partnership.
Subject to any written partnership agreement, where a partnership is wound up, once all debts and liabilities are paid, any money/assets left will be distributed so that each partner is paid back their original capital first.
Common for a Partnership Agreement to have provision dealing with the proportion in which any surplus assets are to be shared out following dissolution. This is called the asset surplus ratio or ASR.
If no agreed ASR - PA 1890 applies and surplus assets are shared in accordance with the agreed profit share ratio (PSR).
If no PSR then surplus assets are shared equally.
Capital Gains Tax - Reliefs
- Business Asset Disposal Relief - reduces higher rate of CGT from 20% to 10% for gains arising on qualifying disposals.
- Investors Relief - reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to lifetime limit of 10 million.
- Rollover Relief (Replacement of business assets relief) - defers liability to CGT.
- Hold-over Relief (Gift of business assets relief) - Defers liability to CGT.
Inheritance Tax - Business Property Relief (‘BRP’)
BRP is an exemption which applies to the value of qualifying business assets and is available to LIFETIME transfers and the DEATH estate.
Business Property Includes:
- a business or interest in a business e.g. business of a sole trader or partnership;
- shares in an unquoted company;
- shares in a quoted company;
- land or buildings, machinery or plant owned by transferor but used for business purposes by either a company of which the transferor has control, or a partnership of which the transferor was a partner.
The transferor must have owned the business assets for at least 2 years immediately prior to the transfer. However, BPR not available if business consists wholly or mainly for making / holding investments.
Rates;
100% relief shares of all private company.
50% relief shares in quoted company if SH had control.
Directors duties under CA 2006… (7)
s.171. Duty to act within powers / constitution. (Everything set out in company’s articles of association and decisions taken in accordance with the articles (ie shareholder resolutions). A director is in breach of this duty if they act without authority, e.g. commit the company to borrow money more than the articles allow without prior SH approval).
s172. Duty to promote success of company for the benefit of members as a whole (cannot use powers for improper purposes e.g. for personal gain. must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Success being ‘long term increase in value’ - see factors to consider).
s173. Duty to exercise independent judgment (should be mindful of the individual nature of this duty when acting, cannot blindly follow others without considering the companies interests)
s174. Duty to exercise reasonable care, skill and diligence (the level of care, skill and diligence which a director must exercise is assessed objectively and subjectively - ie
Required level of care, skill and diligence which would be exercised by a reasonably diligent person with:
- general knowledge, skill and experience that may reasonably be expected of someone in their role; and
- the general knowledge, skill and experience of that director.
Min standard expected is that objectively expected of the director. Standard may then be subjectively raised if the particular director has special knowledge, skill and experience).
s175. Duty to avoid conflicts of interest
(This duty requires a director to ‘avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.’
Wide duty - said to apply ‘in particular to the exploitation of any property, information or opportunity’.
Duty isn’t infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict, or if a conflict arises:
- in relation to a transaction with the company (ie between director and company) (s175(3) CA 06) or;
- in relation to a matter which has been authorised by the directors (s175(4)(b) CA06.)
s176. Duty not to accept benefits from 3rd parties - e.g. bribes.
(A director must not accept a benefit from a 3rd party which is conferred by reason of them being a director, or by reason of them doing (or not doing) anything as a director.
However the duty is not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict (s176(4) CA06).
Other directors cannot authorise an arrangement under this section - possible for shareholders to approve the proposed action in advance or for ratification under s239).
s177. Duty to declare any interest in a proposed transaction.
(Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors, whether the interest is direct or indirect. The director does not have to be a party to the transaction for this section to apply, can be spouse/another relative. They must declare before the transaction is entered, either during BM1, or in writing in advance of BM. Written notice must be disclosed to all directors electronically or in paper form.
Further duty to disclose interests in existing transactions or arrangements entered into by the company (s182 CA06).
Directors duties - s172. Duty to promote success of company for the benefit of members as a whole
Cannot use powers for improper purposes e.g. for personal gain. Must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Success being ‘long term increase in value’.
In exercising this duty, directors are required to have regard to a range of non-exhaustive matters (s172(1) CA06);
- Likely long-term consequences of any decision
- Employees’ interests
- Need to foster relationships with suppliers, customers and others
- The impact of the company’s operations on the community and the environment.
- The desirability of the company’s maintaining a reputation for high standards of business conduct
- The need to act fairly as between the members of a company.
Directors duties s177. Duty to declare any interest in a proposed transaction.
Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors, whether the interest is direct or indirect. The director does not have to be a party to the transaction for this section to apply, can be spouse/another relative. They must declare before the transaction is entered, either during BM1, or in writing in advance of BM. Written notice must be disclosed to all directors electronically or in paper form.
Further duty to disclose interests in existing transactions or arrangements entered into by the company (s182 CA06).
MA14 and s177 CA 06 - MA14 specifies that a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for BR’s in respect of that transaction or arrangement. This could cause issues with small companies, however the MA’s specifically MA14(2) and (3) allow the conflicted director to vote and count in the quorum if:
- company disapplies MA 14(1) each time the conflict arises by OR;
- director’s interest cannot reasonably be regarded as likely to give rise to a conflict; or
- the director’s conflict arises from a permitted cause (as per MA 14(4).
Alternatively could remove MA14 under s21 CA06 and replace with an article expressly permitting a director interested in a transaction or arrangement with the company to vote and count in the quroum on BR’s to approve the transaction or arrangement.
Remedies for breach of directors’ duties
Directors owe duties to the company, rather than to individual shareholders. If directors breach their duties, the company has a claim against them personally in law.
Under s178 CA06 - the consequence of a breach of directors’ duties are the same as for breach of the corresponding common law or equitable principles. With the exception of the duty to exercise reasonable care, skill and diligence (s174 CA06), the statutory duties are enforceable in the same way as fiduciary duties owed by directors to their company.
Section 174 - remedy for breach of duty of care, skill and diligence is damages.
Sections 171-173 and 175-177 - remedies for breaches of general duties other than s174 include:
- Injunction;
- Setting aside of the transaction;
- Restitution and account of profits;
- Restoration of company property;
- Damages.
Shareholders may support a director’s proposed action, and be prepared to approve it in advance, even though it would otherwise represent a breach of the general duties set out in s171-s177 CA06. Shareholders CANNOT approve unlawful acts in this way.
The statutory duties under CA06 are said to ‘have effect subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be done (or omitted) by the directors… that would otherwise be a breach of duty’ (s180(4) CA06) - Authorisation only effective if there has been full disclosure by the directors to the shareholders - they can then make an informed decision.
Shareholders can, by OR, subject to anything in the company’s Articles requiring a higher majority or unanimity, under s239(2), ratify (ie approve after breach) the following conduct of directors:
- Negligence
- Default
- Breach of duty
- Breach of trust
If a director holds shares in the company, any votes to ratify their breach which attach to shares held by them or any person connected with them (spouse - children - parents - or a company which they control) will be disregarded under s239(4) CA06.
Unlawful acts can never be ratified (e.g. declaring a dividend when no distribable profits are available) and shareholders cannot ratify a director’s breach of fiduciary duty in insolvency situations since directors owe their duties to creditors, not shareholders, once the company is insolvent.
Ordinary Resolution
Over 50% votes
Special Resolution
Not less than 75% votes.
Written resolution
Method of voting! Still need OR/SR.
Only available to private companies.
Each member has 1 vote
Cannot pass following decisions by WR:
- Removal or director
- Removal of auditor
Board Resolution
Simple Majority ie over 50%
Types of vote at GM
Show of hands
- 1 vote for each shareholder.
Poll Vote
- 1 vote for each share the shareholder has.
Right to demand a poll vote
Can be demanded either in advance of the GM where the vote will take place or at a GM before a show of hands on that resolution of immediately after the result of that vote.
Can be exercised by:
- Chairsperson of the meeting
-Directors
-Two or more persons having the right to vote on the resolution; or
- A person or persons representing at least 10% of the total voting rights of all shareholders entitled to vote on the resolution.
Section 33 CA 2006 - Members rights to sue (for damages usually) if their membership rights are infringed. What are membership rights?
Rights to:
- A dividend once one is lawfully declared
- Shares in surplus capital on winding up
- To vote
- To receive notice of GM or AGMs.
Shareholders Agreements
While the parties could rely solely on the articles to govern the way the company is run, in most companies owned by more than 1 person a Shareholders’ Agreement will be entered into.
SA’s are a contract between some or all of the shareholders, in which they agree between themselves how to regulate the companies affairs. These constitute personal rights and obligations on the shareholders, including how they will exercise their voting rights on certain decisions. Whereas the articles are contract between the company and is shareholders in their capacity as shareholders pursuant to s33 CA 06 and therefore dont deal with personal rights/obligations.
Acts as an extension to the Articles in terms of governing how the company is run and can contain provisions that the law does not permit the Articles to contain.
Specific provisions of SA’s depend on why the parties are entering into the business venture but will likely include provisions relating to:
- Unanimous voting over certain matters e.g. removing a director
- Quorum for GMs
- Dividend policy
- Allotment of new shares; and
- New and departing shareholders
SA can be kept private (unless specifically referred to in articles)
Protecting minorities:
SA provides right of action which enables 1 member to enforce the provisions of the SA directly against another whereas under the Articles this right of action may not arise. Not regarded as membership rights.
How to alter articles?
By special resolution (s21(1) CA 2006).
The alterations must be made bona fide in the interests of the company as a whole.
Entrenched articles can only be amended or repealed if specific conditions are met. These are rare and nevertheless can be amended by agreement of all members or a court order.
Legal effect of the Articles
The generally established rule is that the Articles evidence a contract between the company and its members in their capacity as members and with respect to their rights and obligations as members.
Courts appear to be of the opinion that members will only be able to enforce provisions contained in Articles through the company itself. Therefore if a member is likely to wish to enforce rights against other members, they should enter into a shareholders agreement which becomes an enforceable contract between the members.
Courts have been willing to prevent a company from infringing its members’ rights in breach of the Articles by way of an injunction. s33 CA06 - Rights contained in the Articles enforceable by members e.g. right to vote/right to a dividend.
Directors’ long-term service contracts (s188 CA06)
Require SH approval by OR as real risk of conflict of interests occurring if director themselves enters into the contract.
SH approval required by OR for any director’s service contract which is, or may be, for a guaranteed period in excess of 2 years (the ‘guaranteed term’).
The guaranteed term applies to either:
- a period during which the contract is to continue other than at the instance of the company (ie a contractual term of more than 2 yrs or where the director is in control of how long the contract continues) - s188(3)(a)(i) CA06, and
- during this time the company either cannot terminate the contract or can only terminate in specific circumstances - s188(3)(b) CA06. OR
- OR the period of notice to be given be the company - s188(3)(a) or (b)
It will also apply to an aggregate of any periods covered in either s188(3)(a) or (b).
Note that s188(2)(b) CA06 also makes it clear that if D is also a D of any holding company, the SH of the holding company will also need to give approval.
Consequences of non-compliance with requirement to obtain SH approval for long term service contract - s189 CA 06
If the company agrees to a provision in a service contract in contravention of s188 the consequences are as follows:
- Provision will be void to the extent of the contravention under s189 CA 06; and
- The contract will be deemed to contain a term entitling the company to terminate it at any time by the giving of reasonable notice.
IF a company is unable to terminate a director’s service contract for the first 18 months of the term and thereafter has to give a nine months notice to terminate, this falls within s188(3) because the aggregate period of two provisions are in excess of 2 years. Therefore contract requires approval by OR.
s188(6)(b) - directors long term service contract approval by OR exception (wholly owned subsidiaries)
Approval is not required by the members of any company which is a wholly owned subsidiary of another company.
S.188 CA06 and Disclosures
Disclosure of interest (s177 CA) - director is not required to disclose their interest in the service contract, however, it is likely to remain the practice that directors will continue to make the declaration of interest under s177(1) so that is it documented in board minutes. Additionally, director not permitted to vote/count in quorum on any board resolution relating to the contract (MA14(1)).
Members inspection rights of all directors’ service contracts - s228 CA
A company must keep a copy of all directors service contract at the companys registered office for at least a period of 1 year from date of termination or expiry of the contract for the members to inspection. This obligation applies regardless of the length of any service contract and whether or not it is terminable within 12 months. Under s229 CA members have right to inspect without charge or to request a copy on payment of a fee.
