Blogs by our partner, John Clarke, who specialises in corporate/commercial law

Disagreements, disputes and separation

The day after the night before, it seems topical to be talking about not letting a disagreement grow into a dispute, and then separation – but, as we have seen, that’s all too easy. So, what can you do?

Disagreements are bound to happen from time to time, so rather than wait until they have happened and then try to sort things out, why not anticipate them and build in some sort of dispute resolution mechanism? If you don’t, when things morph into disputes, positions become more entrenched, making them harder – and much more expensive – to resolve.

You might think that I’m talking about countries or couples here – but I’m actually writing this with shareholder disputes in mind. There, if the disagreement becomes a dispute then (in addition to the complexity and cost) there is every chance that, because the focus of the people in dispute has been diverted, the business in question runs into difficulty and may fail. Then, even the winner of the dispute would be a loser.

If there’s a dispute, what do you do?

  • Just as in romantic entanglements, business relationships start off all “sweetness and light”. It’s hard at that time to listen to the “what if it goes wrong?” questions, but you really should – because it’s easiest to get a framework for dispute resolution sorted out when nothing is wrong.
  • If you can’t, or don’t want to, do it at the start, do it shortly thereafter. Your advisers really don’t want to say “I told you so” when you get in touch with the bad news some years later.
  • Using the matrimonial analogy, if things do go wrong you can divorce, reconcile or soldier on. What is best for you – and the business (because, if the business suffers, you suffer)?
  • And if it goes wrong, can it be fixed? Mediation of some sort can work – and do remember that companies can have directors who represent shareholders (without being shareholders themselves). That is one way of taking some of the tension out of things.

So, if you don’t remember anything else from this short note, please do have a think about putting dispute resolution measures in place before they are needed.

If you want to discuss these matters further, please contact John Clarke.

League of Nations

I got back from the (long) journey to Avrio’s latest meeting in Malta – of which more later – just in time to follow the last day of the English Premier League (EPL).  As Alan Green said on Radio 5, “If this was a Hollywood movie, you wouldn’t believe the script”.

The timing for the EPL couldn’t be better, of course, as they are just about to renegotiate their commercial rights around the world.  One of the many fascinating things about the EPL is just how international it is: not only in relation to the number of countries which follow the games, but also where all the players come from.  And that leads me – albeit rather tenuously – back to Avrio.

My first Avrio meeting was (I think) in December 1990 – and since then there have been a very large number of meetings in many different locations, whether they were meetings of members or meetings of the board (as I was a Director for 10 years and President for 5).  So, I think it a reasonable question for you to ask me, “Why is CCW involved in Avrio?”

There are two main reasons:

  • CCW’s people who go to the meetings get an understanding of how law is dealt with elsewhere, and that should (in theory) make them better lawyers.
  • More importantly, we can offer a better service to any clients or contacts who have legal needs in jurisdictions that we can’t service ourselves.  Not only can we find out the answer that is needed but we can put you in touch with someone we know and trust. Recent examples involve transactions in Cyprus, Portugal and Italy.

What we have been guilty of – and the fault here is largely mine – is in not telling our clients and contacts more about Avrio.  So, fresh from the Malta meeting, I’m trying to do that now.  Please have a look at the Avrio website and if you are doing any business abroad – even in the near-abroad – think of our extended network of friends and contacts. Also, the next meeting will be in Croatia this Autumn – so expect a follow up email before then to try to find out if you have any business in Croatia and/or you have any legal problems you would like us to discuss with our Avrio colleagues at that meeting.

If that email doesn’t appear – remind me!

John Clarke

How do you avoid liabilities? As best as you can….

Sorry about the old asbestos pun, but a recent case (Chandler v Cape plc) is throwing something of a wobbly into the otherwise fairly staid world of corporate group structures.

Until the Cape decision, the law in the UK pretty much upheld what has been called the “corporate veil”. Broadly, that means that (for example) the liabilities of a subsidiary company remained with that subsidiary, and couldn’t be attributed to the parent unless there was something extra: a guarantee or undertaking from the parent, for example. In the past, health and safety issues have pushed at the boundaries of that “settled position” – but Cape may have run straight past the boundary!

Cape involved someone exposed to asbestos dust while working for a subsidiary of Cape. The subsidiary couldn’t pay damages awarded to the claimant, who then pursued Cape – and won. That was good news for that claimant and for others in similar positions – but from my usual point (advising businesses how they should be set up) it is worrying. So, what lessons are there to be learnt?

Firstly, don’t panic. Secondly, though, don’t ignore Cape. The lessons seem to be:

  • A parent company may be in the frame if it takes control over the relevant affairs of a subsidiary. So, the subsidiary must be able to make its own decisions (usually by its board).
  • Cape dealt specifically with health and safety issues, but the judgement was wider than that – so don’t assume this can be ring-fenced.
  • This liability was imposed on Cape a long time after the subsidiary ceased to exist. That has implications for corporate sales: expect to be asked Cape-related questions about any subsidiaries, whenever they existed.

I can’t help thinking that the corporate landscape just got a little more complex!

Yes we can…maybe

As I drove into work today and heard the news about the final stages of this year’s Presidential election I remembered the newsletter we issued when President Obama was being inaugurated in January 2009.  I know: that seems like yesterday to me too!

When we sent that mail shot I don’t think we expected that nearly 4 years later the economy would be as tough as it now is but given the current and continuing financial problems, I think it is worthwhile re-emphasising some of the points we made in January 2009.

As we said then, normally we would all run a mile rather than tell others that business isn’t too good.  You can’t talk to your bank, in case they pull the plug; and your auditors have statutory duties, so you may not be able to confide in them. But lawyers don’t have these issues to deal with – and might (just) have some ideas.

So:

  • Is your business structured in the best way to protect its value?
  • Are there hidden assets that can be used to generate cash flow?
  •  What changes should you be making now to prepare and protect your business?
  •  Are your terms and conditions robust enough when customers do not pay?
  •  Are you making the best use of your trading premises?

As recent cases we have dealt with show it is genuinely never too early to have a quiet, confidential chat about these issues. In many cases this isn’t a question of “time means money”: it is a case of “time might just mean survival”.

So, when you are ready, drop me an email or give me a call?

Forum shopping? I don’t like any sort of shopping…

A Scotsman, and Englishman and a Frenchman (and others) went into a bar (well, many bars actually). Yes, I’ve been to another Avrio Advocati meeting. This time, while the Frenchman didn’t sing, he did dance with a bride he didn’t know – but that’s another story!

You’ve heard me mention Avrio Advocati before. It’s a growing and active group of lawyers throughout Europe and beyond so that, if you have a problem in another country, we should have a colleague who can help.

Two or three of the sessions this time involved “forum shopping”. That means thinking about where legal contracts or proceedings should be based, to get round problems in one legal jurisdiction or take advantage of a peculiarity in another. And that’s not as esoteric as it sounds: people and businesses may have options that they (and their advisers) might not have thought of. Examples include:

  • Insolvency: there are quite different rules in different jurisdictions, so if someone has solvency issues, would they be dealt with better in Country A than Country B – and if so, how do you take advantage of that?
  • Family law: the rules relating to pre-nuptial contracts, divorce, maintenance and so on are quite different, jurisdiction to jurisdiction. If someone from Country A is married to someone in Country B and they live and have a business in Country C, if something goes wrong with the relationship, what law applies? Does either A or B have any options? And what happens to the business assets?

The more that people move around – whether for work or pleasure – the more these issues will become relevant to more people. So, please remember to let us know if any of these sorts of “forum issues” are relevant to you – and you should anticipate these sort of questions from us.

Given the complexity of the issues, you’ll understand why we needed to go into the “many bars” to have long and deep conversations on these and other(!) topics. And if you want to hear the story about a Frenchman singing, we’ll have to have a (long) chat……

 

Are family companies different?

There is a lot of talk in the press just now about how all companies are evil tax avoiders or (even worse) tax evaders.  It was good to hear some rebalancing on the radio that this all might just be “heat and light” from the politicians, but that will be the subject of a later rant (sorry blog). Few of the companies involved in this bad press are family companies, but family companies are not without their own problems.

Lately, I’ve been struck by a number of recent cases where there were striking similarities between what were broadly family companies – and that lead me to thinking (I know, a dangerous thing…….) whether there is anything inherently common to family companies that makes them different from other private companies.

In theory – and often in practice – shares are held in companies for a couple of reasons:

  • to make a gain when the shares were sold; and / or
  • to generate income through the payment of dividends.

That corporate law theory begins to “flex” for private companies for a variety of reasons:

  • often, it is unthinkable that the company could be sold;
  • dividends may not even be considered let alone paid, and
  • the company is more like an entity to hold the family business for successive generations.

So, with that in mind do we need to tweak what would otherwise be the “orthodoxy”?  Here are a few thoughts

If a company is not going to be sold but is going to be kept within the family then, over time, that will probably mean more shareholders as more generations are involved.

The more remote those shareholders are from the heart of the company and the more distant they are from its decision making – the more the risk of problems.  Consider: if a (remote) shareholder is not going to be able to sell his or her shares, then the share certificate is in effect a worthless piece of paper unless those shares pay dividends.  So is it inevitable that after a few generations, family companies have to pay dividend.

Whenever shareholder disputes happen they are hugely disruptive and hugely expensive.  In other words, they should be anticipated and avoided at all costs.  So, how would you go about avoiding a shareholder dispute from non-involved shareholders?

    •  A dividend strategy?
    •  Changing the rights attaching to the shares so that, in exchange for payment of regular dividends, the non-involved shareholders either don’t have any voting rights or have limited voting rights?

It is tempting to say that the problem should be removed altogether by “taking out” the non-involved shareholders, probably by the company buying back their shares.  But in the current financial climate:

    • Could those bought out shareholders get as good a return on that cash as they will get in the company?  Probably not.
    • Could the company borrow to fund that buyout and anything else it intends to do as cheaply as the cost of keeping those non-involved shareholders.  Probably not.

So I think there is something of a long term bargain between those at the heart and those at the periphery of family companies along the lines of:

  •  Those of us at the heart will look after your interests and pay you a good return as long as you keep out of our hair;    and
  •  Those at the periphery keep on banking the cheques.

The good news is that all of this is doable easily for private companies.  The big thing, though, is to think about the issue and put things in place when there are no problems.  Stating the obvious, when there are problems, people won’t agree to changes.

Food for thought?

It wisnae me..

A big boy did it and ran away. For non-Scottish readers, this is a more or less standard excuse from our (Scottish) childhood. But what on earth is the connection to an email from business lawyers (apart from the fact that they are based in Scotland)?

When things go wrong in contracts and in business, and in particular when they are heading towards court, that’s when everyone usually reaches for the paperwork – just to check that what the paperwork says is what it is supposed to say. And yes, that’s where we get the “I wish I had listened” sort of comment because – stating the obvious – when that dispute has blown up it is usually (although not always) impossible to put things right at that stage.

So, how do you stop things going wrong?

  1. Easy: don’t enter into any contracts. I know: that’s a bit like the old joke of the hospital that works perfectly until it is forced to accept some patients. You can’t be in business and not enter into contracts, and some will go wrong. So how do you go about limiting the damage when they do?
  2. If it is going to be you on the receiving end – say you have supplied something and it doesn’t work – what will you do then? Options include insuring against claims and having what lawyers call “exclusion clauses” in your contractual paperwork but (and this is a major “but”), will they work when the crunch comes? Those sorts of clauses if properly drafted do work, but they do have to legally form part of the contract – so in your case, do they? Are you sure (because this will only be tested “in extremis” when you are unlikely to be able to do much to remedy any shortfall).
  3. If your business is the party that suffered the loss, do you have a right of recovery against the supplier – and if you do, is the supplier good for your claim (or is your real target their insurer)? Again, does your paperwork say what you want it to say, particularly given that it will only be stress tested when you have a limited opportunity to change anything (particularly when your real target is the insurer)?

I know that a lawyer would say this anyway, but the paperwork does matter – not just that you have at least some paperwork (always a good idea) but that it does what you want it to do (amuch better idea). We’d much prefer to be involved in helping prevent problems arising (by getting it right at the outset or minimising the risk) than in trying to help you come up with reasons why your business should not bear that particular liability when things have gone wrong. In other words, could we try to avoid the “it wisnae me” defence?

Going forward, please have a think about the risks involved here – and please do get in touch if you’d like to chat through ways of avoiding or minimising them.

John Clarke

Where do you think you’re going?

We’ve already been challenging you to get your house in order earlier this month, but here’s one further resolution to give some thought to for 2013.

As is the case in so many different areas, having a think about what you intend to do with your business longer term and doing some planning is likely to be beneficial.  So:

–       What’s going to happen to your business in the future?  Is it going to stay in the family, be sold to colleagues already involved in the business or sold on the market?

–       When are you thinking of making any changes that you are planning to make?

Together, the answers to these sorts of questions get you thinking about:

–       Is training going to be needed for the people who succeed you?

–       What things need to be done to make the business more saleable – altering its look and feel and making it “cleaner”?

–       How might your plans be affected by changes to (for example) tax rates etc?

It is genuinely never too early to start thinking and discussing matters even if the net result of those discussions is “no change meantime”. Having a clear (or even rough) plan in place is not only good for your future, but can give you peace of mind in the present.

So, if this rings any sort of bell, give me a call or drop me an email.

John Clarke

Insolvencies: is our current system working?

Let’s start at the historical side of things.  We used to put debtors in prison until their debts were paid.  I think we have moved on a bit since then… As you probably know we now have systems of both personal and corporate insolvency and it’s here that I’d ask – is that system working in the majority of cases?

That isn’t just a philosophical – or even idle – question.  In trying to answer it, we also have to ask – what is the insolvency legislation for?  To my mind one of its purposes is to bring a tidy end to those cases where there is no hope of “survival”: let’s call this the undertaker function.  The second purpose is to get back to creditors whatever can be recovered in such a way that is broadly equitable between them:  the recovery function.  Thirdly, if there are businesses or parts of businesses that can be rescued then they should be rescued: the rescue function.

From my perspective, undertaking is working pretty efficiently.  I haven’t seen any proposals to put debtors in prison again!  But I’m not sure that the recovery or rescue functions are working as well as they should. There are many reasons for that including the availability of finance, timing, culture and costs.  Looking at these briefly:

Availability of finance:  not surprisingly, if one business has gone down, the existing lenders are going to start off with being reluctant to lend to any successor business unless they are really sure that the successor is going to be viable – and often if everyone was as sure as that, then the funding would have been available to rescue the business before the collapse.  So should we encourage no hope in this area about these problems?  In some cases suppliers to a business that is going downward much prefer to have a business to continue to supply (even if that meant writing off some debt) rather than writing off debt and not having a business to supply.  In technical terms, that might be Hobson’s choice.

Timing:  I’m afraid that this is pretty simple.  If people face up to their problems early enough something might be doable.  If they don’t, the chances are that it won’t.  So we need to encourage a culture where people can be more honest about the difficulties of their business.  That leads me onto…

Culture:  Here I’ll always remember a fundraising trip with a client to Texas nearly 30 years ago.  He made his pitch for funding, which went very well.  Afterwards somebody approached him and chatted about the product etc, and then said, “I hear you’ve been bankrupt”.  My guy said “yes”, his shoulders slumped and we started to think this opportunity was lost – until the Texan said “Great: what did you learn?”  We in the UK are light years away from that frame of mind.

Costs: All too often, complying with the legislation means that ordinary creditors get no recovery – so to that extent, the whole process fails ordinary creditors. They have lost all their outstanding debt and their customer – and that can’t be right. So, I think we need to start thinking of better ways to do these jobs, that improve the prospects of recovery and rescue.

We have to accept that businesses run into difficulties, often for reasons that are nothing to do with the hard work of those running them: for example, a key customer can go bust.  So I think we have to be more proactive about rescuing those businesses that can be saved, and that will only happen if there is a dialogue early enough.

Food for thought?

If you would like to discuss this, please contact, John Clarke.