Corporate and business

Selling your Business (1)

 

Unless you happen to be the one person who answers a knock on the door to find someone so desperate to buy your business that they’ll pay whatever you want for it – and I’ve never dealt with one in my career – you will find that when you do want to sell your business, it isn’t easy. If you are to maximise the price you get, the business or company has to be “clean” (minimising the risk of the buyer price-chipping); you and your fellow shareholders need to know what you will accept and the taxation implications of that; and then you have to find a buyer. All in all, it isn’t easy: much more art, rather than science.

Market trends

Among the market trends just now are:

–           There are very few deals where the whole of the agreed price is paid on the date of sale. Many deals involve some element of deferred consideration or earn out – and they cause potential tax problems (when are you treated as receiving the cash, for tax purposes) and risk issues (will I get the deferred element?). It’s best to be briefed about these sort of things before going into any negotiations.

–           Capital Gains Tax relief. I know that I have already mentioned tax a couple of times, but Entrepreneur’s Relief (ER) from CGT is such a useful relief that many deals are shaped around it. It’s often said that ER results in the lowest tax rate many of us face, short of dying! Slightly more seriously, if the business and individuals qualify, the prospect of facing only a 10% tax “hit” has focussed minds on doing deals in order to lock-in the net-of-tax sum. That’s fine but don’t assume that you’ll get the relief: take advice.

Finding a purchaser

It is not uncommon but it is relatively rare for someone to buy a business in a sector they know nothing about. Those sort of deals are more likely to be financially, rather than commercially, driven. In most cases, the buyer will be someone in broadly the same line of work or someone already at the business – someone known to you, in many ways. So, if the prospective buyer is known to the seller, why do the majority of people engage an outsider to help with the sale?

Among the reasons for that are

–           It’s hard to sell businesses, and it follows that it is better to have someone who “knows the ropes”

–           This may be the biggest transaction that you will ever do. Would you trust your finances to someone who may never have done one of these before (i.e. you) or who might become too emotionally tied up in the deal (i.e. you)

–           External people are deniable. They can ask and say things that sellers often can’t, particularly if you have an existing business relationship with the buyer.

Selling your business is not the kind of thing that can be done on a Purple Bricks type of site, if in fact one exists: businesses are just too complex

To be continued…..

 

Please don’t hesitate to contact John Clarke or  Alison Marshall with any queries regarding your business

Gimme a break?

No break for Nestlé in trademark row

On 25 July 2018, the European Court of Justice (ECJ) dismissed Nestlé’s attempt to overturn a ruling that it had not done enough to prove KitKat’s shape deserved legal protection.

The case was about whether the brand had become distinctive enough to deserve its trademark, meaning that its shape alone was how people recognise the snack.

The ECJ declared that it’s not enough to prove that a product has become iconic in “a significant part” of the EU – it has to be recognised throughout all 28 countries of the EU i.e. proven across all the markets of the bloc and not just some.

The ECJ instructed the EU Intellectual Property Office to reconsider its decision to grant Nestlé a trademark in the first place.

The ECJ sided with the makers of Kvikk Lunsj, a Norwegian snack that is a long-time favourite of hikers and skiers – and is shaped almost exactly like a KitKat. The decision will allow Mondelez, the maker of Kvikk Lunsj, to market and sell the chocolate bar more widely throughout the bloc.

 

How did we get here?

For 16 years Nestlé has been trying to trademark its KitKat four-finger shape in the EU, arguing that it’s a distinctive feature which deserves protection.

The ECJ is the latest battleground in the feud between the chocolate bars, which began when the company Freia first introduced the Kvikk Lunsj – “Quick Lunch” in English – to Norwegians in 1937, two years after KitKat hit UK shelves.

For 65 years, KitKat and Kvikk Lunsj co-existed – until 2002 when Nestlé applied for a trademark in Europe for Kit Kat.

Their battle intensified in 2006 when Nestlé secured a trademark for KitKat’s shape, only to be challenged by Kvikk Lunsj maker Cadbury, now owned by Mondelez.

In 2016, a lower EU court decided that Nestlé had to prove a Kit Kat was recognisable in every EU country – and no evidence had been provided for Belgium, Ireland, Greece and Portugal.

Nestlé and the EU’s trademark office appealed against the 2016 decision. If proof of distinctiveness had to be shown for every single member state, they argued, no company could ever reach that high standard.

Mondelez, meanwhile, argued that it was wrong to conclude that KitKat had “distinctive character” anywhere – including countries like the UK, Germany and France.

The European court threw out all those objections.

 

What does this mean for Nestlé?

For now, KitKat is set to lose its EU trademark, but there is still a fight to be fought.

Rather than cancelling the trademark the ECJ decided that it should never have been awarded at all on the basis of the evidence. This means the decision heads back to the EU trademark office. Assuming the EU Intellectual Property Office does not have evidence that the shape is distinctive across the EU, the trademark will be removed from the register. It is open to Nestlé to apply again, and to put stronger evidence in.

Nestlé are determined to keep fighting as they believe the “distinctive shape” of their KitKat is deserving of protection.

 

What does this mean for us?

Courts wish to ensure that they are not giving a monopoly to a company for a shape that’s needed to make a product. For example, a circle for a cracker can’t be trademarked.

As discussed in our previous article, establishing distinctiveness of a 3D shape is still a high hurdle to overcome.

In order to get trademark approval, you need to be able to show that your shape is distinctive enough and that it’s not merely  functional. When proving distinctiveness, carefully consider the evidence you plan to document in your application. Where it is possible to gather evidence of comparability in similar markets, expressly refer to it in your application.

 

If you have any queries regarding trademarks, please get in touch with Alison Marshall and Sophie Graham in our corporate team.

The new Community Right to Buy

With effect from June of this year, local communities shall have a new right to buy abandoned or neglected property and without the agreement of the existing owner, provided that the Scottish Ministers approve their application.  This new right to buy should not be confused with the existing community right to buy under the Land Reform Act 2003 – the new right implemented by the Community Empowerment Act does not require the property to first be marketed, i.e., the right can be exercised at any time, upon application to the Scottish Ministers.

 

The idea behind the legislation is to bring derelict property into productive use, so the existing owner will have a say during the application process, if they can show that they intend in the future to develop or otherwise make use of the property.  If the application is decided in favour of the community body, a price based upon the market value of the land must be paid, as determined by a valuation expert appointed by the Scottish Ministers.

 

There are, however, certain restrictions and qualifications to this new right to buy.  Firstly, certain categories of land are explicitly excluded, the most important being land (including ancillary land) in residential use.  Secondly, the right may only be exercised by a community, defined as a body comprised of at least 10 members, 75 % of which must be members of the community in which the land being purchased is situated.  The land itself must also be neglected or abandoned land, defined by reference to the physical condition of the land and its effect on the environment.

 

As mentioned above, application to the Scottish Ministers must be made by the community body, who must send a copy of the application to the owner and to any lender with an interest in the land.  The community body must show that the purchase will be in the public interest and give details of the intended use of the property.

 

From the point of view of buyers generally, it will be necessary to ensure that any property being purchased is not subject to such an application, which can be carried out by way of search in a new register called the Register of Applications by Community Bodies to Buy Land.

 

If you have any queries regarding the new community right to buy then please contact Kieran Reilly or Michael Dewar

MAKE OR BREAK… FOR TENANTS WHO WISH TO END LEASES EARLY

Tenant break options are nowadays popular and for good reason – most businesses value flexibility and they want to avoid long-term commitments to stay in commercial leases. Whilst leases of 10 years or longer are not uncommon, the majority of those will include tenant only break options at the end of either 3 or 5 years.

There are, though, a host of traps for the unwary tenants wanting to exercise break options. Some of these we have written about before on our website, often giving our readers goosebumps by citing the grim consequences for those businesses unable to exercise the option. These traps include:

• the importance of serving notices in the correct manner; a letter written to the local landlord manager is unlikely to be sufficient

• ensuring that the notice is sent to the correct landlord; this may not be the person named in the rental invoices or as described in the original lease

• ensuring the correct amount of rent has been paid as at the tenant break option date; any underpayment and the tenant risks losing the ability to exercise the break option

A recent court case of the High Court in England, Goldman Sachs International v (1) Procession House Trustee Ltd on 3 May this year, has highlighted a further potential trap. In this decision the court had to decide whether a tenant should be allowed the benefit of its break option where the tenant had left the property but failed to remove tenant fit-out works. The landlord promptly claimed the tenant break option to be invalid because although the tenant had paid all rent to date and given up occupation, it had failed to comply with a condition attached to exercise of the break option, namely the removal of the fit-out works.

Fortunately for the tenant, on this occasion the court decided to “give them a break” by interpreting the specific wording in the lease in their favour. It was, though, a very close call for the tenants and the landlord has been given leave to appeal.

The all important lesson for tenants wanting to exercise break clauses is clear: not only should they make sure the tenant break notice is served properly but they must ensure that they comply with the terms of the lease. Giving up possession of premises can sometimes mean more than just leaving. In some leases tenants may require to remove fit-out works and alterations such as internal partitioning, reception desks, lifting equipment in industrial units or disabled access ramps. In other leases, however, the tenants may be prohibited from removing fit-out works or alterations unless the landlord specifically directs them to do so. Each lease varies and needs to be read carefully. It pays to do so review the lease carefully rather than to risk an expensive dispute with landlords.
If you would like advice in this area please get in touch either myself (michael.dewar@ccwlegal.co.uk) or one of our other solicitors in our property team.

Michael Dewar, Partner

Commercial Contracts

But we varied our contract, didn’t we?

Something about making contracts, particularly business to business contracts, which is often forgotten by the parties is that, while the UK tradition is you have freedom of contract, your freedom is curtailed the moment the contract terms are agreed. If I can prove you agreed to sell a particular thing to me (say a piece of plant) for an agreed price at an agreed time, you no longer have freedom to sell it to anyone else- because I can sue you for breach of contract.

A common feature in written business contracts is a clause forbidding variation of the contract unless the variation is recorded in a particular way e.g. by a further written exchange signed by the parties. So what happens if the parties seem to vary what was agreed, but only by acting in a different way to what is recorded in their written contract? For example, informally, a licensor of serviced offices does not strictly insist on a set instalment of the licence fee being paid by the licensee at a fixed time (monthly, quarterly or whatever)? Arrears build up and the licensor seeks to enforce the strict terms of the licence. This is what happened in a case decided this month by the UK Supreme Court, where the licensee claimed the licence contract had been varied informally.

In essence, the licensee’s argument was the parties to the contract can always agree between themselves to do things differently (after all they are the same parties). The fact no written variation of the sort contemplated by the contract was signed did not matter. This argument was firmly rejected and the earlier decision of the Court of Appeal overturned (showing even very senior judges can get it wrong sometimes).

In short, the judicial reasoning is (a) such clauses prevent attempts to undermine written agreements by informal means, which may be open to abuse; (b) oral agreements can give rise to misunderstandings as to the nature of the variation, something which such clauses avoid; and (c) formality in recording variations makes it easier for businesses to regulate their own management team’s authority to agree variations with the other party. The Supreme Court considered these to be legitimate commercial reasons for agreeing, and expecting the courts to enforce, what are, after all, the parties’ own freely chosen rules on variation; it is not the role of the law of contract to obstruct the legitimate intentions of businesspeople.

So be careful. If your contract has a procedure for regulating variations and you believe the other party has agreed some important change to your contract, do not wait for the dispute you think will never happen, get the variation documented and signed as required by your contract.

Even if there is no control on variation, remember the courts always start by looking at the written terms agreed by the parties. If those are clear, the courts will be reluctant to accept the parties have orally, or by their acts/omissions, varied the written contract. If you are facing such a set of circumstances, but it is now too late to get a written agreement documenting the variation, at the very least look for all the evidence you can produce to convince the court (1) the parties agreed to vary their contract and (2) as to what the detailed variation was.

Finally, if you fail to prove the parties varied the deal, you might at least have an argument that the other party is personally barred by their actions or omissions from enforcing the original contract against you (but that is very difficult to do and a subject for another day)

Stephen Cotton, Partner

 

If you would like to discuss any contract queries you have please contact Stephen Cotton or Emma Arcari

 

 

AVRIO

 

So – it’s that time of year again when we remember to remind you all about Avrio. Each year, in Spring and Autumn, Avrio members gather together for a conference. The May 2018 conference is in Brighton, with 51 representatives there from 25 countries.

I’ve been involved with Avrio since Autumn 1990 (annoyingly, just missing the Spring 1990 meeting in Berlin – not long after the wall fell). Despite what of my colleagues have inferred, this hasn’t just been nearly thirty years’ of travelling and meeting (and eating and drinking) at their expense…..

We, and I, have learnt a lot in these years. One of the big lessons I learnt early on (when everyone from northern Europe responded to a questionnaire on time, and no-one from southern Europe did) is that neither is right or wrong: it is the way that things are done by those people. Similarly, when a German colleague wanted a two day response time from everyone with a progress report on a litigation matter, a colleague from Portugal said he would get a proforma response prepared – because nothing would happen for years. Again, that’s just the way it is: neither right nor wrong. But it does seem something that the UK has ignored in relation to the tortuous Brexit negotiations.

What have we gained from membership of Avrio? Some overseas customers that we wouldn’t have but for Avrio. The ability to get help for our customers from trusted colleagues elsewhere. And the ability for those involved in Avrio to get all sorts of training: not to get hung up on whether something should be subject to Scots law (because lawyers really like these jurisdictional points); when I was in the chair, how do deal with lots of lawyers used to getting their own way (think of herding cats…); and really thinking about and discussing cross-border issues.

Avrio and its members and connections are there for CCW’s customers to use. Broadly speaking, if we don’t have a member in the country that concerns you or that member doesn’t do the sort of law you need, we’ll find the right person for you.

John Clarke, Partner

 

For further information on AVRIO please contact John Clarke

Ken Dodd’s last laugh

You may (just) have read that Ken had the last laugh on HMRC, by marrying his long term fiancée just before his death. That way, his assets passed to her without Inheritance Tax being paid – whereas up to 40% would have helped the Treasury otherwise.

There are also rumours that some high-profile divorces had at least a hint of tax planning about them.

While I am not advocating marriage or divorce for tax planning purposes, they are important – if delicate – things to take into account when looking at the shares in (for example) family companies. Is there a risk of family wealth being “lost” on divorce? Or, in taxes, on death? So, as well as having up to date wills and Powers of Attorney (and you do have both – don’t you?), you do need to have a think some time about, well, what next?

What will happen to your interest in the company when you want to retire? And, what happens on divorce?

From our perspective at CCW our prime interest is in our client businesses. We don’t pretend to understand the niceties of (for example) divorce law: we have good professional colleagues who we can call on should advice be needed there. But, we can do things to protect family ownership in those unfortunate circumstances, even if we can’t do much about ring-fencing value.

But the purpose of this article isn’t to make you think about the stability of, for example, your children’s relationships. No, it is to make you think. What will happen to the business should the worst happen? Just as you’ll probably have life insurance, you should think of this as “business insurance” and take the steps you can to protect the business.

If you would like to discuss any of the points mentioned above, please get in touch with John Clarke in our Corporate Team

 

You reap what you sow….

Taste your own terms before serving them up to consumers.

The latest guidance from the CMA, (the Competition and Markets Authority – who replaced the Office of Fair Trading) has advised businesses when dealing with consumers – not to use terms that the businesses wouldn’t like to sign up to themselves.

To see the short guide from the CMA click here.

A lot of the guidance from the CMA will sound familiar – for example that unfair terms and notices are not binding on consumers. A list of top tips is set out in the guidance as well as mention of certain terms that are considered “blacklisted” – to see the list click here.

The CMA has issued the guidance ahead of the Consumer Rights Act 2015 coming into force on 1 October 2015. This aim behind the 2015 Act is to consolidate much of the consumer law in the UK.

If your business deals with consumers and you’d like further advice on your terms of business or the effects of the 2015 Act, please get in touch.

Emma Arcari is an experienced corporate & commercial solicitor advising businesses on contract law, transactions, procurement & disputes.

Spring into action – Small Business, Enterprise and Employment Bill

The Government is out to do some overdue Spring cleaning with this Bill, with one stated, general aim being to increase transparency about who really owns companies. Though not law yet, the Bill is huge and it is on the way with broad cross-party consensus on many provisions. It affects many areas, so we will be drip feeding the impact in our newsletters and on our website.

Facilitate and rejuvenate receivables finance contracts? Invigorating invoice factoring?

In many ways, the most useful change under the Bill for hard-pressed and cash-strapped SMEs and very much the one to watch is the proposal in the Bill to allow the assignation of customer debts due to SMEs – even when the relevant customer contract prohibits such assignation without customer consent or at least intimation to customers. The effect could be enormous for those businesses who have shied away from assigning their customer debt book to their banks or invoice factors for fear of unsettling their customer base. In many ways this, at a stroke, could achieve what providing for statutory interest on the late payment of debts has failed to do in ongoing supplier-customer contracts and, if this proposal gets through, and it could yet be stymied or made useless by amendments which defeat its apparent benefits, it could have a massive effect on cashflows as there may no longer be a need to seek consent or even advise customers that such income streams have been assigned. As ever, though, the devil will be in the detail that emerges in any final enactment.

Are you a ‘spotless’ shadow director?

Though plenty of case law exists in relation to so-called shadow directors, the Bill now states that the general duties of directors expected by the Companies Act 2006 will apply to shadow directors. An exemption exists for advice given in a professional capacity, but those who run businesses though, or with regular advice and support from, family or friends should take care.

Time to clean out corporate directors?

The Bill proposes that all directors should be individuals, and the use of corporate directors (typically other limited companies) will be prohibited (with a few exceptions). So far, the Bill has set a provisional implementation date for the prohibition of October 2015. The exact exceptions to the rule are still being debated – watch this space. Companies will have 12 months from the provision coming into effect to appoint a natural director.

Nowhere to hide if you are a ‘person with significant control’ aka a PSC?

Companies will be required to obtain information about who owns (directly/indirectly) more than 25% of the shares or voting rights of the company; who has the ability to appoint the majority of the board; and who can exercise significant influence /control over a company. This information will then need to be kept in a public register (known as the PSC register) from January 2016. Criminal sanctions can be faced by the company and the PSC if there is a failure to comply with the new rules.

Emma Arcari is an experienced corporate and commercial solicitor with CCW Business Lawyers Limited  advising businesses on contract law, transactions and disputes across Edinburgh, Fife and Scotland.