Is it time for some much needed business housekeeping?
The last six months have presented significant challenges to business owners who have grappled with continuing their businesses in the face of restrictive lockdown rules imposed to combat the spread of Covid 19. Many business owners are now operating with a workforce of home workers and their typical working day differs significantly from their life pre-March 2020.
As face to face meetings, corporate events and travel have been stripped from the schedules, business owners may finally find some free time during their day to review the nuts and bolts of their business. That long-awaited review of the shareholding structure, the employee share scheme that has been in the offing for years, the review of key commercial contracts, for some there is now enough time in the working week to get around to these projects.
Here’s some ideas of projects you may have been putting off that it would be sensible to rocket up the to do list in 2020.
- Share Capital – it’s all about the detail.
When did you last review your share capital/register of members to ensure this matches precisely what is lodged at Companies House? It is not unusual for business owners to discover that their understanding of the shareholder structure does not concur with what is recorded on the company register.
Although this seems like a basic task, if a company is looking to sell or raise investment it is essential the share capital table reflects what is shown on the public record. It is not unusual for share movements or change of share rights to be agreed which are either forgotten or not documented correctly. This stores up issues for the future and can cause some unneeded tax problems down the line.
There should be no uncertainty on who owns shares, past share movements and in particular any rights attached to those shares. A forensic review by a solicitor will provide you with certainty that the public record is accurate.
Not having a correct record can quickly undermine a potential purchase or investment as it creates a poor first impression of the company and its management.
- Shareholders Agreement, Articles of Association and Executive Service Agreements – insurance for the unforeseen circumstance.
During lockdown a number of our clients have decided to review their equity documents. This should be done on an annual basis, or when the share structure changes/employee shareholders join or leave.
This task is often overlooked and that can result in equity documents which no longer fit the corporate structure making them less effective if they need to be called upon. Shareholders agreements are there to help regulate the relationship between shareholders by ensuring that all the parties are clear about their rights and obligations in relation to the company. If these documents are ambiguous or contradictory they fail in this purpose.
Clauses that can be particularly divisive include ‘Good/Bad’ leaver, rights attaching to particular classes of shares and any clauses that treat categories of shareholders differently.
With uncertain times ahead, business owners need to be absolutely sure these key documents will work if a shareholder dispute arises or members with significant equity decide to move on, in order to avoid an expensive and drawn out process that is damaging to the company.
Well drafted Service Agreements are also a must have for all employee shareholders and key personnel which clearly define roles, in order that performance can be managed and if necessary an orderly exit from employment/equity ownership managed.
- Corporate Structure – protecting assets and streamlining.
Deciding on the best corporate structure for a business can be a challenge and what was right when the company was formed may not necessarily be right now. A more mature company may have valuable assets which may not be best held in the trading company or it may be time to consider a group structure to allow a move into different projects without risking the core business.
If you own commercial property you may want to consider moving this into pension funds or a new holding company, similarly valuable intellectual property may be another asset that could be moved to a group company and then be licensed/leased to the trading subsidiaries.
Getting your business structure right can serve as great preparation for any potential sale or succession planning.
- Employee motivation and incentive schemes
For a lot of businesses their employees are a massive asset and it is important to ensure they are aware they are valued members of your team, this is especially critical in the current climate when particular key employees may be vital to the survival of your business.
Identifying those key employees and knowing what motivates them is essential. Cash bonuses is one form of motivation that is often used but this often does not buy a long-term form of motivation.
Many businesses now consider share incentives such as Enterprise Management Initiative schemes that give key employees a future stake in the company that will grow in value as the company grows. This can be a real motivator as the employee will see how their contribution adds to the value of the company.
Outside of the EMI scheme there are various share schemes that give the employees shares in the company with or without voting rights but with dividend rights and a realisable value upon the sale of the company.
- Commercial Agreements and Intellectual Property Rights – robust trading terms are a must!
Cash is king in troubles times and debt collection is more effective if your terms of sale and purchase are bespoke to your business and entered into with each contracting party.
With automation being accelerated by Covid, old terms may not fit your business so these should be reviewed/refreshed or completely replaced.
We have extensive experience on advising business owners on all aspects of commercial law. Our partner led specialist teams are only a phone call away.
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