Your Business: Is This Your Opportunity to Change?

12th October 2020 by

By Charlie Pattihis, Solicitor – Healys Corporate & Commercial

Headshot of Charlie Pattihis

The global pandemic and its all-consuming impact on businesses, not only in the UK but across the world, means that many business owners have been forced to pivot and/or innovate just to survive.

This is a huge opportunity for business owners to reflect on their current processes and to take steps to strengthen and adapt to the evolving ‘new normal’. If you’re changing the way you do things, you need to make sure that any practical changes also work from a legal perspective and complement your long term strategy.

Here are a couple of things to think about.

Constitutional documents and ownership arrangements: don’t have the rug pulled out from beneath you…

Have a look at your constitutional documents (your articles of association and/or shareholders’ agreement). Chances are these have not been looked at in some time but they are in fact extremely important documents. Remember that these arrangements are not static – as your business develops they too should be refreshed to reflect changes in your underlying structure or practices.

Covid 19 has created one obvious need for a review – the new way of working means that many businesses have adapted to holding virtual team, management, board and/or member meetings. Platforms such as ‘Zoom’, ‘Skype’ or ‘Microsoft Teams’ have been extremely successful during this time and appear to have provided a solution to some of the legal obstacles facing businesses in the decision making processes.

Unfortunately, as is so often the case, the law can be a few steps behind innovation and there can be issues if your constitutional documents do not allow for meetings to be held virtually.

If your articles require that notice of a meeting should state the time, date and “place” for the meeting, this has been interpreted that a meeting would have to be held in a physical place.

What does this actually mean for your business I hear you ask…? Well, the bottom line is that there is a risk that any decisions taken at a virtual meeting will be invalid. So, a decision to enter into a finance agreement or new commercial arrangement could ultimately be unlawful.  This could potentially cause significant contractual and financial problems for the business. It is also possible that  the directors themselves could become personally liable for a breach of their director’s duties.

The current conservative approach is to make sure your constitution expressly allows for virtual meetings.  We also recommend including additional wording to make it clear that participants can attend, speak and vote at a virtual meeting.

A different kind of exit: If your ship doesn’t come in, swim out and meet it!

Has the pandemic scuppered a potential sale of your business or, perhaps just given you pause for thought about the way in which you run your business now and how to plan for the future? Traditional sales are very much still an option.  But have you thought about Employee Ownership instead?

Employee Ownership structures allow businesses to implement arrangements (usually tax efficient) so that they are either wholly or majority owned by their employees (John Lewis is a great example of this) with the employees either holding shares in the company directly, via an  Employee Ownership Trust company or a combination of both.

They are the fastest growing form of business ownership structure in the UK at the moment with more and more business owners recognising the opportunity to improve performance and create a stronger business for the future.

So, why might you think about an Employee Ownership structure for your business?

Legacy: Transferring ownership of the business to your employees instead of selling to a third party can allow for a more holistic exit. The transfer process can be implemented at a pace which suits your business allowing you to continue to be involved and help the business grow more remotely whilst bringing through the next generation of leaders to take the business on and continue the culture and ethos you have created.

Empower and incentivise your employees: Employees that think more like business owners are more likely to fully engage with that business and work together to improve performance; and research has shown that Employee Owned businesses perform more strongly as a result of a more collaborative culture. On top of this, Employee Ownership can be a powerful recruitment tool you can use to attract and nurture and inspire talented employees.

Flexibility: We have already mentioned the benefits of a tailored implementation of the transfer but, perhaps more importantly for business owners, switching to an Employee Ownership structure allows for an exit without the need to find a third party buyer. On top of this the transfer itself can be funded by a mixture of traditional bank financing and capital as well as by the business itself.

Tax: There are very attractive tax incentives available when you switch to certain Employee Ownership structures.  Given the question mark over the future of Entrepreneurs Relief this has to be a consideration that shouldn’t be ignored.

If you’d like to speak in a bit more detail about any of the above points, Healys’ experienced Corporate Commercial team are here to help. Our lawyers can advise and assist you in all contractual and corporate restructure matters. For more information or advice, please contact us on 020 7822 4000 or email corporate@healys.com