There are so many things you will be thinking about when running your business and getting the legal documents right is crucial to ensuring that your business is adequately protected and has the best possible chance of success.
This guide, brought to you by Fashion Rider and Stephenson Law, outlines the essential legal documents you, as a business owner, may need to put in place to be sure that you’re doing things the right way to protect your business.
Beavis Morgan is the preferred finance partner to Fashion Rider, the fashion industry’s premium membership site.
A shareholders’ agreement is a private contract between the owners of a private company limited by shares. It regulates the various aspects of ownership of the business, how the business is run and protects the owners on a day to day basis. Whilst there isn’t a legal requirement to have a shareholders’ agreement, we strongly recommend having one if you’re in business with someone else, whether it’s a friend, family member or investor.
Top tip: Many funding providers make it a condition of any facility that a shareholders’ agreement is in place and we suspect that this practice will become widely enforced in the future.
Why are shareholders’ agreements so important?
- The fall out
In the first instance, the agreement will regulate what happens if something goes wrong. These situations are hard to foresee, especially when you’re going into business with someone you trust. However, disagreements do arise and, naturally, people do move on. Dealing with the ‘divorce’ at the outset can be easier and more cost effective in the long run. Ultimately, minimising conflict in this way will prevent the business reaching a stalemate position and will allow the business to survive a parting of ways.
- Decision making
Most businesses are not split 50/50; you may have minority and majority shareholdings in various percentages. The agreement can be drafted in order to protect minority shareholders from being outvoted or prejudiced or, in the alternative, allow majority shareholders to take action without the consent of all shareholders. By outlining the process, it will make decision making more efficient and save your valuable time.
The day to day decision making of a company is undertaken by the directors, rather than the shareholders (although you can act as both simultaneously). A shareholders’ agreement can hold directors accountable for certain actions and can require the directors to seek shareholder consent in respect of key company decisions. Whilst shareholders are able to take a step back from the day to day dealings of the company, the shareholders? agreement will provide for situations in which the shareholders must be consulted, allowing them to retain control.
You will want to get paid for the blood, sweat and tears that you’ve put into building your business, right? Shareholdings in a company can be linked to financial contribution or investment in the company or in certain circumstances performance through mechanisms such as a share option scheme. There are a range of different options for how company profits can be distributed – the details of which should be set out in the shareholders’ agreement.
- Confidentiality and restrictions
We’re pretty certain that the Winklevoss twins didn’t envisage Mark Zuckerberg stealing their idea for Facebook and it’s easy to see how this can happen between two or more shareholders in a company. No one wants their co-founder to set up in competition with them, taking all their trade secrets with them … do they?
It is extremely important to protect the business, and this can be done by placing restrictions on the shareholders during their involvement with the business and for a period of time after their departure. Restrictions can be imposed to protect intellectual property rights and trade secrets or to stop suppliers, customers and employees from being taken from the company, along with restrictions around setting up a competitive business.
Terms & Conditions
Depending on the type of business you are running, you will usually need a standard set of terms and conditions for both your customers and suppliers. Terms & Conditions (T&Cs) are a legally binding contract which outline the rights and responsibilities of both you and the other party based on the product or service you’re providing.
- Customer T&Cs Customer
T&Cs set out how and where your goods or services are to be delivered, the pricing and payment arrangements, and limitations of your liability (should a complaint arise). Many insurance companies require you to have professionally drafted T&Cs otherwise they may not cover you in the event of a claim. The specifics will differ from business to business as companies put greater importance on different aspects. For example, a tech company may want extremely robust provisions relating to intellectual property, whereas this may not be as important for a recruitment company.
- Supplier T&Cs
Supplier T&Cs allow you to set out the scope of the goods or services. They will outline your rights and responsibilities, as well as those of your supplier. It is important to consider your approach and the level of risk you’re willing to take and this should be linked to the legal responsibility (or liability) that you are prepared to take on, and the liability you want the supplier to have, if something was to go wrong. There are ways of limiting and excluding your liability and how you want to go about this will depend on your arrangement with the supplier. For example, your position with regard to liability may be very different when dealing with a stationary supplier, as opposed to the company providing the platform in which your entire customer database sits because the level of risk to your business if something was to go wrong is much greater!
If you’re employing even one person, it is vital that they have an employment contract. An employment contract is a legally binding agreement designed to give both parties certainty, security and protection. It sets out the employee’s terms of employment including their rights, responsibilities and duties and sets out the employer’s guidelines and expectations. There are many provisions in an employment contract that can protect your business’ interests, as follows:
- Confidentiality clause
Ensuring that employees keep information relating to the business confidential is a term that is implied into any employment contract so, if you don’t have it, it’s not the end of the world because it will apply regardless. This means that whether or not you mention confidentiality in an employment contract, all employees have a duty of confidentiality to your business. However, it is still in an employer’s interests to include such a clause as it can act as a deterrent to employees and can help to classify what you consider to be confidential information.
- Probationary period
It is difficult to assess how well an employee will integrate into the business and whether it’s the right fit for both parties. Almost one in five new employees fail to get past their probationary period or have their probationary period extended. Given these statistics, employers are better positioned to deal with issues if the employment contract contains a well-drafted probationary period. In the absence of such a clause, you will have to rely on the usual notice provisions to terminate the employment contract. This can be more expensive and take longer to end the relationship, which can aggravate an already challenging situation for you as the employer.
In contrast, a well drafted probationary period can provide both parties with an immediate period in which they can evaluate the success of the relationship. Probationary periods can help manage expectations and can prevent situations where poor performance or misconduct is left unmanaged.
- Restrictive covenants
With the exception of an employee’s duty of confidentiality, there are no other implied restrictions on your employees after employment has ended. Therefore, if you want to put further restrictions on employees, you need to expressly set these out in the employment contract (generally known as restrictive covenants). The basic premise is that all restrictive covenants are void and unenforceable unless they:
- a) protect a legitimate interest of the business, and
- b) go no further than is reasonably necessary to protect that legitimate interest.
There are numerous examples of what constitutes a legitimate interest, depending on the nature of the business. The most common examples include the employer’s trade connections (i.e. with the customers and/or suppliers), the stability of the employer’s workforce and trade secrets.
Once a legitimate interest has been identified, the restriction must be no more than reasonably necessary to protect that interest. Therefore, the duration of the restraint must be for a reasonable length of time, any geographical restraint must correspond with the legitimate interest and the duties of the employee should be taken into account. It is important that restrictive covenants are tailored to suit the requirements of each individual employment situation and should be reviewed regularly.
In today’s world, flexible working arrangements are widespread and many businesses favour consultancy arrangements over engaging employees. Consultancy agreements are just as important as employment contracts because, for one, they define the business relationship. A consultant is not an agent or an employee of the business and so they don’t operate in the same way. It is important that expectations and responsibilities are agreed in writing as well as the scope of the work, payment terms, duration and that any confidentiality issues are captured.
Non-Disclosure Agreements (NDAs)
Information is power and can be one of your business’ biggest assets. Information that falls into the wrong hands can be extremely detrimental and so it’s no surprise that people go to great lengths to protect it. An NDA is a legal agreement which requires one party to keep quiet about certain information. NDAs are common in the world of business and are used to protect trade secrets. An NDA will enable you to seek compensation where the terms of the NDA are breached and can therefore be a great deterrent to stop people running their mouth off!
A well drafted NDA will often include several important terms:
- Definition and scope
The definition and scope of the information that will be considered confidential are crucial. It is better to be specific when designating what proprietary information will be considered a trade secret so as to avoid any ambiguity when it comes to enforcing the provisions. When making this list, think about your trade secrets. What sets your business, idea or invention apart from your competitors? What would your competitors want to know about you and your business? Examples include:
– vendor and customer lists
– personnel records
– financial and accounting records, such as revenues and profit targets
– marketing strategies
– product designs
– proprietary software and technology.
- The receiving party’s obligations
Your NDA should specify the duties of confidentiality, e.g. non-disclosure (prohibiting the sharing of information with third parties) and non-use (prohibiting the use of the information for personal gain). Depending on the sensitivity of the information, you can be more or less restrictive, but bear in mind that NDAs can be regarded as unenforceable if they are too restrictive. The NDA must be reasonable, similar to restrictive covenants in employment contracts as mentioned above.
NDAs are extremely important in protecting your business’ trade secrets. Remember that like restrictive covenants, NDAs can be hard to enforce if they are considered unreasonable. Therefore, they should always include a time limit.
If your business processes any personal data, as well as being registered with the Information Commissioner’s Office, it is a legal requirement to have a privacy notice.
- Who you are
You need to include the name and contact details of your organisation so that people know who you are and who to contact regarding anything privacy related. The most common example is of contact details is the email address: privacy@[companyname].co.uk
- The purposes for processing
You must explain why you’re using people’s data and be clear about each different purpose. There are many different reasons for using personal data and you will know best the particular reasons why you use data. Typical purposes could include marketing, order processing and staff administration.
- The lawful basis for the processing
You must have a valid lawful basis in order to process personal data and there are six available lawful bases. No single basis is ‘better’ or more important than the others – which basis is most appropriate to use will depend on your purpose and relationship with the individual. Most lawful bases require that the processing is necessary. If you can reasonably achieve the same purpose without the processing, you won’t have a lawful basis. The seven lawful bases are, as follows:
– performance of a contract
– legal obligation
– vital interest
– public task
– legitimate interests. If you rely on this ground, you must state what the legitimate interests are.
- The recipients or categories of the personal data
You must say who you share people’s personal data with. This includes anyone that processes the personal data on your behalf, as well as other third parties. You can tell people the names of the organisation or the categories that they fall within which must be as specific as possible.
- The details of transfer s of the personal data to any third countries or international organisation
You must tell people if you transfer their personal data to countries or organisations outside the European Economic Area (EEA). If you do transfer personal data to a country outside the EEA, you must say whether the transfer is made to a country classified as ‘adequate’ by the European Commission. This is a list of countries whose data protection legislation is deemed adequate and therefore no further mechanisms need to be put in place to ensure the protection of EEA personal data.
- The retention periods for the personal data
You need to say how long you will keep the personal data for. If you don’t have a specific retention period, then you will need to tell people the criteria you use to decide how long you will keep their information.
- The rights available to individuals in respect of the processing
Tell people which rights they have in relation to your use of their personal data. Individuals have right to access their data, rectify it, have it erased, restrict the processing of it, object to the processing, to have the data ported to another company or organisation and the right to complain to a supervisory authority. In relation to objecting to the processing, you must bring this explicitly to people’s attention and separately from any other information. It is good practice to include a link to unsubscribe to any marketing material within every marketing email you send; this is usually a link in the footer of the email.
About Beavis Morgan
As specialist business advisers to the fashion and retail sectors and, through our association with Fashion Rider, we work with businesses to identify their unique requirements. We then design and implement a system that will provide all the information needed to run and grow a business, through real-time information on actual performance, within a cost effective and efficient framework.
We can help your new business identify the areas and aspects of control and management that should be incorporated into a shareholders’ agreement. We recommend that such agreements are drawn up at the outset of a new business, when the parties are not in a conflict situation and when there are no disputes.
We are here to guide you through each stage of the business lifecycle, whilst navigating the challenges and advising on making the right decisions both now and for the future – for you, your family and your businesses.
Note: Our specialists to the Professionals Sector regular contributors to Barrister Magazine and the Barrister Lifestyle Blog, providing expert commentary on topical issues relevant to barristers and the legal profession as a whole.
With thanks to:
Fashion Rider – www.fashionrider.com
Stephenson Law – www.stephensonlaw.co.uk