Lifecycle of a Business: Part 7 - Making Decisions
Decisions, decisions, decisions… who calls the shots around here?
The decisions that you make for your business could lead to its success, hinder its growth or worse still, put it out of existence. It is a process that cannot be undertaken lightly, and those making decisions must act prudently and be accountable for the decisions that they make.
Depending on your business structure, the power vested in those who make the decisions will vary. Seeking proper legal advice would mean that all decisions should be compliant and within that power.
Understanding the Partnership Act 1890
By way of example, as we have seen in [Business structures – the risk of getting it wrong part one], under a partnership business structure, if no partnership agreement is drawn up, the Partnership Act 1890 will govern the decision making rules for your business. The PA 1890 will not distinguish between the partners involved in the business and all partners in a partnership will – the absence of agreement - share equal rights and responsibilities. Collectively, the partners are known as a firm.
The PA also states that all partners are jointly liable for all debts and obligations of the firm, so partners not actively involved in decision making will still be bound by their consequences. Partners may therefore wish to ensure that without a bespoke agreement, they share the decision making and running of their partnership equally between the firm’s partners. All partnership decisions are made on the basis of simple majority; if each partner has one equal voice, then the majority will win.
(By contrast, if you’re a sole trader then as we have seen in our blog [Business structures – the risk of getting it wrong part one ] you, of course, are in charge of it all (and thereby responsible)).
Limited Liability Partnerships
A Limited Liability Partnership (LLP), must have at least two members (called ‘designated members’) as required by Limited Liability Partnership Act 2000. The ‘designated members’ of an LLP have greater responsibilities compared to ordinary members. The greater the implications of the decision being made, the more likely it is that ‘designated members’ will have the responsibility to decide what happens next. If, as is commonplace, the LLP has drawn up an LLP Agreement, there would be specified terms within the agreement as to who will be making decisions in that business and how. The decision-making provisions in an LLP Agreement will need to be aligned with the business’ chosen management structure.
In a decision-making process, members can often struggle to agree, causing a ‘deadlock’. This can be a serious issue for those in the business. It can stagnate the progress of the business and cause disputes between decisions makers that are difficult to resolve. Seeking legal advice on how to resolve a ’deadlock’, especially if your business is deciding on a fundamental matter, will be essential. To deal with this risk, provisions can be incorporated into the LLP Agreement so as to bring clarity, ease tensions and conclude a positive outcome for the benefit of the business. Seeking the appropriate legal advice will help your business formulate an agreement that would prevent disputes arising within the business when key decisions are being made.
As we have seen in, a company limited by shares is an artificial person that will need human beings to run it on its behalf. There are two types of decisions-makers for a company, shareholders (the owners of the company) and the directors (who manage the company). Shareholders can often be directors of companies.
The Companies Act 2006 (CA), its Articles of Association and also any Shareholders’ Agreements (both tailored to the Company’s particular circumstances) will provide for the decision-making process. Directors will also need to take account of their legal duties as fiduciaries. It is therefore possible for a limited company to be governed by its constitutional documents, statute and the common law, in addition to being guided by the personal opinions and judgments of those running the company.
A company’s overall decision-making process will be divided between the directors and shareholders. Directors predominately have the power to manage the company on a daily basis. The board of directors will make many decisions affecting the company, for instance directors on their own have the power to change the way its business is run, as well as dealing with housekeeping like changing the location of the company’s registered office. There are cases where Shareholders of the company are involved in the decision-making process; these decisions tend to be important decisions like amending the company’s Articles of Association and approving the statutory accounts. This is because Shareholders own the company and have wholly or partly financed the business by buying shares in it. When decisions are being made within a company, they will have to be voted upon before they can be implemented.
When Shareholders are voting, the majority required will depend on the decision that is being made. For example, if they are voting on changing the company’s name, this is done by ‘special resolution’. A special resolution is passed by show of hands (or poll) at a general meeting (or written resolution) with a majority no less than 75%. Many other decisions may only require a simple majority. You must familiarise yourself with which decisions are passed by special resolution and which are not, so your business is fully compliant with the law. If not, this could result in decisions being made that are null and void and which may lead to severe difficulties for the decision makers. Company governance is a potential minefield, and solid legal advice throughout the process is recommended.
As we have also seen in relation to LLP’s, avoiding or resolving deadlock is very important. Seeking legal advice on how to deal with potential deadlock, by reference to the drafting of the Company’s Articles of Association and/or any Shareholders’ Agreement will be time and money well spent. It may well eliminate or at least reduce this risk of this being insoluble at a later date.
Read further into our series with part 8: Lifecycle of a Business - Growth, diversification, advertising and marketing.
Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of BLM. Specialist legal advice should always be sought in any particular case.