Lifecycle of a business: Part 4 - Agreements
BLM's Lifecycle of a Business series captures key elements of a business's growth story - from the highs of formation right through to lows of dissolution. Our experts’ advice and knowledge will help guide you to understand and deal with litigation risks.
Directors service agreements, consultants and shareholder agreements
Remember Amy Smith and Oliver Jenkins from our previous blogs? Well, they’ve decided to set up a Limited Company (Ltd) by shares called ‘The Widget Fixer Ltd’. A limited company, by shares, will require directors. Shareholders of a limited company are the owners and the directors run the company on behalf of the shareholders. It is possible for Amy Smith and Oliver Jenkins to be both a shareholder and a director of The Widget Fixer Ltd. A shareholders' or directors' agreement should be put in place to provide greater clarity on how that would operate.
Directors unlike employees have different rights and responsibilities. They must adhere to The Companies Act 2006 (CA 2006) which specifies the main duties of directors. As a director, you have access to the business’ most valuable and confidential information.
Some of a director's duties include; following the companies constitution and its article of association; promote the success of the company; exercise reasonable care, skill and diligence; avoid conflicts of interest; must not accept third-party benefits and must not have an interest in a company transaction.
You can decide to entrust directors with additional responsibilities, rights, duties and liabilities for the benefit of your company and the director. It is important to clearly set out responsibilities in documentations to prevent confusion. Documentation should be put in place to guide the relationship between the director and the company or even other directors. If you are a director working in the company as an executive director you will (usually) also be an employee of the company. It would be advisable that the director and the company draft a contract of employment, this is often known as a (director’s) service contract. A service contract is defined in s 227(1) of Companies Act 2006 to include a contract whereby the director is under obligation to perform services personally for the company. This contract should set out the various rights and obligations that a director of the company will fulfill. The document provides assurance in situations of disputes and disagreements.
When a business is set up, the company limited by shares is required to have articles of association in place to set out how the relationship between the business and shareholders will be governed. When incorporating a company with two or more Shareholders, it would be beneficial to draft a Shareholders Agreement (SA). An SA is different from that of an article of association. A SA would regulate the relationship between the shareholders and the company. A SA reflects enterprise stability because it puts what shareholders should do on paper.
A limited company will need at least two partners but you are not limited to this figure. Those two partners are known as ‘designated members’ and their responsibilities entail filing annual accounts. It is beneficial to draft a limited agreement with any other members as a part of setting up a limited company. This agreement will set out the rights, liabilities and even how shares will be distributed. Again, it is important that you seek legal advice to draft a suitable agreement.
This agreement is needed when the company is in favour of hiring a consultant. You can have a consultants’ agreement that is in favour of business or consultant. When a consultant agreement is drafted for a business, it will include provisions that will stop the consultant from approaching customers to work for them directly or provide services directly to them. Meaning that the business owners can rest assured with this protective document. It will restrict the consultant from taking your customers or working with them directly without your acknowledgment.
As with most agreements the overall benefit will allow the business to have a bespoke document that will govern the relationship between the directors, shareholders, consultants and the company. The agreements will have mechanism for issues that may arise during the lifecycle of your company, for instance, a SA will provide terms for what needs to be done when a shareholder wants to leave or sell their shares. Seeking proper legal advice would ensure that the documentation is correctly drafted.
The wheel below outlines all of the key stages your business may go through. Our team of business experts can advise you on any of these stages. To find out more and request a consultation to support you and your business, you can request more information here.
Read further into our series with part 5: Lifecycle of a Business - Supplier & customer contracts and disputes.
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.