Company law advice for owner-managed businesses

Company law is about the rules governing a private company itself, which covers its shares, its articles of association, its directors and shareholders, and what has to be filed at Companies House. I’m a company law solicitor for owner-managed and family companies in England and Wales, and I deal with the work that comes up when the ownership or structure of a company needs to change.

You’ve got to remember that a limited company is its own legal entity, which means the owners can’t simply agree something between themselves and assume it has happened. Shares are issued, transferred or cancelled by following a procedure set out in the Companies Act 2006 and in the company’s own articles, and the result is on a public register at Companies House, so it’s important that things are done properly. Where the procedure isn’t followed, the problem usually stays hidden until a buyer’s solicitor goes through the company’s history, which is not a good time to find it.

Issuing shares and bringing someone in

The most common reason for issuing shares is that a new shareholder is coming in, who might be a spouse, a key employee, an investor, or a business partner whose stake was promised years ago and never documented. Issuing shares means checking that the directors have authority to allot them, dealing with the existing shareholders’ pre-emption rights, passing the right resolutions, updating the register of members and filing at Companies House. None of it is difficult, but it’s quite common for one of the steps to have been missed. I’ve written a guide to how to issue shares in a small private company.

Whenever a new shareholder comes in, it’s worth asking whether you now need a shareholders’ agreement, or whether the one you have still works.

Alphabet shares

Alphabet shares are different classes of ordinary share (A shares, B shares, C shares and so on) which are created so that the company can pay a different dividend on each class. They’re popular with husband and wife companies and with businesses where the owners don’t all take the same amount out. They can also carry different voting and capital rights, which is useful if you want someone to share in the income without having a say in how the company is run.

Setting them up properly means new or amended articles which spell out the rights of each class, shareholder resolutions and filings at Companies House. A common mistake is for a company to have been paying different dividends to different people for years when it only has a single class of shares. Whether alphabet shares make sense for you is first a tax question, which is one for your accountant, and I do the legal side. There’s more in my guide to what alphabet shares are and what they’re for, and a separate piece on giving your husband or wife alphabet shares.

Share buybacks

A buyback is where the company itself buys a shareholder’s shares and cancels them. It’s a common way of dealing with a retiring founder or a departing shareholder, because the remaining owners don’t have to find the money personally.

Buybacks are also easy to get wrong, as the rules are strict. A private company buying its own shares has to follow the procedure in Part 18 of the Companies Act 2006. In broad terms the shares must be fully paid, they generally have to be paid for in full when they’re bought (so paying the leaver in instalments needs a different structure, usually a series of separate buybacks), the money normally has to come from distributable profits, and the purchase contract has to be approved by a shareholder resolution. There are then forms to file and, depending on the price, stamp duty to pay. A buyback which doesn’t comply can be void, which leaves the leaver still owning shares that everyone thought had gone.

The tax treatment for the seller needs your accountant’s input before anything is signed. I’ve written about how company share buybacks work and the red flags, and about the wider options for buying out a retiring shareholder.

Articles of association and the rest

A good number of companies are still running on the model articles they were given on day one, or on a set from the 1990s which refers to legislation that has since been repealed. I draft new articles and amend existing ones, usually alongside a share reorganisation or a shareholders’ agreement. Changing the articles needs a special resolution, which means 75% of the votes.

I also deal with reorganising share capital, board minutes and shareholder resolutions, directors’ service agreements, and share option arrangements for key staff (I’ve written about EMI options, although the valuation and tax side is for your accountant). Larger reorganisations, such as inserting a holding company, have their own pages under restructuring.

Turning a sole trader or partnership into a company

I don’t form companies, as registering a new company is quick and cheap and a formation agent or your accountant will do it for you. Some business bank accounts include it as well: Tide, for example, will register the company when you open an account with them.

What I do is the step after that, which often gets missed. When a sole trader or partnership becomes a limited company, the business doesn’t move across by itself. The new company needs to take over the assets, the customer and supplier contracts, the lease, the staff and the intellectual property, and that should be recorded in a transfer agreement, with contracts assigned or novated where they need to be. Otherwise you can end up with a company which is invoicing customers but doesn’t own the assets or the contracts of the business. If you’re still deciding whether to incorporate at all, I’ve written about the difference between a limited company and a sole trader or partnership.

What it costs

I work on fixed fees, with a written scope agreed before I start, and I do the work myself. Company law work varies completely in cost, and could be as little as a few hundred pounds for a simple matter, but most of the work on this page comes in between £1,000 and £3,000 plus VAT. For new clients there’s also an ID check at £30 plus VAT per director or shareholder.

I don’t act on shareholder disputes which have turned into litigation. I’m happy to give initial advice and to handle a negotiated exit, but a full dispute goes to one of my Nexa colleagues.

Next steps

Whether you’re putting in place some new shares, changing your articles or you just don’t know what you need, send me the details and let me know what you’re trying to achieve, who the shareholders are now and who they should be afterwards. I’ll tell you what’s involved and what it will cost.