Dudley Solicitors

Franchising

Franchising is where the franchisor grants a license to another franchisee which lets the franchisee ttrade under the trade mark or trade name of the franchisor. The franchisee is allowed to use the whole package which comprises which enables him run the business.

In order to for the franchising to take effect preliminary steps are generally to :-

•             Sign a confidentiality agreement

•             Enter into a deposit agreement and pay the deposit

•             Enter into a franchise agreement

The Franchise Agreement

•             The agreement should protect interests of both parties

•             If you intend to enter into a franchise agreement, it is advisable to find a franchise company which has been accredited by the British Franchise Association

•             Franchisors that have many different franchises generally assert that their business uses standard agreements. It is important to check whether all terms and conditions are the same as sometimes they may vary.

•             The terms should protect the franchisor from competition, enable him to control the performance of the franchisee, and restrict the rights of franchisee to a certain degree.

•             The terms should also protect the franchisee in relation to training of staff, marketing and promotions, delivery of goods and services, and management and other services.

•             It is important to note that Intellectual Property Rights such as trade names, trademarks, copyright or confidential information may be given in the agreement

•             The agreement can last for as long as the parties agree in the contract. This should be clearly specified.

Normally, franchisee enters into a franchise agreement because they are able to trade under the already existing trade name of a company. Therefore, the franchisor must ensure that his intellectual property rights are protected in the agreement

Are shareholders free to transfer or sell their shares to someone else?

A company’s articles of association commonly allow the directors to refuse to register any transfer of a share submitted to the company.

However, they may include other, different restrictions on the transfer of shares. For example, they might require any shareholder who wants to sell shares to offer them to existing shareholders first, which is known as pre-emption, or to offer them back to the company through a share buy-back. The articles might also establish how the price for the shares is to be calculated in each case.

Alternatively, they might provide that shares can be transferred freely between members of the same family, but any other transfers are subject to the usual directors’ powers to refuse to register a transfer, or to pre-emption rights in favour of existing members or the company (with a mechanism for establishing the price to be paid for the shares) mentioned above.

Should we acquire the shares or just the assets of the target company?

There are pros and cons for either method and as with many aspects of the acquisition of a business  tax is an important consideration.

• Usually the shareholders of the seller will wish to dispose of their shares in order to avoid a potential double tax charge on the sale of assets.
• From the buyer’s perspective there are sometimes tax losses in the target company which can be utilised
• Stamp duty may be an issue in buying assets if they include a land or buildings with substantial value.
• In buying a company and not assets the buyer would normally be taking on all the liabilities of the company, which are not always obvious, and it is essential that a very thorough due diligence exercise be undertaken .
• Whether liability for employees will pass to the new owners – even with an asset sale only, if the core of the business is being acquired the TUPE regulations may still apply in respect of employees.

When is a company insolvent?

This can be a difficult issue to answer and it is often a  good idea to seek professional advice to protect the directors. The law says that a company is insolvent when either it cannot afford to pay its debts as they fall due or when its liabilities exceed its assets.

In practical terms, it is important to be seen to be keeping a careful eye on the company’s position and to keep accurate and up-to-date records, which demonstrate an awareness of the importance of not trading insolvently.

Do directors duties change when a company becomes insolvent?

A director has a duty to act in the best interests of the company and its shareholders. However, once the company becomes insolvent, the directors are then under a legal duty to protect the interests of the creditors instead of the shareholders. The company must now function for the primary purpose of getting the best return for creditors.

When can a director be held personally liable?

If a company goes into insolvency procedure, conduct of the directors and the company’s transactions would generally be considered going back 3 years.

Directors may be held personally liable and be ordered to pay money to the company for the benefit of its creditors under several circumstances :-

• Wrongful Trading – continuing to trade or enter into contracts after the director or shadow director, knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. If a court considers there has been wrongfully trading, it can order a contribution to the company without financial limit and disqualify a person from acting as a director for up to 15 years.
• Fraudulent Trading – carrying on a business with the intention to defraud creditors or  other fraudulent purpose. Examples might be taking deposits for orders which will not be fulfilled, or giving wrong or inaccurate information to obtain credit or contracts. If a court considers there has been fraudulent trading, it can a contribution to the company without financial limit and it can result in going to prison you for up to 7 years.
• Personal guarantees – Personal guarantees may have been given by directors to obtain credit for the company. Most guarantees are on a “joint and several liability” basis, which means that there is no requirement for the lender to pursue the company in preference to the individual.
• Misfeasance - This is a breach of fiduciary duties of care legally owed to the company as a director. Examples are taking out money wrongly from the company or using company money for matters not associated with company business. If a court considers there has been  misfeasance, it can order the director to make a contribution to the company without financial limit.
• Preferences – relates to an advantage given to one creditor in preference to another which is unlawful as creditors must be treated equally (subject to there being a difference between secured and unsecured creditors). The penalties for this include setting aside the transaction, and ordering the beneficiary of the preference to refund  the company.
• Transactions at an undervalue – where a company has allegedly transferred assets for significantly less than their market value. The sanction may be to set aside the transaction and for the recipient to refund money or return assets to the company.

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