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Fair shares

It’s wonderful to have someone believe in your business enough to invest in it, but as legal expert Michael Budd warns, you need to get the paperwork right.

Michael Budd

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You have set up an estate agency having worked hard to get it established and you might have found someone interested in investing in the company to provide you with the funds you need to grow the business and achieve the objectives you have for it.

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Michael Budd

Whilst this sounds good, what you do not want to do is end up in a situation where once the investment has been made you realise you have lost some or all of the rights and control you had before the investment was made. To prevent that from happening, certain terms can be incorporated into the legal documents that should be entered into to help ensure that your rights are protected.

Of course, the terms of investment and the documentation containing those terms will usually be negotiated before they are signed. It is always worth asking for certain protections to minimise certain risks for you after the investment has been made.

Good leaver, bad leaver

You will most likely already be a director of the company and this is a right you will want to ensure you retain for so long as you are holding any shares in the company. Typically, employees who hold shares will be forced to relinquish their shares when they leave. You will want to provide that this arrangement does not apply to you. You may have come across the term ‘good leaver’ and ‘bad leaver’. These relate to what price is paid to a shareholder for their shares when they leave their employment. The definition of a good leaver may be limited and sometimes it is only possible to be a good leaver if you were to be diagnosed with a serious illness, for example. The definition of bad leaver, in contrast, is often very wide and may state that if you are not a good leaver then you are a bad leaver. The difference in the price payable for shares in these two circumstances will be very significant with the price for shares as a good leaver often being market value and the price for shares as a bad leaver being the nominal value of the share which could be next to nothing.

Investor rights

In the future, you may find your shareholding is diluted which can affect your ability to influence decisions as a shareholder. However, if you do remain the majority shareholder post-investment, one right you are going to want to ensure is included in the investment document is what is known as a ‘drag along right’. This allows the majority shareholder to force the remaining shareholders to sell their shares if an offer is made to buy the company by a third-party buyer. All shareholders will be entitled to receive the same price per share for their shareholding and so this does not disadvantage the minority shareholders but equally, it enables the majority shareholder to proceed with the sale.

Certain terms can be incorporated that should help ensure that your rights are protected.

You will also want to make sure that you can appoint yourself or someone whom you choose to act as a director. Including this right prevents you from being removed as a director.

Assuming you are a director and do not already have one, the investor will want you to have a service agreement. The agreement is likely to contain restrictive covenants which will apply to you both during your employment with the company and for a certain period when you cease to be a director. These restrictive covenants typically include things such as not working with or being involved in another competing estate agency business and not poaching employees.

The above is not an exhaustive list of the points to consider when receiving investment but provides a brief indication of the protections you would expect to see in the investment documentation.

Michael Budd is Partner and Head of Company Commercial at Longmores Solicitors.

www.longmores.law

June 1, 2021

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