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Alex J.
Alex J., Solicitor
Category: Law
Satisfied Customers: 3557
Experience:  Solicitors 2 years plus PQE
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I have a brother who has an idea business but needed

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I have a brother who has an idea business but needed funding to build the website. he found an investor who was willing to pay x in return of the business. A ltd company was then set up in both their names(directors) (1 share each).
The other director is now taking greater interest in decision making and being more older/experienced is having greater influence than expected. Also he has mentioned the investment will be repaid as a dividend....is this normal as 33pct was given away investment? The investment has not been paid yet.
I feel he needs advice to protect his interest and to ensure that he remains in control of decision making. Any thoughts on this situation? A couple of related questions
How does my brother ensure that he has control of his business and how it is run?
- what does my brother need to do to ensure the split of shares is legal at 67/33
- what power/control does a 33pct director have in the company's? Do they have equal say in day to day decisions?
- if my brother added his wife as a director with equal or smaller share does this strengthen their control I.e. 2 votes to 1 on decision making.
We are a bit naive on this and need some help
Apologies as this is probably all sounds very naive but guidance needed.
Submitted: 2 years ago.
Category: Law
Expert:  Alex J. replied 2 years ago.
,
Thank you question and welcome.
My name is ***** ***** I will assist you.
Do they have shareholders agreement?
Is the "investment" listed as a debt of the company in the accounts?
Kind regards
AJ
Customer: replied 2 years ago.
Thanks reply,No shareholder agreement has been set up.Company only recently set up, no bank account yet, investor has not paid the money to the company yet but I would expect some form of payment to be paid to the web site design company shortly as they have verbally agreed with the company to use them and start design.
Expert:  Alex J. replied 2 years ago.

Thank you.
I am preparing a response and will revert to you as soon as possible.
Kind regards
AJ
Expert:  Alex J. replied 2 years ago.
,
Thank you.
I will deal with each point in turn:
1. The investment:
There are the following options:
(i) The investment is made by way of a loan - if this is done the investor is a creditor of the company. He can potentially put it into administration or liquidation (if he has a charge). His investment will get repaid subject to a set repayment time;
(ii) The investor is given shares investment - the shares are issued at a premium and this is reflected in the issued capital of the company. This is what is agreed. It is up to your brother if he wants to agree that the shares have a preference on dividends.
2. The facts:
Currently they have one share issued each - the shareholding is therefore 50/50.
If the investor is going to be a 33% shareholder then they need to issue more shares - really your brother needs another 66 shares and the investor needs another 32 shares. Your brothers shares need to be issued a "par value" i.e £1.00 of shares and the investor will need to pay a premium shares to the value of the investment.
If the investor is seeking his investment to be paid by a preferential dividend, then your brother should ideally insist that he has an opportunity to buy back the shares at a fixed price when the investment is repaid - the company will also need to issue two classes of share (one with a preferential dividend). The investor should not ideally have his cake and eat it, he either gets shares in the company which he pays he effectively lends the company money and gets repaid his investment (and an agreed return) over time. If he gets shares his return will come from when the company is sold or distributes its profits by dividends.
3. Shareholders agreement
Your brother must agree a shareholders agreement if the investor becomes a shareholder. This will agree matters such as:
1. How to resolve a deadlock;
2. what the company policy on dividends is;
3. Who can be directors of the board?
4. How often they should have boarding meetings?
5. If your brother gets an offer shares he should be able to drag the investor into the deal if certain conditions (to be agreed) are met - these are known as drag and tag rights.
Essentially this is a contract to agree how the company is managed.
There are a lot of concepts here, so please let me know what you would like to discuss further.
I look forward to hearing from you.
Kind regards
AJ
Customer: replied 2 years ago.
thanks very much, most of this makes sense....a couple of final questions if that's ok...
As it stands at companies house the investor is a director of the company.
It feels that my brother should move quickly to ensure that the shareholding is accurate at 70/30. to gain majority control.
- is this done via companies house or is it part of the shareholders agreement?
- if the other party is a director and 30pct shareholder what say or control does this give him in the company OR by having 70pct does my brother have complete control?
- Roughly what is the cost of setting up a shareholders agreement? Is this expensive?
- if my brothers wife is added as a 3rd director with 10pct share 60/30/10 then does this impact on decision making and how?
On the repayment of 10k I assume that;
If the shareholding remains at 50/50 then repaying could be a deadlock position if both parties disagree and no shareholders agreement is in place?
If it is 70/30 then my brother can reject to repay it if no shareholding agreement is in place, albeit it may be difficult .?
Ideally it should be agreed or not agreed NOW and if agreed then included in shareholders agreement?
Thanks again
Expert:  Alex J. replied 2 years ago.
,
Thank you.
To answer your questions:
- Directors are responsible of the company but ultimately the majority shareholder will exercise the most control;
- The shareholders agreement should include a section detailing who is allowed to be a director and how they can deal with the deadlock of any disputes - it should also detail what authority each person will have in the day to day business of the company;
- You can use a shareholders agreement to issue more shares - but what you need to do is pass a resolution with the other shareholder to issue another 98 shares, this is done by special resolution (as you need each party to suspend their pre-emption rights) and by filing what is known as an SH01 allotment of shares at Companies House - what you should do is get a solicitor to draft your shareholders agreement and he/she can manage the filings at Companies House and allotment of shares at the same time;
- A Shareholders agreement from a high street solicitor would cost between £500 - £1000 plus VAT - it will be money well spent to avoid any future disputes - http://solicitors.lawsociety.org.uk/?gclid=CI2-wvDln8MCFQ-TaQod9zAAMQ The Law Society can recommend someone close to you;
- If the company owes £10k now, as they have 50/50 each the company is deadlocked- so the investor cannot force the company to pay a dividend - you need a 51% shareholding to force a dividend payment - this is requisite percentage to pass an ordinary resolution of the company which is required to approve a dividend. If the £10k is registered as a debt, then he may be able to sue the company to recover it;
- A shareholders agreement is essential to ensure that to parties have certainty over what is agreed regarding the investment made and how it is paid and repaid.
I look forward to hearing from you.
Kind regards
AJ
Alex J., Solicitor
Category: Law
Satisfied Customers: 3557
Experience: Solicitors 2 years plus PQE
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