Starting and running a business comes with its fair share of challenges and opportunities. As an entrepreneur, your focus is likely on driving growth, generating revenue, and ensuring smooth operations. However, safeguarding your business and its assets is just as critical to long-term success. From establishing consistency across corporate and operational levels to addressing industry-specific regulatory requirements—such as in financial services or healthcare—understanding key legal considerations is essential. Protecting your business against the unexpected not only ensures compliance but also builds a strong foundation for sustainable growth. Read on to find out more about the key legal issues for start-ups and entrepreneurs.
Business structure
For most people starting a business, the structure that will be most advantageous will be a limited company – this has a number of advantages which include:
- limiting the personal liability of the business founders;
- having a very flexible way for dividing up ownership between the relevant owners through the issuing of shares .
- having different classes of shares so it is possible to have shares with voting rights and those that do not have such rights and merely entitle the shareholder to a share in any sale proceeds on exit.
- avoiding the risk of a partnership arising inadvertently between the founders (where profits and losses will be shared equally).
It is Important to remember that although a company is owned by its shareholders who ultimately can decide the key decisions for the business, day-to-day management will be the responsibility of the directors so the number and composition of the board of directors must be considered carefully.
Shareholder Agreements
This is the agreement that governs the rights and dealings between the owners of the company. The shareholder agreement is a private document and will not be publicly known and will deal with matters such as:
- voting rights.
- reserved matters, i.e. those key matters requiring a specified majority such as merger, sale or dissolving the business;
- what happens if a shareholder wishes to leave the business and sell their shares;
- “Drag along” and “tag along” type provisions which facilitate an exit by ensuring that all shareholders must sell their shares to a purchaser in specified circumstances.
If there is no shareholder agreement in place, particularly if there are 2 co-founders with 50% of the shares, there can be deadlock and may end up in the company having to be dissolved if agreement cannot be reached on the way forward for the business.
Investments into a company
External funding is often necessary in order to enable a business to grow and develop. A common form of funding a company is through investments made by a third party – in return for the risk of investing money into the business, the third party will require shares in the business. The shareholder agreement will need to be amended to reflect the new investor/shareholder. Key issues to be managed in such negotiations are:
- establishing the value of the company, as this will be directly relevant to how much of the company is allocated to the new investor through shares;
- depending on the size of the investment, the investor may require rights to approve the business plan and/or budget, as well as having voting rights in relation to his/her shares and possibly the right to appoint a director to the board of directors;
- any existing shareholder agreement may well need to be amended as it is often the case that a major investment into a company will require amendments to the existing shareholder agreement.
Non disclosure agreements
All businesses will need to use NDAs in order to be able to disclose confidential commercial information to discuss a project or transaction knowing that the party to whom information is disclosed cannot use it for their own benefit. An NDA is the only effective legal way to protect pure ideas or concepts and a good NDA should contain clauses which:
- clarify what the confidential information is;
- establish who is providing the confidential information;
- specifies how the information can be used and the requirements to destroy/return any confidential information on request;
- disclaim any warranty in relation to the accuracy/completeness of information provided – the onus and risk must be on the recipient to check the information is correct;
Even if there is no formal NDA in place, it may be possible to argue that there is an implied obligation of confidence based on the commercial background. In addition, it may still be possible to set up a paper trail both before and after disclosing information making it clear that the information was not volunteered and that it cannot be used by the recipient for any purpose. If confidential information is disclosed by documents or other tangible form, the document itself can also contain a statement to the effect that its contents are confidential and belong to the disclosing party.
Effective business agreements
Contracts are the lifeblood of most business sectors and under English law a contract is simply a legally binding promise to do something. Little formality is needed and English law even recognises oral contracts (although in practice it may be hard to demonstrate what the oral terms agreed to really were). In order to avoid unwittingly being bound by a legal contract before you want to be, it is possible to avoid this by using “subject to contract” headings in correspondence or using documents stated to be “non-binding”. It is good practice to create an initial document called a “Heads of Terms” that sets out the basic legal principles of a proposed agreement but such principles are not legally binding. Effective agreements will include clear terms that specify:
- the obligations on each party;
- any price/payment to be made by the parties;
- the relevant term and termination rights;
- IP ownership where new IP is created;
- limitation of liability – there needs to be a suitable limitation of liability of cause in place so that in the event of a breach of contract, the damages payable will be proportionate and put the party in breach out of business. In bespoke contracts where the parties discuss and agree upon a specific limitation of liability clause, the parties will be held/bound by whatever they agree – this is not the case in relation to limitation clauses which are found in the standard form agreements– in these cases, a limitation clause is only valid to the extent that the limitation is “reasonable”. This is a complex area, governed by legislation and caselaw.
Maximising your intellectual property
Intellectual property (IP) can often be confusing given that it relates to a number of different rights and intangible assets that have no physical existence. Notwithstanding this, IP has real commercial value and as it is a type of “property”, the IP owner can sell or license their IP as they see fit. Things to always keep in mind when dealing with IP issues are that:
- IP will usually be owned by the party actually creating something even if they have been paid to do so by another party – so clear express terms stating who owns new IP are critical;
- IP rights can be either be registered or unregistered – in the former case there will be a formal application to be filed and considered by the IP authorities and potentially subject to third party oppositions before the IP right exists, whereas for unregistered rights, such as copyright, the IP right arises automatically on its creation;
- IP is governed on a territorial basis, i.e. for registered IP rights you need to take out protection in the countries which are key to your particular business – if you are trading in many countries this can be prohibitively expensive and you will need to be discerning and choose only the key markets for IP registration (i.e. trade marks and patents).
An IP strategy is necessary which the business should follow in relation to ensuring it only focuses on key IP for its business and as a way of ensuring that IP expenditure is spent on the most important IP rights and in the key geographical jurisdictions.
Sale of the business
Most business exits will either be way of a share sale, where the shareholders sell their shares to a new party who become owners of the company, or an asset sale in which some or all of the company assets are sold (this could be physical plant and machinery and/or business contracts and/or physical properties).
Whenever a business sale is contemplated, it is very important for the seller to:
- get early legal and accounting advice in relation to the best way to plan a business exit, as taxation issues will often dictate the best approach;.
- be aware that it will need to comply with the buyer’s due diligence exercise which will be an exercise aiming to ensure that everything is in order in relation to the target company;
- prepare for due diligence by ensuring that its company books and records and contracts are in place; employees are subject to proper employment contracts that protect the existing business and IP);
- understand that they may be asked to carry on working in the business for a specified period (an earn out) after the sale, where their continued personal involvement is important for the business’ continued success.
Prior to the due diligence exercise carried out by the buyer, the sellers should anticipate the main areas of the due diligence exercise by ensuring that all documentation and contracts are up to date. This is particularly important as the sellers (the company’s shareholders) will need to give personal warranties that certain statements relating to the business are true – to the extent that they are not, the buyer will be able to claim damages against the shareholders.
The sellers can reduce their potential liability by making full disclosure of any problem areas in a Disclosure Letter: this should prevent the buyer from later making a claim for damages, on the basis that the buyer bought the business knowing of these disclosed issues. Finally, as with any other business agreement, the sellers should ensure that there is a suitable limitation clause protecting them in the event of a later claim by the buyer.
How Moore Barlow can help
Not all commercial relationships run smoothly and not everyone will have the same high business standards as you do. To protect your business, you will need to ensure that you have appropriate commercial contracts in place with suppliers, buyers, sellers and any other organisation that you have a financial relationship with. That’s where we can help – Contact our commercial and technology solicitors to get advice.
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