Q: I have been speaking with my financial advisor about investing in a UK company and taking advantage of the tax relief available. Should I be instructing a solicitor and what legal protection should I be seeking?
In light of the Spring Statement and announcement of measures to boost skills and productivity in UK businesses, companies are still looking for finance opportunities to support their growth. Whilst online crowdfunding and lending platforms are currently attractive routes for start-ups; raising money through investment schemes such as venture capital trusts, the enterprise investment scheme and the Seed EIS scheme is still popular. For companies, this is due to the expertise and support that often accompanies the investment; and for investors like you, they offer fantastic tax advantages.
Unsurprisingly, we think it is really important that solicitors are instructed due to the high risk for all stakeholders involved. The needs of the founders, the investors and the company must be carefully considered and an agreement reached that strikes a balance between their respective interests.
What protection is there for minority shareholders?
Depending on the amount of cash you are investing, you are likely to own a minority shareholding (less than 50%). Company law provides some protection to minority shareholders; however, doesn’t go far enough where a significant sum of money is at risk. Therefore, a condition of your investment should be requiring the founders and company to enter into an investment agreement that provides you with protection on matters such as the four examples we have provided below:
1. Warranty Protection
You should carry out financial and legal investigations into the company before investing to determine its valuation and understand its current position. Post-investment, you will want comfort that what you’ve been told about the company is true and legal recourse if it turns out not to be. We do this through warranties and breach of these may enable you to recover damages.
2. Decision Making
Every investor will have different expectations regarding their involvement in the running of the business. The day-to-day management is carried out by the directors and if you have expertise to contribute, you may want to ensure you have the right to sit on the board. Certainly, you should have control over the key business decisions – such as whether to raise further finance or acquire a competitor. Therefore, you should ensure the agreement provides that your consent is obtained before such decisions are taken.
3. Right to financial information
There is no legal requirement for you to be provided with regular financial and operating information about the company. If this is important to you, you will want undertakings from the company to provide you with such information on a timely basis.
4. Share rights
As an early stage investor, you are taking a higher risk and will want to protect your return. If further finance is raised you should seek protection to ensure your equity isn’t unfairly diluted or have the option to invest more cash.
If the company is successful and the founders decide to exit, you should have the right to participate and sell your shares at the same time rather than risk staying on under new ownership.
If your tax planning advice changes, you should ensure you can transfer your shares to a family member or trust.
If you would like further information about this topic, please get in touch firstname.lastname@example.org