These case studies were serialised in the Kent and Sussex Courier, but are collated together in this case to show all of the different stages a company can go through and how we can assist. MexxaMixx is a ficticious Kent-based business which manufactures and sells a range of Mexican style cooking sauces.
An exciting new company launches in Kent
For the past year, Kent based brothers Thomas and Steven Parks have been manufacturing and selling a range of Mexican style cooking sauces. The business is called MexxaMixx and is currently being run out of Thomas’ home.
Due to the growth and success of the business, Thomas and Steven have decided to set up a company. To ensure they have the right business structure they have come to us, at Thomson Snell & Passmore, for advice.
We advised Thomas and Steven that there are two types of business structure that would apply to them and their business. The first is a partnership and the second is a private limited company.
At the moment Thomas and Steven are in a general partnership. These are formed automatically when two or more individuals enter into business together with a view to making a profit. As the arrangement currently stands Thomas and Steven are jointly and severally liable for the business’ debts. To protect themselves against creditors, they may want to enter into a limited liability partnership (LLP). Members of an LLP have limited liability in that, generally, they do not need to meet the LLP’s liabilities.
The alternatives to a partnership would either be a private company limited by shares or a private company limited by guarantee. The difference between these two is:
- A private company limited by shares limits the liability of the shareholders to the amount they have agreed to pay for their shares in the company.
- Members of a company limited by guarantee undertake to contribute a financial sum in the event of the company being wound up.
Thomas and Steven explained to us that they would like their wives, Tamara and Sofia, to own part of the new company. In conjunction with the brothers’ accountant, who was providing the necessary tax advice, we advised Thomas and Steven that they should incorporate MexxaMixx as a private company limited by shares. This will make it easy to identify the percentage of ownership held by each of the brothers and their wives and will limit their potential exposure to liability.
Thomas and Steven instructed us to incorporate MexxaMixx Limited, a company limited by shares.
Launching a company website
Over the last month MexxaMixx’s local success has gone from strength to strength. The business is now looking to trade online. Thomas and Steven Parks of MexxaMixx approach Thomson Snell & Passmore for advice on the key legal issues associated with e-commerce ventures.
Before embarking on an e-commerce project, there are several important points that need to be considered, summarised below, and we provided advice to the brothers in connection with each point:
- Who is going to have overall control of the website?
- What is the domain name and should the company register several different domain names to protect against cybersquatting?
- Who is to check that the website is compliant?
- Who is responsible for ensuring that the website is secure?
- Has the website designer been given clear instructions?
- Is there a written contract with the website designer? We need to ensure that any copyright created by the website designer is assigned to the company.
- Does the website infringe any third party’s intellectual property rights, for example, by using photographs without a licence?
- Who owns and has access to the website code?
- Who will be the web-hosting company and are the terms of the web-hosting agreement acceptable?
- What is the disaster recovery plan that will be put in place?
We also looked into the information that will need to appear on MexxaMixx’s website. We advised Thomas and Steven that, in order to comply with Trading Disclosure Regulations, MexxaMixx must clearly show its registered name, registered number, the part of the UK in which the company is registered and the company’s registered office address.
As the cooking sauces will be sold online via the website, Mexxamixx must comply with the Electronic Commerce Regulations. This means that the website must include the company’s VAT identification and be clear as to whether the prices of the sauces are inclusive of VAT and delivery costs.
Thomas and Steven could put the information on their home page, on the ‘contact us’ page or at the foot of every webpage of their website.
Finally, we advised Thomas and Steven on the requirements under the Distance Selling Regulations and UK data protection laws.
Protecting the brand and the recipes
MexxaMixx now has an established brand and sales are increasing (both online and at various specialist food stores around the South East). Thomas and Steven realise that there is real value in both the brand name and the sauce recipes. They approached us to find out how the brand and recipes can be protected to stop anyone from copying them.
We looked into the possibility of patent protection for the recipes. A valid patent would last for 20 years and, during that time, would give MexxaMixx monopoly rights to use the patented recipe. To be patented, a recipe must be new in the sense that it is not publically known. In addition, that recipe must not be obvious to a knowledgeable, experienced and skilled chef. This requirement is known as the need to show an “inventive step”.
We talked in detail with Thomas and Steven about the various recipes and the manufacturing process. As the sauces are made from known ingredients and do not involve a new method of preparation, we determined that the recipes were not patentable due to the lack of an “inventive step”.
However, many famous foods and drinks (such as Coca-Cola and Heinz Baked Beans) are not protected by patent and, instead, rely on trade secret protection. The advantage of trade secret protection is that a recipe is not disclosed on the public register (as would occur in the case of a patent).
The key to maintaining a trade secret is to limit disclosure of the recipe to only that which is absolutely necessary by, for example, carefully vetting any potential recipients of information and providing controlled hard copies. Where disclosure is necessary, we advised MexxaMixx to ensure that there is a non-disclosure agreement or confidentiality agreement in place. All employment contracts should also contain suitable confidentiality restrictions. We provided MexxaMixx with a suitable confidentiality agreement and advised that it should be entered into by a recipient before any information is disclosed.
Trade mark protection was available for the name “MexxaMixx” and we assisted the company in successfully registering a Community Trade Mark. MexxaMixx now had exclusive use of the name throughout the EU in connection with cooking sauces and other food products.
Getting the products into a major supermarket
MexxaMixx is a Kent-based business which manufactures and sells a range of Mexican style cooking sauces. Its operations recently expanded and it was ready to sell its products in a leading supermarket’s stores across the UK. Thomas, one of the directors, approached us, for advice on the supply contract which had been prepared by the supermarket.
The pricing strategy, and MexxaMixx’s position in relation to price reductions, was at the forefront of all negotiations with the supermarket as, despite the allure of launching products into a major supermarket, contract profitability was vital.
One key concern about the terms of the proposed contract related to the strict obligation on MexxaMixx to deliver the products ordered by the supermarket in the correct quantity and by the date stipulated by the supermarket. If MexxaMixx failed to cope with the demand or delivered the products late, it would be liable to pay a pre-agreed sum of money to the supermarket for breach of contract (known as liquidated damages).
As a principle of law, pre-agreed damages for breach of contract should be compensatory, not punitive. A penalty, imposing an excessive payment as a deterrent to breach, is not enforceable. Our view was that the liquidated damages provision was a genuine pre-estimate of the loss likely to be caused and the provision was likely to be enforceable.
We therefore looked to ways in which we could amend the draft contract so that MexxaMixx had greater control over the order process. We were successful in negotiating terms to oblige the supermarket to provide clear forecasts of the future orders that it would place. We also ensured that MexxaMixx had the absolute discretion to decline to accept any order from the supermarket (especially where MexxaMixx had concerns about meeting the order quantity or delivery date).
Where delivery was late due to circumstances outside of MexxaMixx’s control (also known as a force majeure), we ensured that MexxaMixx would not be liable to pay the liquidated damages. In addition, we carefully drafted the force majeure clause so as to include a failure by third parties (such as the factory, warehouse or carrier).
Following successful negotiations, the contract was signed and MexxaMixx was delighted to have established long-term business continuity with a major supermarket chain.
Dispute with a manufacturer
MexxaMixx is a Kent-based business which manufactures and sells a range of Mexican style cooking sauces. Thomas, one of the directors, approached us for advice in relation to an issue it was having with the manufacturer of the packaging for the sauces.
They had an agreement with the manufacturer setting out the basis on which the packaging products would be supplied. At the beginning of each month, MexxaMixx would give the manufacturer its product order for the next month. The manufacturer was then required to deliver MexxaMixx’s order on a specified date.
Unfortunately the manufacturer started to be late with the product deliveries. This caused problems for MexxaMixx – the delays were threatening its ability to deliver on time to the supermarket chain it supplied.
MexxaMixx tried to resolve the issue with the manufacturer directly, but its request for a meeting went unanswered. Eventually, MexxaMixx had to find an alternative supplier to avoid breaching its own contract with the supermarket chain. Fortunately it found one, but it was 10% more expensive.
We advised MexxaMixx that the late deliveries amounted to a breach of contract and that MexxaMixx had the right to claim damages and to terminate the agreement.
MexxaMixx wanted to avoid an expensive dispute; it simply wanted to terminate the agreement, and move forward. We wrote to the manufacturer setting out MexxaMixx’s position. We ensured MexxaMixx complied with the Pre-Action Protocol for this type of dispute which it is obliged to do under law. If Court proceedings were eventually issued, our compliance with the Pre-Action Protocol would have increased MexxaMixx’s chances of recovering its legal costs from the manufacturer and avoided the Court imposing cost sanctions on MexxaMixx. We demanded that the manufacturer pay compensation to MexxaMixx to put it back in the position it would have been had the manufacturer not breached the contract. This included the additional costs of the new manufacturer and the loss of management time - both of which MexxaMixx was entitled to recover.
Initially the manufacturer denied the breach. We responded threatening to take further action on MexxaMixx’s behalf. Through our decisive and reasonable approach we were able to reach an agreement with the manufacturer where it compensated MexxaMixx for its losses and terminated the agreement thus achieving our client’s aims.
Expanding the business
The dispute with MexxaMixx’s manufacturer was actually a sign that the manufacturer was struggling financially. Seeing an opportunity, MexxaMixx made a speculative offer to buy the manufacturer’s business and bring its operations in-house.
Thomas and Steven approached TS&P for advice on raising finance from an institutional lender to fund the acquisition of the manufacturer’s business. They needed to consider the form of security the lender required over the assets of the company (likely by way of a charge and/or debenture). Lenders require security to ensure they rank ahead of the company’s other creditors should the company no longer be able to pay its debts. In addition a lender often requires the directors of the company to guarantee the company’s obligations under the loan by way of personal guarantee.
MexxaMixx discussed with the manufacturer whether it will purchase the share capital (thus acquiring the whole company) or just certain of its assets and liabilities. They agreed that MexxaMixx would purchase the shares in the manufacturer and a deal was agreed in principle. Heads of terms were agreed which set out what was being purchased, the purchase price and other key terms of the deal.
MexxaMixx and TS&P then carried out due diligence - an information gathering exercise to identify the strengths and weaknesses of the manufacturer’s business. Due diligence covers a range of subjects such as property, employees, key commercial agreements, intellectual property and the like.
Once due diligence had been completed, TS&P prepared a detailed sale and purchase agreement to record the terms of the deal and which also contained provisions seeking to protect MexxaMixx from undisclosed issues coming out the woodwork.
Eventually the deal completed and MexxaMixx now has a wholly-owned subsidiary to carry out its manufacturing requirements thus streamlining its whole operations.
Employee share incentive schemes
Thomas and Steven Parks of MexxaMixx decided to introduce employee incentive schemes into the business to recruit, retain and motivate employees. Thomas and Steven approached us for advice.
We advised MexxaMixx in relation to a range of schemes which, subject to certain statutory conditions being met, could be offered to reward and incentivise employees.
We began by advising MexxaMixx in relation to Share Incentive Plans (SIPs). SIPs provide employees with the opportunity to acquire shares (as opposed to an option to buy shares) in the company by which they are employed. SIPs can provide tax benefits for the employees. The shares are acquired upfront and are held on trust for the employees.
Another option was to offer share options under the Enterprise Management Incentive scheme (EMI). EMI options enjoy favourable tax treatment and are typically targeted at smaller trading companies. EMI options can only be offered to certain employees, so employees of MexxaMixx who have a ‘material interest’ (i.e. those controlling more than 30% of the shares) in the company cannot participate in the scheme. Eligible employees will be offered share options so that instead of being given shares upfront, employees can pay a nominal amount for the right to buy shares in MexxaMixx in the future.
MexxaMixx also considered a save as you earn scheme (SAYE). Subject to a qualifying period of service, this scheme must be offered to all employees. Employees are granted a share option in exchange for the employee taking out a saving arrangement into which a proportion of their salary is paid. The savings are then used to fund the share option exercise price.
We advised Thomas and Steven that the company should also take professional tax advice before deciding which scheme to offer employees.
After taking such advice, MexxaMixx decided to offer EMI options to key members of staff, as being the most cost and tax efficient of the choices, whilst also giving the staff a sense of equity ownership of the company.
How divorce affects a family company
Tamara and Steven Parks are directors and shareholders in MexxaMixx. Steven’s marriage to his wife Tamara has recently ended and Tamara has told Steven that she would like to resign as a director and she no longer wants to hold shares in the company.
Following his discussion with Tamara, Steven approaches Thomson Snell & Passmore for advice on the steps the company needs to take to deal with Tamara’s resignation and with the transfer of her shareholding.
We check MexxaMixx’s articles of association. A company’s articles of association are one of its constitutional documents which set out the management and administrative structure of a company. MexxaMixx’s articles also deal with how shares can be transferred.
Tamara is a minority shareholder in the company. The articles of association have been drafted specifically to deal with the situation where either Tamara and Steven’s or Thomas and Sofia’s marriages end. The articles provide that Tamara’s shares will be transferred to Steven. Tamara and Steven agree the value of each of the shares which is based on their market value, i.e. what the shares might be worth in the event that MexxaMixx were to be sold. We prepare a share purchase agreement between Steven and Tamara to document the transfer which is negotiated with the solicitor acting for Tamara. We also prepare various ancillary documents such as stock transfer forms, and board minutes which accept Tamara’s registration and which approve the share transfer to Steven. Removing Tamara as a director of MexxaMixx is a straightforward process and we are able to submit a form to Companies House terminating her directorship.
We then arrange for the stock transfer forms to be sent to HM Revenue & Customs for stamping, along with the payment of stamp duty and for new share certificates to be issued to Steven.
Finally, we advise Steven to arrange for the company’s register of members to be updated. It is a legal requirement for a private company limited by shares to maintain a current record of its owners and what shares they hold.
MexxaMixx is a Kent-based business which manufactures and sells a range of Mexican style cooking sauces. Following the purchase of the manufacturing business by MexxaMixx, orders have been running smoothly as MexxaMixx is now able to control production itself.
Thomas approached TS&P about an issue MexxaMixx is having with one of the finance managers employed by the manufacturing business. Thomas told TS&P that MexxaMixx had installed its own directors in the manufacturer and had implemented the MexxaMixx staff handbook and policies to introduce and integrate the employees into the MexxaMixx brand.
MexxaMixx would like the employee to work in MexxaMixx’s headquarters with the rest of the finance team, rather than the office in the factory 3 miles away. The employee is objecting to this change and saying it is unfair treatment. TS&P advised Thomas that ordinarily TUPE does not apply to share purchases. However, where the subsidiary business is integrated into buyer then there is a risk it could create a TUPE transfer.
TS&P advised Thomas that integration means a TUPE transfer may have occurred, however, this will not be an issue in relation to the employee MexxaMixx wants to move. Recent amendments to TUPE mean that contractual terms can be changed if the reason is an ‘economic, technical or organisational’ reason requiring ‘changes in the workforce’. This change is organisational as the rest of MexxaMixx’s finance team is based in the main office with all of the resources. Change of workplace is specifically included in the definition of ‘changes in the workforce’. Additionally, the employee’s contract contains a variation clause allowing it to be varied by agreement.
TS&P assisted Thomas with drafting a letter to the employee setting out why the change of location is necessary and the benefit to the employee of being located with the MexxaMix finance team. Helpfully, the employee lives slightly closer to headquarters so the commute will actually be better for her. The employee accepted it was sensible and her contract variation was agreed. TS&P’s clear and unequivocal advice helped MexxaMixx to resolve the situation with the employee quickly and avoid the conflict advancing any further. All of the finance staff are now working together which makes managing this aspect of the business easier.
Kent business MexxaMixx manufactures Mexican style cooking sauces. Originally run by brothers Thomas and Steven Parks from their home, the business has expanded. Having acquired a manufacturing business, the sauces are now made in their nearby factory.
MexxaMixx is doing so well that Thomas approaches TS&P to discuss moving to a larger factory. The current factory is held on a 10 year lease, but there is a tenant’s break option coming up and he wants to know how to exercise it; he recalls there were some issues around the break option that were explained to them when they bought the manufacturing business and the lease.
TS&P advise that usually break clauses are operated by serving notice in accordance with the lease terms. In this case the lease requires the tenant to serve not less than 6 months’ notice on the landlord. However, it is not uncommon for a lease to state that any break notice will only be effective if certain conditions are met.
A well advised tenant negotiating a new lease should try to ensure that these conditions are limited to being up-to-date with the main rent and handing back a vacant property. However, the lease inherited by MexxaMixx also requires that the tenant should not have committed a “substantial or material breach” of the tenant’s obligations in the lease.
Thomas recalls that there are some outstanding repairs that need to be carried out to the roof of the factory. TS&P explain that unfortunately, landlords and tenants will not always agree if a breach is material. Consequently, if these repairs have not been carried out by the break date, the landlord could refuse to accept the break notice and MexxaMixx will not be able to end the lease early.
Thomas agrees with TS&P that he should review their lease obligations and get a surveyor to draw up a list of works that may need to be undertaken before the break date. He will them instruct TS&P to review the information to decide how best to proceed with exercising the break option effectively. Thomas says he will definitely make sure TS&P negotiate the terms of any new factory lease they take to make sure they avoid any problems in future.
Buy back of business partner’s shares
Following Steven’s divorce he speaks to his brother, Thomas, as he has decided he wants to ‘cash in’ on MexxaMixx and start afresh with a different venture. Although Thomas is slightly anxious about the change he is happy for Steven to do this.
Thomas and Steven ask Thomson Snell & Passmore how they can exit Steven from MexxaMixx.
We recommend that the most efficient way of exiting Steven from the business would be for MexxaMixx to buy back his shares. Prior to the meeting with Thomas & Steven, we checked the following to ensure MexxaMixx satisfied the criteria to carry out a share buyback:
- we looked at MexxaMixx’s accounts to ensure they had sufficient distributable profits in order to buy back Steven’s shares;
- we looked at the articles of association to ensure there was nothing prohibiting the company from buying back the shares; and
- we checked that Steven’s shares were fully paid.
Following our checks and satisfying ourselves that the company can buy back Steven’s shares we begin to explain the documentation that will be needed to effect the buyback. Firstly, Steven will need to enter into a short share buyback agreement with MexxaMixx. The agreement will document the shares that are being bought back, the consideration payable for the shares and any completion details (such as completion dates).
Board minutes and an ordinary resolution will need to be prepared and signed by the directors and shareholder of MexxaMixx respectively.
Companies House form SH03 will also need to be completed and signed by the company. This is the notice of a purchase by a private limited company of its own shares.
MexxaMixx does not want to hold the shares bought back from Steven in treasury and so the shares will need to be cancelled. In order to do this a Companies House form will need be completed giving notice of a cancellation of shares in respect of the company.
Finally, MexxaMixx will need to update their statutory registers to reflect the changes in the company.
Tax and estate planning
Shortly before MexxaMixx buy back the brother’s shares, the company is approached by a major competitor who wants to buy the entire issued share capital. Both brothers are in agreement that the price and timing is right and the sale proceeds. They approach us for advice about what they should do with their lump sums from a tax and estate planning perspective.
Each brother is unique and they will each require a personal plan based upon their own circumstances. We would tailor our advice to each individual.
We would ensure that the brothers have Wills in place. It is important to have a Will to safeguard what happens to the brothers’ assets when they die.
In terms of investments, we would advise that diversification is important. The brothers might choose to invest in cash, shares, bonds, commodities or property. They would need to consider carefully whether to invest in high or low risk investments. We could point the brothers in the direction of an Independent Financial Advisor to help choose the most appropriate investments.
We would advise the brothers to put some money into tax-free savings and investments, such as ISAs and Personal Pension Schemes. It should be remembered that if money is put into Personal Pensions then it cannot be withdrawn until an individual is at least 55 years old.
The brothers may wish to consider Business Property Relief. They could invest in discretionary management services that provide investment into unquoted companies, which are exempt from IHT after 2 years. The brothers may also consider using trusts. They could gift an amount up to the nil rate band of £325,000 per person into a discretionary trust. If the amount gifted is above the allowance then there would be a lifetime transfer tax of 20%.
We might advise the brothers to consider making lifetime gifts. Provided they survive seven years from the date at which they make the gifts then there would be no inheritance tax payable. They could gift up to £3,000 a year completely tax-free (and the previous year’s allowance can be rolled over if unused) and they could make small gifts of up to £250 a year tax-free. The brothers could also gift money to their spouses completely tax-free.