Five questions that regularly land in the Lawbox. inbox
A lot of legal work starts in a very unlegal way. More often than not, it’s an email, a Teams message or a quick call that begins with, “Can I just ask you something?” The question itself is usually pretty simple, but the answer can open up into something much bigger if it’s left too long.
This month, we’ve had a few of those.
We thought we’d share 5 of the very ordinary questions we’ve had, each of which has the potential to become much more complicated if it’s not dealt with early enough.
Happy reading!
“A shareholder wants out. What now?”
This usually starts as a people problem before it becomes a legal one. Someone wants to move on, priorities have changed, the relationship between the shareholders has become strained, or one founder simply wants to do something different.
The natural instinct is often to jump straight to the exit itself. Who’s buying the shares? What are they worth? How quickly can it all be sorted? But, before we get into any of that, it’s usual to go back to the company’s foundation documents and work out what framework already exists. The questions we tend to ask are:
- What does the Shareholders’ Agreement say?
- What do the Articles say? (These are the company’s constitutional rules and often deal with how shares can be transferred, what approvals are needed and what rights the shareholders have.)
- Is there already a process for somebody leaving?
- Does anyone else have a right of first refusal?
- Could the company itself buy the shares back?
Sometimes the answer is straightforward and it’s written there in black and white. Buyt, more often than not, the documents are out of date, incomplete or there isn’t a Shareholders’ Agreement at all. That doesn’t necessarily mean there’s no agreement between the shareholders, but it can make the position much harder to work through.
If there isn’t a formal agreement, the parties may need to look back at what was actually agreed when the business was set up or as it developed. That might mean digging through old emails, WhatsApp messages, meeting notes or other correspondence, or even looking at what everyone says was agreed verbally at the time.
The difficulty, of course, is that people’s memories can differ and informal agreements don’t always deal with the practical questions that arise when someone actually wants to leave.
That’s why it’s worth working out the legal route before anybody starts promising dates, numbers or outcomes. Once you know what the documents say, and what was actually agreed if the paperwork is silent, you can start looking sensibly at valuation, who can buy the shares and how the exit can be documented.
And above all, don’t panic. A shareholder wanting to leave doesn’t automatically mean there’s a dispute or that the business is heading for trouble. In most cases, the first step is simply to get clear on the documents, understand everyone’s position and work through the options in the right order. Once you do that, the situation usually feels much more manageable.
“We’re thinking of selling. What should we do now?”
This one often comes much earlier than people expect. There may be no buyer, no deal and sometimes not even a timetable. It might simply be a business owner saying, “We think we might want to sell in the next couple of years.”
That’s actually a really good time to start thinking about it.
When a buyer does eventually arrive, they’re going to look under the bonnet. They’ll want to see customer contracts, employment arrangements, ownership of intellectual property, company records, data compliance, supplier terms and any historic issues sitting in the background. Let’s be clear, though. None of those things necessarily stop a sale, but trying to fix them halfway through a transaction can make life much harder than it needs to be (and more costly!)
In all honesty, the best sale prep is often unglamorous. Get the paperwork in order, deal with the thing everyone has been meaning to sort for years, and make sure the business looks as organised on paper as it does in reality. This is also the stage where we usually start bringing in the people we trust:
- A good accountant can help you understand the numbers, tax position and what a sale might actually mean for you.
- A decent sale adviser or broker can give you a feel for the market, likely buyer interest and how the process might look.
(And, of course, we can help you understand the legal side and spot anything that’s worth sorting before a buyer starts asking questions, fyi)
You don’t need to launch straight into “sale mode” just because you’ve started thinking about it. Often, the best first step is simply to get the right people around the table, get a realistic lay of the land and understand what you might want to tidy up over the next 12 to 24 months.
That way, when the right buyer does come along, you’re not starting from scratch.
“Can we buy back someone’s shares?”
Often, yes, but this is one of those areas where a commercial conversation can make something sound much simpler than it actually is.
“We’ll just buy their shares back” is often simple in principle, but not always a simple execution.
The first thing to work out is who is actually buying the shares, because that can change the whole process. Sometimes, the shares are bought by another shareholder, or perhaps by a new buyer coming into the business. That is essentially a share sale between one person and another. On other occasions, the company itself buys the departing shareholder’s shares. That is what’s known as a formal company share buyback, and there are very specific company law rules around how that has to be approved, how it is funded, what documents are needed and what happens to the shares afterwards.
Those two routes can look quite different, even though commercially they may both feel like “getting one shareholder out”. Sadly, or not, they can also have different tax consequences, both for the person selling the shares and for the company or remaining shareholders, so this is another area where it is worth bringing the accountant in early rather than treating the tax piece as an afterthought.
How we’d manage this is that we would usually start by looking at the Shareholders’ Agreement and Articles to see whether there is already a process for transfers or exits, then look at the practical options, ie. (a) who has the money to fund the exit, (b) whether the company can lawfully fund a buyback, (c)what valuation has been agreed and what tax treatment each route is likely to produce.
Done properly, either route can be a neat and effective way of dealing with a shareholder exit. If rushed or structured incorrectly, it can create problems that only become obvious much later.
“Should we sign their contract or ours?”
This question usually lands with an attachment and a message saying, “Can you just have a quick look at this?” Bring on straight-face-emoji! The contract itself can be ten pages and not too detailed or a whopping sixty. We also have the glorious email chain to consider where both sides have negotiated terms without adding this to the contract. Then at the top of the email chain is a statement that makes all lawyers nervous – “It all looks fairly standard, let’s just get this signed off.”
Now, let’s be clear. There’s nothing automatically wrong with signing somebody else’s terms and, in many commercial relationships, particularly with a larger customer, you may not have much choice. The more important question is what a “quick look” actually needs to cover for your business.
If we already know the business well, that can make a huge difference. We know what tends to cause problems, where your margins are tight, how you deliver the service, what your customers usually expect and which risks you are comfortable taking. If we don’t know the business yet, then the first part of the review is really about understanding that context:
- What are the pain points?
- What would actually hurt if the contract went wrong?
- Is cashflow critical?
- Are delays outside your control common?
- Do you rely on subcontractors?
- Is your IP valuable?
- Are there particular service levels you know are difficult to meet?
That context helps us work out what “quick” should mean.
For one business, the priority might be payment terms and the right to suspend services if invoices aren’t paid. For another, it might be liability caps, ownership of intellectual property, termination rights or whether the customer can require extra work without paying for it.
So the questions we tend to ask (and you can adopt internally) are this:
- What are you promising?
- When do you get paid?
- What happens if something goes wrong?
- How much liability are you taking on?
- Can the other party walk away easily?
- Who owns the work you create?
(there are obviously many more, but this gives you a decent starting point)
The aim is rarely to red-line every clause just because we can. And please, never do that! The best thing is to understand the relationship, identify the provisions that genuinely matter to your business, and make the commercial decisions with your eyes open. Sometimes that means saying, “Yes, sign it as it is.” Sometimes it means negotiating two or three points and leaving the rest alone.
And if it comes up and you need to, it’s also ok to insist on using your own terms instead!
“Is an email agreement legally binding?”
This is probably the one that surprises people most, because there is still a common assumption that nothing really counts until somebody signs a formal contract.
That isn’t always the case.
Sometimes a binding agreement can be formed through an exchange of emails, messages or even conversations, which means a fairly casual “Yep, happy with that. Let’s go ahead” can sometimes carry more weight than the sender intended.
The real question isn’t simply whether there’s a signed document, but whether the parties had actually reached agreement on the important points and intended to be bound by them. That means looking at the whole exchange, not just one email in isolation.
From our side, we’ll often look at the following things:
- What was being discussed?
- Whether the key commercial terms had been agreed;
- Whether anything was still left to negotiate;
- Whether the correspondence said things such as “subject to contract”;
- What the parties actually did afterwards.
For example, if both sides agree the price, the work to be done and when it will start, and then one party begins delivering the service while the other starts paying invoices, the fact that the formal agreement sitting in someone’s inbox was never signed doesn’t necessarily mean there is no contract. On the other hand, a chain of emails agreeing to some headline points while making it clear that the deal remains subject to a formal contract may lead to a very different answer.
This can get particularly tricky when negotiations have gone on for months and the story is spread across emails, WhatsApp messages, meeting notes and calls (and, at times, different people across the business). At that point, we may need to piece together what was actually agreed, when it was agreed and whether either party had made it clear that they weren’t committing until something formal was signed.
The practical point to remember is not to assume that something isn’t binding just because there isn’t a signed contract. If negotiations are still ongoing, make that clear. If you don’t intend to be bound until a formal agreement is signed, say so and use wording such as “subject to contract” where appropriate.
Our main takeaway, though, is that if the deal matters, it’s worth getting it documented properly! And if you’re already looking back through an email chain thinking, “Hang on, did we actually agree this?”, that’s usually the point to ask the question before anybody takes the next step.