Corporate and commercial round-up August 2020

Employee owned businesses: A succession planning option

When selling a business it can often be difficult to find an appropriate buyer who shares their values and who has the same ambitions for the future of the company. Therefore, succession planning can often be problematic.

One option which is growing in popularity, rather than selling to a trade buyer, is employee ownership. Employee ownership is a form of employee benefit trust where all the employees have a ‘significant and meaningful’ stake in the business. John Lewis is an example of such an enterprise. The number of employee-owned businesses has been increasing rapidly.

The employee ownership model is an attractive option for a number of reasons. From a tax perspective, provided that the various legislative requirements are met, the qualifying shareholders can transfer their shares free from Capital Gains Tax. This may be more relevant given the recent changes to Entrepreneur’s Relief. The employee ownership model also has advantages when it comes to recruitment and retaining of staff as well as reportedly higher employee engagement, greater job satisfaction and better overall employee wellbeing.

There are certain requirements that must be met which include (amongst others), the employee ownership trust must hold more than 50% of the ordinary share capital and voting rights and in addition, the trust must be entitled to 50% of the profits which are distributed.

Top tips for early stage companies looking to obtain investment

• make sure you have a robust and realistic valuation of your business;
• consider alternative incentivisation of employees where remuneration cuts have been implemented. This includes share schemes (such as EMI schemes) and other LTIPs;
• ensure you appropriate IPR assignment/vesting provisions in commercial contracts and employment/consultancy agreements;
• review termination and force majeure provisions on key existing agreements together with any onerous provisions (especially those that apply in the event of times of difficulty);
• scrutinise existing funder provisions relating to financial difficulty or emergency funding;
• be able to show that you have a workforce who have been able to transition to working from home and a product that will thrive in the post-Covid market;
• be able to exhibit sustainability and environmental impact of your business;
• review real estate requirements and ability to work flexibly – if this suits the requirements of your work force. With shorter commute times for those not based in large cities, some prefer the collegiate nature of being in the office;
• set out clearly your exit proposals for an investor; and
• be able to demonstrate prudent cash flow management.

Services agreements: Termination as a result of insolvency?

The Corporate Insolvency and Governance Bill (the Bill) 25 June 2020 includes new prohibitions on suppliers’ ability to terminate their agreement following the other party entering into an ‘insolvency event’.

The Bill includes the following prohibitions on the suppliers’ termination rights:

• terminating the agreement or doing ‘any other thing’ as a result of the other party’s entering into an ‘insolvency event’;
• terminating the agreement for breaches which had occurred prior to the other party entering into an ‘insolvency event’; and
• making payment of pre-insolvency debts a condition of the future supply of services.

A supplier will need to continue providing services despite the other party entering into an ‘insolvency event’, subject to any of the exemptions listed below.

Exemptions

The Bill includes the following exemptions to the above prohibitions:

• any new breach of agreement, that occurs after the other party has entered into an ‘insolvency event’ (including a breach of payment obligations);
• with the consent of the other party or the insolvency office holder; and
• with the permission of the court (provided that the court is satisfied that such performance would cause the supplier ‘hardship’.

‘Small entities’ will be excluded from the Bill for a period of one month following its commencement (until 25 August 2020). To qualify as a ‘small entity’ the supplier must meet any two of the following criteria:

• turnover was not more than £2 million;
• balance sheet was not more than £1 million; and
• does not employ more than 50 employees.

Issues in the transfer of data to the US (and elsewhere) following Schrems II case

The Court of Justice of the European Union has given a landmark decision on data transfers to the US in Data Protection Commissioner v Facebook Ireland and Max Schrems (Case C-311/18; 16 July 2020) – known as Schrems II.

Click here to read the full article.

If you would like to discuss these subjects further, please contact us.