Be a Dragon in Reviewing Investment Terms, say Midlands Law Firm

Potential company investors should be as cautious as the “Dragons” from the BBC series “Dragons’ Den” in reviewing both the commercial and legal terms of their proposed investment, according to a leading Midlands corporate lawyer.

“Fans of ‘Dragons’ Den’ are used to watching contestants see their business plans torn to shreds by a panel of potential investors,” says Clare Martin, an associate solicitor in the Black Country law firm George Green LLP.  “As a result of recent company law changes, it is crucial that prospective minority investors in a company adopt an equally critical approach to the terms which they are offered.”

According to Ms Martin, who is based in George Green LLP’s Cradley Heath office, reforms introduced by the Companies Act 2006 can have the effect of weakening the position of minority shareholders.

“Many shareholders will be familiar with the concept of ‘authorised share capital’,” explains Ms Martin.  “This creates a ceiling on the number of shares which can be issued without further shareholder approval.  This restriction has, however, been abolished for companies incorporated on or after 1 October 2009, although existing companies will have to pass a shareholder resolution in order to disapply their current authorised share capital limit.”

“Also, directors of private companies formed on or after 1 October with only one class of share will not require shareholder approval to allot further shares of the same class.  Again, the shareholders of existing companies will need to resolve to give the directors this freedom.”

Ms Martin continues, “Although new companies can choose to adopt a more restrictive position, the combined effect of these changes increases the risk of minority investors with no presence on the board finding their shareholding diluted without their knowledge or consent.”

Ms Martin stresses that whilst shareholders potentially have legal remedies in such a scenario, these tend to be expensive and time consuming.

“It is far preferable for minority shareholders to ensure, at the outset, that they are protected by an appropriate mechanism in the investee company’s constitution, which enables them to participate proportionately in any further issue of shares.  Such a default mechanism is stipulated in the 2006 Act, but is commonly disapplied by companies who tend to adopt a more sophisticated procedure.  Shareholders should also ensure that they have a veto over any potential amendment to a company’s constitution which might weaken their position.”

“Many investors are used to being as canny as ‘Dragons’ Peter Jones and Duncan Bannatyne in negotiating the commercial terms of their investment,” Ms Martin concludes. “Only by adopting a similar approach to the legal structure can they be confident of their investment strategy.”

Established in 1897, George Green has 11 partners and 75 staff, and is headquartered in Cradley Heath with a satellite office in Birmingham.

For further information, contact Beverley Weston, Marketing and PR Manager for George Green LLP, Tel: 01384 340585.  Email: [email protected]