As lawyers we are often consulted by both IFA businesses and those seeking to leave a business, where either the terms that apply on the departure of a key individual are not clear, or the terms are clear but cause either the individual or the business a potentially significant problem.
The crux of the problem is often one of two things. Either the relevant party did not read a contract at the time that they signed and joined a business, or nothing was signed at all and the terms are not clear.
Two common areas where this arises are shareholder/director disputes and disputes with employed or self-employed advisers (often around restrictive covenants).
Many IFA businesses start off fairly small with ambitions to grow. Understandably, at the start money is tight and the shareholders/directors are focused on the day job and the more exciting stuff such as winning new clients, rather than putting a solid legal framework in place that will stand the business in good stead in the long term. Unfortunately, in the event of a dispute or a parting of ways, this can leave the business exposed to considerable uncertainty. A shareholders’ agreement can prove invaluable in that event as it will provide a process for resolving issues such as:
- How to deal with a deadlock between shareholders. Particularly important when a business is owned 50:50, as the company would otherwise be paralysed and unable to make decisions. It is not unusual to see such businesses forced to carry on when neither party is happy, because neither will back down. An unpleasant “who will blink first” situation can result, which ends up causing significant damage to the business.
- How decisions are to be made. In companies with more than two shareholders, it is likely to be beneficial for the shareholders to determine a list of key business and constitutional decisions which may only be taken if a certain percentage of the shareholders’ agree. In 50:50 companies, such key decisions would require unanimous agreement. On a day-to-day level, these provisions will give the management team clarity as to the extent of their discretionary decision-making powers.
- How, and the terms on which, a shareholder may transfer their shares, and what should happen to their shares if they cease to be involved in the business. For example, what happens on retirement, how are those shares valued, what procedure should be followed where a third party makes an offer to acquire a majority/controlling stake in the company.
- How to protect the company’s client base. Restrictive covenants are often included in shareholders’ agreement to prevent an outgoing shareholder from soliciting clients or employees for a certain period of time following their exiting the business. Such covenants will be enforceable for a longer period than may be the case under a standard service/employment contract and offer better protection than any implied duty of confidentiality.
A failure to put robust contracts in place with key staff (employed or self-employed) or, from the individual’s perspective, a failure to consider terms properly before signing them, is the other common issue that arises.
A key piece of advice that all businesses should bear in mind is if a new member of staff is stalling on signing a contract, there is often a reason why and the business should address this head on before the staff member joins, rather than park the issue and let everyone get on with it – there is often a real reason why someone will not sign but that person will hide behind the “too busy, haven’t had time to look at it” excuse. It can be a difficult conversation but it is certainly easier to have it before the new member of staff is in post than once they have started – the business’ negotiating position is also much weaker once a person has joined and started work. What often happens is that when a dispute arises the member of staff maintains that they didn’t sign the contract because they didn’t agree with particular terms – this puts the business in a difficult position.
For employees, the employer has a legal duty to provide a statement of employment terms within 2 months of joining, but to a large extent this is about mitigating risks to the business rather than black letter compliance. If no clear written contract is in place then in the event of a dispute a court or tribunal will look to infer the terms that were agreed between the parties, but if there is any grey area then a term will always be construed against the party seeking to rely on it (contra preferentum for those who like latin!).
One of the most important issues for IFA businesses is the extent to which the confidential information, client lists, client contact details and the intellectual property of the business are protected in a relationship with a staff member where no contract was ever issued. For IFA businesses, this data is often its most valuable asset – the assets from which the business makes its profits. Any business which does not have contracts with its staff protecting these assets risks, overnight, losing the assets which enables it to make a profit, and not being able to do very much about it. The law can offer some protection in the absence of a contract but this is entirely inadequate (and considerably more uncertain) in comparison to the protection that can be put in place in a clearly drafted contract.
When it comes to clients, a business should be looking to protect clients of the business which an adviser deals with, whereas an adviser may want to protect any clients that they take to the business when they join. That is often regarded as a fair bargain by both sides, so it should not be difficult to record that at the outset, and it can save a whole lot of pain and expense later. You may be surprised at the number of times where this has not happened, or where an adviser gives up all rights to clients that they bring with them to the business, only to be surprised about this when they come to leave (because they didn’t read the contract before they signed it).
Accordingly, the key message is to spend time (and yes, maybe some money) at the beginning of a business or relationship, or when it changes getting appropriately drafted documents in place that provides the necessary business protections, and ensuring that it is signed by all parties concerned. This will work wonders in avoiding expensive disputes at a later stage.
Please note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of Sense Network Limited. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author.