Contracts are the lifeblood of your business. They govern everything from relationships between the company and its directors and employees to the way you work with suppliers, customers and outside agencies. Get them right and the business will thrive. Getting contractual terms wrong presents all sorts of problems. Think about the following:

• The business enters a contract without fully reviewing the terms or considering the effect of specific clauses and obligations on it before signing on the dotted line
• Lack of oversight means key obligations as to performance can be missed. If these responsibilities cannot be met, the business is immediately in breach, entitling the other party to damages
• Not all contractual terms need to be in writing. There may be other matters or discussions between the parties that can be said to be incorporated into the contract and which not all parties will be aware of
• Liability and indemnity provisions in the contract could cripple the business if something goes wrong
• Termination provisions could be onerous and costly if not properly considered
• The terms that you think are incorporated might actually not be if both parties have separate terms and conditions. Establishing which terms take precedence could prove to be a costly and acrimonious exercise

Top Tip

Investing in expert legal advice provides the peace of mind that your commercial agreements are legally watertight. A good contract lawyer will take the time to understand your business goals and spot any danger areas such as potential exposure to unintended liability. Above all you’ll be able to rely on the contract’s enforcement procedures in the event of a breach or other kind of dispute. 

Some businesses stem from friends or family going into partnership with each other. There’s a danger here that the partners never formalise their working relationship.

Specifically you should consider:

• When disagreements arise individual partners will have limited protection and fewer legal remedies than if the relationship had been properly agreed
• Disputes over who is right and who is wrong will escalate as you attempt to establish what the precise nature of the understanding between you was
• Day to day it may be difficult to establish the roles and responsibilities of each partner
• When the business is operating successfully there may be disputes over how profits should be split
• Fights on control, management rights and decision making are difficult to resolve if there is no formal structure. Default rules under the archaic Partnership Act may apply. These rarely assist in a modern day business environment
• When a partner wishes to leave the business a lack of exit or dissolution terms can lead to confusion and argument even in situations where the departure of the individual was amicable to start with

Top Tip

The best way to avoid the uncertainty of an informal partnership is to agree a comprehensive Partnership Agreement. This should define roles clearly and include robust provisions governing profit share, decision making, dispute resolution and exiting the partnership. It’s also a good idea to review the agreement if there are significant changes to the direction of the business or if key personnel leave.

Disputes between shareholders and the company can lead to a range of legal disputes, affecting day to day operations and – depending on the nature of the disagreement – damaging the reputation of the business and reducing investor confidence. Disputes will also have a financial impact of some kind whether in terms of legal costs, the staff resources used in handling the issues or the cost of litigation or settling the dispute informally. Some of the most common disputes involving shareholders are:

• Breach of Shareholder Agreement – the Shareholders Agreement sets out the rights and obligations of shareholders and manages their relationship with the company. It should cover everything from voting rights, share sale mechanisms and dispute resolution. Disputes will arise where a breach of the terms occur
• Claims of Unfair Prejudice – groups of shareholders may take action under The Companies Act if they believe the company is being run in a way that is prejudicial to their interests
• Disputes Over Profit Distribution – where there is disagreement over whether company profits are ploughed back into the business or distributed as dividends
• Disagreement over the valuation of shares – often arising during a buyout or shareholder exit
• Buyout Disputes – when a company is sold, how are shares valued and sale proceeds distributed? Disputes can also arise over the disposal of shares in a way that goes against the terms of the Shareholder Agreement

Top Tip

The risk of shareholder disputes is largely mitigated if there is a detailed Shareholder Agreement in place – ideally one that is legally binding and tailor-made for your company. Even where the agreement fails to prevent a dispute arising, it should have reasonable dispute resolution mechanisms in place, including mediation and arbitration requirements. These can help ensure that any dispute is managed proportionately and cost effectively.

Data acquired by a business is a valuable commercial asset – often the most valuable. Restricting access to confidential information not only makes commercial sense, but it also reduces the possibility of litigation arising because commercial know-how falls into the hands of a competitor. Here we consider some of the risks to business posed by the mishandling of confidential information.

• Departing employee sharing data – when someone leaves the business it’s crucial to ensure post termination restrictions on data use and how the individual leaving can access key client data are properly drafted to adequately protect the business
• Insecure IT policies and systems checks – your internal IT systems are key to safeguarding your confidential data. Security access should only be given to a limited number of trusted staff. Appropriate restrictions should be placed on individual ownership rights of key documents and data sets
• Depending on the nature of mishandled confidential information, the company could face legal claims from suppliers or clients identified in the data who suffer reputational or other damage as a result of the data breach
• When confidential information has been shared with unauthorised external parties the business must have the capability to act quickly to protect its position and minimise the impact of the loss of data
• Personal data held by the company is subject to strict data protection rules. Non-compliance with the UK GDPR framework can lead to reputational damage and significant regulatory fines and other sanctions

Top Tip

Managing your confidential commercial information and protecting any personal data you hold is essential in today’s commercial environment. Instilling a data safe culture within your business is the most effective way to ensure compliance. You can do this by investing in regular compliance training and incentivising staff to prioritise data security.

Extensive analysis of relevant company documentation is essential for both buyers and sellers of a business. A failure to properly review documents leaves open the possibility of legal action being taken by either party. This might be because company debts weren’t revealed by the seller or legal cases involving the company weren’t disclosed. Other risks of inadequate due diligence include:

• Expensive breach of warranty and misrepresentation claims. These will involve the buyer contesting the veracity of statements made by the seller around issues such as intellectual property rights, company assets, customer base and financial details
• Personal liability of company officers and employees. Arguments based on fraudulent misrepresentation may be made against individual company figures. If it’s proved, these members could be held personally liable for the losses suffered by the other party. In the context of business sales cases of fraudulent misrepresentation usually centre on the buyer arguing that they relied on statements made recklessly (intentionally lying or hiding key facts) by a representative of the seller. Key facts may relate to debts, litigation or the loss of major clients. If fraud is proved the buyer may be able to walk away from the contract and claim damages
• Disputes over earn out clauses in the sale agreement – occasionally the amount paid for the business will include a future payment that’s based on the sold entity’s future performance. These are complex clauses, and it’s not uncommon for disputes to arise over the way they are put into practice. Where the financial calculations haven’t been properly formulated, agreed or considered in advance, various claims may be brought. These include breach of the implied duties of good faith and fair dealing.

Top Tip

The risks involved in buying a business are multi-faceted and complex. If things go wrong, there can be significant long-term financial and legal consequences – for both buyers and sellers. Investing in expert legal advice from your solicitor is the best way to reduce risk, ensure compliance with all relevant regulations and ensure a smooth commercial transition. Extensive due diligence on the sale of a business is never really an option. It’s the only way to manage change of ownership without the permanent threat of legal or commercial blowback in the future.