Potentially Setting Up New LTD Co. with Brother

[sammas]

Hi,

We have a joint pot to set up a limited company with the intention to lend the money to the new company with concrete agreement that the monies are payed back to us and not left outstanding on the company acc's. .

1. Brother is not in the country therefore the establishing of the company is left up to me.
2. I have Lukewarm feeling as to whether my brother is entirely congruent to self-employment & he is only 25 with a tidy job in the US not perfect but fair his own words.

I am looking at various scenarios from how many directors there will be, shareholding ownership, profit share / dividends

Perhaps incentives to buy one another out in 5 years for example

I want to be transparent & fair our father had a successful partnership business of 30 years that got really ugly effectively it took 8 years & 4 solicitors to figure it out, along with our father dying with dementia Aswell.

Any views?

Thanks

 

[japancool]

I have two important words to say - shareholders' agreement!

You can build all of what you mention into it. But be very clear as to the division of duties, and your roles. Perhaps create performance targets.

Remember a director has a fiduciary duty to act in the best interests of the company.

Does your brother have to be a director?

 

[DontAsk]

I am no expert, but I would have two classes of shares, one for you, one for brother, with different dividend rights for each class. That way you can declare dividends for whoever puts in the effort.

 

[Paul Kelly ICHYB]

I have two important words to say - shareholders' agreement!

This.

 

[sammas]

@japancool
I hear yeah in terms of the shareholders agreement and director duty.
Division of duties aswell, fair.

He of course would not have to be but considering he wants to put up half the money he may want that role Aswell, when he comes home.

 

[sammas]

@DontAsk

I think that could be a fair thing to explore, I don't mind working harder at the LTD but it would deserve recognition to limit confrontation

 

[sammas]

@paulkelly

Took on board

 

[japancool]

@japancool
I hear yeah in terms of the shareholders agreement and director duty.
Division of duties aswell, fair.

He of course would not have to be but considering he wants to put up half the money he may want that role Aswell, when he comes home.

He could be a shareholder without being a director, and the repayment terms could be set out in the shareholders' agreement.

Being a director comes with duties, so make sure he is prepared to carry those out, and not just want the title.

 

[MBE2017]

OP, shareholders agreement, definition of roles, how to resolve disputes, because you will have them.

Most importantly, congrats on thinking about this now.

 

[japancool]

Also, I strongly suggest you do not split the shares 50/50. You'll be deadlocked in the event of a dispute.

Have a look at @The Resolver's Mr 2 Percent service:

About us

www.mr2percent.com

 

[Gyumri]

I wouldn't get involved with my brother in the first place if you want to stay brothers. Take a leaf from your late fathers experience. Money tends to eventually destroy family relations.

 

[MOIC]

As above.

 

[brucegreig]

As others have said, you can use a shareholders agreement to deal with this. Some of the things you might want to consider:

- Drag along / tag along / pro-rata rights clauses (google these if you don't know them already)

- A pre-agreed mechanism to buy each other out. "Texas Shootout" is an elegant, although rather brutal, solution: one party makes an offer, at any time, to buy out the other for £x (x being any number at all, selected by the party making the offer). Other side can then either (a) sell at that price, or (b) must *buy the other one out* at £x+1. Risky if one side is likely to be much more liquid than the other (i.e. unable to fund purchase, so has to sell)

- Another mechanism: both sides have an option to buy out the other at some pre-agreed multiple of EBITDA. Risky if you have a bad year, so maybe you put in a floor price, or average EBITDA over a few years.

- These things would tend, in practice, to be used to set some parameters for a negotiation, rather than actually be exercised (because exercising such an option against the will of the other likely to not be worth the legal trouble that might ensue)

 

[The Resolver]

I am no expert, but I would have two classes of shares, one for you, one for brother, with different dividend rights for each class. That way you can declare dividends for whoever puts in the effort.

But not if they both are directors with, no others, as you will just have stalemate over declaring the dividends.

If Sammas is to be the sole director then needs to ensure the company does not adopt the Model Articles without altering them. If he does not do so then even his sole deicsions on dividends would have no effect in law. See my page on this problem.

 

[The Resolver]

OP, shareholders agreement, definition of roles, how to resolve disputes, because you will have them.

Most importantly, congrats on thinking about this now.

For a full set of reasons why its madness not to have a Shareholders Agreement see my page here

 

[The Resolver]

Also, I strongly suggest you do not split the shares 50/50. You'll be deadlocked in the event of a dispute.

Have a look at @The Resolver's Mr 2 Percent service:

About us

www.mr2percent.com

www.Mr2PerCent.com

 

[The Resolver]

- Another mechanism: both sides have an option to buy out the other at some pre-agreed multiple of EBITDA. Risky if you have a bad year, so maybe you put in a floor price, or average EBITDA over a few years.

Pre-committing to a multiplier of the average EBITDA should not be used since the average may not reflect the real dynamic. For example if you pre-agree a multiplier of 4 x the average EBITDA of last 3 years and suppose the company is on a steady sharp rise in fortunes with the EBITDA in each of last 3 years being:-

2019/20 = £100,000
2020/21 = £200,000
2021/22 = £300,000

The average is £200,000 - so the value of the company used a base for determing the value of the exiting shareholders shares is £800,000.

But what if the company is on a sharp decline as in:-

2019/20 = £300,000
2020/21 = £200,000
2021/22 = £100,000

The averag e is still £200,000 and thus the value of the company still £800,000.

Clearly you not want to be stuck with having to pay at that level if on steady fall.

So pre-arranged formulae are to be avoided, However in the Shareholder Agreemenst I draw up I include a formula for reaching agreement by givmg an neutral expert the taskfollowing fixed parameters.

BTW In the case of a buy out from the heirs on death, this should be covered by insurance. See here.

 

[dylanmarlais]

Hi,

We have a joint pot to set up a limited company with the intention to lend the money to the new company with concrete agreement that the monies are payed back to us and not left outstanding on the company acc's. .

1. Brother is not in the country therefore the establishing of the company is left up to me.
2. I have Lukewarm feeling as to whether my brother is entirely congruent to self-employment & he is only 25 with a tidy job in the US not perfect but fair his own words.

I am looking at various scenarios from how many directors there will be, shareholding ownership, profit share / dividends

Perhaps incentives to buy one another out in 5 years for example

I want to be transparent & fair our father had a successful partnership business of 30 years that got really ugly effectively it took 8 years & 4 solicitors to figure it out, along with our father dying with dementia Aswell.

Any views?

Thanks

Lots to think about and you are correct in thinking about potential problems now, no doubt as a result of your father's experience.

In my opinion, it is important that you invest some money now in getting some good advice from a company lawyer. I see that there are well-meaning suggestions in this thread, such as to have a shareholders agreement or to Google various terms, but, in my opinion, you need some legal advice and some documents drafted by a lawyer. It may well prove to be a very good investment.

 

[The Resolver]

To avoid any misunderstandings about this Forum , I am a company lawyer. There are other lawyers here as well.

 

[japancool]

I see that there are well-meaning suggestions in this thread, such as to have a shareholders agreement or to Google various terms, but, in my opinion, you need some legal advice and some documents drafted by a lawyer. It may well prove to be a very good investment.

Suggestions and advice on a forum should NEVER be in lieu of advice from a professional.

 

[Gyumri]

If Sammas is to be the sole director then needs to ensure the company does not adopt the Model Articles without altering them. If he does not do so then even his sole deicsions on dividends would have no effect in law.

It's fair to say that the High Court Hashmi obiter comments are not a statement of the law and would probably not be followed by another judge in another case.

The model articles clearly refer to a quorum for a directors' meeting (plural) so it was rather silly for the judge to remark that a company could not therefore effectively be run by a sole director.

 

[sammas]

To be Honest I have witnessed the pitfalls of when it doesn't work out & I wouldn't want to embark on this to ultimately fall out with my Brother.

> I aware @japancool of the Sole Director & I am very aware of the 50/50 scenario. (Nightmare) TY
> @MBE2017 any example how you would suggest a clause how to narrow down how you would handle a dispute? TY
> @Gyumri Its equally weighted, I guess it's all contractual if you can get the agreement in the beginning. TY
> Parmentiers for negotiations very well said @brucegreig TY
> @theresolver Shareholders agreement critical TY
>@dylanmalais Totally agree TY

My main concern really is the operational, I'm happy to take on more responsibility but the recognition has to be there from the beginning but of course I am happy to be regulated Aswell.

First class response TY

 

[MBE2017]

> @MBE2017 any example how you would suggest a clause how to narrow down how you would handle a dispute? TY

My suggestion, talk to an expert like The Resolver, there will be things you will have thought about, other things brought up in this thread, and probably a lot more not mentioned yet.

Everyone hopes everything goes well but experience tells us it often doesn’t. Planning correctly at the beginning will help avoid many problems, who controls what, who is responsible for what, who has the controlling votes etc.

I’m more a solo guy, so use professionals who have been there, seen it and got the T shirt and save yourself a lot of future headaches.

 

[smallclaimsassistance]

I wouldn't get involved with my brother in the first place if you want to stay brothers. Take a leaf from your late fathers experience. Money tends to eventually destroy family relations.

Well said!

 

[The Resolver]

It's fair to say that the High Court Hashmi obiter comments are not a statement of the law and would probably not be followed by another judge in another case.

The model articles clearly refer to a quorum for a directors' meeting (plural) so it was rather silly for the judge to remark that a company could not therefore effectively be run by a sole director.

Under our common law system, judges interpret the law. That does not commit other judges in other later cases to not interpret differently, but they need to explain why they come to a different interpretation. It would be wholly wrong for a lawyer to tell a client to ignore such interpretation on the grounds that it was 'silly'. It does not look like there is to be an appeal and I have not seen reports of later cases interpreting differently. The reason is because it is not worth the risk when the solution is easy to implement. Most lawyers will now, therefore. be giving the simple advice of amending the Articles or appointing an additional Director(s). This is a simple step to avoid the damage if a later judge followed Hashmi

 

[The Byre]

To be Honest I have witnessed the pitfalls of when it doesn't work out & I wouldn't want to embark on this to ultimately fall out with my Brother.

The obvious answer is to not enter into a partnership with your brother - or (IMO) anyone else, come to that! You could form two separate companies that work together.

Failing that, each does their own thing and all is sweetness and light and family get-togethers do not end up at the hospital and the female members requiring therapy!