There is an established, but growing, trend for wealthy private individuals (known as “angels”) investing in young and small private businesses in return for shares in the company. This is a form of equity finance, as opposed to the more usual debt finance provided by lenders.
After the heads of terms have been agreed, the investor’s lawyers will be asked to conduct legal due diligence on the target company. The extent of this will depend on the trading history of the target and the investor’s appetite for information about the target. The scope of due diligence usually covers the constitution and structure of the board and shareholders, employment contracts, existing financing arrangements, existing licence, research and development and other collaboration agreements, property arrangements and key commercial contracts.
Timings and documentation
The target company is likely to require shareholder approval as part of the investment process in order for new shares to be issued to the investor, new articles of association to be adopted, the subscription and shareholders agreement (also referred to as an investment agreement) executed, the appointment of the investor director approved and the existing rights of pre-emption in relation to the issue of shares waived. These shareholder resolutions can either be passed by convening a general meeting or by passing shareholders’ written resolutions remotely.
If the target company has existing equity or debt investors, their consent may also be required as a result of any right of veto they have in any existing investment or loan agreement. This will normally become evident from the due diligence exercise, although it is more expedient if the target company obtains letters of consent beforehand.
If the incoming investor subscribes for more than 50 per cent of the share capital of the company, the share issue may result in the target company breaching any change of control clauses in its commercial contracts. If this is the case, the target company will need to seek consent to the investment round from the relevant third party before completion.
The legal advisers involved will need to agree that all conditions have been satisfied and decide on the precise mechanism for completion and the sequence of events. In practice, the execution pages are normally circulated by email and exchange will be agreed on the basis of electronic signatures, before funds are transferred.
My first job was dogsbody to a chick-lit author – a glossy ex-glamour girl who turned her eye-watering love life into beach bliss reading for millions – a great business model that meant she got paid for living her life (twice, I suspect). I would be bound to learn loads about publishing – hot break, huh. The other staff were minimal – it was only me.
Oh, there was an office cat. Simpkin, “the tiny angel” had been with Ms Shiny, aged 13, since she rescued him as a stray kitten on the way home from a seedy shoot in Dagenham. Now a vast tabby of easily 25, Simpkin weighed 30 lbs and had issues with anger management. Ms Shiny, who had never really made it work with any of the millionaires, adored him.
I was meant to run the office and do a bit of basic accounting. The previous occupant had enquired whether Simpkin counted as “equipment” or “personnel” in tax terms – he lasted four hours.
In the morning, Simpkin’s routine was unvarying. He received several breakfasts (my job) which were rejected (his job). After thieving my sandwiches, he performed his toilette, usually in my handbag, then staggered off to sleep on the printer– woe betide you if it wasn’t on and warmed up. Or you wanted a copy of a contract or the million-dollar MS. I was grateful for email.
Lunch is big in publishing and Simpkin knew how to behave. Around 12:30, as hapless agents and editors swung by to take the glamour girl out somewhere pap-worthy, Simpkin fell out the printer tray and weaved his way to the front door, where he lay in wait. The shriek acted as a doorbell.
Feeling his age rather, once Simpkin had attacked he fell asleep on the job, leaving incisors stuck in the victim. Whose job was it to ease the fangs out of a well-known publisher without risking the million-pound advance? Who apologised for “the little tinker” as “playful” or “free spirited”? Who paid for the tweezers?
No one came back for after-lunch coffee. Simpkin received a choice of four human-food lunches (inc. parsley trim), one of which he threw up for my attention around 3. At 4, he demanded a “cuddle”. I scrabbled frantically to cover the vast acreage of furry tum as fast as possible before both arms were disembowelled. 5 o’ clock saw a final, complementary paw massage for him and a wet wipe to get the blood off for me, and I was free.
Did the job do anything for me? Yup – I learned how to be a Minor Injuries Operative, run an office, and negotiate foreign rights, all while suffering an arterial bleed. Oh, and how to keep the boss happy – Simpkin was a director and shareholder in Chick Lit Ltd.
My question is: do you have to be human to end up in a tribunal?
Michael Scutt writes:
“Animals were regularly put on trial in the Middle Ages and even into the eighteenth century. American historian Robert Darnton’s book, The Great Cat Massacre, recounts the story of Parisan printers in the late 1730s who became so angry at the lavish treatment accorded to pampered pets by their masters that they put the moggies on trial and hanged them. Darnton interprets the episode as an early example of industrial action.
Simpkin, had he been around then, wouldn’t, presumably, have put up with any such nonsense and would have known how to deal with stroppy Frenchmen. These days he is aided by anti-cruelty legislation meaning that applying a crafty boot to his furry rear end would probably lead to prosecution.
All is not lost, though, for Simpkin’s “friend”. The employee should remember that an employer has a duty, implied into every contract of employment, to provide a safe working environment. The Health & Safety Act 1974 and subsequent regulations also require the employer to provide a safe working environment. That usually means a safe system of work, safe premises and safe fellow employees. Simpkin doesn’t count as an employee anymore than he does as a director, but I think the employee could have walked out claiming constructive dismissal, thus bringing her employment to an end.”
David Impey, company lawyer, writes:
"Under UK company law, a cat can't be either a director of a company, or a shareholder, of a UK limited company. Even a cat showing the remarkable self-interest, greed and tenacity shown by Simpkin, and even if the company is a bank. In fact, the law on directors was tightened up fairly recently (1 October 2008). Now, even humans cannot be directors if they are under 16 years old. (In a stroke of terminological genius, the new law provided that any existing under-age directors were automatically 'dis-appointed' as directors from that date.)
Otherwise, there are remarkably few barriers to becoming a director of a UK company. For example, you mustn't be an undischarged bankrupt, have been disqualified from being a director by the courts (which takes some pretty dire behaviour and, usually, the insolvency of your previous company), or started up using a new company name that's too like the name of a previous company of yours that has gone bust in the last five years. And you can't be a director if you are the company's auditor, or if the company's constitution stops you.
But if you can avoid those hurdles, and almost everybody can, you don't have to pass any exams, or have any particular qualifications (although the Institute of Directors does run a Chartered Directors' Course), or even have an IQ. Just a pulse will do.
Nor do you have to be British (though you can't be a director if you are officially classified as an enemy alien). Finally (and I am at an age where I find this encouraging) there is no maximum age beyond which you cannot be a director. Directors can be as old as you like.”