Case and Matter Analysis – Business organisations, rules and procedures (ElectroEndurance)

From: Partner Sent: 11 December 202# To: Candidate Subject: Nick Dutton and Alex Hayman Yesterday I spoke to some new clients, Nick Dutton and Alex Hayman. They are excited about a new product they have been developing. They explained that this is a device which will enable electric cars to run further than at present before they have to be re-charged. They intend to set up a new private limited company to develop and produce this device. They have worked in the car industry for some time, and have already had some small success in developing car parts. They will work together in this new business venture and we will act for them both. The Initial Meeting and Proposal Nick and Alex have some money of their own to invest in the business. Frank Wells, who is an experienced businessman, is willing to invest in their project. Frank's sister, Mary Freeman, has also agreed to contribute some capital. Nick and Alex have worked out that they will need £65,000 as start-up capital. Nick and Alex between them have £15,000 to invest: they will be putting in £7,500 each. An initial meeting has taken place and Frank and Mary have agreed to provide the remaining £50,000: Frank will invest £32,500 and Mary will invest £17,500. It was further agreed that the company will be called ElectroEndurance Limited and that Nick Dutton would be the Company Secretary. After the meeting Frank and Mary sent Nick and Alex a letter summarising their position and an outline of their proposal. These are attached. Important Background Information As you will see from the attached letter, Frank and Mary have made it clear that, since they are taking on a significant risk, they expect an early return on their investment in the company. However, Frank and Mary are both happy to discuss and negotiate their initial proposal. Nick and Alex realise that without the investment from Frank and Mary they cannot go ahead with the development and production of their new device. However, if Nick and Alex are as successful as they hope, they would like to take the business forward themselves. They therefore want to know how secure they will be in their positions as directors of the company. They have also said they would prefer to minimise outside involvement in the company. So far as possible they want profits to go into development of the product and recruiting specialist employees, and they want to be in control of making decisions about use of profits. Nick and Alex have indicated that they expect to agree with each other on decisions to be made within the company. They expect that Frank and Mary will also agree with each other. However, they recognise that the four of them may not always be in agreement. Advice and Analysis Required Nick and Alex would like advice about this proposal and suggestions for negotiating a better position for themselves bearing in mind what might be acceptable to Frank and Mary. I would like you to provide this advice and analysis for me to use as the basis of a letter to the clients. In providing your advice, please bear in mind that Nick and Alex have no experience of forming a company, or running a business through a company. They have only a very basic sense of what it means to be shareholders and directors in a private limited company. However, they would like brief explanations of the relevant law where appropriate, so please include these in your advice and analysis. Do not include advice about incorporation of a company, nor a detailed procedure plan which might eventually be required: the advice we have been asked for is preliminary only at this stage. Please also do not include taxation advice at this stage. Please set out your advice and analysis on the following: 1. If the company is structured in the way suggested in the investment proposal attached can Nick and Alex be removed by Frank and Mary as directors of the company? What changes would you recommend Nick and Alex try to negotiate to strengthen their position as directors? 2. What alternative proposals to those made in the investment proposal attached might Nick and Alex consider, as ways of structuring the investment to be made by Frank and Mary? You should suggest proposals which will benefit our clients, bearing in mind what you think might be acceptable to Frank and Mary. For any suggestions you make, you should note the advantages and disadvantages from both Nick and Alex's, and from Frank and Mary's points of view. This will enable Nick and Alex to understand the position fully before entering negotiations. Thanks Partner Note to Candidates: You should assume that there is no conflict of interest between Nick and Alex. You should assume Nick and Alex's interests are identical in this matter and will not conflict at a later date. In particular, you should not consider any separate legal advice which either of them may wish to take in due course. You do not need to deal with any client care matters (including costs), money laundering, financial services or taxation issues. ———————————————————— ATTACHMENT 1 – Letter from Frank and Mary The Homestead, Falconer's Rise, Doncaster DN12 1AD 8 December 202# Dear Nick and Alex We thought you would like to have written confirmation from us of our proposal for how we become involved in your new business venture. This, you explained, is the development by you both of a new product to enable electric cars to run further than at present before they need to be re-charged. You have not yet incorporated the company to develop and produce this device, but you explained that you will be consulting a solicitor. I suggest that you take some advice on our proposal from your solicitor, and that we meet again after that. Frank has £32,500 to invest in the company. Mary will invest £17,500. Our suggestion is that we will use this investment to become shareholders in the company, but neither of us wish to become involved in the day-to-day running of the company, and do not wish to be appointed as directors. Since we are making such a substantial investment, we must see some return as early as possible. You told us that you do not expect the company to make any profit for its first 18 months of operation. Our suggestion therefore is that, in return for our investment, you issue some preference shares and some ordinary shares to each of us. This seems to us to be a good way for you to get the capital you need to get started, whilst allowing us to receive a share of profits early on in the life of the company. In the investment proposal attached (which includes the proposed company structure), we have included some wording which we suggest is put into the company's articles to set out the rights attaching to the preference shares. Once you have taken some legal advice, you may find that there are elements of our proposal, or points arising from it, which you would like to discuss with us. By all means, contact us in due course and we will be happy to consider any reasonable alternative proposals. With best wishes Frank and Mary ———————————————————— ATTACHMENT 2 – Investment Proposal dated 8 December 202# Name: ElectroEndurance Limited Directors: Nick Dutton; Alex Hayman Company Secretary: Nick Dutton Registered Office: 75 Hopswood Drive, Doncaster, DN11 7BQ Shareholders: - Frank Wells: 10,000 £1 20% cumulative preference shares; and 22,500 £1 ordinary shares - Mary Freeman: 5,000 £1 20% cumulative preference shares; and 12,500 £1 ordinary shares - Nick Dutton: 7,500 £1 ordinary shares - Alex Hayman: 7,500 £1 ordinary shares Articles of Association: Schedule 1 of the Companies (Model Articles) Regulations 2008 with one amendment comprising an additional article setting out the rights attaching to the preference shares: The holders of preference shares shall be entitled to receive a fixed cumulative preferential dividend at the rate of 20% per annum upon the amount paid up thereon. On a winding up of the company in any circumstance, any excess of capital available for distribution to the shareholders shall be distributed equally among all shareholders in proportion to the nominal value of their total shareholdings of all classes of shares held. The holders of the preference shares shall be entitled to receive notice of any resolutions put before the members of the company but shall not be entitled to vote on any such resolutions nor count in the quorum at any general meeting. Shareholders' Agreement: None Directors' Service Contracts: Nick Dutton and Alex Hayman – terms, including salary, to be agreed.