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How Not to Lose Your Company to a Competitor
You can so easily lose your business to your competitor. In this paper, you will learn how this can happen and how you can avoid it.
Recently a client called and said he heard that one of his shareholders is trying to sell his shares to a third party. He was horrified that the third party was a competitor. How could he lose his company to a competitor!
He could because his business had no Shareholders Agreement, only the standard form Articles of Association. Without a Shareholders Agreement, he was not able to stop the other shareholder from:
- first, sharing and divulging confidential information about the company's business to third parties;
- secondly, offering to sell and selling shares to third parties without notice to himself and the company;
- thirdly, offering to sell and selling shares to third parties who are competitors of the company; and
- finally, competing against the company.
Consequently, he was running the risk of losing part of his business to a competitor.
How could he have avoided and prevented this risk? A properly drafted Shareholders Agreement will contain the following provisions:
- the right as an existing shareholder to be notified if any other shareholder wishes to sell their shares. This is known as the "right of pre-emption" or "right of first refusal". This also gives him the right to buy any exiting shareholder's shares
- the right to approve a sale of shares to a third party. This right ensures that any third party competitor can be avoided.
- a confidentiality undertaking to protect his business' trade secrets and client lists
- a restriction on shareholders competing against the company directly or indirectly. Direct competition includes forming a new business in the same or similar business. Indirect competition includes taking investments in companies that are competitors or investing through third parties.
These are safeguards that could have saved him from expensive litigation costs and many sleepless nights. Instead, he lost over 3 months' of business time dealing with this matter and had costly legal fees. Having a Shareholders Agreement would have sorted this problem out as the procedure will have been agreed for such a situation.
If a Shareholders Agreement is what you need or your current agreement needs updating, please do contact us.
For further information
If you have any further queries, contact Francesca Lee on 01865 3399360 or email fsclee@crescolegal.com