business lawhttps://www.linkedin.com/feed/update/urn:li:activity:7270755354643161088/
In today’s dynamic business environment, directors and shareholders often face challenges when exploring new ventures while maintaining involvement in existing companies. A recent case we managed highlighted key considerations for navigating such situations, particularly in industries where competition is unavoidable.
Our client, the CEO and majority shareholder of several sports-focused companies, sought to establish a new venture based on his intellectual property. The decision stemmed from unresolved fraud issues and operational paralysis in his current companies, coupled with an investor’s preference for a fresh entity. However, questions arose regarding the legal implications of this move, especially concerning conflicts of interest and non-compete obligations.
Under the Companies Act 2006, directors have a duty to act in the best interests of their company. This includes avoiding conflicts of interest and not exploiting corporate opportunities for personal gain. Transparency with shareholders is essential to mitigate risks of potential claims.
Many agreements include non-compete clauses restricting directors or shareholders from engaging in similar businesses. In our client’s case, the Shareholders’ Agreement imposed a 12-month restriction only after ceasing to be a shareholder. While active, there were no explicit restrictions, allowing the client to proceed provided no proprietary resources or information were used.
Open communication with shareholders is critical. We advised our client to notify all stakeholders of his intentions, ensuring compliance with corporate governance and reducing potential disputes. Additionally, documenting the independence of the new venture is vital to demonstrate that no assets, employees, or intellectual property of the existing companies are utilized.
To protect the integrity of both businesses, maintaining operational and financial separation is non-negotiable. This includes using independent employees, funding, and systems for the new venture.
The client was reminded to adhere to non-solicitation obligations, ensuring that employees or clients from existing companies were not approached for the new venture. Similarly, strict confidentiality regarding proprietary information was emphasized.
Practical Recommendations for Business Leaders
1)Review Articles of Association, Shareholder Agreements, and Employment Contracts for restrictive clauses.
2)Notify stakeholders early to mitigate claims of bad faith.
3)Maintain records of compliance with fiduciary duties and legal obligations.
At J. Preedy Solicitors Ltd. specialize in advising business leaders on complex corporate matters, ensuring compliance with legal obligations while empowering strategic growth.
