(If you are interested in the issues raised below, please note that the Corporate Team at Morrisons provide company secretarial administration services for a competitive annual fixed fee. Please see details at the end of this article of who to contact for further details.)
Recently we advised a group of sellers who, after many years of building a successful business, were selling their company to a private equity purchaser. Due diligence carried out by the purchaser’s advisory team showed that the businesses was prudently operated, with robust contracts and generally well-managed risk. A handful of issues did arise but, largely, we were able to resolve them without the need for the sellers to give “indemnities”, which could have required them to repay part of the purchase price if the liabilities were realised.
It may be surprising to hear that the most time-consuming issue that arose related to errors and omissions in the company’s historic corporate compliance. As an owner-managed business the sellers had maintained the statutory registers, made their own filings at Companies House and dealt directly with seemingly straightforward transactions. One of these involved the company buying back shares from a former shareholder, which were then cancelled… or were they transferred to another shareholder. It was far from clear.
Having unpicked the factual background, it was apparent that the company’s statutory registers, which (amongst other things) contain details of the shareholders, were incorrect. The importance of these registers is often underestimated as evidence of legal title that can easily be amended or re-written, but it is not always that straightforward. This is because entry of a shareholder’s name on the register of members is more than just “evidence” of legal title. Broadly speaking, it “creates” legal title. The information at Companies House is not definitive, nor is possession of a share certificate. The registers are paramount.
Moreover, these errors had resulted in the filings at Companies House (over many years), being incorrect, including every confirmation statement, statement of capital and certain statutory accounts.
We were able to resolve these problems, but it was an unhelpful distraction and involved significant time and expense. These sorts of issues are not uncommon and can have a negative impact on the confidence that a purchaser has in a seller. It’s also not an overstatement to say that substantial work to repair compliance matters can disproportionately damage a seller’s negotiating strength on unrelated issues.
These errors often only arise when it matters most (i.e. a company is equity fundraising or is the subject of a sale) but they can be avoided by taking prudent measures. Here are some tips to help ensure that you remain compliant:
- Make sure that your registers exist. It is a legal obligation to maintain them. They could be in hardcopy or maintained electronically in a spreadsheet and they must also be held at your registered office.
- Make changes on an ongoing basis. Like most things, taking a few moments to do this regularly will save substantial time later. The transfer and allotment of shares and the appointment and removal of directors all require an update to the registers.
- Make accurate filings at Companies House. Rarely will you need to update the registers without filing a form at Companies House to update its records. Make sure the updates match. There are guidance notes available at Companies House for completing most forms.
- Make prompt filings at Companies House. There are penalties for late filings and failing to make some filings can result in a company being struck off and/or director disqualification.
- Consider outsourcing corporate compliance to your solicitor or accountant.
If you would like to discuss any of the issues addressed in this article then please do contact a member of our corporate team. We also offer fixed price company secretarial administration services and if you would like more details please contact [email protected] or your usual advisor at Morrisons.
*Please not that some of the facts in the case study above have been changed to maintain client confidentiality.