Investing in English private companies from abroad: 8 legal considerations

Summary

Investing in English private companies from abroad is an attractive opportunity for many investors. In England and Wales, most private companies are incorporated under the Companies Act 2006 as private limited companies. This means that the shares are owned privately and therefore cannot be sold or traded to the public on the stock exchange.

There are several factors that should be considered before investing in English private companies from overseas and careful due diligence is required. In this article we discuss some of those considerations.

1. Due diligence

If you are purchasing shares in an existing company then you will need to ensure that you carry out due diligence on specific areas of the company e.g. constitutional documents, accounts and financial performance, employees and pension schemes, ongoing or pending litigation and more.

Privately owned English companies are not required to disclose large amounts of information to the public. There are basic filings at Companies House, but you will need to request in depth information about the company and its business to assess the business and any risks. The findings of the due diligence request will also help prepare the legal paperwork and the extent of any warranties and indemnities required.

2. Shareholders Agreement when investing in English private companies

A shareholder’s agreement is a private contract between the shareholders, and often the company, which governs how the company is run. Common areas dealt with in such agreements are:

Transfer restrictions
Voting rights
Board constitution and representation
Information rights
Veto rights/decision making by shareholders
Pre-emption rights

Depending on the level of your investment it is likely that a new shareholders agreement will be entered into, but you may find that the company ask that you sign a deed of adherence to the current agreement in place. In these circumstances, the current agreement will need to be carefully reviewed to ensure that it contains the requisite protections, and if not, a new agreement will need to be put in place. The terms of a shareholder’s agreement are one of the most important considerations when investing in a UK company as you will be bound by its terms as a shareholder.

3. Valuation

The valuation of a privately owned English company will be provided to the investor by the current board of directors or the current shareholders. Unlike public companies who can use available market data to value a business, a private company can be valued using a range of methods and requires an assessment of various factors in order to arrive at a comprehensive figure. The investor should understand the methodology used to value the business, and calculate the share price.

4. Compliance

As part of the due diligence carried out by the investor it is important to confirm that the target company is properly incorporated, in good standing and compliant with any specific regulations. If the company is in a specific regulated sector e.g. financial services, then approval from regulators may be required e.g. the Financial Conduct Authority, especially where there is a change of control.

5. Change of control

In addition to obtaining any regulatory approvals for a change of control, the investor should ensure that any contracts which contain a change of control restriction are carefully considered and complied with.

There is not a standard definition for a “change of control” but commonly a change of control arises where a percentage of the issued shares in a company are transferred. Typically, this is over 50% but can be lower e.g. 25%.

Often contracts state that on a change of control the other party can terminate the contract. The investor will not want to invest into a company if its contracts, especially material contracts, will be terminated (possibly with a financial penalty). It is therefore important to assess these contracts as early as possible to ensure compliance by the business.

6. Minority protections

It may be that the investment is not going to constitute a change of control and instead shall result in the investor holding a minority share in the company. In those circumstances the investor needs to ensure that the articles of association and shareholders agreement contain the necessary protections.

Such protections usually include:

Board representation
Restriction of dilution
Information rights
Veto rights on certain decisions

It is important to understand, especially as a minority shareholder, how key decisions can be made. Without these protections, minority shareholders are in a much weaker position in respect of decision-making by the company so it is important to have provisions included in the shareholders agreement when the investment is made.

7. Exit strategy when investing in English private companies

How the investor will eventually exit from the company is as important as considering the above factors in making the investment. Shares in privately owned companies are not traded on a stock exchange and therefore any transfers of shares will need to be to a willing buyer in accordance with the terms, and restrictions, of the company’s articles of association and any shareholder’s agreement.

It may be that the company is planning to exit the current shareholders by way of a sale of the entire issued share capital, management buy-out or IPO but the timing of any of these options will need to be considered by the investor as there is likely to be no guaranteed timeline.

At the initial investment stage, the investor should consider the wording of the investment paperwork, and shareholder documentation, to ensure they understand any restrictions on transferring shares and to check that the documentation allows for exit within a reasonable time frame.

8. Taxation

The tax consequences of owning shares in a company overseas will need to be carefully considered with an accountant or tax adviser, including any double taxation treaty which may apply.

If you are considering investing into English private companies Blake-Turner LLP can assist you with that process. Thorough due diligence and ensuring sufficient contractual protections are in place are essential when making a decision to invest.