Leaving business as shareholder - signing a non-compete??

Leaving business as shareholder - signing a non-compete??

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Undirection

Original Poster:

467 posts

120 months

Wednesday 25th November 2015
quotequote all
I am a 10% shareholder in a business and have always managed contractors/customers etc, basically the operational running of the business. I am leaving this behind, pulling put my stake and moving on.

My soon to be ex business partner (agreeable spilt I should point out) wants me to sign a 3 year non compete and although I don't have any intention of competing I don't want to have to sign one. As far as I understand I am under no obligation to sign one?

cautiontothewind

54 posts

102 months

Wednesday 25th November 2015
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Mine field...

How agreeable would it be if you refused to sign the non-compete? Were you a Director also?

ModernAndy

2,094 posts

134 months

Wednesday 25th November 2015
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If he's a tight bugger just ask him to cover the legal costs of getting one drafted up properly and it'll probably lose its appeal.

Jasandjules

69,825 posts

228 months

Wednesday 25th November 2015
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And what benefit is being offered in exchange for signing?

Beetnik

502 posts

183 months

Wednesday 25th November 2015
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Presumably you're selling your 10% to your co-director? If so then, in his shoes, it would be part of the exit negotiation - i.e. no non-compete agreement = lower price.

Other than that, do you have a contract of employment and/or a shareholder agreement and, if so, what does it/they say?

In the absence of anything in place already then it's just down to negotiation.

JustinP1

13,330 posts

229 months

Wednesday 25th November 2015
quotequote all
ModernAndy said:
If he's a tight bugger just ask him to cover the legal costs of getting one drafted up properly and it'll probably lose its appeal.
If he's a tight bugger, the better thing to do would be to not sign it, and not sell the shares, start up a competitor with the knowledge that the tight bugger's going to be having to send off 10% of the profits until the OP wants to sell.


Beetnik

502 posts

183 months

Wednesday 25th November 2015
quotequote all
JustinP1 said:
If he's a tight bugger, the better thing to do would be to not sign it, and not sell the shares, start up a competitor with the knowledge that the tight bugger's going to be having to send off 10% of the dividends until the OP wants to sell.
Fixed that for you! - and he'll be the one who decides what the dividend will be.

JustinP1

13,330 posts

229 months

Wednesday 25th November 2015
quotequote all
Beetnik said:
JustinP1 said:
If he's a tight bugger, the better thing to do would be to not sign it, and not sell the shares, start up a competitor with the knowledge that the tight bugger's going to be having to send off 10% of the dividends until the OP wants to sell.
Fixed that for you! - and he'll be the one who decides what the dividend will be.
You are of course right - I made a simplified point. However, depending on the type of shares, he won't be able to take out his own dividend without also granting monies to the OP.

The OP needs to work out what the non-compete is worth to him and negotiate based upon that.

ModernAndy

2,094 posts

134 months

Wednesday 25th November 2015
quotequote all
Seems like the OP just wants to walk without any further aggravation and without too much worry about earnings from the business. Just sounds like a simple solution to put the onus on the director to go through all the formalities and complications if it's likely they won't bother. Maybe I should have said indifferent or lazy bugger?

Beetnik

502 posts

183 months

Wednesday 25th November 2015
quotequote all
@ Justin.

Quite - but the OP's basic problem is the 90% shareholder holds the whip hand unless there's a Shareholder Agreement in place. Without that 'Mr 90%' calls all the shots so he could, for instance, offer peanuts for the OP's shares. If OP refuses to sell it could go from (say) 200k profit (before directors pay) available for distribution from:

Mr 90%: Salary 50k & Div 90k
OP : Salary 50k & Div 10k

to

Mr 90%: Salary 200k & Div 0k
OP : Salary 0k & Div 0k

And Mr 90% could pay himself even more thus reducing the net assets of the company to the further detriment of the OP.

I'd always advise a client to ensure there's an SA in place if they are to hold less than 50% shareholding.

Fortunately this split is amicable so I'm confident a sensible negotiated agreement will be reached...

JustinP1

13,330 posts

229 months

Wednesday 25th November 2015
quotequote all
Beetnik said:
@ Justin.

Quite - but the OP's basic problem is the 90% shareholder holds the whip hand unless there's a Shareholder Agreement in place. Without that 'Mr 90%' calls all the shots so he could, for instance, offer peanuts for the OP's shares. If OP refuses to sell it could go from (say) 200k profit (before directors pay) available for distribution from:

Mr 90%: Salary 50k & Div 90k
OP : Salary 50k & Div 10k

to

Mr 90%: Salary 200k & Div 0k
OP : Salary 0k & Div 0k

And Mr 90% could pay himself even more thus reducing the net assets of the company to the further detriment of the OP.

I'd always advise a client to ensure there's an SA in place if they are to hold less than 50% shareholding.

Fortunately this split is amicable so I'm confident a sensible negotiated agreement will be reached...
Except to pay himself that salary through PAYE he'd be paying more much, much more in taxes than it would be to draw it as a dividend. He'd end up with more cash in his pocket if he pays the OP his 10%.

Beetnik

502 posts

183 months

Wednesday 25th November 2015
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Quite - but there are some bloody minded people out there!

My point is valid though - a 10% shareholder has little leverage.

Lurking Lawyer

4,534 posts

224 months

Wednesday 25th November 2015
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Beetnik said:
Quite - but there are some bloody minded people out there!

My point is valid though - a 10% shareholder has little leverage.
Very true - but bear in mind that the 90% shareholder can't ride completely roughshod over the 10%-er with complete impunity. There's always the threat of an unfair prejudice petition. Neither cheap nor straightforward, admittedly, but the threat does sometimes help to rein in majority shareholders who think they can do what they want without consequences.

pork911

7,087 posts

182 months

Wednesday 25th November 2015
quotequote all
Beetnik said:
Presumably you're selling your 10% to your co-director? If so then, in his shoes, it would be part of the exit negotiation - i.e. no non-compete agreement = lower price.
non-compete agreement = higher price wink

Undirection

Original Poster:

467 posts

120 months

Thursday 26th November 2015
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Thanks for the replies. It is a Limited Company, I own 10%, I am getting my original stake back, we have a shareholders' agreement but nothing about non-copmetes (although I will now double check!)

JimiGT

71 posts

181 months

Thursday 26th November 2015
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Lurking Lawyer said:
Very true - but bear in mind that the 90% shareholder can't ride completely roughshod over the 10%-er with complete impunity. There's always the threat of an unfair prejudice petition. Neither cheap nor straightforward, admittedly, but the threat does sometimes help to rein in majority shareholders who think they can do what they want without consequences.
^ This

anonymous-user

53 months

Thursday 26th November 2015
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The approach to non compete clauses is more relaxed in the case of a business vendor than it is in the case of an employee, but even on that basis three years is perhaps a tad on the full side when you own only a tenth of the company. If the clause does not bother you, however, simply use the other party's insistence on it as a basis for a price negotiation.

Also, take insured advice. This is not the sort of thing for quick opinions on a car forum.

JustinP1

13,330 posts

229 months

Thursday 26th November 2015
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Breadvan72 said:
If the clause does not bother you, however, simply use the other party's insistence on it as a basis for a price negotiation.

Also, take insured advice. This is not the sort of thing for quick opinions on a car forum.
This bit in particular.

I think it also depends at what point in negotiation the non-compete has been introduced. It sounds like you've come together in an amicable agreement on price etc, then the non-compete has been chucked in.

If that's the case then it does seem like they are moving the goalposts after the price has been agreed. On the other hand, if it's been on the table throughout negotiations then the same would be true for yourself.

That's all part of negotiation, but it does affect your ability to reasonably ask for its removal in negotiation now. If it's been tagged on at the end, if it doesn't bother you and you have no intention on competing you could just negotiate it down to one or two years, or, if you are feeling mercenary, ask for a price bump.

Undirection

Original Poster:

467 posts

120 months

Thursday 26th November 2015
quotequote all
JustinP1 said:
It sounds like you've come together in an amicable agreement on price etc, then the non-compete has been chucked in.

.
That's exactly it. For all I know i could end up working for a competitor, its unlikely but I I don't want him telling me what I can and can't do. I'll 'charge' him for a non compete but he can't do anything about it if I say No I believe. its not part of our shareholder agreement. I can see he paranoid about me basically running the business currently and him just doing the admin/finances/marketing but that's his problem.

JustinP1

13,330 posts

229 months

Thursday 26th November 2015
quotequote all
Undirection said:
JustinP1 said:
It sounds like you've come together in an amicable agreement on price etc, then the non-compete has been chucked in.

.
That's exactly it. For all I know i could end up working for a competitor, its unlikely but I I don't want him telling me what I can and can't do. I'll 'charge' him for a non compete but he can't do anything about it if I say No I believe. its not part of our shareholder agreement. I can see he paranoid about me basically running the business currently and him just doing the admin/finances/marketing but that's his problem.
In which case then, legalities totally aside, as a negotiation issue this should be brought up.

Ask him what he is hoping to achieve by the inclusion of a clause. The answer is of course "So you don't X, and so I can Y." that of course has an economic value to his benefit, and your detriment.

It may be that he's simply thrown it in as an afterthought and is not too precious about it, in which case he might drop it altogether. On the other hand, if he feels very strongly about it, then this clearly has an economic value to him which should end up being reflected in the negotiations and indeed the value of the agreement.