Business Rescue Expert answers your questions… Part Two
This week’s question: “Can investor consents prevent a company from entering insolvency?”
Before we tackle this question, we need to take a step back and explain what investor consent is and how it can affect the future direction of growing companies.
Investor consent rights give investors a say in some company decisions and can be a powerful tool both in order to safeguard their investment and have a say in decisions which otherwise could be costly without giving investors any say on the future of the business.
Founders usually start the business owning 100% of the company’s share capital. As the business develops and takes on investment, the founders issue shares, whilst retaining a controlling interest.
Any decision which requires a shareholder vote will be decided by the founders choice as investors simply don’t have enough votes to counter this. Investor consents protect against this position, allowing the investor certain rights despite the controlling interest of the founders share capital.
Any investor consents are usually specifically written into the legal shareholder agreements and will be raised and addressed before any investment is made typically.
Investor Consent rights can broadly be categorised in three ways:-
- No investor consent
- Light consents
- Full consents
No investor consent means that investors don’t have an automatic right to be consulted specifically about management or founder decisions. They will be informed as a matter of course but their input is not essential.
Light investor consent specifies that certain company decisions require specific consent.
These would usually include but are not limited to:-
- Winding up the company or placing it into administration
- Creating or redeeming any share or loan capital
- Launching a share offering
- Changing the company’s Articles of Association.
Full Investor consent includes all of the above as well as other examples including the following such as:-
- Change share capital or the rights of its shares
- Changes to the company name
- Change the accounting dates
- Sell any part of the company
- Assign or transfer any of the company’s intellectual property rights
- Enter into a joint venture or create a subsidiary organisation
- Pay a dividend or grant a debenture
- Pay any bonuses or commission payments
- Set director remuneration levels
Investor Consent rights are generally seen as an important way not only for investors to protect their investment but also make a meaningful contribution to the company through their required input.
This can be welcomed if the investor has experience in business and can be used as a sounding board by younger or less experienced management.
The downside is that if the consent causes blockages in the decision making process or is actively holding back expansion or potential success because the investors have as much power in some circumstances as the founders or directors.
Most companies won’t encounter investor consent issues as they raise capital through banks or other traditional lenders but technology startups and other new companies might come across it more.
Some businesses might even include it in their investment offering to make their package more enticing to would-be investors.
So given these potential hurdles – to return to the original question – “can investor consent prevent a company from entering insolvency?”.
We asked Business Rescue Expert’s Insolvency Director Chris Horner, a licensed insolvency practitioner, for his professional view.
He said: “A business that has investors who oversee a board’s actions through investor consent has to take it seriously.
“When it comes to insolvency procedures, these would generally fall under a board’s purview and theoretically, because insolvency constitutes a major change to the business, how it does business and it’s future configuration, investor consent may be required.
“Even if that’s the case, directors have a statutory duty to act if the company is insolvent.
“If consent is withheld on statutory matters then the investor risks being treated as a “de facto” director – which means they effectively are one and will be treated as one in law, putting them at risk of personal financial and legal liability.
“If the investor doesn’t give their consent for whatever reason and if any actual directors are also creditors then they may be able to petition for administration on that basis to circumvent the consent requirement.
“This should only be a last resort however and 90% of the time any investor would cooperate with the insolvency process due to the risk of personal liability.”
We hope this explains the concept of investor consent a little more and how companies can approach it if they need to look at administration or any other appropriate insolvency solutions for their businesses.
No matter what situation your company faces, getting professional, impartial advice is always the best first step to take.
We’ll work to understand your unique circumstances and then be able to offer appropriate, timely and effective actions that you can begin to take immediately to secure a better, brighter future for your business.