welcome to our latest corporate & technology bulletin
In this issue we cover Keyperson Insurance, joint ventures and collaborations, and the importance of including an interest provision in a contract.
Keyperson Insurance
Finding the Perfect Partner
Practice Tip – Interest Provisions
Useful Links
Keyperson Insurance
Insurance of any sort is always a “grudge purchase”. The best outcome from the purchase of any insurance policy is that you never claim on it and therefore the premiums are entirely wasted. However, insurance is necessary in many parts of business and it is no less important to insure the key people in your business than the building in which you work.
For many businesses, the first time that Keyperson Insurance is brought up is when going to the bank to take out a loan. It is often a condition of the loan that the key drivers of the business, those on whom the profits are dependent, are fully insured so that the bank will get its money back in the event of their death.
There is no doubt that Keyperson Insurance is necessary when taking on debt within the company; the loss of a key individual could have a significant impact on profits in the short term while the business adjusts to his or her loss. At this point, the burden of interest and capital payments to the bank could make the difference between the company surviving or not.
Equally though, even without debt, the loss of a key person can have a devastating impact on turnover and profitability. Insurance can help to pay for an interim replacement for the deceased, cover the costs of recruitment or even replace turnover in the short term.
Having said all this, insurance is an additional cost to the business and it is therefore important to structure a policy in such a way as to keep costs to a minimum but still provide the safety net required. We will often advise our clients to put in place policies on a five year term but with the option to renew at the end of the term. This keeps the cost down by reducing the risk to the insurance company but provides flexibility.
The cost of such insurance can be surprisingly low. For example, a policy covering a 45 year old man for £250,000 could cost £27 per month for the five year term. Even a 50 year old needing £500,000 of cover might only cost £110 per month on the same basis.
Insuring individuals often comes a long way down the list of priorities for a company but it shouldn’t and it need not be too expensive if you tailor the cover to match the need.
Article by Lindsays Financial Planning Limited
Back to topFinding the Perfect Partner
If you are looking to expand and develop your business but are hesitant due to the costs and risks of doing so in the current uncertain market, a joint venture or “collaboration” may offer the ideal solution.
A joint venture is when two or more businesses collaborate in order to achieve a particular goal. There are different types of joint venture – how this is structured, and who you choose to work with, will depend very much on what you are attempting to achieve.
You may decide to co-operate with another business in a specific way - for example, a UK business may wish to attempt its first venture overseas through the distribution network of another business which is already well-established in foreign markets.
On the other hand, you may be collaborating with another company or group of companies to deliver a particular contract. In this case, it may be appropriate to establish an entirely new company owned by the various parties in shares proportionate to each party’s involvement in the project.
Joint Ventures can take many forms, for example:
- a traditional partnership or a limited partnership;
- a limited liability partnership;
- a corporate joint venture; or
- a pure contractual joint venture.
Consideration of each model, when aligned with an understanding of the parties’ key objectives, will assist the success of the joint venture.
Friend or Foe?
There are many advantages to joint ventures. The ability to share knowledge, resources, costs and risk with another party can be beneficial to all involved. There may also be opportunities to learn new skills and to break into new markets. A successful joint venture will enhance the reputation of all participants. As a result, in joint ventures often businesses are able to achieve together a calibre of results which none of them would be able to bring about if acting independently.
Also if, like many businesses at present, you are struggling to obtain funding through traditional sources, teaming up with a partner on a common project might be a far better alternative to missing out on the project entirely.
However, joint ventures are not without their risks – teaming up with another business can be difficult. Like any relationship, time and effort must be invested in the joint venture in order for it to be a success, but it will undoubtedly be more problematic where the parties involved have different objectives, where there is an element of mistrust or an imbalance of power between them, or where the responsibilities of each are unclear or poorly communicated. You may be concerned that a potential partner is more interested in poaching your technology, staff or clients rather than working collaboratively with you to achieve a mutual goal. Accordingly, you should seek to protect yourself by taking appropriate professional advice. This is particularly true where joint venture partners are located in different countries because there may be uncertainty as to which jurisdiction’s laws apply.
As with any business venture, you should take time at the outset to consider what might go wrong in a joint venture and how much risk you are prepared to undertake.
Are You Compatible?
Your ideal partner, or partners, in a joint venture will have resources, skills, assets and contacts which complement your own. It is logical that businesses will work well with others which have similar cultures and management styles.
You may decide to team up with a key supplier or a distributor, or partner up with a University to take advantage of its research and development facilities and expertise.
The Correct Match?
As with any potential partner, you must ensure that they are actually who they say they are and can deliver what they say they can. A thorough due diligence exercise should be carried out by each party to ensure that the prospective partner does indeed hold the assets, resources and capabilities they claim. The numbers may look good on paper but you must be confident that your partner has capacity to deliver what they have promised to the venture and to cover their share of any liabilities. It is worth seeking legal advice, at an early stage, to identify and resolve potential problems before they arise.
Signed, Sealed, Delivered
Once appropriate due diligence has been carried out, the parties should then draw up an appropriate joint venture agreement which will set out the terms and conditions of their relationship. Each agreement will be tailored to the specifics of the particular joint venture, but should at least cover matters such as who the partners are; the objectives and structure of the venture; roles and responsibilities of each party; investment and financing arrangements; equipment, technology and staff requirements; division of liabilities; dispute resolution; and, most importantly, how any profits will be shared!
Whatever the venture, the agreement should be fair to all involved (bearing in mind the proposed relationship!) and recognise the contribution of each party.
Additional considerations include taking steps to protect confidential information and to regulate the ownership of any intellectual property resulting from the venture.
The Amicable Break-Up
It is important to plan the joint venture thoroughly and to have a comprehensive business strategy including, in particular, an exit strategy. If you can address termination issues in the original joint venture agreement, there is a better chance for the partners to part company on good terms. How assets will be divided, how shared IP will be used, how confidential information will continue to be protected and how future income and liabilities will be split are all issues which must be carefully considered.
A bitter carve-up of assets can end a successful relationship on a sour note.
If you would like any further advice in relation to joint ventures, please do not hesitate to get in touch with one of our team.
Back to topPractice Tip – Interest Provisions
Securing timely payment, especially in the current economic climate, is vital to any business’ cashflow and keeping the bank off your back. However, with late payment being the order of the day, it is difficult to achieve and the purpose of an interest provision in a contract, providing a sanction for delay in payment of sums due, seek to motivate timely payment. Determining the rate of interest applicable can be something of a balancing act. Whilst a high rate of default interest runs the risk of being viewed as unduly onerous or penal in nature (and thereby unenforceable if challenged in a court), the default rate of interest must be high enough to effectively incentivise timely payment.
In order to best protect your position, we would recommend that your contracts include an express contractual provision for the payment of interest for late payment.
That said, where a contract doesn’t include explicit interest provisions, not all is lost and claiming interest may still be possible. The Late Payment of Commercial Debts (Interest) Act 1998 (the “Act”) operates to apply the statutory rate of interest (currently 8% above the base rate of England) into commercial contracts (subject to certain limitations) in the absence of a negotiated contractual rate of interest. However, another benefit of including an express contractual interest provision is the ability to incorporate a right for the supplier to elect to claim interest either at the statutory rate or the contractual rate. This can be useful as the statutory rate will often be substantially higher than the negotiated contractual rate of interest.
As the title of the Act suggests, it only applies to commercial contracts and, therefore, will not provide a “fall back position” when your debtor is a consumer. Therefore, ensuring that an interest provision providing for a “fair” rate of default interest is included in your standard terms and conditions for consumer customers is of even more importance.
Back to topUseful Links
Bribery Act
The Ministry of Justice has at long last issued guidance on the Bribery Act which illustrates that corporate hospitality will be permitted in bona fide circumstances or in situations where such hospitality is promotional, or intended to develop business. Essentially, the guidance recognises that corporate hospitality is an important part of doing business and confirms that the new bribery laws are not intended to criminalise such behaviour. The guidance sets out six principles to assist companies assess their compliance with the new bribery laws which come into force on 1st July 2011. For further details click here .
Business Link
Business Link, a government based online resource for UK businesses, has launched a free new service called Contracts Finder. This resource allows businesses to view live contract opportunities, closed tender documentation, contract awards and contract documents. This service is in its introductory phase but the intention is that, over the coming months, even more information will be added, making it a useful tool for any business trying to keep abreast of prospective opportunities. It is hoped this tool will also improve government transparency and allow businesses to get more from the publication of government information. For further details click here.
More Power to ICO – Fines for Unwanted Marketing
The Information Commissioner (ICO) has been given new powers to serve monetary penalties of up to £500,000 for serious breaches of the UK’s Privacy and Electronic Communications Regulations. This covers cases where businesses make unwanted marketing phone calls or send unwanted emails and texts to consumers. The Regulations also provide the ICO with increased investigatory powers which will enable it to demand information from telecommunications companies and internet service providers to assist investigations into breaches of the regulations. Assuming the ICO take a similar attitude towards unwanted marketing correspondence as they have done to date with breaches of data protection laws, then it is likely these new powers will have a significant impact. The additional powers came into force on 25 May 2011. For further details click here.
Data Sharing
The ICO has introduced a new code of practice advising businesses in relation to the sharing of personal data. The guidance encourages organisations to consider the risks and objectives of sharing data and asks whether personal data sharing could be limited to a “need to know” basis only. For further details click here.
Fee Rates
Companies House has introduced new fee rates which have been effective since 6th April 2011. Generally fees have increased with the exception of web filing fees which have been reduced. For further details click here.
On a similar note, Companies House has also introduced a new online web incorporation service allowing companies (limited by shares only) to be incorporated completely online. This should speed up and simplify the process of incorporation. For further details click here and
here.
Electronic Filing
The measures detailed above reflect a conscious move to electronic filing. Moreover, Companies House has confirmed that from March 2013, some forms may only be filed electronically. For further details click here.
If you would like to discuss any of the issues raised in this Bulletin please contact a member of our team.
If there are any topics which you would like to see covered in our future Bulletins or you require additional copies sent to you by post or email to distribute to your colleagues or clients, please email marketing@lindsays.co.uk .
This newsletter has been issued by Lindsays on the basis of publicly available information, internally developed data and other sources. Whilst all reasonable care has been taken to ensure the facts stated and the opinions given are correct, Lindsays does not accept any responsibility for its content and advise that specific advice should be sought regarding the topics covered.
© Lindsays 2012
