Monthly Archives: April 2016

Avoid Disruptive Company Deadlocks

Companies are often formed by equal-share partners with a shared vision for their business. But when serious disagreements arise, such as over the future strategic direction of the company, that initial confidence and optimism quickly turns sour, resulting in a Mexican standoff. In legal circles this is known as a “deadlock”.

What is a deadlock?

Deadlocks arise where shareholders have equal voting rights and the right to appoint an equal number of directors to the board of a company. (A dispute at shareholder level often becomes a dispute at board level.) For example, one shareholder may wish to take the business in a new direction or acquire a new business while the other party wants to carry on business as usual. Deadlocks can arise in both company and joint ventures and are disruptive or fatal if not resolved quickly.

How can deadlocks be resolved?

Quite simply, by paying attention to the details and including a deadlock mechanism in your shareholders’ agreement. This encourages everyone to reach a quick and amicable settlement in the event of shareholder disputes. Here are the main options to consider:

  1. Russian Roulette
    Any shareholder can, by written notice, either require the receiving shareholder to purchase that shareholder’s shares or require the receiving shareholder to sell their shares to the initiating shareholder, at a specified price. The receiving shareholder can then sell their shares at the specified price or buy the other shareholder’s shares at the offered price. The risk of reversal incentivises the initiating shareholder to offer a fair price.
  2. Texas Shoot-out
    This is similar to Russian Roulette, except that if the receiving shareholder also wishes to buy the initiating shareholder’s shares, then both shareholders submit sealed bids and the highest bidder wins.
  3. Put and Call Options
    Under a put option, one shareholder is obliged to sell their shares to the other shareholder. Under a call option, one shareholder is obliged to buy the other shareholder’s shares. The shareholders’ agreement should set out the basis upon which the selling shareholder’s shares will be valued if the purchasing shareholder exercises their option.
  4. Alternative Dispute Resolution 
    Where the dispute is over the interpretation of a clause in the shareholders’ agreement or is factual in nature, the shareholders may agree to refer the dispute to an arbitrator or expert for a decision. This form of resolution is not appropriate where the dispute in question relates to business strategy.
  5. Voluntary Liquidation 
    Voluntary liquidation involves the company being wound up, selling its assets and distributing the proceeds to the shareholders. This will usually be a last resort where none of the shareholders are in a position to buy the other shares out and the shareholders are unable to sell the company to a third party.

Before choosing a deadlock mechanism, carefully consider the financial and commercial strengths of the parties and the merits of each approach for your situation. That’s because most of these procedures can be manipulated by an astute shareholder who has greater financial means than the other shareholders. In some circumstances, a combination or variation of these mechanisms will work.

We help our clients to meet expectations and resolve disputes, which is made a lot easier with early planning. To discuss shareholders’ agreements, including deadlock mechanisms, speak to our Commercial Team.

What are the risks of Company Names versus Trading Names?

There are risks associated with the different ways you structure your business. Knowing the best option for you, along with the ways to protect your business name from being used by other companies or entities is the topic of this post.

What is a Company Name?

Company names are names of businesses registered at the Companies Office pursuant to Part 4 of the Companies Act 1993 (“the Companies Act”). If you wish to limit the liability of the business’ shareholders, register as a limited company, for example: Bob’s Burgers Limited. It’s the “Limited” at the end of the business name that lets you know the type of entity or business structure you’re dealing with.

Everything that is written, sent, issued, and signed on behalf of the company that represents or creates a legal obligation of the company, needs to contain the full company name with “Limited” at the end. If not, the person issuing or signing documents or communications on behalf of the company will be exposed to potential personal liability claims. Yes, really.

We’re often approached by clients seeking to recover funds from a third party who’s arguing that the contract was between their company and our client. But when the third party’s business card, letterhead or invoice hasn’t included the word “Limited” then we are able to sue the third party, requiring they pay from their personal assets.

How is a Trading Name different?

Trading names are often used by sole traders and partnerships, but may also be used by companies. Confused? It’s okay, we’ll explain. A trading name can be any name, as long as it isn’t the same name or a confusingly similar name to another entity (more below). It can be used in all business documents and doesn’t have “Limited“ at the end of it. But where a trading name is being used by a company, everything including the business card, letterhead, invoice and email correspondence, still needs to show the true entity behind the trading name (in the small print is okay).

Let’s say your company is called Lollies Limited but you trade as Delicious Sweet Shop. Your public facing brand shows “Delicious Sweet Shop” but should also show “Lollies Limited, trading as Delicious Sweet Shop” somewhere on your documents. Again, this informs people of the legal entity behind the brand they are dealing with and prevents personal liability claims.

Protecting your company or trading name

The registrar of the Companies Office will not register a name which is identical to any other company name or reserved company name. However, very similar names are registered, such as by the addition of a year: Bob’s Burgers Limited and Bob’s Burgers (2007) Limited. This example is considered sufficient enough to differentiate these companies.

But be careful because using another entity’s company name as your trading name may breach the Fair Trading Act 1986 (for misleading and deceptive behaviour), constitute a trade mark infringement (in the case of a registered trade mark), or constitute the tort of passing off (pretending to be someone else to take business away from them).

Trading names don’t have the added protection of registered company names. But you could protect your trading name by registering it as a trade mark. For example, Dancing Dogs Limited might trade mark DANCING DOGS.

Before deciding on a Name, background check it

Making a naming error at the start of your venture can be very costly, so before deciding on a name, research your market. Start with a trade mark search at the Intellectual Property of New Zealand website, followed by a company search on the Companies Office website. Then search Google and the Yellow Pages, to ensure that your company name and brand will not infringe on the intellectual property rights of other entities. This also helps you to avoid “brand dilution”, with a similar competing name.

We have had clients who instructed their accountants to form a company without undertaking these background checks, only to receive a cease and desist letter from a similarly named competitor. They’ve then incurred legal fees and rebranding expenses, all of which could have been avoided, by performing these simple steps and/or speaking to us first.

When starting a new venture, our Commercial Team can help ensure that everything is set up correctly and that your interests are protected. Talk to us today.