united-kingdom business
Can a company make an ethical commitment to customers that survives even when it&#39;s sold?
<p><strong>TL;DR</strong>: Suppose a company has made a specific ethical commitment to its customers. When selling that company, is it possible for the seller to prevent the buyer from reneging on or dropping that commitment?</p>

<p><strong>Details:</strong></p>

<p>I got to thinking about this the other day in relation to ethical promises from companies. Suppose Company A sells a service customers pay for monthly/annually/whatever. As part of its business model, Company A promises not to do X, and writes that promise into its customer contract. It doesn't matter what X is, but let's assume</p>

<ul>
<li>it's legal</li>
<li>it's something other companies do</li>
<li>it's something some consider to be unethical</li>
<li>it's something that can be clearly defined</li>
</ul>

<p>...like selling the customers' email addresses, or sending them advertisements in the post; something like that.</p>

<p>Megacorp B comes along and wants to buy Company A (in its entirety, not allowing the current owners to retain a controlling interest). Is it possible to sell it in such a way, or structure the customer contracts in such a way, that Megacorp B can't change the customer contract to drop the guarantee about X once the sale is complete? (Obviously they may lose customers doing that, ones who reject the new contract, but assume Megacorp B is okay with losing those customers.)</p>

<p>I tend to think it's not possible, that there would be <em>some</em> way for Megacorp B to get around it (perhaps by setting up a new company doing an identical service, telling the customers they're winding up Company A, and offering to migrate customers to the new service), but IANAL.</p>

<h2>B has the same right to change the contracts that A had</h2>

<p>In general, altering a contract requires the agreement of all parties to the contract. So A/B and the customer have to agree to the change.</p>

<p>However, most contracts for ongoing services (rent, telephone, internet etc.) have that agreement written into the terms. That is, the customer agrees that the contract can be changed by A/B when they enter it. Alternatively, there are usually terms allowing A/B to terminate the existing contract and then only provide services if the customer agrees to a new contract.</p>

<h2>A can impose conditions on the sale</h2>

<p>A can write into the terms of the sale agreement that B will never do the thing that they are concerned about.</p>

<p>However, this does not guarantee that B in 1 or 5 or 10 years will choose to break their contract with A. If A still exists, then they can sue B for the damage that they have suffered. However, it's unlikely that A will have suffered anything other than nominal damages since they presumably no longer have any relationship with their former customers. A cannot hang a penalty off this condition because penalties are illegal under common law. They could if they are sufficiently clever trigger, say, an option to buy the business back or do something else but we're really starting to get esoteric.</p>

<h2>If you sell it, you don't own it anymore</h2>

<p>The common law is allergic to people trying to control other people's rights to use their property as they see fit. It's not impossible but imposing ongoing obligations on something that <em>could</em> be done and dusted all in one go is unlikely to stand up to a court challenge. They are more likely to survive if they have a sunset clause - for example, they won't do the unethical thing for 5 years.</p>

<p>This 'allergy' goes back a long time and stems from ancestors trying to control their decedent's behavior through wills and bequests. The law says you can't do it unless the restriction is reasonable.</p>

<p>Jurisdiction: <a href="/questions/tagged/england-and-wales" class="post-tag" title="show questions tagged &#39;england-and-wales&#39;" rel="tag" aria-labelledby="england-and-wales-container">england-and-wales</a></p>
<p>&quot;<em>Megacorp B comes along and wants to buy Company A (in its entirety, not allowing the current owners to retain a controlling interest).</em>&quot;</p>
<p>I'm going to pose a frame challenge here, and use that to provide a solution. If the previous owner can compel the new owner not to do something with the company, then that is equivalent to a controlling interest to the extent of that ability to compel. With that in mind, we can call it what it is and tweak the above criterion slightly:</p>
<p><em>Megacorp B comes along and wants to buy Company A (in its entirety, not allowing the current owners to retain a controlling interest, <strong>other than an interest which allows the current owner to control the ethical commitment</strong> ).</em></p>
<p>Now the problem can be resolved by having different share classes in the company:</p>
<ul>
<li><strong>Ordinary shares</strong>: full rights to dividends, proceeds of winding up, and voting.</li>
<li><strong>Restricted voting shares</strong>: no rights to dividends or proceeds of winding up; restricted voting rights.</li>
</ul>
<p>The current owner retains an arbitrary number (e.g. 1) of the restricted voting shares; the new owner takes all the ordinary shares. The effect of this is that the new owner receives 100% of the company profits and retains 100% control of the company <em>other than</em> in regards to the ethical commitment.</p>
<p>In the company's articles of association, you insert 4 clauses:</p>
<ol>
<li>The ethical commitment (e.g. &quot;The company shall not do X&quot;).</li>
<li>A provision for entrenchment, which provides that amendments to the articles which amend clause 1, 2, or 3, require unanimous agreement of the shareholders' voting rights. See <a href="https://www.legislation.gov.uk/ukpga/2006/46/section/22" rel="nofollow noreferrer">Section 22 of the Companies Act 2006</a> for how this works, and note that the usual rule in the absence of such a clause is that the articles can be amended by agreement of 75% of the voting rights per <a href="https://www.legislation.gov.uk/ukpga/2006/46/section/21" rel="nofollow noreferrer">Sections 21</a> and <a href="https://www.legislation.gov.uk/ukpga/2006/46/section/283" rel="nofollow noreferrer">283</a> of the Act.</li>
<li>Definition for the restricted voting share class such that it carries only the right to vote on amendments to the articles which amend clause 1, 2, or 3, but has no voting rights on any other issue and no rights to dividends or capital on winding-up.</li>
<li>Definition for the ordinary share class such that it carries 1 vote per share on all issues, and equal rights to dividends and capital on winding-up (or whatever other voting/dividend/capital arrangement you want).</li>
</ol>
<p>Alternatively, you can omit clause 2 and amend clause 3 so that the restricted voting shares have a weighting of at least 25% on any votes to amend clause 1 or 3.</p>
<p>Make sure you comply with the following requirements:</p>
<ul>
<li><a href="https://www.legislation.gov.uk/ukpga/2006/46/section/26" rel="nofollow noreferrer">Section 26</a>: provide Companies House with a copy of the amended articles within 15 days of them taking effect.</li>
<li><a href="https://www.legislation.gov.uk/ukpga/2006/46/section/23" rel="nofollow noreferrer">Section 23</a>: if the articles contain provision for entrenchment (clause 2 above), notify Companies House of that fact.</li>
</ul>
<p>You must use Companies House standard online/paper forms for most such notifications.</p>
<p><a href="https://en.wikipedia.org/wiki/Bushell_v_Faith" rel="nofollow noreferrer">Bushell v Faith</a> is authority for the principle that weighted voting share classes are valid, even to the extent that they override statutory voting rules (e.g. the statutory rule that a company director can normally be removed by 50% of the members).</p>
<h2>Enforcement</h2>
<p><a href="https://www.legislation.gov.uk/ukpga/2006/46/section/33" rel="nofollow noreferrer">Section 33</a> of the Companies Act 2006 provides that a company's constitution (i.e. the articles of association) have the same effect as if it were a contract between the companies and its members. Accordingly, if the company breaches the ethical commitment, you can sue it for breach of contract.</p>
