Scotland

DevelopingConsortia

Forming a consortium for the delivery of

public services

This guide has been part funded by the European Union EQUAL programme.The EQUAL Social Economy Scotland Mainstreaming Partnership involves:

Social Economy Scotland works in partnership to support the thirdsector to increase its role in the delivery of innovative, high qualityservices, thereby enhancing its contribution to community regeneration,sustainable economic development and labour market integration inScotland. To support this aim, Social Economy Scotland has fundeda range of pilot projects under the following themes: Public SocialPartnership and Procurement; Access to Finance; Quality and Impact;Business Development and Raising the Profile. For more informationsee www.socialeconomyscotland.info

designed by social enterprise - foyer graphicswww.foyergraphics.com Tel: 01224 562865

ACKNOWLEDGEMENTS

This guide has been primarily drafted byStephen Philips and Gillian Harkness atBurness LLP, with introductory chapterscompleted by Kevin Robbie and KateMcDonald at Forth Sector.

Recognised as a UK top 100 law firm,Burness provides legal advice to clients inthe commercial, corporate and publicsectors throughout the UK and overseas. www.burness.co.uk

Forth Sector is one of Scotland’s leadingsocial enterprises. Forth Sector runs aportfolio of businesses to createsupported employment opportunities forpeople with mental health problems.One of those businesses, FSD, providesbusiness advice, consultancy,development support and policy adviceto third sector organisations (and theagencies that support them) seeking togrow and develop.www.forthsector.org.uk

The authors would like to thank individualsand organisations involved in the EQUALSocial Economy Scotland DevelopmentPartnership pilot projects on Public-SocialPartnerships in North Lanarkshire,Renfrewshire and Edinburgh. Without yourvaluable insights and assistance some of theearly work on the guide would not havetaken place. Forth Sector also acknowledgethe support of transnational partners fromthe SEEN Transnational Partnership,particularly Reti.Qu.AL in Italy for theirsupport in gaining understanding of theconsortium model and issues associated withdevelopment.

The EQUAL Social Economy ScotlandDevelopment Partnership in partnership withthe Scottish Government Third SectorDivision commissioned the guide. Theauthors would like to acknowledge thesupport of the Scottish ProcurementDirectorate in placing the work on consortiadevelopment within the broader policybackground surrounding developingprocurement practice in Scotland.

The guide has been produced as part of theEQUAL Programme. The Social EconomyScotland Development Partnership is part-funded through the EQUAL Programme. TheDevelopment Partnership involves:

• Careers Scotland

• Communities Scotland (Scottish Centrefor Regeneration)

• Forth Sector

• Highlands and Islands Enterprise

• North Lanarkshire Council

• Scottish Council for VoluntaryOrganisations (Lead Partner)

• Scottish Enterprise

• Scottish Government (Third SectorDivision)

• Scottish Social Enterprise Coalition

• Social Firms Scotland

• Social Investment Scotland

• Volunteer Development Scotland

Social Economy Scotland works inpartnership (nationally and transnationally) tosupport the social economy to increase itsrole in the delivery of innovative, high qualityservices, thereby enhancing its contributionto community regeneration, sustainableeconomic development and labour marketintegration in Scotland. To support this aim,Social Economy Scotland has funded a rangeof pilot projects under the following themes:Public-Social Partnership; Access to Finance;Quality and Impact; Business Developmentand Raising the Profile.

For more information seewww.socialeconomyscotland.info

DISCLAIMER

The information herein has been provided forgeneral use only and while measures havebeen taken to ensure that the information isaccurate and up-to-date, none of the aboveorganisations or the authors is liable for anyuse that may be made of this information norcan they be held responsible for any errorsresulting from the use of this information.

CONTENTS

Chapter 1: Introduction 1

Chapter 2: Policy Background 5

Chapter 3: Getting Started 9

Chapter 4: Choice of consortium model - key considerations 16

Chapter 5: Advantages and disadvantages of each model 20

Chapter 6: Choice Of Legal Entity For A Consortium Based On A Corporate Model 24

Chapter 7: Seeking charitable status 29

Chapter 8: Becoming a Community Interest Company (CIC) 30

Chapter 9: Developing the outline terms 32

Appendix 1 - Template memorandum and articles of association (with accompanying notes) - consortium involving a jointly controlled company limited by shares as the vehicle

Appendix 2 - Template contract (with accompanying notes)- consortium relying purely on a contractual framework

1CHAPTER 1 - INTRODUCTION

CHAPTER 1 INTRODUCTION

Developing Consortia is a guide to the legal issues involved in establishing consortia. Theguide has been developed for social enterprises and other third sector organisations inScotland. It has a specific focus on supporting organisations that want to enter the publicservice delivery market, although the legal issues covered in the guide are of a generic nature.

The Scottish Government wants to make Scotland a more successful country. Key to thataspiration is increasing sustainable economic growth. The Scottish Government has fivestrategic objectives: to make Scotland wealthier and fairer, healthier, safer and stronger,smarter and greener. The role of the third sector in meeting the Scottish Government’spurpose and objectives is recognised in the Government Economic Strategy (2007). One wayof increasing third sector economic activity – enabling it to deliver larger and more variedcontracts – is through the development of consortia.

Approximately £8 billion is spent annually by the public sector in Scotland purchasing goodsand services. The Scottish Government recognises that action is required to level the playingfield for social enterprises and other third sector organisations in securing access to thisgrowing public sector market. To address this, the Scottish Government has published a suiteof guides to provide information to both those commissioning public services and thoseseeking to deliver public services. This suite of guides includes:

• Tendering for public sector contracts (2007) is a step-by-step guide to ensure that socialenterprises and other third sector organisations have the knowledge to be able toeffectively tender for contracts.

• Better Value – Purchasing public services from the social economy (2007) supports thepublic sector in their efforts to engage with the social economy and the accompanyingcase studies in Better value – The social economy delivering public service contracts (2007)are intended to demonstrate to the public sector the advantages of contracting with thesocial economy.

• Making the Case: The Social Added Value Guide (2006) stresses to social enterprises andother third sector organisations the importance of proving their social added value anddescribes some of the tools that can be used to measure this.

Copies of these publications are available on the following website:

www.socialeconomyscotland.info

Developing Consortia is the latest addition to this suite of publications.

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Who commissioned the guide?

The EQUAL Social Economy Scotland Development Partnership in partnership with theScottish Government Third Sector Division commissioned the guide. The EQUAL SocialEconomy Scotland Development Partnership involves:

• Careers Scotland

• Communities Scotland (Scottish Centre for Regeneration)

• Forth Sector

• Highlands and Islands Enterprise

• North Lanarkshire Council

• Scottish Council for Voluntary Organisations (Lead Partner)

• Scottish Enterprise

• Scottish Government (Third Sector Division)

• Scottish Social Enterprise Coalition

• Social Firms Scotland

• Social Investment Scotland

• Volunteer Development Scotland

Social Economy Scotland is a Development Partnership (DP) supported through the secondround of the European EQUAL Community Initiative. The DP focused on influencingmainstream agencies in terms of supporting the development of the social economy sector.

Strategic Aim of Development Partnership

Through partnership working and transnational cooperation, Social Economy Scotlandsupports the social economy to increase its role in the delivery of innovative, high qualityservices, thereby enhancing its contribution to community regeneration, sustainable economicdevelopment and labour market integration in Scotland.

The EQUAL Social Economy Scotland Development Partnership has been operating three pilotprojects on public-social partnership within Scotland. These pilot projects have involvedorganisations from the public sector and third sector working together to design and delivermore effective public services for end users. Each of the pilot projects involved socialenterprises and other third sector organisations forming consortia to deliver the pilot phase ofthe potential contract. Through the evaluation of these pilot projects it became apparent thatthere was a gap in the knowledge of the third sector around how to develop consortia,particularly around the legal implications of consortia working.

The EQUAL Social Economy Scotland Development Partnership in partnership with theScottish Government Third Sector Division commissioned Burness LLP and Forth Sector towrite this guide.

3CHAPTER 1 - INTRODUCTION

Who is the guide for?

The Scottish Government has commissioned this guide to support social enterprises and otherthird sector organisations that are developing consortia in order to effectively tender for anddeliver public sector contracts.

This guide is for staff and directors in social enterprises and other third sector organisationswithin Scotland. It is recognised that the third sector has within it wide differences anddisparity between organisations. There are large multi-million pound organisations and smallcommunity groups or individual social entrepreneurs. The guide attempts to cover relevantinformation for this diversity of sub sectors.

How to use the guide?

The guide complements the other publications mentioned earlier. The aim of the guide is toassist social enterprises that want to establish a consortium to decide what legal form andstructure will best suit their needs and achieve the aims and objectives of the parties to theconsortium. The guide starts from the assumption that there has been an assessment, by theparties to the proposed consortium, of the advantages and disadvantages of working in aconsortium (although some of the key advantages and disadvantages are outlined in Chapter3 of the guide) and focuses on the next stage, namely what legal form the consortium is goingto take.

• Chapter 2 starts by looking at the main drivers behind collaborative working and, inparticular, the key policy developments that have taken place in recent years which areresponsible for driving forward the new developments in this area.

• Chapter 3 outlines the key questions an organisation should consider before developinga consortium.

• Chapter 4 outlines the key features of each of the three models for social enterpriseconsortia, in turn.

• Chapter 5 outlines the advantages and disadvantages of each of three models for socialenterprise consortia.

• Chapter 6 considers the choice of legal entity for a social enterprise consortium based ona corporate model.

• Chapter 7 considers the issues around obtaining charitable status for a social enterpriseconsortium based on a corporate model.

• Chapter 8 considers the issues around establishing a social enterprise consortium as acommunity interest company.

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• Chapter 9 contains checklists of detailed points for discussion in developing the outlineterms for the consortium under each of the three models examined in Chapters 4 and 5.

There are two appendices to the guide:

• Appendix 1 contains template memorandum and articles of association for a consortiumwhere use is made of a jointly controlled company limited by shares, as the vehicle for thesocial enterprise project.

• Appendix 2 contains a template consortium agreement which could be used for aconsortium that relies purely on a contractual framework (as opposed to forming aseparate legal entity as the vehicle for the project).

It is not intended that the guide be read in one sitting; it is there as a reference source for yourorganisation. It has been designed so that you can dip in and out of it, picking up appropriatelegal information as you think through the issues of forming a consortium.

This symbol is used where we signpost you to a source of advice or guidance.

This symbol is used for a top tip

We recognise that some of the terminology may be unfamiliar to you. A full glossary of keyterms is available at the website www.socialeconomyscotland.info

As indicated above, the material in this guide is intended to enable social enterprises andother third sector organisations which are looking to form a consortium arrangement todecide upon which model and legal structure would best suit their objectives (Chapters 4 to8) and thereafter to consider the more detailed issues applicable to the type of model theyhave chosen (Chapter 9). Once the key decisions have been taken (depending upon the modelselected) reference can be made to Appendix 1 or Appendix 2 to give the parties an idea ofhow the legal documentation may ultimately look.

After the parties to the proposed consortium arrangement have reached a consensus on thekey issues outlined in the guide, we would recommend that specialist legal advice be taken inrelation to the detailed drafting of the legal documentation which will give effect to theconsortium.

The type of documentation involved in this context would be fairly complex. Specialist legaladvice will be required to draft and fine-tune the provisions, so as to give effect to what theparties to the consortium want to achieve in relation to the structure, and their respectiverights and obligations.

5CHAPTER 2 - POLICY BACKGROUND

CHAPTER 2POLICY BACKGROUND

There have been a number of recent policy developments within the area of publicservice delivery. These include:

• The Review of Public Procurement in Scotland (the McClelland Review) highlightedinconsistencies in procurement practice across the Scottish public sector. The reviewoffered a number of recommendations to increase transparency, to improve innovationand where appropriate to consolidate buying practices. The Scottish Government is actingupon these recommendations with the establishment of both a Public ProcurementReform Board to oversee the successful implementation of actions to improveperformance and a Public Procurement Advisory Group, composed of businessorganisations, including third sector representation, to provide a body with whom theReform Board could engage in dialogue about the effect of changes in public procurementpolicy and practice upon suppliers.

• Best Value and Community Planning are foundations of the Local Government in ScotlandAct (2003) which placed a duty upon local authorities to secure continuous improvementin performance and to work with other public agencies, together with communities toplan and deliver better local services.

• The Public Contracts (Scotland) Regulations 2006, which take account of the new EUServices Directive, have had considerable implications in terms of the regulations forprocurement. In the main, the Directive sets out clear guidance on the requirement toadvertise tender opportunities for works, goods and services across the European Union.It has clarified a set of technical standards for use across the EU, and requirements forobjective and open criteria for the evaluation of tenders and the selection of contractors.

• The growth of e-procurement across Scotland is of considerable importance as it has thepotential to improve the accessibility in relation to guidance about the procurementprocesses and strategies employed by the public sector, as well as information aboutspecific tender opportunities. Scotland is leading the way in this regard as it is the firstcountry in the world to recommend all government-funded organisations use e-procurement as a buying method.

Why is there a focus on public service delivery?

The Scottish Government has a vision of world-class public service delivery. It wants to makeScotland a more successful country. Key to that aspiration is increasing sustainable economicgrowth. This will be achieved through five strategic objectives: to make Scotland wealthierand fairer, healthier, safer and stronger, smarter and greener.

What role is there for the third sector in delivering public services?

Social enterprises and other third sector organisations have been delivering public services formany years. This work has traditionally been undertaken through grant-funded arrangements,voluntary activity and service level agreements. Increasingly over the last decade, the publicsector has been purchasing goods and services from the third sector through commercialcontracting arrangements.

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As good practice develops in the public sector there is a corresponding need for socialenterprises and other third sector organisations to become more business like in their dealingswith the public sector. The public procurement market is opening up and there will beincreased opportunities for social enterprises and other third sector organisations to competefor contracts to deliver public services. One means of achieving a more business-like approachcould be to collaborate with other third sector organisations to supply goods and services tothe public sector.

What changes are taking place in public service delivery?

The Scottish Government recognises that to achieve its vision of innovative and dynamicworld-class public services there needs to be stronger and more effective commissioningbased upon partnerships. Recent policy has placed an emphasis on collaborative purchasingwhich sees public agencies coming together to buy goods and services in order to achieve costsavings and efficiencies.

Conversely, processes such as Community Planning place an emphasis on the design anddelivery of services at a level closer to the users, often allowing them to have an input into thepriorities around design of local services. This tension in public policy is unresolved and placespressures on service commissioners to make complex and multi-faceted purchasing decisions.

As a consequence, public sector reform will see an increasingly mixed economy of publicservice delivery with different sectors contributing according to their strengths. The publicsector will bring its value base, strong governance, professionalism, experience andaccountability. The private sector will contribute both commercial discipline and customerfocus. The third sector will bring its understanding and experience of service users, as well asa culture of responsiveness to need and positive attitude towards innovation. Socialenterprises blend commercial acumen with social purpose and have the potential to providebenefits associated with the social economy and private sector. Collaboration within andacross these sectors will be far more common.

What changes are taking place as a result of the McClelland review?

The recent McClelland Review of public procurement highlighted the good practice thatcurrently exists and set out recommendations to raise the standard of practice across thesector as a whole. However, the McClelland Review also found that the public sector wasinsufficiently resourced to manage and implement the procurement system and processesrequired to achieve excellence in Scotland’s public services. It stressed the potential for goodprocurement practice to act as a key driver in the achievement of strategic objectives acrossthe sector and in the attainment of Best Value and efficient government. Much of the goodpractice that is beginning to emerge across the sector at present is a result of this work.

One of the main recommendations of the McClelland Review was that the public sectorshould co-operate in purchasing high value, nation-wide commodities. This would enable thepublic sector to benefit from improved utilisation of scarce procurement resources and greaterpurchasing power as a consequence of the aggregation of the value of their spend.Consequently a classification system has been introduced in order that procurement ismanaged over three levels.

• Category A: Nationally procured commodities and services across all of the public sectorwhere a single interface facilitates efficiency and competitiveness of suppliers

• Category B: Commodities and services procured on a sector-specific basis yet commonwithin that sector

• Category C: Commodities and services that are neither categorised as A (NationalContracts) nor B (Sector Specific Contracts)

• Category C1 – Local/Regional Contracts – where it is appropriate to consolidaterequirements on a local or regional basis.

In response, national and sectoral 'Centres of Procurement Expertise' (CoEs) have beenestablished to drive collaboration in the public sector. Procurement Scotland is the CoE for allCategory A contracts, and there are 4 Category B CoEs (NHS National Procurement for thehealth sector, Advanced Procurement Universities & Colleges [APUC] for Higher and FurtherEducation sector, Scotland Excel for local government and the Central Government Centre ofProcurement Expertise [CGCoPE] for central government).

These changes have quite important implications for the manner in which purchasers andsuppliers communicate and interact. Third sector organisations will need to take account ofthese new developments in terms of procurement, in the same manner as private sectorcompanies might, in order to be able to compete effectively and win business.

What are the potential implications for the third sector?

There are a range of potential strategies that social enterprises and other third sectororganisations can pursue in relation to the significant changes outlined above in the externalenvironment.

These strategies are briefly summarised below:

• Sub-contracting – Smaller third sector organisations become sub-contractors to large-scale operators. These large-scale operators may be private companies, the public sectoror even larger third sector organisations.

• Scaling-up – Pursuing a growth strategy to become a large scale regional or nationalorganisation that can compete at scale with the current large-scale operators. To achievethis scaling up quickly may mean pursuing a strategy of acquisition of other third sectororganisations operating in related markets.

• Merger – Similar to the above, third sector organisations could pursue a strategy ofmerging with related organisations to achieve sufficient scale to compete in the market.

• Federating – While retaining a degree of independence, third sector organisations couldbegin to work closely together gaining competitive advantage and scale through thesharing of key services, whilst retaining individual identity and autonomy.

• Sheltering – A third sector organisation could shelter within a larger organisation (thiswould probably be another third sector organisation but could be a public sector agency)where there are shared values, agreed mutual benefits and economies of scale. This is lessformal than a federation but would require some form of memorandum of understandingaround operations.

7CHAPTER 2 - POLICY BACKGROUND

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• Clustering – Groups of third sector organisations (often within a locality) could achieveeconomies of scale in back-office services by clustering together. These organisationswould usually complement each other in terms of services offered.

• Consortium – Third sector organisations could agree to work together and form aconsortium to bid for specific contracts. See below for when this is most appropriate.

• Partnership – A less formal approach than the above, where third sector organisationsdevelop strategic alliances and partnerships to gain critical mass when delivering services.

It is not within the scope of this guide to discuss the advantages and disadvantages of eachof these strategies, suffice to say there is not one ‘right strategy’. The external environment,value-base of an organisation, its track record and vision will influence what it believes to bethe right strategy. Each strategy will probably require facilitation in order to identify the correctoption and develop trust with any potential partners.

As indicated, the focus of this guide is on consortia development.

Where would a consortium be appropriate?

Given the moves to ensure value for money, many of the highest-value public serviceopportunities will be available to companies operating over a broad geographical area. Youmay identify a contract opportunity that interests you but which you know you cannot deliverbecause of the size or scale of activity involved. Entering into a consortium might be the mostappropriate method to enable you to respond to such a tender.

• You recognise that you cannot gain access to some contracts without partners

• You are approached to partner another organisation based on your expertise

• The specific problem that needs to be solved requires a range of partners to work togetherto develop the solution

Consortia combine the capabilities of two or more service providers, working in partnership,so that larger and more complex contracts can be delivered.

One driver behind consortia development is that it allows for greater economy of scale,efficiency and effectiveness. Consortia can be composed of partners from a variety of sectors– e.g. could combine social enterprises with social enterprises, or voluntary organisations orinvolve a mixture of public, private, social enterprises and voluntary organisations.

Effective consortia take time to develop. It can be the case that where consortia are rushedbecause of a contract opportunity then problems arise once the contract is won. You will haveto be prepared for this if it happens, as often you may only have a short period to time torespond to an invitation to tender.

9CHAPTER 3 - GETTING STARTED

CHAPTER 3GETTING STARTED

What are the advantages of developing a consortium?

There are a number of advantages to developing a consortium:

• The consortium will enable partners to share relevant skills, experience and expertise in away that complements one another in terms of the tender and in relation to delivery.

• It will give you the opportunity to access experience or competencies that you might nototherwise have in terms of service delivery and which you cannot afford to buy in just tosecure the contract.

• Also, your partners may have a specific unique selling point that you do not have. Theymay also deliver in other geographical areas to you. This will increase the scope of deliverywhilst not over stretching your own resources simply in order to be able to tender for thecontract.

• As a consequence of sharing your expertise and capabilities you can increase your chancesat tender evaluation.

• The consortia approach allows for shared development costs – which might represent asignificant reduction in overheads in relation to the contract.

• Perhaps most importantly, the consortium means that the risk associated with entering thisparticular marketplace and in relation to this particular contract is spread across thepartners.

• Also you may lack the skills or experience to participate in tendering but you can gainaccess to the contract. Alternatively you may not have invested significant resources intopreparing a tender but can focus on delivery.

What are the disadvantages of developing a consortium?

There are disadvantages to entering consortia. These can be:

• You might find that some contractors are not used to offering contracts to consortia andthis will mean that more effort is required at tendering stage to explain the deliverymethod.

• It is also worth noting that consortia take time to be properly developed. Where hastilythrown together they may not be as effective.

• Consortia usually require more resource intensive management during the contractdelivery to ensure consistency and quality are maintained across the range of organisationsinvolved.

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• Although consortia allow for shared risks between partners, you are likely to need legaladvice to ensure that the structure of the consortium is fit for purpose.

• If one of your partners fails to deliver, then you may be ‘tarred with the same brush’ interms of future tendering, or indeed exposed to legal and/or financial liabilities, dependingon the partnership arrangements in place. If you are the lead partner then you may beresponsible for 100% of the liabilities.

• Where you are further down the supply chain, there can be cashflow difficulties,particularly if the lead partner is experiencing delays in payment.

• You need to be clear about who has Intellectual Property Rights (IPR) in terms of thecontract.

• You may not gain experience in tendering.

• There may be no ‘brand’ recognition for your organisation within the consortia.

• If you have differing values from your other partners then this can cause friction.

• You may not be in a position to become involved in negotiations or managementdiscussions, yet the impact of these will be felt by your organisation.

Why is the EQUAL development partnership supporting consortia development?

Through the EQUAL Social Economy Scotland Development Partnership, the various partnershave been able to engage in transnational working. Our transnational partners within theSEEN Transnational Partnership are other EQUAL funded Development Partnerships in Italy(Reti.Qu.AL), Finland (HOT DP) and Poland (Krakow Initiative for Social Economy – COGITO).

Through working with our Italian partners, we were able to identify the success of theconsortia in Italy in winning contracts and delivering public services. This led us to pilot theapproach in Scotland, through the work on public-social partnerships.

11CHAPTER 3 - GETTING STARTED

Italian Social Co-operatives

By becoming a member of a consortium, social cooperatives in Italy can benefit from a widerange of support, including direct training, peer mentoring, shared central resources. Theconsortia network operates on a tiered basis. Social co-operatives can join a consortium, or anumber of consortia. In turn, those consortia can become members of larger consortia.Therefore the consortia network is an interlinked web of social cooperatives. At all levels, theconsortia network places a strong emphasis on the sharing of good practice and plays a keyrole in shaping the environment within which the consortia operate.

The consortia enable social cooperatives to operate greater economies of scale because theycan work together to compete for contracts which they would otherwise fail to win in termsof capacity. In doing so, social cooperatives can compete for higher value contracts but cancontinue to operate on a scale that they feel comfortable with.

The consortia enable social cooperatives to bid for contracts which call for a range of activitiesto be delivered as part of a service without them resorting to the need to divert resourcesaway from their core activities. Instead, social cooperatives are able to come together as aconsortium in order to submit a joint bid to deliver the service.

For further information see www.socialeconomyscotland.info for PSP Lessons LearnedReport and SEEN Adding Value to Public Procurement

What strategic questions should you consider?

If you are thinking of getting involved in developing a consortium or joining a consortium,there are a number of strategic questions that you need to ask.

Here we will look at some of the key questions that you should think about.

• Community impact – What is the impact of the decision to join a consortium on yourcommunity of interest? What community benefit will be produced from your deliveringthis contract? What fit is there between your mission/purpose and mission/purpose of theconsortium?

• Contract specifications – What areas are there where you do not have the skills,expertise or experience to deliver but the potential consortium partners do? How willsharing the risks and sharing expertise help you to deliver the contract more effectively?

• Catastrophe – What are the risks related to delivering this contract via a consortium?What are the implications of performance failure by the consortium? What capacity issuesdoes involvement in a consortium cause for your organisations?

• Continuation – How long is the consortium contract for? What effect will delivery of theconsortium contract have on your existing operations? What other potential opportunitieswill it open up? What happens to the consortium when the contract finishes? What is yourexit strategy? What happens if the contract is not re-issued?

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• Competition – Who will you be competing against? What unique selling point does yourconsortium have that will help you to win the contract? What unique selling point/s doesyour competition have?

Tendering for public sector contracts (2007) provides social enterprises with advice andguidance on tendering. Copies can be downloaded fromwww.socialeconomyscotland.info

What other issues should we consider?

You will have to find partners to work with. You may know who they are or be easily able toidentify them. Or you may have to search for appropriate partners to be able to deliver thecontract.

Below we have outlined a quick guide to the key questions that a new consortium should startto think through.

Shared vision and values

What does each of the partners want to achieve out of being in the consortium? Is there ashared vision?

What fit is there between the vision for each of the partners’ organisations and the

vision of the consortium as a whole? Have we agreed a vision for the consortium?

What are the core values of each of the partners? Are they compatible?

What similarities of working culture exist between the partners? Are they compatible?

Structure

What skills mix do we need to strategically manage the consortium as it delivers contracts?

What management structure do we need to deliver this contract?

What decisions will be made by the consortium? What decisions will be made by thepartners?

How will we make decisions quickly and effectively?

Style

What is the appropriate style of management to deal with delivering this contract?

What is our attitude to risk and risk management?

What is our approach to relationship management? Do we have the right processes in placeto manage the relationship with the contractor?

What time have we set aside to work through problems or issues?

How will we manage disagreements?

13CHAPTER 3 - GETTING STARTED

Skills

What skills or competences does the consortium need to have to deliver this contract?

What experience does the consortium need to deliver this contract?

What additional staff or sub-contractors do we need to deliver the contract?

What contingency plans are in place for dealing with staff changes during the contract?

Sub-contracting

What processes do we have in place to manage sub-contractual relationships?

Where will we find our sub-contractors?

What level of involvement in decision-making will any sub-contractors have?

Systems

What financial systems do we have in place to deal with the contract? Will one of the partnerstake responsibility for this? What are the implications for the partnership of this approach?

What are the potential cash flow implications for the consortium? What capacity do we haveto deal with cash flow difficulties?

How will we manage or allocate responsibilities/ liabilities?

What is the most appropriate communication system to manage delivery of the contract?

What review has taken place of existing practices? What discussion has taken place aroundhow things will work should we win the contract?

What policies and procedures should the consortium have in place? What level ofpolicy/procedure is delegated to the partner organisations?

Who owns the Intellectual Property Rights?

Standards

What standards are required to deliver the contract? Do we have the appropriate qualitystandards to deliver the contract?

What processes are in place for sharing learning?

Stakeholders

What effect will joining the consortium have on our relationships with our existing keystakeholders?

How can we engage our key stakeholders in the process?

How are our stakeholders able to assist us in pursuing this new strategy?

What concerns will our key stakeholders have over any change in strategic direction?

Will we form relationships with new stakeholders as a result of this decision and how will thataffect existing stakeholder relationships?

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It may be that you need external facilitation to help you through the process of developing aconsortium. Specialist social enterprise advisers, business advisers or consultants can help inthis area.

Forth Sector Development (FSD) is an Edinburgh based social firm providing business anddevelopment support to social enterprises, voluntary organisations and community groups.Fellow development partner, Community Enterprise in Strathclyde (CEiS) operates a similarservice in Glasgow. Both FSD and CEiS are members of the HIE Consortium, a Highlands andIslands Enterprise led partnership of experts including Social Investment Scotland (SIS),Scottish Enterprise and Highland and Islands Community Energy Company (HICEC), workingin the field of development and support, to help community groups acquire assets.

In 2006, the HIE consortium successfully won a large contract to support communities seekingto establish an asset base, to contribute to their development, through the Big Lottery’sGrowing Community Assets fund.

The consortium has proved a useful vehicle for building effective relationships between theseorganisations, and in terms of pooling the skills, knowledge and resources of the group inorder to deliver a cohesive and professional service to community groups across the whole ofScotland. The HIE Consortium works well because there is no duplication of provision, ratherthe membership places an emphasis on the complementarity of skills and experience of itsmembers – whether that be in terms of delivering support in an urban or rural setting, tocommunity groups or social enterprises.

From an organisational perspective, FSD has benefited greatly from the opportunity to providea tailored investment plus support service to a range of different groups. This has enabled FSDto broaden the scope of its activities – in terms of our role in supporting organisations and inthe extent of our geographical coverage. The consortium model also allows us and ourconsortium partners to share the risk associated with undertaking such a large contract.

The successes we have achieved - as an organisation, and as a consortium, would be unlikelyto have occurred were it not for the approach we have taken to sharing responsibility fordesigning and delivering the service. Our combined knowledge of the policy environment andpractical experience within the Scottish social economy sector has ensured that we are makinggood progress in helping to achieve the Big Lottery Fund’s ambitions to bring about lastingsocial change which recognises the value of investing in communities.

Neal Mackay, Business Development Director, Forth Sector

15CHAPTER 3 - GETTING STARTED

ROAR CONSORTIA (REACHING OLDER ADULTS IN RENFREWSHIRE)

RCVS supports third sector organisations in Renfrewshire. We are the lead partner of ROAR,a consortia formed to deliver services designed through a Public-Social Partnership (PSP). PSPsare a new way of designing and delivering public services. The PSP approach was used toprovide a befriending service for older adults and make the most effective use of resources.We brought together a range of organisations that had expertise in different aspects of carefor older people, in partnership with representatives from the Local Authority. The issues

• Third sector organisations are often short of resources.

• They may also duplicate each other’s work.

• Officers who commission services may not understand the benefits of working with thethird sector.

• Third sector organisations do not always feel in a strong position to compete for contracts.

• Older people are often isolated in their homes, this effects their self-confidence, health andwell-being.

What we did

We took the lead role in managing the process and providing staff to support thedevelopment. A Development Officer was appointed. They were responsible for co-ordinating and supporting the organisations involved in the PSP. A partnership agreement forthe consortia was developed which outlined everyone’s roles and responsibilities. It has takenjust over 18 months to get the service up and running. It has taken that time to get commonareas of agreed principle, identify the services needed, draft the service specification, designthe strands of service to meet these needs and build the consortia.

The organisations in the PSP that formed the consortia were: • Renfrewshire CVS (lead partner)

• Volunteer Centre Renfrewshire

• WRVS

• Alzheimers Scotland, and

• Contact the Elderly

Lessons learnt

• It takes a long time to build effective consortia.

• Some organisations will decide to drop out of the consortia. There will always be fewerorganisations at the end than there were at the beginning. Through time others mightjoin.

• At the beginning it is essential to spend time on building the consortia, understanding theorganisations involved, agreeing shared values and respecting their differences. This buildsa solid foundation for the hard work ahead.

• It is important, from the beginning, to be clear about the kind of the service to be deliveredand the roles of each partner involved.

• Consortia development can work and does provide third sector organisations with theopportunity to be involved in larger contracts.

• Third sector organisations who want to get involved in consortia development should beclear about the additional burden this is likely to place on them. They should weigh upthe potential benefits against the perceived cost.

Janis McDonald – CEO, Renfrewshire CVS

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CHAPTER 4 CHOICE OF CONSORTIUM MODEL: KEY CONSIDERATIONS

Where a number of partner bodies have decided to form a consortium with a view to jointlytendering for, and thereafter delivering, public sector contracts (on the basis that thiscollaboration will bring together the necessary blend of skills and resources), the next step tobe taken will be to decide what type of model and structure is most appropriate for givingeffect to the objectives of the consortium.

Before the partner bodies start to look at the detailed legal issues associated with anyparticular type of consortium, it is best to take a step back and decide:

• Whether or not it would be desirable to form a separate legal entity, through which thejoint venture would be run, as opposed to relying upon contractual rights/obligationsamong the members of the consortium; and

• If the decision is taken to establish a separate body as the vehicle for the joint venture,what sort of legal entity should be used (which will depend upon whether or not theconsortium is to be profit-distributing or non profit-distributing).

The next few chapters of the guide take you through the process of making these decisions.

What are the models for a consortium?

There are three key models for social enterprise consortia, as follows:

• a contractual framework, consisting of an agreement among the members of theconsortium to work together and setting out their legal rights and obligations (but withoutany additional legal entity (in the shape of a joint body being formed)

• a contractual framework, as above, with the additional feature of a joint steering group

• the establishment of a jointly controlled company, as a separate legal entity, through whichthe joint venture will be run.

The decision as to which model to adopt will depend upon a number of considerations. Forexample, if the project is intended to be of a long-term nature, there may be a need forflexibility in responding to new developments and market opportunities as they arise, ratherthan implementation being tied to a pre-set detailed contract, and that would tend to pointto use of a corporate body.

It should also be noted that the three models are not necessarily mutually exclusive. Themodels relying on a contractual framework will be very similar (but with one model includingthe additional feature of a joint steering group and all that that entails). In addition, a jointlycontrolled corporate model will also need to carry with it contractual obligations (with adegree of overlap with the types of contractual obligations reflected under the other models).Nevertheless, it is useful to categorise the various possibilities in this manner so as to highlightthe key features of each approach. The features associated with each of the models are setout in turn below.

17CHAPTER 4 - CHOICE OF CONSORTIUM MODEL: KEY CONSIDERATIONS

Contractual framework: basic features

The most straightforward means of forming a social enterprise consortium is on a purelycontractual basis; under the contractual framework model, the parties will proceed on thebasis of an unincorporated structure whereby the consortium rests on contractual rights andobligations among the members of the consortium. This model could be said to be lesscollaborative than a consortium which proceeds on the basis of a jointly controlled corporatevehicle (or even one which involves the establishment of a joint steering group).

The usual features of such a contractual arrangement would be as follows:

• a contractual approach involves each of the parties to the consortium entering into adetailed set of contractual terms and conditions (thereby agreeing to associate asindependent contractors, rather than members in a company), with the contract amongthem representing the key mechanism by which the partner bodies participate in thesuccess (or otherwise) of the social enterprise project

• the consortium agreement will outline (a) the duration of the relationship between theparties; (b) the rights and duties of each of the parties; (c) the scope of the project (whichcould allow for significant flexibility in certain areas, recognising the need to adapt tochanging conditions over the life of the project, if it is intended to be long-term); (d) howthe project will be financed (how costs will be shared); (e) restrictions on the freedom ofthe parties so as to prevent them from taking steps which would prejudice the realisationof the agreed outcomes; (f) the rights of the parties to participate in any profits generatedand on a return of capital etc; and (g) the exit provisions

• the consortium agreement will also dictate the extent to which assets are shared amongthe parties in the consortium - there may or may not be any pooling of assets and similarly,there may or may not be any sharing of profits/costs (where it is the intention of the partiesto have a lesser degree of integration, as is permitted by this model). Unless and to theextent that the consortium agreement makes specific provision for the sharing of assets(used in connection with the consortium arrangement), the assets of each party will remainthe assets of that party

• the consortium agreement will normally include a declaration to the effect that it is notthe intention of the parties to create a legal partnership (the implications of the contractualarrangement being deemed, by law, to be a legal partnership are examined in Chapter 5)

• in implementing the project, there will be a need for one of the parties to the consortiumto actually enter into contracts (associated with the consortium) with third parties(occasionally, the parties to the consortium can enter into such contracts jointly, but thatcan represent a clumsy solution). The effect, therefore, is that the consortium party who,for example, is party to the contract with the local authority, represents the first target inthe event of any claim by the local authority; as a result, the consortium agreement willdictate the extent to which liabilities under separate contracts/sub-contracts are to beshared or are to fall solely on the party who is party to the relevant contract/sub-contractwith the third party (for example, the local authority). Where the consortium proceeds onthe basis of one party being the lead partner (with that party entering into all contractsassociated with the consortium project, with third parties), there may be a need for theother participants to provide guarantees in respect of the obligations of the lead partner

• the profits of the contractual consortium arrangement will generally not be shared but willaccrue separately to the parties and each party will pay corporation tax on its own profits1

and will be entitled to relief for its own costs

1 Where the parties to the consortium are registered charities, then those bodies may not be liable to pay corporationtax on any profits accruing to them as a result of the social enterprise project (provided that they are registered fortax relief) depending upon the nature of the work involved and whether it is such as to fall within the exemptionsunder section 505 of the Income and Corporation Taxes Act 1988.

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Contractual framework with joint steering group: basic features

The joint steering group model would incorporate all of the features of the contractualframework model referred to above. In addition, it would involve the establishment of a jointsteering group which would act as the forum for joint decision-making on matters of detaileddelivery and which would help to maintain the focus on the agreed objectives of the socialenterprise project. It can be seen, therefore, that this model involves a higher degree ofintegration among the partner bodies involved in the consortium.

The key features of this model are as follows:

• under this model, the consortium agreement would include a provision requiring thepartner bodies to establish a joint steering group within a certain period of time; theconsortium agreement would also formalise the make-up and status of theunincorporated joint steering group

• the joint steering group would typically consist of representatives of the key partner bodiesbut may (depending upon the circumstances) additionally consist of representatives ofpublic sector partners and members of the community

• the consortium agreement would also contain a provision requiring the partner bodies torefer certain decisions (appropriately defined) to the joint steering group, as a mechanismfor guiding detailed delivery of the social enterprise project

Jointly controlled corporate body: basic features

This model would involve the establishment of a dedicated corporate body to facilitatedelivery of the social enterprise project (rather than relying solely on contractual arrangementsamong the participants).

The use of a corporate entity as the vehicle for the would be appropriate where, for example,(a) the joint venture is intended to be relatively large-scale; (b) the joint venture is not of ashort-term duration; and (c) there are a significant number of parties who are keen tointegrate closely in relation to the implementation of the social enterprise project.

The key features of this model are as follows:

• there is a separate vehicle for delivery of the public sector contract i.e. the jointly-controlledconsortium entity will be the party to the main contract with the public sector agency (andcan thereafter enter into sub-contracts, as necessary, employ staff etc);

• the corporate entity provides the benefit of limited liability (which will be examined furtherbelow)

• the corporate entity provides (if appropriate) a mechanism for recycling of financial return(where the intention is not to distribute profits)

• use of a corporate vehicle involves a higher degree of integration of the interests of theparticipants

• the structure of the entity will involve a higher degree of joint decision making (forexample, in the context of a limited company model, the board of directors will includeindividuals appointed by each of the parties); this in turn can ensure that there is a higherdegree of joint management of risk associated with the activities of the consortiumcompany

19CHAPTER 4 - CHOICE OF CONSORTIUM MODEL: KEY CONSIDERATIONS

• the corporate entity represents a better mechanism for the sharing and management ofrisk

• all of the assets and liabilities relating to the venture (other than as relating to delivery bythe partners under subcontract arrangements) will be pooled in a single vehicle i.e. in theconsortium company

The basic features of the jointly controlled corporate body will be examined in more detail inChapter 6.

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2 It should be noted, however, that the benefits of limited liability may be restricted, to some extent in that, until such time as the separate entity has developed a good covenant in its own right, the shareholders will most likelyhave to provide guarantees etc to third parties (such as lenders) in respect of the liabilities of the consortium vehicle.

3 In the case of an LLP, there is no distinction as between members and directors and an LLP will strictly speaking only consist of members; however, regulation of the affairs of the LLP is largely a matter for the members to determine and it is likely that the members would opt to establish a board with similar responsibilities to the boardof a company, (albeit the individuals sitting on that board will not be directors for the purposes of the CompaniesActs).

4 A floating charge is a charge which is taken over all the assets, or a class of assets, owned by a company from time to time. It is used as security for borrowings or other obligations/liabilities. The primary advantage of a floating charge is that (at any stage prior to a company becoming insolvent) it allows the charged assets to be bought and sold during the course of a company’s business without reference to the chargeholder. If the companyis in default, then the floating charge crystallises i.e. it is converted to a fixed charge over the assets which it coversat that time.

CHAPTER 5 ADVANTAGES AND DISADVANTAGES OF THE VARIOUS MODELS

What are the advantages of using a corporate entity as the vehicle for the socialenterprise project as opposed to relying solely upon contractual arrangements?

There are a number of advantages in using a corporate entity as the vehicle for the consortiumjoint venture, as opposed to relying solely upon contractual rights and obligations.

These advantages are as follows:

• the use of a joint venture vehicle greatly assists in packaging projects which involve jointinvestment and joint sharing of risks - and particularly where the intention is to share indecision-making

• limited liability - this enables the parties to the social enterprise consortium to limit theirliability in respect of liabilities and losses of the social consortium vehicle; the financialexposure of the parties is limited to the sum invested by each party in the project2

• a dedicated corporate entity will be separate from the bodies involved in it - and cantherefore hold property, enter into leases and other contracts, employ people, sue and besued etc in its own name

• a corporate vehicle allows the various partners to work more closely in partnership (and topool assets with greater confidence) through a joint vehicle in which they aremembers/shareholders and (in the case of a limited company), in which they haveappropriate levels of representation at board level3

• there is a greater degree of financial flexibility - in the case of a company limited by shares,different categories of shares (for equity investment) can be created, loan capital can becreated; in addition, the corporate entity can create a floating charge4 over its assets

• use of a corporate vehicle can facilitate greater accountability and better governance

• the formation of a board of directors automatically carries with it the principle that theindividuals serving on the board must take decisions on the basis of what they considerwill promote the success of the company; that ought to facilitate a stronger partnershipapproach to decision-making

• it facilitates the introduction of more robust legal commitments as regards future funding,contribution of assets etc

• the formation of a company at the outset of a project has the benefit of allowing a smoothbuild-up of expertise, and the fine-tuning of procedures and processes in the light ofexperience, and minimises the disruption and other negative effects of the partner bodieschanging over time

21CHAPTER 5 -AADVANTAGES AND DISADVANTAGES OF THE VARIOUS MODELS

• it facilitates the introduction of more robust legal commitments as regards future funding,contribution of assets etc

• the formation of a company at the outset of a project has the benefit of allowing a smoothbuild-up of expertise, and the fine-tuning of procedures and processes in the light ofexperience, and minimises the disruption and other negative effects of the partner bodieschanging over time

What are the disadvantages of using a corporate entity as the vehicle for the socialenterprise consortium as opposed to relying solely upon contractual arrangements?

The disadvantages of using a separate corporate vehicle (as opposed to relying upon solelyupon contractual relationships) are as follows:

• the benefits of limited liability may not be fully available in that, until such time as theseparate entity has developed a good covenant in its own right (i.e. is deemed to be in asound financial position), the member bodies will most likely have to provide guaranteesetc to certain third parties (e.g. funding bodies, lenders etc) in respect of the liabilities ofthe social enterprise vehicle

• there are formal registration procedures to be followed in creating a corporate vehicle

• set-up costs can be higher than for a contractual arrangement and annual costs are higher,particularly if there is an external company secretary and/or if a formal audit is required

• a corporate entity inevitably carries with it additional administrative tasks (for example,there is an ongoing requirement to notify a change in directors5, a change in the companysecretary, or a change in the registered office, to a public register (Companies House)).Similarly, annual accounts and annual returns have to be filed with Companies House.These administrative requirements are not, however, likely to be onerous in the context ofa corporate vehicle which has a small number of corporate members

• a corporate structure imposes an element of additional formality; in particular (in the caseof limited companies), meetings of the board of directors will require to be formallyminuted, which would not be the case in the context of a joint steering group, and onlydirectors of the company (again, in the case of a limited company) will be able toparticipate fully in decisions relating to the social enterprise project6. There would begreater flexibility in the context of a joint steering group

• the creation of a new corporate vehicle normally gives rise to a requirement for a separate“infrastructure” e.g. separate staffing arrangements, separate financial and administrativearrangements etc.

• a corporate entity requires to maintain separate accounting records and to produceseparate annual accounts

• because of the need to file accounts etc with Companies House (which is a publiclyaccessible register), the business of the social enterprise consortium is subjected to ahigher degree of public scrutiny; this has the added disadvantage of allowing anycompetitors to gain access to the information contained in the annual accounts

• there are various statutory requirements which have to be followed in relation to members’meetings etc and various principles of company law which could in certain circumstanceshave an impact on the company

• the existence of a separate vehicle (in conjunction with a members’ agreement and variouscontractual relationships between the partner bodies and the entity itself) may make itmore difficult for each partner body to disengage from the contract - as compared with amore informal partnering arrangement

5 In the case of an LLP, changes to the members will have to be notified (as opposed to changes in directors)

6 Although others may attend as advisers/observers.

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What are the advantages of relying solely on a contractual framework?

The advantages are as follows:

• it may be simpler to establish

• it allows independent decision-making for each party within the framework set by thecontract (although this will be restricted, to some extent, where a joint steering group isestablished)

• it avoids the additional formalities/infrastructure of a corporate body (which may beappealing to parties which are not keen to integrate too closely or where there is areluctance for the consortium to have any real degree of permanence)

What are the disadvantages of relying solely on a contractual relationship?

The disadvantages are as follows:

• it is likely to be less conducive to building a true partnership approach to decision-making

• it can be unduly rigid insofar as there is not normally a joint decision-making forum (theparties can, however, establish a joint steering group to which certain decision-makingpowers can be delegated)

• the absence of a joint vehicle creates additional complications in relation to contracts withthird parties and there is greater risk exposure for the parties as compared with using acorporate vehicle

• the parties in the consortium could potentially be liable for claims and liabilities which areunlimited in amount; these claims may have arisen due to the negligent or recklessbehaviour of the party itself or as a result of the negligence/recklessness of the otherparties (but this will depend upon whether the consortium agreement contains provisionsby which the parties assume responsibility for the acts/omissions of the other parties to theagreement)7

• the greater degree of risk exposure for certain parties (for example, the partner body whichenters into contracts (associated with the consortium) with third parties) can distort thedynamic of decision-making

• a non-corporate form of association can (despite the inclusion of a statement in theconsortium arrangement to the effect that it is not intended to be a partnership) still bedeemed to be such; the intention of the parties will, however, be important in determiningwhether or not a legal partnership exists, so it would be helpful to include a statement inthe consortium agreement to the effect that each party acts on its own account asprincipal (and not as an agent)

7 This will further depend upon whether authority has been given to the parties to act on one another’s behalf andto effectively bind co-parties, and upon the indemnities in the consortium agreement

23CHAPTER 5 -AADVANTAGES AND DISADVANTAGES OF THE VARIOUS MODELS

• the primary disadvantages of the contractual framework being deemed to be apartnership are that (a) there is unlimited liability - each partner is deemed to be the agentof the other partners for the purposes of the business such that each partner is jointlyliable for the debts and obligations of the partnership and jointly and severally liable forthe wrongful acts and omissions of the other partners (such that there is potentiallyunlimited liability); this means that any one partner can be required to pay the full amountand it is then up to that partner to try to recover the appropriate proportion from the otherpartners; and (b) even if the participants to the consortium outline loss-sharingarrangements in the consortium agreement, each of the partners will still have a duty tocomply with its statutory obligations, and a participant to a social enterprise consortiummay have a concern that its co-participants might not be able to meet those obligationsfor which they are responsible (in which case, the liabilities will fall upon the remainingpartners)

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CHAPTER 6 - CHOICE OF LEGAL ENTITY FOR A CONSORTIUM BASEDON A CORPORATE MODEL

If the principle of using a corporate body as the vehicle for the consortium is felt to beattractive, one key issue on which there requires to be full clarity (as it represents a criticalfactor in relation to the choice of legal entity) is whether the partners bodies would expect toreceive a dividend in the event of surpluses being generated by the overarching projectvehicle, and in addition, whether they should be able to sell their “stake” in the overarchingproject vehicle to a third party.

These issues, at a less technical level, translate into the more fundamental question ofwhether or not the intention is that the consortium should be profit-making8 or non profit-making.

Where the intention is for the consortium to be profit-making, the choice will be as betweena company limited by shares and an LLP.

Where the intention is for the vehicle to be non profit-making, a company limited byguarantee will be the appropriate legal entity.

The key features of each legal form are outlined below. This is followed by an outline of theadvantages & disadvantages of a company limited by shares as compared with an LLP

Key features of a jointly controlled company limited by shares as the vehicle for theconsortium (profit-making)

• the parties to the social enterprise consortium will become the members of the companylimited by shares (known as the shareholders) and will have a financial interest in thecompany

• the memorandum and articles of association (in conjunction with the shareholders’agreement) will set a detailed framework with regard to investment in the corporatevehicle, decision-making at shareholder/member level and board level, financial returns outof profits, capital returns through the sale of shares etc

• the member bodies may realise their stake in the company via a sale of their shares or ona payout of surplus assets on a winding-up

• the member bodies are entitled to draw out the profits of the company for their ownbenefit, subject to internal procedures e.g. board recommendation and subsequentshareholders’ resolution

• an increase in the underlying value of the company’s assets and business will, broadlyspeaking, be reflected in an increase in the value of the shares held by the shareholders

• all of the trading activities, assets and liabilities relating to the social enterprise consortium,will be vested in the social enterprise company i.e. in one entity (but with the exception ofthose relating to delivery of services through the individual members of the company interms of sub-contracts between the company and its members)

• the contribution of assets by each of the parties to the social enterprise company willnormally constitute a “disposal” by the parties, for tax purposes; if there has been anyincrease in value of those assets (since acquired by the relevant consortium party), then thedisposals could be liable to capital gains tax9

8 It should be noted that the reference to “profit-making” here is a reference specifically to making profits with aview to distributing these to the members of the legal entity; the reference here is not to entities which generateprofits with a view to these being recycled back into the organisation (to be used in furtherance of its objects) -such organisations may be profit-making, but will be non profit-distributing.

9 It should be noted, however, that if the parties are charities, there is an exemption from tax on capital gains, provided that the gains are applied for charitable purposes. Special considerations may also apply if the social enterprise company is a charity itself.

25CHAPTER 6 - CHOICE OF LEGAL ENTITY FOR A CONSORTIUM BASED ON A CORPORATE MODEL

• the members of the company (the shareholders) have the benefit of limited liability. Wherea company limited by shares goes into liquidation, a shareholder would only be requiredto pay (irrespective of the level of debts) a sum equal to the amount (if any), which theshareholder is still to pay to the company for the shares which it holds. As a matter ofpractice, shares are normally fully paid up, and therefore there would be nothing furtherfor the shareholder to pay10

• the constitution (primarily the articles of association) of the social enterprise company,taken together with a separate shareholders’ agreement, will detail the legal relationshipsof the parties in the consortium. These documents will detail the percentage shareholdingof each of the parties.11 The constitution and the shareholders’ agreement will also outlinethe division of power as between the board of directors of the social enterpriseconsortium, and the shareholders; there will, for example, be certain matters reserved tothe shareholders i.e. the board will not be able to take decisions on certain matterswithout first referring these matters to the shareholders for approval

• there will be detailed provisions in both the shareholders’ agreement and the articles ofassociation in relation to the transfer of shares. There will normally be restrictions uponwhen existing shareholders can transfer their shares and the articles will generally statethat the remaining shareholders will have pre-emption rights (i.e. the transferor’s shareswill be offered to the existing shareholders in proportion to their shareholdings and theshares can only be transferred to a third party if all of the transferor’s shares are not takenup by the existing shareholders within the relevant time limits)

• the directors of the social enterprise company will be appointed by the parties to theconsortium; in addition, there may be co-opted directors, who are appointed by the othermembers of the board on the basis of their having special skills or experience which willbe of assistance to the board. There will need to be detailed conflict of interest provisionswithin both the articles of association of the company and the shareholders’ agreement(i.e. to specify in which situations the directors will not be entitled to vote etc). In thecontext of a social enterprise consortium, it is very likely that a director may findhim/herself in a position where he/she has a conflict between the interests of the socialenterprise company and the interests of the party which nominated him/her - this will beparticularly important in light of the new conflict of interest rules governing companydirectors, as contained in the Companies Act 2006

• the social enterprise company (including its members and directors) will be subject to theprovisions of the Companies Acts e.g. the directors of the company will be subject to thestatutory statement of directors’ duties under the Companies Act 200612

10 It should be noted, however, that the benefits of limited liability will to some extent be eroded in that, until suchtime as the separate entity has developed a good covenant in its own right, the shareholders will most likely haveto provide guarantees etc to third parties (such as lenders) in respect of the liabilities of the consortium vehicle.

11 It will not necessarily be the case that the party to the consortium holding the greatest shareholding will have thegreatest degree of control in relation to the company; for example, a party could hold only 1% of the percentageshareholding but that particular class of shares could carry 99% of the voting rights

12 The relevant provisions of the Companies Act 2006 (relating to directors’ conflict of interest duties) come into force with effect from 1 October 2008; a detailed examination of the new conflict of interest duties is outwith thescope of this guidance, but broadly speaking, a director must avoid situations in which he/she has or can have adirect or indirect interest that conflicts with or may conflict with the company’s interests. The duty does not applyto a conflict of interest arising in relation to a transaction or arrangement with the company (these do not have to be authorised by either the members or by the board and instead directors have a duty to declare their interestsin these transactions). The duty will not be infringed where the situation cannot be regarded as being likely to give rise to a conflict of interest or if the matter has been authorised by the board (subject to certain procedural requirements being met).

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• one of the features of a company structure is that it imposes - by operation of law - a dutyon the directors of the company to take decisions in what they consider will promote thesuccess of the company; accordingly, so long as the key parameters of the project areproperly defined through the objects clause of the company, the effect should be tocultivate an ethos of decision-making at board level that is directed towards mutual benefitrather than advantage to any particular party

• any profits to be distributed to the parties to the social enterprise consortium will bedistributed via a payment of dividends13

• the shareholders’ agreement will contain detailed provisions regarding termination of theconsortium (which may lead to the social enterprise company being wound up). On thetermination of a joint venture, there will normally be a transfer of assets back to the partiesto the social enterprise consortium

Key features of a jointly controlled company limited by guarantee as the vehicle forthe consortium (non profit-making)

A company limited by guarantee will be the most appropriate vehicle for a consortium wherethere is no intention that any of the participating bodies will derive any financial return (in thesense of a share in profits) from the project, yet it is nonetheless felt that a corporate entity isdesirable.14;

The main features are outlined below:

• the membership of the company limited by guarantee consists of the key partner bodiesinvolved in the social enterprise project, with each partner body having a built-in right torepresentation on the board (rather than people being appointed to the board through anelection process); the board may additionally consist of co-opted directors

• there is a prohibition on distribution of profits to members (and, similarly, a prohibition onpaying out to the members any surplus on a winding-up)

• the liability of the member bodies will be limited; there will be a clause within theconstitution of the company limited by guarantee by which each of the members of thecompany undertake (“guarantee”) to pay up to a nominal sum (normally £1) towards thecompany’s debts if it goes into liquidation; the members’ liability is therefore limited to thesum which they guarantee to pay, hence the name “company limited by guarantee”

12 Where the consortium vehicle has charitable status, payments can be made to those members (if any) which havecharitable status (although these payments need not be structured as dividends, which may not be the most taxefficient means of distributing profits) but no distribution of profits can be made to members which do not havecharitable status. Where the consortium vehicle does not have charitable status, but certain of its members are charities, instead of paying dividends to its charitable members, it can gift aid surpluses to those members whichare charities.

13 See above for details of the advantages of using a corporate entity for the consortium rather than relying solely upon a contractual framework.

27CHAPTER 6 - CHOICE OF LEGAL ENTITY FOR A CONSORTIUM BASED ON A CORPORATE MODEL

Key features of a limited liability partnership as the vehicle for the consortium

A limited liability partnership (“LLP”) is incorporated under the Limited Liability PartnershipsAct 2000. An LLP can only be used where two or more parties wish to carry on a business“with a view to profit”; accordingly, an LLP is an alternative to the company limited by shareslegal structure, where the parties to the consortium are looking to establish a profit-distributing legal entity as the vehicle for the consortium.

Where the joint venture vehicle is intended to be profit-making, the decision as between acompany limited by shares and an LLP will largely be driven by tax considerations.

The key features of an LLP, in this context, are as follows:

• an LLP must have a minimum of two members, with new members being admitted byagreement of the existing members. Bodies can generally withdraw from membership byagreement with the other members, failing which, on giving reasonable notice; thepartners to the consortium will become the members of the LLP

• at least two members have to be “designated members” who are responsible forappointing the auditors, delivering the accounts and annual return to Companies House,notifying Companies House of changes in membership, the registered office address etc

• an LLP is a clear legal entity, separate from the bodies involved in it as members - and cantherefore hold property, enter into leases and other contracts, employ people, sue and besued etc in its own name

• every body which is a member of an LLP is an agent of the LLP (when acting on behalf ofthe LLP, but not in carrying out its other activities), but if a member is acting withoutauthority (and a third party is aware of this), then the member’s acts will not be bindingupon the LLP (and there may be the possibility of a claim being made by the othermembers of the LLP against a member which acts without having the authority to do so)

• there is no shareholder/director distinction and accordingly the members of the LLP arefree to regulate decision-making as they see fit; the members will regulate themanagement of the LLP by setting out the relevant provisions in a membership agreement(as opposed to articles of association)

• the membership agreement is not a public document and does not have to be filed withCompanies House

• an LLP generally has the same tax treatment as a legal partnership i.e. rather than the LLPitself being taxed, each of the individual partner bodies will be taxed on the profitsaccruing to it (in accordance with the normal tax treatment of any profits accruing to thosebodies15 )

• an LLP is able to grant floating charges

• the contribution of assets into an LLP may attract lower stamp duty/stamp duty land taxthan would a transfer to a company limited by shares

15 Consequently, if the partner bodies are charities and the trading activities fall within the relevant exemption, thenthey will not be taxed on the profits.

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What are the key advantages & disadvantages of an LLP as the vehicle for a socialenterprise consortium (as compared with a company limited by shares)?

If a decision has been taken that the consortium should be conducted through a profit-making corporate entity, a decision will have to be taken as to whether to form a companylimited by shares or an LLP.

The formation of an LLP, when compared with relying on a purely contractual framework, hasmany of the same advantages as forming a limited company, for example, an LLP has full legalcapacity (i.e. the ability to hold assets, enter into contracts etc in its own name) and has thebenefit of limited liability for all of its members. Consequently, the focus here is on theadvantages of forming an LLP as opposed to a limited company which are, broadly speaking,as follows:-

• there is a greater degree of organisational flexibility, akin to that in a legal partnership,such that the members of an LLP are (to a greater extent) free to regulate the managementand control of the LLP as they see fit

• an LLP receives the same tax treatment as a legal partnership, such that the LLP itself is nottaxed on its profits, but the members of the LLP are taxed on profits accruing to them16

When compared with relying purely on a contractual framework, many of the disadvantagesof forming an LLP as the vehicle for the social enterprise project, are the same as for forminga limited company (compliance requirements; accounts open to inspection at CompaniesHouse) and as such, the focus here is on the disadvantages of forming an LLP as comparedwith a limited company, which are as follows:-

• the members of an LLP do not have a readily transferable stake in the company17 (i.e.shares) which may not be as attractive to corporate entities involved in a joint venture; thiswill really depend upon whether or not the bodies involved in the consortium want to havea transferable investment, or not

• although the members of an LLP can choose to form a board (regulated by the LLPagreement) thereby creating a situation similar to that of a limited company; it is, however,the members of the LLP which retain ultimate responsibility for the acts/omissions of theLLP

• where a limited company is used as the vehicle for the project, depending upon theunderlying aims and objectives of the project, the company can be registered as either acharity or a community interest company (further details are given in Chapters 7 and 8)

16 Depending upon the parties involved this may or may not be an advantage; if the corporate social enterprisevehicle is a charitable company, then it will not be taxed on its profits; if the corporate vehicle cannot benefit fromcharitable status and an LLP is formed, if the parties to the LLP are charities, then they will not be taxed on any profits (provided that profits fall within section 505 of the Income and Corporation Taxes Act 1988 (which relatesto exemptions from tax for charitable companies).

17 Strictly speaking the LLP Agreement can make provision for the transfer of the members’ capital stake in the LLPalthough this type of transfer will most likely be more complex than for a transfer of shares, and partial transferscan be less easy to make provision for.

29CHAPTER 7 - SEEKING CHARITABLE STATUS

CHAPTER 7 SEEKING CHARITABLE STATUS

Where the decision has been taken to make use of a limited company as the vehicle for thesocial enterprise project, it may be possible (depending upon the underlying aims andobjectives of the social enterprise), to apply for charitable status in respect of the company.

In reaching a decision on whether or not to pursue charitable status, it is important thatconsideration should be given to both the advantages and disadvantages of charitable status,such that an informed decision can be made. Careful consideration should be given to thefollowing issues, in determining whether or not to apply for charitable status:

• Are the core objectives of the proposed social enterprise company ones which are likely tobe regarded as charitable?

• Is it clear that the “public benefit” test will be met in relation to the proposed company’sactivities?

• Where membership of the company is to include bodies which are non-charities, will theprohibition on payment of dividends to members (and, similarly, the paying-out tomembers of any surplus on a winding-up) be acceptable? It should be noted that whereall of the parties to the social enterprise consortium are themselves charities, there will bea possibility of these parties receiving from the company a payment, in lieu of dividends.18

• Is the proposed social enterprise company likely to become involved in trading activitieswhich fall outwith the charities tax exemption?

A detailed analysis of the above questions is outwith the scope of this guidance; referenceshould be made to module 5 of the SCVO Guide to Constitutions and Charitable Status, fora detailed discussion of the advantages and disadvantages of charitable status.

18 Although dividend payments would be possible, it may not be the most tax efficient means of distributing profitsto the members; but specialist advice would be required in relation to the most appropriate payment mechanism.

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CHAPTER 8 BECOMING A COMMUNITY INTEREST COMPANY

Where the decision has been taken to make use of a limited company as the vehicle for theconsortium but the partner bodies have decided not to apply for charitable status19 , then analternative would be to apply for incorporation as a community interest company (a “CIC”).

A CIC is a type of company limited by guarantee or company limited by shares; it is not acompletely different legal entity.

In essence, a CIC is an optional variant on the usual company format that can be used if thecompany is going to be pursuing activities for the benefit of the community. The name of theCIC must end with the words “Community Interest Company” or “CIC” - so it is instantlyrecognisable.

The CIC “badge” can be useful in identifying a trading company as being directed towardscommunity benefit, rather than having the characteristics of a normal private sector business.

The key features of a CIC are as follows:

• a CIC must satisfy the “community interest test” i.e. it must carry on activities which arefor the benefit of the community (or a section of the community)

• a CIC cannot have charitable status, even if its objects are charitable

• a CIC cannot distribute profits beyond a limit (“the dividend cap”) set by regulations20

• any surplus assets remaining on the winding up of a CIC must not be paid/transferred toits members (except – in the case of a company limited by shares – to the extent of theamount paid up on the shares); the surplus assets have to be paid/transferred to other CICsor to charities21

• a CIC has to issue an annual report describing the manner in which the company’sactivities during the financial year have benefited the community

• a company can be formed as a CIC; alternatively, an existing company can convert to aCIC.

• the regulation of CICs is dealt with by “the Regulator of Community Interest Companies”(that introduces an additional step in relation to the incorporation process)

• the Regulator of CICs has various powers to intervene where there ismisconduct/management in relation to a CIC and/or there is a need to preserve publicconfidence in CICs.

19 Either on the basis that the proposed company would not be eligible for charitable status or on the basis that therestrictions imposed by charitable status (particularly as regards the distribution of profits to members) are too limiting.

20 Depending upon the provisions contained within the articles of association of a CIC, a CIC can pay dividends toasset locked bodies (which will generally be another CIC or a charity) which are specified in its articles or to otherasset locked bodies (which are not so specified) with the consent of the CIC Regulator, and such payments to asset locked bodies will not be subject to a dividend cap. Payments made to non asset locked bodies will be subject to a dividend cap, which cap consists of three elements - (a) the maximum dividend that can be paid onany given share is currently 5% above the Bank of England base lending rate; (b) the maximum aggregate dividend currently limits the total dividend declared to 35% of distributable profits; and (c) the ability to carry forward unused dividend capacity from year to year is currently limited to 5 years. The rates applicable can be varied from time to time by the Regulator after consultation and with the approval of the Secretary of State.

21 It should be noted that where the members of the company are themselves charities, then any surplus assets can,in those circumstances, be paid/transferred to such of the members as are charities.

31CHAPTER 8 - BECOMING A COMMUNITY INTEREST COMPANY

At the time when the CIC model was being developed, there were suggestions that the CICwould be the model for social enterprises. It is not and the likelihood is that the vast majorityof social enterprises will continue to use non-CIC models, particularly having regard to theadvantages associated with charitable status. Nevertheless, the CIC model does represent auseful option where charitable status is not available or where the advantages of charitablestatus are clearly outweighed by other factors.

What are the advantages of a CIC as compared with non-CIC company?

• the CIC badge may be useful in setting the company apart from a conventional private-sector trading operation

• over time, some funders/investors may come to view a CIC in a similar light to charitablecompanies, from the point of view of eligibility for grant funding

• it may represent a useful focus for socially-motivated investment ie. from partner bodieswho are prepared to accept a lower financial return on shares (but it is important to notethat there are stringent rules relating to anything which could be taken to be an offer orinvitation to the public to subscribe for shares)

• there is plenty of flexibility with regard to how a CIC can be structured – either as acompany limited by guarantee (normally the most appropriate approach where nodividends are to be paid) or as a company limited by shares (and with the ability to splitthe share capital into various classes, as required).

What are the disadvantages of a CIC over a non-CIC company?

• a CIC cannot have charitable status, and that deprives it of access to certain fundingsources which will only give support to charitable bodies (also, the tax, rates, and stampduty/sdlt reliefs that charities enjoy will not be available)

• where there is an intention to apply surpluses towards community projects which wouldfall within the charitable field, there may be a need to set up a sister charitable body towhich payments can be made under gift aid, so as to avoid unnecessary tax being paid; itmay be, however, that certain (or indeed all) of the parties to the consortium are charities,in which case such gift aid payments could be made directly to those parties

• where equity investment is required as part of the financial model, it may in fact be easierto attract interest from the private sector if a conventional company limited by shares isused, since the pool of investors who would be prepared to accept the more limitedreturns associated with a CIC is likely to be quite narrow (albeit the novel nature of a CICand the possible linkage with Corporate Resonsibility policies could be helpful).

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CHAPTER 9DEVELOPING THE OUTLINE TERMS

Once a decision has been taken as to the appropriate legal model for the social enterpriseconsortium, consideration should then be given to the detailed features to be reflected in thedocumentation giving effect to the consortium arrangements. This chapter of the guidecontains checklists in respect of the detailed information required to give effect to theconsortium under each of the models outlined in the previous chapters.

We would recommend that the parties set aside a reasonable period to conduct a fulldiscussion of these points in advance of seeking legal advice; it will ultimately help to savelegal costs if these matters have been fully discussed and decisions reached on all, or at leastmost, issues at the outset prior to commencement of detailed drafting.

Key issues for a Contractual Framework (with or without a joint steering group)

Consortium Agreement: Checklist of Points

The following is a checklist of the various detailed issues which will require to be resolved priorto drafting the consortium agreement - where the consortium is to proceed solely on the basisof a contractual framework:

• Objectives/shared purpose – The parties to the consortium agreement will, in the firstplace, require to ascertain what the shared purpose and the specific objectives of thecollaboration are. Care should be taken to clearly define the objectives of the consortiumand to try to avoid general statements, which may be subject to differing interpretations.

• Duration – The parties require to determine for how long the collaboration will last; forexample, will it relate only to a specific public sector contract, or will it be a more open-ended collaboration with a view to bidding for any number of public sector contractswithin a particular field?

• Responsibilities of the parties – The parties should make decisions as to their respectiveroles and responsibilities with regard to the consortium, which will include making adetermination as to who will be the lead party in contracts with public sector agencies(where the decision has been taken that one party will enter directly into contracts with apublic sector agency and thereafter sub-contract with the other parties for the detailedimplementation of the service obligations under the principal contract). The parties shouldalso determine any relevant service levels i.e. the standard to which each of the partiesshould perform its obligations.

• If there is to be a planned timetable (with basic milestones to be reached) then this shouldbe drawn up.

• Decision-making processes – There should also be a determination as to the appropriatedecision-making process i.e. how will decisions be taken on behalf of the consortium?What will be the relevant thresholds for decision-making (e.g. unanimity of the parties tothe consortium or majority vote)? Should the parties be able to act as agents on behalf ofthe other parties, or will specific consent be required to bind the other parties to theconsortium? What matters should require the consent of all parties (or a certain majorityof the parties) before decisions can be taken in this regard?

33CHAPTER 9 - DEVELOPING THE OUTLINE TERMS

• Point of contact – A decision should also be taken as to who should be the point ofcontact within each organisation. A further decision requires to be taken in relation to staffassociated with the consortium - will one organisation employ the staff who will carry outactivities in relation to the consortium (leaving aside for this purpose service delivery underthe sub-contracts) or will each party make use of its own staff insofar as is necessary tofulfil its specific obligations with regard to the consortium and the delivery of publicservices?

• Joint Steering Group – If use is to be made of a joint steering group, what is thecomposition of this to be? What will the specific responsibilities of the joint steering groupbe and what decision-making powers will it have? Will the joint steering group (or the leadpartner) be responsible for marketing the consortium and for making initial approaches topotential customers (i.e. public sector agencies)? What are the procedures for meetings ofthe joint steering group? What rules of procedure should govern the procedures formeetings of the parties to the consortium generally (quorum and notice requirements etc)?

• Contribution of funding and assets – A decision requires to be taken as to whether(and the extent to which) each of the parties will require to contribute any initial andongoing funding to the consortium. Decisions also require to be taken as to which of theparties will pay for the facilities utilised by the consortium (e.g. premises, IT etc). Will anyassets contributed become the joint property of the parties to the consortium or will theyremain the property of the party which contributed them? If the latter, will the otherparties have the right to make use of the assets so contributed? Who has ownership ofany intellectual property rights generated through the activities of the consortium (and inintellectual property22 which is in the ownership of the individual parties, but use of whichis made in the course of carrying out the consortium’s activities)?

• Sharing of risk – The parties should determine, at the outset, how the risk should beshared among them. If, for example, the consortium is structured (as it often is) such thatthere is a lead partner which enters into contracts with the public sector agencies (andthereafter sub-contracts with the remaining parties in respect of the detailed delivery ofpublic services), then that lead party will be exposed to the greatest amount of risk, on thebasis that any breach of the principal contract (with the public sector agency) is likely tolead to the public sector agency seeking recourse against the lead partner. The lead partnerwill, therefore, no doubt want to share the risk among the other parties to the consortium.The parties should therefore determine whether each party will be responsible only to theextent of its own default (for example, under the terms of a sub-contract), or whether theparties will have any liabilities in respect of the default of any of the other parties.

• Profit-sharing – If there is to be a lead partner, the mechanism for onward payment tothe other partners requires to be determined e.g. when will the other parties receivepayments? On what basis will profits be divided among the parties? Which parties willbear what costs e.g. management costs? Will parties simply bear their own costs? Shouldthe lead partner take a higher “cut” due to the increased risk to which it is exposed?

• Monitoring and review – A decision requires to be taken as to the appropriate reviewprocess, to ensure that the objectives of the consortium are being effectively met. Theprocess for communicating among partners, generally, has to be determined, which willnecessitate confidentiality obligations. Consideration should also be given as to what theoutcome of the review process should be, for example, if the review reveals a seriousproblem.

22 Examples of intellectual property include patents, trade marks, registered designs, copyright, database right, unregistered design right, rights in and to trade names, business names, domain names, product names and logos, databases, know-how etc.

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• Publicity – A decision requires to be taken as to how the consortium should be referredto; will the consortium, for example, have a name? Is there to be a logo? What is thedecision-making procedure in respect of publicity material?

• Admission of new parties – A decision requires to be taken as to whether new partiesshould be able to join the consortium at some point in the future and, if so, what thedecision-making process should be for admitting new members (including any conditionswhich must be met).

• Termination of the consortium – The parties should also determine in whatcircumstances the consortium will be brought to an end. Should parties to the consortiumbe able to voluntarily withdraw from the consortium? What are the grounds fromremoving a party to the consortium (e.g. breach of consortium agreement and/or any sub-contracts etc)? What are the consequences of termination? How are any assets and profitsdivided upon termination (either of the agreement as a whole, or on one party ceasing tobe a member)?

• Dispute resolution – The mechanism for resolving disputes should also be determined inadvance - this could, for example, indicate that all disputes must (in the first instance) bereferred to a joint steering group and if this is not successful, should thereafter be referredto an independent arbiter.

Key issues for a Jointly Controlled Corporate Body

The following paragraphs focus on the detailed issues which will require to be resolved priorto drafting the necessary legal documentation to give effect to the consortium - where ajointly controlled corporate entity is to be used as the vehicle for the project.

Brief consideration will also be given to decisions required to be taken in relation to theshareholders’/members’ agreement.

Company Limited by Shares: Checklist of Points

The following are the key areas on which decisions will be required in order to establish acompany limited by shares as the entity for the project:

• Name – The parties to the proposed consortium will have to think of a suitable name forthe new company. If the company is expected to be recognised as a charity, it would bepossible to omit the word “Limited” from the company name. That would not affect theprinciple of limited liability, and the only implication is that the company would have tostate clearly on its notepaper that it was a limited company.

There are certain words laid down in statutory instruments which can be used in acompany name only if their use can be justified by reference to certain criteria, or if specialclearance has been obtained.

35CHAPTER 9 - DEVELOPING THE OUTLINE TERMS

A further area to check is whether there is some other organisation in existence whichoperates under a similar name. In terms of the general legal principles, the other organisationcould, in those circumstances, raise a court action against the new organisation on thegrounds of “passing off”, i.e. on the basis that the public were being misled, through thesimilarity in the names, into thinking there was some connection between the twoorganisations. It would not be necessary in the context of an existing organisation to be ableto prove that there had been a deliberate intention on the part of the new organisation tomislead people.

From a practical point of view, the best course of action would be to check for similar namesin any directory or database listing local/national voluntary organisations and socialenterprises, and checks should also be made with the Register of Companies at CompaniesHouse, available online at www.companieshouse.gov.uk and (where the intention is to applyfor charitable status), a check should also be run on the Scottish Charity Register, as the Officeif the Scottish Charity Regulator (“OSCR”), www.oscr.org.uk

It should be noted, incidentally, that the fact that Companies House accepts a new companyname does not mean that there is no risk of an existing organisation challenging the use ofit, or of OSCR accepting the use of it. In practice, Companies House will only refuseregistration under a name which is identical, or virtually identical to the name of an existingcompany; OSCR, on the other hand, are unlikely at a practical level to register a proposedcharitable company with a name which is too similar to that of another charity and appear toadopt a more stringent test than that required by Companies House.

The provisions of the Companies Act 2006 (“the 2006 Act”) relating to company names comeinto effect from 1 October 2009, but with the exception of those provisions relating toobjections to company names and trading disclosures, which will come into effect on 1October 2008. Broadly speaking, the key changes under the 2006 Act are as follows:-

• Regulations can be made under the 2006 Act specifying what letters, symbols and so oncan be used in a company’s name;

• In terms of the list (currently applying) of words, letters etc that are to be disregarded incomparing whether a proposed and an existing name are too similar, the intention is toexpand this list under regulations to be made under the 2006 Act;

• The Secretary of State has been given the power to specify circumstances or consents sothat a name is permitted where it would otherwise be prohibited, because it is the sameas another name on the register;

• There is a new right for any person (and not just a company) to raise an objection with acompany names adjudicator if the company’s name is the same as a name associated withthe person raising the objection, in which name he/she/it has goodwill, or where the nameis sufficiently similar to such a name that it would be likely to mislead. The objection willonly be successful where it is shown that (a) the name was not adopted legitimately by thecompany; or (b) that the name was not adopted in good

• Objects – The memorandum of association should set out clearly the main objects of theproposed social enterprise company23. It is important that these are carefully drafted inorder to reflect the aims which the organisation will be pursuing in practice. If thecompany will be applying for charitable status, then the choice of terminology will belimited by the need to stay within the confines of the “charitable purposes” as defined inthe Charities and Trustee Investment (Scotland) Act 2005.

23 (But please note comments in the introductory paragraph of Appendix 1 to this guide in relation to proposed changes to the memorandum of association under the Companies Act 2006, expected to be effective as from 1October 2009).

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• As a general principle, and irrespective of whether charitable status has been pursued, theobjects clause has two main aspects. It guides future boards of directors in relation to therange of activities which the company should pursue and identifies for those dealing withthe company what the company is set up to do. This could include people consideringwhether or not to apply for shares in the company and, importantly, bodies which areconsidering whether to provide funding and other financial assistance (such as banks) andadditionally public sector bodies looking to contract with the company.

• Share capital – A decision requires to be taken as to the level of the company’s authorisedshare capital. The authorised share capital of the company is the amount of capital thatthe company is authorised by its shareholders to issue. The memorandum of associationwill require to state the amount of authorised share capital together with the number andnominal value of the shares into which it is divided. It is normal in the context of socialenterprise companies limited by shares for the authorised share capital to be set at £100.The parties will also have to make a decision as to how many shares each party to theconsortium will take on incorporation of the company and the shares will be divided intoclasses accordingly (for example, A ordinary shares of £1 each, B ordinary shares of £1each and C ordinary shares of £1 each) as a mechanism for referring to each partythroughout the articles of association. The nominal value of each ordinary share in thecompany will normally be set at a level of £1 24 .

• Capital – A decision will require to be taken by the parties to the consortium as to howto deal with any return of the assets remaining on the winding-up of the company. Themost common means of dealing with this is to say that any assets of the companyremaining after the payment of its liabilities (on liquidation) shall be distributed among theparties in proportion to the number of shares held by them.

• Voting – The parties require to decide whether the different classes of shares (where eachclass is held by a separate shareholder) should have different voting rights attached tothem, or whether each share should carry with it one vote.

• Further issue of shares – The parties are required to decide what the mechanism will bein relation to further issues of shares in the capital of the company; for example, will thisrequire the consent of the existing shareholders and what will the threshold be forconsent? Will consent only be required in respect of the issue of shares to third parties,or will it also be required in respect of a further issue of shares to existing shareholders?Where there is to be a further issue of shares, must these first be offered to the existingshareholders in proportion to their existing shareholdings?

• Transfer of shares – The parties will require to decide what the appropriate procedureswill be in relation to the transfer of shares by existing shareholders in the company. It willnormally be the case that the parties will want to set some sort of restriction in respect ofthe transfer of shares, such that a degree of control can be retained over who may holdshares in the company; and, therefore, who will be the members of the consortiumarrangement. The types of restrictions which are normally contained in articles ofassociation in this context are as follows:

24 Please note that with effect from 1 October 2009, the requirement to state a company’s authorised share capitalin the memorandum of association will be abolished with the result that the requirement to have an authorisedshare capital will also no longer apply. Instead, a statement of capital and initial shareholdings must be deliveredto the Registrar of Companies on an application for the registration of a company limited by shares; that statement will detail the proposed company’s aggregate share capital, the nominal value of the shares, the amount to be paid up on each share, the number of shares to be taken by each of the subscribers to the memorandum, the number and aggregate value of any class of shares and the particulars of the rights attachedto those classes. Further statements of capital must be filed with the Registrar of Companies every time an alteration of capital affects (i) the total number of shares allotted; (ii) the aggregate nominal value of those shares;(iii) the value of the individual shares which have been allotted; or (iv) the amount (if any) unpaid on those shares.

37CHAPTER 9 - DEVELOPING THE OUTLINE TERMS

- a shareholder wishing to transfer its shares must transfer the whole of its shareholding andis not able to transfer only part of its shareholding;

- any shareholder looking to transfer its shares (i.e. looking to exit the consortium) must firstoffer its shares for sale to the existing shareholders, who will be entitled to purchase theshares in proportion to their existing shareholdings (although a shareholder may beentitled to purchase such number of shares as is greater than its percentage shareholding,where the other shareholders have declined to purchase their total entitlement);

- if the existing shareholders do not agree to purchase all of the transferring shareholder’sshares, the transferring shareholder can decline to sell any of its shares to the remainingshareholders, and in that event, the transferring shareholder is then able to sell its sharesto a third party. The rationale behind this is that the existing shareholders will have beengiven ample opportunity to purchase all of the exiting shareholder’s shares such that theyare able to retain complete control over who the members to the consortium are; and if,having had that opportunity, they fail to purchase all of the exiting shareholder’s shares,then it would seem only equitable that the exiting shareholder should be able to thereaftertransfer its shares to a third party.

• General meetings – A decision should be taken by the parties to the proposedconsortium as to whether or not the company should be required to hold annual generalmeetings. Under the 2006 Act, private companies will no longer be required to hold anannual general meeting. The relevant provisions came into effect on 1 October 2007. It isentirely at the option of the parties as to whether or not the company should require tohold an annual general meeting, but if this is to be the case, then the articles of associationmust specifically state this requirement.

It should be noted, however, that the shareholders of the company (if a decision is takento dispense with the need for an annual general meeting) will continue to have a right todemand that a general meeting for the company is held when certain circumstancesprevail, i.e. where members holding 10% of the paid up share capital in the companydemand a meeting, then the directors must convene one25 .

Where the members of a company consist of a small number of corporate entities (and, inthis context, where each is likely to have an automatic right to appoint directors onto theboard), holding annual general meetings may be seen as an unnecessary additionaladministrative burden.

• Proceedings at general meetings of the shareholders – A decision requires to betaken as to the quorum for business to be conducted at general meetings. In the contextof a social enterprise consortium, it will ordinarily be the case that a representative of eachshareholder must be present in order for the quorum to be met (the representative couldbe either an authorised representative or a proxy). The parties can decide upon anyquorum, but it is likely that each party will want to ensure that no business can beconducted without one of its representatives being present. A provision will, however,quite often be included to the effect that if the quorum is not met at any adjournedmeeting, the meeting can proceed and decisions can be validly made.26

25 The threshold is lowered from 10% to 5% if more than twelve months has passed since the last meeting.

26 The rationale behind this is to prevent abuse of the quorum provisions by a minority shareholder who ensures that its authorised representative does not attend general meetings in order that business cannot be transacted.

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The provisions as to voting at general meetings of the members will have to bedetermined. In the context of a social enterprise consortium, there may be certain issueswhich are deemed to be so fundamental to the rights of each of the parties that eachshould essentially have a right of veto in respect of those issues (in other words, theunanimous consent of the shareholders will be required on any decision in respect of thoseissues). It will be for the parties to decide what these issues should be, but it will ordinarilybe issues such as:

- alterations to the memorandum and articles of association;

- any resolution to wind up the company (other than on grounds of insolvency);

- any resolution to increase or reduce the authorised or issued share capital of the company or to confer authority on the directors with regard to the issue of shares ;

- any resolution to authorise the purchase by the company of its own shares.

• Composition of the board – There are a number of issues to be considered in relationto the composition of the board of directors. They key areas are:

- what should be the maximum number of directors?

- how many directors should each shareholder (i.e. each party to the consortium) be entitled to appoint?

- will the directors be subject to annual retiral procedures or will they remain in officeuntil such time as the party which appointed the directors removes them from office by notice in writing given to the company?

- should there be any co-opted directors i.e. directors who are appointed by the boardon the basis of their having specialist skills and/or experience which are deemed to be of assistance to the board or on the basis of their having been nominated by organisations with which the company will have close links?

The maximum number of directors should be set at a level which allows for an appropriatelevel of representation for each of the shareholders, but numbers should not be set so highthat effective decision-making becomes difficult. The decision as to the maximum number ofdirectors to be appointed by each party to the consortium will probably be based upon anumber of factors, one of which will be the balance of power as among the parties to theconsortium.

27 With effect from 1 October 2009, there will no longer be the need for shareholder authority to allot shares (in the case of a private limited company with only one class of share capital), due to the abolition of authorised share capital.

39CHAPTER 9 - DEVELOPING THE OUTLINE TERMS

• Office bearers – The parties to the consortium should decide what named office bearersshould be referred to in the articles; for example chairperson, vice chairperson, treasureretc. A decision also requires to be taken as to whether the office of chairperson should beopen to any of the directors (without any conditions being attached) or whether the officeof chairperson should, for example, be held in rotation by directors appointed by each ofthe parties to the consortium. If the parties to the consortium decide that the office ofchair should not be held in rotation and should be open to any of the directors, then itmay be that the parties decide that there should be a maximum term in office for thechairperson.

• Remuneration of directors – A decision requires to be taken as to whether or not thedirectors of the company should be paid for carrying out their duties as directors. It shouldbe noted that if the company is to apply for charitable status, there are very stringentrestrictions on payment of directors by the company and only fewer than half of the boardof directors can be paid at any one time. In general, directors of charitable companies willnot be paid for fulfilling their duties as directors, but an exception is sometimes made forthe chief executive of the company where he/she sits on the board.

• Powers of directors – In the context of a social enterprise consortium, it will normally bethe case that the articles will refer to a list of reserved matters, whereby the directors tothe company cannot take any of the steps in the reserved matters list without the priorconsent of the shareholders. The parties to the consortium will therefore have to decidewhat matters the directors will have to refer back to the shareholders for approval. Inaddition, a decision will be required on what the threshold for consent will be, forexample, will the unanimous consent of the shareholders be required?

The types of matters which are generally referred back are looked at in detail in article 99of the template memorandum and articles of association contained within Appendix 1 tothis guide.

• Proceedings of directors – A decision needs to be taken by the parties as to the detailedrules governing proceedings for meetings of directors.

A decision requires to be taken as to whether the chairperson at a meeting should havethe casting vote or not.

As with general meetings, in the context of a social enterprise consortium, the quorumprovisions will normally dictate that there will require to be at least one director appointedby each of the parties present at the meeting in order for the meeting to proceed - butdepending on the balance of power among the various parties, it may be that this isdeemed to be inappropriate. As with general meetings of the shareholders, if the quorumstill is not met at an adjourned meeting, the adjourned meeting may nevertheless continueand business can be validly transacted.

A decision will also require to be taken in relation to voting by directors; for example, theparties to the consortium may want to include wording in the articles to the effect that, ifany shareholder is in breach of any of its obligations under the shareholders’ agreement,or under any contract between the company and the shareholder, or under the articles ofassociation themselves, then any director appointed by that shareholder will not beentitled to vote, or be counted in the quorum.

40

A further decision requires to be taken as to whether any or all of the directors should beentitled to appoint alternate directors. Alternate directors are the equivalent of proxies, butat board level and would have the right to attend and vote at board meetings in place ofthe director appointing him/her where that director is unable to attend. Again, based onthe balance of power, it may be that only certain categories of director (i.e., thoseappointed by a certain class of shareholder) are entitled to appoint alternate directors. Theparties to the consortium may, if they decide to allow for alternate directors, also decideto indicate in the articles that only other directors28 should be appointed as alternates, or,where this is not possible, that any other individual appointed as an alternate must beapproved by a resolution of the directors.

• Company secretary – As of 6 April 2008, it will no longer be necessary for privatecompanies to have a company secretary, but it may be that the parties to the consortiumconsider that it would still be worthwhile (from an administrative perspective) to have acompany secretary; if this is the case, then reference should specifically be made in thearticles to company secretary.

Once decisions have been reached in relation to the above matters, reference should be madeto Appendix 1, which contains template memorandum and articles of association for acompany limited by shares. This template gives an indication of the types of clauses whichwould ordinarily be contained within a company limited by shares in the current context, andan indication is given of the rationale behind certain of the key clauses. The comments on theprovisions of the template memorandum and articles make it clear whether a provision is instandard form, or whether a particular provision requires a decision to be made by the partiesto the consortium.

Company Limited by Guarantee

Certain of the comments above in relation to a company limited by shares apply equally inrelation to a company limited by guarantee, and where the parties to the consortium havedecided to use the company limited by guarantee model as the vehicle for the project,decisions will therefore have to be taken in relation to the matters outlined in the relevantparagraphs.29

One of the key differences in the company limited by guarantee model as compared with thecompany limited by shares model is that there will be no reference to shares throughout thisdocument and the parties to the consortium will be specifically named in the articles ofassociation, rather than their being referred to as classes of shareholders.

The articles of association will include qualifications for membership which will make it clearthat membership will be open only to the named parties to the consortium.

The articles will also contain provisions relating to application for membership (by namedparties to the consortium) and in respect of withdrawal from membership (which, in this case,will be effected by a written notice to the company, rather than by a transfer of shares).

28 The rationale behind this is that the board may prefer not to have individuals (not being directors) who do not have knowledge of the company etc being entitled to attend and vote at board meetings; it may, therefore, bepreferable to state that a director may only appoint another director as his/her alternate.

29 Reference should be made to the comments under the following sub-headings: Name; Objects; General Meetings; Proceedings at General Meetings; Composition of the Board; Office Bearers; Remuneration of Directors; Powers of Directors; Proceedings of Directors and Company Secretary.

41CHAPTER 9 - DEVELOPING THE OUTLINE TERMS

Shareholders’/members’ agreement

Where the decision is taken to use a separate corporate entity as the vehicle for theconsortium, in addition to drafting the memorandum and articles of association, there willnormally also be a shareholders’ or members’ agreement. This is an agreement made amongthe members of the company.

In the context of a social enterprise company, the purpose of the agreement will be toregulate the ongoing relationships among the parties to the project after completion.

The shareholders’/members’ agreement will cover many of the same issues as are containedin the articles of association, such as the appointment of directors, reserved matters for themembers, etc. It is likely to contain reference to the following matters, upon which decisionswill require to be taken:

• The object and scope of the social enterprise project in more detail than is given in theobjects clause. What will be the nature of the activities carried on by the joint venture?Will the purpose of the consortium be to carry out a one-off specific project, or will it beon a continuing basis to bid for contracts within a particular area of business? Will therebe a geographical limitation on the operations of the company?

• Details of the initial and ongoing funding to be contributed by each of the parties to theconsortium. It will therefore be important for the parties to make a decision on what theywill contribute, both at the outset and on an ongoing basis, for example, intellectualproperty rights, the secondment of staff, the provision of premises. Will the initialinvestment be in cash or in kind? Will the parties be required to contribute on an ongoingbasis? Where any assets are to be transferred by the parties, will the contribution be byway of an outright transfer, a lease or a licence for a fixed or indefinite term? Will stampduty or other tax considerations affect the method of contribution of the assets? It will alsohave to be determined whether or not any charge should be made to the company inrespect of any of these matters, for example payment in respect of premises provided

• Composition of the board and detailed management arrangements

• Staffing arrangements; for example will any of the parties second staff to the socialenterprise company or will new staff be recruited?

• Property arrangements; for example will new premises be located from which thecompany will operate, or will it be based at premises of one of the parties to theagreement? If the latter, what rent will be payable?

• The approach to borrowings

• Whether the company will operate on the basis of an approved annual business plan andthe mechanism for approval

• Reserved matters requiring the approval of the shareholders and the threshold forshareholder approval

42

• Details of the procedure for decision-making, at both member level and at board level,including whether directors will be entitled to appoint alternate directors

• How any profits will be distributed (in the case of a company limited by shares) - will it bein proportion to the shareholdings of each of the shareholders? Should there be aprohibition on the distribution of profits for a certain number of years followingincorporation of the company, thereby allowing time for it to establish itself financially?

• In the case of a company limited by shares, details of the mechanism for the transfer ofshares, which will replicate the provisions in the articles.; should shares in the company betransferable? Or should the company simply be wound up if one party wants to realise itsinvestment? Where the transfer of shares is permitted, should there be pre-emption rightsfor the other shareholders, i.e. the other shareholders should be entitled to purchase theshares prior to any third party? Should there be any restrictions on the identity of thirdparties to which shares can be transferred? What will be the method for valuing shares ona transfer? If a shareholder chooses to transfer its shares, will provision need to be put inplace for the continuing use of any assets contributed or licensed by the exiting member?

• Should the agreement contain restrictions on the parties competing with the business ofthe company?

• What will be the mechanism for resolving disputes among the parties? Will any deadlockissues be resolved by the chairperson or by reference to an external expert or arbiter?

• Default provisions - for example, the option for innocent parties to acquire a defaultingparty’s shareholding in proportion to their existing shareholdings, which provisions wouldcome into play not only where a shareholder has committed a breach of the shareholders’agreement, but any other relevant agreement - for example, a sub-contract between thecompany and that shareholder

• Are there any circumstances in which the consortium will automatically terminate, forexample on the transfer of any party’s shares? Are there any circumstances in which anyparty will be entitled to terminate the consortium arrangement, for example a materialbreach of the agreement by another party? What arrangements will apply on terminationin relation to the distribution of assets, intellectual property rights etc?

• Details of the manner in which any assets remaining on liquidation of the company will betransferred to the shareholders, for example in proportion to their existing shareholdings

• Issues of confidentiality

• Details of the terms to be contained in the main contract between the company and anypublic sector agency

• Details of the key terms to be contained within the sub-contracts between the companyand the parties to the consortium for the detailed implementation of the delivery of thepublic services under the main contract.

43CHAPTER 9 - DEVELOPING THE OUTLINE TERMS

Limited Liability Partnership (LLP)

The focus on this section has been solely on the key decisions to be taken where the jointly-controlled vehicle for the consortium is to be a limited company; there is, however, a certaindegree of overlap with the kinds of decisions which would have to be taken where an LLP isselected as the appropriate model.

Consideration of the detailed issues to be discussed in the context of establishing an LLP isoutwith the scope of this guide.

APPENDIX 1MODEL MEMORANDUM AND ARTICLES OF ASSOCIATION

What follows is a clause-by-clause commentary on the model memorandum and articles ofassociation for a social enterprise consortium, where a company limited by shares is beingutilised as the vehicle for the project. Comments are given next to each of the clauses for thepurposes of (a) explaining what the purpose of the clause is; and (b) highlighting areas wheredecisions would require to be made by the parties to the consortium as between alternativepossibilities.

It should be noted that the Companies Act 2006 (“the 2006 Act”) will have a bearing uponcertain of the provisions contained within the model memorandum and articles; the 2006 Actis coming into force in various stages, and the model memorandum and articles take accountof the changes which are scheduled to take effect during the period up to 30 September 2009.

The most radical changes affecting company constitutions take effect from 1 October 2009;in particular, there will be significant changes to the memorandum of association. A company’smemorandum of association is currently a fundamental part of a company’s constitution,outlining its purposes and the limit on members’ liability. The memorandum of association ofa company formed under the 2006 Act will only contain details of the initial subscribers andtheir agreement to form a company (and, in the case of a company limited by shares, to takethe subscribers’ shares). The memorandum of association will therefore be of importance onlyin the initial formation of a company but will not have any continuing relevance.

In respect of existing companies, with effect from 1 October 2009, provisions that are currentlycontained in the company’s memorandum of association will thereafter be treated as beingprovisions of the company’s articles.

Another point to note when reviewing the template memorandum and articles of association,is that this model contains wording which would be appropriate for a company with charitablestatus; these elements could be omitted where there is no intention of applying for charitablestatus in respect of the joint vehicle.

1

2

3

3.1

3.2

3.3

3.4

3.5

The company’s name is “[insert name]”.

The company’s registered office is to besituated in Scotland.

The company’s objects are: [insert objects,listed as (a), (b), (c) etc if appropriate]. Inpursuance of those aims (but not otherwise),the company shall have the followingpowers: -

[insert reference to main activities]

To initiate, promote, conduct, participatein, co-ordinate, monitor and/or assist(whether financially or otherwise),operations, projects, initiatives and eventsof all kinds which further any of the objectsof the company.

To provide information, advisory, support,consultancy and/or other services whichfurther any of the objects of the company.

To commission and/or conduct research,and to publish and promote the results ofsuch research.

To design, prepare, publish and/or distributeinformation packs, leaflets, books,newsletters, magazines, posters and otherpublications, audio and video recordings,multimedia products and display materials,and to create and maintain a database ordatabases.

See comments under the heading ‘Name’in paragraph 3.1.1 of Section 3 of thisGuide.

This clause is only intended to identifythe company as being a companyincorporated in Scotland as distinct fromEngland & Wales. In particular, it wouldnot be appropriate to insert the fullregistered office address here.

See comments under the heading‘Objects’ in paragraph 3.1.2 of Section3 of this Guide.

It is often useful, particularly in a casewhere the need to obtain charitablestatus limits the type of wording whichcan be used in clause 3, to set out a briefoutline in clause 3.1 of the main activitieswhich the company will be carrying onin practice.

The remainder of clause 3 sets out arange of powers which will beappropriate for most projects. Thesteering group may feel that there is noimmediate prospect of certain of thepowers being used in practice.Nevertheless, it is usually best to keepthe full set of powers rather than deleteitems from the list, in case the power isneeded at a future date. One of thepoints that should be borne in mind isthat including reference to a particularpower does not mean that the companyhas to exercise that power in practice.Indeed, it might be necessary in somecases to add in some further powers toclause 3.

With reference to the definition of“charity” given in clause 3 of thememorandum of association (after thelist of powers), please note that it isanticipated that section 1 of the CharitiesAct 2006 (which is the relevant Englishcharities legislation) will come into forceas of early 2008 and the reference to

MODEL MEMORANDUM AND ARTICLES OF ASSOCIATION

The Companies Acts 1985 to 2006

Company limited by shares

Memorandum of Association of

[insert name of company]

3.6

3.7

3.8

3.9

3.10

3.11

3.12

3.13

3.14

3.15

To liaise with European, UK, Scottish andlocal government authorities and agencies,local enterprise companies, local economicdevelopment companies, voluntary sectorbodies and others.

To carry on any other activity which may beappropriately carried on in connection with,or as ancillary to, any of the objects of thecompany.

To establish and/or participate in jointventures and to promote companies and/orother bodies whose activities may furtherone or more of the above objects or maygenerate income to support the activitiesof the company, acquire and hold shares,stocks, debentures and other interests insuch companies or other bodies, and carryout in relation to any such company whichis a subsidiary of the company, all suchfunctions as may be associated with aholding company.

To acquire and take over the whole or anypart of the undertaking and liabilities ofany person entitled to any property or rightssuitable for any of the objects of thecompany.

To purchase, take on lease, hire, take inexchange, and otherwise acquire anyproperty and rights which may beadvantageous for the purposes of theactivities of the company.

To improve, manage, enhance, develop,turn to account and otherwise deal with allor any part of the undertaking, propertyand rights of the company.

To sell, let, hire, license, give in exchangeand otherwise dispose of all or any part ofthe undertaking, property and rights of thecompany.

To lend money and give credit to any person,with or without security, and to grantguarantees and contracts of indemnity onbehalf of any person.

To borrow money and give security for thepayment of money by, or the performanceof other obligations of, the company or anyother person.

To draw, make, accept, endorse, discount,negotiate, execute and issue cheques andother negotiable or transferable instruments.

“section 96 of the Charities Act 1993”should (as from then) be amended toread “section 1 of the Charities Act2006”; the definitive date forimplementation is not yet known butthe Office of the Third Sector (part ofthe Cabinet Office) can be contacted forfurther information(www.cabinetoffice.gov.uk).

3.16

3.17

3.18

3.19

3.20

3.21

3.22

3.23

3.24

To remunerate any individual in theemployment of the company and toestablish, maintain and contribute to anypension or superannuation fund for thebenefit of, and to give or procure the givingof any donation, pension, allowance orremuneration to, and to make any paymentfor or towards the insurance of, anyindividual who is or was at any time in theemployment of the company and thespouse, widow/er, relatives and dependantsof any such individual; to establish, subsidiseand subscribe to any institution, association,club and fund which may benefit any suchperson.

To oppose or object to any application orproceedings which may prejudice thecompany’s interests.

To enter into any arrangement with anyorganisation, government or authority whichmay be advantageous for the purposes ofthe activities of the company and to obtainfrom any such organisation, governmentor authority any right, privilege orconcession.

To enter into any arrangement for co-operation or mutual assistance with anybody, whether incorporated orunincorporated.

To effect insurance against risks of all kinds.

To invest funds not immediately requiredfor the purposes of the company’s activitiesin such investments and securities (includingland in any part of the world) and that insuch manner as may from time to time beconsidered advantageous, and to disposeof and vary such investments and securities.

To establish and support any association orother unincorporated body which is a charityhaving objects altogether or in part similarto those of the company and to promoteany company or other incorporated bodywhich is a charity formed for the purposeof carrying on any activity which thecompany is authorised to carry on.

To subscribe and make contributions to orotherwise support charities, whetherincorporated or unincorporated, and tomake donations for any charitable purposeconnected with the activities of the companyor with the furtherance of its objects.

To accept subscriptions, grants, donations,gifts, legacies and endowments of all kinds,either absolutely or conditionally or in trust,for any of the objects of the company.

3.25

3.26

3.27

To take such steps (by way of personal orwritten appeals, public meetings orotherwise) as may be deemed expedientfor the purpose of procuring contributionsto the funds of the company, whether byway of subscriptions, grants, loans,donations or otherwise.

To carry out any of these objects in any partof the world as principal, agent, contractor,trustee or in any other capacity and throughan agent, contractor, sub-contractor, trusteeor any person acting in any other capacityand either alone or in conjunction withothers.

To do anything which may be incidental orconducive to the attainment of any of theobjects of the company.

And it is declared that:-

(i) in this clause, “property” meansany property, heritable or moveable,wherever situated

(ii) in this clause, and throughout thismemorandum of association,

(A) the expression “charity” shall meana body which is either a “Scottishcharity” within the meaning ofsection 13 of the Charities andTrustee Investment (Scotland) Act2005 or a “charity” within themeaning of section 96 of theCharities Act 1993, providing (ineither case) that its objects arelimited to charitable purposes;

(B) the expression “charitable purpose”shall mean a charitable purposeunder section 7 of the Charities andTrustee Investment (Scotland) Act2005, which is also regarded as acharitable purpose in relation to theapplication of sections 505 and 506of the Income and CorporationTaxes Act 1988;

(iii) any reference in this memorandum of association to a provision of any legislation shall include any statutory modificationor re-enactment of that provision in force from time to time.

4.1

4.2

4.1.1

4.1.2

4.1.3

4.1.4

4.2.1

4.2.2

4.2.3

4.2.4

4.2.5

Subject to clause 4.2:-

The income and property of the companyshall be applied solely towards promotingthe company’s objects (as set out in clause3 of this memorandum of association).

No part of the income or property of thecompany shall be paid or transferred (directlyor indirectly) to the members, whether byway of dividend, bonus or otherwise.

No director of the company shall beappointed as a paid employee of thecompany; no director shall hold any officeunder the company for which a salary orfee is payable.

No benefit (whether in money or in kind)shall be given by the company to anydirector except (i) repayment of out-of-pocket expenses or (ii) reasonable paymentin return for particular services (not beingof a management nature) actually renderedto the company.

The company shall, notwithstanding theprovisions of clause 4.1, be entitled: -

to pay interest at a rate not exceeding thecommercial rate on money lent to thecompany by any director or member of thecompany;

to pay rent at a rate not exceeding themarket rent for premises let to the companyby any director or member of the company;

to purchase assets from, or sell assets to,any director or member of the companyproviding such purchase or sale is at marketvalue;

to make any payment to a member of thecompany where such payment is made infurtherance of the company’s charitablepurposes;

to pay or transfer the whole or any part ofthe income and property of the company,whether by donation (including paymentby way of gift aid or under deed of covenant)or by way of dividend or other distribution,to any member which is a charity.

The wording here reflects the usualprinciples which would apply in thecontext of a charitable company; as such,this wording can be omitted where thereis no intention to apply for charitablestatus in respect of the consortiumcompany.

The wording here reflects the generalexception to the rule, applying incharitable companies, that (a) no part ofthe income or property of the companyshall be paid or transferred to themembers; and (b) that no director shallreceive remuneration from the company. Where there is no intention to registerthe consortium company as a charity,this wording may not be applicable andthere will not be any restriction on eitherremunerating the directors of thecompany or on the members of thecompany receiving any of the company’sincome (although if the intention is toregister the company as a CIC, there willbe limits on the amount of any dividendpayable to the members, where they arenot asset locked bodies30).

It should be noted that it is possible, inexceptional circumstances, for directorsof charitable companies to beremunerated, but only where strictconditions are adhered to. Remunerationof directors in these circumstancesnormally relates to the situation wherebycertain individuals are providing servicesto the company, not being of amanagement nature. It is, however,possible to make provision for a keyemployee (normally a project manageror equivalent) to serve as a director, butagain this must also meet therequirements of the Charities and TrusteeInvestment (Scotland) Act 2005.

30 An asset locked body will generally be either another community interest company or a charitable company i.e. a body whose constitutioncontains provisions designed to ensure that the body’s assets can only be used for certain purposes e.g. for the benefit of the community(in the case of a CIC) and for charitable purposes (in the case of a registered charity).

5

6

7.1

7.2

7.3

7.4

The liability of the members is limited.

The company’s share capital is £[100] dividedinto [ •] “A” ordinary shares of £[1] each,[•] “B” ordinary shares of £[1] each and [•]“C” ordinary shares of £[1] each.

No member, other than a member whichis a charity, shall have any entitlement toparticipate in any return of capital associatedwith the reduction of capital or in anydistribution of surplus assets on the winding-up of the company; the capital or assetsrepresenting the entitlement which amember excluded from participation byvirtue of this clause would otherwise haveenjoyed shall be distributed to or amongthe member(s) not so excluded fromparticipation.

If on a reduction of capital or on thewinding-up of the company, the effect ofclause 7.1 is to exclude all members fromparticipation in a reduction of capital or ina distribution of surplus assets, such capitalor assets shall not be paid to or distributedamong the members of the company butshall be transferred to some other charityor charities (whether incorporated orunincorporated), whose constitution restrictsthe distribution of income and assets amongmembers to an extent at least as great asdoes clause 4 of this memorandum ofassociation.

The charity or charities to which surpluscapital or assets are transferred under clause7.2 shall be determined by the members ofthe company at or before the time whenthe reduction of capital takes effect or (asthe case may be) the time of dissolution or,failing such determination, by such courtas may have or may acquire jurisdiction.

To the extent that effect cannot be givento the provisions of clauses 7.2 and 7.3,the relevant capital or assets shall be appliedto some charitable purpose or purposes.

This provision must be included andcannot be altered in any way.

It is the norm for voluntary sector offshootcompanies to be established with a sharecapital of £100 divided into 100 sharesof £1 each. It will thereafter be for thesteering group to decide how manyclasses of shares there should be. In thiscontext, the classes of shares will normallycarry with them the same rights, and thedivision of the shares into different classesis really a mechanism designed to makeit easier to refer to each shareholder (i.e.each party to the social enterpriseconsortium) and their respective rights.

If it is not the intention to apply forcharitable status in respect of theconsortium company, then it would bepossible to provide that the assets on awinding-up could be transferred to anon-charitable body, and all referencesto charities could be omitted from theseprovisions.

Clauses 7.1 to 7.4 state that where thereare any surplus assets available fordistribution (e.g. on the winding-up ofthe company), these can only bedistributed to such of the members asare charities31; the entitlement whichwould have otherwise accrued to non-charitable members will be distributedamong such of those members as arecharities. Where none of the membersare charities, the assets will not bedistributed to any of the members andwill instead be distributed to acharity/charities, or otherwise forcharitable purposes.

31 This flows from the fact that charities are only entitled to use their assets for charitable purposes.

8 Accounting records shall be kept inaccordance with all applicable statutoryrequirements and such accounting recordsshall, in particular, contain entries from dayto day of all sums of money received andexpended by the company and the mattersin respect of which such receipt andexpenditure take place and a record of theassets and liabilities of the company; suchaccounting records shall be open toinspection at all times by any director ofthe company.

WE the subscribers to this memorandumof association, wish to be formed intoa company pursuant to thismemorandum; and we agree to takethe number of shares shown oppositeour respective names.

Names and addresses of subscribers/numberof shares taken by the subscribers

1

2

3

Witness to the above signatures: Dated:

1

2

Constitution of company

The regulations contained in Table A in theschedule to the Companies (Tables A to F)Regulations 1985 as amended by theCompanies (Tables A to F) (Amendment)Regulations 1985 and further amended bythe Companies Act 1985 (ElectronicCommunications) Order 2000, theCompanies (Tables A to F) (Amendment)Regulations 2007 and the Companies(Tables A to F) (Amendment) (No. 2)Regulations 2007 (such regulations beinghereinafter referred to as “Table A”) shallbe deemed to be incorporated in thesearticles and shall apply to the company withthe exception of regulations 24, 29 to 31,37 to 98, 101, 111, 112, 113, 115, 116and 118 and any other regulation to theextent that it is inconsistent with thesearticles.

Definitions

In these articles

an “A Director” means a directorappointed in pursuance of article 74 by theA Shareholder;

an “A Share” means an “A” ordinary shareof £1 in the capital of the company;

the “A Shareholder” means the holderof the A Shares;

a “B Director” means a director appointedin pursuance of article 74 by the BShareholder;

a “B Share” means a “B” ordinary shareof £1 in the capital of the company;

the “B Shareholder” means the holder ofthe B Shares;

a “C Director” means a director appointedin pursuance of article 74 by the CShareholder;

a “C Share” means a “C” ordinary shareof £1 in the capital of the company;

the “C Shareholder” means the holder ofthe C Shares;

“the Companies Acts” means theCompanies Acts 1985 to 2006;

The effect of this article is to incorporateinto the company’s articles of association,the provisions of Table A. Table A iscontained in regulations issued underthe Companies Act 198532 and containsa model set of articles of association thatapply automatically to a private companylimited by shares, that does not adoptits own tailored articles of associationon incorporation. Generally speaking,most private companies limited by shareswill adopt articles in the form of TableA but with alterations (to suit the specificneeds of the company), as is the casehere.

It can be seen from these definitions thatthe shares in the company have beendivided into three separate categoriesof shares - the A Shares, the B Sharesand the C Shares. The division of theshares into three separate classes isreflective of the fact that, in this particularmodel, there are three parties to thesocial enterprise consortium (so in caseswhere there are more parties, therewould be more classes of shares). Thedivision of the shares into separate classes(to reflect the different parties) makes iteasier to attribute different rights to eachof the parties to the consortium, forexample, in relation to appointment ofdirectors (as noted above).

Reference is also made in the definitionsto a shareholders’ agreement to beentered into among the parties. Theshareholders’ agreement will containdetails of the following:-

• the objectives and scope of the social enterprise project (in greater detail than is outlined in the objects clause of the memorandum of association);

• details of financial and othercontributions (e.g. secondment ofstaff, premises etc) to be madeavailable by each of the parties to thesocial enterprise vehicle;

THE COMPANIES ACTS 1985 to 2006

COMPANY LIMITED BY SHARES

32 The Companies (Tables A to F) (Amendment) Regulations 2007 and the Companies (Tables A to F) (Amendment) (No. 2) Regulations 2007came into force on 1 October 2007; this statutory instrument amended amend Table A for companies incorporated on or after 1 October 2007,which amendments are necessary due to provisions of the Companies Act 2006 which came into force on 1 October 2007. Table A may haveto be further amended in April 2008 (as a result of further provisions of the Companies Act 2006 coming into force). The new model articles(replacing Table A) will come into force in October 2009.

3

4

“Fair Value” means the fair value asdetermined in accordance with articles 21and 22;

“the 1985 Act” means the Companies Act1985;

“the 2006 Act” means the Companies Act2006; any reference in these articles to aprovision of the 2006 Act shall be deemedto include a reference to any statutorymodification or re-enactment of thatprovision for the time being in force;

“the Secretary” means the secretary ofthe company or any other person appointedto perform the duties of the secretary ofthe company, including a joint, assistant ordeputy secretary;

“Shares” means ordinary shares of £1 eachin the capital of the company;

“the Shareholders” means, at any giventime, all of the parties which hold a Shareor Shares at that time; “Shareholder” shallbe construed accordingly;

“the Shareholders’ Agreement” meansthe shareholders’ agreement to be enteredinto among [insert the names of the parties]and the company.

Subject to article 2, the definitions andprinciples of interpretation contained inregulation 1 of Table A shall apply in thesearticles as they do in Table A.

Share capital

The authorised share capital of the companyas at the date of incorporation is £100,divided into [•] “A” ordinary shares of £1each, [•] “B” ordinary shares of £1 eachand [•] “C” ordinary shares of £1 each.

• details of the board structure andmanagement arrangements;

• details of how, and in whatcircumstances, any profits will bedistributed rather than being recyled;

• details relating to approval of thebusiness plan;

• details of the mechanism for thetransfer of shares, and thecircumstances in which shares can betransferred;

• deadlock and termination provisions(which may include reference to anobligatory transfer of shares, whereone of the shareholders is in defaultof its obligations under theshareholders’ agreement or underanother contract/sub-contract enteredinto pursuant to the shareholders’agreement (for example, a sub-contract between the company andone of the shareholders for theimplementation of various strands ofwork under the principal contract withthe local authority).

 

See comments in relation to clause 6 ofthe memorandum of association.

5

6

7

8

Capital

On a return of assets on liquidation orotherwise, the assets of the companyremaining after the payment of its liabilitiesshall (subject to clauses 7.1 to 7.4 of thememorandum of association) be applied indistributing such assets among theShareholders (the A Shares, the B Sharesand the C Shares ranking equally in respectof any such distribution, as if the sameconstituted one class of shares) in proportionto the number of Shares held by themrespectively.

Voting

Every Shareholder shall have one vote forevery Share which it holds.

Further issue of shares

No invitation to subscribe for shares maybe made to any individual, or to any bodywhich is not an incorporated charity (asdefined in the memorandum of association).

The provisions of section 89(1) of the 1985Act (shares to be offered to existingshareholders in proportion to shareholdings,on any proposed allotment for cash) (for solong as it is in force) or section 561(1) ofthe 2006 Act shall not apply to any allotmentby the company of equity securities.

This article states that when the companyis wound up, its assets (after paymentof the company’s liabilities) will bedistributed to the shareholders inproportion to the number of shares heldby them. If there is to be some otherbasis on which the assets are to bedivided up, then this article will requireto be amended accordingly.

The provisions of this article are subjectto clauses 7.1 to 7.4 of the memorandumof association, which means that whereany of the shareholders are not charities,then these bodies will not be entitled toparticipate in a distribution of thecompany’s assets (and their entitlementwill be divided among such of themembers as are charities or, if there arenone, will be distributed to some othercharity/charities etc). If there is nointention to apply for charitable statusin respect of the consortium company,it will not be necessary to refer to “clauses7.1 to 7.4” in this article.

This provision reflects the default positioni.e. if a party holds 45 shares, it will beentitled to 45 votes. It is, however, opento the parties to agree a different positionas regards voting, e.g. equal votesirrespective of the number of shares heldby each.

If it is not intended to apply for charitablestatus in respect of the proposedconsortium company, then this articleneed not be included.

The reason for including this provision(in the context of a charitable company)is on the basis that, under these articles,the shareholders have the right toparticipate in a distribution of the profitsand also to participate in a distributionof the assets on a winding up, and acharity’s assets etc can only be used forcharitable purposes33 (and shouldtherefore, in most cases, only betransferred to another charity).

The provisions of section 89(1) of theCompanies Act 1985 (to be replaced bysection 561(1) of the 2006 Act witheffect from 1 October 2009) arespecifically excluded from these articlesof association on the basis that this modelstates that no shares can be issued to

33 For which see the Charities and Trustee Investment (Scotland) Act 2005.

9

10

11

12

11.1

11.2

The directors shall not issue any shares inthe capital of the company (whether forcash or non-cash consideration) withoutthe prior written consent of all of theShareholders.

Alteration of class rights

Whenever the capital of the company isdivided into different classes of shares, thespecial rights attached to any class may bevaried, either whilst the company is a goingconcern or during or in contemplation of awinding-up, only with the consent in writingof the holders of all of the issued shares ofthat class.

Without prejudice to the other provisionsof these articles, the special rights attachedto each of the A Shares, the B Shares andthe C Shares shall be deemed to be varied:-

if the company takes any of the stepsspecified in article 61;

if the company’s share capital is increasedor reduced, or any of the company’s sharesare purchased, or any of the shares in thecapital of the company are subdivided,consolidated or cancelled, or any of therights attaching to any class of shares inthe capital of the company are varied.

Rights attaching to shares

The A Shares, the B Shares and the C Sharesshall constitute separate classes of sharesfor the purposes of the Act, but shall, exceptas otherwise provided in these articles, rankequally in all respects.

third parties (i.e. bodies which are notcurrently shareholders) without theconsent of all of the existing shareholders,rather than stating (as article 89(1) does)that shares can be offered to third parties,but must first be offered for sale to theexisting shareholders in accordance withthe proportion of shares already held.

As indicated above, the effect of thisprovision is that all of the parties to thesocial enterprise consortium, at the timewhen the consortium company isincorporated, require to give their consent(in writing) to any further issue of sharesin the company, whether that is to theexisting parties or to third parties. Thistherefore enables the original parties tothe consortium to retain a degree ofcontrol over future changes to thebalance of power.

The effect of this clause is that wherethere are special rights attaching to aparticular class of shares (for examplepreferential rights to dividends, specialrights in relation to appointment ofdirectors etc), which are to be varied,that this will require the consent of allof the shareholders in that particularclass.

This article states that the separate classesof shares have equal rights attaching tothem in all respects (except as otherwiseprovided for in the articles) i.e. there areno special voting rights or rights toparticipate in profits etc attaching to anyparticular class of shares (although itwould be open to the parties to makeprovision for this). As previouslyindicated, the division of the shares intoseparate classes is a mechanism to makeit easier to refer to the rights of theparticular parties to the social enterpriseconsortium.

Share certificates

Any share certificate issued by the companyshall be signed by two directors (or by onedirector and the Secretary) but it shall notbe necessary to apply any seal to thecertificate; regulation 6 of Table A shall bedeemed to be modified accordingly.

Transfer of shares

No Shareholder shall be entitled to transfershares of any class to another party exceptas permitted by and in accordance witharticles 18 to 34 (pre-emption rights) (andsubject always to the restrictions containedin article 17 below); and the directors shalldecline to register any transfer that (a) isnot permitted under the provisions of thesearticles or (b) relates to shares over whichthe company has a lien.

Reference in article 14 to disposing of ashare shall include (a) selling or transferringtitle to or beneficial ownership of any shareor otherwise disposing of any interest in orright attaching to any share, or renouncingor assigning any right to receive or subscribefor any share, or creating or permitting tosubsist any charge, lien, encumbrance ortrust over any share; or entering into anyagreement (or issuing any undertaking) totake any of the preceding steps and (b) anytransmission of a share on liquidation,receivership or administration.

Whenever an A Share, a B Share or a CShare is transferred to a Shareholder holdingonly Shares of another class, each Sharewhich is so transferred shall automatically(and as at the time of completion of thetransfer) be converted into and redesignatedas a share of the same class as the Sharesthen held by that Shareholder.

Every member of a company, uponbecoming a shareholder, is entitled to acertificate for all the shares in each classwhich it holds. Regulation 6 of Table Arefers to every certificate being sealedwith the company seal, which is anunnecessary formality, hence regulation6 is deemed to be modified to excludereference to the seal.

It should be noted that this article makesreference to the Secretary, for which seethe comments given in relation to article137.

The effect of this article is to imposerestrictions on the transfer of shares byany of the existing shareholders in thecompany (i.e. by one of the parties tothe social enterprise consortium, to athird party); as such, the directors arenot allowed to register a transfer of sharesunless the transfer is specifically permittedby the articles.

This article further states that the directorsof the company cannot register a transferof shares over which the company hasa lien; this refers to a situation where theshareholder transferring the shares hasnot paid the company in respect of thoseshares. In the circumstances described,the transfer of shares cannot be registereduntil such time as the shares have beenfully paid up by the transferringshareholder.

This provision describes the situationswhich will be deemed to be a disposalof shares under article 14.

The provisions of this article are self-explanatory; the rationale behind thisrelates to the fact that the division ofshares into different classes is really ameans of identifying the differentmembers and ideally each membershould hold shares in only one class suchthat they can be identified as being thesole shareholder in that particular class.

13

14

15

16

17

18

19

20

18.1

18.2

18.3

20.1

Transfer only of whole shareholding

Except as permitted under articles 18 to 34,a Transferor (as defined in article 18 below)shall be prohibited from transferring partonly of its shareholding in the company.

Transfer notice

A Shareholder wishing to transfer its Sharesor any of them (“the Transferor”) shallgive notice in writing (a “Transfer Notice”)to the company, specifying:

the number of Shares which it holds (“theTransfer Shares”);

the price per share at which it proposes totransfer the Transfer Shares; and

the name of the third party to whom itproposes to transfer the Transfer Shares.

Advising Shareholders of receipt ofTransfer Notice

The directors shall, within 7 days after receiptof any Transfer Notice from a Transferor,send a copy of the Transfer Notice to eachof the other Shareholders.

Transfer Price

The price per Share (“the Transfer Price”)at which the other Shareholders shall beentitled to purchase the Transfer Sharesfrom the Transferor shall be:-

the proposed price per share as set out inthe Transfer Notice;

The effect of this provision is that ashareholder looking to transfer its sharesmust transfer all of its shares (and notpart only), such that it thereafter ceasesto be a member of the company.

The general effect of articles 18-34 isthat whenever one of the shareholdersin the company (i.e. one of the partiesto the consortium) wants to transfer itsshares in the company (such that it ceasesto be a member of the company andtherefore a party to the social enterpriseconsortium), it must first offer thoseshares to the remaining shareholders inthe company in proportion to theirexisting shareholdings. With regard tothe price at which those shares areoffered, it can either be the priceproposed by the transferor or (whererequested by the other shareholders),the price (representing the fair value ofthe shares) as determined by anindependent accountant.

The shares will be offered to the existingshareholders in two separate rounds ofoffers - the second offer is intended tocatch any shares which were not appliedfor in the first round, which allows foreach of the remaining shareholders toapply for any remaining shares over andabove that shareholder’s entitlement.

21

22

20.2

21.1

21.2

21.3

22.1

22.2

22.3

22.4

or, if any of the other Shareholders sorequest, by way of written notice given tothe company within 14 days after the copiesof the Transfer Notice are sent to theShareholders in pursuance of article 19;

the fair value (expressed as a price per share)as fixed by an independent firm of charteredaccountants.

The fair value of the Transfer Shares shallbe determined by a firm of independentchartered accountants (“the IndependentAccountants”) appointed by agreementamong the Shareholders, or in the absenceof such agreement, appointed on theapplication of any Shareholder by thePresident (or other senior executive replacingor deputising for the President) at the timeof the Institute of Chartered Accountantsof Scotland; the following provisions shallapply:-

the Independent Accountants shall act asexperts and not as arbiters and their writtendetermination shall (except in the case ofmanifest error) be final and binding on theparties;

the company will use all reasonableendeavours to procure that the IndependentAccountants determine the Fair Value within28 days of being requested to do so;

the costs of the Independent Accountantsshall be borne by the Transferor and thecompany in equal shares or in such othermanner as the Independent Accountantsmay otherwise direct.

The Fair Value in respect of the TransferShares shall be calculated as at the date ofthe appointment of the IndependentAccountants and shall be based upon thefollowing assumptions:

an arm’s length sale between a willingvendor and a willing purchaser;

the Transfer Shares are capable of beingtransferred without restriction;

no account is taken of the fact that theTransfer Shares constitute a minority ormajority interest by reference to the numberof Shares in issue at the time;

there will be no effect on the company orits financial performance arising out of thefact that the director or directors appointedby the holder of the Transfer Shares willcease to hold office as a director.

23

24

23.1

23.2

23.3

23.4

23.5

24.1

24.2

Offer Notice

Within seven days of agreement ordetermination of the Transfer Price pursuantto articles 20 to 22, the directors shall, bynotice in writing (an “Offer Notice”):

inform the Shareholders (including theTransferor) of the Transfer Price;

offer the Transfer Shares to the Shareholders(other than the Transferor) in proportion tothe number of Shares then held by themrespectively, stating their respectiveproportionate entitlements;

state the period (not being less than 21days) within which the offer, if not accepted,will be deemed to be declined;

state that each Shareholder may offer topurchase any number of Transfer Shares(over and above that Shareholder’sproportionate entitlement) that are offeredto but not accepted by the otherShareholders;

state that it will be an essential conditionof any contract constituted in pursuance ofthe provisions of articles 24 and 25 thatacceptances are received from the remainingShareholders in respect of all the sharescomprised in the Transferor’s whole holdingof Shares, failing which, the Transferor shallbe entitled to rescind such contracts anddecline to proceed with the sale of theTransfer Shares to the remainingShareholders.

Allocation of the Transfer Shares - First Offer Notice

After the expiry of the period for acceptanceprescribed under article 23.3 the directorsshall allocate the Transfer Shares in thefollowing manner:

to each Shareholder which has agreed topurchase shares (a “First RoundApplicant”) (a) that number of the TransferShares as corresponds with theproportionate entitlement notified to theShareholder under article 23.2 or (b) if less,such number of Transfer Shares as it mayhave applied for;

if any First Round Applicant has applied forless than its proportionate entitlement (asnotified to the Shareholder under article23.2), the excess shall (subject to article 25)be allocated to First Round Applicants whoapplied for Shares in excess of theirrespective entitlements in proportion to thenumber of excess Shares which theyrespectively applied for.

25

26

27

26.1

26.2

26.3

26.4

27.1

For the avoidance of doubt, no Shareholdershall be allocated Transfer Shares underparagraph 24.2 in excess of the numberwhich it applied for under the precedingprovisions.

Allocation of the Transfer Shares -Second Offer Notice

If on conclusion of the procedure specifiedin articles 23 to 25, the directors have notreceived acceptances from Shareholders inrespect of all of the Transfer Shares, theyshall give notice in writing (a “Second OfferNotice”) of that fact to the Shareholders(other than the Transferor); the notice shall

offer those of the Transfer Shares in respectof which acceptances have not beenreceived (“the Remaining TransferShares”) to the Shareholders (other thanthe Transferor) in proportion to the numberof Shares then held by them respectively,stating their respective proportionateentitlements (calculated in accordance witharticle 23.2);

state the period (not being less than 21days) within which the offer, if not accepted,will be deemed to be declined;

state that each Shareholder may offer topurchase any number of Remaining TransferShares (over and above that Shareholder’sproportionate entitlement) that are offeredto but not accepted by the otherShareholders;

state that it will be an essential conditionof any contract constituted in pursuance ofthe provisions of articles 27 and 28 thatacceptances are received from the remainingShareholders in respect of all the sharescomprised in the Remaining Transfer Shares,failing which, the Transferor shall be entitledto rescind such contracts and decline toproceed with the sale of the Transfer Sharesto the remaining Shareholders.

After the expiry of the period for acceptanceprescribed under article 26.2, the directorsshall allocate the Remaining Transfer Sharesin the following manner:

to each Shareholder which has agreed topurchase shares comprised in the RemainingTransfer Shares (a “Second RoundApplicant”) (a) that number of theRemaining Transfer Shares as correspondswith the proportionate entitlement notifiedto the Shareholder under article 26.1 or (b)if less, such number of the RemainingTransfer Shares as it may have applied for;

28

29

30

31

27.2 if any Second Round Applicant has appliedfor less than its proportionate entitlement(as notified to the Second Round Applicantunder article 26.2), the excess shall (subjectto article 28) be allocated to Second RoundApplicants who applied for RemainingTransfer Shares in excess of their respectiveentitlements in proportion to the numberof excess Remaining Transfer Shares whichthey respectively applied for.

For the avoidance of doubt, no Shareholdershall be allocated Remaining Transfer Sharesunder paragraph 27.2 in excess of thenumber which it applied for under article26.

Failure to secure acceptances for alltransfer shares

If on conclusion of the procedures specifiedin articles 23 to 28, the directors have notreceived acceptances from Shareholders inrespect of all of the Transfer Shares, thedirectors shall give written notice of thatfact to all of the Shareholders (includingthe Transferor); the Transferor shall in thosecircumstances be entitled, by written noticeto the company to that effect, given within14 days of the notice given by the directorsunder the preceding provisions of this article29, to rescind the contracts constituted inpursuance of the provisions of articles 23to 28 and decline to proceed with the saleof the Transfer Shares to the remainingShareholders.

Completion of the transfer of theTransfer Shares

The directors shall, immediately uponcompleting the calculations of the allocationspursuant to article 24, and (if applicable)article 27, give a written notice (“the FinalAllocation Notice”) to the Transferor andto each of the First Round Applicants andSecond Round Applicants (together referredto as “the Applicants”) of the allocationof the Transfer Shares in accordance withthose articles, specifying the number ofTransfer Shares allocated to each Applicantand the place and the time (which shall benot later than 21 days after the FinalAllocation Notice) at which each of theparties shall be bound to complete the saleand purchase of such Transfer Shares.

At the time specified in the Final AllocationNotice for completion of the sale andpurchase of the Transfer Shares, theTransferor shall be bound, on receipt ofpayment of the Transfer Price in respect ofthe Transfer Shares to be taken by eachApplicant named as transferee in respectof such Transfer Shares in the Final Allocation

If following the two rounds of offers forthe transferor’s shares, applications topurchase the shares (by the remainingshareholders) have not been made inrespect of all of the transferor’s shares,then the transferor will be entitled todecline to proceed with the sale of itsshares (and in terms of article 33, will beable to sell all of its shares to a third party- see comments in relation to article 33).

32

33

34

32.1

32.2

32.3

Notice, to transfer the relevant number ofTransfer Shares to that Applicant.

Default by the Transferor

If the Transferor defaults in transferring theTransfer Shares:

the Chair of the company, or failing him/heranother director nominated by the boardof directors for that purpose, shall bedeemed to be the duly appointed attorneyof the Transferor with full power to execute,complete and deliver in the name and onbehalf of the Transferor a transfer of therelevant Transfer Shares to each of therelevant Applicants;

the directors may receive and give a gooddischarge for the Transfer Price on behalfof the Transferor and (subject to the transferbeing duly stamped) enter the name ofeach Applicant in the Register of Membersas the holder of the relevant Transfer Shares;

the directors shall immediately pay theTransfer Price into a separate bank accountin the company’s name and if and whenthe Transferor shall deliver up its certificate(s)for the relevant Transfer Shares to thecompany (or an appropriate indemnity inrespect of lost certificates) then it shall bepaid the Transfer Price without interest andless any sums owed to the company by theTransferor pursuant to these articles orotherwise.

Sale of Transfer Shares if not all theTransfer Shares are taken up byremaining shareholders

In the circumstances described in article 29,the Transferor shall be entitled, within aperiod of six months after the date of theOffer Notice, to sell all (but not some only)of the Transfer Shares to any charity (asdefined in the memorandum of associationand whether or not a Shareholder) at anyprice which is not less than the TransferPrice (after deducting, where appropriate,the amount of any net dividend or otherdistribution to be retained by the Transferor).

The directors shall be bound to register atransfer of Shares made pursuant to anysale under article 33.

These provisions of the articles enableone of the company’s directors to signthe stock transfer form in the name ofthe transferor, where that body fails totransfer its shares in accordance with thetransfer provisions. Articles 32.2 and32.3 allow the sale to be completed.

Where acceptances to purchase (by theremaining shareholders) have not beenmade in respect of all of the transferor’sshares, then (providing that certainprocedural requirements are met), thisarticle entitles the transferor to sell all(but not some only) of its shares to anythird party (providing that the third partyis a registered charity). Where there isno intention to register the consortiumcompany as a charity, the transferor neednot be restricted to selling its shares toa third party which is a registered charity.

35

36

37

38

36.1

36.2

General meetings

All general meetings other than annualgeneral meetings are to be calledextraordinary general meetings.

The directors must:-

convene an annual general meeting in eachyear, and on the basis that not more than15 months may elapse between the dateof one annual general meeting and the next(but subject to the qualification that thefirst annual general meeting may be heldat any time within 18 months ofincorporation);

convene an extraordinary general meetingif there is a valid requisition by theShareholders (under section 303 of the2006 Act) or a requisition by a resigningauditor (under section 392A of the 1985Act (for so long as it is in force) or section518 of the 2006 Act.

Subject to the preceding article, the directorsmay convene general meetings wheneverthey think fit.

Notice of general meetings

At least 14 clear days’ notice must be givento all the members and directors of (a) anannual general meeting or (b) anextraordinary general meeting.

The provisions of this article are instandard terms. It should be noted,however, that as from 1 October 2007,it is no longer mandatory for privatecompanies to hold AGMs. A decisionwill require to be taken by the parties tothe social enterprise consortium as towhether or not it is desirable to holdAGMs; if not, the articles shouldspecifically state this fact and variousother consequential amendments shouldbe made.34 It may be that in the contextof social enterprise companies comprisedof a small number of corporate members(all of whom have automatic rights torepresentation on the board), that anAGM is not deemed to be necessary.

This provision should be deleted if theparties to the social enterprise consortiumdecide to dispense with holding AGMs.

The members of the company can requirethe directors to convene a generalmeeting. In order for the request by themembers to be valid, it must be madeby members representing at least 10%of the paid up share capital of thecompany (where those shares have votingrights attached); the relevant percentageis reduced to 5% where more than 12months have elapsed since the end ofthe last general meeting (a) requisitionedby the members under the 2006 Act; or(b) in relation to which any members ofthe company had (under the company’sarticles or otherwise) rights with respectto the circulation of a resolution no lessextensive than they would have had ifthe meeting had been called at theirrequest.

This wording is standard.

With effect from 1 October 2007, thestatutory notice period for calling allgeneral meetings (including annualgeneral meetings and extraordinarygeneral meetings at which a specialresolution is to be proposed) has beenreduced from 21 days to 14 days;however, the articles can make provision

34 For example, those articles which refer to the AGM as the point of reference (in terms of when directors and office bearers are due to retire)could instead refer to some other reference point, such as the accounting reference date of the company or the anniversary of the date of incorporation.

39

40

41

42

42.1

42.2

42.3

The reference to “clear days” in article 38shall be taken to mean that, in calculatingthe period of notice, the day after the noticeis posted (or, in the case of a noticecontained in an electronic communication,the day after the time when it was sent)and also the day of the meeting, should beexcluded.

A notice calling a meeting shall specify thetime, date and place of the meeting; it shall(a) indicate the general nature of anybusiness to be dealt with at the meeting(b) if a special resolution (see article 43), (ora resolution requiring special notice underthe Companies Acts) is to be proposed,shall also state that fact, giving the exactterms of the resolution and (c) contain astatement informing members of their rightto appoint a proxy in respect of each sharewhich it holds.

A notice convening an annual generalmeeting shall specify that the meeting is tobe an annual general meeting.

Notice of every general meeting shall begiven:-

in hard copy form;

(where the individual or body towhom/which notice is given has notifiedthe company of an address to be used forthe purpose of electronic communications)in electronic form; or

(subject to the company notifying membersof the presence of the notice on the website,and complying with the other requirementsof section 309 of the 2006 Act) by meansof a website.

for a longer notice period (but not ashorter period), if this is deemed to bedesirable. If the intention is that annualgeneral meetings should not be held,the provisions of this article will requireto be revised accordingly.

The provisions of this article are standard.

The provisions of this article are standard. They reflect the statutory provisions(including the statutory right of eachmember of a company to appoint a proxyto vote in his/her/its place at generalmeetings) and therefore cannot be varied.

This article will not be necessary wherea decision has been taken to dispensewith annual general meetings.

In order to notify the members of thecompany of a general meeting by wayof a notice on the company’s website,the notification must:-

(a) state that it concerns a notice of acompany meeting;

(b) specify the place, date and time ofthe meeting;

(c) be available on the website throughoutthe period beginning with the date ofthat notification and ending with theconclusion of the meeting.

It should be noted that it is not enoughmerely to put a notice on the company’swebsite; the members of the companymust actually be notified that the noticeis on the website.

43

44

45

46

47

44.1

44.2

44.3

Special resolutions and ordinaryresolutions

For the purposes of these articles (but subjectto the provisions of articles 56 to 59), a“special resolution” means a resolutionpassed by 75% or more of the votes caston the resolution at a general meeting,providing proper notice of the meeting andof the intention to propose the resolutionhas been given in accordance with articles38 to 42; for the avoidance of doubt, thereference to a 75% majority relates only tothe number of votes cast in favour of theresolution as compared with the numberof votes cast against the resolution, andaccordingly no account shall be taken ofabstentions or Shareholders absent fromthe meeting.

In addition to the matters expressly referredto elsewhere in these articles, the provisionsof the Companies Acts allow the company,by special resolution:

to alter its name;

(subject to the provisions of the CompaniesActs) to alter its memorandum of associationwith respect to the company’s objects;

to alter any provision of these articles oradopt new articles of association.

For the purposes of these articles (but subjectto the provisions of articles 56 to 59), an“ordinary resolution” means a resolutionpassed by majority vote (taking accountonly of those votes cast in favour ascompared with those votes cast against) ata general meeting, providing proper noticeof the meeting has been given in accordancewith articles 38 to 42.

Proceedings at general meetings

No business shall be transacted at anygeneral meeting unless a quorum is present;a quorum shall be deemed to be constitutedonly where at least one A Shareholder, oneB Shareholder and one C Shareholder arepresent (in each case via their authorisedrepresentatives or represented by proxy) atthe meeting.

If the quorum required under article 46 isnot present within half an hour after thetime appointed for the meeting, or if duringa meeting such a quorum ceases to bepresent, the meeting shall stand adjournedto such time and place as may be fixed bythe chairperson of the meeting; if at theadjourned meeting, the quorum requiredunder article 46 is not present within half

The definition of a special resolutionreflects the relevant statutory provisionsand cannot be varied; it would not bepossible, therefore, to specify apercentage other than 75%.

In the context of a social enterpriseconsortium, it will be the norm to statethat for a quorum to be met, there mustbe a representative of each of theshareholders present, in order that eachof the parties to the consortium isrepresented and that decisions cannotbe taken without each having had theopportunity to vote.

It would be possible to include a provisionwhich indicates that if, at an adjournedmeeting, the quorum provisions are stillnot met (on the basis that there is not arepresentative of each shareholderpresent) that the adjourned meeting willnonetheless proceed and decisions canbe validly taken; the rationale behind theinclusion of such a clause would be

48

49

50

51

52

53

an hour after the time appointed for theadjourned meeting, the adjourned meetingshall be dissolved.

The Chair shall (if present and willing toact) preside as chairperson of the meeting;if the Chair is not present and willing to actas chairperson of the meeting within halfan hour of the time appointed for holdingthe meeting, the directors present shall electone of their number to act as chairpersonof the meeting or, if there is only one directorpresent and willing to act, he/she shall bechairperson of the meeting; if no directorsare present or no director present is willingto act as chairperson of the meeting, thechairperson of the meeting shall be electedby the Shareholders present at the meeting.

A director shall, notwithstanding that he/sheis not a Shareholder, be entitled to attendand speak at any general meeting.

The chairperson of the meeting may, withthe consent of the meeting at which aquorum is present (and must, if the meetingrequests him/her to do so), adjourn themeeting but not for a period in excess ofthirty days; no notice need be given of anadjourned meeting.

All resolutions put to the vote of a meetingshall be decided on a show of hands unlessbefore, or on the declaration of the resultof, the show of hands, a poll is dulydemanded; on a show of hands, votes maybe given via the Shareholders’ authorisedrepresentatives present at the meeting orby proxy.

A poll may be demanded by the chairpersonor by any Shareholder; a demand by aperson as proxy for a Shareholder shall bedeemed to be a demand by the Shareholder.

Unless a poll is duly demanded, a declarationby the chairperson that a resolution hasbeen passed or passed unanimously or bya particular majority or lost, or not passedby a particular majority, and an entry tothat effect in the minutes of the meeting,shall be conclusive evidence of the factwithout proof of the number or proportionof the votes recorded in favour of or againstthe resolution.

A poll is a procedure used at a generalmeeting of a company whereby everyshareholder present (via its authorisedrepresentative(s)) or represented by proxyhas one vote for every ordinary shareheld.

A proxy has the same right to demanda poll as the shareholder which appointedthe proxy.

The articles can exclude the right todemand a poll in relation to adjourninga meeting (or in relation to election of achair for the meeting35, where this isdone in general meeting), but in no othercircumstances.

35 Where the individual holding the office of Chair is not present at the meeting and another director has to be appointed as chair of that particular meeting

54

55

56

57

57.1

57.2

The demand for a poll may, before the pollis taken, be withdrawn, but only with theconsent of the chairperson; and a demandso withdrawn shall not be taken to haveinvalidated the result of a show of handsdeclared before the demand was made.

If a poll is demanded in accordance witharticle 52, it shall be taken at once by meansof a secret ballot of all the Shareholderspresent (via their duly authorisedrepresentatives), or represented by proxy,at the meeting, conducted in such manneras the chairperson may direct; the result ofsuch poll shall be declared at the meetingat which the poll was demanded.

Written resolutions

A written resolution can be passed by themembers of the company (having beenproposed by either the members or thedirectors in accordance with the proceduresdetailed in Chapter 2 of Part 13 of the 2006Act) and will have effect as if passed by themembers of the company in generalmeeting; a written resolution is passed whenthe required majority of eligible membershave signified their agreement to it bysending to the company (in hard copy orelectronic form) an authenticated documentwhich identifies the resolution to which itrelates and which indicates the member’sagreement to it (which agreement cannotthereafter be revoked).

For the purposes of the preceding article:-

the reference to “eligible members” is tothose members who would have beenentitled to vote on the resolution on thecirculation date of the resolution (which iseither (a) the date on which copies of thewritten resolution are sent or submitted tothe members in accordance with theprocedures detailed in Chapter 2 of Part 13of the 2006 Act; or (b) if copies are sent orsubmitted to members on different days,the first of those dates);

the reference to “required majority” is tothe majority required to pass an ordinaryor a special resolution under the CompaniesActs, as follows:-

57.2.1 in order to pass an ordinary resolution by way of written resolution, it must be passed (in accordance with article 56) by members representing a simple majority of the total voting rights of eligible members;

57.2.2 in order to pass a special resolutionby way of written resolution, it must

These provisions reflect the new statutoryprocedure for passing written resolutionsunder the Companies Act 2006.

The procedure to be followed is fairlydetailed - but broadly speaking, themembers of a company can pass virtuallyany resolution (but with exceptions forresolutions to remove directors or theauditors) by written resolution.

In order for a written resolution to bepassed, it will require to meet thethreshold for approval which would applyif the resolution were passed at a generalmeeting, i.e. where an ordinary resolutionis to be passed by way of a writtenresolution, this will require the approvalof a simple majority; and likewise, anyresolution in writing deemed to be aspecial resolution will require 75%approval (also, the resolution must specifythat it is to be a special resolution).

The company will have an obligation tosend a copy of the proposed writtenresolution to every eligible member. Therequisite proportion of the members ofthe company must indicate theiragreement to the resolution within a setperiod. The period for indicatingagreement can be set out in the articlesof association of the company. However,where the articles are silent, a statutoryminimum of 28 days will apply.

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59

60

61

61.1

61.2

61.3

be passed (in accordance with article56) by members representing not less than 75% of the total voting rights of eligible members and theresolution must specifically state that it was proposed as a special resolution.

For the avoidance of doubt, a resolution toremove a director (under section 168 of the2006 Act) or a resolution to remove anauditor (under section 391 of the 1985 Act(for so long as it is in force) or section 510of the 2006 Act) cannot be proposed as awritten resolution under article 56.

For the purposes of article 56, a proposedwritten resolution will lapse if it is not passedbefore the end of a period of 28 daysbeginning with the circulation date (asdefined in article 57), and the agreementof any member to a written resolution willbe ineffective if signified after the expiry ofthat period.

Voting

If any resolution of the nature referred toin article 61 is proposed either at any generalmeeting, or by of a written resolution, anyShareholder, if voting against that resolution,shall, in relation to that resolution, be entitledto cast that number of votes (in aggregate)which exceeds by one the total number ofvotes that may be cast by (a) all the otherShareholders voting on that resolution at ageneral meeting; or (b) all the otherShareholders entitled to vote on thatresolution, where it is proposed as a writtenresolution; the preceding provisions of thisarticle shall also apply in relation to anyalteration (the adoption of additional orsubstitute provisions being deemed for thispurpose to constitute an alteration) to thememorandum or articles of associationwhich would exclude or modify theoperation of this article 60.

The provisions of article 60 shall apply inrelation to:

any alteration to the provisions of thememorandum of association of thecompany with respect to the objects of thecompany;

any alteration to the articles of association(the adoption of additional or substituteprovisions being deemed for this purposeto constitute an alteration);

any resolution for the winding up of thecompany (other than on the grounds ofinsolvency of the company);

The effect of the provisions of this articleis to ensure that the unanimous consentof the shareholders is required in respectof certain issues which are deemed tobe fundamental to the interests of eachof the members - for example, changesto the constitution, a resolution to conferon the directors the authority to issueshares (which could result in the balanceof power being altered), a resolution towind up the company etc. The list ofmatters is not exhaustive; it is, however,representative of the types of matterswhich would most commonly be seenas appropriate for involving the consentof all of the shareholders.

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any resolution to increase orreduce the authorised or issued share capitalof the company or to confer authority onthe directors with regard to the issue ofshares;

any resolution to authorise the purchase bythe company of its own shares;

any resolution authorising the directorsto issue any shares or any instrumentcarrying a right of conversion into shares,or to grant any options in relation to theshare capital of the company;to take any steps directed towards thewinding-up of the company or to do anyact or thing the effect of which could resultin the winding-up of the company.

No A Shareholder shall be entitled to votein relation to the appointment or removalof a B Director or C Director.

No B Shareholder shall be entitled to votein relation to the appointment or removalof an A Director or a C Director.

No C Shareholder shall be entitled to votein relation to the appointment or removalof an A Director or B Director.

Subject to articles 60 to 64, eachShareholder shall (whether on a show ofhands or on a poll) have one vote for eachShare which it holds.

Any Shareholder which wishes to appointa proxy to vote on its behalf at any meeting(or adjourned meeting):

shall lodge with the company, at thecompany’s registered office, a writteninstrument of proxy (in such form as thedirectors require), signed by one of itsappropriate officers; or

These provisions are designed to ensurethat each party to the social enterpriseconsortium (which is defined by referenceto a particular class of shares) has theright to appoint directors onto the board,with the remaining shareholders nothaving a say (as regards eitherappointment or removal) in relation tothe individuals appointed by thatparticular shareholder.

There is a statutory 48 hour cut-off pointfor members to lodge written instrumentsof proxy with the company; the 48 hourperiod is calculated using working days,such that no account will be taken ofbank holidays and weekends. The articlescan however, indicate that a simple 48hour period will apply (i.e. taking accountof holidays/weekends) or can set a shorterperiod (i.e. the cut-off point is closer tothe meeting), but cannot set a date forreceipt of the form of proxy whichrequires longer notice than under thestatutory provisions.

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shall send by electronic means to thecompany, at such electronic address as mayhave been notified to the Shareholders bythe company for that purpose, aninstrument of proxy (in such form as thedirectors require).

providing (in either case) the instrument ofproxy is received by the company at therelevant address not less than 48 hoursbefore the time for holding the meeting (oras the case may be, adjourned meeting);for the avoidance of doubt, in calculatingthe 48-hour period referred to in thepreceding provisions of this article 66, noaccount shall be taken of any part of a daythat is not a working day.

An instrument of proxy which does notconform with the provisions of article 66,or which is not lodged or sent in accordancewith such provisions, shall be invalid.

A proxy appointed to attend and vote atany meeting instead of a Shareholder shallhave the same right as the Shareholderwhich appointed him/her to speak at themeeting and need not be a Shareholder.

A Shareholder may authorise an individualor individuals to act as its representative orrepresentatives at any general meeting ofthe company on the basis that: -where a Shareholder has authorised onlyone individual to act as its representative,he/she shall be entitled to exercise the samepowers on behalf of the Shareholder whichhe/she represents as that corporate bodycould exercise it were an individualShareholder;

where a Shareholder has authorised morethan one individual to act as itsrepresentatives, any one of the individualsso authorised shall be entitled to exercisethe same powers on behalf of theShareholder which he/she represents as thatcorporate body could exercise if it were anindividual Shareholder.

A vote given, or poll demanded, either bya duly authorised representative of aShareholder or by a proxy shall be validnotwithstanding that the authority of theperson voting or demanding a poll hadterminated prior to the giving of such voteor demanding of such poll, unless noticeof such termination was received by thecompany at the company’s registered office(or, where contained in an electroniccommunication, was received by thecompany at the address notified by thecompany to the Shareholders for thepurpose of electronic communications)

This reflects the position under statuteand cannot be varied.

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before the commencement of the meetingor adjourned meeting at which the votewas given or the poll demanded.

No objection may be raised as to the validityof any vote except at the meeting at whichthe vote objected to is tendered, and everyvote not disallowed at the meeting shall bevalid; any such objection shall be referredto the chairperson of the meeting, whosedecision shall be final and conclusive.

Maximum number of Directors

The maximum number of directors shall be[insert maximum number of directors].

Eligibility

An individual shall not be eligible forappointment as a director if he/she is anemployee of the company.

Appointment, vacating of office, re-appointment of directors

Subject to articles 72, 73 and 76, the AShareholder, the B Shareholder and the CShareholder may each, by notice in writing,duly signed on its behalf by an appropriateofficer of that body and given to thecompany:

The maximum number of directors shouldbe set at a level which allows for anappropriate level of representation asbetween the different shareholders. Inthe context of a social enterpriseconsortium, it would be normal for eachof the shareholders to have an automaticright to appoint individuals onto theboard of directors, but the decision asto how many each should appoint willdepend upon the balance of power tobe reflected.36 The maximum numbershould not be set so high that effectivedecision-making becomes difficult. Thekey is to ensure that each of the keystakeholders has an appropriate level ofrepresentation at board level.

It would be usual in the context of aconsortium company that employees ofthe company would be de-barred fromserving on the board. In addition, whereit is the intention to apply for charitablestatus in respect of the company, OSCRwould prefer that, as a general rule,employees should not be eligible forappointment as directors (with anexception being made for a key employeesuch as a project manager, who wouldbecome an executive director). Thecharities legislation does not strictlyspeaking prohibit employee directors,but there are restrictions on this - forexample, fewer than half the boardwould be eligible to receive remuneration.

This article describes the mechanism bywhich each class of shareholder (i.e. eachparty to the consortium) actually appointsand removes individuals as directors.Article 74.2 also allows for the fact thatthe actual body which forms a particularcategory of shareholder may change overtime such that if, for example, the partyto the consortium which is the originalA Shareholder transfers its shares to a

36 It should be noted that although the “balance of power” is normally viewed as a determining factor in deciding upon the maximumnumber of directors to be appointed by each party to the consortium, this is somewhat misleading in that each director has a duty (under theCompanies Act 2006) to promote the success of the company, i.e. he/she cannot, in acting as a director, seek to promote the interests of theparty which appointed him/her where that would provide a less than optimum outcome for the company.

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appoint any individual who is willing to actto be a director; or

remove any director who was previouslyappointed by that Shareholder or by theholder of the whole of the issued Shares ofthe same class.

Any appointment or removal of a directorunder article 74 shall have effect from thedate on which the relevant notice is givento the company.

The powers conferred by article 74 shall belimited such that:

the number of individuals appointed by theA Shareholder who may hold office asdirectors at any given time shall be [•];

the number of individuals appointed by theB Shareholder who may hold office asdirectors at any given time shall be [•];

the number of individuals appointed by theC Shareholder who may hold office asdirectors at any given time shall be [•].

At the conclusion of each annual generalmeeting, [insert number of directors toretire] of the directors shall vacate officebut shall then be eligible for re-appointmentunder article 74.

The directors to retire under article 77 shallbe as follows:

[] of the directors appointed by the AShareholder - of the [•] directors appointedby the A Shareholder, the director to retireat an annual general meeting shall be theindividual who has been longest in officesince he/she was last appointed or re-appointed (and on the basis that as betweenpersons who were last appointed/re-appointed on the same date, the questionof which of them is to retire shall bedetermined by some random method);

third party (which then becomes the AShareholder), that third party can removeany director appointed by its predecessor.

As indicated above, a decision will requireto be taken as to the number ofindividuals which each class ofshareholder (i.e. each party to theconsortium) should be entitled to appoint,bearing in mind the need to have anappropriate level of representation onbehalf of each shareholder.

There are essentially two ways of dealingwith retrial/removal of directors. It maybe that the parties to the consortiumdecide that individuals appointed asdirectors should remain in office untilsuch time as the shareholder whichappointed that individual removeshim/her from office by written notice tothe company; alternatively, the partiesto the consortium may feel that it isappropriate to have annual retiral of thedirectors. If the parties decide that itwould be preferable to have some formof annual retiral, ideally the provisionsshould be worded such that retiral of thedirectors is staggered - this will help toavoid the risk of loss of continuity throughmost/all of the board being replaced.

A decision will require to be taken as tohow many directors should retire eachyear and, within that number, what thesplit will be, as between the directorsappointed by each category ofshareholder. It should be noted thatannual retiral provisions which makereference to the AGM will not beappropriate where the parties to theconsortium elect to dispense with therequirements for holding annual generalmeetings; in such a case, it would bemore appropriate for:-

(a) the directors to be removed fromoffice by notice in writing by the categoryof shareholder appointing him/her (as isprovided for under this model (in addition

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[] of the directors appointed by the BShareholder - of the [] directors appointedby the B Shareholder, the director to retireat an annual general meeting shall be theindividual who has been longest in officesince he/she was last appointed or re-appointed (and on the basis that as betweenpersons who were last appointed/re-appointed on the same date, the questionof which of them is to retire shall bedetermined by some random method);

[] of the directors appointed by the CShareholder - of the [] directors appointedby the C Shareholder, the director to retireat an annual general meeting shall be theindividual who has been longest in officesince he/she was last appointed or re-appointed (and on the basis that as betweenpersons who were last appointed/re-appointed on the same date, the questionof which of them is to retire shall bedetermined by some random method).

Disqualification and removal of directors

A director shall vacate office if:

he/she ceases to be a director by virtue ofany provision of the Companies Acts orbecomes prohibited by law from being adirector or a charity trustee (within themeaning of the Charities and TrusteeInvestment (Scotland) Act 2005);

he/she is sequestrated;

he/she becomes incapable for medicalreasons of fulfilling the duties of his/heroffice and such incapacity has continued,or is expected to continue, for a period ofmore than six months;

he/she becomes an employee of thecompany;

he/she resigns office by notice to thecompany;

he/she is absent (without permission of thedirectors) from more than three consecutivemeetings of directors and the directorsresolve to remove him/her from office;

to the annual retiral provisions)); or

(b) a different reference date to be set - for example, reference could made tothe accounting reference date or to theanniversary of the date of incorporationof the company as being the date onwhich directors will be due to standdown.

If the parties to the consortium do notintend to apply for charitable status inrespect of the consortium company, thenreferences to the charities legislationshould be deleted from this provision.

The period of six months referred to inthis article could be adjusted to suitwhatever the parties to the consortiumfeel to be appropriate.

This provision ties in directly with article73, which indicates that employees ofthe company are not eligible to bedirectors. If the intention is to have anexecutive director (i.e. where the projectmanager or managing director or chiefexecutive of the company sits on theboard of directors), then this article wouldrequire to be amended.

The reference to “three consecutivemeetings” could be amended to reflectwhat the parties to the consortium feelto be appropriate.

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80.3

he/she is removed from office in accordancewith article 74.2;

he/she is removed from office by resolutionof the directors on the grounds that he/sheis considered to have committed a materialbreach of the code of conduct for directorsin force from time to time (as referred to inarticle 91);

he/she is removed from office by resolutionof the directors on the grounds that he/sheis considered to have been in serious orpersistent breach of his/her duties undersection 66(1) or (2) of the Charities andTrustee Investment (Scotland) Act 2005; or

he/she is removed from office by ordinaryresolution (special notice having been given)in pursuance of section 168 of the 2006Act.

A resolution under article 79.8 or 79.9 shallbe valid only if:

the director who is the subject of theresolution is given reasonable prior noticeby the directors of the grounds upon whichthe resolution for his/her removal is to beproposed;

the director concerned is given theopportunity to address the meeting ofdirectors at which the resolution is proposed,prior to the resolution being put to the vote;and

at least two thirds (to the nearest roundnumber) of the directors then in office votein favour of the resolution.

This provision refers to removal of adirector by the shareholder whichappointed him/her (i.e. by the relevantparty to the consortium which appointedthat director).

This provision refers to a code of conductfor directors in force from time to time. It is becoming more common forcompanies in this sector (especiallycharitable companies) to develop a codeof conduct which is adopted by thedirectors and under the terms of whicha director can be removed from the board(by resolution of his/her fellow directors)if he/she is deemed to be in persistentor serious breach of that code. There isno statutory requirement on companies(or even charitable companies) to havesuch a code of conduct, but it is seen tobe in line with best practice, as beingone means of ensuring good governance.

This provision refers to the duties ofcharity trustees which are outlined in theCharities and Trustee Investment(Scotland) Act 2005. This provisionshould be deleted if it is not intended toapply for charitable status in respect ofthe consortium company.

Section 168 of the 2006 Act states thatany director can be removed from officeby ordinary resolution of the membersof the company providing the variousdetailed procedures laid down in the2006 Act are followed. The proceduresinvolve (broadly speaking) giving thedirector concerned 28 days’ prior writtennotice of the intention to propose theresolution, and allowing him/her anopportunity to make representations; 14days’ notice of the intention to proposethe resolution also has to be given to themembers of the company.

The provisions of these articles dictatethe mechanism by which a director canbe removed from office by his/her fellowdirectors on the grounds of his/her beingconsidered to be in breach of a code ofconduct for directors or in serious orpersistent breach of his/her duties as acharity trustee. There is no statutoryrequirement to include this wording, butgiven that the relevant provisions of thearticles allowing the remaining directorsto remove a fellow director from officecould be open to abuse, it is seen to bemore appropriate to have an open andtransparent process by which the directorconcerned has reasonable prior noticeof the grounds for his/her removal andan opportunity to be heard in respect ofthose grounds.

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Appointments to offices

Directors shall be appointed to hold theoffice of Chair, and any other offices whichthe directors may consider appropriate.

The appointments under the precedingarticle shall be made at meetings of directors.

The office of Chair shall be held annuallyin rotation by directors appointed by the AShareholder, the B Shareholder and the CShareholder; the first Chair shall be a directorappointed by the A Shareholder, the secondChair shall be a director appointed by theB Shareholder, the third Chair shall be adirector appointed by the C Shareholder,and so on in that order of rotation.

Each office shall be held (subject to article85) until the conclusion of the annualgeneral meeting which next followsappointment.

The appointment of any director to an officeunder article 81 shall terminate if he/sheceases to be a director or if he/she resignsfrom that office by notice to the company.

If the appointment of a director to any officeunder article 83 terminates, the directorsshall appoint another director to hold the

Reference could also be made in thisarticle to a vice chair and a treasurer ifthe parties to the consortium feel thatthis would be desirable. It would alsobe possible to adopt different titles inrelation to the office bearers (for example,convenor or chairperson) rather thanchair. It should be noted, incidentally,that the secretary of a company falls intoa rather different category (for example,a secretary need not be a director of thecompany). The material dealing with theappointment of the company secretaryis contained in article 137.

In the context of a social enterpriseconsortium (whereby each of the partieswill most likely have the automatic rightto appoint directors onto the board), itmay be felt appropriate to specify thatthe position of chair will be held annuallyin rotation by the directors appointed byeach of the parties to the consortium.Alternatively, it may be felt moreimportant to ensure that the personappointed as chair is the best person forthat position and that there should beno particular restriction on who thatdirector should be. If the decision istaken that the appointment of the chairis to be left open (rather than referringto rotation of the chair), then this articleshould be deleted.

If the decision is taken to leave theappointment of the chair open (i.e. anydirector can be appointed as chairregardless of which shareholderappointed that particular director), itmight be seen to be desirable to providethat an individual who had held the officeof chair for a specified period of time(for example three successive years) couldnot be eligible for re-appointment untila further year had elapsed.

This article will require to be altered ifthe office of chair is not to be rotatedamong the directors appointed by each

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office in his/her place; if the appointmentof a director as Chair terminates (otherwisethan as a result of annual retirement underarticle 83), the director to be appointed tohold the office of Chair in his/her place forthe remaining term of the originalappointment under article 83 shall be adirector appointed by the same Shareholderwhich appointed the director whose tenureof the office of Chair has just terminated.

Directors’ interests

Subject to the provisions of the Act and tothe Charities and Trustee Investment(Scotland) Act 2005 and of clause 4 of thememorandum of association, and providedthat he/she has (a) disclosed to the directorsthe nature and extent of any personalinterest which he/she has (unless immaterial)and (b) complied with the code of conductas referred to in article 91, a director(notwithstanding his/her office):

may be a party to, or have some otherpersonal interest in, any transaction orarrangement with the company or anyassociated company;

may be a party to, or have some otherpersonal interest in, any transaction orarrangement in which the company or anyassociated company has an interest;

may be a director or secretary of, oremployed by, or have some other personalinterest in, any associated company; andshall not, because of his/her office, beaccountable to the company for any benefitwhich he/she derives from any such officeor employment or from any such transactionor arrangement or from any interest in anysuch company and no such transaction orarrangement shall be liable to be treated asvoid on the ground of any such interest orbenefit.

For the purpose of the preceding article:

an interest of which a director has noknowledge and of which it is unreasonableto expect him/her to have knowledge shallnot be treated as an interest of his/hers;

the references to “associated company”shall be interpreted as references to anysubsidiary of the company or any othercompany in which the company has a director indirect interest.

of the parties to the consortium.

Although the provisions here may seemfairly complicated, the question of conflictof interest is seen as increasinglyimportant within the social enterprisesector and it is useful to have clearguidance within the articles ofassociation. Indeed, as a matter of bestpractice, the board should develop amore detailed set of conflict of interestrules (to be incorporated within the codeof conduct) once the company is up andrunning.

The provisions of these articles reflectthe fact that, realistically, the directorswill find themselves in situations wherethey will have some form of personalinterest; these articles are designed toensure that where such an interest doesarise, appropriate mechanisms are inplace to ensure that the remainingdirectors are aware of any such personalinterest. These provisions also displacecertain common law provisions regardingdirectors deriving personal benefits; forexample, if the provisions of article 87.3were not included, a director could berequired (under general common lawprinciples) to pay over to the companyany financial benefit which he/she derivesfrom the arrangements described in thatprovision.

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Conduct of directors

It is the duty of each director of the companyto take decisions (and exercise his/her otherpowers and responsibilities as a director) insuch a way as he/she considers, in goodfaith, would be most likely to promote thesuccess of the company, and is in theinterests of the company, and irrespectiveof any office, post, engagement or otherconnection which he/she may have withany other body which may have an interestin the matter in question.

Without prejudice to the principle set outin article 89, each of the directors shall havea duty, in exercising functions as a charitytrustee, to act in the interests of thecompany; and, in particular, must:

seek, in good faith, to ensure that thecompany acts in a manner which is inaccordance with its purposes;

act with the care and diligence which it isreasonable to expect of a person who ismanaging the affairs of another person;in circumstances giving rise to the possibilityof a conflict of interest between thecompany and any party responsible for theappointment of that director:

90.3.1 put the interests of the company before that of the other party;

90.3.2 where any other duty prevents him/her from doing so, disclose theconflicting interest to the companyand refrain from participating in anydeliberation or decision of the other

The 2006 Act contains a statutorystatement of seven general duties ofdirectors, which came into effect as of1 October 2007 (with the exception ofthe conflict of interest duties, which comeinto force with effect from 1 October2008). The statement of duties includesthe duty to promote the success of thecompany for the benefit of its membersas a whole (in the context of a charitablecompany, the duty is to promote thesuccess of the company with a view toachieving its charitable purposes). Theduty to promote the success of thecompany replaces the previous commonlaw duty to act in the best interests ofthe company, and although the exactinterpretation of this duty has not yetbeen tested, by its very wording itsuggests that a more proactive (andpotentially onerous) duty is involved thanpreviously. In fulfilling this duty, directorsmust have regard to a list of prescribedfactors (which list is non-exhaustive).There have been concerns that this newduty could lead to a compliance drivenapproach (i.e. a ticking the box approach)to the exercise of director’s duties, ratherthan one based on making good faithjudgements; however, the governmenthas made clear that the new provisionis not intended to impose additionalbureaucratic burdens on companies, andis intended to reflect what is alreadywidely regarded as good practice.

The provisions of this article replicate thewording in relation to duties of charitytrustees contained within the Charitiesand Trustee Investment (Scotland) Act2005. It can be seen, when this list ofduties is compared with the statutorystatement of duties for companydirectors, that some of the standardsimposed on directors of charities arehigher than those applicable to directorsof non-charities; for example, a directorof a charitable company is subject to ahigher standard of care, namely the careand diligence which it would bereasonable to expect of a person who ismanaging the affairs of another person.Where it is not intended to apply forcharitable status in respect of theconsortium company, these provisionsshould not be included within the articles.

37 The prescribed factors are (a) the likely consequences of any decision in the long term; (b) the interests of the company’s employees; (c)the need to foster the company’s business relationships with suppliers, customers and others; (d) the impact of the company’s operations onthe community and the environment; (e) the desirability of the company maintaining a reputation for high standards of business conduct;and (f) the need to act fairly as between the members of the company.

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directors with regard to the matterin question;

ensure that the company complies with anydirection, requirement, notice or dutyimposed under or by virtue of the Charitiesand Trustee Investment (Scotland) Act 2005.

Each of the directors shall comply with thecode of conduct (incorporating detailedrules on conflict of interest) prescribed bythe board of directors from time to time;for the avoidance of doubt, the code ofconduct shall be supplemental to theprovisions relating to the conduct of directorscontained in these articles of association,and the relevant provisions of these articlesshall be interpreted and applied inaccordance with the provisions of the codeof conduct in force from time to time.

Directors’ remuneration and expenses

No director may serve as an employee ofthe company, and no director may be givenany remuneration by the company forcarrying out his/her duties as a director oras Chair or as the holder of any other officeunder article 81.

The directors may be paid all travelling andother expenses properly incurred by themin connection with their attendance atmeetings of directors, general meetings,meetings of committees of directors orotherwise in connection with the carrying-out of their duties.

Powers of Directors

Subject to the provisions of the CompaniesActs, the memorandum of association andthese articles and to any directions given byspecial resolution, the business of thecompany shall be managed by the directorswho may exercise all the powers of thecompany.

As highlighted above, it is becomingmore common within the social enterpriseand voluntary sector to include referenceto a code of conduct within the articlesof association and this is especially so inrelation to charitable companies. Thereis no statutory requirement to includereference to the code of conduct, but itis seen as showing a commitment to bestpractice in governance.

This article will require to be amendedwhere it is intended to have, for example,the chief executive or project managerserving on the board of directors.

The reference to directions given byspecial resolution reflects the principlethat the members of a company may, ifthey feel particularly strongly about anissue, requisition a general meeting anddirect the board to take a particularaction, or refrain from implementing aparticular proposal. This is, of course, apower which is only very rarely exercised. One possibility which the parties to theconsortium might want to consider isallowing such direction to be given byway of ordinary resolution, but it isunlikely that they would want this to bethe case. In the present context, wherethe members of the company are allcorporate bodies (each havingrepresentation on the board), it isextremely unlikely that this power wouldbe exercised.

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No alteration of the memorandum ofassociation or these articles and no directiongiven by special resolution shall invalidateany prior act of the directors which wouldhave been valid if that alteration had notbeen made or that direction had not beengiven.

The powers conferred by article 94 shallnot be limited by any special powerconferred on the directors by these articles.

A meeting of directors at which a quorumis present may exercise all powers exercisableby the directors.

Matters requiring the sanction of theShareholders

The directors of the company shall notexercise the powers of the company so asto take any of the steps specified in article99 without the prior written consent ofeach of the Shareholders.

The steps referred to in article 98 are asfollows:

issuing any shares or loan stock or anyinstrument carrying a right of conversioninto shares, or granting any options inrelation to the share capital of the company;

taking any steps directed towards thewinding-up of the company or doing anyact or thing the effect of which could resultin the winding-up of the company;

amending the business plan of the companyor adopting a budget for the company;

the company making donations to anycharitable body, other than to theShareholders;

the company acquiring any property rights(by way of purchase, under lease etc);

the company making a loan or issuing loancapital to any party;

the company declaring or paying anydividend or distribution;

the company borrowing any sum of money;

the company incurring any capitalexpenditure in excess of £10,000;

the company acquiring or disposing of anybusiness (or any material part of anybusiness) or any shares in any company;

the company effecting insurance of anykind;

In the context of a social enterpriseproject, it is very often the case that theparties to the consortium want to retaina degree of control over what the boardof directors of the consortium companyis able to do. To this end, it is the normto list out various matters which theboard of directors have to refer back tothe shareholders (i.e. the parties to theconsortium) for approval, prior to takingaction. The list of reserved mattersoutlined at article 99 represents a veryextensive list; the parties should carefullyconsider the list and thereafter selectthose matters which should require theapproval of the shareholders in thecontext of their particular consortiumproject.

Article 98 refers to the unanimousconsent of all of the shareholders; theparties to the consortium may, however,feel that it is appropriate for the approvalof the shareholders to be by way ofordinary or special resolution (in relationto all, or only certain of the matters whichare listed here), rather than all of theshareholders having to approve eachreserved matter.

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99.13

99.14

99.15

99.16

99.17

99.18

99.19

99.20

99.21

the company investing funds notimmediately required for the purposes ofits activities;

the company entering into (or terminating)any partnership, joint venture, profit-sharingagreement or collaboration;

the company entering into any contract,liability or commitment which:

99.14.1 is of a long term or unusual nature(and on the basis that for this purpose “long term” means continuing for more than two calendar years);

99.14.2 could involve an obligation of amaterial magnitude or nature (and on the basis that for this purpose “material” means a liability for expenditure in excessof £10,000); or 99.14.3 is outsidethe ordinary course of business of the company;

unless the contract satisfies suchauthorisation criteria as the Shareholdersmay approve from time to time as part ofthe procedures for the company enteringinto contracts;

major decisions relating to the conduct oflegal proceedings to which the company isa party;

the company amalgamating with any bodyand/or subscribing for, taking, purchasingand otherwise acquiring shares, stocks,debentures and other interests in anothercompany or acquiring and taking over thewhole or any part of the undertaking, assetsand liabilities of any body;

appointing or removing anyone as the ChiefExecutive or the Secretary of the company;

creating any charge, encumbrance or othersecurity interest of any nature in respect ofall or any part of the company’s undertaking,property or assets;

appointing or removing the company’sauditors;

approving the company’s statutory accountsand/or any change in the principalaccounting policies of the company;

adopting (or varying) the company’s policiesin respect of employees’ remuneration,employment terms and pension schemes;

100

101

102

103

104

99.22

99.23

99.24

99.25

99.26

adopting (or varying) policies in relation tothe environment and health and safetyissues for the company;

the waiver of any debts or other financialobligations owed to the company;

creating a subsidiary by making anyinvestment which would have the effectthat another company or entity became asubsidiary undertaking of the company;

entering into a contract or otherarrangement in which any director of thecompany (or any person connected withthe director of the company, within themeaning of section 252 of the 2006 Act)or any Shareholder (or any company withinthe same group as any Shareholder) has apersonal interest;

granting a guarantee for the benefit of anyother party.

Proceedings of directors

Subject to the provisions of these articles,the directors may regulate their proceedingsas they think fit.

Any director may call a meeting of thedirectors or request the Secretary to call ameeting of the directors.

The board of directors must meet not lessthan [] times in each financial year.

At least five working days’ notice shall begiven in relation to each meeting of thedirectors, unless the Chair (or as the casemay be, the other director who is callingthe meeting) is of the view (actingreasonably) that the delay associated withgiving five working days’ notice would belikely to cause significant prejudice to theinterests of the company and/or theShareholders, in which case he/she shallgive such notice of the meeting as isreasonable in the circumstances.

Notice of every directors’ meeting (includinga short agenda in relation to the businessto be conducted at the meeting) shall beissued to each director and alternate directorat the address, fax number or e-mail addresswhich was last notified by him/her to thecompany for that purpose.

It is the norm in the context of socialenterprise projects to specify theminimum number of times which theboard of directors must meet in eachfinancial year. This is really a safeguardto ensure that the directors are aware ofwhat is happening within the companyat a practical level, and that they aretaking their duties as directors seriously.

The reference to five days can beincreased or decreased as necessary; anyless than five days may be deemed to beunreasonable, and ideally, a period ofnotice should be set, so as to ensure thatas many directors as possible are able toattend each meeting.

105

106

107

108

109

107.1

107.2

107.3

Only the business detailed in the agendacirculated to the directors may be consideredat the meeting, subject to the qualificationthat any item of additional business maybe considered if all of the directors presentat the meeting consent to the considerationof that item of business.

Questions arising at a meeting of directorsshall be decided by a majority of votes, andon the basis that (subject to articles 107,109 and 110) every director shall have onevote.

In relation to each resolution which isproposed at a meeting of the directors:

the A Directors (and the alternates for theA Directors) present at the meeting shall beentitled in aggregate to exercise [] votes,irrespective of the number of A Directors(and their alternates) present at the meeting;

the question of which individual, whetherhe/she is an A Director (or an alternate foran A Director) should be entitled to exerciseany additional vote available to the ADirectors (and to their alternates) by virtueof the preceding provisions of this articleshall be determined by agreement amongthe A Directors and their alternates presentat the meeting and intimated to thechairperson of the meeting at thecommencement of the meeting;

if two additional votes are available to theA Directors and their alternates by virtue ofthe preceding provisions of this article, theA Directors (and their alternates) present atthe meeting may elect either to assign bothof those additional votes to a singleindividual or to allocate them among twoindividuals; and their election in that respectshall be intimated to the chairperson of themeeting at the commencement of themeeting.

The provisions of article 107 shall apply tothe B Directors (and to their alternates) andto the C Directors (and to their alternates)as if each reference to the A Directors inthat article were a reference to the BDirectors and similarly to the C Directors.

Without prejudice to articles 106 to 108, adirector acting as an alternate director shall,if his/her appointor is not present, have avote in his/her capacity as an alternate aswell as his/her own vote as a director.

The provisions of this article are notcompulsory. It is, however, generallyregarded as best practice to dictate thatonly the business detailed in the agendawill be considered at the meeting unlessall of the directors consent to consideringan additional item of business; thisminimises the possibility of abuse e.g.an item of business discussed covertlyamongst certain of the directors beingsprung on the others unexpectedly,without time for them to look into thematter further.

The parties to the consortium can decidethat a particular majority should apply inrelation to decisions by the directors -for example, a two-thirds majority (tothe nearest whole number).

Where each category of shareholder (i.e.each party to the consortium) is entitledto appoint more than one director ontothe board, it may be felt appropriate toinclude a provision which states that,regardless of the number of thosedirectors who are actually present, therewill always be a set number of votesapplicable to the directors appointed bya particular shareholder e.g. if theshareholder has the right to appoint threedirectors, the directors appointed by thatshareholder will always be entitled tothree votes, regardless of the number ofdirectors present.

Comments in relation to alternatedirectors are given in relation to articles126 to 132 below.

110

111

112

113

114

115

In the case of an equality of votes, thechairperson of a meeting of directors shallhave a second or casting vote.

The quorum for meetings of the directorsshall (subject to articles 112 and 122.2) bethree, one of whom shall be an A Director,one of whom shall be a B Director and oneof whom shall be the C Director.

If the quorum required under article 111 isnot present within half an hour after thetime appointed for the meeting, or if duringa meeting such a quorum ceases to bepresent, the meeting shall stand adjournedto such time and place as may be fixed bythe chairperson of the meeting; if a quorumis not present at the meeting solely becausethe provisions of article 111 were notsatisfied, and the adjourned meeting is heldwithin the succeeding ten days (andproviding that the directors are given notless than three days’ notice of the adjournedmeeting), the provisions of article 111 shallnot apply in relation to the adjournedmeeting in determining whether a quorumis present.

The continuing directors or a sole continuingdirector may act notwithstanding vacancies,but if the number of remaining directors isless than the number fixed as the quorum,they or he/she may act only for the purposeof calling a general meeting.

Unless he/she is unwilling to do so, theChair shall preside as chairperson at everymeeting of directors at which he/she ispresent.

If the Chair is unwilling to act as chairpersonor is not present within fifteen minutes afterthe time appointed for the meeting, thedirectors may nominate one of their numberto preside as chairperson of the meeting.

A decision requires to be taken by theparties to the consortium as to whetheror not the chair should have a castingvote at meetings of the board of directors.

In the context of a social enterpriseproject, it will generally be felt appropriatethat the quorum for board meetingsshould not be met unless there is at leastone director appointed by each categoryof shareholders (i.e. each party to theconsortium) present, but this need notbe the case. It is unlikely however thatany one party to the consortium wouldbe happy for decisions to be taken atany board meeting at which a directorappointed by that party was not present.The provisions of this article are subjectto the provisions of article 112.

The provisions of this article state that ifa board meeting has to be adjournedbecause there is not at least one directorappointed by each category ofshareholders present, then the adjournedmeeting will not be postponed again(and decisions can validly be taken atthis meeting) on the basis that a quorumis still not met. This is designed to protectagainst the situation where one particularparty to the consortium has a particularagenda and is seeking to ensure thatboard meetings cannot proceed (andthat there is effectively a deadlock) byensuring that its directors fail to attend.

The effect of articles 111 and 112 takentogether is that decisions cannot be takenat an initial meeting unless there is adirector appointed by each shareholderpresent but if, having had the chance toattend the adjourned meeting, thedirectors appointed by a particular partystill fail to attend, then the adjournedmeeting can proceed as planned.

This article will be require to be amendedif the articles specifically refer to theappointment of a vice chair, who will actas chairperson if the chair is not presentor willing to act within 15 minutes.

116

117

118

119

120

121

121.1

121.2

The directors shall be entitled to allow anyperson to attend and speak (but not vote)at any meeting of the directors; a personinvited to attend a meeting of the directorsunder the preceding provisions of this articleshall not be entitled to exercise any of thepowers of a director, and shall not bedeemed to constitute a director for thepurposes of the Companies Acts, or anyprovision of these articles.

All acts done by a meeting of directors orby a meeting of a committee of directorsor by a person acting as a director shall,notwithstanding that it is afterwardsdiscovered that there was a defect in theappointment of any director or that any ofthem was disqualified from holding officeor had ceased to hold office or was notentitled to vote on the matter in question,be as valid as if every such person had beenduly appointed and was qualified and hadcontinued to be a director and had beenentitled to vote.

A resolution in writing signed by all thedirectors entitled to receive notice of ameeting of directors or of a committee ofdirectors shall be as valid and effectual asif it had been passed at a meeting ofdirectors or (as the case may be) a committeeof directors duly convened and held; it mayconsist of several documents in the sameform each signed by one or more directors.

A resolution signed by an alternate directorneed not also be signed by his/her appointor;a resolution signed by a director need notbe signed by any alternate directorappointed by him/her (in that capacity).

A director shall not vote at a meeting ofdirectors or at a meeting of a committeeof directors on any resolution concerning amatter in which he/she has, directly orindirectly, a personal interest or duty (unlessimmaterial) which conflicts or may conflictwith the interests of the company.

For the purposes of the preceding article:-

an interest of a person who is taken to beconnected with a director for any purposeof the 2006 Act shall be treated as apersonal interest of the director;

an interest of the appointer of an alternatedirector shall be treated as a personalinterest of the alternate director;

See comments below in relation to articles126 to 132.

See comments above in relation to articles87 and 88 and also comments below inrelation to alternate directors (articles126 to 132).

With reference to article 121.4, theparties to the consortium require to takea decision on whether or not a directorshould be treated as having an interestin a matter if it relates to a contractualrelationship between the company andany of the parties to the shareholders’agreement (for example, where one ofthe parties to the consortium enters intoa sub-contract with the consortiumcompany for the delivery of services on

122

123

124

121.3

121.4

122.1

122.2

a director shall (subject to paragraph 121.4)be deemed to have a personal interest inrelation to a particular matter if a body inrelation to which he/she is an employee,director, member of the managementcommittee, officer or elected representativehas an interest in that matter; and

(subject to article 121) a director shall notbe deemed to have a personal interest inrelation to a particular matter if it relates toa contractual relationship between thecompany and any of the parties to theShareholders’ Agreement, notwithstandingthat he/she is an employee, director, officeror elected representative of the body whichis a party to that contractual relationship.

In the event that any Shareholder hascommitted, or is believed by a majority ofthe directors to have committed, a breachor default in respect of any of its obligationsunder the Shareholders’ Agreement, orunder any contract between the companyand that Shareholder, or under these articlesof association:

any director appointed by that Shareholdershall not be entitled to vote in relation toany resolution connected with that breachor default (including, without limitation,the pursuit of any right or remedy availableto the company in respect of that breachor default); and

the quorum in respect of the passing of anysuch resolution shall be adjusted such thatit shall be deemed not to be a requirementunder article 111 that a director appointedby that Shareholder (or an alternate for anysuch director) must be present, and thereference in article 111 to three shall bedeemed to be a reference to two.

A director shall not be counted in thequorum present at a meeting in relation toa resolution on which he/she is not entitledto vote.

The Shareholders may (subject to theCharities and Trustee Investment (Scotland)Act 2005) by unanimous agreement,suspend or relax to any extent, eithergenerally or in relation to any particularmatter, the provisions of articles 120 to 123.

behalf of the local authority). If such adirector is deemed to have an interest inthese matters, then he/she will not beable to vote in relation to that matter(unless the shareholders suspend or relaxthis provision of the articles under article124). The parties to the consortium mayfeel that it is more appropriate to dealwith conflicts of this nature on a case bycase basis, thereby allowing them to relaxthis provision, rather than having ablanket policy which states that directorsin this situation are deemed not to havean interest.

The provisions of this article are designedto provide protection to the remainingparties to the consortium where oneparty is in breach of its obligations underthe shareholders’ agreement, or undera sub-contract with the company fordelivery of public services on behalf ofthe local authority. The effect of thisprovision is that where any party to theconsortium is in breach, any directorappointed by that shareholder will notbe entitled to vote in relation to anyresolution connected with the breach,and attendance by any such directorswill not be required for a quorum to bepresent.

If it is not intended to apply for charitablestatus in respect of the company, thereference to the Charities and TrusteeInvestment (Scotland) Act 2005 shouldbe deleted from this article.

The reference to unanimous agreementcan be amended to refer to ordinary orspecial resolution, but care should betaken in considering the implications ofsetting a lower threshold of that kind.

125

126

127

128

129

130

131

132

If a question arises at a meeting of directorsor at a meeting of a committee of directorsas to the right of a director to vote, thequestion may, before the conclusion of themeeting, be referred to the chairperson ofthe meeting; his/her ruling in relation toany director other than himself/herself shallbe final and conclusive.

Alternate directors

Any A Director, B Director or C Director(excluding, for the avoidance of doubt, analternate director) may appoint any otherdirector (or any other person approved byresolution of the directors and willing toact) to be an alternate director and mayremove from office, at any time, an alternatedirector so appointed by him/her.

Any appointment or removal of an alternatedirector may be made by written noticesigned by the director making or revokingthe appointment, or may be effected in anyother manner approved by the directors.

A notice appointing an alternate directormay specify that the appointment is to relateonly to the particular meeting at which thedirector will not be present; in the absenceof a statement to that effect, theappointment will be deemed to relate tocarrying out all the functions of the directoruntil such time as the appointment isrevoked.

An alternate director shall, subject to theterms of the notice of appointment, beentitled to be given notice of all meetingsof directors and of all meetings ofcommittees of directors of which his/herappointer is a member, to attend and voteat any such meeting at which the directorwho appointed him/her is not personallypresent and generally to perform all thefunctions of his/her appointer as a directorin his/her absence.

Subject to article 131, an alternate directorshall cease to be an alternate director ifhis/her appointer ceases to be a director.

If a director retires but is reappointed at orimmediately following the meeting at whichhe/she retires, any appointment of analternate director made by him/her whichwas in force immediately prior to retirementshall continue after his/her re-appointment.

References in these articles to directors shall,unless the context otherwise requires, beconstrued as including alternate directors.

It is often the case in the context of acompany consisting of solely corporatemembers that the directors appointedby the members are entitled to appointan alternate director (which is theequivalent of a proxy, but at board level)to attend and vote at a board meetingat which the director is unable to bepresent.

The disadvantage of having alternatedirectors is that overuse of this facilitycan have an adverse effect on decisionmaking, since the alternate director mightnot be aware of the discussions atprevious board meetings. The provisionson alternates could be modified suchthat only certain of the directors wereentitled to appoint alternates - forexample, only the A Directors could bestated to be entitled to appoint alternates.

The disadvantage of appointing alternatesmay to some extent be mitigated whereeach category of shareholders is entitledto appoint more than one director, bystating that if one of the directorsappointed by that Shareholder is unableto attend, he/she can appoint anotherof the directors within the same categoryto act as his alternate; the difficulty lieswhere a particular category ofshareholder is only entitled to appointone director (in that event, the articlescould state that he/she would have toappoint another of the directors (whowill not have been appointed by thesame shareholder as him/her), or anindividual who is not a director. Theparties to the consortium may also takethe approach that an alternate directorshould have to be one of the directorsor, where non-directors can be appointedas alternates, it may be advisable toinclude wording such as is included hereto the effect that such an individualwould have to be approved by resolutionof the directors.

133

134

135

136

137

Delegation to committees of directorsand holder of offices

The directors may resolve to delegate anyof their powers to any committee ofdirectors consisting of two or more directors;they may also delegate to the Chair or adirector holding any other office such oftheir powers as they consider appropriate.

Any delegation of powers under thepreceding article may be made subject tosuch conditions as the directors may imposeand either collaterally with or to theexclusion of their own powers, and may berevoked or altered.

Subject to any condition imposed inpursuance of the preceding article, theproceedings of a committee consisting oftwo or more directors shall be governed bythe articles regulating the proceedings ofmeetings of directors so far as they arecapable of applying.

In addition to their powers under article133, the directors may delegate their powersto any committee consisting of one or moredirectors and such other individuals (whoneed not be directors or employees of thecompany) as the directors may considerappropriate; the provisions of articles 134and 135 shall apply in relation to any suchcommittee, subject to the qualification thatthe role of any committee formed underthe preceding provisions of this article shallbe limited (except to the extent that thedirectors otherwise determine) to the issueof reports and recommendations forconsideration by the board of directors.

Secretary

The directors shall (notwithstanding theprovisions of the 2006 Act) appoint acompany secretary, and on the basis thatthe term of office, remuneration (if any),and other terms and conditions attachingto the appointment of the companysecretary shall be as determined by thedirectors; the company secretary may beremoved by the directors at any time.

With effect from 6 April 2008, a privatecompany will no longer be required tohave a company secretary. A decisionwill therefore have to be taken by theparties to the consortium as to whetheror not it is desirable to have a companysecretary. In many cases, it will bedeemed to be desirable from anadministrative point of view. If thedecision is taken to have a companysecretary, specific reference should bemade in the articles to this effect. If thecompany has been incorporated prior toApril 2008 and the company decides atthis point that it no longer wishes tohave a company secretary, the articleswill need to be amended accordingly.

138

139

140

141

142

143

144

145

Minutes

The directors shall ensure that minutes aremade (in books kept for the purpose) of allproceedings at general meetings, meetingsof the directors and meetings of committeesof directors; a minute of a meeting ofdirectors or of a committee of directors shallinclude the names of the directors present.

Accounting records and annual accounts

The directors shall ensure that properaccounting records are maintained inaccordance with all applicable statutoryrequirements.

The directors shall prepare annual accounts,complying with all relevant statutoryrequirements.

No Shareholder shall (as such) have any rightof inspecting any accounting records orother book or document of the company,except as conferred by statute, or authorisedby the directors or by ordinary resolution ofthe company.

Winding-up

If the company is wound up, each of theShareholders may become a purchaser ofproperty belonging to the company.

Notices

Any notice to be given under these articlesshall be given either in writing or byelectronic means.

The company may give any notice to aShareholder, either by sending it by post ina prepaid envelope, addressed to theShareholder at its registered address, or byleaving it at that address; in the case of aShareholder who/which has notified thecompany of an electronic address to be usedfor this purpose, the company may give anynotice to that Shareholder by electronicmeans.

The Shareholder may give any notice to thecompany, either by sending it by post in apre-paid envelope addressed to the companyat its registered office, or by leaving it,addressed to the Secretary at the company’sregistered office, or (where the companyhas notified the Shareholder of an electronicaddress to be used for this purpose) byelectronic means.

Where a decision is taken not to have acompany secretary, reference to thesecretary should be deleted from thisarticle.

146

147

148

149

Any notice, if sent by post, shall be deemedto have been given after the expiry of 24hours after posting; for the purpose ofproving that any notice was given, it shallbe sufficient to prove that the envelopecontaining the notice was properly addressedand posted.

Any notice sent by electronic means shallbe deemed to have been given at the expiryof 24 hours after it was sent; for the purposeof proving that any notice sent by electronicmeans was indeed sent, it shall be sufficientto provide any of the evidence referred toin the relevant guidance issued from timeto time by the chartered institute ofSecretaries and Administrators.

Indemnity

Every director or other officer or auditor ofthe company shall be indemnified out ofthe assets of the company (to the extentpermitted by section 310 of the 1985 Act(for so long as it is in force) and sections232, 234, 235, 532 and 533 of the 2006Act) against any loss or liability which he/shemay sustain or incur in connection with theexecution of the duties of his/her office;that may include, without prejudice to thatgenerality (but only to the extent permittedby those sections of the 2006 Act), anyliability incurred by him/her in defendingany proceedings (whether civil or criminal)in which judgement is given in his/her favouror in which he/she is acquitted or any liabilityin connection with an application in whichrelief is granted to him/her by the courtfrom liability for negligence, default or breachof trust in relation to the affairs of thecompany.

For the avoidance of doubt, the companyshall be entitled to purchase and maintainfor any director insurance against any lossor liability which he/she may sustain or incurin connection with the execution of theduties of his/her office, and such insurancemay extend to liabilities of the nature referredto in section 232(2) of the 2006 Act(negligence etc. of a director).

The general principle reflected in theseprovisions is that the company shouldreimburse a director where he/she incursliability in carrying out his/her duties asa director. The ability of a company todo that is, however, limited under theCompanies Acts.

Broadly speaking, a provision of this kindwill be invalid if it indemnifies the directoragainst liability which would otherwiseattach to him/her in relation tonegligence, default, breach of duty orbreach of trust, unless he/she is ultimatelyabsolved from liability by the court. Itshould also be noted, that under theCharities and Trustee Investment(Scotland) Act 2005, trustee indemnityinsurance is categorised as remunerationof charity trustees, and as such, thisinsurance can only be purchased inrespect of fewer than half of the charitytrustees, which is evidently not asatisfactory position. OSCR haverecognised that the implications of the2005 Act may have unfortunateconsequences in discouraging ordeterring some potential or existingcharity trustees and have noted that theposition is an unintended consequenceof the 2005 Act. As such, steps will betaken in due course to amend thelegislation such that trustee indemnityinsurance is not treated in the same wayas other remuneration of charity trustees,and OSCR have published a statementto the effect that new organisationsseeking charitable status will not beturned down on the basis that theirarticles allow for the purchase of trusteeindemnity insurance. This will not, ofcourse, be a problem if there is nointention to apply for charitable statusin respect of the consortium company.

APPENDIX 2MODEL CONSORTIUM AGREEMENT

What follows is a clause-by-clause commentary on a model consortium agreement fora social enterprise consortium, where the parties have opted to rely solely on a contractualframework to give effect to the aims and objectives of the consortium rather thanforming a separate legal entity through which to run the consortium. Comments aregiven next to each of the clauses for the purposes of (a) explaining what the purposeof the clause is; and (b) highlighting areas where decisions would require to be madeby the parties to the consortium as between alternative possibilities.

It should also be noted that this template has been drafted on the basis that it relatesto a single joint venture (for example, the delivery by the consortium of public servicesunder a particular contract with a local authority); an alternative would be to enterinto a framework agreement which regulates the relationship among the parties inrelation to any number of public sector contracts in respect of which a tender has beensubmitted.

This template represents only one example of a consortium agreement. It should benoted that specialist legal advice will be required to ensure that the agreement istailored to the specific needs and objectives of the consortium and to ensure that theposition of each of the parties is sufficiently protected. Specialist advice will also berequired in respect of a variety of legal issues potentially arising out of the consortiumarrangement; for example, specialist advice may be required in respect of any VAT andother tax issues, data protection issues, health and safety and insurance issues and inrelation to any potential implications under the Transfer of Undertakings (Protectionof Employees) Regulations (TUPE).

AGREEMENT

among

[insert name of the lead party, which will directly enter intothe contract with the public sector agency, for the deliveryof the relevant services; the lead party will have beenidentified as the lead partner in the tender documentation], a company limited by guarantee (registered numberSC[insert registered number] and having its registered officeat [insert registered office address] (“the Lead Partner”)

[insert designations of other parties to the contract]

WHEREAS:-

(a) The Lead Partner has entered into a contract with [insertthe name of the public sector agency] (“the Public SectorAgency”), following a successful tender submission by theConsortium (as defined below), for the delivery of [insertdescription of the services to be provided under the contractwith the public sector agency] (“the Principal Contract”);

(b) The parties to this agreement wish to collaborate indelivering the various strands of the services under thePrincipal Contract;

(c) The parties wish, by means of this Agreement, to establishtheir respective rights and obligations in relation to theircollaboration.

This particular model assumes that one party to the consortium arrangement will act as thelead party and will enter into the contract with the public sector agency for the delivery ofpublic services (the main contract); the intention would be for each of the other parties toenter into sub-contracts with the lead partner, for the delivery of the various strands of theservice under the principal contract.

An alternative option would be for all of the parties to the consortium to enter intocontractual relationships with the public sector party jointly, but that is a more cumbersomeapproach and is unlikely to be acceptable to the public sector body.

For ease of reference, use should be made of acronyms etc when defining each of theparties.

The preamble should be used to briefly describe the purpose for which the consortium isbeing established.

1

1.1

DEFINITIONS ANDINTERPRETATION

For the purposes of this Agreement,the terms set out below shall havethe following meanings:-

“Agreement”

“Background IPR”

“Commencement Date”

“Confidential Information”

means this agreement;

means any IPR owned or held by a Partner prior tosigning this Agreement and any IPR acquired by aPartner after signing this Agreement but which isacquired independently from any work undertakenin delivering the Public Services (or otherwise inrelation to its obligations as regards the Consortium);

means the last date upon which this Agreement hasbeen signed by all of the Partners;

means all commercial, financial, technical or otherinformation of a confidential or proprietary nature(including but not limited to trade secrets, formulae,processes, ideas and inventions, specifications,designs, financial or business information, customerdetails, market research and pricing strategies) relatingto or used in the business of the Partner in questionin tangible or documented form or communicatedorally and subsequently presented in tangible ordocumented form within a period of thirty dayswhether or not:

(a) labelled or otherwise identified as confidential;and/or

(b) belonging to the party in question or any thirdparty.

Confidential Information shall also include anyknowledge which may be imparted or developedthrough examination, collation, analysis or working

This section contains the definitionswhich will be used throughout theremainder of the agreement.

Alternatively, a specific date couldbe inserted in this clause.

“Consideration”

“Consortium”

“Consortium Plan”

“Foreground IPR”

“IPR”

“Joint Steering Committee”

of such information;

means the consideration payable under the PrincipalContract;

means the collaboration of all of the Partners, witha view to fulfilling the objectives laid out in thisAgreement;

means an action/business plan, as agreed amongthe Partners, outlining the key aims and objectivesof the Consortium;

means any IPR generated or acquired by any Partnersolely or together with any other Partner in the courseof delivering the Public Services (or otherwisegenerated or acquired in fulfilling its obligations asregards the Consortium);

means all patents, trade marks, registered designs(and any applications for any of the foregoing),copyright (including rights in software - object codeand source code), semi-conductor topography rights,database rights, unregistered design rights, rights inand to trade names, business names, domain names,product names and logos, databases, inventions,discoveries, know-how and any other intellectual orindustrial property rights in each and every part ofthe world together with all applications, renewals,revisals and extensions;

means the committee established under clause 4.1which will have responsibility for managing theConsortium, and the individual members of whichare detailed in Part 1 of the Schedule;

The parties to the consortium, if theydecide to establish a joint steeringcommittee, will have to determineits composition - it will no doubtinclude at least one individualnominated by each of the parties tothe consortium but may additionallyinclude other individuals (who mayhave particular skills or experiencewhich are of relevance, or who maybe representatives of the local

2

3

2.1

3.1

“Partners”

“Public Services”

“Schedule”

“Sub-Contracts”

“Staff”

PURPOSE OF THE CONSORTIUM

The purpose of the Consortium is tocollaborate in the delivery of thePublic Services, in accordance withthe terms of the Principal Contract.

COMMENCEMENT ANDDURATION

This Agreement shall commence onthe Commencement Date and,

means those bodies which are signatories to thisAgreement and any additional bodies admitted aspartners (under the terms of this Agreement), all ofwhich are comprised in the Consortium;

means the services to be delivered by the Lead Partnerto the Public Sector Agency under the PrincipalContract, the intention being that the Lead Partnerwill enter into Sub-Contracts with the remainingPartners (in furtherance of this Agreement) for thedelivery of certain elements of those services;

means the schedule in [•] parts annexed to thisAgreement;

means sub-contracts to be entered into between theLead Partner and each of the other Partners fordelivery of the various strands of the Public Serviceswhich the Lead Partner is not delivering directly tothe Public Sector Agency;

means those employees of each of the Partners whoare directly engaged in the delivery of the PublicServices either under the Principal Contract (in thecase of the Lead Partner’s Staff) or under the Sub-Contracts.

community to be served by theactivities of the consortium).

This clause outlines the purposes ofthe consortium, as decided upon bythe parties to the consortium.

The termination of this agreementis tied to the date of termination of

4

3.2

4.1

subject to the other provisions fortermination contained in thisAgreement, will terminate on thedate at which the Principal Contractis terminated.

The termination of this Agreement,howsoever arising, is withoutprejudice to the rights, duties andliabilities of the Partners accruedprior to termination. The provisionsin this Agreement which expresslyor implicitly have effect aftertermination shall continue to beenforceable notwithstandingtermination.

JOINT STEERING COMMITTEE

The Consortium shall establish a JointSteering Committee, thecomposition of which will be as setout in Part 1 of the Schedule.

the principal contract (i.e. betweenthe lead partner and the public sectoragency).

The effect of this clause is that, ifany of the parties to the consortiumhave any rights which have accruedto them prior to the date oftermination (for example, the rightto receive payment under any of thesub-contracts etc) then these rightswill continue to be enforceablefollowing termination of theagreement, as will certain otherclauses of the agreement - forexample, the confidential i typrovisions.

The following clauses relate to theestablishment of, and to the rolesand responsibilities of a joint steeringcommittee (reflective of the secondmodel outlined in Section 2 of thisguidance). These clauses should beomitted in situations where theparties do not intend to establish asteering group (for example, wherethe parties want to retain a higherdegree of independence).

It is for the parties to determine whatkind of management framework isappropriate for the consortium - theestablishment of a joint steeringcommittee is only one mechanism.Where a decision is taken to establisha joint steering committee, it will befor the parties to decide the remit

4.2 The Joint Steering Committee shall:-

appoint a Chairperson from amongstits members;

provide overall leadership for andstrategic direction to the Consortium,and shall have certain operationalresponsibilities as prescribed in thisAgreement or as otherwise agreedto by all of the Partners;

be responsible for coordinating andmanaging the overall performanceof this Agreement, which will includeensuring that the objectives of theConsortium are achieved; inparticular, the Joint SteeringCommittee will have responsibilityfor preparing and updating theConsortium Plan, and for continuallyreviewing this to assess the progressof the Consortium in meeting itsobjectives, and for supplying financialand other information to themembers of the Consortium;

decide upon the division of work asamong the Partners andconsequently the division of incomederived from the Principal Contract,which will be directly linked to thevolume of work being undertakenby each Partner.

4.2.1

4.2.2

4.2.3

4.2.4

and role of that committee.

The division of work among thepartners and hence the division ofincome is a key issue to be resolvedamong the parties. The mechanismfor determining the split will haveto be agreed upon. The types ofissues which the parties might wantto consider include (a) whether eachparty should be entitled to a certainpercentage of the workloadthroughout the life of the contract;(b) whether each party should beentitled to a minimum percentage

4.3 Meetings of the Joint SteeringCommittee will operate inaccordance with the followingprocedures:-

Meetings of the Joint SteeringCommittee will take place at least[•] times per year; in addition, furthermeetings may be called by two ormore Partners;

as far as is possible, at least fiveworking days’ notice shall be given

4.3.1

4.3.2

of the work (for example, 10%) butwith the joint steering committeebeing able to allocate the remainderof the work (over and above thatbaseline figure), as it sees fit; (c)whether directly linking the divisionof income derived from the principalcontract to the volume of work is afair and appropriate mechanism inthe particular circumstances of thecollaboration (and given the differentfunctions being performed by eachof the parties).

It will be for the parties to theconsortium to determine how manytimes per year the joint steeringcommittee should meet (if there isto be a joint steering committee)and whether or not the partnersthemselves should have the right tocall an additional meeting and, if so,what the mechanism for doing thisshould be.

There are no set procedures whicha joint steering group must followin terms of the format/conduct etcof its meetings (as, for example,there are with meetings of the boardof directors of limited companies);the parties are therefore free todecide upon these matters.

in relation to each meeting of theJoint Steering Committee;

notice of every meeting of the JointSteering Committee (including ashort agenda in relation to thebusiness to be conducted at themeeting) shall be issued to eachmember of the Joint SteeringCommittee;

each member of the Joint SteeringCommittee will have one vote, withthe exception of the Chairperson,who will have a second or castingvote;

the quorum for a meeting of theJoint Steering Committee will be [•];

each member of the Joint SteeringCommittee may, with the approvalof the Chairperson, nominate arepresentative to attend meetingsand vote on his/her behalf;

all votes (but excluding a vote toterminate a Partner’s membershipof the Consortium) will be decidedon the basis of a majority vote ofthose attending and eligible to vote.

4.3.3

4.3.4

4.3.5

4.3.6

4.3.7

It will be for the parties to theconsortium to decide upon votingprocedures, including whether ornot the chairperson should have acasting vote.

A decision will require to be takenon the quorum; that decision shouldbe based upon the overall numbersinvolved in the joint steering group,and the need to achieve a balancein terms of each partner beingrepresented.

Again, it is for the parties to theconsortium to decide whether“proxy” voting is acceptable or not.

Again, the parties to the consortiumcan decide on a different thresholdfor resolutions to be carried, e.g.75% majority.

Also, the consortium agreementcould specify a list of reservedmatters which are reserved fordecision of the partners, rather thanbeing decided by the joint steeringcommittee; if this is the case, this

5

4.4

4.5

5.1

In addition to the collectiveresponsibilities of the Joint SteeringCommittee, its individual membersmay be assigned specificresponsibilities (as determined by theJoint Steering Committee) from timeto time.

In the event of a dispute arisingamong any of the Partners whichcannot be resolved among them,the dispute shall be referred to theJoint Steering Committee forresolution in accordance with clause13.

IMPLEMENTATION OF THEPRINCIPAL CONTRACT

Within [•] days following the dateof execution of this Agreement, theLead Partner will enter into the Sub-Contracts in accordance withinstructions from the Joint SteeringCommittee as to the division of workamong the Partners.

provision 4.3.7 should make specificreference to the provision containingthe list of reserved matters.

The parties to the consortium shoulddecide whether the joint steeringcommittee should have the powert o d e l e g a t e a n y o f i t sfunctions/responsibilities to anyindividual members of the jointsteering committee.

In addition to having a joint steeringcommittee, the consort iumagreement could state that one ofthe parties (likely to be the leadpartner) would employ a supervisingofficer.

As noted above, in this particulartemplate, the lead partner entersinto all contracts with the publicsector agency but the actual detailedimplementation of the work underthe principal contract will be dealtwith via sub-contracts between thelead partner and the other partnerbodies (also this is most likely toinvolve an element of direct deliveryby the lead partner). In addition,under this wording, it is the joint

5.2Following payment of eachinstalment of the Considerationunder the Principal Contract to theLead Partner, the Lead Partner willthereafter apportion theConsideration among itself and theother Partners in accordance withthe distribution of work determinedby the Joint Steering Committee andas reflected in the terms of the Sub-Contracts.

s tee r ing commi t tee wh ichdetermines the split of work asamong the various partner bodies;that may or may not be acceptableto the partners, in which case somealternative approach should bereferred to here.

As an alternative to these provisions,the parties to the consortium coulddecide at the outset what the divisionof work should be, and consequentlyw h a t p e r c e n t a g e o f t h econsideration (under the principalcontract) each should be eligible toreceive; the approach taken in theseprovisions, however, allows for agreater degree of flexibility (it allowsfor the division of work to vary overtime etc).

This provision also assumes that theconsideration under the principalcontract will simply be divided upamong the parties in accordancewith the division of work; analternative to distribution of profitsamong the partners, would be tosay that any consideration raised bythe consortium should be held withina bank account, set up specificallyfor the consortium, and that thosefunds could only be used forparticular purposes e.g. to furtherthe objectives of the consortium,such that any consideration waseffectively recycled back into theconsortium (or was used to meetthe joint costs of the consortium).

5.3

5.4

5.5

5.6

The Partners will submit invoices tothe Lead Partner in accordance withthe terms of the Sub-Contracts.

The Lead Partner shall not, withoutthe consent of the Joint SteeringCommittee, agree to anyamendment to the Principal Contractor waive any obligation incumbentupon the Public Sector Agency underthe Principal Contract.

The Lead Partner undertakes that itwill not, without the consent of theJoint Steering Committee, enter intonegotiations with the Public SectorAgency.

The validity of this Agreement shallnot be affected by any variation tothe obligations of the Lead Partnerunder the Principal Contract.

The rationale behind this clause isto try to ensure that the lead partner(being the only party to the contractwith the public sector agency) doesnot unilaterally agree to amendmentsto the principal contract which mighthave an impact on the othermembers of the consortium, withouttheir approval; in this case, approvalis given by way of the joint steeringcommittee, but the draft couldspecifically state that approval needsto be given by all of the partiesdirectly.

The rationale behind this provisionis the same as at clause 5.4 above -this enables the other partners toretain a certain degree of control.

6

6.1

RESPONSIBILITIES OF THE LEADPARTNER

During the term of this Agreement,the Lead Partner undertakes to:-

pursue (at the request of the JointSteering Committee) any right orremedy open to the Lead Partnerunder the Principal Contract inrespect of any breach of the PrincipalContract by the Public Sector Agency,and to remit the sum so recovered(under deduction of the costsassociated with pursuing the claim)to the Joint Steering Committee (onthe basis that it will then distributeit among those of the Partners whichhave suffered a loss as a result ofthe breach by the Public SectorAgency);

pursue (at the request of the JointSteering Committee) any right orremedy open to the Lead Partnerunder any sub-contracts with thirdparties (for delivery of its obligationsunder the Principal Contract) inrespect of any breach of the sub-contract by the third party, and toremit the sum so recovered (underdeduction of the costs associatedwith pursuing the claim) to the JointSteering Committee (on the basisthat it will then distribute it amongthose of the Partners which havesuffered a loss as a result of thebreach by the relevant third party);

6.1.1

6.1.2

7.1

follow the directions issued fromtime to time by the Joint SteeringCommittee as to how the LeadPartner should exercise optionsavailable to it under the PrincipalContract;

notify the Joint Steering Committeeof any notices which it receives fromthe Public Sector Agency under thePrincipal Contract;

exercise its rights under the Sub-Contracts in line with decisions ofthe Joint Steering Committee;

negotiate the terms of any sub-contracts, in line with guidanceissued by the Joint SteeringCommittee;

negotiate variations to the PrincipalContract and to any sub-contracts,in line with guidance issued by theJoint Steering Committee but shallnot agree any such variations withoutthe prior written consent of the JointSteering Committee.

RESPONSIBILITIES OF THEPARTNERS

During the term of this Agreement,each of the Partners shall use allreasonable endeavours to:-

perform on time, in a diligentmanner, its obligations under theSub-Contracts (in accordance withthe standards specified therein)and/or (in the case of the LeadPartner), under the Principal Contract

6.1.3

6.1.4

6.1.5

6.1.6

6.1.7

7.1.1

7.2

(in accordance with the standardsspecified therein);

promptly notify the Joint SteeringCommittee of any delay inperformance under the Sub-Contracts and/or (in the case of theLead Partner), under the PrincipalContract;

prepare and submit to the JointSteering Committee monthly reportson performance and progress underthe Sub-Contracts and/or (in the caseof the Lead Partner), under thePrincipal Contract;

ensure that its obligations under theSub-Contracts (insofar as relating tothe delivery of the Public Services)are performed by qualified staff withall reasonable skill and care and thatthe Staff shall at all times act withthe utmost good faith towards theConsortium;

diligently adhere to all reasonabledirections of the Joint SteeringCommittee in relation to itsobligations as regards delivery of thePublic Services under the Sub-Contracts and/or (in the case of theLead Partner), under the PrincipalContract.

Each Partner warrants that under itscontractual relationship with eachmember of its Staff, any intellectualproperty rights arising out of orrelating to work done by the Stafffor the Partner will vest in the Partnerand that the Staff will have no right,

7.1.2

7.1.3

7.1.4

7.1.5

7.3

title or interest, whether legal orbeneficial, in any such intellectualproperty rights; a Partner shall, if sorequired by the Joint SteeringCommittee, produce writtenevidence to this effect signed by itsStaff.

Each Partner acknowledges that itis and shall remain liable for theconsequences of any failure on thepart of its Staff to fulfil itsresponsibilities under the Sub-Contracts or (in the case of the LeadPartner), under the Principal Contractand shall accordingly:-

procure and maintain its owninsurance with insurers of goodrepute, to cover its own liabilitiesand those of its Staff;

keep full and accurate records of allthings done by its Staff in relationto its responsibilities under therelevant Sub-Contract or (in the caseof the Lead Partner), under thePrincipal Contract;

nominate a contract manager(“Contract Manager”) (whose detailswill be made available to the otherPartners and to the Joint SteeringCommittee), whose role will be toensure that the Partner which hasnominated him/her is complying withthe obligations incumbent upon itunder this Agreement, the relevantSub-Contract and (in the case of theLead Partner) under the PrincipalAgreement; in the event of anyPartner failing to deliver in

7.3.1

7.3.2

7.3.3

accordance with such obligations,the Contract Manager (in respect ofthat Partner) must notify the JointSteering Committee in writing, assoon as reasonably practicable afterhe/she becomes aware of any failureof performance or breach, of thedetails of such failure or performanceor breach of obligations;

take all reasonable steps to complywith and assist the Consortium andthe Joint Steering Group incomplying with all relevant statutes,laws, regulations and codes ofpractice relating to the PublicServices, in force from time to time;

indemnify the Consortium, the JointSteering Committee and the otherPartners from and against all costs(including the costs of enforcement),expenses, liabilities, injuries, direct,indirect or consequential loss, pureeconomic loss, loss of profits, lossof business, depletion of goodwill),damages, claims, demands,proceedings or legal costs (on a fullindemnity basis) and judgementswhich they incur or suffer as a resultof breach of this Agreement ornegligent acts or omissions or thewilful misconduct of the Partnerand/or its Staff including withoutlimitation any resulting liability theConsortium has to the Public SectorAgency or to any third party.

7.3.4

7.3.5 This provision is designed to giveprotection to the parties to theconsortium from losses/liabilitiesarising as a result of the acts oromissions of any of the other parties.

7.4

7.5

7.6

In the event of a successful claimbeing brought against the LeadPartner (or indeed any of the otherPartners) by the Public Sector Agencyfor breach of the Principal Contract,then as between all of the Partnersall liabilities, costs, claims, demands,expenses, fines and other penalties(including legal fees and expenses)arising from the breach or in anyway relating to the breach, shall beborne by each Partner to the extentof its responsibility for the breach,determined in accordance with thisclause and the provisions of thisAgreement generally, and each ofthe Partners shall indemnify andaccount to the other Partnersaccordingly.

The Partners shall each haveresponsibility for the provision of allappropriate equipment, facilities andservices which are required for theproper performance of theirobligations under the Sub-Contractsand (in the case of the Lead Partner)under the Principal Contract, witheach bearing its own costs in thisregard.

Each Partner shall each agree andundertake at its own expense tomake its Contract Manager (and anyother members of its Staff) availableto attend meetings with the JointSteering Committee to reviewprogress as and when necessary, andat the reasonable request of the Joint

The provisions of this clause giverecognition to the fact that wherethere is any breach of the principalcontract (to the detriment of thepublic sector agency), the first partywhich the local authority etc is likelyto make a claim against, is the leadpartner, but the breach may not beentirely the fault of the lead partner,i.e. it may be a breach of one of thesub-contracts which has led tobreach of the principal contract; assuch, this clause seeks to remedythe situation by stating that eachparty will have to accept financialresponsibility for any breach to theextent that it has been caused bythefault of that party.

The wording of the model is basedon the assumption that each of theparties makes use of its own facilities,equipment etc in delivering itsobligations in respect of theconsortium; an alternative would beto state that the parties contributeassets to the consortium (which mayor may not then be subject to jointownership (i.e. one party may retainownership of its assets, but the otherparties may be entitled to use thoseassets)) for use by the consortium.

8

9

8.1

9.1

Steering Committee.

ADMISSION OF NEW PARTNERSTO THE CONSORTIUM

New Partners may be admitted tothe Consortium by invitation,following a unanimous decision bythe Joint Steering Committee to thiseffect and subject to the new Partnerbecoming a party to this Agreement.

REMOVAL OR WITHDRAWALOF PARTNERS FROM THECONSORTIUM

Without prejudice to any other rightsor remedies available to theConsortium or any individualmember of the Consortium, theJoint Steering Committee may, by75% majority vote of the full JointSteering Committee in favour,terminate a Partner’s membershipof the Consortium by notice in

This provision opens up the possibilityof new bodies being admitted to theconsortium arrangement. Themechanism for admitting newmembers will vary from agreementto agreement - in this case, admissionis by invitation only, and it is the jointsteering committee which has theultimate say. An alternativemechanism would be to say that itis up to the existing Partnersthemselves to decide whether or notto admit new members, and theagreement can specify the thresholdfor agreement (e.g. simple majority,75% majority vote, unanimous voteetc). The conditions for membershipcan vary as well - in this case, it isentirely at the discretion of the jointsteering committee and providedthat the body concerned agrees tothe same terms and conditions asthe original parties to the consortium.

These clauses make provision forremoval of a Partner from theConsortium by the Joint SteeringCommittee on the basis of a set offairly standard grounds for removal. It will be for the parties to theConsortium to decide whetheradditional grounds should be addedto this or whether any of these

writing, but only on the basis thatthe Partner:-

is in material breach of any of theterms of this Agreement, the Sub-Contracts and/or (in the case of theLead Partner), the PrincipalContract and, where the breach iscapable of remedy, the Partner failsto remedy such breach within 30days of receipt of a written noticespecifying the breach and requiringthe same to be remedied; or

the Partner, or any of its Staff,commits any act of gross orpersistent misconduct and/orneglects or omits to perform any ofits duties or obligations under thisAgreement, the Sub-contractsand/or (in the case of the LeadPartner) under the PrincipalContract; or

ceases to carry on its activities,becomes unable to pay its debtswhen they fall due, becomesinsolvent or apparently insolvent,has a receiver, manager,administrator, administrativereceiver or similar officer appointedin respect of the whole or any partof its assets or undertaking, makesany composition or arrangementwith its creditors, takes or suffersany similar action in consequenceof debt, an order is made orresolution passed for its dissolutionor liquidation (other than for thepurpose of solvent amalgamationor reconstruction) or enters intoliquidation whether compulsorily or

9.1.1

9.1.2

9.1.3

grounds are not applicable.

10

10.1

voluntarily or shall suffer anyanalogous event;

provides the Joint SteeringCommittee with any false ormisleading information;

by its actions or inaction, hasbrought or might reasonably beexpected to bring the other Partnersor the Consortium into disrepute.

WITHDRAWAL OF PARTNERS

A Partner can withdraw from theConsortium only with theunanimous consent of theremaining Partners.

9.1.4

9.1.5

The provisions of this clause couldbe relaxed to indicate that it is at theoption of a member to terminate itsmembership of the Consortium bygiving a certain period of notice tothe other Partners to the Consortium.This clause could be further relaxedsuch that unanimous consent of theremaining partners was not requiredwhen a partner wished to withdrawfrom the arrangement.

11

12

11.1

12.1

12.2

12.3

CONSEQUENCES OF REMOVALOR WITHDRAWAL FROMCONSORTIUM

In the event of withdrawal orexpulsion of a Partner, theConsortium will be liable only to payover such proportion of theConsideration as is owed to therelevant Partner up until the pointat which that Partner ceases to bea member of the Consortium. Thebalance of any payments made tothe Partner will be returned to thenominated representative of the LeadPartner within 30 days of withdrawalor expulsion.

CONFIDENTIALITY

Each Partner agrees that it shall keepsecret and confidential at all timesboth during and after the term ofthis Agreement all ConfidentialInformation of the other Partnerswhich comes into its possession orwithin its knowledge at any timebefore, during or after the term ofthis Agreement.

None of the Partners shall use, copyor disclose to any third party anysuch Confidential Information unlessfor the proper purposes of thisAgreement or having obtained theprior written consent of the otherPartners.

To avoid any doubt, in maintainingconfidentiality, the recipient shalltake the same or greater care of theConfidential Information of the other

The provisions of this clause outlinethe consequences of removal orwithdrawal of a partner from theconsortium. The reference torepayment of the balance of anypayments made to the partner whois withdrawing or being removed,will only apply where the partnersare paid in advance.

The wording in this confidentialityclause is in standard form; it detailsthe confidentiality obligations of theeach of the parties in respect ofinformation of a confidential naturewhich comes into its possession asa result of the consortiumarrangement.

12.4

12.5

Partners as it takes of its ownConfidential Information but in anyevent, not less than a reasonablestandard of care.

Disclosure of any ConfidentialInformation by any Partner to theother Partners shall not affect theownership of such ConfidentialInformation or the disclosingPartner’s rights to it.

The provisions of clauses 12.1 to12.4 shall not apply to anyinformation which the recipient candemonstrate by documentaryevidence to the disclosing Partner’sreasonable satisfaction: -

is in or enters the public domainexcept as a result of a breach of thisAgreement, or

is properly in its possession orproperly within its knowledge andat its free disposal prior to itsreceiving or becoming aware of therelevant Confidential Information;or

is or becomes available in good faithto the recipient from a third partywhich is not subject to any obligationof confidence to the disclosing party;or

was developed independently of itsreceiving or becoming aware of theConfidential Information; or

12.5.1

12.5.2

12.5.3

12.5.4

13

12.6

12.7

13.1

the recipient is required by law todisclose to any court or relevantauthority, including a request forinformation under the Freedom ofInformation (Scotland) Act 2002,provided that the recipientimmediately notifies and consultsthe disclosing Partner of any suchcompelled disclosure when therecipient first becomes aware of anysuch legal obligation to disclose.

Without prejudice to clauses 12.1to 12.5 each Partner undertakes torestrict access to the ConfidentialInformation of the other Partners toonly those of its Staff who have aneed to know the same for theproper purposes of this Agreementor the Sub-contracts and/or (in thecase of the Lead Partner) the PrincipalContract and shall ensure that suchmembers of the Staff are aware ofand comply with the obligations inthis clause 12.This clause 12 shall survive the expiryor termination of this Agreement forwhatever reason.

DISPUTE RESOLUTION

Save as otherwise provided in thisAgreement, in the event that anydisputes or questions of any naturearise among the Partners or any ofthe Partners in relation to thisAgreement or any other matterrelating to the affairs of theConsortium or the rights, duties orliabilities of any of the Partners, underthis Agreement, under the Sub-

12.5.5

These clauses provide a mechanismfor resolving disputes among thepartners, the first stage being torefer the dispute to the joint steeringcommittee (where the parties cannotnegotiate an agreement betweenthemselves); the parties mustthereafter remit the dispute to someform of dispute resolution procedure- it is quite common to refer in a

contracts and/or (in the case of theLead Partner) under the PrincipalContract:-

the parties to such dispute orquestion shall attempt to resolve thedispute by negotiation;

if such dispute or question is notresolved within 14 days, the Partnersinvolved in the dispute shall referthe dispute to the Joint SteeringCommittee who will attempt toresolve the dispute;

if such dispute or question is notresolved within 14 days of its havingbeen referred to the Joint SteeringCommittee, the Partners involved inthe dispute shall thereafter attemptto resolve the dispute by such disputeresolution procedure conducted insuch manner and with the assistanceof such independent person as shallbe agreed between them or failingagreement as recommended by theCentre for Effective DisputeResolution (at the instance of thefirst person applying to such body);

If the dispute is not resolved in a 28day period (or extended periodagreed by Partners involved in thedispute) from referral to the disputeresolution procedure, or if one ormore of the Partners is unwilling toparticipate in any form of disputeresolution procedure, the disputeshall be submitted to the exclusivejurisdiction of the Scottish courts.

13.1.1

13.1.2

13.1.3

13.1.4

contract to a particular type ofdispute resolution procedure (forexample, arbitration or mediation),and it is for the parties to theconsortium to decide on whichprocedure is most appropriate.

14

14.1

14.2

14.3

KNOW-HOW AND INTELLECTUALPROPERTY RIGHTS

The Background IPR remains theexclusive property of the Partnerowning it (or, where applicable, thethird party from whom its right touse the Background IPR has derived).

The Foreground IPR remains theproperty of the Partner thatgenerated or acquired it; in situationswhere the Foreground IPR has beengenerated or acquired jointly by twoor more Partners, then those Partnersshould endeavour to agree on theownership of the Foreground IPR viaa separate agreement and if no suchagreement is reached, the questionof the ownership of the ForegroundIPR will be determined in accordancewith the relevant legal principles.

Each Partner shall use reasonableendeavours to ensure that anyinformation which it supplies to theother Partners is accurate, and wherei t becomes aware of any

This clause is intended for use wherethe IPR is not a key part of anyProject. If the purpose of a Projectis to develop IPR, or if one party isbringing a valuable piece of IPR (suchas a patent) to a Project the partiesshould carefully consider theintended commercial and legalposition in respect of that IPR andseek separate legal advice. A moredetailed IPR clause will then berequired.

This clause is intended for use wherethe jointly owned IPR is not likely tobe of great value outside of theProject. This is because commerciallyit is not desirable for parties to jointlyown IPR because the consent of eachjoint owner is needed beforeanything can be done with the IPR,which is often unduly restrictive. Ifit is likely that a Project will generatevaluable IPR, as noted above theparties should seek separate legaladvice and more detailed IPR clauseswill be necessary.

15

14.4

14.5

15.1

15.2

inaccuracies, shall promptly notifythe other Partners accordingly.

Each Partner hereby grants to theother Partners a royalty-free, non-exclusive, worldwide licence for aslong as the Agreement is in force touse its Foreground IPR for thepurpose of performing theirobligations under the Agreement.

Each Partner hereby warrants to theother Partners that it has sufficientright and title in the Foreground IPRto grant the licence set out in thisClause 14.4

Each Partner hereby indemnifies theother Partners against any liabilities,loss, claims or expenses broughtagainst or incurred as a result of itsuse of the other Partners’ ForegroundIPR.

NO ANNOUNCEMENTS

Subject to c lause 15.2, noannouncement concerning the factthat the Partners have entered intothis Agreement or that thisAgreement has come to an end willbe made by any of the Partnerswithout the approval of the JointSteering Committee.

Any of the Partners may make anyannouncement concerning the factthat the Partners have entered intothis Agreement if and to the extentrequired by law, provided that the

This clause is not intended for usewhere any Foreground IPR is likelyto be patentable. If any ForegroundIPR is likely to be patentable,disclosure of that Foreground IPRand any improvements that mightbe made should be addressed andthe parties should seek separate legaladvice.

This clause is designed to ensure thatthere are no public announcementsmade without the knowledge andconsent of all of the parties to theconsortium, which consent is givenvia the joint steering committee;instead of referring to the jointsteering committee, reference couldbe made to the approval of all ofthe partners.

This clause recognises that there willbe circumstances in which the parties(or one of them) will be bound tomake a disclosure about theconsortium arrangement (for

16

16.1

timing and content of any suchannouncement will (if practicable)be made only after consultation withthe Joint Steering Committee.

NO PARTNERSHIP OR AGENCY

Nothing in this Agreement isintended to create a partnership ofany kind among the Partners, or toauthorise any Partner to act as agentfor any other. Save to the extentexpress ly permitted by thisAgreement, no Partner will have theauthority to act in the name or onbehalf of or otherwise to bind anyother Partner.

example, if one of the partners isbound by Freedom of Informationlegislation) and as such, it is notappropriate to refer to the approvalof the other parties but where timepermits, there should be some formof consultation with the other parties(in this case, effected throughconsultation with the joint steeringcommittee).

A consortium agreement of thisnature will normally include adeclaration to the effect that it isnot the intention of the parties tocreate a legal partnership - the reasonbeing that if the arrangement isdeemed to be a legal partnershipthen there are a number ofimplications flowing from this, asfollows:-

(a) there is unlimited liability - eachpartner is deemed to be the agentof the other partners for thepurposes of the business such thateach partner is jointly liable for thedebts and obligations of thepartnership and jointly and severallyliable for the wrongful acts andomissions of the other partners (suchthat there is potentially unlimitedliability); this means that any onepartner can be required to pay thefull amount and it is then up to thatpartner to try and recover theappropriate proportion from theother partners; and(b) even if the participants to theconsortium outline loss-sharing

17

18

19

17.1

18.1

19.1

WAIVER

No failure or delay by any Partner toexercise any right, power or remedywill operate as a waiver of it nor willany partial exercise preclude anyfurther exercise of the same, or ofsome other right, power or remedy.

SEVERANCE

If any provision of this Agreement isjudged to be illegal or unenforceable,the remainder of the provisions ofthis Agreement will remain in fullforce and effect.

FORCE MAJEURE

No Partner will be deemed to be inbreach of this Agreement, norotherwise liable to any of the other

arrangements in the consortiumagreement, each of the partners willstill have a duty to comply with itsstatutory obligations, and theparticipants to a social enterpriseconsortium may have a concern thatits co-participants cannot meet thoseobligations for which they areresponsible (in which case, theliabilities will fall upon the remainingpartners).It should be noted that the inclusionof this declaration does notguarantee that the arrangementswill not be deemed to be a legalpartnership.

The effect of this provision is that ifa party to the agreement fails toexercise any of its rights (e.g. theright to take action against a partywhich is in default), this does notprevent that party from exercisingthat right in the future nor will itpreclude the exercise of any otherright, power or remedy.

The effect of this clause is that if onepart of the agreement is invalidated,the rest of the agreement will stand.

The remainder of the provisions ofthis agreement are in standard formand are included within most

20

21

20.1

21.1

Partners for any failure or delay inperformance of this Agreement if itis due to any event beyond itsreasonable control other than strike,lock-out or industrial disputes, butincluding, without limitation, acts ofGod, war, fire, flood, tempest andnational emergencies and a Partnerso delayed shall be entitled to areasonable extension of time forperforming such obligations.

ASSIGNATION

No Partner shall be entitled to assignany of its rights or obligations underthis Agreement without the priorconsent of the other Parties.

VARIATION

This Agreement may be amendedat any time by written agreement ofall of the Partners. No variation tothis Agreement shall be effectiveunless in writing, signed by a dulyauthorised officer of each of thePartners.

commercial contractualarrangements.

This clause states that a party willnot be treated as having breachedthe agreement where it has failedto meet its obligations due to someevent beyond its reasonable control(e.g. flood, fire etc). Any party whichhas been prevented from fulfillingits obligations due to any of thecircumstances described in thisclause, is to be entitled to areasonable extension of time to allowit to fulfil its obligations.

The effect of this clause is to ensurethat none of the parties can assigntheir rights or obligations under theAgreement to any other partywithout first obtaining the consentof the other parties; this enables theoriginal partners to the consortiumto retain control over who is involvedin fulfilment of the obligations underthe consortium arrangement.

In order for the provisions of theagreement to be amended, all ofthe partners must give their writtenconsent to such an amendment.

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22.1

22.2

NOTICE

Any notice required to be givenunder this Agreement must be givenor served in writing and shall bedeemed to be duly served if: -

delivered personally to the Partnerto whom the notice is intended tobe given;

left for the Partner or sent by firstclass post addressed to the Partnerat its registered office;

sent to the Partner by fax to itsregistered office and marked for theattention of the Partner.

Any such notice shall be treated asserved:

in the case of personal delivery, whendelivered to the Partner;

in the case of service by post, at thetime when in the ordinary course ofpost it would reach the address towhich it was posted (and to provesuch service it shall be sufficient toprove that the same was properlyaddressed and posted in accordancewith the preceding provisions);

in the case of service by fax, on thenext following day.

ENTIRE AGREEMENT

This Agreement, including theSchedule (and taken together withthe Sub-Contracts) constitutes the

22.1.1

22.1.2

22.1.3

22.2.1

22.2.2

22.2.3

This clause outlines the mechanismby which notice is given to each ofthe parties under this Agreement.

The effect of this clause is that thisagreement, and only this agreement,will regulate the relationship among

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23.2

24.1

25.1

entire agreement and understandingamong the Partners in respect of thematters dealt with within it andsupersedes any previous agreementamong the Partners or any of themrelating to such matters.

Each of the Partners acknowledgesand agrees that in entering into thisAgreement, it does not rely on, andwill have no remedy in respect of,any statement, representation,warranty or undertaking (whethernegligently or innocently made) ofany person (whether party to thisAgreement or not) other than asexpressly set out in this Agreement.

COSTS

Each Partner shall be responsible forits own costs and expenses in relationto the negotiation, preparation,execution and carrying into effectof this Agreement.

GOVERNING LAW ANDJURISDICTION

This Agreement shall be governedby and construed in accordance withScots law and each Partner agreesto submit to the exclusive jurisdictionof the Scottish courts any claim ormatter arising under or in connectionwith this Agreement, the Sub-Contracts or any other legalrelationships established by thisAgreement.

the parties (subject of course to whatis provided for in the sub-contracts)and any other correspondence orcommunication among the partieswill not be able to be relied uponi.e. it is this agreement whichrepresents the final position andunderstanding of the parties.

The provisions of this clause are reallya follow-on from the last clause. Itis important that each of the partiesto the agreement recognises thatthey will only be able to rely uponany representations etc specificallyreferred to in this agreement andthat any statement or representationmade by any of the parties which isnot reflected in this agreementcannot be relied upon.

This clause dictates that if any disputearises under this agreement, it willbe resolved in accordance with theprinciples of Scots law.

IN WITNESS WHEREOF thisAgreement consisting of this andthe preceding [•] pages togetherwith the Schedule in [•] partsannexed, are executed as follows:-

SUBSCRIBED for and on behalf of[ insert name of first Partner]

at [insert location of signature]

on [ insert date of signature]

----------------------by [print full name of individualsigning]

before this witness

---------------------[print full name of witness]

Address [insert address of witness]

SCHEDULE

--------------------Director [the individual signing on behalf of eachPartner should be a director, where the partner bodyis a limited company; where the partner body is someother form of legal entity, an appropriate officershould sign]

insert detailed composition of joint steering group]

Details of all of the signatories (andwitnesses) to the Agreement are tobe inserted here.