Business Law

A partnership is the most flexible of business structures for a multitude of reasons. Profit/loss allocation and governance are great examples of where creativity can thrive in such a business structure. Given the flow-through nature of a partnership structure, it can also be very beneficial for tax purposes.  Typically, professionals are well suited to general partnerships, or limited liability partnerships where there is a variation of practice areas and oversight is concentrated in and with a partner in each functional area.

Limited partnerships are best suited when initial capital investments are intensive, and losses are forecasted to accrue for the first initial number of years. A brewery would be a good example. Limited partnerships also can be very useful as investment structure to a limited liability corporate partner and to provide returns to the investor partners free of risk other than to their initial investment.

The answer in one word: absolutely. Failure to have a partnership agreement allows the legislation governing partnerships to default over any agreements between parties. Limited liability partnerships are variations on a general partnerships and are quite similar in nature. However, limited partnership agreements are typically quite different in structure.

One of the most important clauses in a partnership agreement deals with dispute resolution and the exit of a partner and its impact on the business relationship. Without such provisions, a partnership might have to be wound up in its entirety as a result of a dispute, and this can cause serious issues, both tax and others for all partners involved.

• a review of contracts to which the target corporation is a party;
• public record searches for registered security on the target corporation’s assets and on the vendor’s assets;
• a review of any litigation to which the target corporation or the vendor is a party;
• a review of all employment related matters on the target corporation’s employees;
• public record searches for registered writs of execution against the target corporation or the vendor;
• public record bankruptcy searches on the target corporation and of the vendor;
• searches with respect to tax and HST with al taxes relevant authority on the target corporation and the vendor; and
• a review of intellectual property owned or used by the target corporation.

A guarantee is a document often requested by a bank, landlord, supplier, or other supplier with whom you may be dealing in the course of your business.  When there are two or more guarantors of the same debt, there is another significant risk. The assumption many people make, when signing a guarantee with someone else, is that, upon default, the bank or other supplier to whom you have guaranteed payment, will neatly divide the debt amongst the number of people signing the guarantee, and go after each guarantor for his or her proportionate share of the debt.  Not so.  Most guarantees carry the words “joint and several” to describe the nature of the multiple party guarantee.  Those words mean that the bank can go after any one of the guarantors to collect the entire debt.

There are several ways to reduce this risk.  one is to ask the supplier to limit each guarantee to a proportionate share of the debt, so that the bank can only go after each guarantor for the amount of the debt on his/her guarantee – we call that “several liability”.  Another way is to ensure that there are sufficient assets secured by the supplier from the business to cover the debt.  A final way is to ask those other guarantors to provide the asset-rich guarantor with security for the repayment of his/her share of the debt.

In short, it is extremely important, before signing on as a guarantor on a debt or obligation, that you obtain legal advice on your options for reducing your risk under the guarantee.

As a small business owner, you may be under the impression that securities laws are not applicable to you.  This impression likely stems from a common perception that “securities” are publicly traded, and consequently the laws that regulate them must only be of concern to publicly-listed entities. Right? Unfortunately not.  Securities laws are relevant to all businesses, especially those operating under corporations, and business owners would do well to keep them in mind when considering growth opportunities.

Apart from the legislative requirements, you should also keep your records up-to-date for a number of reasons.  In the event that you wish to sell your business later on, it will be easier for prospective purchasers to perform their due diligence reviews of the business. This will save you significant legal expenses in relation to the transaction.  Lawyers acting for vendors are frequently required to tidy up minute books with remedial resolutions and amendments to various documents (such as articles and shareholder agreements), and the costs of having to do so could significantly diminish your sale proceeds.

Should your corporation be sued, you will lose credibility where further facts are explored by the courts and you claim to recall matters that are not adequately reflected in the records (e.g. no corporate resolution exists approving a sale of shares, so how can it be argued that the sale was authorized?).

Failing to keep adequate records could be a violation of the fiduciary duty that you owe to the corporation as its director. The very heart of a director’s fiduciary duty is to act on an informed and reasonable basis.  It will be difficult to argue that you upheld this duty if your records do not accurately reflect the information behind, and the reasons for, your actions.

You will want to think about having the following in place:

• Shareholder’s Agreement;
• Cohabitation Agreement or Marriage Contract;
• Power of Attorney for Property;
• Will, including possibly double wills to address corporate assets

In addition to the above, various types of insurance policies are an important part of any contingency plan.

There are fundamental matters that need to be considered in each transaction. In essence, each seller and each buyer has its own objectives; the “art of the deal” is to find the common ground that enables each to sufficiently achieve its objectives so as to enable the transaction to occur. Anticipating and understanding the other parties’ objectives is key to finding the common ground.

Similarly, there are many factors that can or may need to be considered such as the industry/ sector, securities laws, foreign investment and competition laws, tax, IP, labour relations and employment, pension and benefits matters, international or multi-jurisdictional matters, etc. Some or all of these (plus others) may or may not be relevant depending upon the circumstances.

There is also the negotiation and drafting of the documentation.  Each business has similarities with and differences from others in its sector and beyond. No “one size fits all” works; instead numerous factors will influence including available resources, time constraints and pressures and risk/liability allocation.

A successful acquisition/disposition transaction requires care and attention in preparation and execution including in the analysis of trends and customs in structuring and creating the principal documentation.

Starting or owning a corporation with a partner can be very exciting. These ventures force partners to focus on the financial projections, financial results, and organization and management of the day to day operations. These issues are fundamental, but the partners (or shareholders) also need to understand that no business is free from contentious issues within the corporation. While corporations started by a family, friends, or even long-time associates may run smoothly, you should never assume that problems cannot arise. These are the cases where shareholder agreements come into play.

A shareholder agreement is a contract between the shareholders and, in some situations, between the shareholder(s) and the corporation to structure the relationship amongst them. A unanimous shareholder agreement has the same features as described above, but it restricts the power of the directors explicitly to manage the corporation.

A well-drafted shareholder agreement should define each party’s expectations with clear rules that describe the relationship amongst the shareholders and provide some mechanisms designed to be able to address some of the possible contentious issues that could arise in the future.