Realistic Timetables and Expectations

Peter Welsh Law Partnership and Shareholder Agreements

It is not unusual in Corporate or Commercial Law to be engaged by a businessman who wishes to buy or sell his business and to do so as quickly as possible (oftentimes, “strike while the iron is hot”). However, it is equally important that realistic timetables be understood for how quickly transactions can be done for the protection of all parties.

For example, a not atypical situation: a businessman wishes to acquire a franchise operation in leased premises in a retail mall. Both the Purchaser and the Vendor are willing to complete the transaction as quickly as possible. One or the other will be charged with the responsibility to record, by way of a purchase agreement, what the deal is and thereafter proceed with the completion of the intentions of the parties.

Third Parties

However, there are third parties involved in the transaction: the Franchisor and its approval process for a transfer (which is subject to strict requirements of Ontario Law) and the Landlord and its consideration of its new Tenant. Almost invariably, the Purchaser is subject to the requirements of the Franchisor and the Landlord in terms of credit worthiness, application process, consideration of candidacy and the timetable of those third parties to the transaction.

From a critical path perspective to accomplish the closing of the transaction, those third parties have their own timetables, their own requirements, their own assessment of the business transaction and invariably those timetables are not going to be the same as the willing buyer and the willing seller, regardless of the good standing of the direct participants, the buyer and the seller.

What are the Times?

It would not be unusual for a Franchisor to take 4 or more weeks, probably closer to 8 weeks to approve a transfer. Part of that time period is mandated by the franchise legislation which requires any potential franchisee to have received all of the documentation required of a franchisor before anyone can become a franchisee. Under the “Franchise Act”, that is no less than 15 days (sometimes referred to as a “cooling off period”) required to consider the Franchise Documents. In addition, there may well be an assessment made by the Franchisor/Landlord about the premises, equipment, operations and training before a new operator takes over.

Even in those circumstances where there is commonality of interest between the buyer and the seller, the third party procedures will dictate when or if the transaction will close.

A solicitor acting for either side is knowledgeable about these requirements and, while solicitors are not infrequently claimed to be slow or overly cautious, the singular objective of commercial lawyers in these types of transactions is to be sure that, following closing, each party has received exactly what he/she had expected without fallout later.

To accomplish that objective, the client and the lawyer must work hand in glove to be sure that all third parties involved have been adequately informed, early on, provided all necessary documentation, have been fully satisfied with their own business requirements and that at the end of the day, the buyer relationship with the Franchisor and the Landlord will be without issues.

So the Message is Simple

Expectations of a speedy closing may well be under the control of others well beyond the individual client or his solicitor. Realistic expectations about how the transaction will close (and when) must be established at the outset of the transaction. The client should be actively involved in the process throughout including fulfillment of all requirements of the third parties, on time and fully. Otherwise, frustration and disappointment will ensue.

In our office, we work toward establishing a Closing Agenda as the primary guideline document on a business transaction with attention paid to the critical path, the requirements and timetable of the third parties and the instructions of our client. We believe setting realistic timetables and expectations will result in a satisfactory conclusion and the avoidance of sometimes much more difficult or even irresolvable issues arising after closing.

We’d be pleased to consult with you with respect to any of your pending business transactions.

Mediation and Arbitration

Peter Welsh Corporate Law

Almost all Shareholders’ Agreements and Partnership Agreements include some form of dispute resolution by way of mediation or arbitration as an alternative to litigation.

In a recent matter, a Partnership Agreement had a relatively modest mediation provision. Essentially, the partners are to attempt to resolve the matter in dispute between themselves and thereafter mutually select a mediator and if that does not work out then to move toward arbitration before litigation. This is rather standard: attempt resolution and then a process.

Business Input

Unfortunately, partnership disputes almost immediately interfere with the operation of the business. Yet, most mediation and arbitration clauses have relatively lengthy time periods for matters to be resolved, often 30, 60 or even 90 days during which the business may well be imperiled.

In addition, most mediation/arbitration provisions provide for the parties to agree on who is to be the mediator or arbitrator. If the parties cannot agree on their own dispute, they are highly unlikely to agree on who is to be the mediator/arbitrator; so the entire process may fall just on the procedure.

While we promote mediation and arbitration as alternatives to litigation, we are becoming more attuned to the necessity of an expeditious method for mediation to unfold with a focus on only a matter of days and, at the same time with extreme attention to the costs.

What to do?

We think mediation/arbitration clauses should be significantly tightened to address the realities of the business, the customers, the suppliers and the employees, all of whom may be caught in the middle of a dispute of a personal nature between the partners (or shareholders). You should consider how your mediation clause will actually work should there be a dispute.

Of course, that begs the question of the eventual viability of the business when one or the other of the partners pulls out the Partnership Agreement in the first place. Usually, when reliance upon the written agreement is made, the relationship is already in serious difficulties. A delay in its resolution will undoubtedly affect negatively the business and hence our recommendation for these matters to be handled quickly, deftly and with the capability of being enforced rather than utilized as a further tool in the dispute.

If you would like to consult with us before the matters turn confrontational or even if they already have, please don’t hesitate to contact us.

The Mutual Legal Assistance in Criminal Matters Act

Peter Welsh Corporate Law

This is something you should know about. A relatively new and not well known piece of Federal Legislation in Canada can be of considerable help to enforce in Canada a Judgment obtained in a foreign jurisdiction. Under Treaties between Canada and numerous other countries, the legislation allows for some rather severe and effective entitlements in Canada for those who have secured a Judgment in another Country but have been frustrated in their efforts to enforce it.

In essence, this Act allows, in certain circumstances, for the filing in a Canadian Court of an Order obtained for the collection of a Judgment, the enforcement of a payment or the seizure of assets that are in Canada. The Act is similar to the Reciprocal Enforcement of Judgments Act which is long established inter-provincial legislation allowing for a Judgment in one province to be filed and enforced in a Court in another province. The Mutual Legal Assistance in Criminal Matters Act provides that the assets in Canada of a party defendant sued successfully in another jurisdiction may be frozen in Canada. That includes “freeze” Orders on bank accounts and seizure of real estate and personal property.

The Process

The process is simple. The Applicant (with a Judgment in a foreign jurisdiction) applies to The Central Authority of Canada (which means, in Canada, the Federal Minister of Justice) with a mere letter together with the foreign Judgment appended and requests enforcement of the foreign Order.

The Minister of Justice applies to the Canadian Court having jurisdiction for enforcement of the “freeze” Order.

Several recent, somewhat famous, cases illustrate its effectiveness.

Example

The Government of Iran was successfully sued in California for liability arising from the death of a hostage during a ransom case in the Middle East. But Iran had no assets in California. The relatives of the hostage brought a California Judgment into Canada to seize the Iranian Embassy in Ottawa. They got the Court Order in Ontario which froze the Iranian Embassy.

My current case

I currently have a case involving a criminal conviction in the United States. The United States Department of Justice holds a Forfeiture Order from a US Court, forfeiting any assets anywhere that the defendant held. In this case, the United States Department of Justice has claimed that assets of a third party in Canada (who is my client) are actually the assets of the defendant in the United States. The United States Department of Justice obtained an Order from the Ontario Superior Court of Justice to freeze the Canadian assets, claiming that the Canadian assets were “substitute assets”.

But beware of abuse

Now there is a potential for misapplication: by way of obtuse example, if a hotel patron were to not pay a hotel bill in a foreign destination resort or hotel, the foreign hotel could obtain a Judgment in the foreign jurisdiction against the hotel patron and then with unsworn testimony, claim that assets of a third party in Canada are actually the substitute assets of the defaulting hotel patron and obtain a Freeze Order over the third party’s assets in Canada.

As with almost anything, some very good intentions of legislators (possibly the seizure of hidden drug money or fraud proceeds) may spill over in to the seizure or “freezing” of completely legitimate property.

As my case unfolds, I’ll update this blog to let you know what has become of the assets of my client that have been frozen in Canada to satisfy a Judgment obligation of a US convicted felon currently a prisoner in the United States. The frozen assets in Canada may not, in fact, be the “substitute assets” of, in my example above, the hotel patron.

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