Compelling Reasons Why You May Need a Business Lawyer

My friend and I have an idea for a business and we are considering forming a partnership. How does a partnership work and how should one be setup?

Whether or not a partnership exists is a fundamentally a legal question. Ontario’s Partnerships Act says that a relationship between “persons carrying on a business in common with a view to profit” is a partnership within the meaning of the Act. This is important because it means that whether or not you declare yourself to be a partnership, legally speaking, you might be a partnership anyways, whether you intended to or not.

A partnership can exist between you and your friend personally, or even as between two corporations controlled by each of you. Unlike a corporation, however, a partnership has no separate legal existence from the partners themselves and each partner has the power to bind the partnership and each partner is jointly liable for any obligations incurred on behalf of the firm. This is why, when deciding to form a partnership, a partnership agreement can be very practical.

A partnership agreement sets out the rights and obligations for partners in the partnership and provides for what should happen in circumstances of partnership incapacity, retirement or death. Without one, the Partnerships Act will provide for what happens to the partnership in these circumstances, often with unintended results. A partnership agreement can also provide mechanisms for the distribution of partnership income and a process for bringing additional persons into the partnership. Creating a partnership agreement that meets your goals with the help of a commercial Lawyer ensures that your partnership will continue in a manner of your design.

“I’ve been told I need a Shareholder’s Agreement - do you have a standard agreement I can use” is something we hear with frequency. It reflects an understanding by the client that a Shareholder’s Agreement is a “good thing”, but without an understanding of what that good thing is. Generally the response of legal counsel to this question is that there is no such thing as a “standard” Shareholder’s Agreement, let’s meet and talk. So what is it about Shareholder’s Agreements that are so valuable and why isn’t there a standard form, like a real estate agreement?

At a high level of abstraction, a Shareholder’s Agreement is a document that expresses the expectations of shareholders in respect of a corporation through legal obligations and rights. The task of the Lawyer in preparing the Shareholder’s Agreement is threefold - discerning what the expectations are (and those expectations are often not fully formed) –  providing counsel on the legal and tax implication on the various alternatives by which those expectations may be realized - and expressing those expectations in the form of contractual terms that bind the parties.

For example, shareholders in a narrowly held private corporation may have an expectation that on death the shares will be purchased. In the absence of a Shareholder’s Agreement, this expectation may not be realized. There is no statute or common law requiring or obligating a purchase. If the remaining shareholders are unwilling to agree to a purchase, the estate is left with the shares and a tax bill. Nothing of course prevents the parties from negotiating a purchase, but the relative bargaining power may have shifted in unpredictable ways, and planning opportunities, such as insurance funding, may have been missed. A Shareholder’s Agreement that addresses these expectations will reflect the parties prior expectations for fairness, and will create certainty.  Legal counsel will discuss alternatives including the corporate purchase of the shares, purchase by the remaining shareholders, and hybrids including spousal rollovers, the tax implications under the alternatives to the estate and to the remaining shareholders, the use of insurance funding, payment terms, security and so forth.

In family held corporations, expectations for succession (how management is succeeded) and liquidation (how the shareholding interests are turned into cash) are particularly difficult and require unique and sometimes innovative solutions. A Shareholder’s Agreement is a valuable tool in estate planning for resolving how competing expectations for liquidation and succession are accommodated.

I am negotiating to purchase a business and my business advisor has strongly suggested I structure the deal as an “asset purchase”. Why is this preferable?

‍There are two principal ways to structure the agreement of purchase and sale of a business: as an asset purchase or as a share purchase. An asset purchase is just that, a purchase of listed assets without taking on liabilities of the business. A share purchase, by contrast, is the purchase of the shares of the corporation that carries on the business and owns the assets. There are a number of considerations as to which form of purchase is preferable. In this article, we want to focus on why your advisor has strongly recommended an asset purchase.

‍Liability

‍A properly structured asset purchase agreement will allow you to purchase all of the desirable assets of the business you wish to acquire while leaving out the unwanted liabilities.

Your advisor has likely identified the business as one either by its nature or by the disclosure you’ve obtained in which there are significant potential liabilities that may be avoided through an asset purchase agreement. For example, if the owner of the business has been pocketing cash payments or using corporate assets for personal use, the business may be exposed to re-assessments and penalties by the Canada Revenue Agency. A purchase of shares would mean that you, through the purchased corporation, are exposed to those claims.

‍Exceptions

‍There are some exceptions to the avoidance of liability by an asset purchase. For instance, if the purchased business employed unionized labour, a collective agreement and any ongoing liabilities thereunder will follow the purchased business, even if structured as an asset purchase. Your legal counsel can assist you to identify and understand the relevant risks and how to avoid them where possible or otherwise obtain protection.