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“Unfair” agreements may be rejected by the court

Obtain independent legal advice to ensure that you are not entering into an unconscionable transaction/agreement.

Generally, when a signor signs a contract, they are bound by it. However, courts have created exceptions to set aside a contract if they are unconscionable (when there is unequal bargaining power between the contracting parties). The courts have created some categories of unconscionability:

1. Duress of Goods: when a person in possession of goods is in a position of stronger bargaining power because of the urgent need of the goods by the other weaker party;

2.

Unconscionable Transaction: when a stronger party takes advantage of a weaker party who is in need of some special care and protection by obtaining the weaker party’s property for a grossly under valued amount;

3. Undue influence: a) when the stronger party is guilty of some fraud or wrongful act to gain some gift or advantage; or b) because of a special relationship between the parties (relationship of power/confidence/fiduciary), the stronger party has gained a gift or advantage for themselves over the weaker party;

4. Undue pressure: a party exerts pressure to obtain some gift or advantage which the weaker party would not have otherwise consented to; and

5. Salvage agreement: when the weaker party is in a vulnerable situation in need of rescue/assistance and submits to the requests of the stronger party. In Lloyds Banks Limited v Bundy [1975 EWCA], looks at the concept of unconscionability. Bundy only had one asset, his home. His son operated a business that was in financial trouble.

He asked his father to provide a collateral so that he could get loans from Lloyds Banks. After speaking to a lawyer, the father signed an agreement providing collateral for a smaller amount of money. Later on, the son required a larger collateral amount. Workers from Lloyds Banks and Bundy’s son told Bundy that the son was in great financial trouble and required Bundy’s help by providing his home as collateral. Bundy signed the document agreeing to do this. Five months later, the bank foreclosed on the son’s business and seized Bundy’s home. The court held that this was an unconscionable agreement for the following reasons:

1) Consideration moving to the bank was grossly inadequate (Bundy received no benefit);

2) the relationship between Bundy and his son was one of trust and confidence-Bundy’s affection for his son had great influence on him;

3) There was a lack of independent legal advice-the bank should have suggested that the father receive independent legal advice;

4) There was clear unequal bargaining power.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Changes in Marriage Contracts since Ancient Egyptian Times

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Read the article here.

Some may think entering into marriage contracts is a recent trend. However archeological evidence shows the contrary: marriage contracts have been around for quite some time – since ancient Egyptian times. These ancient Egyptian marriage contracts were quite popular amongst women at the time. In fact, some men were given “8-foot long” marriage contracts! Because men often had multiple wives, marriage contracts were seen as a way for women to ensure that they were financially secure upon a breakdown of the marriage. Often these marriage contracts were highly advantageous for women with little regard for the husband’s rights.

However, modern law will often not enforce contracts which would allow one party to have such a large advantage. When a court is assessing the validity of a marriage contract, one of the factors to be considered is whether the marriage contract was entered into under undue pressure. The court will also consider whether the marriage contract is unfairly advantageous to one party, and unconscionably detrimental to the other party. Because of this concern, it is common practice for each party to obtain independent legal advice prior to signing the marriage contract. Each party will have their own lawyer review the marriage contract and advise them on whether the marriage contract is fair or whether their rights/interests should be better protected.

Read the article here.

Take away:

  • When giving independent legal advice on a marriage contract, counsel should do more than just thoroughly review the terms of the contract. It is also essential to obtain adequate information before advising the client. This information will include: age of the parties; family history (previous marriages, children, dependants) medical needs, financial status, career goals, business interests,debts, cultural expectations of the marriage etc.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Entering Into a Term Sheet is Hard Enough, Getting Out of One Can be Even Harder

As a company entering into a possible investment, when accepting an investor term sheet, consider the provisions relating to termination of that term sheet.  There’s nothing worse than being stuck in an unlimited holding pattern while trying to raise funds.

Here are some tips to make sure that your interests are protected.

  1. Set an automatic termination date (30 days, 60 days) that will provide sufficient time for due diligence and receiving and reviewing legal documentation.

     (The termination date can be extended after that day by written approval).

  2. Make sure that the termination provision is in writing (can be in a non-binding term sheet with certain binding provisions, including the termination mechanism).
  3. Avoid a term that requires the company to pay legal fees, unless the deal successfully closes.
  4. Honour the “no-shop/break fees” clause (if any) i.e. do not start shopping the deal around, or you may be on the hook for paying the agreed-upon break fees.
  5. Don’t start performing as if the deal has closed until it actually closes i.e. until funds are transferred, documents are signed, and so on.  The court has looked at “non-binding” deals in which the parties starting to work together, co-market and so on, and in some cases has considered that the deal had actually closed based on such (and other) performance by both parties.

     In doing so, the court has found that a “non-binding” term sheet is therefore binding.

Reviewing multiple term sheets can be tricky.  In some cases the investors will welcome co-investors, and will agree that a lead investor can protect their interest, can be responsible for management decisions, and so on.  In other cases, the investors will consider themselves competing.  When faced with multiple term sheets you as a company should consider the long term strategic relationship that you are looking to develop, trust your instincts, and make sure that you consult with your trusted advisors and legal counsel before selecting your investor.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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When Fundraising, “Know” Your “Accredited Investor”

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here

When raising money in Ontario or Canada for your startup company, you fall under the scrutiny of the rules of the Securities Act and related National Instruments that set the rules on the nature and type of disclosure that you need to provide to your potential investors.  In all cases you are required to provide a prospectus (which is a detailed document outlining the risks and details of the business to invest in), unless your fall under a prospectus exemption.  I’ve written about prospectus exemptions in the past (see here).  My past article describes the Accredited Investor Exemption which is often used when raising money from “arm’s length parties”, and that is the topic of this blog post.

Determining if your investor is “accredited”

I’m often asked what steps should be taken to confirm that investors are accredited.   When raising money from accredited investors, it is the responsibility of the company raising money to determine whether the accredited investor test is met.  Other than relying on a statement by the investor as to their net worth or earnings, how can a company confirm that they truly are a member of that category?

Best practices for confirming/recording the status of potential investors include:

  • Reasonable efforts to ensure that the purchaser understands the meaning of the definition of “accredited investor” through discussion and written explanation;
  • A certificate of independent legal advice from the investor that the investor documents were reviewed by their own counsel who provided advice on same;
  • Receipt of a signed document by the investor indicating which exemption is relied upon, and better still, specifics on their “fit” in the category;
  • Signed letter from the fundraising board director/executive indicating which exemption is relied upon (in the future if the fundraising party has moved on to another company, having this documentation on file will potentially be useful).

It is useful and prudent to review supporting information wherever possible:

  • with respect to purchasers who are accredited investors based on income, a review of tax returns for the past two years and obtaining a written representation from such person that he or she has a reasonable expectation of reaching the income level in the current year;
  • with respect to purchasers who are accredited investors based on net worth, the issuer reviews bank statements, brokerage statements, other statements of securities holdings, in order to verify assets, a consumer report from at least one of the nationwide consumer reporting agencies to verify liabilities and obtains a written representation that all liabilities necessary to make a net worth determination have been disclosed (all information reviewed may not be more than 3 months old); and/or
  • confirmation from the accountant, broker or lawyer of the accredited investor in writing that they have confirmed that such purchaser is an accredited investor.

After funds are raised using this exemption, disclosure of this financing should be filed with the securities regulator in your jurisdiction.  It is important for companies raising money to conduct this process carefully with a view to investor protection.   Always consult with legal counsel to ensure that you’re properly navigating the fundraising process.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Legal Tips and Tricks: A Term Sheet Should Start with a Blank Page

When entering into an important contract, take the time to discuss with your business partners, advisors and legal counsel, to make sure that you are clear about your opportunities and risks.  In this article, we describe four simple steps to follow to make sure that your interests are protected when drafting a term sheet.

The best way to commence drafting a contract is similar to the best way to build a presentation slide deck or to design a website wire frame – start from scratch.  This is to ensure that you are not constrained or swayed by the language of a prior contract.  Start with a blank canvas, and start writing out the concepts that you want to include.

Step 1:  The first element to think about is the opportunity i.e.

what you stand to gain.  Make sure that you clearly understand and have communicated what you desire.

This can be very simple (such as a cash payment), or can be more subtle (for example, receiving the rights to publish the logo of your counterparty on your website, access to an advisor’s business network, etc.).  You may desire that the rewards be provided to you all at once, or that they are time-delayed.  Once you have jotted down everything you stand to gain by entering into the opportunity, you can start determining the qualities of those rewards.

Step 2:  Make a list of your risks (or how could the deal go wrong), i.e. what could happen that could result in being sued, losing your cash compensation, or public embarrassment (not ideal for an individual or a company).  Your legal counsel can assist you to determine what steps you need to mitigate these possibilities (e.g. requirement for insurance, cash up front, ease of termination of contract, and so on).

Step 3:  Once you have completed your list of interests and risks, it is time to think about your counterparty’s interests and your counterparty’s risks.  Making sure that your interests are protected and predicting the setbacks that might occur are two of the goals of a well drafted contract.  A savvy (and speedy) negotiator will also try to anticipate the interests and risks to your counterparty, and to address those in the basic terms.

Step 4:  After completing the prior steps, you will have the basic negotiating points of your agreement and can supplement with discussions with your business partners, advisors, colleagues in the same industry, and your legal counsel.  The benefit of the additional experience and awareness of external factors (legal, operational, negotiating tactics or other issues) will add another layer of insight and protection.

To be diligent, I further recommend that you repeat steps 1 and 2, each time you commence contract negotiations and even at the time of renewal, to ensure that you have captured the elements of the contract that are important to you.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

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