VCC – Corporate Complex Transactions Week 1

The first part of these notes provides a review of the laws of contract that
you should be familiar with, part 2 is a brief overview of how contracts
should be drafted, and part 3 is some basic concepts and terminology for
the course.

CONTRACTS

WHAT IS A CONTRACT?

A legally enforceable agreement between 2 or more parties:

 sets out the rights and obligations of the parties;
 sets out what obligations each party owes to the other;
 allows each party a remedy in the event the other party does not honour
its end of the bargain.

FORM OF CONTRACT

The form of a contract can be:

 oral;
 in writing;
 express, inferred or implied;
 Some contracts have to be in writing (eg. land).

FORMALITY OF CONTRACT

A contract requires at least the following 3 elements to be enforceable:

 offer;
 acceptance; and
 consideration.

THE OFFER

 One party makes an offer to another

o for example, an offer to buy goods or to sell goods, or to buy shares
or sell shares;
 can be verbal or in writing;
 an offer must have sufficient certainty of terms:
 at least the following: parties, property, price

THE ACCEPTANCE

Once an offer has been made, the offeree has the choice to either accept or
reject it.
To accept the offer, the offeree must communicate her acceptance to the offerror
 communication of acceptance can be verbal or in writing
 If the offerror expresses a certain required way of accepting, it may only
be accepted in that manner.

Acceptance can be express or implied.

Generally, an offer may be withdrawn at any time prior to acceptance.

Once an offer has been accepted, it cannot be withdrawn or revoked.

HOW DOES AN OFFER EXPIRE?

 If the offerree decides to reject the offer

o by communicating her rejection to you
 Once an offer has been rejected, it cannot later be accepted
unless it is re-offered.
 If you set a time limit to accept and the time limit passed
 If it is no longer possible to accept the offer
 If the other party makes a counter offer. In such a case, the original offer
that was made is no longer open for acceptance.

THE CONSIDERATION

A benefit bestowed
 binds the parties to an agreement.

Courts will not inquire into the adequacy of your consideration;

 Generally, it doesn’t matter if your exchange was a fair one. That is left up
to the parties to determine;
 if you choose to sell your product or your shares for 1 cent (when $10.00
would be a more appropriate price), that is up to you;
 courts may interfere and overturn your contract only in instances where it
is clear that there was fraud, or that either party was incapable of looking
after his / her own interests.

Language of consideration
Words such as:
 "In consideration of $10.00 and other good and valuable consideration
(the receipt and sufficiency of which is acknowledged by each of the
parties), the parties agree as follows.'"
 "For value received, the parties agree as follows.'"

establish written evidence of consideration, and indicate the parties' mutual

intention to be legally bound by what they have agreed to do.
REMEDIES

If one party has entered into a contract and the other party fails to comply with
its material obligations under the contract, the contract has been breached.

 The breach gives the non-defaulting party the right to sue

 If you sue, you are generally looking to obtain damages.
 Damages are based on the amount of money it would take to put you in
the position you were in as though the other party had fulfilled his end of
the agreement.
 The amount depends on the particulars of each case.

The non-defaulting party has the obligation to mitigate his losses. Courts will
compensate the non-defaulting party only for losses due to the other party’s
breach, and not for the non-defaulting party’s failure to behave reasonably after
the breach has occurred;

A non-defaulting party might also be looking for the remedy of specific

performance.
 This is an alternative to damages.
 The breaching party will be ordered to do what the contract states that she
is obligated to do (eg. delivery and / or instalment of the equipment)
 Courts may award specific performance (rather than damages) if what is
being sought is in some way unique and priceless.

A CONTRACT OR A TERM OF A CONTRACT CAN BE INVALID AND

RENDERED OF NO LEGAL EFFECT

A breach of the contract will not automatically lead to an award of damages or

specific performance.
 There must be actual loss
 Consider if there was a material misrepresentation that induced them into
entering into the contract

A statement is a misrepresentation if:

 the statement is false;
 it concerns a matter of fact (and not opinion or ‘mere puffery’);
 the party is actually mislead by it; and
 the statement actually induced the party to enter into the contract.

Courts may refuse to enforce a contract or a term of a contract upon evidence of

 Contractual misrepresentation
 Pre-contractual misrepresentation during negotiations:
 Part 2 DRAFTING A CONTRACT

A written contract expresses the intentions of the parties.

Complexity can range from formal to a napkin agreement.

BASIC PRINCIPLES IN DRAFTING CONTRACTS

A. Considerations

1. Document organization and design

(a) Titles. Consider using titles to separate concepts and

obligations

(b) Numbering. Only one concept or obligation should be

included per paragraph.

(c) Consider separating into subparagraphs for lists

(d) Spacing and Alignment

(i) Align left is easier to read than full justified

(ii) Consider highlighting, underlining, or bolding

important information

2. Rules of interpretation.

The following are general rules used in interpreting contracts. Some of

these are conflicting and each case has to be decided on its merits.

(a) Generally, a document is to be read as a whole

(b) Specific provisions generally override general provisions and

the general provision is “read down”

(c) Ambiguities are interpreted against the drafter

(d) Where particular words are followed by general words, the

general words will be limited to the class of particular words

(e) Lists of particulars exclude all others of the class unless

expressly stated to not be limited

(f) Words are interpreted according to subject matter

 (g) Every word has meaning

(h) Surplus words are ignored

(i) Similar words have similar meanings

B. PARTS OF A CONTRACT

1. Date

(a) appears at the top of the contract

2. Terms

(a) set out the rights and obligations of the parties to the
agreement

(b) explain the terms of the agreement

(c) should be set out in a logical sequence, for example:

(i) what the 1st party is going to do

(ii) what the 2nd party is going to do

3. Parties

(a) Legal entities with capacity to contract

(b) Consider doing a corporate searches to confirm the proper

spelling and existence of parties.

4. Background paragraphs

(a) WHEREAS / RECITALS / BACKGROUND

(b) These are a few brief statements that establish the context
within which to read the agreement

(c) They have little legal effect

(d) Their purpose is to inform

(e) They may be used to assist in interpretation of the contract

(f) They can be considered by the court

(g) They are a factual basis upon which the contract is based
 (h) They use language such as “has”, “have” etc.

5. Operative paragraphs

(a) Only parties to the contract can be bound. This is often

missed by clients.

(b) Contracts identify obligations of the parties in the future.

Therefore, use active voice drafting, using future terms, such
as: “will” and “will not” or “shall” and “shall not” – action
words, who does what and when.

(c) Some terms to consider might be:

(i) the terms of payment, if any

(ii) the term

(iii) termination of the agreement

(iv) representations and warranties

(v) conditions precedent

(a) i.e. events that must occur before a party must

fulfill his obligations under the contract;

(vi) other general matters relating to the rights and

obligations of the parties;

(d) Contracts put obligations on persons so the person should

come first. For example, “The Vendor will transfer title.”

(e) Consider the following five elements to each clause:

(i) who takes the action

(ii) what the action is

(iii) when the action is taken

(iv) where the action is taken

(v) whom the action affects

(f) Try to limit use of “The Parties acknowledge…” It does not

clearly set out an obligation. However, sometimes this is
necessary.
(g) Passive voice is inherently confusing, lacks clarity and is
perceived as deceptive:

(i) what is done precedes the doer so the emphasis is on

what happens rather than the doer – contracts are
about who does what, in that order.

(ii) avoid:

(a) “shall be”, “to be” and “may be”

(b) “will have been”

(iii) Example:

(a) The Purchaser will be given access to the

records by the Vendor within 13 days of
signing this agreement. (Poor)

(b) The Vendor will give the Purchaser access to

the documents within 13 days of signing this
agreement. (Better)

(h) Clarify ambiguity and uncertainty – avoid vague terms: fine,

bad, good, major, high etc.

(i) Plain language (effective communication)

(i) Simple sentence structures – short term memory can

retain 35 words. Therefore, consider replacing:

(a) “on behalf of” with “for”

(b) “in the event that” with “if”

(c) “pursuant to” with “under”

(ii) Consider using familiar words and avoiding old

redundant legalese: “give, devise and bequeath” or
“final and conclusive” etc.

(iii) Defined terms are typically found at the beginning of

an agreement or in a schedule. Defined words are in
capitalized and in quotes and used in the agreement
in capitalized form.

(iv) Good grammar is essential. Grammar should be

consistent throughout.
 (v) Don’t convert verbs to nouns. For example, replace

(a) “make a decision” with “decide”

(b) “make a recommendation” with “recommend”

(vi) Avoid double negatives.

(vii) Avoid archaic words: henceforth, heretofore, herewith,

whereas, whilst, witnesseth, aforesaid,
aforementioned, beforementioned, hereby, herein,
hereinafter, herewith and “the said”.

(viii) Avoid Latin or other foreign phrases

(ix) Try to keep the agreement gender neutral

(x) Use cross referencing sparingly

(a) to exclude a paragraph: “Despite paragraph

14…”

(b) to incorporate a paragraph: “Subject to

paragraph 9…”

(c) to incorporate preconditions: “If the Purchaser

delivers a notice under paragraph 10…”

(d) to make clear one paragraph does not affect

another paragraph: “Without limiting the
obligations of the Vendor under paragraph
16…”

6. Boilerplate paragraphs

(a) These are operative clauses and should carefully be

considered. They are often standard but can have a
significant effect.

(b) They often deal with potential future difficulties.

(c) They can be the life saver of the contract.

7. Signature blocks

(a) Parties must sign or they will later argue that there was no
agreement. A court will probably agree.

(b) Corporate searches to determine authorized signatories

 (c) Individuals signatures should be witnessed

8. Schedules

(a) Must be incorporated into operative paragraphs. They are

not automatically included in an agreement.

(b) Definitions and interpretive provisions are often found in

schedules.

Part 3

Basic concepts and terminology.

This course will primarily deal with corporate transactions such as:

Mergers and Acquisitions - this is the more generic term given to a number of
transactions, where by 2 or more companies somehow “get together. The usual
types of M & A structures are share purchases, asset purchases,
amalgamations.

Share purchases – Eg. The shares of Xco are owned by A and B, who are
individuals. Yco, a company owned by Y and Z, wants to buy the shares of Xco;
this can be done in a number of ways:

(1) YCo could purchase the shares owned by A and B, thereby making Xco
a wholly owned subsidiary of YCo.
(2) Y and Z could buy the shares owned by A and B, so they become the
owners of the shares.
(3) Yco could purchase 51% of the shares of Xco from A and B, thereby
making Xco a partially owned subsidiary of Yco, with Yco having control
of the XCo since it holds enough shares to cast a majority vote in each
shareholder meeting. However, as you should recall from Corporate
Advanced course, there are certain situations that require a 2/3 or 3 /4
majority vote of shareholders, such as for major corporate changes, and
therefore, while YCo is referred to as having control, in fact there are
issues corporate wise which YCo could not control.

Asset Purchases - in the scenario above, Yco may decide that it does not want
to purchase the shares of XCo at all. What it really wants to purchase is the
major assets of Xco but does not want the shares themselves. There are
numerous reasons for this, including the fact that XCO may have liabilities,
whether actual or contingent (ie may come to fruition in the future) and Yco does
not want to take the risk of being faced with those liabilities after closing.

An asset purchase can mean: the purchase of all of the assets of Xco, or Yco
may want to purchase only some of the assets of Xco. By purchasing the assets,
it is not responsible for the liabilities of Xco after closing, so that makes an asset
purchase a much safer transaction for the buyer.

In the past, an asset purchase was also referred to as a bulk sale, or a sale in
bulk, which term meant that the company was selling its assets outside the
normal course of business. Because the purchaser was not assuming liabilities
of the vendor, it was considered that protections had to be built into that process
to protect the creditors of the vendor corporation since the company may cease
operations the next day, leaving the creditors in an awkward position. Therefore,
the vendor and purchaser had to ensure that the creditors’ interests were
protected on this bulk sale. The law that provided these rules was called the
Bulk Sales Act.

However, after many years, the Bulk Sales Act was repealed by all provinces in
Canada (Ontario is the last to do so) as it was felt that this was a cumbersome
system that in fact provided very little protection for the creditors of the vendor.

Because of the repeal of the Bulk Sales Act, sales of assets have become much
more common in BC, in lieu of sales of shares.

Almost all asset or share purchases have representations and warranties.

These representations and warranties are extremely important to the parties – for
example, if the vendor represents that it owns the assets free and clear of
encumbrances, and this is not true, then the whole deal will likely fall apart. Or
else it will have to be renegotiated.

A system of insurance has been developed, called Warranty and Indemnity

Insurance (W & I), whereby an insurance company will insure that these reps
and warranties are true, and if not, the insurance company will bear the losses,
not the purchaser. This is a fairly new insurance product, and you should be
aware of it.

Amalgamations

As you should recall from the Corporate Advanced course, an amalgamation is

the process whereby 2 or more companies “amalgamate” to form one new
corporation.

In most cases related to acquisitions an amalgamation takes place after a share

purchase has been completed. Thus, in the scenario outlined regarding share
purchases, once YCo has purchased the shares of XCO so that it is a parent
subsidiary relationship, the 2 companies may amalgamate into one company, for
various reasons. Similarly, if the shareholders of Yco purchase the shares of
Xco, then the 2 companies may often amalgamate after closing so that there is
only one corporation in existence – the amalgamated company.
Due Diligence

This term refers to searches and investigations that the parties to a transaction
must engage in prior to closing to determine that:

1. The reps and warranties are true.

2. There are no issues that they should be aware of prior to closing, that can
become serious problems after closing.

3. These searches include the Personal Property Security Act registers, for
information regarding security held by lenders against the assets or
shares, corporate searches to obtain all relevant information from that
office regarding the corporation, its directors, review of the Record Book of
the company to see who the registered shareholders are, directors,
officers, etc. We will look at this in more depth throughout the course.

The Role of the Lawyers

In these types of transactions, the role of the lawyers is generally:

To negotiate on behalf of the client in regard to the transaction;

To prepare the agreement of purchase and sale, and go through numerous

revisions to the agreement as the parties negotiate the terms in great depth

To arrange for the execution of the agreement.

To conduct the due diligence on the transaction to the extent that there are
legal issues that need to be attended to. Often, there will be issues that are
not of a legal nature, such as accounting matters.

To report the results of the due diligence to the client, and assist the client in
understanding those results, and the risks that are implied by the results.

To prepare all of the documents that will be needed to complete the

transaction – this is often voluminous.

To meet with the client to explain the documents prepared for closing, and
then to have the clients sign the documents as required.

To close the transaction with the lawyers representing the other party.

To attend to after-closing outstanding issues that often remain.

To report the matter to the client in full detail, as a record of what the
transaction was all about.

As you can appreciate, these transactions can be VERY complex, and require
expert input from:

1. Tax experts such as Tax lawyers and accountants;

2. Accountants to provide financial and accounting advice;

3. Corporate lawyer experts who can best structure a deal;

4. International experts if the transaction includes issues outside of the

province and the country.

5. Human relations experts because the biggest problem that causes

mergers to fail is the failure to look at the corporate culture of each of the
2 companies that are merging. The corporate culture of the 2 companies
(even if they are both Canadian) may be so different that the 2 cultures
cannot really co-exist in one organization. When the merger is
international, then the culture issue becomes even larger.