Steps to Growth Capital Self-Study GuideStep 9

9.3 Scrutinize Legal and Other Obligations

As you know, the fine print can often include some surprises. This investment deal is one of the most important you will ever make for your business, and it's vitally important that you know and understand every detail of the commitment you will be making. Take the time to comb through the details and to ensure you're aware of how the deal fits with new and existing obligations. Be sure to consider:

• Legal Issues
  
• Government Regulations
  
• Existing Contracts

Legal Issues

Keep Actively Involved in the Legal Agreement

Reviewing and negotiating the various elements in your legal agreement is time consuming. But it's critical for you to do so before closing the financing. Don't rely on your legal counsel to take care of the legal issues for you. Read all sections of the agreement and make sure that you understand them. Why? Because you'll have to be involved in decisions affecting the agreement, such as what representations and warranties the company is prepared to give, the composition of the board of directors, the dividend policy, compensation arrangements, positive and negative covenants, and so forth. Don't underestimate the importance of these issues.

Work With a Specialist

It's critical that you continue to work with a lawyer throughout the final closing of the deal. At this stage you need a lawyer who is a specialist with investment contracts and shareholder agreements. Your existing lawyer may not have the necessary experience to guide you properly, and if so, should refer you to a specialist practising in this sector of the law.

Retain Your Own Lawyer

No matter how much you trust the investor and the investor's lawyer, always remember that they have the investor's interests in mind, not yours. Although many of your interests coincide (e.g. to have your business succeed), many will conflict (e.g. who has effective control over the business). Without independent legal counsel protecting your interests, you allow the investor to control the agreement.

Get Advice Before Signing Anything

In particular, don't sign agreements that the investor says are used "with all the other companies" that the investor finances, without having your own legal expert check them over. And don't try to save on legal fees by signing an agreement in which only "minor" changes were made. Your lawyer should always review the final version. Changes that you regard as minor could have major repercussions in terms of the documentation to be filed or the impact on your business. Besides, if your lawyer reviewed the first draft, it shouldn't take much time or money to review the changes.

Government Regulations

Financing arrangements are governed by provincial statutes. These statutes establish regulatory requirements that vary according to the type and amount of the investment. Each province has legislation that covers various aspects of business transactions and the issuance of securities by companies. In Ontario, for example, the Ontario Business Corporations Act, the Ontario Securities Act and the Personal Property Securities Act may all contain regulations that may apply to your particular financing arrangement.

You should consult with your lawyer to ensure that all applicable regulations, restrictions and registration requirements are considered. And your lawyer should review every document to ensure that the investment agreement conforms to the negotiated terms. Once all the documents are signed, you'll find it very difficult, if not impossible, to change, delete or add clauses.

For more information on legal issues and government regulations see the Legal and Regulatory Overview.

Existing Contracts

Think ahead. Once your agreement is signed, your company's capital structure and ownership will have changed, perhaps dramatically. What effect will this have on existing contracts? For example, if you have a bank loan, you may have agreed in writing to notify the bank and get its approval before you change the ownership structure.

Before the deal is finally closed, ensure that there are no loose ends that could turn into problems down the road. Your lawyer will be able to guide you on these matters. Here are some items that you should consider. ^{Lefton et al.}

• Do any options or other agreements exist that were negotiated earlier in the company's life that would be unreasonable after the financing? For example, options to purchase shares that may have very low exercise prices in light of the new size of the company.
  
• Are there any contracts (licences, employment contracts, supplier contracts, etc.) that will soon expire? Should they be renegotiated early or allowed to lapse? For example, a supplier may demand increased prices knowing that the product is vital to your expansion or, alternatively, if you will be producing more items in-house, you may need to cancel some contracts.
  
• Do any existing contracts restrict your ability to enter into new contracts, open up new markets, etc.?
  
• Do employment contracts and confidentiality agreements (especially with respect to intellectual property) cover all key employees? Key employees may include not only the management team but also scientists, engineers, plant managers, etc.
  
• Did you enter into any related party transactions that, while appropriate when you were the sole owner, may no longer be appropriate? For example, payments to management companies, special dividends or shareholders loans may need to be attended to.
  
• What about any potential or contingent liabilities (i.e. lawsuits)? You may wish to settle these before your company grows because an award granted after the financing may be larger simply because your company is larger.
  
• Are you satisfied with your current auditors and legal counsel? Changing advisors may be more difficult later on with additional owners who must consent.
  
• Are there any agreements, contracts, etc., that will end or materially change as a result of a new share issue, share dilution, the assumption of subordinated debt or a change of control?
  
• Ensure that all banking arrangements reflect the new financing structure and that there are no outstanding issues regarding security documentation, required notice or forced repayments.
  

<< Previous | Next >>