How do you stop a simple transaction from devolving into a
nasty shareholder dispute? Draft a good buy/sell clause
When a company has multiple shareholders with large voting and
equity stakes, the importance of a precisely worded buy/ sell
clause within the shareholders' agreement cannot be overstated.
Take the case of Maple Leaf Sports & Entertainment. Last year,
the Ontario Teachers' Pension Plan announced that it would be
divesting its 66.1-per-cent controlling interest in the sports
company, which owns a number of properties including the Toronto
Maple Leafs, the Toronto Raptors, the Toronto FC soccer team and
the Air Canada Centre, as well as a number of TV stations.
The other two shareholders, Lawrence Tanenbaum (with 20.5 per
cent) and the Toronto-Dominion Bank (with 13.5 per cent), each had
a right of first refusal (in direct proportion to the shares they
owned) on any proposed sale of the Teachers' shareholding. If
either of the minority shareholders decided not to purchase any
Teachers shares, then the other would have to purchase the entire
stake or nothing at all.
In addition to the right of first refusal, the agreement
stipulated that Tanenbaum and TD, as the two remaining shareholders
of MLSE, would be required to approve any transfer of the
company's broadcast and Internet assets.
One can only imagine the turmoil that would have ensued without
such a carefully constructed buy/sell covenant. With the MLSE's
majority stake in play, the interest could have been sold to
outsiders – at a dilutive price, perhaps – whose
strategy might have diverged significantly from that of the current
shareholders. Lawsuits would have been a real possibility.
That didn't happen, however, thanks to a shareholder
agreement that contained explicit buy/sell provisions. The purpose
of these, broadly, are to offer a predictable "liquidity
event" for departing shareholders. Assume a shareholder wants
to sell his or her stake in the company. The buy/sell clause sets
the terms under which a sale can be conducted and often stipulates
"triggering events" that allow current shareholders, or
the corporation itself, to purchase shares on favourable terms.
The clause is also meant to achieve a number of other
objectives. In the case of death, the buy/sell clause sets out how
the shares of the deceased will be dealt with. The provisions are
designed to ensure fairness and to permit management to continue
without interference from outside parties. And they take a variety
of possible events into account when determining the selling price
and terms of payment.
That being said, there are a number of important considerations
that are often overlooked by lawyers.
Defining Value One of the more common problems
with buy/sell clauses that are prepared by lawyers is that they do
not clearly define value. Terms such as "book value,"
"fair market value," "market value," "fair
value," or just plain "value" are often adopted (the
implications of which are rarely given much thought). However, each
of these terms can lead to materially different valuation
Formula Approach Some shareholder agreements
make use of formulas, such as a multiple of the average earnings
for the past five years or a multiple of book value. The problem
with this approach is that a formula often fails to take into
account the business's future prospects or potential.
Furthermore, the parties may wish to have different values or
different payment terms, depending upon the specified event.
Formulas, while simple, can be rigid and inflexible, producing
Shotgun Arrangement With this approach, a
shareholder wishing to acquire another stakeholder's shares
will stipulate an offering price. The offeree will then have the
option to either sell at that price or turn around and, instead,
buy the offeror's shares. To use an analogy, it's as if one
of the parties were asked to cut a pie in two, and the other got to
pick the slice.
As for Maple Leaf Sports & Entertainment, Rogers
Communications and Bell Canada, which already own TV channels,
jointly acquired a 75-per-cent stake for $1.32 billion. Tanenbaum
has the remaining 25 per cent. (See "Big Deals," pg. 30.)
Such a clear path to transfer of ownership could not have existed
without a strong buy/sell agreement, but drafting one often
requires a business valuator. A little help at the start can go a
long way to avoiding problems down the road when the inevitable
"triggering event" occurs.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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