#MaRSBP

Partnerships – A Necessary Evil?

Jeff Dennis May 8, 2012 Tracy Hooey

Introduction

Jeff Dennis Entrepreneur in Residence Fasken Martineau 416 868 7544 jdennis@fasken.com Tracy Hooey Partner Securities and Mergers & Acquisitions Fasken Martineau 416 868 3439 thooey@fasken.com

Outline

•  Do you really want a partner? •  Is this the right partner? •  Roles, responsibilities and powers •  Communication • Get it in writing •  Legal form of relationship •  Contributions of each partner (financially and otherwise) •  Compensation •  Right to information •  Decision making •  Control who your partner is (today and in the future) •  Restrict what your partner does •  Exit options

Do You Really Want a Partner

Do You Really Want a Partner

• Partnership* is like a marriage – easy to get into; messy to get a divorce

• Make your partnership decision carefully • There are alternatives to partnership, including hiring

someone, rather than giving them equity in your business

* When used in this presentation, partnership is used broadly to mean any association between two or

more persons and may include corporations, general partnerships, limited partnerships or joint ventures.

Is This the Right Partner

• More often than not, entrepreneurs spend more time interviewing employees than they spend time getting to know a prospective partner

• Get to know your prospective partner: • Do they share your values? • Do they share your goals and expectations – personal

and business? • Do they share your timeline? • What are you each contributing?

• Money • Property • Sweat equity

• Trust your gut!!

Define Roles, Responsibilities and Powers • Distinguish between ownership and employment • Limits on obligations and risk • How are decisions made?

• Strategic • Major business decisions • New partners/investors

• Operational • Signing cheques • Signing contracts

Communication

• What’s the vision for your business? • Strategic planning – quarterly and annual reviews • Performance reviews • Annual partner retreat • Disclosure rights

•  Financial information • Financial Statements • Annual business plan/budget

•  Corporate records •  Claims – liability and litigation

Get it in Writing!

• Crystallize your intentions and expectations (including with respect to risk) in a binding agreement.

• Customize to your situation. • Assess your bargaining power. Will the provisions be

mutual? • You will learn a lot about your partner during the drafting and

negotiation process. • Address both your current and future needs and the

perspective of a future investor. • Hope for the best, prepare for the worst.

Key Issues

• Legal form of relationship • Contributions of each partner (financially and otherwise) • Compensation • Right to information • Decision making • Control who your partner is (today and in the future) • Restrict what your partner does • Exit options

Legal Form of Relationship

• The legal form of your relationship (eg. partnership, limited partnership, shareholder of corporation) may be determinative of certain issues, only some of which you can modify by contracts

• Statutory and/or common law rights may govern •  Limits on liability (ie. if you are a shareholder or a limited

partner) •  Duties to partner (ie. common law duties of good faith,

fiduciary duties of directors, each partner can bind others, joint and several liability)

•  Decision making (shareholder rights) •  Tax implications

Contributions of each Partner

• Types of Contributions •  Tangible and intangible assets (like intellectual property) •  Financial equity (initial and ongoing capital requirements;

guarantees of obligations of partnership) •  Sweat equity (services)

• How are they valued? What is the consideration?

Capital Requirements

• What are the partnership’s initial and anticipated future capital requirements and how will these be funded?

• Who will determine the timing and terms of any capital calls? • What are the repercussions of non-compliance with calls by

any partner? • How will this impact your relative ownership? • Provide for pre-emptive rights (the right to participate) in the

event of third party financings (to prevent dilution of interest)

Compensation

• Consider how you will be ‘paid’ and who will determine • Will there be cash and non-cash (eg. options) compensation? • Consider tax implications of different forms of compensation • Balance the need for compensation with capital requirements

of organization

Right to Information

• What information do you need about your business •  While you are a partner

• Financial statements • Annual business plan and budget (and variations from

them) • Tax Information • Minute books/corporate records •  Information regarding disputes/litigation/proceedings

•  After you leave the partnership

Decision Making

• Who will make key strategic decisions? • Will there be a board of directors or other governing body and

what will be the composition of it and its powers? • Who will make operational decisions and who will select

those people?

Significant Decisions

• Are there some decisions that require a prescribed level of approval of partners (such as unanimous, super majority, prescribed quorum, veto rights) •  Capital expenditures of certain dollar amount •  Termination or sale of partnership/underlying business •  Declaration of dividends/distributions •  Borrowings and guarantees •  Significant contracts and signing authority (bank accounts) •  Approval of Annual Business Plan/Budget •  Fundamental transactions •  Transfer of ownership interests or addition of new partner

Control Who Your Partner Is

• Restrict the active transfer of partnership interests (whether securities or contractual rights) without your consent

• Protect against transfers of assets by statute (i.e. at the time of death, disability, insolvency or divorce of your partner)

• Consider indirect transfers (i.e. upon a change of control of your partner)

• Consider the ability to pledge interests • Consider the ability to add a new partner (of equal or lesser

priority)

Restrict What Your Partner Does

• Non-competition • Non-solicit (customers, employees, clients, suppliers) • Confidentiality • Dispute resolution (will it be restricted to arbitration?)

Exit

• A time may come when you or your partner no longer wants to be part of the business

• Unless your contract provides for it, you may not be able to buy out or sell to your partner

• Anticipate the worst

Exit Options

• Right to transfer (with a right of first refusal) • Piggyback/Drag along rights • Put/Sell option • Shotgun

Right of First Refusal

• Sell interest only after giving your other partner(s) the right to purchase or refuse to purchase

• Different options – is the right of first refusal triggered only if a partner receives a good faith offer from a third party to purchase a partner’s interest or can a partner simply offer its interest to other partners on terms established by the partner?

Piggyback/Drag-Along Rights

• Piggyback Right •  If one partner offers to sell its interest to a third party, the

other partner can “piggyback” on the sale and sell its interest too

•  The purchaser of one partner’s interest must purchase all interests on the same terms and conditions

•  Improves the liquidity if you are a minority partner but can limit liquidity if you are the majority partner

• Drag-Along Right •  If one partner sells its interest, it can compel the other

partner(s) to sell to the same purchaser on the same terms and conditions

•  Will result in forced sale even if not interested

Put/Call Rights

• Put Rights •  One partner requires the other partner(s) to buy its interest

• Call Rights •  One partner requires the other partner(s) to sell its interest

- usually upon certain events (ie. death, incapacity, insolvency, resignation, change of control)

• Valuation – need to have a mechanism to determine value

Shotgun

• One partner notifies the other partner(s) the price at which it is willing to buy or sell its interest

• Other partner(s) must either elect to buy or sell at that price • Addresses deadlock situations • May not be optimal if partners have unequal financial

resources • Consider requiring a minimum price

Summary

• Do you really want a partner? •  Is this the right partner? • Define the roles, responsibilities, contributions and powers of

each partner in advance and document them in a binding agreement

• Communication among partners is critical – Annual plan, quarterly reviews, annual retreat

• Control who your partner is (today and in the future) • Exit options

Contact Information

Jeff Dennis Entrepreneur in Residence Fasken Martineau 416 868 7544 jdennis@fasken.com Tracy Hooey Partner Securities and Mergers & Acquisitions Fasken Martineau 416 868 3439 thooey@fasken.com