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EASTERNCAPE,SOUTHAFRICA
BLA-LEC COMMERCIAL LAW PROGRAMME (2011):LEVEL I
SESSION SUMMARIES AND CASE STUDY
INTRODUCTION
Welcome theBLALegalEducationCentre’s2011CommercialLawProgramme(theProgramme)presentedinEastLondonTheProgrammecomprises15sessionscoveringthebasicareasandcertainfundamentalskillsforalawyerwithageneralcommerciallawpractice.
YouwillreceiveaProgrammeSchedulewhichshowsthetopicanddateofeachsession,theinstructors’names,the ReadingMaterialsforeachsession.TheScheduleandReadingMaterialscanbeaccessedanddownloadedat
Toreceiveacertificateofsatisfactorycompletion,eachdelegatemust:
- Beforeeachsession,reviewtheapplicablesessionsummaryandreadingmaterialslistedtherein;
- BefamiliarwiththeCaseStudysetforthbelow
- Attendeachdayofthesession;and
- Participateinclassdiscussionsandrole-playingexercises
CASESTUDY
Many of the instructor presentations and class discussions will utilize the following Case Study. At every session, Delegates should be familiar with the facts described in the Study.
BOBBY COOLWHEELS has taken over a car repair business from his elderly father. It operates under the name “Coolwheels Car Repair” (the “Business”). Bobby’s father (“Father”) started the Business many years ago and has never sought any legal or accounting advice about the Business. He continues to help Bobby “keep the books” of the Business using an accounting software package he downloaded from the internet.
The Business is located on downtown property consisting of a garage and small parking area which Bobby’s father still owns. An adjacent vacant property is owned by Nkolo Neighbour. In addition to Bobby, there are two employees of the Business - Ernestine and Eli - who are paid their wages in cash at the end of every week. Bobby essentially pays himself as his wages from whatever cash is left over after the employees and other expenses are paid.
The Business services cars of customers living in the area as well as servicing a fleet of 10 delivery vans owned by Bobby’s cousin, Deon Deliveryman. The fleet is serviced for an annual fixed rate, paid in monthly instalments, plus reimbursement for the cost of parts. Bobby typically gets paid in cash when a car is picked up by the customer but he sends monthly bills to Deon for services provided to the fleet. The Business keeps a supply of parts inventory and other supplies (such as paints, solvents and motor oil) on hand for which it usually pays suppliers in cash upon delivery. However, his principal supplier, Siyanda Supplier, sends Bobby a bill following delivery of the supplies which Bobby usually pays within 30 to 60 days. The Business also has engine diagnostic equipment and other machinery, some of which Father bought years ago. Bobby has also bought or rented some equipment and machinery over the years, both in his own name and in the name of the Business.
Bobby’s has financed the business himself from his earnings or, when needed, by borrowing from Father. He pays Father 2% annual interest over inflation on the amount borrowed. Bobby has talked about growing the Business to provide services to other fleets; this would require use of Nkolo’s adjacent lot for additional parking. Both his cousin Deon and Siyanda have expressed an interest in investing in the business if their investments could “be protected”. Since this sounds complicated, Bobby has also thought he might just go to the local bank and see if it would lend him enough to pay off the loans from Father and expand the Business.
NkoloNeighbourrecentlytoldBobbythatshewouldconsiderbuyingtheentireBusiness.AfterBobbyshowedNkoloahandwritten“financialstatements”preparedbyFather(seeExhibitA),shesaidshemightconsiderpaying3timeslastyear’s“profits”ifthefinancialrecordsandotherinformationprovidedabouttheBusinesswereaccurate.
Bobbydecidestoengageyouashisattorneyandprovidesyouwiththeinformationoutlinedabove.Bobbysayshewantsto“regularize”theBusinesswithaviewtobeingabletogrowitorsellit.Thisrepresentationrequiresthatanumberoflegalissuesbeaddressed,includingthefollowing:
1.AttorneysrepresentingbusinessenterprisesmustbegenerallyfamiliarwiththesourcesofSouthAfricancommonandstatutorylawsandinparticularwiththeCompaniesAct,asrecentlyamended. Anoverviewoftheselawswillbepresentedinsession1andreferredtofrequentlyinthesessionswhichfollow.
2.Acommercialbusinessis,forthemostpart,aboutriskandreward.Theroleofthebusinesslawyercentersaroundassistingclientsinidentifyingandunderstandingtheirrisks,andeliminating,allocating,shiftingorotherwiselimitingthoserisksinappropriatecircumstances.Whatarethebusinessandlegalriskspresentedbythefactsdescribedinthecasestudy?Whatistheroleofthebusinesslawyerindealingwiththoserisks?How should the initialclientinterviewandengagementarrangementsbehandled?Theseissueswillbeaddressedinsession2andinmanyoftheothersessions.
3.WhatformsofbusinessstructureareavailableunderapplicablelawandwhichoneshouldBobbyCoolwheelsadopt?Whataretheoptionsandtheconsiderationsrelatingtoeachoption?TheseissuesareaddressedinSession3.
4.Ifacorporatestructureisused,howwouldtheBusinessbeorganizedandgoverned?Onceformed,whomdoesthecompany’slawyerrepresentandhowshouldconflictsandotherethicalissuesberesolved?TheseissuesareaddressedinSession4.
5.Toobtain funds toexpandtheBusiness,whatareBobby’salternativesforfinancingandcapitalizingtheexpansion?WhatdoBobby’sFinancialStatementsindicateabouttheprofitabilityoftheBusinessandthelikelihoodof obtaining funds?IftheBusinesssellsshares,whatlegalissuesareraised?IftheBusinessborrowsfunds,whatlegalissuesareraised?Howshouldthesearrangementsbedocumented?TheseissuesareaddressedinSessions5,6and7.
6.WhatagreementsdoesBobby needtopurchaseorsellgoodsand personal services, e.g.DeonDeliveryman,and/orSiyandaSupplier? If Bobby wants to use (but not buy) the neighboring property in order to expand the Business, what documents does he need and what provisions should they include? TheseissuesareaddressedinSession8.
7.WhatprinciplesandskillsshouldtheBusinesslawyer’suseinforminganddraftingcontractsandotherlegaldocumentswhichtheBusinessneeds?HowcantheseprinciplesandskillbebestutilizedusetoprotecttheinterestsoftheBusiness?TheseissuesareaddressedinSessions9and10.
8.IfBobbydecidestoselltheBusiness,whatisthebasicstructureofthetransaction?Whatdocumentsneedtobenegotiatedanddrafted?Whattechniquesshouldbeusedtoassurethesuccessfulcompletionandclosingofthetransaction? TheseissuesareaddressedinSessions11,12and13.Sessions14and15involverole-playingexercisesregardingthistransaction.
SESSIONSUMMARIES
Introduction:PurposeandOutlineoftheProgramme
Wewillbeginwithanintroductiontofamiliarizeyouwiththeprogrammeinstructors,theotherparticipants,andtheobjectivesanddesiredoutcomesoftheprogramme.Wewillreviewthetopicsandsuggesteddelegatereadings;linkstothereadingscanbefoundatthewebsiteforprogrammeat
Session1: Overview of South AfricanCommercialLaw
Session Summary:
Thesessionwillbeginwithanoverviewofthesourcesofcommonandstatutorylawwithwhichbusinesslawyersshouldbefamiliar.WewillthenfocusontheCompaniesAct,asrecentlyamended.
Delegate Reading:
GlossaryofLegalTerms
SummaryoftheCompaniesAct
Session2:TheRoleoftheBusinessLawyer;Engagement
SessionSummary:
Inthissessionwewilldiscusstheroleofthebusinesslawyer,thebusinessclientinterviewandengagementprocess,andtheskillsetsrequiredtobeasuccessfulbusinessattorney.Thesessionwillincludethefollowing:
•Skillsetsrequiredtopracticecommerciallaw
•Work Ethic
•ContinuingLegalEducation
•Understandingtheclient,thebusinessandnatureoftheengagement
•Understanding financial statements
•Flawlessdocumentation
DelegateActivity:Thesessionwillincluderole-playingthebusinessclientinterviewprocess
Session3: FormsoftheBusinessEnterprise;EstablishingandRegisteringtheEnterprise.
Session Summary:
This session will focus on the question of what types of business entities are available to Coolwheels to establish a commercial enterprise, and what the advantages and disadvantages are in using the different types of business organizations, such as the following:
•Unincorporated enterprise
•Corporate enterprise
•Partnership
•Joint Venture
•Limited Liability
Delegate Reading:
Comparison of Business Entities
Session 4: Corporate Governance: The Board of Directors; Fiduciary Obligations; the Company Lawyer’s Legal and Ethical Obligations
Session Summary:
We will first discuss the role of a company’s directors and officers in the management of the enterprise. We will then discuss the concept of fiduciary duties as one of the range of duties owed by one to others in the context of the Coolwheels business: (i) a shareholder to other shareholders including a majority shareholder to a minority shareholder; (ii) each director to the Company, shareholders, creditors and other directors; (iii) the Company’s lawyer to the Company, its shareholders, its directors and others.
Wewillnextreviewthedifferentgoverningdocuments,includingthecompany’scharter,itsArticlesofAssociation,resolutionsadoptedbydirectorsand/orshareholders,agreementsamongshareholdersandagreementsbetweenthecorporationandthirdpartiesbothnowandinthefuture(i.e.,banksandothercreditors).Wewillalsoreviewregulatoryimpactsoncorporategovernanceissues,includingtransparencyandanti-corruptionmatters.
We will also discuss the company lawyer’s legal and ethical obligations to the company and other shareholders.
DelegateActivity:Thesessionwillincludedelegatediscussionofanethicalissuethatfrequentlyconfrontsbusinessattorneys.
Delegate Reading:
1.Sample Articles of Association
2.PricewaterhouseCoopers-KingIIIataGlance
Session5:UnderstandingtheBusinessFinancialStatementsandCapitalizationOptions
Session Summary:
We will address accounting for a company’s capital on the financial statements as well as the overall purposes of the balance sheet, income and cash flow statements, and how the commercial lawyer should utilize these tools in due diligence, document creation and negotiations. Our discussion will include the following:
•What commercial lawyers need to know about accounting
•The difference between cash and accrual accounting
•Accounting for debt and equity
The session will then focus on the equity and debt financing available to Bobby’s newly-formed company and the typical expectations of their respective holders, a general review of the financial instruments available to “fund” or “capitalize” the company.
Delegate Activity:
DelegateswillbeaskedtodiscusstheadvantagesanddisadvantagesareforBobbyofcapitalizinghiscompanywithequityversusdebt.
Delegate Reading:
Merrill Lynch - Guide to Understanding Financial Reports (excerpts)
A Few Things Lawyers Should Know About Accounting
Session6:SaleofShares;TheRightsandObligationsofShareholders;ShareholderandAssociationAgreements
SessionSummary:
Thissessionwillfocusonthesaleofsharesand the rights ofshareholdersandtheroleof“shares”inanenterprise. Wewillbeginwithanoverviewofthefollowingtopics:
•Meaning and issuance of company shares/ “securities”
•Types of shares/securities
•Publicvs.Privatesaleofshares
We will explore the relationships of the shareholders to one another, to the Company and its directors and to persons external to the Company (i.e., employees, suppliers, customers, lenders and other creditors).
We will next discuss written shareholders agreements. We will discuss how a shareholders agreement can be used as a guide book for such issues as (1) how communications among the shareholders and the Company are to be handled; (2) how and when shareholders may participate, or are not permitted to participate, in the conduct of the Company’s business; (3) how Company profits and losses are allocated and funds distributed; (4) whether, and under what circumstances, the Company might want protection from actions of its shareholders outside the Company; (5) how disputes among the shareholders are to be handled; and (6) what exit strategies are available to the shareholders.
Delegate Activity:
AssumethatCoolwheelshasformallyregistereditselfasaprivatecompany.Bobbyisconsideringwhetherornottohave Deon become aninvestorinandaminorityshareholderoftheCompany.Thedelegateswilldiscussthefollowingissue:IfyourepresentedDeon,identifywhatinformationandprotectionshewouldneedtohavebeforeagreeingtobuysharesinCoolwheels.
Delegate Reading:
1.Typical Issues to Be Considered in Drafting a Shareholders’ Agreement
2.Sample Shareholder Agreement
Session 7: Basic Principles of Lending and Security; Loan Agreements
Session Summary:
Assume that Coolwheels decides to raise at least some of its capital through a commercial bank loan.
We will discuss what a commercial bank is and how it is organized. We will talk very generally about the loan officer, the loan review committee and the reality of form documents. We will then move on to discuss the central premise of a commercial loan and the role risk plays in the bank’s decision to make the loan and how the bank prices the use of its money in accordance with that risk. We will also talk about how the bank seeks to protect itself generally by discovering risk factors and changes in those risk factors during the course of the loan.
We will next talk about the concept of security, including different types of security ranging from tangible to intangible. We will also discuss the following terms and conditions typically found in a commercial loan agreement:
•Loan Amount and Interest Rate
•Interest and Capital repayment date
•Use of proceeds
•Warranties & Representations
•Covenants
•InformationDisclosures
•Security requirements
•Events of Default
Delegate Reading:
Sample Bank Loan Agreement
Session8:ContractingforGoods& Personal Services;Leases
Session Summary:
This session will provide an overview of other types of commercial contracts that would facilitate operations of a growing and expanded Coolwheels business.
We will discuss agreements needed to formalize the relationship between Coolwheels and its landlord, customers and suppliers. This will include an overview of leasing building space and equipment.
WewillalsoreviewemploymentandotherservicecontractsCoolwheelswillneedtonegotiatewithcertainemployeesandagents,includinghowthesecontractsareusedtoregulaterightsduringemploymentandtogovernanemployee’soragent’sbehaviorafteremploymenthasended.
Delegate Reading:
SampleProductSalesAgreement(Tobeprovided)
Sample Personal Services Agreement
Sample Lease for Commercial Space
Session9:PrinciplesofEffectiveFormationandDraftingofLegalDocumentsinaCommercialContext
Abusinesslawyermustunderstand the principles ofeffectivelegalwriting.Toooftenlegaldocumentscontainprovisionsthataredifficulttointerpret–theymaybeambiguous,overlycomplicated,imprecise,orcontainconfusingerrors.Abusinesslawyermustalso understand the structure,thetermsandpurposeofthedocumentbeingdraftedorinterpreted.Inthissession,wewillreviewthetypesofprovisionscommontomanylegaldocumentsandtonearlyallcommercialcontracts:
•operative provisions
•representations and warranties
•covenants
•suspensive conditions (conditions precedent)
•indemnities and other remedial provisions
•definitions
•“boilerplate” provisions
DelegateReading:
Fox,WorkingWithContracts,Chapter2andChapter6,Sections1-3
Session10:Legal Writing and DraftingWorkshop
SessionSummary:
Inthissession,delegateswillbeaskedto apply the principlesoflegalwritinganddraftingdiscussedinthepriorsession.Thissessionwillfocusondraftingdocumentsthatareclear,enforceableandprotectiveofyourclient’sobjectivesandinterests. Asapointofreference,delegateswillreviewdraftprovisionsthatarenotmodelsofclarityanddiscusshowtoimprovethem.
Delegate Reading:
Fox, Working With Contracts, Chapter 3, Section 1-3 and Chapter 4.
Session 11: Overview of Mergers and Acquisitions; Price; Transaction Basis; Due Diligence
Assume that after several years of growth and success, Bobby decides to sell the enterprise. In this session we will consider the basis of the transaction: (i) what the structure of the transaction should be (shares, assets); (ii) what the structure of the purchase price should be (e.g., cash, cash and note, earn-out); and (iii) what can be done to protect the lender and the minority shareholders. We will then discuss the investigative and analytical phase of the transaction, focussing on the following:
1.The use of a Letters of Intent and Memorandum of Understanding.
2.The “Due diligence” process with a discussion of the types of diligence (physical, financial, management and legal); why lawyers do legal due diligence; the relationships between due diligence and the representations and warranties in the agreement; and how to do due diligence; how to report the results of due diligence to the client.
2.Protecting confidential information and relationships with employees and customers during due diligence, with a discussion of the principal terms of a confidentiality agreement and the different perspective of the buyer and sellers.
3.The use of exclusivity and “no shop” provisions
4.The diligence report for the client.
Delegate Activity:
Consider and be prepared to discuss the principal risks for a buyer of Bobby’s business.
Delegate Reading:
Fox, Working with Contracts, Chapter 6, Section 4.
Session12:StructureoftheSales Agreement: Representations andWarranties,Indemnities,Covenants,ConditionsandDisclosures
Session Summary:
This session will consider the commercial lawyer’s role in assisting his or her client to understand and manage the risks inherent in the purchase or sale of a business enterprise. We will consider the use of representations and warranties and other provisions to confirm information and to allocate risk and review the other important covenants and conditions of an agreement of purchase and sale.
Delegate Reading:
Fox, Working With Contracts, Chapter 9, Section 4.
Session 13: Closing the Sale: Regulatory Compliance and Approvals; Shareholder and Lender Approvals; Closing Documents
Session Summary:
This session will consider the following:
1.The consents and approvals needed to close the transaction: “internal” approvals (directors and possibly shareholders) and “external” approvals: regulatory, contract parties, creditors, others
2.The mechanics and documentation to transfer ownership of the enterprise.
Delegate Reading:
Fox, Working With Contracts, Chapter 3, Section 5.
Sessions 14 and 15: EnterpriseSale Negotiation Workshops
Session Summary:
These sessions will involve the practical application of the contract drafting and negotiation principles discussed in the prior sessions. The delegates will either prepare and negotiate a term sheet for the sale of the Business or review the provisions of a hypothetical draft contract to sell the Coolwheels business (which the instructor will provide) and participate in negotiating modifications to protect their clients’ interests. You will be assigned to represent either Bobby, the minority shareholders, or a commercial bank regarding who may be providing funds for the sale.
Delegate Reading and Pre-Class Activity:
To prepare prior to these sessions, you should:
•Read the following: Trumper - Mastering the Essential Skills of Negotiating Business Agreements
•Review of case study to confirm the understanding and motivation of the parties
•Identify business and legal issues important to your client
•Develop a negotiation plan to resolve issues
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EXHIBITA
COOLWHEELS
FINANCIALSTATEMENTS
2010
INCOMESTATEMENT
INCOME
RevenuefromcustomersR450,000
RevenuefromFleetRepairsR450,000
PartssaleR800,000
TotalIncomeR1,700,000
EXPENSES
EmployeeWages
EliR140,000
ErnestR120,000
BobbyR200,000
PartsboughtR750,000
LeasepaymentsR90,000
InterestpaymentsR20,000
UtilitiesR27,000
MunicipaltaxesR27,000
DepreciationR26,000
TotalExpensesR1,400,000
NetIncomeR300,000
BALANCESHEET
2010
CURRENTASSETS
CashinbankR100,000
AccountsreceivableR225,000
InventoryR 75,000
TotalCurrentAssetsR400,000
PropertyEquipment
PropertyimprovementsR100,000
FurnitureandfixturesR30,000
MachineryandequipmentR70,000
Depreciation(R100,000)
TotalP&E(afterdepreciation)R100,000
TotalAssetsR500,000
LIABILITIES
AccountspayableR200,000
AccruedliabilitiesR100,000
-Payrolltaxes
-Businesstaxes
LoansfromFatherR200,000
TotalLiabilitiesR500,000
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