Vol. 10, #3 – April 23, 2018 ALLAN GOLD’S BLOG
Next blog post of weekly series over 3 months on contracts for
company executives & owners of family-small businesses
TODAY’S TOPIC: “Unanimous Shareholders Agreement” (“USA” for short) – The case of the disappearing check book and bank statements.*”
Oh my, where has all the money gone?
SPECIAL ANNOUNCEMENT TO READERS
√ Hello Readers. Please be informed that I write a blog for my professional community – it’s titled “Gold’s Legal Minute*GLM*” . Because you do not have a lot of time and since time is money, I aim for a quick and easy read. Since I practice primarily in such fields as corporate and commercial law, civil litigation, etc., the subject matter is more or less in such areas. In addition, seeing that I am passionate about the well-being of older people, and as I also practice in the field of civil law relative to elder law, I write about this area as well. Furthermore, I write about topics in the news in order to highlight what’s then legally at issue.
√ In each blog post, I shall deal with a legal notion or raise a legal issue and deliver, strictly for informational purposes, some commentary respecting the same. As per the format, I shall first answer the question, “Why you should read this?” Next, in the facts section, to illustrate some of the things in play, I will recount a fictional story of imaginary characters or companies, not based upon any person or enterprise in real life. For fun, it will be titled “The Case Of The …”, this in the style of the vintage “Perry Mason” TV show (1957–66). And then, through the sections, “Judgment”, “Analysis” and “Lesson Learned Or Take-A-Way”, I shall provide my take on the facts and some thoughts thereon. At the finish, I will offer a “Closing Thought Of The Day” plus a preview of the next in the series.
√We have re-launched the blog, such with a series over 3 months on contracts, especially geared for company executives & owners of family-small businesses. Kindly note that as per our schedule, we will usually make new blog uploads each Monday. Some weeks, usually on Wednesdays, there will be one or more bonus uploads.
A. WHY YOU SHOULD READ THIS BLOG POST (next of weekly series over)
First, this blog post series is written especially for business people, ranging from proprietors of small-family enterprises through to executives of mid-to-large corporations. The assumption is that they routinely make contracts. The proposition is that it’s good business to make each contract sound and profitable. The premise is that a good contract can mean money and profit. And if you’re a member of this group, this is for you.
Second, you want to know about another type of contract, this one being very common in the business world – better said in the corporate world, such for stockholders in an incorporated company. This is where parties organize their association in a corporation, signifying their accord to the issuance of shares in the capital stock and the allocation (split) thereof. It would also recite in advance, their undertakings and expectations setting down their rights, obligations and recourses. It is known as an “Unanimous Shareholders Agreement” (“USA” for short). It could be crucial, if and when, you need to “divorce” your business partner, (particularly where the two of you have an equal shareholding). And it would be important should senior executives succeed one of the founder-owners. In addition, there may be certain provisions covering such areas as resignation, dismissal, serious illness and/or death. This might be critical when you pass away and your spouse and family have to deal with your estate.
B. FACTS OF THE CASE
Note to Readers: In this space, I will recount a fictional story of imaginary characters or companies, not based upon any person or enterprise in real life.
Scenario #1: The Bud (Buddy) & Jimmie Story
Scene #1: Two teenage friends, Bud (Buddy) and Jimmie, both with a love of all things automobile, dreamed of working on cars and trucks as an occupation. Bud is a great all- around guy with a winning smile. Everyone calls him “Buddy” because he likes people and people like him. As a youth, Bud was intent on purchasing his own set of hand tools. He did so by working part- time during the school year at a neighborhood service station; and he got summer jobs at a local factory producing car parts. He was also a saver, emptying his bottle of change, each month, to deposit rolled coins into his savings account. When it came to birthday-Christmas gifts, he told family that tools were the only things on his wish list.
Jimmie, on the other hand, was lazy. A veritable couch potato, he was an expert passing the time, going for coffee and “shooting the breeze.” He was also a night person, intent on enjoying night life, having fun dancing, drinking and doing drugs, until the wee hours – this resulted in this party animal starting his day at noon. He did not put himself out for people, but rather, it was only “me-me”. (People even said that this was why his name contained the word “me”.) Seen as selfish, he was not well- liked. As to temperament, he’s a know-it-all, resenting being interrupted and objecting to being told what to do. Indeed, while over size in his mind, Jimmie isn’t intelligent. As a street kid, Jimmie solved his lack of money, by becoming a gambler. In his high school year book, he was described as always looking for an angle or an edge, most likely to get rich quick, no fuss or muss. Continually expecting the pot of gold around the next corner, he would say that his ship was just about to come in.
Bud & Jimmie started to do repairs for family and friends. This duo did good work at little or no cost to customers; and they came back, time and again.
Buddy has a kid sister, Bridget. As a youngster, she was affectionately called “Nutty Bee”. Later, they referred to her as “BB” for “Bitchy Bridget”. You see, it was well known that she could go from a mouse to a lioness in seven seconds flat. She hated math and dropped out of high school. She liked the bad boys, chasing Jimmie and finally marrying him. He was an unsupportive husband and not much of a family man. They were a good match since she had no skills or attention span and could not keep a job.
Scene #2: After junior college, true to their dream, Bud and Jimmie rented a garage space for $100 a month and they were off and running. They came up with the name “SnA-Zzy Car repair”. Their slogan was: “We do everything A-to- Z.” Everyone called them “AZ.”
They called Lawyer Bob – he told them: “Most new businesses fail in the first year. To own it, you need to think and act beforehand.” He asked to see their Business Plan. Bud & Jimmie said that this wasn’t necessary because they’ve been doing car repairs for years. Bob said it was still important. They said: “Forget it – move on!” Next, he asked if they wanted to make (incorporate) a company. Buddy & Jimmie answered: “No, we don’t want to spend the money now – we’ll do it once we make it.” Then Bob asked if they wanted a written partnership agreement about work and money (i.e., investment, remuneration, etc.). They said: “No, we’re brothers-in-law and old friends. It’s not necessary, we trust each other.” Wanting everything to be fair and square, they just assumed that they would share everything evenly. With no instructions, Lawyer Bob did not act further. The next day, they went to the government office and registered themselves as a partnership with a trade name. the reason was that it cost less.
With no agreement to the contrary, the default position was 50-50. It was understood that Bud and Jimmie would have an equal salary. And they did not think about job descriptions, titles, etc. Like Pollyanna, they believed that each of them would do what they do and it would be perfect and the sun would shine brightly upon them and their new business. Although Bridget wasn’t a bookkeeper, Jimmie insisted (and Buddy acquiesced) that AZ hire Bridget to do the books. They opened the AZ bank account, signing a bank form, stating that any one of Bud, Jimmie or Bridget could deal with account and sign the checks. She instructed the bank to send the AZ account statements to her at her home. Bridget kept the check book at her home office.
Scene #3: AZ did not fail yet (with no thanks to Jimmie) – it survived due to Bud alone. This is a man, who is serious, committed and very responsible. Indeed, he is a solid, a straight-arrow type, very much, intent on doing whatever he does to the best of his ability. Hungry to learn and keep up with technical developments, Bud signed up for courses and training. (Jimmie objected and said that this was a waste of money.) Bud also subscribed to trade papers and even went to auto repair conventions. To a fault, he believes in all work and no play. He is willing to earn everything, believing in the credo, “no work, no pay.” He was a hard worker – people called him “Buddy the bunny” because he works and works and keeps on working some more. He was punctual. He delivered on time. He was intent on doing the best job ever at a fair price. Being a ‘people’ person, he’s no taker, but instead, very giving. Bud is a natural salesman – customers see him as giving great value for the money. Buddy’s family and friends came for their car repairs.
In contrast, not trusting him, Jimmie’s family did not support him. At first, Jimmie seemed to know people and have connections and get one car after another. The price was seemingly no object – some people even paid in advance. But this work dried up entirely after Bud started questioning some of the vehicle paperwork. And apparently, there was also a falling out over a gambling debt of Jimmie. He covered up by using his big mouth. He blamed others. Not only did he not bring in work, he did not get his hands dirty, working on the vehicles. His attendance record was poor – he was rarely at the garage. Anytime Bud said something, Jimmie stormed out! Although he came and went as he pleased, Jimmie still asked for his full salary. He also asked for a bonus whenever there was a credit balance in the AZ bank account. Bud refused, insisting that AZ must build trust, by making payments to creditors even if they amounted to a prepayment or before the expiry of the credit terms of payment. Nevertheless, seeing that AZ had sizeable deposits each week, Bud could not understand how they were always short at the bank. That’s when Bud asked for the check book. Jimmie made one excuse after another. Bud asked Bridget for the bank statements. Bridget made one excuse after another. Never worried about the bank balance, Jimmie had no problem about taking pocket money from the cash. When it came to debts to the bank, suppliers, taxes, etc., Jimmie was a procrastinator, always wanting to let things slide. When asked by Buddy to make cash advances to the credit of the AZ account, Jimmie refused, preferring to just bump along. Indeed, when money was short, Jimmie ran for the hills. It was then left to Buddy to continually make loans to the garage so it could continue operations. Thinking that Jimmie was taking advantage, Bud’s wife said: “Open your eyes.” Indeed, Bud’s wife was sore about Jimmie and Bridget getting most of Buddy’s hard- earned money. Bud’s wife had words with Bridget. This led to a fight between the women. And then Bud and Jimmie started quarreling. Bud went to AZ’s accountant and asked him to call upon Jimmie and Bridget to hand over the checkbook and bank statements; but the CPA also got excuses.
Buddy finally saw Jimmie for being what he is, a nobody, i.e., a man of ’big talk’ and ‘big show,’ but really, ‘no show’, ‘no work’, no cash. wanting less talk and more work, Recognizing that Jimmie was a self-centered man, incapable of being a good partner and knowing that sweet talking can only go just so far, Bud yelled: “Shape up or ship out.” But things just got worse. One day, thinking that AZ finances were either mishandled or out of control, and fearing disaster, Bud said: “Enough is enough…we have problems and we need to call Bob the lawyer.” Jimmie said: “ No.” While putting on a good face, Bud was miserable – he felt alone with his misery. In the end, Buddy felt compelled to call Lawyer Bob. Bob tells Bud: “Stuff happens…you need to take charge of your problems. You need to formulate a plan and take steps to resolve them.” Bud hoped that Bob could find a way out for him. He even smiled, remembering that Bob had a dog named “Loophole”.
Does AZ have a problem? Is Buddy in trouble?
Yes, AZ has a problem. But in actuality, it has many problems. This is not merely a rough patch, which AZ will be able to weather. And Buddy is in BIG trouble. All of these bad moves and decisions, one after the other, all compounding, shall probably reach its ultimate conclusion. The end may probably come due to an apocalyptic event like the bank calling its loan and mandating its agents-receivers to liquidate assets. And this will represent the devastation of everything, for which Bud has been working. More, Bud is in for an un-imaginable financial horror – he could lose everything and have to start all over again, this time, behind the “8-Ball” and with “a big cross to bear.”
AZ is cracking up and breaking down in front of his eyes. While there are telltale signs suggesting the ultimate demise of AZ, Bud doesn’t really see what’s going on and where all of this is leading. Of course, Bud could try and hold on and fix AZ; but while running blind, it’s unlikely that he could do so before time runs out. Unless Bud does something, the business is going down the drain. But there could be plenty of time, if he knew where to look and what to fix. While AZ is cracking up and breaking down in front of his eyes.
Let us put this case under a microscope.
As presently constituted, AZ was deeply flawed at day one. Here’s why.
Mistake #1: Bud Failed to Really Look At Future Partner. Overall, the attitude of Bud (and Jimmie) was to charge ahead ‘willy-nilly’. This is never good. It is particularly bad in the business world. As a result, there were many deficiencies, which pre-date the founding of AZ. If likened to a horse, AZ was no ‘Triple Crown’ winner. Instead, at the start, it was going nowhere fast. And Bud was a horse’s ass, not having any good ‘horse sense’ when he went into this enterprise. And Bud was not part of a team of horses equally bearing the load. Instead, it was really a two horse team, one named Bud moving fast, pulling his weight and the other named Jimmie, going nowhere just like a child’s rocking horse, returning to the barn before the day is done. Simply put, Jimmie was a big slouch/slacker, holding Buddy back. Being a ne’er do well, Jimmie’s goal was only to see how much he could get out of AZ before it would end up at the glue factory. Buddy should have asked himself:
(a) Whether Jimmie could be someone with whom, he could build a business, both in the short term and also the long term? Buddy was badly mistaken- he should have perceived telltale indicators, signifying that Jimmie was ill-suited as a partner. foretelling grave difficulties. If Bud was honest with himself, he would have found that Jimmie is as far as one can get from a ‘salt of the earth’ type. His work ethic and record leave a lot to be desired. Being a low energy guy, he likes doing nothing. Living for “Rest and Recreation (R&R)” 24-7, he chooses play over work any day. Indeed, he’s a ‘play” boy type. Furthermore, Jimmie also had problems with substance abuse, gambling, etc. Of course, it does not take rocket science to know that a druggie- alcoholic- gambler would be a problem associate.
(b) Whether they are compatible? Bud erred in not recognizing that if there were two men grossly mismatched, they were it. You see, if Buddy was a Bud, Jimmie was just a dud. Obviously, they should not have been in business together. Indeed, Bud should have nixed the business deal from the get-go!
Mistake #2: Bud Failed to Recognize He Alone Was Putting Up The Money. Buddy was the only party paying. Jimmie had no money and made no bones about it. Jimmie had no way to make any investment whatsoever. If taking all of the risk, Buddy should have been the sole owner, this with all of the advantages. Since chances were that Jimmie would not perform or discharge his obligations, Bud, should have, (pardon the pun), nipped this in the bud! But if he still wanted to give Jimmie the opportunity to join, he could have offered him a job. And if that worked out, he later could have granted him an option with a pre-set term, to buy in, at a fair price calling for a capital contribution to match that of Bud. In addition, Buddy should have had a USA contemplating the possible need for an infusion of capital, whether from savings or by borrowing, and providing for the dilution of shares, if and when, a party fails to make his proportional shareholder loan to the company.
Mistake #7: Bud made a bad Hire With Bridget. For a small business, AZ seems to be ‘top- heavy’. With a two-headed management (Bud & Jimmie) plus Bridget, there are, (as the saying goes), “too many chiefs, but not enough Indians.” But more significantly, on hiring Bridget, Buddy erred in: (a) Making a place for someone who was unemployable; (b) Creating a situation that regardless if Buddy was doing all the work, Bud’s take home was less than that of Jimmie plus Bridget; (c) Compounding the risk due to the connection to Jimmie who was a huge risk in his own right. Regardless of being a sister, Bridget is looking out for herself particularly due to the problems in her marriage. Where there is a need, temptation surely grows. And where someone bites into the apple, a cover-up cannot be far behind. Of course, Bridget and Jimmie are hiding their misdeeds by withholding the check book and bank statements. As a result, financially speaking, Buddy did not know what was going on and which end was up.
E. LESSON LEARNED OR TAKE-A-WAY
In the movie,” Godfather II”, the character, “Michael Corleone” said, “Keep your friends close, and your enemies closer.” I agree. But it’s also said that a friendly today can become a hostile tomorrow. I agree. For me, the reason is simply said in the Bible as follows: “For the love of money is the root of all evil” (Source: Bible’s First Epistle to Timothy). That’s why I would add: “Keep family even closer, and very close family, the closest!” I would continue with this line of thought by saying: “What’s true in life, is true in business.”So if and when, going into business with a relative, know that you’re making a business deal and with any deal, it’s always expedient to have a strong contract in place. In this instance, the best means to protect yourself is a well-drafted Unanimous Shareholders Agreement” (“USA” for short). Indeed, for two or more persons, founding a small, family business, it’s the only way to go!
F. CLOSING THOUGHT OF THE DAY
If you think like a corporate ‘bigwig’, you will have a better chance to become one!
G. PREVIEW OF NEXT IN THE SERIES OF ARTICLES: The case of the fast food franchise eating the franchisee alive
Next time, continuing on with general topic of contract, we will next look at another type, this time a franchise agreement. There are several kinds – they could be classified as a master franchise (national, provincial or regional), multi-unit franchise, or individual unit franchise. It usually involves a license agreement and a registered user agreement. This is where a grantor, known as a franchisor, grants to a grantee, known as a franchisee, a limited right to use a trade mark and carry on a business, whilst employing trade secrets and a special system of operations. This is also where the franchisor recites its rights, obligations and recourses, while the franchisee makes its undertakings. There would be a term and a location/territory. Not familiar with this? See you next time.*
* ©/TM 2015, 2016, 2017, 2018 Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED