Bla Commercial Law Programme (2008) Cape Town and Johannesburg
JOHANESSBURG,SOUTHAFRICA
BLA-LECCOMMERCIALLAWPROGRAMME(2010)
LEVEL2: SESSIONSUMMARIES
ANDDELEGATEEXERCISES
INTRODUCTION
WelcometoLevel2oftheBLALegalEducationCentre's2010CommercialLawProgramme(theProgramme).TheProgrammecomprises13advancedsessionscoveringgeneralcommerciallawpractice.
YouwillreceiveaProgrammeSchedulewhichshowsthetopicanddatesofthesessions,theinstructors’names,thePre-ClassDelegateReadingandReferenceMaterialsforeachsession.TheScheduleandtheReadingsandReferenceMaterialscanbeassessedanddownloadedat
Toreceiveacertificateofsatisfactorycompletion,eachdelegatemust:
- Attendandparticipateinnolessthan10ofthesessions;
- ReviewtheCaseStudyasSupplementsdescribedbelowandthematerialslistedontheScheduleas“DelegateReading”;
- Completethe“DelegateExercises”foreachsessionlistedbelow;and
- Successfullycompleteawritten“openbook”examinationattheendoftheProgramme.
ForthepurposesoftheDelegateExercises,eachdelegatewillbedesignatedamemberofeitherthe“Blue”or“Green” group.
THECASESTUDY
ThefollowingCaseStudy,assupplementedinthespecificsessions,willbeusedasabasisfordiscussionatallsessions:
SandileZondiisanentrepreneurbasedinanearbytownship. Forthepast20yearshehasmanufacturedatonicusinglocalherbsknownasVukani;literallytranslated,itmeans"awaken". Overthepastthreeyears,thebusinesshasgrownmodestlybeyondasustenancebusiness;yearlygrossrevenuesarenowaboutZAR700,000. Theexactrevenue(andprofit)figuresareuncertainasSandilehasoperatedthebusinessasasoleproprietaryconcern,andrevenuesgeneratedhavebeenattimesco-mingledwithhispersonalincome.
AtpresentSandileoperatesoutofa buildingwhichheleasesfromhisneighbour--DinganeDalala. Hemixesherbswithbottledspringwaterthathepurchases,andproducesandbottlestheproductusingantiquatedbatchovensandahand-operated bottlingmachine. Hesellsmostlytosmalllocalgrocersforimmediatecashondelivery.
Sandile'sson,Mandla,recentlyobtainedanMBAdegreeafterhavingworkedforfouryearsataleadingpharmaceuticalcompany. Hewantstojoinhisfather’sbusinessandsignificantlyexpanditusinghiseducationandbusinessexperience.
MandlaandSandilehaveagreedthatthebusinesswillbeformalizedascorporateentitycalled“Vukani2U”,thatMandlawillbeVukani’s DirectorofOperations,andthatMandlawillhavea30%interestinVukani.
NeitherSandilenorhissonMandlahassufficientpersonalcashtoexpandthebusiness. However,Mandlaisnotpreparedtoacceptthebusinessoperationsbeingconductedastheyhavebeen. Hewantstobringthebusinessintothemainstreameconomythrough4steps–
- employingtheservicesofexperiencedmarketingpersonnel,securingaspringwatersupplyandmovingtheoperationsintoanewproductionfacility;
- raisingcapitaltoexpandthebusinessandmovingtheproductintothemainstreamofprovince’seconomy;
- distributingtheproductintootherpartsofthecountryandperhapsbeyond;
- achievingthisobjectivewithin10yearsandsellingthebusiness,thusprovidingforSandile’sretirementleavinghisfamilyaconsiderablenestegg.
SESSIONSUMMARIES
Session1: ProgrammeMechanicsandRoleoftheCommercialLawyer.
SessionSummary:
ThesessionwillbeginwithareviewoftheProgrammemechanics,theobjectivesoftheProgrammeandtheexpectationstheProgrammehasforthedelegates.Wewillthendiscusstheroleofthecommercial/businesslawyer,focusingonthefollowingthemes:
A.Risk. Riskisatthecenterofmostbusinessdeals.Helpingtheclientidentifyandunderstandriskssothattheclient(notthelawyer)canmakeaninformedbusinessdecisionisahallmarkofbusinesslawpractice.Regardlessoftheclient’ssize,thelawyermustknowthedetailsoftheclient’sbusinessandtailorhisorheradviceaccordingly. Thatis,thecommerciallawyerisanadvisor,andnotsimplyadrafter.Understandingleverage(thebargainingpower)ofeachpartyinagiventransaction,andtheriskprofileofyourclientandtheotherparties,isfundamentaltoproperrepresentation.Afteridentifyingriskandassessingleverage,theremaybetheopportunitytolimittherisk,toallocatetheriskamongbusinesspartiesortoshiftittothirdparties.Understandingriskprovidesabetterunderstandingoftheduediligencethatisnecessary,disclosures,representations,conditionstoclosingandotheressentialelementsofacommercialtransaction.Theconceptofriskalsoprovidesaconvenientwaytotalkabouttransactioncosts,anissueofgreatimportancetosmallandmedium-sizedclientswhomaybeembarkingonaonceinalifetimetransactionandthereforehavelittleappreciationofwhateffortmayhavetogointoevenasingletransactiondocument.
B.Documentation.Theimportanceofproperlydocumentingthetransactioncannotbeoverstated.Documentationisnotasahousekeepingmeasurebutanintegralpartofenforcementoftheparties’agreementsarticulatedinthetransactiondocuments. Properdocumentationalsoplaysakeyroleinprotectingthelawyerfrommalpracticeclaimsandisawayofdevelopingfollow-onbusiness.
C.Whoistheclient. Thiscanbeaparticularlyconfusingandvexingproblemforlawyersrepresentingsmaller-sizedclientsingeneralandforyoungerlawyers,inparticular.Sincefactsandplayersaremorelikelytochangeindealingwithsmaller-sizedclientsandprivatetransactionsthaninlargeinstitutionalorpublictransactions,thelawyerneedsconstantlytoaskthesequestionsandadoptstrategiestodealwiththesituation.
DelegateExercise:
Afterthissession,draftashortdescriptionofyourpresentlawpracticeandyourobjectivesandexpectationsinenrollinginthisProgramme.
Session2:UnderstandingtheCommercialContractStructureandToolstoAchievetheAgreement’sObjectives.
SessionSummary:
Alawyerwhoworkswithcontractsmustunderstandthepurposeofthedifferenttypesofcontractualprovisionsandhowtheyinteract:
- operativeprovisions
- representationsandwarranties
- covenants
- suspensiveconditions(conditionsprecedent)
- indemnitiesandotherremedialprovisions
- definitions
- boilerplateprovisions
Forexample,theoperativeprovisionsofacontracttoselltheassetsofabusinesswouldincludeadescriptionoftheassets,thecalculationandmethodofpaymentofthepurchaseprice,andthemechanicsoftransferringtheassets. Anassetsalecontractcontainingonlytheseoperativeprovisionswouldbeaveryshortdocument,legallyenforceable,butwouldnotaddressmanyoftheotherimportantissuesthatthepartiescareabout. Forexample,whatifthesellercauseddamagetotheassetsorthebusinesspriortoclosing? Thesearethekindsofissuesthatareaddressedintheotherprovisions–representationsandwarranties,covenants,suspensiveconditions,remedialprovisionsanddefinitions.
Session3: AnalysisofExistingCommercialContracts.
SessionSummary:
Lawyersarefrequentlyrequiredtoreviewandinterpretexistingagreements. Severalcircumstancesmaygiverisetoaneedforsuchreview. Oneisasapartofthe“duediligence”process,inwhichoneormorecontractsmustbereviewedinconnectionwithanothertransaction. Anotherisalawyerbeingaskedbyaclienttoreviewacontracttodeterminewhetheraparticularactionisrequiredorpermitted.
Oftencontractprovisionsaredifficulttointerpret–theymaybeambiguous,overlycomplicated,imprecise,orcontainconfusingerrors. Sometimesaprovisionisperfectlyclearbutcontainsasubjectiveelement,suchasamaterialityorreasonablenessqualification. Insomecases,thelawyerisrequiredtorenderalegalopinionastoaninterpretationissue. Forallofthesereasons,thereview,analysisandinterpretationofexistingcontractsgivesrisetosomeofacommerciallawyer’smostsignificantchallenges.
ThissessionwillalsoreviewtheprovisionsoftheCompaniesActandotherstatutesrelevanttothedraftingofcommercialcontracts.
CaseStudySupplement:
InJanuaryofthisyear,SkylarStyleswashiredbyVukani2UtoworkastheheadofMarketing,receivedasigningbonusand signedaconsultancyagreement(tobeprovidedbytheinstructor).
Skylarimmediatelystartedworking todevelopanewmarketingstrategyforVukani2U. Thecompanywasalreadyusingacomediantopitchtheproductnamed“HuggyLowdown”;hisrealidentityisasecrettothepublic. Skylarincorporatedthecomedian intohernewmarketingstrategyandpresentedthenewstrategytoMandlainFebruary.
Shortlythereafter,SkylergotacallsayingthatherbelovedGrandmotherhadbecomequiteill andthatsheneededtoreturntoEastLondontotakecareofher;shetoldMandlathatshewastaking anindefinite,unpaidleaveofabsence. TwoweeksafterSkylarleft, hertrustyassistantcalledherwiththefollowingnews: sheoverheardMandlasayinghewaselatedabout Slylar’snewmarketing strategy,butthathedidn’tknowwhetherVukani2UneededSkylar anymorenowthatVukani2Uhadthestrategy.SkylerrespondedthatthiswasdisappointingnewssinceherGrandmother’shealthwasimprovingandshehoped toreturntoworkinMay;SkylertoldherassistanttotellMandlaofherplanstoreturn.
Inmid-April,Vukani2UsentSyklaraletterstatingthatshehadbeenterminatedforcausepursuanttoSection4(a)(iii)(c)ofhertAgreementandthatsheshouldreturnhersigningbonus. Skylarbecameveryangry andwroteonherpersonalblobabouthowVukani2Uwastreatingherunfairly. ShealsobloggedaboutthenewmarketingstrategyshehaddevelopedforVukaniandrevealedthetrueidentityof“HuggyLowdown.” Thefollowingmonth,sheapplied toworkasaconsultantforaherbaltonicmanufacturerinEastLondonandduring herinterviewsthereagain touted themarketingstrategyshehaddevelopedforVukani.
Skylarhasrecentlyretainedanattorneybecauseshewantsto keepthesigningbonusandalsoreceiveseverancesothatshecanusethatmoneytofundhernewconsultingbusiness.
DelegateExercise:
Priortothesession,alldelegatesshould reviewandanalyzeSkylar’s Agreement. Greendelegatesshouldthendraftamemoadvising theirclient,Vukani2U,aboutitsrightsundertheagreement,including whetherornotVukani2UhasagoodcaseforterminatingSkylar,withholdingherseveranceandseekingreturnofthesigningbonus. Bluedelegatesshoulddraftamemoadvisingtheirclient,SkylarStyles,aboutherrightsundertheagreement,includingwhethershehasagoodcase forretentionofhersigningbonusandreceiptofseverancepayments.
Session4: FormingandDraftingNewCommercialContracts.
SessionSummary:
Thissessionwillreviewtheprinciplesofeffectiveformationanddraftingofanewcontract. Acontractisauniquedocument: itmemorializesanagreementabouttherightsandobligationsoftwoormorepartieswithdifferinginterests. Thelawyer’schallengeiscraftinglanguageaccuratelydescribingtheparties’agreementinamannerthatwillbeinterpretedbyallsubsequentreaders(includingthecontractparties)tohavetheexactsamemeaning. Awell-writtencontractprovisionisonethatprovidesnoroomforanyonetoarguethatsomethingelsewasintended.
Wewilldiscusseffectivecontractdraftingthroughprovisionswhichareclearandprecise,simpletounderstand,andinternallyconsistent. Theuse(andmisuse)ofprecedentswillalsobereviewed.
CaseStudySupplement:
Mandlahasidentified thecompany’sneedtoobtainacheaperandsecuresourceofpurewater. TheneighbouringpropertyownedbyDinganeDalalahasaperpetualspringwhichSandilehasusedfromtimetotimewhenhehashadneedforextrawater. Mandlawouldliketoregularizethearrangementandsecurethesourceofpurewaterformanyyears. MandlahasapproachedDingane andobtainedhisoralagreementtopermitVukani2Uaccesstothepurespringwater.
DelegateExercise:
Afterthesession,draftanoutlineofthecontracttermsofanagreementforuseof springwaterbetweenVukani2UandDinganeDalala. Green delegatesshouldassumetheyrepresentDingane;BluedelegatesshouldassumetheyrepresentVukani.
Session5: CommercialContractNegotiationSkillsandTechniques.
SessionSummary:
Inthissession,wewilldiscusstheattorney’sroleinprotectinghisorherclient’sinterestsduringthenegotiationprocess. Wewillfocusontheconceptofriskallocationinthecontractnegotiationprocessandthelawyer’sroleinhelpingtheclientidentifyandunderstandtheseriskssothattheclient(notthelawyer)canmakeinformedbusinessdecisionsessentialtothenegotiationprocess. Wewillalsoexaminehownegotiationsaboutcontracttermsofferanopportunitytolimittheclient’srisk,allocatetheriskamongbusinesspartiesortoshiftittothirdparties.
Thedynamicsofcontractnegotiationsoftenyielduncertaintyratherthancertainty: thehesitancytomakeconcessions,thetendencytosloughoverdisagreementsorcontentiouspoints,theemotionalreactiontobeingtold“no,”theintrusionofpersonalabrasion,allstandinthewayofagreement. Thesubstantivecomplexityoftheissuesunderdiscussion,intersectingwiththecomplexityofhumanpsychology,canmakethenegotiationofcontractschallenging. Itisthebusinesslawyer’stasktoextracttheactualagreementofthepartiesfromthesecomplexcircumstances. Thisisnotapassiveendeavor: thelawyermustinserthimself/herselfintotheprocess,exploreinconsistencies,challengepositions,battleambiguities,andraiseuncomfortableissues,inordertobestextractameaningfulandcomprehensiveagreement.
Inthissession,wewillalsoaddressthroughrole-playingspecifictermsthatarelikelytobethesubjectofnegotiationsaboutadraftcommercialcontract. Thiswillincludeuseof“reasonable”,“material”,“bestandreasonableendeavours”andliketerms;resolvinginconsistencywithotherprovisionsinthisagreementorotheragreements;inclusionaryorexclusionaryprovisos;trumpingprovisions;andaccountingterms.
DelegateExercise:
Priortothesession,Delegatesshouldprioritizethetermsofthespringwateragreementwhicharemostimportanttotheirclient(seepreviousexercise)andbepreparedtonegotiatetheprincipaltermsofthecontractduringthesession.
Session6: WorkshoponCorporateGovernance.
SessionSummary:
Inthissession,wewillreviewtheprinciplesofgoodcorporategovernance,thestatutoryprovisionsthataffectgovernanceandthemostcommongovernanceissuesthatariseinaprivatecompany.
Thissessionwillalsofocusontheimportanceoftheshareholdersand/orassociationagreementinthegovernanceandoperationsofacompany.
Wewillreviewhowtheshareholdersagreementmightbeusedasaguidebookforsuchissuesas: (a)howcommunicationsamongtheshareholdersandtheCompanyaretobehandled;(b)howandwhenshareholdersmayparticipate,orarenotpermittedtoparticipate,intheconductoftheCompany’sbusiness;(c)howCompanyprofitsandlossesareallocatedandfundsdistributed;(d)whether,andunderwhatcircumstances,theCompanymightwantprotectionfromactionsofitsshareholdersoutsidetheCompany;(e)howdisputesamongtheshareholdersaretobehandled;and(f)whatexitstrategiesareavailabletotheshareholders.
Wewillalsodiscusscontentiousissuesthatoftenariseinnegotiationsabouttheagreementandexaminehowtoresolvethoseissues.
DelegateExercise:
Priortothesession,DelegatesshouldreviewtheCaseStudyandtheSupplementsand recallthatinitiallySandileandMandlaown70%and30%ofthenewCompany’sshares,respectively. Assumetheyareconsideringaddinganothershareholder,theneighbour–DinganeDalalainordertoraisecapitalofZAR200,000.
Atthesession,BluedelegateswillrepresentVukaniandbeaskedtoaddressthefollowingissues:
a.Governancestructureandrightsofminorityshareholders
bTheCompany’ssaleofadditionalshares
c.Exitstrategies: WhathappensifDinganeDalalawantstosellhisshares oriftheCompanyissold?
Atthesession,theGreendelegateswillrepresentDinganeDalala,andwillbeaskedto identifytheinformationyourclientneedstoknowaboutcorporategovernanceandtheprotectionsheneedsbeforeagreeingtobuysharesinVukani.
Session7: WorkshoponPersonalServicesIssues.
SessionSummary:
Thissessionwillprovideanoverviewof consultancyandotherpersonalservicescontracts,includinghowthesecontractsareusedtoregulaterightsduringthecontractandtogovern behaviorafterthecontracthasended. Wewilldiscusshowpersonalservicescontractscanlimitthewaysinwhichacontractormayusethecompany’sconfidentialorproprietary information,orrestrictthecontractor’srighttocompetewiththeemployer. Wewilldiscussthescopeofnon-competeagreements,andconsiderationsofthegeographicareacoveredorthelengthoftimethatitlasts.
CaseStudySupplement:
MandlawouldliketouseMaryBerry—alocaltalkshowhost—tohelpmarkettheproduct.Severalyearsago,Marydidsimilar work forHerbalHeaven,aSouthAfricanbeveragecompany, andgreatlyenhancedtheirsales.
MandlaenvisionsthatMarywillvisitexclusiveretailgrocersaswellaschainstoresintheProvince,andifshedoeswellthere, visitotherstoresthroughoutSouthernAfrica. Vukani2UbelievesthathercontactlistfromHerbalHeavenwillbeabigadvantage. MarywouldalsoberesponsibleforcreatingandimplementinganadvertingcampaigntocreateabuzzaboutVukani2UinSouthernAfricawhich,ifsuccessful, couldincludehavingher doing televisioncommercialsfortheproduct.VukaniintendstouseMaryforoneyear,andpossiblylongeriftheproducttakesoff.
MaryhasprovidedherattorneyandVukani’sattorneywithacopyofherservicesagreementwithHerbalHeavenandindicatedshe’dlikeasimilararrangementwithVukani.
DelegateExercise:
BluedelegateswillrepresentVulkani;GreendelegateswillrepresentMaryBerry. Priortothesession,eachdelegateshouldreviewtheHerbalHeavenprecedentandmarkituptoshowchangesyouwouldmakeindraftingacontractbetweenMaryandVukani.Atthesession,delegatesshouldbepreparedtonegotiatethetermsoftheservicescontract.
Session8: WorkshoponProductSalesandDistributionIssues.
SessionSummary:
Inthissession,wewilldiscussissuesrelatingto productssalesanddistributionagreements,andthelegalenvironment(includingstatutoryprovisions)andissuesrelatingtothesemodelsofbusinessexpansion.
CaseStudySupplement:
SincetheCompanyoperationsareexpandingrapidly,Sandiledecidesheneedshelpdistributingtheproducttostoresinotherprovinces. Mandlaidentifies acompany,Distributor,Ltd.,tomarketanddistributetheproductintwodistantprovinces Distributor,Ltd. wantstosignanagreementdocumentingthetermsofthearrangementwithVukani. Mandlahasalsoaskedyoutoprovidehimwithastandardpurchaseorderwhichhecanuseforallhisdirectsalestolargegrocersonanet30-daybasis.
DelegateExercises:
1.Priortothesession,draftthestandard purchaseorder for goodsMandlahasrequested.
2 GreendelegatesrepresentVukani;BluedelegatesrepresentDistributor,Ltd. Considerandbepreparedtodiscussatthesessionthelegalissuesandtermsimportanttoyourclientinnegotiatingadistribution agreement.
Session9: DraftingandNegotiatingLeasesforCommercialImmovablePropertyandEquipment.
SessionSummary:
Aleaseagreementisalegalinstrumentdocumentingtherelationshipbetweentheownerofpropertyandapersonorentitythatwantstousebutnotowntheproperty. Inthissession,wewillexaminethebasicprovisionsofacommercialleaseforthetypeofequipmentorbuilding thatabusinessmightconsiderrenting. Someoftheleaseissueswewillconsider are:
-LeasePayments
-CommencementDate,Term,andTermination
-PropertyMaintenanceand ImprovementsDuring LeaseTerm
-DamagetoPropertyduringUse
-RepresentationsorWarrantiesoftheOwner
-OngoingdutiesandrightsofeachPartyduringLeaseterm
-Sublettingandassignmentrights
-Whathappensifthebusinessfails?
CaseStudySupplement:
Assumethat2yearshaspastand that,becauseofthe Company’sgrowth,itneedsalargerfacilityforitsoperations. Mandlahaslocatedtwobuildingsonaparceloflandneartheairport;oneisasmallofficebuildingandtheotherissuitableforaproductionand bottlingfacility.Thepropertywaspreviouslyleasedtoachemicalmanufacturingenterprise.IfVukanileasestheproperty, italsoplanstoleasenewbottlingmachines.Thebuildingowner’sattorneysendsMandla adraftbuildingleaseandthebottlingmachinecompanysendsMandlaaproposedequipmentlease(which the instructor will provide).
DelegateExercises:
1.BlueDelegates:AsVukani’sattorney,reviewthebuildinglease.GreenDelegates:AsVukani’sattorney,reviewthemachine lease.
2. Priortothesession,Delegatesshouldidentifyand provisionsintheleaseagreementtheyreviewedwhichtheirclientshouldseektohavemodified;delegatesshouldthenmark-uptwohigh-priorityprovisionstomakethedesiredmodifications.
Session10: WorkshoponCommercialLoans.
SessionSummary:
Inthissession,wewillreviewthecentralpremiseofacommercialloanandtheroleriskplaysinthebank’sdecisiontomaketheloanandhowthebankpricestheuseofitsmoneyinaccordancewiththatrisk. Wewillalsotalkabouthowthebankseekstoprotectitselfgenerallybyidentifyingriskfactorsandchangesinthoseriskfactorsduringthecourseoftheloanandbyusingsecurity. Wewillreviewhowabankmightsecureitspositionanditsrightsandprioritytothesecurityinthecontextofstatutorylaw.
Wewillthenexamineasamplecommercialloanagreementtermsheet,focusingonthefollowingprovisions:
- Interestandprincipalrepaymentdate
- Prepayment
- Useofproceeds
- WarrantiesandRepresentations
- Covenants
- Informationrequirements
- Security;subordination
- EventsofDefault
Wewillalsoexamine-
(a)thelawyer’sroleintheprocessincluding(i)bargainingonbehalfoftheclientbasedonaknowledgeofwhatiscustomaryinlendingtransactionsofthisnatureatthistimeinthemarket;(ii)advisingtheclientontheprimaryitemstoattempttonegotiate;and(iii)providingtheclientwithpracticalsummariesofitsmajorobligationsandlimitationsforuseaftertheloancloses.
(b)theethicalissuesforlawyersinnegotiations,forexample,whatisalawyerrequiredtodoandwhatshouldabusinesstransactionlawyerdowhenfacedwithaclientwhoismateriallymisleadingalenderinsecuringfinancing.
DelegateExercises:
1. GreenDelegates:AssumethatMandeladecidestoapplyfor aloanofZAR1millionwithasmallSouthAfricanbank Followingitsduediligenceprocess,theBank providesadraftloanagreementtermsheet.DraftalettertotheBankrequestingchangestooneormoreoftheprovisionsofthesampleloanagreementtermsheetandprovidingarevisedtermsheetsatisfactorytoVukani.
2.BlueDelegates:AssumeMandlaandthebankcannotagreeontermsandthat DinganeDalalaagreestoprovidetheneededcapitalbywayofa loan.Draftan agreement fortheloanasDalala’sattorney.
Sessions11,12and13—WorkshopsonSaleofaBusiness
CaseStudySupplement:
Assumeitisnow10 yearsfromthetimeyoufirstdealtwithVukani2UandthatwiththecapitalfromDinganeDalalaandabankloan,Vukani2Uhasgrownsignificantly.SandilehasjustbeenapproachedbyaprospectivebuyerforVulcani.Sandilewishestosellthebusinessandretire.Dalalaisagreeablesincehewantstocashouthis20%share(seesession6;heloantoVukanihasbeenpaidoff. However, Mandlaandhisotherrelatives,whoknownootherbusiness,arenotsureaboutasale,andmaywanttoeitherremaininthebusinessorstartanewone.
Vukani2Unowhas50employees,25ofwhombelongtoaunion(and5ofwhomarerelativesofSandileandMandla).Vukani’sassetsincludeapatentforitsbottlingtechnology,trademarksforitsproductnamesandtherecipefortheVukanitonicwhichVukani2Uconsiderstobeatradesecret. Vukani2UhasrecentlyreceivedaletterfromHerbalHeaven,whichproducesaherbalsupplementcalled“Volcani”,allegingthatthenameVukaniinfringesthecompetitor’srightsanddemandingthatVukaniceaseusingtheVukaniname.
Latyear,Vukani2U’sgrosssaleswereapproximatelyZAR30Million,withexpensesofR25M,andaprofitofR5Million. Itsbalancesheetandincomeandexpensestatementarecontainedinacharteredaccountant’sreport,whichstatesthatitisacompilationandisnotaudited;thereportisintheDelegateReadingsforSession13. Vukani2UmaintainsarevolvingcreditfacilitywithStandardBankwithacurrentlyoutstandingbalanceofR3Million. Itowns10vehicles,oneofwhichisaPorscheCarrerathatisusedexclusivelybyMandla.
Vukani2UmanufacturesitsproductsinaleasedfacilitydescribedinSession9. Theofficebuildingcontainartwork whichdonotappearonVulkani’slistofassets.
Vukani2Uhas12yearstogoona20-yearcontractwithDalala(theneighbourwiththepurespring)fortheexclusiverighttodrawwaterfromthespring.SeeSession4above.
Vukani2Umaintainsrelationshipswithanumberofitssupplierswithwhomithasdonebusinessforanumberofyears. Itsellssomeproductdirectlytolargegrocerychainsonanunsecured30daynetbasis.Ithasawrittenagreementtosupplyatleast1000boxesoftheVukanitonicayearatafixedpriceto DistributionLtd.Seesession8above.Italsohasanemployeeretirementplanwhichrequiresanannualcontributionbaseduponawrittenformula.
TheprospectiveBuyerisSandtonAcquisitionCompany(SAC).SAC,newlyformedinRSA,isownedbytwoindividualsequally. Itisadequatelyfinancedtooperatethebusinessforawhile,butclearlyhasinsufficientresourcesitself topurchaseVukani2U. SACwillneedsomeformoffinancialassistanceinordertoacquireVukani2U.
TheonlycontactbetweenSACandVukani2UhasbeenacalltoSandilebySACindicatingadesiretotalk. Eachhasnowcontactedindependentcounselforadviceonhowtoproceed.
Session11: WorkshopI–OverviewoftheContractualStructureandProcesstoSell ABusiness
SessionSummary:
Thisisthefirstofthreesessionsaddressingthepurchaseandsaleofabusinessandtheroleof commerciallawyersinthatprocess.
Thissessionwillprovideanoverviewof(a)theprocessofsellingabusinessasagoingconcern(asopposed,forexample,toaliquidation),identifyingtheprincipalstagesandstructuresofthesaleprocessandtheissueswhichariseateachstageandineachstructure;(b)thestructureofatypicalpurchaseandsaleagreementanditsbasicterms;(c)theneedforconfidentialityandnon-disclosureagreements;(d)theduediligenceprocess.
DelegateExercises:
1.Greendelegates:DraftamemolistingtheadvantagesanddisadvantagesforVukanitosellits sharestoSACversussellingitsassetseasagoingconcern.
2. Bluedelegates: Draftamemo listingtheprincipallegal issuesand risks SACshouldconsiderinnegotiatingthepurchaseofVukani2U.
Session12: WorkshopII-NegotiatingDisclosuresandRepresentationsandWarrantiesinaBusinessSaleTransaction.
SessionSummary:
Thissessionwillfocusonthenegotiationoftherepresentationsandwarrantiesinthesaleofabusiness,focusingonthekeyrepresentationsandwarrantiesandtheallocationofriskbetweentheparties.
DelegateExercises:
GreendelegateswillrepresentVulkani;BluedelegateswillrepresenttheBuyerSAC.Priortothesession,eachdelegateshould draftthefiveprincipalrepresentationstheyneedfortheirclient(eitherSACorVulkani).AtthesessionDelegateswillnegotiateandtrytoagreeonthefinalprovisions.
Session13: WorkshopIII-NegotiatingthePriceandOtherKeyProvisionsofaBusinessSaleTransaction.
SessionSummary:
Thissessionwillfocusontheotherkeyprovisionsofanagreement:price;priceadjustment,indemnities,covenants,andsuspensiveconditions.
Case Study Supplement:
The buyer, SAC, has proposed a purchase price for all of the assets of ZAR 15 Million, inclusive of working capital and wants a representation as to the minimum level of working capital at closing. Mandla, on behalf of the company, has responded with a proposed purchase price of ZAR R15 million, plus the amount of net working capital of the business at closing.
Delegate Exercises:
1.Green Delegates will represent SAC; Blue Delegates will represent Vulkani. Prior to the session, delegates will draft the price and price adjustment clause for the Vukani 2U sale and will negotiate the final provisions at the session.
2.Prior to the session delegates should also draft the key conditions for their client to close the transaction (suspensive conditions) and negotiate the final provisions at the session.
1