Content provided by a guest contributor.
In the past year or so I have been coaching many buyers of businesses, and giving legal advice on the wording of legal documents. Accordingly, this article is given mainly from the buyer's perspective.
I would like to relate to readers some of the matters which have arisen, or which I have been apprised of over the years, which have or could have been extremely detrimental to the buyer. It is very much an overview, but gives an insight into the play on words.
- The seller's lawyers often draw up the agreement, and the buyer believes it is saving him/her legal fees. This is not necessarily the case. In one case it was agreed that the legal fees would be split 50-50, although the agreement was drawn up very much in favour of the seller. The wise buyer must get his/her own advice and insert in the agreement that each party will pay its own fees.
- The seller's lawyers had drawn up the agreement, which included a clause that there would be action against the buyer if he/she breached the agreement, but no mention was made of what would happen if the seller breached the agreement.
- The word "voetstoots" can work against a buyer. In a case in question, the wording in a sales agreement indicated that the seller wanted the sale voetstoots (with all its faults). The buyer persisted and the agreement eventually read that the seller would warrant that the business assets were sold in good working order and condition. Many faults were found, which cost the seller dearly. Perhaps this is a case of, are you buying or selling?
- I was recently shown a suretyship agreement, which had Latin phrases, and a clause inserted, which said that the buyer had read and understood the agreement, which of course he/she didn't. On asking the bank what the phrases meant, their advisers could not give an answer - enough said.
- It can sometimes work in favour of the buyer. A seller had warranted that he would be liable for any damages which arose from any claim for occurrences which took place before the effective date. A claim arose which had consequential damages, which the seller had to pay. The seller's lawyers should have limited the warranty to simple damages - the word "damages" had not excluded consequential damages.
- In a lease agreement, a clause had been inserted to the effect that, if the lessee did not report any defaults within one month, then he/she was liable for the defaults. Luckily we had inserted a clause that the same situation would apply at the end of the lease, if the lessor did not report any faults. When the lease was terminated, there were faults which the lessor had to cover, because he/she did not report them within one month. I have not seen this clause recently - I wonder why? It must be stressed that lease agreements are difficult agreement from the perspective of the lessees and advice must be sought - especially on such matters as options, negligence by the lessor and rental increases - watch the wording.
- A buyer signed an agreement, as did the seller. It was found out later that the person signing on behalf of the seller had not been mandated to do so. Luckily there were no significant consequences. Make sure the other party is mandated to sign.
- In the sale of businesses, agreement's warranty clauses are important - from the buyer's perspective, the catch all clause is important: "That the seller has disclosed all material facts of a deal of this nature and the price paid therefore". This clause is vital to the buyer and the seller's lawyers are inclined to forget it. Also watch phrases such as "To the best of the seller's knowledge and belief" - difficult to prove.
- Going to the beginning of the agreement - it is amazing how many times it is found that the seller is not necessarily the seller, assets are in the wrong box and the registration numbers are wrong. Check carefully.
- Definitions are also extremely important - I have been in court cases arguing over the definition of ‘net asset values', ‘stock in transit', ‘restraints of trade', and the lawyers' favourite - the word "material".
To show how far misunderstandings can occur, I was involved with a case where a shareholder retained 10% of the shares in the company which he sold. It was agreed that he would be paid out this 10%, after 5 years, on a price formula calculated on net profits for the fifth year. However the formula could be read that he was entitled to all the net profits, and not just the 10%, for the fifth year - which had not have been the intention. Eventually he settled for 30%.
To conclude, a buyer brought a company for R5m. There was no warranty that taxes had been fully paid, etc. Tax assessments arrived and the buyer had to pay another R2m.
This article is too short to cover all the issues surrounding the principles around the drafting of legal documents - which will be for another article. The intention of this article is to show how you can lose out on an agreement which you did not understand, whether it was badly drafted or not.
Readers are cautioned, therefore, that if you do not understand any document you have to sign, you must get advice. Don't be penny wise and pound foolish. In the agreement you can also define a male as a female and vice versa - makes you think, doesn't it?
Article written by Bob Power from Power Corporate Consultants; firstname.lastname@example.org.