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Debra
Debra, Lawyer
Category: Canada Law
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Background: I have a partnership agreement with my business

Customer Question

Background: I have a partnership agreement with my business partner of 13 years. He owns 84% of our business and I own 16%. Our contract states buyout procedures including business valuation details and schedule of payments to the party being bought out. I resigned from the business and my last day as an active partner and first scheduled payment to me for my equity share was to be on July 4. Rather than that hsppening, on that date he handed me a crippling non compete document that he says I must sign or he will not "elect" to buy my shares. As our contract does not state that he must buy them but rather has first right of refusal that is what he is using against me. My equity share is so small it would not be compelling for another buyer except for him. Our contract does not have any non compete clause and I didn't think he could introduce one at this late stage but he is stating that what he is doing is a "buyout offer" and the non compete is part of it .
Right now my question is can he force a non compete when he has for the last three months shown every intention in word and action (witnesses other than me present) of buying my equity without question or further negotiation?
And
If I don't sign this and he therefore does not buy my equity and I retain it what happens as I would then be a non participating "owner"? Since my resignation several months ago he has been making plans with someone else with whom he wants to join businesses in the near future. I would imagine that my still owning 16% of his business would make any amalgamation or blending of those two businesses problematic. While I would prefer to just take my buyout as we always have discussed (without any mention of a buy offer woth non compete) right away, would I have any leverage in the above scenario by just holding on to my equity at this point? I would get no money in an immediate buyout but might there be other advantages?
The non compete that his lawyer has written up is so severe that at The end of the three year "ban" he wants to impose on me from our industry my licensing will have expired and I would be required to retake and rewrite the grueling licensing exams all over again like I did 20 years ago when I first entered the industry. It doesn't seem right to me that he could even demand I sign something like that.
I really look forward to hearing your feedback and I hope what I have outlined here is clear enough for you to provide helpful comment.
Submitted: 11 months ago.
Category: Canada Law
Expert:  Dwayne B. replied 11 months ago.

Hello and thank you for contacting us. This is Dwayne B. and I’m an expert here and looking forward to assisting you today. If at any point any of my answers aren’t clear please don’t hesitate to ask for clarification. Also, I can only answer the questions you specifically ask and based on the facts that you give so please be sure that you ask the questions you want to ask and provide all necessary facts. Please note: This is general information for educational purposes only and is not legal advice. No specific course of action is proposed herein, and no attorney-client relationship or privilege is formed by speaking to an expert on this site. By continuing, you confirm that you understand and agree to these terms.

Before I ask questions about your situation, I need to make sure that you understand how the website and rating system works.

Many times in situations like this the law is not in favor of the partner. When that happens we have to give the person asking the question bad news. It's true, but sometimes it's not in their favor.

On this website the customer rates us experts at the end of the question and answer and every now and then a customer is unhappy about the law and gives a negative rating. Unfortunately, that negative rating is taken by the website to be a reflection on me, indicating that I wasn't polite, wasn't prompt, or provided a wrong answer.

I'm more than happy to discuss this with you, but I just wanted to make sure that you understood how the system works and that you will rate me on my professionalism and not on whether the law is in your favor or not, since I have no control over that.

With that understanding, do you want me to discuss this in more detail with you?

Expert:  Dwayne B. replied 11 months ago.

The question is now showing it is from British Columbia? Is that correct or is this a US question?

Expert:  Debra replied 11 months ago.

Is there a "shotgun" provision in the contract? Do you know what that means?

Customer: replied 11 months ago.
1) yes I understand the rating system is based on your service and not on my being happy with the legal facts you tell me
2) yes, this is in BC Canada
3) no, there is no shotgun clause - meaning that there is nothing contained in the contract that says if I don't like his buyout offer that I can then buy him out (is that what you mean)
Expert:  Debra replied 11 months ago.

A shot gun clause is where you give him an offer and he either takes it or you get to buy him out for that same amount per share.

So you are stuck in a way because unless he is harming you or the corporation you don't have a right to force him to buy you out.

You have to come to some agreement that you can both live with.

If he wants you out then he will likely be more flexible.

Otherwise it may make sense to continue to own the shares though that does not mean you have to be actively involved or work for the corporation.

Does that help?

Customer: replied 11 months ago.
if I retain my equity, as a result of my not signing his buy offer/non compete, what would happen in the event that he wants to take action on merging "his" business with our colleague's business? As I would still have an equity position in "his" business could I not cause complications for him in doing so?I tried to attach the 10 page Partnership Agreement so that you could review it yourself as my ability to understand ALL of the legalese is not full, but this system would not accept a file of that size (? its only 10 pages?). Instead for now I have attached Schedule B. In reading it would it suggest that he must buy my share and that this buy out "offer" he is trying to execute is contrary to the original agreement?
Expert:  Dwayne B. replied 11 months ago.

As I would still have an equity position in "his" business could I not cause complications for him in doing so?

Sure, depending on the exact setup of the business and the terms set forth in the paperwork he may have to have your permission, etc.

You need to have a local attorney review all of the paperwork, including all emails, letters, agreements, etc to know what will have to happen.

I need you to re-attach Schedule B in PDF format so I can look at it. The Word files won't open online

Customer: replied 11 months ago.
I have managed to attach the documents by splitting them into sections.
Please see the original Partnership Agreement in its entirety, plus the "offer to purchase" document he presented to me on July 4. I may be misinterpreting it but it reads to me that the non-compete would prevent me from operating in our industry in any capacity for three full years, at which time I would no longer have an eligible license.(they stale date after 3 years being absent from industry). Is this interpretation correct?Schedule B - does this mean that he has already in effect agreed to buy my equity upon the acceptance of my resignation (which was accepted and acknowledged as of April 4 2016) and if so making the buy out offer an empty demand?
Expert:  Dwayne B. replied 11 months ago.

I missed the part earlier where this was BC. I will have to opt out of this one as I am just familiar with US Law.

Expert:  Debra replied 11 months ago.

I am sorry for this confusing post.

The US expert didn't seem to realize that the question had been moved to the Canada law a list. I am a lawyer in Canada which is why I have taken over answering this post.

In terms of the non-competition, three years is not considered reasonable and there is little likelihood that any court would uphold any agreement that restricts someone for so long. Generally a Court will only uphold such an agreement where the length of time is about one year. The Court would balance your need to earn a living with the former partners need not to be competed with unfairly.

Schedule B uses the term "shall" and that is a mandatory word. That means that if you want your shares to be bought out they must be bought out. That is really then end of the story. There is nothing to be negotiated. It is not that they will be bought out if you agree not to compete.

If necessary you simply have to go to court to enforce the agreement.

Does that help as a starting point?

Customer: replied 11 months ago.
Hi, thank you for making sure I'm getting the correct input for Canadian law.Have you read the earlier communications as well?So from what you have said the non compete buy out document he wants me to sign is unenforceable on a few fronts and is essentially a waste of paper . And, the partnership agreement we have as is is all that is needed to complete the necessity of his buying my equity, full stop.True?If this is true znd he still refuses, instead of going to court to settle it would there be any value/leverage in me retaining my ownership? (As per earlier question about complications arising come time for him to want to amalgamate businesses with a separate and current colleague)
Expert:  Debra replied 11 months ago.

That is all correct. I am saying that the non-competition agreement would not likely be enforceable but in any event there already is an agreement and he has agreed to by your shares when asked to do so.

He cannot refuse and you would get your costs in court.

I don't know enough about the business to know if it would make sense to give in a keep your shares but it really sounds to me that you cannot trust this guy and you will be telling him that he can really do what he wants no matter what he agreed to do.

If it were me I would take steps to enforce the contract and get out.

The first step would just be to have a lawyer threaten a lawsuit. It is likely all you would have to do.

Customer: replied 11 months ago.
Thank you. Yes, he is something else for sure.Just to be sure....the fact that our partnership agreement gives him right of first refusal does not infer he has option to not buy me out?I just want to know for sure that that part and the wording in sched b don't conflict and open for argument/interpretation.
Expert:  Debra replied 11 months ago.

From my reading it is clear that you have the right to sell and he must buy from you.

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