Are you a co-founder of a company?
Did you found a company with another person(s)? Meaning you and another person or group of persons has pulled your resources together to start a company, with a fantastic business idea that is guaranteed to change the world.
Let me call your attention to a mistake that many co-founders of companies make all over the world.
A quick question, have you ever heard of Eduardo Saverin? He was a co-founder of Facebook Inc. with Mark Zuckerberg but not any longer. They had no co-founders agreement and on the basis of that, he was eventually booted out of Facebook after years of litigation and slugging it out in court.
Imagine losing out of such a profitable company? It is horrible right? To confirm this story, you can read up more details on the internet.
A number of co-founders lose out of their companies because they fail to protect their interest in the company. It is important that co-founders agree on certain important issues and have it documented in a binding agreement.
But you say, our company has a memorandum and articles of association. Yes, but as you will soon discover, it isn’t sufficient.
What is a co-founders agreement and what does it contain? Why is it so important?
A co-founders agreement contain among other things; Roles and responsibilities of each founder, equity ownership and vesting, remuneration, confidentiality, the goals, vision of the company, appointment of employees, signatory rights, mergers and acquisition, exit strategy, issuing new share , percentage of ownership, type of shares, how board members will be appointed, merger, signatory rights, quorums and resolutions, conflict of interest among many other things.
A co-founders agreement is a detailed agreement that sets out clearly these important issues as agreed upon by the co-founders hence protecting the interest of the co-founders so they can concentrate on the hectic tasks of running and building a business.
Once it is made into a legal agreement, all the parties are bound by it. This is great, right?
Does your company’s memorandum and articles of association include all these details?
Have you discussed with your co-founders the issues raised above and documented it in a legally binding contract?
If your answer is yes, kudos! You are on the right path.
If your answer is No, then you know that your interests aren’t protected.
Will you work hard at building a company, scaling up but leaving your investment to chance, like Eduardo Saverin?
The choice is yours; i trust that as an astute entrepreneur, you will choose wisely.
Tosin Omotosho is the Principal Partner at Charis Legal Practice, a law firm based in Lagos Nigeria. She is a business lawyer and helps companies implement best legal practices and avoid legal mistakes associated with running a business in Africa.
She has over 11 years experience in legal consultancy, litigation, company structuring, commercial contracts and commercial transactions. She has consulted for and represented companies in the real estate, retail, advertising, agriculture, e-commerce, technology, hospitality and manufacturing industries.
An avid reader and writer, she believes in helping companies improve their operations and increase revenue by placing more importance to the legal aspects of their businesses. Contact her here, to read more of her articles, click here.
Derivatives: Enforceability of Close out Netting in Nigeria
By: Olayemi Anyanechi, Managing Partner at Sefton Fross
The Companies and Allied Matters Act (CAMA 2020) is a game changer for derivative transactions in Nigeria. It introduces innovative provisions that will impact financial collateral arrangements typically used by parties involved in derivative trading. This article will examine the novel provisions introduced by CAMA 2020 as it relates to financial collateral arrangements.
An examination of financial collateral arrangements under the CAMA 2020
Until recently, the enforceability of derivative transactions in Nigeria had lingering questions. This was mainly due to the uncertainty over enforcement of the close out netting provisions. To mitigate this, counterparties were typically advised to pursue the Automatic Early Termination route.
Netting is a reconciliation and payment mechanism which involves the aggregation and conversion of mutual payment obligations into a single claim, so that the party owing the greater aggregate amount makes a net payment to the party owing the lesser aggregate amount. Forms of netting include contractual/settlement, insolvency and close-out netting.
Netting under extant Nigerian laws
Prior to CAMA 2020, Nigerian laws supported contractual netting and insolvency netting.
Insolvency netting is a mandatory right of set-off that arises when a company goes into liquidation. It is automatic and applies at the date on which the liquidation commences
Insolvency netting is recognised under the provisions on mutual credit and set-off in section 33 of the Bankruptcy Act 1 and implied by reference in the previous CAMA 2. Section 33 of the Bankruptcy Act provides that where there has been mutual credits, mutual debts or other mutual dealings between a debtor and any other person claiming to prove a debt in the debtor’s liquidation, an account of what is due from one party to the other in respect of such mutual dealing and the sum due shall be set off against any sum due from the other party and the balance of the account and no more shall be claimed or paid on either side respectively. Thus, it required the claim and cross claims to be between the same parties in the same right.
Contractual or settlement netting is the netting of reciprocal deliveries or payments which are due on the same date. It provides for mutual payment obligations of contracting parties to be discharged by a single net payment obligation from one party to the other. This form of netting addresses the risk presented when parties’ obligations are not performed simultaneously, particularly where payment obligations are in the same currency to be performed on the same date. It assesses the parties’ mutual payment obligations and requires physical payment only from one of the parties, usually the one with the larger debt.
Close-out netting on the other hand, is typically employed to minimise the risk of exposure to an insolvent counterparty. It applies to contracts having different settlement dates and results in dealings between the counterparties coming to a close.
Prior to CAMA 2020, insolvency netting was mandatory and it was not possible to enforce certain provisions under such agreements after the commencement of winding up without a court order. This was because under Nigerian law, any disposition of the property of the company made after the commencement of the winding up shall, unless the court otherwise orders, be void.
Furthermore, in line with the provisions of section 499 of the erstwhile CAMA, where the termination of obligations under netting agreements do not occur prior to commencement of winding up, the liquidator may have been able to “cherry-pick” and require the performance of contracts that he deemed beneficial while disclaiming the onerous contracts.
New close out netting provisions
CAMA 2020 now recognises and provides a legal framework for termination and close-out netting.
Close out netting is defined under CAMA 2020 to include the occurrence of “the termination, liquidation or acceleration of any payment or delivery obligation or entitlement under one or more qualified financial contracts entered into under a netting agreement”. Netting agreements are recognised to include a ‘master netting agreement’, a ‘master-master netting agreement’, and a ‘collateral arrangement’.
Section 721 of CAMA 2020 further provides that:
(1) “The provisions of a netting agreement is enforceable in accordance with their terms, including against an insolvent party, and, where applicable, against a guarantor or other person providing security for a party and shall not be stayed, avoided or otherwise limited by-(a) Any action of the liquidator;(b) Any other provision of law relating to bankruptcy, reorganisation, composition with creditors, receivership or any other insolvency proceeding an insolvent party may be subject to; or(c) Any other provision of law that may be applicable to an insolvent party, subject to the conditions contained in the applicable netting agreement.”
With this provision the perennial issue with derivative transactions in Nigeria, which was to the effect that only insolvency netting was possible, has been addressed.
In terms of obligations of the parties to a netting agreement surviving the commencement of insolvency proceedings, the only obligation/right, if any, of either party is to make/receive payment or delivery under a netting agreement which shall be equal to its net obligation/entitlement with respect to the other party as determined in the netting agreement.
Furthermore, the provisions under CAMA 2020 limit the liquidator’s powers to disclaim netting agreements as onerous contracts. It provides that:
“Any power of the liquidator to repudiate individual contracts or transactionswill not prevent the termination, liquidation or acceleration of all payment or delivery obligations or enforcements under one or more qualified financial contracts entered into under or in connection with a netting agreement, and applies, if at all, only to the net amount due in respect of all of such qualified financial contracts in accordance with the terms of such netting agreement”.
Section 721(6) of CAMA 2020 also provides protection for netting agreements in that a liquidator is prohibited from avoiding the terms of such agreement unless there is clear evidence that the enforcing party made such transfer or incurred such obligation with actual intent to “hinder, delay or defraud any entity to which the insolvent party was indebted or became indebted”. The relevant time period is the period on or after the date that such transfer was made or such obligation was incurred.
These new provisions mitigate the risks hitherto inherent in “qualified financial contracts” which includes a whole range of derivatives and will go a long way to enhance financial stability and investor confidence in the Nigerian financial sector.
There is no doubt that with the improved regulatory landscape, the CAMA 2020 has commendably set the tone for the actualisation of key innovations in the market, providing enabling legal backing for netting, bankruptcy remoteness and attendant regulatory frameworks for the smooth functioning of financial markets in Nigeria which would ultimately impact positively on transactions between counterparties and other participants in the market.
The Companies and Allied Matters 2020 is currently awaiting gazetting as the last step to its effectiveness.
1. The Bankruptcy Act, CAP B2, LFN 2004, s 33.
2. The Companies and Allied Matters Act CAP C20 LFN 2004, s 493.
3. The Companies and Allied Matters Act CAP C20 LFN 2004, s 413.
4. The Companies and Allied Matters Act 2020, s 718.
5. The Companies and Allied Matters Act 2020, s 721(2),(3).
6. The Companies and Allied Matters Act 2020, s 721(4).
Article by: Olayemi Anyanechi, Managing Partner at Sefton Fross
Current Legal Issues Arising from Banking and Financing Arrangements
In August 2020, Diagoe Plc’s Nigerian entity announced that it was struggling to refinance a $23 million debt and trim costs following a shortage of dollars in the local-foreign exchange market. While the lack of access to greenback (dollar) remains a growing concern for borrowers in Africa, the downturn in the revenue and profits as a result of COVID-19 has recently become a more prevalent cause for the inability of many borrowers to fulfill their contractual obligations.
The disruption of supply chains, compulsory quarantine, and social distancing regulations are a few examples of the effect of COVID-19 which in turn have materially caused economic instability and affected the ability of borrowers to meet their financial obligations. There is therefore a need for lenders and borrowers to critically consider the implications of the current economy on their financial obligations.
This article highlights some key implications the current financial terrain may have on borrowers’ businesses and their ability to comply with their contractual obligations. The article further sets out recommendations for lenders and borrowers who are faced with the task of funding and repaying loans under respective financing arrangements. While there are numerous impacts of the resultant effect of COVID-19 on covenants in finance documents, this article highlights only a few of such key legal consequences on financial obligations.
Financial Conditions and their Implication on Covenants in Finance Documents
Generally, financial covenants in a loan agreement are undertakings given by the borrower to test the performance of the business servicing the loan and to help the lender ensure that the risk attached to the loan does not unexpectedly deteriorate prior to maturity. These performance covenants may cover the borrower’s business both back or forward to assess whether the business is showing any signs of distress that could potentially affect its financial obligations under the finance documents.
However, as a result of the steps taken to combat the COVID-19 pandemic, many businesses have seen a severe and abrupt drop in income which has affected the ability of businesses to meet some performance covenants.Where these covenants have been breached as a result of the pandemic, the lenders may declare a default under loan documents and demand early payments of loan which acts as a drawstop, such that the borrowers will not have access to their facilities. A drawstop event means a breach by the borrower of a financial covenant which gives the lender the right to refuse to make further loan advances under a facility agreement.
In light of the foregoing difficulties that both lenders and borrowers may face in these uncertain times, the following paragraph sets out practical solutions that may be explored by the parties.
Legal Considerations for Borrowers and Lenders
With the current unpredictability of the financial markets, it is important that borrowers and lenders conduct a critical review of their current loan documents to verify the implications of COVID-19 on their rights and obligations. Most importantly, borrowers have to fully disclose to their lenders the current situation of their businesses, highlighting any potential breach before it happens helps to build trust and to enable the lenders to have a clear picture when deciding if they will be willing to adjust financial obligations in line with the current realities of the economy and take into consideration some practical solutions set out below.
First, parties may agree to re-negotiate and subsequently amend their financial covenants, taking into consideration the impact of COVID-19 on the borrower’s ability to comply with their financial covenants. For instance, certain definitions in the finance documents may no longer reflect the current realities of the borrower’s business, such as EBITDA which is used as a metric for thelast four fiscal quarter periods of earnings before interest, taxes, depreciation, and amortization to measure the company’s financial performance.
Thus, where the EBITDA has been affected as a result of the pandemic an amendment to its substance will be an appropriate step in order to reflect the current financial condition of the borrower. Other re-negotiation may be in relation to compliance with certain conditions provided under the finance documents.For example, a facility agreement may include provisions requiring the borrower to fulfil certain further conditions precedent before it can access additional funding under the relevant facility.
It usually includes confirmation that:
(i) no Event of Default or a potential Event of Default has occurred and is continuing; and
(ii) the repeating representations are true in all material
respects, in each case, as at the date of the utilisation request and the proposed utilisation date.
In such instances, parties may either amend the provisions or the borrower may request that the lender grant waivers in the event that such conditions will not be fulfilled.
Another consideration that the borrower may explore (subject to the fulfillment of any available conditions or if waivers are granted by the lender) is utilizing any undrawn commitment under its existing facilities. Although, it has been highlighted above that material breaches of covenants may give right to the lender torefuse to provide additional funding, it may be in the interest of lenders to provide same. This is because additional funding may positively impact the borrower’s business and in turn improve the lender’s chances of full debt recovery.
Finally, parties may consider undertaking a full restructuring of the financing by re-negotiating substantial terms and entering into restructured facility documentation which may capture relaxation of financial covenants, obtaining a moratorium on interest payment obligations, all necessary requirements, amendments, waivers, and consents required by the borrower. Essentially, the restructured facility documentation is drafted on much better terms that reflect the current financial conditions and commercial needs of the borrower.
The global COVID-19 pandemic has no doubt placed a strain on the ability of some businesses to service their debts under finance documents. While many governments especially in developed countries have granted some aids, this may not be enough especially for companies in certain industries that have been seriously hit by the pandemic. The situation is even worse in undeveloped markets where there is little or no support from government. Thus, it is unavoidable that re-negotiation and restructuring are considerations that will likely be put forward by borrowers to avoid triggering defaults under their finance document during these unprecedented times.
It is advisable that lenders on the other hand, are more flexible with their approach with their borrowers and are willing to work around re-negotiating the financial covenants with the borrowers given the current uncertainties arising in the economy.
Written By: Bukola Adelusi recently completed her LL.M in corporate law at Western University, Ontario. Prior to her LL.M, she practiced with a top-tier law firm in Nigeria, where she specialized in banking and finance, M & A and private equity.
How Artificial Intelligence Is Transforming the Legal Profession
LegalTech Image (Source: Medium)
The legal sector has a general reputation for being conservative when it comes to technology. Not anymore. The landscape is rapidly changing. Digital legal tools have gone beyond the days of Westlaw and LexisNexis, the two companies that pioneered online legal research. Artificial intelligence is revolutionizing how attorneys practice law. Keep reading to understand what artificial intelligence is and how it’s transforming the legal profession.
AI Partners with Lawyers
Artificial intelligence (AI) is a term used for a computer-based algorithm that can analyze, strategize, and draw conclusions to complete tasks typically performed by humans. Although AI is new, people have dreamed of harnessing the capability of computers to assist in legal tasks for hundreds of years. In the late 1600s, the German attorney G.W. Leibniz theorized that machines would someday use a binary logic system to calculate numbers, and he envisioned a partnership between artificial intelligence and lawyers. Despite never seeing anything resembling a computer, he accurately described the benefits that AI now provides to the legal profession: “It is unworthy of excellent men to lose hours like slaves in the labor of calculation which could safely be relegated to anyone else if machines were used.”
AI-based software allows law firms to automate lower-level tasks, freeing time for attorneys to focus on complex analysis and client interaction. AI greatly enhances an attorney’s ability to research, advise, and serve their clients. Some large firms already use AI-based tools to enhance their practices. According to the 2018 Technology Survey by the International Legal Technology Association, 100 percent of law firms with 700 or more lawyers use AI tools or are pursuing AI projects. Firms, particularly larger businesses, that don’t adapt to changing technology, will soon struggle to compete.
Eventually, artificial intelligence will automate even more aspects of legal practice. According to a Deloitte Insight report, AI may automate more than 100,000 supportive roles in the legal sector within the next two decades. However, AI won’t spell the end of non-attorney legal careers. Instead, it will undoubtedly create new career paths, with boundless opportunities in AI and machine learning.
Applications of AI in the Legal Field
AI will revolutionize the following areas of the law.
LItigation Document Review
One thing all attorneys can agree on is that law practice involves a lot of paperwork. Even a simple case can involve an impressive number of documents, communications, and reports. Attorneys have a duty to review all the discovery materials associated with a case. If an attorney misses key terms or changes, it can be disastrous and even rise to the level of malpractice. Fortunately, AI streamlines eDiscovery technology, including document review.
AI eDiscovery algorithms work by learning how a firm reviews documents and sorting out relevant terms, topics, and other criteria. Once AI software knows what to look for, it can suggest important documents and areas of interest within the content. AI solves two persistent problems with discovery: it typically takes too long, and it’s expensive.
To illustrate the benefits of AI for document review, imagine that in-house counsel for Company A receives a few thousand documents relating to pending litigation regarding an order of botched goods. Company A’s attorney specifies terms of interest along with relevant documents for the company’s AI to review. The AI scans through thousands of records within seconds and provides the attorney with the necessary information to build a case. With the help of AI, Company A drastically lowers legal costs and quickly drafts a claim to recoup damages and mitigate further losses.
Attorneys have used text retrieval for legal research for decades. Companies such as Westlaw and LexisNexis provided foundational online legal research tools. AI enhances these traditional search methods.
Searching for applicable case law is tedious. General search terms can yield thousands of case results, proving useless to a busy attorney. AI improves searches because it learns what an attorney needs. The more data and information an attorney provides to narrow the scope, the more the AI tailors the information. Instead of 1,000 possible cases that could contain applicable precedent, the AI may provide the attorney with a handful of the most relevant cases. Plus, AI can continue the search even after the initial inquiry. It’s similar to having a legal assistant researching for a client day and night.
For example, imagine Company A sues a manufacturer for failure to deliver conforming goods. Attorneys for Company A provide their AI with important terms and applicable facts and request a list of relevant case law. Not only does the AI deliver past cases on the subject, but it automatically provides updates and further research as it’s published. This intuitive retrieval process is the cornerstone of how AI transforms legal research.
Artificial intelligence serves as an invaluable tool for attorneys to manage their workloads and protect the best interests of clients by being able to review more documents in less time, and with greater accuracy.
Due diligence can vary widely in its breadth and depth. Generally speaking, it’s a time-consuming process of gathering documents, relevant data, communications, and other vital information. Once assembled, attorneys must painstakingly review each document and search for language in those documents that effectively prohibit a transaction from proceeding forward, or that state that certain consents are required, among other things. Attorneys can use or customize AI to search provided documentation and information, extract key points, and organize everything for thorough review. They can cut contract review time by up to 60 percent by using AI, according to research by Kira Systems.
For attorneys who regularly deal with large volumes of contracts, contract management is a must. Artificial intelligence provides a fast and efficient method to organize, track, and negotiate contracts. AI collects data over time to help attorneys draw conclusions, create future contract strategies, and discover new insights within the contract terms. AI software provides attorneys with more confidence in contract negotiations and leads to better outcomes for clients.
For example, imagine an attorney for Company A would like to request a change to the current commission rate during the next contract renewal with Company B. The attorney provides the AI software with access to past contracts associated with Company B. The AI then provides an accurate prediction of whether Company B will approve the requested change.
AI can also help attorneys predict the amount of time it will take a counterparty to approve a contract. The timing of contract approval can significantly impact a businesses’ overall strategy. AI can provide unprecedented accurate estimations from contract creation to close.
For example, imagine Company A needs to decide whether to ask for a modification of a clause in a contract with a manufacturer. Company A’s attorney uses AI to analyze the change and provide Company A with a time estimate for approval due to the added request. The AI assigns cost values to extensions of time to allow Company A to weigh financial penalties against further negotiations. AI provides Company A with sophisticated insights to enable their attorneys and managers to assess whether additional requests would be worth the estimated delay.
Some of the most common questions clients ask attorneys are, “Do you think I would win this case if it went to trial?” and “Should we settle? How much is reasonable?” Attorneys draw conclusions based on their years of experience in litigation and their knowledge about the local judges and opposing counsel.
Artificial intelligence takes prediction to the next level. AI can analyze similar cases with similar facts and provide a statistical analysis to predict litigation outcomes accurately. This tool allows attorneys to confidently advise clients on how and if to move forward with litigation.
For example, imagine Company A is contemplating whether to settle in mediation regarding a suit against Company B. In-house counsel for Company A uses AI legal software to weigh their options. The attorney discovers that with the current facts, Company A has approximately a 55 percent chance of winning at trial. Because of the risk of a negative impact on public relations and the small chances for a win at trial, Company A accepts a settlement, which saves their business tens of thousands of dollars in legal fees.
But is AI accurate with litigation outcome prediction? A London law firm used the data of more than 600 cases over a year to predict the viability of several personal injury cases. And artificial intelligence beats human experts in predicting the outcomes of Supreme Court cases.
Artificial intelligence is transforming the legal profession and the practice of law. Some people fear it will eventually replace attorneys. But AI legal software produces the opposite effect. It has the potential to help lawyers fall in love with their careers all over again while saving time and money in the process.
By automating repetitive tasks, lawyers can focus on higher-thinking and more complex operations of their practice. Attorneys may be able to say goodbye to long hours spent reviewing documents. They can spend more time with clients and devote more energy to formulating arguments and strategic planning. For the legal profession, the implementation of AI is a victory for everyone involved.
Written by: Rachel Vanni
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