Articles of interest

Rescue Clauses

When there are human relationships, conflict is inevitable. However, we can all ensure a way in which these conflicts are resolved in the most just and objective way possible, achieving the minimum possible impact on the company.

There are prior agreements between partners, employees, suppliers, distributors, franchisees, among others, that can save the company from a total blockade or that avoid blows that make it less competitive in the market. These agreements are called conflict resolution clauses and can be divided into:

a) anti-blocking clauses and

b) dissuasive clauses.

These clauses serve to a large extent to delimit the legal consequences that a judge (or preferably an arbitrator) may apply to specific cases. Its content does not come from the books but from the (usually bad) experience of many merchants and from the risk forecasting carried out by the advisors (lawyers, financiers, spouses, etc.). Some are known in the medium, which I will mention briefly, but there are others that, due to their specificity, are totally the product of the lawyer’s creativity and ability to write his client’s risk coverage.

Anti-blocking clauses

These clauses are focused on guaranteeing the continuity of the business or carrying out operations of the mercantile nature. They find their foundation in the very old promise contract included in our Civil Code.

We speak of blocking when a merchant can not make transcendental decisions about his business independently; for example, in a society in which the capital is divided 50-50, it is exposed to a situation of blockage, as well as family societies (brothers, cousins, spouses). These blocks are maintained for years uncomfortable relationships: no profits were distributed, there are auditory constants, the legal representative is exposed to denounce fraudulent administration and many more.

The anti-blocking clause, allows the conflict not to drag on for years without solution and is based on a principle: if there is a blockade, the mechanism for breaking it is activated by means of which one of the parties in dispute will be obliged to sell their shares at the price X to the other, previously met some requirements.

Examples of these clauses are given names like: “Put & Call option”, Russian Roulette”, “Texas Shotgun”; (it first use was in the Anglo-Saxon cultures and hence their names in english).

With the use of these clauses one of the two parties to the conflict leaves the equation and therefore ceases to exist. And it can be executed voluntarily in a couple of weeks, necessarily through arbitration could last from 3 to 10 months or judicially from 10 months to 4 years, all with the advantage of having previously established the way to calculate monetarily the total cost of said conflict and the type of dispute resolution.

Now, the blockade can also occur because a third party wants to buy 100% of the business at a good price, but there is one of the shareholders who does not want to sell, the clause called “Drag Along” arises; which, forces the minority to sell their shares together with the majority if the price is appropriate (as recorded in the agreement between the two).

It can also be that before a third party that only wants to buy them a control stake (say 51% or 76%) the minority shareholder that represents less than 51% or less than 10%, requires that the purchase does not exclude it, but to sell the shares to the third in proportion to the participation of all the shareholders, this clause is called: “Tag Along”.

We achieve with these clauses that in case there is a problem, we have already completely delimited the rules of the game, the economic limits of the conflict and the decision parameters of a judge or an arbitrator (we recommend that it be arbitration and not judgment), and thus we avoid that the conflict is indefinite and that it prevents the company from operating normally.

The normal thing is to include them in a partner contract or shareholder agreements, which is not bad, but in jurisdictions like ours, it is important that you consult with your lawyer about the additional documents that must be signed to ensure the effectiveness of the same.

Dissuasive clauses

They are the clauses of NOT DOING, for example: That my employee does not go to the competition if he finishes working with me or that he does not reveal information of the company to third parties; also that a business partner can not offer employment contracts to my employees, among other assumptions.

These types of clauses are very difficult to execute due to issues of freedom of hiring or protection of labor law.

In this regard, I can tell you that in El Salvador, the only way to guarantee them is through a series of agreements with economic content that can dissuade non-compliance with these agreements. In recent cases in our firm, we have analyzed that there are no more than 4 jurisprudence in this regard in the entire history of the country.

In other countries, confidentiality agreements, or the “Non- compete” clauses, prohibit a worker from revealing confidential information, the know-how of the companies, that goes to the competition or that a partner who leaves them does the same. competition, subjecting its validity to criteria such as: the term and the amount of compensation.

This type of salvage clauses requires a broad study and joint analysis between the employer and his lawyer for its operation, only in this way will be able to guarantee a greater degree of compliance with them.

Conclusions

If conflict is inevitable, at least let’s try to manage it with our rules. In this type of cases if the agreements are not voluntarily fulfilled, we must go to experts in the matter to resolve them, that is why arbitration is essential when signing this type of agreement.

On the other hand, even if it costs a little everything, having liquid guarantees of the agreements facilitates their execution, these guarantees may include: Term deposits, escrow accounts, securities or securities (stocks, bonds or other ), which must be decided together with a trusted financier.

At the end of the day, it’s nothing personal, they are businesses on which many families depend and a conflict without exit or subject to the pride of the parties can wear down so much a company that it can cause its end. Taking a couple of hours or additional days negotiating this before starting a business or in the course of it (if possible), can save years of trials and enough money.

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