Recently we were consulted by a doctor (here, we’ll call him the “Investor”) that had made a large investment (i.e. >$500k) into a property development project. The client was concerned that nearly 3 years had past since he wrote the large cheque and the property remained undeveloped. He wanted to know his options for confirming the developer was diligently working on the project and, if not, how he could get his his money back.
My first question to the Investor was “Did you have a lawyer represent you on the investment?” I asked this question for two reasons: 1) the structure of the investment was more likely to be in his favour if he had legal representation and 2) if he was represented by a business lawyer or attorney and still wasn’t protected correctly he may have a recourse to the lawyer’s insurance policy if the investment was bad. Secondly, I asked the Investor to show me all the “paper” that was given to him and/or signed as part of his investment. In the case of an equity investment, I want to see the term sheet, subscription agreement, share certificates, articles of incorporation of the company in which in the investment was made and any other documents that were exchanged as part of the investment. In the case of a loan investment, I want to see the term sheet (if any), the loan agreement and/or promissory note, the general security agreement, mortgage, etc… In either case, for the company in which the investment was made I want to review all available financial statements, bank statements, property title documents, ppsa reports, etc… The contents of these documents determine an investor rights and remedies.
In the case of our doctor client, a lawyer did prepare the transaction documents, which included a shareholders agreement, subscription agreement and share certificates. This same lawyer incorporated a company for the doctor to use for his investment. Did this lawyer represent the doctor on the investment? The doctor-investor may have thought so, but the typical protections were absent from the documents we examined. Specifically, the shareholders agreement did not require the investor shareholder’s approval of any corporate action nor did it give our investor a way out. Moreover, the investment itself was structured as an equity investment rather than debt and, accordingly, the investor did not have any security over the property to be developed.
We have yet to determine if our doctor client will lose his investment, but this case highlights the importance of getting good legal advice and legal representation before investing.
