Shareholder Agreement Legal Question

[randombizguy]

Hello All,

I'm in a fairly unique scenario. 11 months ago I went in to business with 2 of my friends and an acquaintance in a field that we were all very well versed in. One of the Partners had come from a company previously that had engaged in the same line of business. The business is in the tech field. We had developed software and databases to help analyze and support corporate accounts (I can't get in to too much detail). Our systems were derived mainly from one of the Partners previous roles. He had essentially worked for them for a year and copied their solution verbatim. We hired developers to create a business around his knowledge. Although I don't agree with ripping off someones idea, I didn't quite know the extent of which we had duplicated the other companies systems until he showed be examples of their reporting functionality a few months back. As he was not a shareholder in the previous company, with no form of nondisclosure agreement in place, we carried on without legal problems.

The relationship of the Partners had become increasingly hostile over the past few months (more so myself and the other partners), as we were investing in things that I hadn't exactly agreed with, noticed several questionable corporate credit card expenses and once asking about the expenses, the online banking password gets changed immediately. I had also experienced condescending remarks from a couple of the partners quite regularly, as they had conspired to try to have me leave. Completely fed up, I basically told them off and we're now going through legal to finalize my exit from the company. I had verbally resigned early June and we're not able to agree on a valuation on the company, so we're bringing in a business valuator to place a value on on our company, which will help determine a value of my shares (we were all equal 25% partners). They've mentioned that they're going to value the company on everything prior to my date of resignation, which I'll fight as well, as I'm still a shareholder in the company and my shares should be worth 25% of the current value of the corporation.

About a month prior to my resignation, we had all signed a USA (Unanimous Shareholder Agreement). The agreement was a revised a couple of times, as I didn't agree with the non compete clause, stating that I essentially couldn't be in the industry for a period of 10 years in the event I no longer worked there (LOL). My question is, am I able to start a new company, with a similar service? I would obviously create my solution from the ground and have even contemplated white labeling a solution currently in market to avoid legal ramifications. The only pertinent clause left in the USA is in relation to confidentiality and non competition of "like" services to existing clientele. The confidentiality clause states that trade secrets, know how, inventions, process and propriety information is property of the company.

I spoke with a lawyer (one that I don't have a lot of confidence in) who stated that if I don't pursue existing clients and develop my own systems that I may be OK. He also stated that governments support competition and would likely not stop someone from performing a business in the field of their trade, or where most of their experience lies, although anyone could sue for any reason and they now have the financial backing to do so.

My plan (if I decide to do so) is to start a new business, create my own database and do things slightly differently. I plan to be discreet and possibly even register the company 100% owned by a close friend, or family member, if they're willing to do so. Either that, or I find a new business partner and have them on the books as 100% owner. Thereafter I would transfer shares in to my name at a later date.

I'm hoping some of you have experience with such a matter and can provide some advice as to how I should proceed and the extent of my legal liability.

[Business Attorney]

First, a disclaimer: I'm not a Canadian lawyer and, in any event, can't give legal advice on a summary without seeing the legal document and asking a lot of questions.

With that out of the way, it sounds like what your lawyer told you is very likely the same advice that you would get from any lawyer. Courts generally don't like to enforce restraints on competition, but anyone can sue. Depending on what you do and how the courts view your use of the information in your head against the restrictions on use of the company's trade secrets, know how, inventions, process and propriety information is anyone's guess.

As for hiding your ownership in the new business, I wouldn't count on that for much protection. If you can't do it directly, you should assume that the facts will come out and that any attempts to structure the ownership to conceal your involvement will ultimately be laid open. In fact, it could well boomerang on you. Your attempt to keep your ownership secret could make you look guilty in the eyes of a judge.

[randombizguy]

First, a disclaimer: I'm not a Canadian lawyer and, in any event, can't give legal advice on a summary without seeing the legal document and asking a lot of questions.

With that out of the way, it sounds like what your lawyer told you is very likely the same advice that you would get from any lawyer. Courts generally don't like to enforce restraints on competition, but anyone can sue. Depending on what you do and how the courts view your use of the information in your head against the restrictions on use of the company's trade secrets, know how, inventions, process and propriety information is anyone's guess.

As for hiding your ownership in the new business, I wouldn't count on that for much protection. If you can't do it directly, you should assume that the facts will come out and that any attempts to structure the ownership to conceal your involvement will ultimately be laid open. In fact, it could well boomerang on you. Your attempt to keep your ownership secret could make you look guilty in the eyes of a judge.

Yes, good point. I thought over concealing my involvement in the company and determined that it would likely look bad, if things went to court.

At this point, I'm not entirely sure how to proceed. I'm certain that they would be trigger happy if given the opportunity to sue. Not to mention our corporate lawyer is a common law spouse of one of the partners (which I'd battle as a conflict of interest). It's all quite ironic, as our entire business was based on one the founding partners experience in his previous role. The reporting is almost verbatim and was actually quite embarrassing once I saw examples. The guy has no moral fiber and I'm not surprised that it doesn't bother him in the least that the solution is almost verbatim.

If they were to sue and win an IP infringement, could they shut me down? Is there a corporate insurance available to protect such an event?

I should also point out that although our solution was unique, there are several other companies offering a similar solution, both locally and throughout Canada.

[randombizguy]

Wondering if anyone has insight as to the extent of a legal suit in this situation? I am seriously considering starting this new business, with a similar service, however would like to know what the potential of losing all of my time investment would be.

Does anyone know of a corporate insurance that would help with such a suit?

[randombizguy]

As mentioned, the only applicable clause left in the USA pertains to confidentiality of private information, including trade secrets, know how, processes, etc.