ASSIGNMENT RULES:
1.This exercise is subject to all the rules governing assessment in the Melbourne Law School and the university. It is your responsibility to be aware of all those rules including the rules on academic misconduct.
2.This assignment represents 70% of your final mark in this subject.
3.There are three questions in this assignment.
4.In preparing your answer, you may consult any printed or written material.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
5.Students who wish to question any aspect of this assessment should do so by email to the Academic Support Office (law assessment.
6.The total word limit is 4000 words: Marking Code 1 applies (check The Melbourne JD Community page on LMS for details of marking codes).
7.All papers must be submitted electronically via LMS.
8.A penalty for late submission will be imposed.
9.Read the instructions very carefully. Be sure to check that you have complied with these rules and all the instructions before submitting your pa
FACTUAL BACKGROUND
1.Frances Karen and John have decided to set up a new business allowing law firms to have their draft contracts reviewed online. Their idea is to have a large database of executed contracts to use as a basis of comparison. If a clause in a draft contract is not similar to a clause in a previous contract then an error message is produced.
2.You know John from when you were both studying law at Melbourne University. He explains that they have incorporated a company called Legal Blast Pty Ltd Legal Blast to develop and market their idea.
3.John Frances and Karen are equal shareholders in that company and are directors of Legal Blast.
4.John tells you that they have recently been approached by Advanced Ai Technology (“AIT”), a large machine learning company, which has developed a novel method to determine the similarity between two contractual clauses.
5. AIT is interested in Legal Blast’s business as it sees that their method will increase demand for its clause recognition technology. AIT has accordingly offered to support Legal Blast in its initial activities by providing it with marketing and technical assistance, access to AIT’s software and paying $500,000 for a 30% stake in Legal Blast.
6.John gives you a draft of the Funding Agreement that AIT has provided. John says that he has read through it and it all looks fine to him. He is particularly interested in being able to use AIT’s software to increase the accuracy of Legal Blast’s service.
7.You agree to review the draft agreement for Legal Blast. You then sign a retainer agreement with John in his capacity as a director of Legal Blast.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
QUESTIONS
Question 1
Review the drafting Funding Agreement on behalf of Legal Blast. Prepare a letter of advice to John explaining the important risks associated with the draft agreement prepared by AIT and how you suggest those risks be addressed. You are not required to draft any contractual clauses in providing this advice.
Question 2
One month after the Funding Agreement is signed, John stumbles across the Law Geex John asks you to advise Legal Blast on whether Legal Blast would be able to offer in Australia the contract review service described on the Law Geex website, using the same text and visuals as on the Law Geex website but under Legal Blast’s own brand. John has said not to advise Legal Blast on any copyright, trade mark or patent issues as he is sure he can sort those things out later with the owners of Law Geex.
Prepare a letter of advice to John explaining the risks associated with Legal Blast operating its business in this way and how you suggest those risks be addressed.
Question 3
Three months after the Funding Agreement is signed, John meets with you and tells you that Karen wants Legal Blast to start marketing its services directly to the public, rather than only to law firms. John is nervous about this idea as he feels it could increase Legal Blast’s risk profile. John does not know how Frances feels about the idea. John asks you to prepare three bullet points that he can use to convince Karen against making such a change.
What would you tell John?
DRAFT FUNDING AGREEMENT
Background
A As at the date of this agreement, the Shares in Legal Blast are held in the manner set out in Schedule 1.
B All parties have agreed to enter into this agreement for the purpose of recording the terms of this arrangement and their respective relationships with each other.
Operative provisions
1 Issue of Shares
1.1 Agreement to issue Shares
(a) In consideration of the provision of the Clause Recognition Services by AIT, Legal Blast agrees to issue to AIT, before the commencement of the Support Period the number of Shares required to make AIT the owner of the Initial Percentage of the Shares in the issued capital of Legal Blast, at the time immediately following that issue.
(b) The Shares will be issued without any charge payable by AIT, in lieu of payment for the Clause Recognition Services. Legal Blast acknowledges and agrees that the provision of the Clause Recognition Services by AIT is fair and valuable consideration for the Shares and it shall have no further claim to payment for the Shares.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
(c) Before the commencement of the Support Period, Legal Blast must:
(i) issue a share certificate to AIT for the number of Shares required to be issued under clause 1.1(a); and
(ii) lodge with the Australian Securities and Investment Commission all appropriate documents and forms in relation to the Share issuance.
1.2 Equity Financing
(a) If there is an Equity Financing during the Term Legal Blast must offer to AIT the opportunity to purchase whichever is the greater of:
(i) all Shares on offer that are not being purchased by the shareholders who owned Shares at the time of the initial issuance of Shares to AIT; and
(ii) the number of Shares that following the Equity Financing would maintain the percentage of Shares owned by AIT at the Initial Percentage,
at the same price and on the same terms as the other Shares offered in that Equity Financing.
(b) Within one month of the offer, AIT is entitled to accept the offer, decline the offer or accept the offer in part at its absolute discretion. If AIT has not notified Legal Blast of its decision at the end of that period AIT is deemed to have declined the offer which thereupon lapses.
(c) The issuance of Shares by Legal Blast to AIT pursuant to this Section takes effect only upon:
(i) Legal Blast providing to AIT all transaction documents related to the Equity Financing that are the same documents to be entered into with the other purchasers of the Shares;
(ii) AIT executing and delivering the transaction documents to Legal Blast and
(iii) AIT paying Legal Blast the aggregate amount due and payable by it in respect of the Shares issued to it pursuant to this clause.
2 Russian Roulette Procedure
2.1 Right to Make an Offer
If any Shareholder (the “Offering Shareholder”) desires at any time to purchase the Shares owned by the remaining Shareholders the Remaining Shareholders the Offering Shareholder shall make an offer the Purchase Offer in writing to the Remaining Shareholders to purchase all but not less than all, of the Shares owned by the Remaining Shareholders. The Offering Shareholder shall specify in the Purchase Offer the terms of the purchase and sale including the price the Designated Price to be paid for each Share owned by the Remaining Share holders. The Designated price for all shares pursuant to said Purchase Offer shall be not less than the Fair Market Value as provided in Article 10.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
2.2 Acceptance or Counteroffer by Remaining Shareholders
(a) Within 30 days after the receipt by the Remaining Shareholders of the Purchase Offer from the Offering Shareholder pursuant to Section 7.1, each Remaining Shareholder shall advise the Offering Shareholder in writing either:
(i) that the Remaining Shareholder accepts the Purchase Offer made by the Offering Shareholder to purchase the Shares owned by the Remaining Shareholder on the terms and conditions set out in the Purchase Offer; or
(ii) that the Remaining Shareholder elects to purchase Shares owned by the Offering Shareholder on the terms and conditions set forth in the Purchase Offer, mutatis mutandis in which case the Remaining Shareholder shall specify whether the Remaining Shareholder:
(A) elects to make such purchase on the condition that it is able to acquire all of such Shares;
(B) elects to make such purchase on the condition that it is able to acquire only its rate able portion of such Shares; or
(C) elects to make such purchase and is prepared to purchase all of such Shares or only its rate able portion thereof depending on the response of the other Share holders.
2.3 Closing
The purchase and sale of the Purchased Shares resulting from the acceptance or deemed acceptance of the offer pursuant to Section 2.2 (a “Sale Transaction”) shall be completed on the date which is 30 days following the date of such acceptance or deemed acceptance (the “Date of Closing”).
3 Clause Recognition Services
3.1 Agreement to provide Clause Recognition Services
(a) In consideration of the issue of Shares by Legal Blast, AIT agrees to provide Clause Recognition Services of a value equivalent to the Services Value, to Legal Blast, during the Support Period.
(b) The Clause Recognition Services will be provided without requirement of payment by Legal Blast. AIT acknowledges and agrees that:
(i) the issuance of the Shares by Legal Blast is fair and valuable consideration for the provision of the Clause Recognition Services; and
(ii) upon the issuance of the Shares, AIT shall have no further claim to payment for the Clause Recognition Services unless otherwise agreed.
(c) Following the end of the Support Period, AIT may (but is not obliged to) continue to provide some or all of the Clause Recognition Services either at no charge or for a charge agreed by the parties in which case this Agreement will continue to apply to the provision of the Clause Recognition Services.
3.2 Conditions applying to the Clause Recognition Services
Legal Blast agrees that in the course of utilising the Clause Recognition Services and undertaking the Supported Work it must:
(a) prepare and deliver in person a presentation to AIT and its invitees on the outcomes of the Supported Work following the reasonable timing, format and other requirements of AIT;
(b) prepare and deliver a written report to AIT on the outcomes of the Supported Work following the reasonable timing, format and other requirements of AIT;
(c) conduct itself professionally and to the standard of work to be expected in undertaking a program such as the Supported Work
(d) follow the reasonable directions of AIT and its Representatives in relation to all matters relevant to the Supported Work including occupational health and safety environment behavioural standards and policies and workplace requirements
(e) will on reasonable request make its Representatives available to AIT and its Representatives respond to requests for information and input by email, phone or in meetings, and generally co-operate with AIT in undertaking the Supported Work.
4 Legal Blast obligations
(a) Legal Blast must not, without the prior written agreement of AIT, which is not to be unreasonably withheld, transfer, sell, assign, licence or otherwise dispose of the whole or any part of its business including intellectual property, or enter into any contract to do so, other than in the ordinary course of its business.This obligation ceases to apply if the value of Legal Blast as measured by the value of its issued Share capital and of any other security instruments becomes greater than $10,000,000, or if Legal Blast has issued Shares in return for contribution of $5,000,000 capital or more, from a party other than those who owned Shares at the time of the initial issuance of Shares to AIT (whichever is sooner).
(b) Legal Blast must provide a quarterly report to AIT on its business activities including cash flow, income, expenses, sales, major items of expenditure, staff major contracts entered risks and business strategy and other agreed metrics. AIT may specify the reasonable information to be included or the format to be used for the report by notifying Legal Blast.
(c) Legal Blast must promptly notify AIT of any proposal prepared or received by Legal Blast in relation to the acquisition of Legal Blast’s assets or a majority of Shares by voting rights or value by a third party.
5 Legal Blast Warranties
Legal Blast warrants that:
(a) It is a corporation, validly existing, registered and in good standing under the laws of the state of its incorporation, and has the power and authority to own lease and operate its properties and carry on its business as now conducted;
(b) The execution, delivery and performance by Legal Blast of this Agreement is within the power of Legal Blast and has been duly authorized by all necessary actions on the part of Legal Blast;
(c) All Shares issued to AIT pursuant to this Agreement are, and will at all times during the Term continue to be of the same class, and enjoy the same rights, as all shares on issue under the Constitution of Legal Blast, unless AIT otherwise agrees. Legal Blast will not make any changes to the Constitution nor undertake any securitisation agreements, issue of shares or convertible notes or other arrangements that would in any way dilute subordinate or reduce the rights attaching to the AIT Shares;
(d) To the knowledge of Legal Blast, it is not in breach of (i) its current instruments of incorporation (ii) any material statute, rule or regulation applicable to Legal Blast or (iii) any material contract to which Legal Blast is a party or by which it is bound where in each case, such violation or default could reasonably be expected to have a material adverse effect on Legal Blast;
(e) No consents or approvals are required in connection with the performance of this Agreement, other than: (i) Legal Blast’s corporate approvals; (ii) any qualifications or filings under applicable securities laws; and (iii) necessary corporate approvals for the issue of Shares pursuant to clause 3;
(f) Legal Blast’s current and future business complies with all relevant laws and regulations;
(g) Legal Blast is not Insolvent;
(h) At the date of this Agreement no order has been made, or application filed, or resolution passed, or a notice of intention given to pass a resolution, for the winding up of Legal Blast and there are no circumstances justifying commencement of any such action;
(i) Legal Blast is able to pay its debts as and when they fall due.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
6 AIT Warranties
AIT warrants that:
(a) it has the power and authority to provide the Clause Recognition Services and to carry on its business as now conducted.
(b) the execution, delivery and performance by AIT of this Agreement is within the power of AIT and has been duly authorized by all necessary actions on the part of AIT. This Agreement constitutes a legal, valid and binding obligation of AIT enforceable against AIT in accordance with its terms.
7.Term and Termination
(a) This Agreement will continue for the Term until terminated by either party in accordance with this Agreement.
(b) Either party may terminate this Agreement immediately by notice if a breach by the other party is not rectified within 10 Business Days of the first party providing written notice to the breaching party.
(c) Upon termination of this Agreement, each party must on request return to the other party any materials and property of the other party in its possession.
(d) The termination of this Agreement will not affect the accrued rights of either party as at the date of termination.
8 Liability and Indemnity
(a) Each party indemnifies the other party against all Loss which may be made brought against suffered or incurred by the indemnified party and which arises directly out of or in connection with:
(i) any warranty provided in this Agreement being untrue inaccurate or misleading.
(ii) any negligence wilful misconduct negligent act or omission or wilful failure to act of the indemnifying party or its Representative;
(iii) a breach by the indemnifying party or its Representative of the Intellectual Property rights or confidentiality rights of the other party or any third party;
(iv) any personal injury or death to any persons arising out of the conduct of the indemnifying party or its Representative;
(v) any damage to tangible property belonging to the indemnified party or any other party arising out of the conduct of the Supported Work by the indemnifying party or its Representative; or
(vi) any breach of this Agreement by the indemnifying party.
(b) Each party’s liability to indemnify the other party under this clause will be reduced proportionately to the extent that any negligent act, omission or breach of this Agreement by the
indemnified party or its Representative has contributed to the loss or liability.
(c) Each party will, if required by the other party:
(i) maintain professional indemnity insurance, third party liability insurance and workers’ compensation insurance during the Term; and
(ii) furnish to the other party a certificate of currency and renewals of such insurance, if requested to do so.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
9 Intellectual Property
(a) The parties agree that ownership of the Intellectual Property rights and materials provided by one party to the other party in the course of the Supported Work whether owned by that party or a third party, will not be affected by this Agreement.
(b) The parties grant to each other a world-wide, royalty-free, fee-free, non-exclusive licence to use their respective Intellectual Property rights and materials provided by one party to the other party in the course of the Supported Work for the purposes of the Supported Work.
(c) AIT acknowledges that Legal Blast has title to and all ownership rights in the materials and Intellectual Property that Legal Blast creates in the course of the Supported Work the Program Materials subject to clause 9(d).
(d) On or around the end of the Support Period, Legal Blast must provide AIT a copy of the Program Materials in a format convenient for use by AIT. Legal Blast grants to AIT a perpetual,
irrevocable world-wide, royalty-free, fee-free, exclusive licence (including the right to sublicense) to use reproduce commercialise adapt modify communicate broad cast distribute publish and disseminate the Program Materials.
(e) Each party warrants that the use by itself the other party and any permitted Representative,of the materials that it provides to the other party will not infringe the Intellectual Property rights of any person.
(f) Each party makes no representation as to the accuracy currency or complete ness of the materials it provides to the other party.
(g) This clause survives the expiration or termination of this Agreement.
10 Confidentiality
10.1 Confidentiality obligations
Each party must:
(a) not disclose the Confidential Information or allow it to be disclosed to a third party except:
(i) with the prior written approval of the other party; or
(ii) to officers, employees and consultants or advisers of the party (or its Related Bodies Corporate) who have a need to know (and only to the extent that each has a need to know) for the purposes of this Agreement, or to current or potential financiers, shareholders or investors of or in the Recipient; provided that such third parties are aware that the Confidential Information must be kept confidential; and
(b) only use the other’s Confidential Information for the purposes of performing its obligations under this Agreement.
10.2 Announcements
No announcement, press release or other communication of any kind relating to the negotiations of the parties or the subject matter or terms of this Agreement must be made or authorised by or on behalf of a party without the prior written approval of each other party unless that announcement, press release or communication is required to be made by law or any order of any court, tribunal,
authority or regulatory body.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
10.3 Exceptions
The obligations of confidentiality under this Agreement do not extend to information (whether before or after this Agreement is executed):
(a) disclosed to a party, but at the time of disclosure is rightfully known to or in the possession or control of the party and not subject to an obligation of confidentiality on the party; or
(b) that is public knowledge (except because of a breach of this Agreement or any other obligation of confidence).
12 General Conditions
12.1 Further assurances
Each party will promptly execute all documents and do all things that another party from time to time reasonably requires of it to effect, perfect or complete the terms and conditions of this Agreement and any transaction contemplated by it.
12.2 Compliance with Law
(a) This Agreement is to be interpreted so that it complies with all applicable laws and if any provision does not comply then it must be read down so as to give it as much effect as possible.
(b) If it is not possible to give that provision any effect at all, however, then it is to be severed from this Agreement in which case the remainder of this Agreement will continue to have full force and effect.
12.3 Entire agreement
This Agreement embodies the entire agreement and understanding between the parties concerning its subject matter and succeeds and cancels all other agreements and understandings concerning the subject matter of this Agreement and any warranty representation, guarantee or other term and condition of any nature not contained in this Agreement is of no force or effect.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
12.4 Operation of indemnities
Each indemnity in this Agreement survives the expiry or termination of this Agreement. Each indemnity is absolute and unconditional and unaffected by anything that might have the effect of prejudicing, releasing, discharging or affecting in any other way the liability of the party giving the indemnity.
12.5 Jurisdiction
This Agreement is to be governed by and construed in accordance with all applicable laws in force in the State of Victoria from time to time and the parties submit to the non-exclusive jurisdiction of the courts of the State of Victoria.
12.6 Relationship of parties
Except where this Agreement expressly states otherwise, this Agreement does not create a fiduciary relationship or any relationship of employment, trust, agency or partnership between the parties.
13 Interpretation
The following definitions apply in this Agreement Agreement Details means the details set out in Schedule 1 of this Agreement. Business Day means a day (not being a Saturday, Sunday or public holiday) on which Australian banks (as defined in Section 9 of the Corporations Act) are open for general banking business in
Melbourne Victoria.
Clause Recognition Services has the meaning set out in the Agreement Details.
Clause Recognition Software means the software which AIT uses to provide the Clause Recognition Services and which will be deemed to be the Confidential Information of AIT.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
Confidential Information means any written or oral information of a technical business or financial nature, or which is taken by any provision of this Agreement, to be Confidential Information or which the Dis closer makes the Recipient aware is considered by the Dis closer to be confidential and proprietary, and includes all information that is personal information for the purposes of the Privacy Act 1988 (Cth), but does not include information which the Recipient can establish:
(a) was in the public domain when it was given to the Recipient;
(b) becomes, after being given to the Recipient, part of the public domain, except through disclosure contrary to this Agreement;
(c) was in the Recipient’s possession when it was given to the Recipient and had not been acquired in some other way (directly or indirectly) from the Dis closer; or
(d) was lawfully received from another person who had the unrestricted legal right to disclose that information free from any obligation to keep it confidential.
Corporations Act means the Corporations Act 2001 (Cth). Dis closer means the party giving information. Equity Financing means a bona fide transaction or series of transactions with the principal purpose of raising capital for Legal Blast pursuant to which Legal Blast issues and sells Shares in Legal Blast at a fixed valuation. GST has the meaning given to that term in the GST law.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
GST law has the meaning given to that term in the A New Tax System (Goods and Services Tax) Act 1999 (Cth).
Insolvent means, in relation to a person when the person:
(a) is insolvent as that term is defined in Section 9 of the Corporations Act;
(b) is an insolvent under administration or suffers the appointment of a controller, administrator liquidator or provisional liquidator as those terms are defined in Section 9 of the Corporations Act; or
(c) is otherwise unable to pay its debts as and when they become due and payable. Legal Blast means the company whose details are set out in the Agreement Details. Loss means any claim, damage, loss, cost (including legal costs on a solicitor and client basis) debt expense Tax Liability loss obligation suit action demand cause of action, proceeding or judgment of any kind however calculated or caused and whether it is present or future, fixed or un ascertained, direct or indirect, actual or contingent, incidental or economic, whether or not realised.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
Recipient means the party to whom information is given.Representative of a party includes an employee, agent, officer, director, partner, associate, consultant or sub-contractor of that party. Services Value has the meaning given in the Agreement Details. Support Period has the meaning set out in the Agreement Details.Supported Work means the work undertaken by Legal Blast during the Support Period with the support of the Clause Recognition Services. Shares means fully paid ordinary shares in the issued capital of Legal Blast.
14 Interpretation
(a) Headings are for convenience only and do not affect interpretation.
(b) Mentioning anything after includes, including, or similar expressions does not limit what else might be included.
(c) Nothing in this Agreement is to be interpreted as making AIT liable for breach unless that party committed the breach will fully.
(d) The following rules apply unless the context requires otherwise:
(i) The singular includes the plural, and the converse also applies.
(ii) If a word or phrase is defined, its other grammatical forms have a corresponding meaning.
(iii) A reference to a person includes a corporation trust partnership un incorporated body or other entity, whether or not it comprises a separate legal entity.
(iv) A reference to a clause or Schedule is a reference to a clause of, or Schedule to this Agreement.
(v) A reference to a party to this Agreement or another agreement or document includes the party’s successors permitted substitutes and permitted assigns (and, where applicable, the party’s legal personal representatives).
(vi) A reference to an agreement or document (including a reference to this Agreement) is to the agreement or document as amended, varied, supplemented, novated or replaced, except to the extent prohibited by this Agreement or that other agreement or document, and includes the recitals, schedules and annexures to that agreement or document.
(vii) A reference to legislation or to a provision of legislation includes any modification or re enactment of it, a legislative provision substituted for it and a regulation or statutory instrument issued under it.
(viii) A word or phrase given a meaning in the Corporations Act has the same meaning in this Agreement unless otherwise defined.
(ix) A reference to writing or written includes any method of reproducing words figures, drawings or symbols in a visible and tangible form.
(x) A reference to conduct includes an omission statement or under taking whether or not in writing.
(xi) A reference to an agreement includes any undertaking, deed, agreement and legally enforceable arrangement, whether or not in writing, and a reference to a document includes an agreement (as so defined) in writing and any certificate, notice, instrument and document of any kind.
(xii) A reference to dollars and $ is to Australian currency.
Schedule 1 Agreement Details
Clause Recognition Services (clause 2) The Clause Recognition Services are as follows:
1.In-kind support for design, development, marketing and administration as agreed on a case by case basis
2.Access to technical and business advice from senior AIT executives at no charge
3.Access to latest technology to assist in Legal Blast’s business as agreed between the parties.
4.Workspace at AIT’s offices.
Support Period (clause 3) 1 July 2020 to 31 December 2020 unless terminated earlier under this Agreement or extended by agreement.
Services Value (clause 2) The Clause Recognition Services and up to $100,000 funding to support design, product development, marketing and administrative expenses.
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.
Access to Software (clause 2) A perpetual, royalty free licence to use AIT’s software should AIT ever become subject to insolvency proceedings.
Initial Percentage (clause 3) 30% of the Shares in Legal Blast at the date of this Agreement
Term (clause 2) 5 years from the date of this Agreement
LAWS90108 Start-Up Law Assignment-Melbourne University Australia.