January 21, 2010

Flossing The Craw

Every profession has its toolbox of near essentials. For a lawyer, I think a good craw is just about indispensable. Even though humans don’t actually have “craws” (with the possible exception of Don Rickles), a figurative craw is most useful for the practice of law. You need a place to jam the stuff that just rubs you the wrong way. You’ve got to store the things you just can’t quite digest so that you can pull them out, poke at them a bit, and turn them over as over as you look to make sense of them.

Something that has been stuck in my craw for awhile now has been the Alaska Supreme Court’s decision in Roeland v. Trucano. This came down in late August, and yes, it’s been wedged tightly in my craw ever since.

floss.jpgThe facts of the whole dispute are a bit convoluted. Two folks from Belgium held a right of first refusal on a piece of real property located in Juneau. (Belgians in Juneau? Who knew?) The Trucano guys who gave that right of first refusal made a deal to sell a 25% interest in the property to a fellow named Coates. In exchange, Coates was going to give Trucano a 25% interest in the souvenir shop he was going to put on the property, as well as interests in other businesses that he might someday open in the future in Juneau. (I kid you not, the deal was that vague and open-ended.)

Trucano duly sent this off to the Belgians to match if they wanted to under their right of first refusal. The Belgians were confused by the thing, as well they might be, since they didn’t have any plans to put souvenir shops on the property or anywhere else in Juneau. To cloud the matter more, the offer was presented to the Belgians as being the equivalent of $7 million in cash, although it’s not clear at all how one would work the math out on that. The Belgians told Trucano the proposal was not a real deal they had to match.

Trucano went ahead with the transaction and transferred the property to a new LLC to complete the development. Trucano held onto 75% of the new LLC. But instead of giving 25% to Coates -- as he told the Belgians was going to happen -- he gave only 12.5% to Coates. The other 12.5% went to a Ketchikan couple named Jethani. How and when the Jethanis came into the picture is unclear; all the opinion says about these folks is that “Jethani is a business partner with Coates in Ketchikan.”

The Belgians challenged the deal and lost. On appeal to the Supreme Court, they lost again. The Supremies said the offer passed to the Belgians was sufficiently definite and detailed and that the transfer into the new LLC did not change things. Trucano still kept control with his 75% interest, just as he said he would, he just did so in the LLC context. But when it came to the Jethanis – whom the Belgians had apparently never heard anything about -- the Supremes just glided right over it. Even though it was clear the Belgians were never offered the 12.5% interest in the property that ended up with the Jethanis for whatever amounts the Jethanis paid, the court just let that inconvenient fact float away in a bubble. The fact that Trucano kept 75% as originally proposed, and that Coates somehow stayed in there as well, seemed to be close enough. In essence what the Courtus Maximus decided was that the 25% interest Coates was supposedly getting could be divvied up any which way and it did not matter. (Yet, both the trial court and the appellate court characterized the LLC creation as an integral part of the original offer itself, which one would have thought was supposed to have been given to the Belgians.)

The Biggie Court went on to point out that the Belgians still retained their right of first refusal as to Trucano 75% interest. So that when and if Trucano wants to sell out to someone else, the Belgians will have the privilege of getting into a business partnership with a bunch of folks they’ve never met, either Coates and the Jethanis and whoever picks up their interest in the future.

I find this outcome a mite hard to square with the way rights of first refusal are usually understood to work, which is why I’ve got a irritated craw at the moment. Regardless of the oddball nature of the offer transmitted to the Belgians at the start, I can’t see how you can change the participants to add the Jethanis to the deal without allowing the Belgians the chance to buy that same interest for the same amount. Also, one of the functions of rights of first refusal is to keep a lid on who you get into business with, and the Bigs pushed that completely off the rails in this deal.

Anyway, the lesson I take away from the case is that you don’t want the Alaska Supreme Court writing your business deal for you. They just might work it over in a way that you don’t like. It is far better to put more of an effort into writing your deal at the front end. Spell out in the agreement what sort offer you have to match on the property. Set out in unmistakeable English that you can ignore stuff in any offer that an accountant applying usual accounting methods cannot translate into actual dollars and cents. Be explicit that any change in the proposal, including even a change in a minority interest, requires a re-tender to the holder of the right of first refusal. Maybe if you do all that, you will stand a fighting chance of having the deal play out the way you expect.

Now, where did I put that craw floss I had around here?