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It is not unusual for business owners such as manufacturers and their suppliers and consultants to enter into joint ownership in the pursuit of mutual business goals. Those pursuing this strategy should consider that such entanglements can lead to costly future litigation should circumstances change and interests of the parties diverge. In a recent case, a dispute arose between owners of a custom manufacturing limited liability company in which AMM’s client (and a supplier to that same LLC) possessed 33 1/3% of the issued and outstanding ownership interests. The firm’s client also owned 100% of the stock in a separate business entity which supplied materials to the jointly owned custom manufacturer.
When the owners had a falling out, an issue arose with regard to the payment of outstanding invoices generated by the supplier for materials provided to the jointly owned custom manufacturer. When a resolution could not be reached, AMM, on behalf of the supplier, commenced litigation. During the litigation, the majority member of the jointly held custom manufacturer transferred all of the inventory and other assets to a newly formed entity, owned entirely by him, without the payment of consideration, that is to say, without compensating the supplier entity. The transfer of assets left the jointly held entity with insufficient assets to meet its’ liabilities; including the liabilities to the supplier. As a matter of strategy, the controlling member of the jointly owned entity allowed default judgment in favor of the supplier and against the jointly held custom manufacturer. The newly created entity went about doing business utilizing the inventory transferred without regard to the liability to the supplier.
The transfers gave rise to new and additional claims under the recently adopted Uniform Fraudulent Conveyances Act and claims of breach of fiduciary duty; all of which had to be litigated while the newly formed company operated a separate business. Clearly, a small business owner can no longer simply set up shop as a new entity when things go bad and debt accumulates. However, the complexity of ownership structure and relationship between the various entities made judicial intervention very difficult. In the end, the newly formed entity was forced to file a general assignment for the benefit of creditors; the majority owner lost his interest in all of the respective entities and eventually filed for personal bankruptcy.
The above is just one of many “war stories” encountered in attempting to unwind jointly owned business enterprises. Business owners and potential investors should think very carefully before engaging in shared ownership. What may seem like a mutually beneficial relationship at the outset can be costly and challenging to undo if things go bad in the future.
The take away for business owners and potential investors is to think very carefully before engaging in shared ownership. What may seem like a mutually beneficial relationship at the outset can be costly and challenging to undo if things go bad in the future.
The sale or merger of a business often uncovers employment problems that may scuttle the transaction, or impact the value of the business. In my employment law practice, I’ve seen a pattern of common employment issues businesses face when they are contemplating a transaction, or that emerge during due diligence. Below are the five most common of those issues:
1. Classification of employees as “exempt” or “nonexempt” under federal and applicable state law; and time clock and hourly pay policies, and compliance with federal and state overtime rules;
2. Classification of workers as independent contractors or employees;
3. Evaluation of benefit plans to ensure compliance with plan documents and federal benefits law, and evaluation of policies related to unregulated fringe benefits, such as vacation pay or sick pay;
4. Evaluation of whistleblower and harassment and discrimination complaint procedures;
5. Evaluation of employment contracts and restrictive covenants to ensure that the restrictions included therein will protect the seller and will inure to the benefit of the buyer.
A thorough review of employment policies and procedures and contracts will eliminate trouble in the process. AMM attorneys have experience guiding employers through these issues as part of our clients’ transactions. We can help employers address the crisis when it emerges as part of due diligence. More importantly, we can help employers improve their policies and contracts to maximize value and streamline transactions.