People are often surprised to find out from their domestic relations attorneys that there are two different types of custody that have to be addressed: physical custody and legal custody.

Physical custody is simply which parent the children are with at a given time.  This is generally addressed in a custody agreement or custody order based upon three time periods.  First, who has the children on a regular weekly basis.  This is for both days and nights.  Second, how much vacation time does each of the parents have with the children.  Third, who has the children on holidays.  The parents can decide which holidays are important for them to address, and usually not every holiday is considered.  Primary physical custody occurs when one parent has the child or children more than half of the overnights each year.  The other parent is then considered the partial physical custodian.  Even if there is a primary and partial physical custodian, this custodial arrangement is still considered a form of shared physical custody.  Equal physical custody occurs when the parents each have half of the overnights in a calendar year.

Legal custody relates to legal decisions that impact the children.  The major areas of legal custody are education, religion and healthcare decisions.  In the vast majority of custody cases, the parents will share legal custody and therefore make these decisions jointly.   Parents with younger children will have to make more legal custody decisions as compared to those with older children, for whom many of these determinations have already been made.

Custody schedules can be structured many different ways based upon what is in the best interest of the children, and what works for the parents.  Parents are highly encouraged by the court to work out custody schedules.  If they are not able to, the court will make a determination and issue a custody order.

Custody is often the most emotional aspect of a divorce or separation.   We strongly recommend that parents facing custody issues contact an attorney to be sure they understand the process, and their rights under the law. 

The initial divorce consultation is your first meeting with the attorney.   It occurs before you retain the attorney and can be utilized to determine if you and the attorney can work effectively together.  Sometimes this meeting occurs because you want to have the knowledge and information if you foresee potential divorce, support or custody issues in the future or are considering a prenuptial agreement.  Other times, there may be issues which require you to hire a family law attorney immediately.

Prior to the first meeting, our office will ask you to be aware of relevant topics and materials to ensure a productive meeiting.  At the first meeting you are asked to bring information related to your income, assets and liabilities.  If you do not have access to this information, the meeting can go forward without the information, as it can be acquired from the other party during the divorce process.  Expect to be asked questions related to these areas as that will allow the attorney to provide you with a better overview of the anticipated range for a resolution of your case, whether by agreement or court order.  The asssessment made at the initial consultation is based on the financial data provided, and may change as more specific information is made available.  It's a good idea to make a list of your questions in advance of the initial consultation, so that the meeting will be more productive, and you do not forget to ask about your concerns.

The purpose of the first meeting with a domestic relations attorney is to gain information and have your questions answered.  Over the course of an hour you will be provided with an overview of aspects of family law that may affect you: divorce, support (child support, spousal support, alimony pendente lite and alimony), custody and/or a prenuptial agreement.  You may be provided with the anticipated range of outcomes for your case based upon the information provided at the consultation.  Most importantly, you will have an opportunity to have your questions answered.  Having a general understanding of the process and answers to your questions is important at a stressful time like this.

While this is a difficult meeting for many clients, it is important to remember that the attorney is the one who is providing information and answering questions.  Family Law practitioners are well aware that clients are going through a very emotional process, and it the attorney's responsibility to put the client at ease, and help to navigate this unfamiliar and emotionally fraught territory as painlessly as possible.

The issuer is permitted to communicate with potential crowdfunding investors if the communications occur through the platform but, in spite of the use of the platform or a website link, the final rules limit the ability of the issuer, as well as the ability of others acting on the issuer’s behalf, to advertise.  Pursuant to Rule 204, the issuer-company is permitted to advertise the Section 4(a)(6) exempt offering by releasing an offering notice (similar to tombstone ads permitted under Securities Act Rule 134) that contains only the following information:
 
• a statement that the issuer is conducting an offering;
• the name of the intermediary and a link to the intermediary’s offering page;
• the amount of securities offered (target and maximum);
• the nature of the securities;
• the price of the securities;
• the closing date for the offering;
• the name, address, phone number and website of the issuer;
• the email address of a representative of the issuer; and
• a brief factual description of the issuer’s business.

Will compliance with all of these crowdfunding rules be easier than the traditional Regulation D private placement (without general solicitation)?  Certainly the hope was that the crowdfunding rules would allow smaller issuers (and smaller investors) greater opportunities to access capital markets.  But the procedural and informational requirements justifiably deemed necessary to protect investors and reduce the risk of fraud make crowdfunding far less accessible than hoped.  Only the passage of time will determine which of the recent SEC initiatives prove most popular and affordable to small issuers with limited budgets.

The crowdfunding offering must be conducted through a registered broker-dealer or a funding portal with a “platform”. A “platform” is defined as “a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary.…”  No more than one intermediary can be used for an offering, and the issuer-company is required to make certain disclosures to the SEC, investors and the intermediary facilitating the offering, including:

• A discussion about the size and scope of the offering.
• The specific use or range of possible uses for the offering proceeds, as well as the factors impacting the selection by the issuer of each such use.
• Information about the securities being sold to the public.
• A description of the company’s business operations.
• Information about the company’s officers and directors during the prior three years, including how long they have held those positions and their respective business experience.
• Information about the holders of 20% or more of the company’s outstanding voting securities, as well as a description of the capital structure and any special voting rights or investor rights.
• Identification of Rule 501 and any issuer-company imposed transfer restrictions on the securities offered.
• A discussion of risks associated with an investment in the securities and with participation in a crowdfunded offering.
• A discussion of the financial condition and financial statements of the company, tiered in accordance with the size of the offering such that:

1. Offerings of $100,000 or less require financial statements certified by the company’s principal financial officer.
2. Offerings of more than $100,000 but less than $500,001 require audited financial statements if available or, if a first time crowdfunding exemption user, financial statements reviewed by an outside auditor.
3. Offerings of more than $500,000 up to the $1,000,000 limit require audited financial statements

The offering materials must also include a description of the offering or subscription process and a disclosure of the investor’s right to cancel his/her investment up to 48 hours prior to the deadline identified in the offering materials.  

The issuer must complete Form C, which includes details of the initial disclosure about the offering. The completed Form C must be filed with the SEC and either posted by the intermediary on its platform or viewable by investors through a link.   The issuer-company must report material changes on Form C-A,  periodic updates on Form C-U and ongoing annual filings on From C-AR until the filing obligation is terminated on Form C-TR.

The new rules allow the issuer to engage in limited advertisement of the offering, but there are traps for the unwary. These rules are discussed in the next installment of this blog.

In Socko v. Mid-Atlantic Systems of CPA, Inc., the Pennsylvania Supreme Court held that the Uniform Written Obligations Act (“UWOA”) could not render a restrictive covenant not supported by adequate consideration enforceable nonetheless.  In so doing, the Court emphasized that such restrictive covenants – agreements that restrict an employee’s ability to compete against an employer after termination - are disfavored restraints on trade.  As the dissent noted, the opinion does appear contrary to the plain language of the UWOA, but this dissonance highlights the disfavored nature of restrictive covenants. 

As part of his employment with Mid-Atlantic, Socko signed three restrictive covenants:  one upon the beginning of his employment, a second upon return to Mid-Atlantic after terminating his employment, and a third, more restrictive, agreement signed during his employment.  Along with the third restrictive covenant, Socko did not receive a bonus, promotion or other consideration.  The document recited the magic words of the UWOA that “the parties intended to be legally bound.”  Socko resigned from Mid-Atlantic and went to work for a competitor, and Mid-Atlantic filed suit for breach of the restrictive covenant. 

Pennsylvania law requires that restrictive covenants must be accompanied by adequate consideration.  To meet this requirement, the employee must sign the agreement at the commencement of employment, or the employer must supply new consideration for restrictive covenants signed after the commencement of employment.  “New consideration” includes a benefit to the employee or a beneficial change to the employee’s status.  Socko did not receive any new consideration for the new restrictive covenant that Mid-Atlantic sought to enforce.  Importantly, the new restrictive covenant also included language superseding all previous restrictive covenants, thus rendering the second restrictive covenant, which was supported by sufficient consideration, ineffective. 

To address this problem, Mid-Atlantic argued that Socko was barred from challenging the restrictive covenant on the basis that it was not supported by new consideration because it contained the UWOA language.  Mid-Atlantic asserted that the “magic words” foreclosed the usual analysis of consideration for restrictive covenants signed after the commencement of employment.  The Supreme Court, affirming the Superior Court’s holding, held that the UWOA language does not foreclose such an analysis as it relates to restrictive covenants.  In so doing, the Supreme Court rejected Mid-Atlantic’s framing of the issue.  The issue was not, as Mid-Atlantic asserted, that the UWOA foreclosed Socko from challenging the validity of the agreement based on a lack of consideration.  Instead, the Supreme Court stated that the issue was whether the UWOA acted as a substitute for consideration.  

The Supreme Court relied on principles of statutory construction and the body of case law holding that restrictive covenants are disfavored restraints of trade to find that the UWOA language would not act as a substitute for consideration to support a restrictive covenant.  The Supreme Court noted that the unique treatment of restrictive covenants in the law, including rigorous judicial scrutiny, required this outcome. 

While this holding will not shock employment lawyers, as it is consistent with the court’s jaundiced approach to restrictive covenants, it does highlight important considerations for the use of such documents.  Employers strive to foster their entry level employees into valuable positions, and such a practice benefits employer and employee.  Employers must consider when and whether to require those employees to execute restrictive covenants, the consideration they will provide for new restrictions, and whether there are other, more productive, ways to retain a valuable employee and protect the business.  The Supreme Court’s decision does not change the analysis, but it does clarify that no mere technicality will encourage a court to set aside the rigorous scrutiny of restrictive covenants required by the case law. 

By Thomas P. Donnelly, Esquire

Reprinted with permission from the November 23, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.

A high business “tide” does not necessarily float all boats.  Often, when business is good and profits increasing, a business owner’s desire to avoid sharing those increasing profits with an underperforming partner can create an irreconcilable divide; particularly in the case of a partner not intimately involved in the day to day operations of the business.  Similarly, more difficult economic times stress cash flow, and may motivate a performing partner to explore options to decrease or eliminate that portion of the business income flowing to those performing at a lower level.  Of course, the lesser performing partner generally adopts a contrary perspective.  In either case, the divergence between two or more partners can render the status quo unacceptable and threaten the business as a going concern.

In approaching disputes among shareholders several factors must be considered.  First, does the attorney represent the company, the majority interest, or the minority interest?  The practitioner’s potential strategies must be informed by the relative position of the parties.  Second, what are the respective goals of the parties?  Certainly, the long term goal of extracting the most gain in income or the value of the investment is the goal of all the parties, but short terms strategies can have a dramatic and sometimes unintended consequence.  Third, what is the impact of the potential short term strategies, not only on the business, but also on the individuals?   Financing arrangements and personal guarantees must be considered.  Finally, the respective rights and obligations of the shareholders post dissolution must guide the process.

When approached by a client considering business divorce, the attorney must consider potential conflicts of interest.  Often, the majority owner’s first call is to corporate counsel.  However, Rules of Professional Conduct 1.7, 1.8 and 1.9 bear upon whether corporate counsel can represent the interests of only one shareholder/member.  In summary, representation of the “company” in the same or substantially related matter, or receipt of confidential information which may bear upon the representation of the party not seeking to be represented by corporate counsel, would preclude corporate counsel from undertaking the representation of a single shareholder/member. In some circumstances, it may be appropriate for the company to have separate counsel, such as where the company is a potential defendant in litigation commenced by either a third party or a shareholder.  However, such representation is complicated by divergence among board members and can present difficult issues in corporate governance and communication between counsel and the corporate client.

Representation of the majority interest provides for the implementation of whatever remedies may be available under the terms of written agreements among the shareholders or by means of corporate action as to a non-performer.   Significantly, there is no statutory right or method for the involuntary removal of a shareholder (arguably, such a remedy may be available in a partnership or Limited Liability Company setting).  Potential courses of action include severance of employment or reduction in employment benefits for the non-performer, voluntary dissolution if provided and appropriate pursuant to the agreements between the parties, and modification of corporate governance.  Of course, such potential courses of action do not come without risk, and the potential for litigation alleging minority oppression should be anticipated.  In such a case, documentation of non-performance and job duties is compelling.           

Representation of the minority owner is more difficult.  Many times, the minority owner is left with litigation alternatives such as actions for the appointment of a custodian or liquidating receiver pursuant to 15 Pa.C.S.A. Sections 1767 or 1985, respectively.  While these litigation remedies can be compelling, it should not be expected that litigation would result in continuation of the status quo indefinitely. Litigation rarely restores a broken relationship. Further, as recently noted by the United States District Court in Spina v. Refrigeration Service and Engineering, Inc. 2014 WL 4632427, a shareholder seeking the appointment of a receiver or a custodian bears a heavy burden and such appointment is at the discretion of the Court.

In addition, litigation alternatives necessarily incorporate business risk.  Can the company survive the appointment of a custodian? By definition, a custodian is designed to continue the business as opposed to liquidation.  The impact of a custodian on customer relationships, the entity’s capacity to contract and the willingness of business partners to engage in long term planning or projects may render liquidation inevitable. Certainly, the appointment of a custodian or receiver results in a loss of control on the part of the shareholders.  All policy and management decisions fall within the purview of the court appointee.  Such loss of control can be particularly problematic as it pertains to the case of tax reporting. 

That same loss of control must be considered in a liquidation scenario.  Liquidation contemplates an orderly winding down and distribution of assets which should be anticipated to include intellectual property and customer lists in addition to any fixed or hard assets possessed by the entity.  As noted in Spina, liquidation is generally carried out by public auction so as to ensure fairness among shareholders.  In the event of a liquidating receiver, a marketing campaign designed to enhance the value of the assets and maximize the selling price should be anticipated.  In such circumstance, neither party may be in a position to acquire the liquidated assets or may be forced to over-pay, thereby rendering such acquisition economically unfeasible.  Accordingly, while the goal at the outset of a liquidation proceeding may be to force a buy out of a shareholder, the end result may be that no party is in a position to acquire assets and engage in continued business operations.

The impact of a custodian or receivership on the individual business owners must also be considered.  Business owners frequently guaranty corporate debt.  The commencement of an action for the appointment of a custodian or receiver is almost always defined as an event of default with regard to the entity’s financing arrangements and could also trigger liability under the personal guaranty.

Finally, post liquidation obligations, or the lack thereof, should also be considered.  It should be anticipated that former partners would compete post liquidation.  The liquidation of the entity by definition precludes any claim for breach of fiduciary duty on the part of the company to the extent based on post liquidation acts or omissions and any right to enforce a post termination of employment restriction against competition.  However, arguably, the sale of the entity’s assets, including confidential information such as customer lists, may implicate the Uniform Trade Secrets Act and preclude use of information known to the shareholders in competition with the buyer.  While no case decided under Pennsylvania law addresses the application of the Act to such circumstance, the Act appears to be applicable where a shareholder retains possession of information which was subject to transfer in liquidation.
The complexities of business divorce through litigation mandate that the parties consider and pursue all avenues of amicable dissolution and consider all proposals for voluntary consolidation of ownership before pursuing litigation with uncertain results. 

Tom Donnelly is a Partner with Antheil, Maslow & MacMinn. His practice focuses primarily on commercial litigation and transactions, employment disputes and personal injury.