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This post continues my series aimed at explaining the main elements of a contract. These elements are outlined on the attached infographic. My goal is to define the key elements of a contract and to offer some tips and cautions to avoid costly mistakes as you approach these essential documents in your day-to-day business operations.
First up: the preamble and recital sections. The preamble of a contract is the introductory paragraph that identifies the parties to the agreement. It is typically followed by paragraphs known as recitals (also called the background section). Sometimes, these recital paragraphs are labeled “Whereas”. Taken together, the preamble and the recitals tell the who, what, when, and why of the transaction. In other words, they should tell the reader who the parties to the agreement are, the date of the agreement, and what the parties hope to accomplish by entering into the agreement.
As with stories told in other settings, inaccuracies and ambiguities in the preamble and recitals of a contract can cause problems down the road. One of the underlying purposes of a contract is to set forth the agreement of the parties so that their expectations can be enforced by a court or other tribunal. An accurate and detailed introduction to the contract can educate the person who is charged with resolving the dispute as to who the parties are, why they entered into the contract, and what their expectations were at the time the agreement was entered into.
One of the most common mistakes in these preliminary sections of a contract is to incorrectly name the owner of the business as a party, rather than using the entity name. This mistake results in the owner being personally obligated as a party to the contract, which is clearly not the result an owner expects after taking the trouble to incorporate.
While it may be tempting to gloss over these preliminaries without questioning their accuracy, I highly recommend taking the time to carefully review this section in every contract to be sure the story it tells is true and complete. It could prevent costly conflicts later.
Stay tuned for Part 2 of this series, which will move to the next element on the infographic: offer, acceptance, and consideration.
Shortly after Aretha Franklin died at the age of 76 after a battle with pancreatic cancer, documents filed in the Probate Court of Oakland County, Michigan by her family revealed that the legendary singer, who was estimated to be worth $80 million, did not execute a Last Will and Testament. Aretha Franklin now joins a growing list of celebrities, including Prince, Amy Winehouse, Kurt Cobain, Bob Marley, Jimi Hendrix, and Tupac Shakur, who all died without executing a Will or other estate planning documents. For many of these celebrities, their estates were, or are currently, subject to lengthy and protracted probate proceedings that played out for the media.
There are significant benefits to developing an estate plan, which can include a Will, Revocable Trust, and/or Irrevocable Trusts, even if you are not a celebrity.
First, and perhaps most importantly, developing an estate plan allows you to choose the beneficiaries of your estate, the amounts they receive, and how they receive those amounts. Individuals, like Aretha Franklin, who die without an estate plan will have their assets distributed according to their state’s intestacy laws or, for assets that contain beneficiary designations (such as IRAs, 401ks, and life insurance), according to the terms of the account provider. It is extremely difficult, if not impossible, for the personal representative of an estate to argue after an individual passes away that the intestacy rules should not apply when there is no Will or estate plan.
Second, creating an estate plan gives you flexibility to decide how your beneficiaries will receive assets. An estate plan could involve the creation of trusts, which allow the beneficiary to have the use of funds without having direct access to them. Trusts can be a useful tool for minor or young beneficiaries who may need time to develop prudent money management skills; for beneficiaries with special needs who cannot own significant assets outright without jeopardizing necessary public benefits; or for beneficiaries with significant wealth on their own or liability concerns who want to keep assets out of their own estates.
Third, an estate plan can, depending on the circumstances, allow you to reduce taxes that your estate may be subject to at your death. There are numerous estate planning techniques, many of which involve the use of trusts, that can be developed and implemented to reduce estate, inheritance, and/or generation-skipping taxes that may be assessed against an estate. These tax-planning options are extremely limited for intestate estates.
Fourth, the development of an estate plan may allow certain aspects of the estate administration to be completed in a more private manner than available for intestate estates. Probate records are public documents, so many of the details of an estate administration are available to the public. While a Will must be filed as part of a probate record, many trusts that could be created under an estate plan are not included in the probate record, and therefore do not become public. While public interest in the administration of your estate may be less than the interest in Aretha Franklin’s or Prince’s estates, the ability to shield some aspects of an estate from the public can be beneficial.
So, in the words of the late, great Queen of Soul...."You better think......"
PENNSYLVANIA’S PROPOSED RULEMAKING UNDER THE PENNSYLVANIA MINIMUM WAGE ACT
Reprinted with permission from the August 18th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.
In 2016, the United States Department of Labor proposed changes to regulations regarding exemptions from the overtime and minimum wage requirements of the Fair Labor Standards Act (“FLSA”). The proposed changes nearly doubled the salary requirement to qualify for these exemptions. Employers hurried to change policies and reclassify employees in order to meet the December 31, 2016 deadline to comply with the new salary requirement. In late 2016, a federal court imposed an injunction on the imposition of those rules, and there the new regulations died (more at the hands of the Trump administration than as a result of legal challenges). Among other observations, the federal district court for the Eastern District of Texas concluded that the injunction was necessary because the new salary requirement was so high that it rendered the duties test “irrelevant.”
The proposed change was dramatic, and would have required significant policy and personnel changes. Now, Pennsylvania is taking on those salary requirements in a less dramatic, but no less significant way.
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.
Employers work very hard to retain senior, key and talented employees. In the past, we’ve discussed how workplace culture helps to retain talent, and we’ve seen an increased employer focus on those programs. But the truth is that often what causes an employee to stay, and complicates an employee’s exit, are basic compensation programs: competitive salaries, reasonable health insurance, and stock options or other compensation programs that vest over time. These are difficult issues regardless of the reason for the highly compensated employee’s exit.
Of course, any executive is reluctant to walk away from a competitive salary. For executives who resign, this becomes the main bargaining chip with a new employer, and the main area of risk if they are retiring or starting a new business. But, when an executive is involuntarily terminated, our first goal in representing those executives is protecting those benefits. Executives are often eligible for severance programs that will continue their salary for a period. We examine whether the executive is eligible given the circumstances surrounding the termination, and the amount of severance due. Where there is no formal severance program, an executive should consider negotiating a severance package, depending on the circumstances of the termination. For example, most actionable cases of age discrimination occur at these levels, because the more highly compensated employees are also the oldest employees. This may provide some leverage to negotiate a severance.
Health insurance and other benefits are often included in those severance programs. However, if there is no severance program, all employees are entitled to continuation of health insurance under the statute commonly known as “COBRA.” This coverage is available at the employee’s cost unless the employee is terminated for “gross misconduct”. While this coverage is expensive, it does provide a way to continue coverage for up to eighteen months.
The most complicated of these issues, though, is the issue of stock options and other compensation that vests over time. Especially after a long period of employment, executives may find themselves with valuable stock options that vest three or four years in the future. When this executive is terminated, the loss of those unvested options can represent the loss of significant funds. Rarely do such plans allow an employee to vest if he is no longer employed, so there is little room for negotiation on this point. Similarly, when resigning, the executive must consider his timing, calculate what he is leaving “on the table” and perhaps negotiate this loss with a new employer.
AMM has experience navigating these complicated exit issues for executives. We can help a terminated employee protect some of these benefits, and work with resigning employees to navigate an exit in a way that makes economic sense.