In Roman v. McGuire Memorial, the Pennsylvania Superior Court announced a new basis for challenging terminations of at-will employees. While Pennsylvania law has always recognized a “public policy” exception to at-will employment, the case law has limited that exception. Roman expands the exception to include terminations of health-care workers who refuse to work mandatory overtime.
Roman worked as a direct care worker, subject to McGuire Memorial’s mandatory overtime requirement. She was an at-will employee. The mandatory overtime policy allowed for termination of employees who refused to work mandatory overtime on four occasions. McGuire terminated Roman’s employment after her (disputed) fourth refusal, and Roman sued for wrongful termination in violation of public policy. After a nonjury trial, the trial court found in Roman’s favor, awarded her $121,869.93 in back pay and lost benefits, and ordered reinstatement to her former position.
Relevant to the dispute is Pennsylvania’s Prohibition of Excessive Overtime Act (43 P.S. § 932.1 et seq.). The Act prohibits a health care facility from requiring employees to work in excess of an “agreed to or previously determined and regularly scheduled daily work shift.” 43 P.S. § 932.3(a)(1). Further, the Act prohibits retaliation against an employee who refuses to accept work in excess of those limitations. 43 P.S. § 932.3(b). The Act does not provide for a remedy for employees terminated in violation of its requirements. It does contemplate a regulatory scheme to address complaints by employees, but those regulations are not yet final.
The Superior Court held that the Act established a public policy that healthcare facilities should not require its direct care workers to work overtime hours, and, as such, Roman’s termination for refusing to work overtime hours amounted to wrongful termination in violation of public policy. Further, the Court distinguished cases in which it had refused to recognize a public policy exception to the at-will doctrine because a statute had already created a remedial scheme to address violations of the particular policy identified in that statute, such as the Pennsylvania Human Relations Act. In the case of the Prohibition of Excessive Overtime in Health Care Act, there existed no remedial scheme to address the wrong.
The Superior Court has thus used The Act to identify a new public policy exception to the at-will doctrine. Health care entities should be mindful of this exception in creating and enforcing overtime policies for direct care workers.
Part 1 of 3 Part Series:
After years of hand-wringing and speculation by entrepreneurs, re-occurring angels, venture capital firms, registered brokers and lawyer types involved with private placements, on October 30, 2015, the U.S. Securities and Exchange Commission (SEC) finally adopted equity crowdfunding rules pursuant to Title III of the Jumpstart Our Business Startup Act of 2012 (JOBS Act). These rules, which rely on Section 4(a)(6) of the Securities Act, are scheduled to be issued in the Federal Register early in 2016 and will become effective 180 days after publication.
Assuming the issuer is not otherwise ineligible, the crowdfunding rules will permit the following:
• A company can raise a maximum aggregate of $1 million through crowdfunding offerings in a 12 month period.
• Individual investors can invest an aggregate sum, over a 12-month period, in any number of crowdfunded offerings, based on the following formulas:
1. If either the individual’s annual income or net worth is less than $100,000, s/he can invest the greater of $2,000 or 5% of the lesser of his/her annual income or net worth.
2. If both his/her annual income and net worth are equal to or more than $100,000, s/he can invest 10% of his/her annual income or net worth, provided that the total investment does not to exceed $100,000.
Not all companies can rely on crowdfunding under the final rules. If the issuer is (i) not organized under the laws of a state or territory of the United States or the District of Columbia; (ii) subject to the Securities Exchange Act of 1934 reporting requirements; (iii) an investment company as defined in the Investment Company Act of 1940, or a company that is excluded from the definition of “investment company” under Section 3(b) or 3(c) of that act; (iv) has a “bad actor” in management or as a major equity holder; (v) has sold securities in reliance on Section 4(a)(6) and failed to make the required ongoing reports within the two-year period before the proposed new offering; or (vi) is a development stage company that has no specific business plan or purpose or does not identify a proposed merger or acquisition target.
The new rules include detailed provisions relating to mandatory disclosures and other requirements, which will be discussed in subsequent posts on this blog.
Scammers targeting Pennsylvania businesses have been hard at work this summer. The Pennsylvania Department of State reports that three separate direct mail campaigns have sought to get unsuspecting Pennsylvania business owners to pay unnecessary fees:
• A mailing from a company calling itself “Division of Corporate Services – Compliance Division” urges companies to complete a form with officer and director information and return the form with a $150 payment.
• A postcard from a company calling itself “Business Compliance Division” urges owners to call a toll-free number “to avoid potential fees and penalties.” When that number is called, the owner is instructed to pay $100 by credit card to obtain a “certificate of existence” in order to comply with state regulations. The address for this company is the same as the address for the “Division of Corporate Services – Compliance Division” above. According to the Pennsylvania Department of State, this is the address of a UPS store in Harrisburg.
• A letter from a company calling itself “Pennsylvania Council for Corporations” instructs business owners to complete a form with names of shareholders, directors and officers and return it with a $125 fee.
These solicitations include citations to Pennsylvania statutes and look official, but they are not: they were neither prepared nor authorized by the Commonwealth. Essentially, these notices represent a business-generating effort from the sender to prepare generic annual minutes for unwitting companies.
The Department of State cautions that any official notices sent to businesses by the Pennsylvania Department of State or the Secretary of the Commonwealth’s office will contain letterhead and/or contact information for the Bureau of Corporations and Charitable Organizations. If you receive one of these notices or a similar solicitation, contact the Bureau at 717-787-1057, or feel free to call Sue Maslow, Joanne Murray or Michael Mills at 215-230-7500.
On July 1, 2015, the Pennsylvania Association Transactions Act (also known as the Entity Transactions Act) (the “Act”) went into effect. The primary purpose of the Act is to simplify the architecture of Title 15 of the Pennsylvania Consolidated Statutes by moving the provisions applicable to names, fundamental transactions and registration of foreign entities into a new Chapter 3. Presently, those provisions are spread out in numerous subsections applicable to each entity type (e.g., corporations, limited liability companies, etc.). The thinking was that since identical or nearly identical provisions already applied to most or all entity types, they should be moved to a new chapter to streamline the statute and hopefully simplify the process for undertaking fundamental changes. The Act adopts new terms to refer to various entity concepts, so practitioners will have to learn a new vocabulary. For example:
No one (not even us legal corporate types) would ever suggest that bylaws are interesting. But recent Third Circuit and Delaware Court of Chancery decisions have highlighted the complexity of issues regarding a company’s fee advancement bylaws and policies. Some corporate indemnification provisions are mandated and other provisions are simply permitted under Delaware state law. In practice, adopted corporate bylaws refer to the right (or absence of a right) of officers and directors of a company to be reimbursed by the company for losses, including legal fees, incurred in legal proceedings that name individual officers or directors if those proceedings relate to their employment or activities on behalf of that company. Mandated indemnification obligations under Delaware statutory requirements attach only to an “officer or director” but many companies nevertheless have bylaws and policies that permit indemnification to “any person” (including officers, directors, employees and agents) who act in good faith and in a manner they reasonably believed to not be opposed to the best interests of the entity. The Third Circuit, however, recently held that the definition of “officer” was ambiguous; an executive title like “Vice President” alone does not automatically prove eligibility for indemnification. And the Court of Chancery held that officers and directors need not prove that they will be indemnified to obtain fee advancement where bylaws tie fee advancement to indemnification. In other words, entitlement to advancement of fees under corporate bylaws is to be considered independently of indemnification entitlement. Examining the requirement that the conduct in question of any person seeking indemnification must be “by reason of the fact” of his or her officer/employment status, the same court determined that bylaws may not exclude entire categories of alleged wrongdoing for the purpose of fee advancement denial. If the alleged wrongdoing relates to an officer’s duties owed to the company (such as breaches of fiduciary duty), fee advancement may be required (even where the same bylaws require a clawback if the officer is ultimately found to have engaged in such wrongdoing).
Commercial lenders in Pennsylvania await action by the legislature to fix what appears to be an unintended byproduct of recent amendments to the Pennsylvania Probate, Estate and Fiduciaries (PEF) Code that went into effect earlier this year. You may be wondering what a statute that generally applies to trust and estate matters has to do with commercial lending transactions. The answer is that the recent changes applicable to powers of attorney generally could be interpreted to apply to powers of attorney granted in commercial loan documents, leases and other contracts (such as those granted in connection with confession of judgment clauses and certain other remedies). Historically, these statutory provisions did not apply to commercial agreements. It appears that the legislature was focusing on trust and estate documents when enacting this legislation and didn’t understand the impact of these amendments on commercial transactions.
These amendments are troubling from a lender’s perspective because they require that an agent must “act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interest.” In a commercial loan transaction, the agent is the lender and the principal is the borrower, so the tension is obvious: a lender that is foreclosing on property, confessing judgment, collecting rents, or exercising Article 9 remedies is not likely to be acting in the best interest of the borrower.
Pennsylvania House Bill #665 would amend the PEF Code to clarify that the power of attorney requirements do not apply to commercial transactions. This bill is presently in the Senate Judiciary Committee. Until this bill becomes law, lenders should consider making the following adjustments to commercial loan documents containing powers of attorney (typically these include documents with confessions of judgment, security agreements, assignments of rent, and mortgages):
• Include an acknowledgement by the borrower that its reasonable expectations include confession of judgment, foreclosure and other actions typically taken by a lender under the power of attorney;
• Include a waiver of the duties imposed by the PEF Code; and
• Add a notary page.
My wife doesn’t eat fish. Chicken is the staple of the diet in our house. Despite careful consideration, sometimes she gets tricked into consuming what looks like a tasty morsel only to be disappointed by the taste and texture of what comes from the sea. She promptly, but of course gracefully, extracts the fishy culprit from her mouth thereby rescinding the transaction and restoring her being to non-seafood status. Of course, a fishy business transaction cannot be so easily unwound.
Business transactions come in all shapes and sizes. From multi-million dollar mergers involving teams of lawyers and accountants to small asset purchases effectuated by only a bill of sale scribbled on a napkin. Most fall somewhere in between. Almost all involve disclosure of financial and business information in advance of closing in a “due diligence” period of evaluation and investigation. Due diligence is the means by which a buyer attempts to verify what the seller has to sell; the ongoing revenue stream and the customer pipeline. Sometimes the performance of the business after closing sharply contrasts the results of operations depicted in financial information exchanged in due diligence. The new owners are left without a roadmap to ascertain the disparities in performance. The investigation can be all consuming and require substantial attention and money at a time when the business is already in a period of transition. The new owners must balance examination of the transaction and results of operations against the focus required to conduct the daily activities of the business which, of course, remain pressing and are likely made more complex by the unexpected performance levels.
Hopefully, any agreements reached between the parties contain representations and warranties which could benefit the purchaser. The terms of the agreement are the best place to start the analysis of potential legal action. Generally, such agreements will represent and warrant the financial information exchanged in due diligence was accurate and adequately described the performance of the business. For example, often tax returns, profit and loss statements and balance sheets will be exchanged in due diligence and subject to specific representations and warranties. Examination of what documents were specifically referenced as included in the representations and warranties is critical. Where the prevailing agreements contain integration clauses, the representations and warranties are of paramount importance as integration clauses can prohibit reliance upon statements and information not specifically incorporated into the four corners of the documents and bar claims such as negligent misrepresentation and, potentially, fraud.
Determining whether the profit and loss statements and balance sheets contain material mis-statements of operations can be complicated. The investigation must begin with securing all documents subject to due diligence and the verification that those documents were the same documents that were prepared in the ordinary course of business. Ensure that any financial records or tax returns produced by the seller match financial records available from a different source such as a broker, accountant or internal revenue service. Of course, information becomes more available after the commencement of litigation by virtue of the discovery process.
The forensic analysis involves testing the information set forth in summary form in the financial statements against whatever other information is available. Quickbooks reports can reveal adjustments made to performance results. The reality however, is that most business owners, and for that matter attorneys, lack the requisite expertise to effectively conduct the necessary investigation. Accordingly, a forensic accountant skilled in fraud examination and detection is a valuable member of the analytical team. Certainly, there is a cost associated with that service, which cost must be incurred before the results are clear, but the expertise of the investigation will often control the outcome. The forensic accountant is trained to identify inconsistencies such as whether payroll was accurately stated, whether inventory and costs of goods sold were appropriately booked and whether income as stated on the financial records is impacted by other unspecified factors. A preliminary forensic investigation is essential to the decision to pursue costly litigation.
A buyer must also consider the potential parties, their financial positions, and the types of claims that can be raised. In seller financed transactions, as opposed to bank financed transactions, the buyer’s leverage is significantly enhanced. In the former, the buyer may apply pressure to a seller by discontinuing payments. In the latter the bank generally has no regard for any claims the buyer may possess against the seller and simply demands its’ payment each month. Generally, no court will interfere with the bank’s rights to security and payment as same are not dependent on the result of any claims possessed by the buyer as against the seller. The ability to recover in litigation must also be considered. The distribution of purchase price, whether distributed to creditors or held in joint accounts in a tenancy by the entireties state can impose additional obstacles to recovery and necessarily impacts litigation strategy. Identification of potential defendants and causes of action is also essential. Pennsylvania recognizes the torts of negligent misrepresentation in certain circumstances including preparation of financial information for the reliance of others, aiding and abetting breach of fiduciary duty and conspiracy. Accordingly, to the extent a seller was assisted in the preparation of false financial information, those who assisted may also be appropriately identified as defendants when the facts are supportive of liability. Potential claims against a seller include breach of warranty, fraud, misrepresentation, conversion, unjust enrichment and, under the right set of fact, claims for punitive damages. Breach of warranty claims are often the best chance of success as the issue of intent (or lack thereof) has no bearing on proof of a breach of warranty claim.
Finally, consider the measure of damages. Under the right circumstances, lost profits can be claimed. However, post-closing failure (or alternatively, success), management issues and other factors can complicate the damages analysis. In the absence of a lost profits claim, the difference between the valuation of the company in accordance with the financial information presented and the financial information eventually uncovered may result is a simpler damage calculation. Of course, any such analysis also requires the assistance of a business valuation expert in addition to the forensic accountant referenced above. A buyer must also be wary of any damage limitations internal to the agreements between the parties as well as any internal statutes of limitations which may be set by agreement.
In contrast to the ease by which my wife can expel inadvertently consumed sea food, rescission in a business transaction is unlikely. The very idea of rescission, placing the parties back in their respective conditions, may be impossible based on post-sale performance. Claims for money damages are far more often the claims that proceed to conclusion.
Certainly, pursuit of litigation concerning the purchase of a business can be expensive and complicated. Any such decision must weigh the likelihood of success and the cost of that success, against the distraction such litigation may cause and potential impact of that distraction on business operations. That being said, sometimes a buyer simply has no choice and sometimes what smells rotten really is just that; rotten.
A recurring issue employers must address is the enforceability of restrictive covenants entered into with an employee. These restrictive covenants are typically non-disclosure (confidentiality), non-solicitation, and/or non-competition agreements. The timing, form, and substance of these agreements will determine whether a court will find them valid. From a former employee’s perspective, the issue is basically the same but reversed: can the employee disregard a previously signed restrictive covenant without being liable for monetary damages to his former employer (and if newly employed at another company, keeping the second company out of litigation)?
Two cases recently decided by the Pennsylvania Superior Court provide guidance for employers and employees:
Fleisher v. Bergman, concerned an employee who was hired as a full-time employee. At the time of his hire, employee signed a restrictive covenant which was a confidentiality and non-competition agreement. The restrictive covenant provided that employee would not divulge any “Confidential Information” (e.g., customer lists, pricing policies, names of vendors) to other parties without the consent of employer; the Agreement further mandated that for a period of five years after termination of his employment, employee would not “. . . solicit or do business with any . . . entity . . . that was, within the three year period preceding the Employee’s termination, a Client or Prospect of Employer... ”
Reprinted by permission of Catalyst Center for Nonprofit Management. Further duplication without permission is prohibited.
Childhood victimization and other abuses of our most vulnerable citizens unfortunately remain a much too prevalent and tragic issue of our times. Particularly offensive is the possibility of physical or emotional abuse of those susceptible because of age, disability or circumstance while receiving services of a nonprofit. Safety efforts to protect the very people being served by a nonprofit, regardless of size, must be constantly monitored.
Even the smallest nonprofit should adopt safety-related policies based on nationally recommended guidelines developed by experts. Such policies and guidelines help protect both the recipients of the nonprofit’s services and the integrity of the nonprofit’s programs. Every nonprofit that serves children and youth has the obligation to exercise “reasonable due diligence” with regards to screening as part of its hiring and vetting programs for members of the nonprofit’s Board, staff and volunteers. Without such screening or gate-keeping vigilance, the very people the nonprofit is trying to serve are more likely to be unprotected and the reputation of the nonprofit (not to mention its fiscal health) are at unnecessary risk.
Business divorce, just like traditional matrimonial divorce, can occur for many reasons. Many times, business divorce is occasioned by underperformance and the need to separate an underperforming owner. However, the opposite circumstance, a business that has done well, can also spur desire for change in structure. Just like matrimonial divorce, business divorce can be a long, painful and expensive proposition. Consideration of trigger events for dissolution and setting an exit strategy before commencing the business venture can manage the expectations of the parties and facilitate transition when it becomes necessary. And it almost always does.
One of the primary considerations is trust. Consider the level of trust you place in a business partner on so many levels. Trust ranges from the basics of whether you can trust your partner not to have a hand in the cookie jar, to more esoteric questions of whether you can trust your partner to share your long term vision. All too often clients come to us with stories of unexplained payments for personal expenses which are only discovered by accident. What are the rights and obligations of the company and the business partners in such event? These rights should be spelled out in the agreement between the parties, otherwise the company, and the innocent shareholders, are left to argue common law claims and may be without a way to specifically extract the untrustworthy owner.
Trust goes deeper than the simple situation of defalcation (misuse of funds). Can you trust your business partner to have the same desire to grow your business and increase sales and performance metrics over an extended time? Business entities generally have perpetual existence. Can you trust that your partner will continue to make the requisite investments of time, energy and money that are necessary to bring the success you work so hard to achieve? If the agreements between the parties do not provide for a mechanism to remove that partner, or at least monetarily induce that partner to voluntarily separate, what strategy is available to accomplish the necessary change?
If extraction of a non performing owner is one side of the coin, the terms of voluntary separation are the other. Even in the absence of material differences between owners and managers, time and circumstance often require parties to go their separate ways. The terms of voluntary separation can be every bit as complex as forcible removal. Often, the most problematic inquiry is the right to be compensated in consideration of separation. Such terms of separation can vary based on valuation methodologies such as “market” or “book” values, timing of payments, reductions or additions to value based on subsequent conduct. In the absence of advance planning, the parties are almost certain to find dispute.
Post-employment obligations and fiduciary duties are also fertile ground for dispute. Corporate officers and directors have fiduciary obligations to the business. Partners, shareholders and members may have fiduciary obligations to each other. A departing shareholder may or may not be permitted to directly compete either during or after termination of the business relationship. Certainly, issues arise with respect to client/customer relationships and confidential information. More substantial issues may arise when the business develops a new technology or intellectual property which one party seeks to exploit in a different way. Agreements between the parties can address such possibilities and preserve rights by contract which might otherwise be ambiguous.
What if it all goes wrong? Again, business entities are generally established to have a perpetual existence, so termination must be accomplished by agreement or statutory procedure. What kind of consent is necessary to effectuate dissolution? Must all of the shareholders or members agree? Agreements can specify events and effect of dissolution including specific assignments in distribution of assets according to differing methodologies or factual circumstances. In circumstances where one party is opposed to liquidation or dissolution, the situation can become even more complex. Occasionally, only the appointment of a receiver can effectuate liquidation or dissolution; a generally unappealing circumstance as such an appointment necessitates the loss of control.
The questions posed and circumstances described above underline the importance of careful consideration prior to establishment of business entities. Such considerations during the business “engagement” and before business matrimony are necessary to prevent significant hardship when expectations are not managed. Advance planning though counsel can address many of the issues potentially faced by business owners and help the parties realize their expectations when circumstances change.