Reprinted with permission from the June 27th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.Further duplication without permission is prohibited.

Earn out clauses in business acquisitions are notoriously fertile ground for disputes.  Complicated post-closing performance metrics, access to information, modifications to accounting methodologies after closing, tracking and collection of revenue information all present opportunities for buyer and seller to disagree.  The classic struggle of seller’s effort to maximize sale return juxtaposed against buyer’s focus on transforming the operations of the acquired enterprise for long term success necessarily create friction.  Both sides bring their unique perspectives to the interpretation of the exhaustively negotiated purchase agreement with the new benefit of hindsight. 

Certainly, arbitration pursuant to the Commercial Rules of the American Arbitration Association is common in any number of business contracts.  When the parties elect that process, they accept the applicable Rules and agree to adopt the procedures which have been developed by AAA.  In the earn out or deferred consideration context, however, acknowledging the sheer number of potential conflicts surrounding inherent accounting practices, scriveners often  incorporate a unique mechanism for dispute resolution in their  transactional documents.   When the issue is theoretically limited to a calculation, the parties go to great pains to define the applicable accounting terms and may design a system of dispute resolution which does not contemplate many of the applicable provisions of the Commercial Rules or empower any judicial or quasi-judicial third party to control the process. 

Indeed, transactional practitioners have developed language which seeks to avoid the intricacies of AAA arbitration in preference for what should be a predictable accounting calculation based on verified numerical results of operations.  In such cases, parties most commonly agree to submit any dispute related to the earn out to an informal resolution process using mutually agreed upon accountants to serve as “expert consultants and not as arbitrators.” The sole purpose of the accountants’ participation is the review of financial information relating to post closing operations and the calculation of deferred consideration; which calculation would be “final and binding”. 

The law requires drivers in the Commonwealth of Pennsylvania and New Jersey to maintain a certain minimum level of liability coverage with regard to any automobile.  That coverage serves the important function of providing a fund from which an injured person may recover for injuries caused by the negligence of the person securing the coverage known as the “insured”.  Liability coverage also serves the equally important role of protecting the insured’s personal assets by providing a monetary barrier between the claims of an injured person and the personal assets of the insured  

Some other provisions of an automobile policy which get far less attention, however, are also designed to protect the insured as opposed to someone injured by the insured’s negligence.  Policy provisions such as “stacking”, the limited tort option (known in New Jersey as the “verbal threshold”) and uninsured/underinsured protections are critically important to the insuring relationship and may be the difference between a successful recovery and a recovery which is not enough to satisfy your own medical bills, even if you are involved in an accident caused by the negligence of someone else.  “Penny wise and pound foolish” is a dangerous proposition when it comes to automobile coverage.

We recently and successfully tried a week long jury trial in the Bucks County Court of Common Pleas where the predominant issue in the case was the clients’ election of the limited tort option in his auto insurance policy. By choosing the limited tort option, the client had relinquished his right to bring suit against anyone whose negligence may have caused him to be injured,  unless the accident resulted in a “serious impairment of a bodily function”.  In our case, the client had suffered a mild traumatic brain injury – a concussion.  Unlike the majority of individuals who suffer such injuries, our client did not recover as expected, and continued to suffer mild neuropsychological deficits such as difficulty in word finding and rapid processing of information. Notwithstanding those deficits, the client was able to return to his normal occupation.  Because our client had chosen the limited tort option, the tortfeasor’s insurer refused to make any offer of settlement whatsoever based on his neuropsychological deficits, offering only to satisfy the client’s lost wages.  Our negotiating position on behalf of our client in settlement discussions was clearly disadvantaged since the insurance company knew there was substantial potential that the very specific and nuanced nature of the injury would be difficult for a jury to grasp, and might lead a jury to conclude the client had not suffered a “serious impairment of a bodily function”.  While we were successful at trial, the matter is one which should and would have been resolved in settlement but for the election of limited tort coverage by the client.  Had our client invested in full tort coverage, he would have been spared an emotionally taxing and all-consuming trial on merits and damages.

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.  

By Thomas P. Donnelly, Esquire, Reprinted with permission from the November 24, 2014 issue of The Legal Intelligencer. (c) 2014 ALM Media Properties. Further duplication without permission is prohibited.

I do not generally characterize myself as a fan of arbitration.  While proponents argue arbitration is a superior form of dispute resolution and more efficient than litigation, my personal experience in the representation of privately held businesses and individuals is otherwise.  In many situations, the sheer cost to initiate an arbitration proceeding may be prohibitive.  For a claimant, even if that initial cost is not an effective deterrent, the budget of ongoing hourly fees required of a qualified arbitrator in addition to the parties’ own anticipated legal fees, can quickly impair the potential recovery. For a Respondent, many times the cost of proceeding was not considered at the time of execution of an agreement which compels arbitration; thus the obligation to make payment for a service technically rendered by the courts without cost comes as a surprise. In either case, the parties must realize that at arbitration each is compensating not only its own lawyer, but, at least partially, another lawyer and a private dispute resolution industry as well. While arguably profitable for the legal profession, the realities of proceeding can result in difficult client discussions.

The above being said, there are situations where arbitration clauses can be of substantive, procedural and, consequently, financial benefit.  In such cases, even a skeptic of arbitration must recognize the benefits of the bargained for exchange which is an arbitration agreement.  Under the current state of the law, and given the trends in the enforcement of the right to contract, a carefully considered and artfully drafted arbitration agreement can be an essential aspect to certain business relationships and an important term of negotiation.

Employers should almost always include the broadest possible arbitration clause in any employment agreement and, generally, as a term of employment.  In most cases, an action arising in an employment situation concerns a claim raised by an employee, or worse, a class of employees against the employer.  The employer is generally a defendant.  In such cases, arbitration clauses can serve several functions.  First, an employee initiating the action must satisfy the initial fee if mandated by the prevailing agreement. As such fees are often determined by the amount at issue, the larger the claim, the higher the fee, and the greater deterrent toward commencement of the action.  As of November 1, 2014, the filing fee for the commencement of an American Arbitration Association claim involving more than one million but less than ten million dollars was $7,000.00.  Note there is no refund of the filing fee should the matter resolve.  Certainly, the requisite fee is a deterrent to the filing of a border line claim, but could also be a deterrent to a claimant’s joinder of additional even less viable claims which include different damage components.  Under any circumstances, the employee faces an early branch to the decision tree.

The flexibility of arbitration clauses within employment agreements may prove even more critical.  With careful drafting, an employer can effectively insulate itself from certain employment related class actions.   In Quillion v. Tenet HealthSystem Philadelphia, Inc. the United States Court of Appeals for the Third Circuit compelled arbitration of a Fair Labor Standards Act claim and, more importantly, declined to strike down a provision of an employment agreement requiring such claims be brought on an individual basis precluding proceedings as a class.  The Quillion Court indicated that such a class action waiver was consistent with the Federal Arbitration Act and suggested in the strongest of terms that Pennsylvania’s preclusion of class action waiver in the employment context was preempted by Federal Law.  Certainly, the equities of any such situation, including preservation of remedies and additional recovery of fees and costs are important to the court’s inquiry, but the current trend is to support the rights of the parties to contract, even to their own peril.

The flexibility of the arbitration agreement also allows for exclusions from the scope and reservation of certain matters for litigation.  Matters of equity such as enforcement of restrictions against competition or solicitation can be reserved for the courts, thereby preserving immediate access to judicial process for enforcement of employer remedies.  Interestingly, the reverse may not necessarily be true.  The Montgomery County Court of Common Pleas recently dismissed a complaint for declaratory judgment seeking a judicial determination voiding certain restrictions against competition determining that such equity claim was within the scope of the arbitration agreement and, therefore, for the arbitrator to decide.                 

Arbitration also plays a vital role in the ever broadening world economy.  In 2014, international business is the norm rather than the exception.  The courts of the United States and the signatories to the New York Convention on Arbitration have routinely enforced arbitration clauses establishing the parameters of dispute resolution as consistent with the parties’ right to contract.  Critically, the arbitration clause can protect a company operating in this country from the many pitfalls, incremental expenses and inconsistencies of litigating in a foreign country or even against a sovereign nation in its own judicial system by selecting a choice of law and a situs of the arbitration proceeding.  Such forum selection also provides a certain substantive component not only as to applicable law, but also in the qualification of fact finders as the roles of qualified arbitrators available for commercial disputes continue to grow.   Finally, arbitration may be preferable to litigation in the United States District Courts as the parties may be granted greater flexibility and input to the development of the schedule of proceedings rather than subject to the rule of the federal judge, who may or may not be familiar with often complex substantive issues.           Finally, arbitration may also be preferable in any relationship where confidentiality is key.  In some cases, the simple fact of a public filing is of concern.  In many others, the factual allegations of a complaint, even if eventually proven unfounded, can be damaging.  While an arbitration clause cannot prevent a claimant from filing an initial public complaint in court, an enforceable arbitration clause can bring an abrupt end to the public aspect of the dispute.

The courts remain the preferred forum for dispute resolution in many circumstances.  However, with the growing trend of contract enforcement to the terms of arbitration agreements even a skeptic must admit that the inclusion of an arbitration clause in certain circumstances can provide a substantive advantage and dramatically impact the landscape of dispute resolution to your client’s benefit.

By Thomas P. Donnelly, Esquire, Reprinted with permission from the March 27, 2014 issue of The Legal Intelligencer. (c)
2014 ALM Media Properties. Further duplication without permission is prohibited.

It happens all the time.  A potential or existing client calls and advises they have been stiffed by a customer on a commercial contract.  Often times, your client has provided goods or services to a client business only to be advised their client, the other named party to agreements in place, has ceased business operations.  [As filing under Chapter 7 of the Bankruptcy Code does not result in a discharge of corporate obligations, a bankruptcy filing is generally not forthcoming.]  There is no event which gives the client finality as to their loss.  The client is left with only their suspicions that operations have commenced under a new corporate umbrella and whatever assets remained have simply been transferred out of the client’s reach.   

While certainly not in an advantageous position, your client’s claims may not be dead.  Under the right factual circumstance, recovery may still be had.  Claims against successors, affiliated business entities, and corporate principals are fact specific and often necessitate pre complaint development through available public information or, potentially, through the issuance of a writ of summons.  If sufficient information can be mined, causes of action for violation of the Uniform Fraudulent Transfers Act, successor liability under the de facto merger doctrine, unjust enrichment, and claims for piercing the corporate veil may have merit and be successfully pursued.