In a spring post (http://thebusinesslawblog.blogspot.com/2007/04/limited-liability-companies-new-case.html) I wrote about a new case further strengthening the protection offered to limited liability companies. During that time, I was litigating a case in which a home purchaser had paid a large amount of money down to a home builder llc to build a home, only to have it fold. She sued not only the limited liability company, but also the three individual members, one of whom I represented. My client, the only financial strong member of the three, was of course an attractive target for the plaintiff. However, my client was also the least culpable. He'd never met the plaintiff, and actually was nothing more than the cliche' "silent partner"--somebody who put up his money and creditworthiness to allow the two primary members to get loans to build homes.
I'd felt comfortable going in to the case that the law seemed to be in our favor, and during its pendency, two new cases came down from the Court of Appeals further buttressing our arguments. I scheduled a motion for summary judgment (which, for those not in the legal field, is basically a motion to dismiss the Plaintiff's complaint) for mid-November. I wrote a letter to the Plaintiff's attorney giving them one more chance to dismiss their case against my client voluntarily. Normally, in such a case the Plaintiff's attorney, even if they think their case is week, will at least try to fight. However, the Plaintiff had her own risks--we'd filed a counterclaim for attorney's fees, and one North Carolina case had ruled that when a plaintiff improperly named an LLC's member in a lawsuit, the plaintiff may be liable for attorney's fees. The attorney, who was diligent for his client, nonetheless decided the right thing was to dismiss his case against my client. Therefore, though I never got a judge's ruling to reinforce my belief about LLCs, I believe the Plaintiff's dismissal bears out my theory.
Sabtu, 03 November 2007
Sabtu, 20 Oktober 2007
Real Estate Contracts -- Conclusion
A while back on this blog I wrote about real estate contracts (http://thebusinesslawblog.blogspot.com/2006_12_01_archive.html), and described a lawsuit which I was defending on behalf of a client. We tried the case out last week and, after successfully getting the judge to exclude most of the Plaintiff's evidence, we ended up settling the case for a nominal value (about one percent of what the Plaintiff was asking).
Now that the case is over, I can look back and give some advice to prospective buyers and sellers who find themselves in a contract dispute.
1. To the Buyer: it's rarely worth it to sue over a lost sale. In North Carolina, you've got two remedies of a seller breaches his contract to sell: either get a court order forcing him to sell the proprety to you, or ask for damages.
As for specific performance (the court order), this is great if the Court will do it, but it is what is called an equitable remedy, and the Court, in its discretion,
may not order the seller to convey the property to you. Also, to get this remedy, you have to take certain quick legal steps to tie up the property (called a Lis Pendens) before the seller sells it to someone else. In my case, the Plaintiff attempted to do this, but my clients sold the property too quickly. Therefore, that just left a remedy of damages.
As for damages, they are figured by subtracting the price you would have paid for the property (the contract price) from the actual market price. In other words, you have to argue that you were buying the property for less than what it was really worth. If, however, the seller immediately resells the property (and actually this is often the reason why the seller refuses to sell it to the original buyer), then a buyer will be able to show damages in the amount of the difference between what the property sold for and what the buyer had contracted to buy it for.
In my case, however, the buyer, in addition, attempted to sue for lost profits. My clients sold the property for only $15,000 more than the original price with the Plaintiff. But the Plaintiff claimed he thought it was "feasible" that he could have subdivided it and made $700,000 profit from the sales. The judge felt that testimony was speculative, and would not allow it into evidence.
2. Sellers, don't communicate in writing with the buyer. The Plaintiff/Buyer in my case based his hopes, in large part, on the fact that he'd carried on a string of email conversations with my client long after the closing time had passed. He argued that these conversations (in which closing dates were set and re-set) showed that my clients had waived the closing deadline. I was able to get this evidence excluded (without which the Plaintiff didn't have much of a case), but on appeal (or if the Plaintiff had dismissed his case and re-filed again), I don't know if that ruling would have stood. In any event, had my client not communicated in writing with the Plaintiff, this case probably would never have been filed.
3. Get an attorney to draw the contract. Self-serving, I know. But had I drawn the contract for my clients, I would have put in numerous provisions that probably would have kept this case from ever getting started, such as:
a. A time is of the essence provision.
b. A provision that any extensions of time must require additional earnest money.
c. A larger earnest money deposit.
4. Speaking of earnest money... One final piece of advice: if you're selling a serious piece of property, make sure you have a serious buyer by requiring a serious earnest money deposit. I'm convinced that the Plaintiff/Buyer was someone who was financially unsound and was attempting to "flip" the property with almost no money down. My clients only requested a $1,000 earnest money deposit--on a purchase of $389,000! The company that ultimately bought their property put down $25,000 earnest money, and bought the property in less than 14 days. Had my clients forced the Plaintiff/Buyer to come up with serious money (at least $10,000), he probably would not have been able to, and would have simply walked away, looking for another easy mark.
Now that the case is over, I can look back and give some advice to prospective buyers and sellers who find themselves in a contract dispute.
1. To the Buyer: it's rarely worth it to sue over a lost sale. In North Carolina, you've got two remedies of a seller breaches his contract to sell: either get a court order forcing him to sell the proprety to you, or ask for damages.
As for specific performance (the court order), this is great if the Court will do it, but it is what is called an equitable remedy, and the Court, in its discretion,
may not order the seller to convey the property to you. Also, to get this remedy, you have to take certain quick legal steps to tie up the property (called a Lis Pendens) before the seller sells it to someone else. In my case, the Plaintiff attempted to do this, but my clients sold the property too quickly. Therefore, that just left a remedy of damages.
As for damages, they are figured by subtracting the price you would have paid for the property (the contract price) from the actual market price. In other words, you have to argue that you were buying the property for less than what it was really worth. If, however, the seller immediately resells the property (and actually this is often the reason why the seller refuses to sell it to the original buyer), then a buyer will be able to show damages in the amount of the difference between what the property sold for and what the buyer had contracted to buy it for.
In my case, however, the buyer, in addition, attempted to sue for lost profits. My clients sold the property for only $15,000 more than the original price with the Plaintiff. But the Plaintiff claimed he thought it was "feasible" that he could have subdivided it and made $700,000 profit from the sales. The judge felt that testimony was speculative, and would not allow it into evidence.
2. Sellers, don't communicate in writing with the buyer. The Plaintiff/Buyer in my case based his hopes, in large part, on the fact that he'd carried on a string of email conversations with my client long after the closing time had passed. He argued that these conversations (in which closing dates were set and re-set) showed that my clients had waived the closing deadline. I was able to get this evidence excluded (without which the Plaintiff didn't have much of a case), but on appeal (or if the Plaintiff had dismissed his case and re-filed again), I don't know if that ruling would have stood. In any event, had my client not communicated in writing with the Plaintiff, this case probably would never have been filed.
3. Get an attorney to draw the contract. Self-serving, I know. But had I drawn the contract for my clients, I would have put in numerous provisions that probably would have kept this case from ever getting started, such as:
a. A time is of the essence provision.
b. A provision that any extensions of time must require additional earnest money.
c. A larger earnest money deposit.
4. Speaking of earnest money... One final piece of advice: if you're selling a serious piece of property, make sure you have a serious buyer by requiring a serious earnest money deposit. I'm convinced that the Plaintiff/Buyer was someone who was financially unsound and was attempting to "flip" the property with almost no money down. My clients only requested a $1,000 earnest money deposit--on a purchase of $389,000! The company that ultimately bought their property put down $25,000 earnest money, and bought the property in less than 14 days. Had my clients forced the Plaintiff/Buyer to come up with serious money (at least $10,000), he probably would not have been able to, and would have simply walked away, looking for another easy mark.
Rabu, 30 Mei 2007
Planning for emergencies in a (large) one-man company
Over the Memorial Day weekend, I received the sad news that a business client of mine had died in an automobile accident. In addition to the grief and sadness that the sudden loss brought, they had the additional worry of how to keep his successful business running. My client was the sole shareholder of a company that employed a large number of employees on construction jobs, was the only licensed contractor employed by the company, and furthermore was the sole officer and director of the company (more on that later). This crisis has given me pause to think about how, if you own your own large business, you should plan for what happens if an accident strikes.
1. Make sure that at least one other person can make binding decisions in your absence. My client divorced his ex-wife a few years ago, and bought out her shares of the company. At the time, he simply did not want to place anyone else in a position of authority or trust within his company. However, better times came, and as he went back to work he forgot about appointing someone, say, as a secretary or vice-president, because he was a natural leader. Unfortunately, however, when he died, no one could keep the company, which had numerous large-scale construction contracts, in motion. Had someone been able to step in as an officer (or manager) of the company, contracts could have been continued, and the process, while practically not seamless, would at least have been a legally smooth transition.
2. Plan for someone that has practical experience in running the company, in your absence. In a sole proprietorship, a business may simply fold with the death of the owner. In a larger company, however, it is not so simple: there are numerous workers employed, contracts to be fulfilled, people who are relying on the company to stay around and complete its obligations. In a construction company, at least one person has to be a licensed contractor. My client was that person. In his absence, family members are scrambling to either obtain a license for one of the employees or to hire an employee holding such a license.
3. Make sure that someone knows the important details about your company and its business. Once again, in a sole proprietorship, the business may fold with your death. However, in a large company, at least one other person in the company should know important details such as what contracts are outstanding, how to pay the bills, the location of accounts, etc. Fortunately, my client kept at least two co-workers knowledgeable about these details, and in this interim period, they have been able to keep the company above water by, e.g., paying employees.
4. Plan your estate. Most fortunate of all, my client did make a good estate plan. He set up a trustworthy executrix, and made provisions for what would happen if his children were still minors (and one is). Had my client not made such provisions, his entire estate would be tied down in a slow and difficult process since the minor would have to have a guardian appointed and the company ownership would stand in a quagmire. Instead, the executrix will soon be appointed by the Court, and will be able to then appoint officers of the company and help the company get back on its feet during these difficult times. Therefore, though some matters within the company could have been planned better, my client's overarching desire to take care of his children inadvertently helped prevent a much larger crisis in his corporation.
If you have any questions about succession planning for your business, contact me at wldeaton@vnet.net.
1. Make sure that at least one other person can make binding decisions in your absence. My client divorced his ex-wife a few years ago, and bought out her shares of the company. At the time, he simply did not want to place anyone else in a position of authority or trust within his company. However, better times came, and as he went back to work he forgot about appointing someone, say, as a secretary or vice-president, because he was a natural leader. Unfortunately, however, when he died, no one could keep the company, which had numerous large-scale construction contracts, in motion. Had someone been able to step in as an officer (or manager) of the company, contracts could have been continued, and the process, while practically not seamless, would at least have been a legally smooth transition.
2. Plan for someone that has practical experience in running the company, in your absence. In a sole proprietorship, a business may simply fold with the death of the owner. In a larger company, however, it is not so simple: there are numerous workers employed, contracts to be fulfilled, people who are relying on the company to stay around and complete its obligations. In a construction company, at least one person has to be a licensed contractor. My client was that person. In his absence, family members are scrambling to either obtain a license for one of the employees or to hire an employee holding such a license.
3. Make sure that someone knows the important details about your company and its business. Once again, in a sole proprietorship, the business may fold with your death. However, in a large company, at least one other person in the company should know important details such as what contracts are outstanding, how to pay the bills, the location of accounts, etc. Fortunately, my client kept at least two co-workers knowledgeable about these details, and in this interim period, they have been able to keep the company above water by, e.g., paying employees.
4. Plan your estate. Most fortunate of all, my client did make a good estate plan. He set up a trustworthy executrix, and made provisions for what would happen if his children were still minors (and one is). Had my client not made such provisions, his entire estate would be tied down in a slow and difficult process since the minor would have to have a guardian appointed and the company ownership would stand in a quagmire. Instead, the executrix will soon be appointed by the Court, and will be able to then appoint officers of the company and help the company get back on its feet during these difficult times. Therefore, though some matters within the company could have been planned better, my client's overarching desire to take care of his children inadvertently helped prevent a much larger crisis in his corporation.
If you have any questions about succession planning for your business, contact me at wldeaton@vnet.net.
Selasa, 08 Mei 2007
Partnership and Corporate Disputes -- Final Settlement
I've been writing lately about different clients who've found themselves in disputes with their small business partners or co-owners. This week I settled one case, involving a man who'd owned both a corporation and a partnership with one other co-owner. Although emotions ran high between the two former friends, and they'll likely not be on speaking terms for a long time, the actual dissolution process was fairly tame and was resolved without going to court. Looking back on it, there are a few lessons to be drawn from this experience.
1. Put your agreements in writing. Although both gentlemen were the type who liked to do business on a handshake, they'd had the sense, 20 years ago, to put their business agreement in writing. When things between them went sour, and they started rattling their swords at one another, at the end of the day their resolution of the conflict was governed by the written documents that had been drafted two decades earlier. Had the two men operated on simply a handshake, as is quite often the case, I believe my client would likely have been simply shut out of the company and would have had no recourse to protect himself other than go to court.
2. Look at the balance of power. One thing my client, in retrospect, would have done differently is to have put more thought into the balance of power. The two gentlemen were each 50 percent owners, so the opposing party was agreed upon as President, and my client was the Vice President. They created, however, a three-person board, made up of my client, the opposing party, and the opposing party's wife. When things went bad, my client was, to a certain extent, shut out of decisions because his partner and partner's wife constituted a majority of the board of directors. If he had it to do over, I think he'd rather have appointed an independent third party (such as an accountant) as the tie-breaking director.
3. Know your rights. When things between my client and his partner first went south, his partner threatened to just push him out of the business. My client, quite frankly, was scared that he could simply be pushed out of the business. However, he came to an attorney specializing in business matters. We reviewed his business agreement as well as the applicable law, and I was able to advise him of both the strengths and weaknesses of his position. My client learned, for example, that if he and his partner could not agree, the worst thing that could happen is that the business could be judicially dissolved and the assets divided (or sold and the proceeds divided) between the two of them. On the other hand, he also learned that if the corporation and partnership were judicially dissolved, it would involve high court costs and would likely not bring the full value of the property. Armed with this knowledge, my client was able to go into negotiations with a certain degree of confidence, yet also knew that he needed to work together with his former partner so that they both could come out better.
If you have questions about a partnership or corporate dissolution, contact me at wldeaton@vnet.net.
1. Put your agreements in writing. Although both gentlemen were the type who liked to do business on a handshake, they'd had the sense, 20 years ago, to put their business agreement in writing. When things between them went sour, and they started rattling their swords at one another, at the end of the day their resolution of the conflict was governed by the written documents that had been drafted two decades earlier. Had the two men operated on simply a handshake, as is quite often the case, I believe my client would likely have been simply shut out of the company and would have had no recourse to protect himself other than go to court.
2. Look at the balance of power. One thing my client, in retrospect, would have done differently is to have put more thought into the balance of power. The two gentlemen were each 50 percent owners, so the opposing party was agreed upon as President, and my client was the Vice President. They created, however, a three-person board, made up of my client, the opposing party, and the opposing party's wife. When things went bad, my client was, to a certain extent, shut out of decisions because his partner and partner's wife constituted a majority of the board of directors. If he had it to do over, I think he'd rather have appointed an independent third party (such as an accountant) as the tie-breaking director.
3. Know your rights. When things between my client and his partner first went south, his partner threatened to just push him out of the business. My client, quite frankly, was scared that he could simply be pushed out of the business. However, he came to an attorney specializing in business matters. We reviewed his business agreement as well as the applicable law, and I was able to advise him of both the strengths and weaknesses of his position. My client learned, for example, that if he and his partner could not agree, the worst thing that could happen is that the business could be judicially dissolved and the assets divided (or sold and the proceeds divided) between the two of them. On the other hand, he also learned that if the corporation and partnership were judicially dissolved, it would involve high court costs and would likely not bring the full value of the property. Armed with this knowledge, my client was able to go into negotiations with a certain degree of confidence, yet also knew that he needed to work together with his former partner so that they both could come out better.
If you have questions about a partnership or corporate dissolution, contact me at wldeaton@vnet.net.
Minggu, 29 April 2007
Think Before You Invest as a Minority Shareholder
You've got a little extra money in your pocket, and you're looking to invest. Somebody comes to you with a great business idea, and offers to cut you in on it. For just $X, you can own a five percent, 10 percent, 49 percent share in the company, and it has a lot of potential!
I have clients who are approached with these situations every day. Some are wealthy people who are actively searched out to be investment partners in large-money ventures. On the other extreme, some are humble folks, who are considering (or have) poured what little savings they have into a new start-up company. Before you invest as a minority shareholder in a company, consider these tips, and think about the cautionary tales below.
DEFINITION OF MINORITY SHAREHOLDER: a minority shareholder is someone who holds less than a 50 percent ownership interest in a company. I'm using the term loosely to not only include true stockholders in a corporation, but, for example, partners in a partnership or members in a limited liability company. If you hold less than a 50 percent interest in a company, some one or some group of people have the potential to outvote you on company governance matters.
1. What management rights will you have in the company? In consideration of your buying into the company, will you have any rights to control the daily operations of the company, other than your rights as a minority shareholder? Often, the people who start up the company want to retain majority ownership, and are looking to other investors to provide capital, yet still leave control with them. This isn't always bad, but remember, if you're not guaranteed a position as a director or an officer, you're just a shareholder, and one who can be outvoted.
2. What dividend or payout rights will you have in the company? Are there any benchmarks or rights that you'll have to receive money or profits? Too many novice investors blindly invest money in a friend's or acquaintance's speculative company, just to find once they've put their money in, that their money is not bringing them any return. Will you receive any dividends or payments? Or are you just hoping that the value of your investment will go up? Ask these questions at the beginning!
3. What buy/sell rights will you have in the company? In its simplest form, an investor should invest in ownership of a company because he thinks the company will grow, and thus will his investment. However, if you're a minority shareholder, you may not be able to control the direction of the company. What happens if you want to sell out? Can you? Or are you held hostage to the majority interests of the company? A minority interest in a company in which you can't sell your interest is practically worthless.
4. What are the other investors contributing?
Sometimes, the investors trying to get you to invest are contributing their own money, dollar for dollar. Other times, however, the investors are wanting
you to contribute the money, and yet they retain a majority of the stock. This is neither good or bad inherently, but you need to understand. If your $100,000 investment buys you a 49 percent share of a company, and the start-up investor has put in $100,000 yet wants to retain 51 percent ownership, that might be reasonable in some cases. If you're being asked to put up $100,000 for a 10 percent share, and the start-up investor has nothing but his brilliant dream, and wants to retain 60 percent ownership, you need to think about the deal a little harder.
5. Consider a Shareholders' Agreement. If you trust the other investors, and you agree that all interests should be protected, the best thing you could do is to have the attorney setting up the company draw a shareholders' agreement, a buy/sell agreement, or something similar. It, in essence, is an agreement for small companies that is set up to protect the interests of the individual investors. It often guarantees each investor a management position (such as a guaranteed spot on the corporate board of directors), and provides buyout provisions in the event of a dispute.
By way of example, I've recently handled two situations involving investors in small corporations.
In the first case, a tearful woman came in to me after she'd invested in a small corporation. She and a former co-worker had been involved in the dress design business together, and then decided to start their own. The co-worker would get 90 percent ownership, and she, for her smaller monetary contribution, would get 10 percent. They both were supposed to work as employees of the company. Unfortunately, things didn't work out, they got into a dispute, and she was fired as an employee. She was completely shut out of the company's business, and watched as her former friend continued to hire new employees and run the company without her, not providing her any idea of profits or losses. She now wants to be bought out, but under the corporate agreement she entered, the majority partner can buy her interest out with payment, over a long period of time, at a very low interest rate, such that she would likely be paid $100 per month until her interest is paid off in a few years. It's unfortunate, but she did not, when entering into the agreement, make provisions for minority shareholder rights, and has in effect given the majority shareholder money that he really doesn't have to repay.
By contrast, another client of mine hired me before the fact to review a proposed investment for him. This investor had extensive knowledge in science, and owns a chain of stores in his specific field of expertise. He was approached by a scientist and another businessman about going together and starting up a company that would create, market and sell a new invention that the scientist had created. This invention was something my client could visualize, and he knew that, if created, it could save his own business a lot of money, so he knew it was a potentially good idea.
The scientist and businessman wanted my client to invest a large sum of money for a 25 percent interest in the company. If my client desired, he had the right, within a two-year period, to purchase an additional 25 percent interest in the company for a similar sum of money.
I read the documents over numerous times, and spoke to my client about what he visualized the company doing, and what he wanted from the company. I told him I saw a few problems with the agreement:
1. The scientist and businessman were not putting any money into the company, other than their own "sweat equity." Therefore, they had less to lose.
2. The scientist and businessman would each be a director, and my client would be the third director--which meant he could always be outvoted.
3. My client, though putting forth all the money, would not have a majority interest as a shareholder.
4. In fact, the contract was written so that, after a given time, my client had to re-convey a 10 percent interest in the company to the company's employees, therefore guaranteeing that he would become a minority shareholder.
I told my client that I couldn't speak to the wisdom of the business plan, but I didn't like the fact that he was putting up all the money, yet he could be shut out of the control of the company, and furthermore had no way to force returns or the sale of his stock if the business were successful.
We sent a letter back to the gentlemen, nicely telling them that my client was interested in investing, but only if he could have more safety, and outlined some proposals that would protect my client's rights as a shareholder. He never heard from them again, and far from blaming me for "killing" a deal, he thinks that I saved him from potential trouble.
If you have questions about investing in a small company, contact me at wldeaton@vnet.net.
I have clients who are approached with these situations every day. Some are wealthy people who are actively searched out to be investment partners in large-money ventures. On the other extreme, some are humble folks, who are considering (or have) poured what little savings they have into a new start-up company. Before you invest as a minority shareholder in a company, consider these tips, and think about the cautionary tales below.
DEFINITION OF MINORITY SHAREHOLDER: a minority shareholder is someone who holds less than a 50 percent ownership interest in a company. I'm using the term loosely to not only include true stockholders in a corporation, but, for example, partners in a partnership or members in a limited liability company. If you hold less than a 50 percent interest in a company, some one or some group of people have the potential to outvote you on company governance matters.
1. What management rights will you have in the company? In consideration of your buying into the company, will you have any rights to control the daily operations of the company, other than your rights as a minority shareholder? Often, the people who start up the company want to retain majority ownership, and are looking to other investors to provide capital, yet still leave control with them. This isn't always bad, but remember, if you're not guaranteed a position as a director or an officer, you're just a shareholder, and one who can be outvoted.
2. What dividend or payout rights will you have in the company? Are there any benchmarks or rights that you'll have to receive money or profits? Too many novice investors blindly invest money in a friend's or acquaintance's speculative company, just to find once they've put their money in, that their money is not bringing them any return. Will you receive any dividends or payments? Or are you just hoping that the value of your investment will go up? Ask these questions at the beginning!
3. What buy/sell rights will you have in the company? In its simplest form, an investor should invest in ownership of a company because he thinks the company will grow, and thus will his investment. However, if you're a minority shareholder, you may not be able to control the direction of the company. What happens if you want to sell out? Can you? Or are you held hostage to the majority interests of the company? A minority interest in a company in which you can't sell your interest is practically worthless.
4. What are the other investors contributing?
Sometimes, the investors trying to get you to invest are contributing their own money, dollar for dollar. Other times, however, the investors are wanting
you to contribute the money, and yet they retain a majority of the stock. This is neither good or bad inherently, but you need to understand. If your $100,000 investment buys you a 49 percent share of a company, and the start-up investor has put in $100,000 yet wants to retain 51 percent ownership, that might be reasonable in some cases. If you're being asked to put up $100,000 for a 10 percent share, and the start-up investor has nothing but his brilliant dream, and wants to retain 60 percent ownership, you need to think about the deal a little harder.
5. Consider a Shareholders' Agreement. If you trust the other investors, and you agree that all interests should be protected, the best thing you could do is to have the attorney setting up the company draw a shareholders' agreement, a buy/sell agreement, or something similar. It, in essence, is an agreement for small companies that is set up to protect the interests of the individual investors. It often guarantees each investor a management position (such as a guaranteed spot on the corporate board of directors), and provides buyout provisions in the event of a dispute.
By way of example, I've recently handled two situations involving investors in small corporations.
In the first case, a tearful woman came in to me after she'd invested in a small corporation. She and a former co-worker had been involved in the dress design business together, and then decided to start their own. The co-worker would get 90 percent ownership, and she, for her smaller monetary contribution, would get 10 percent. They both were supposed to work as employees of the company. Unfortunately, things didn't work out, they got into a dispute, and she was fired as an employee. She was completely shut out of the company's business, and watched as her former friend continued to hire new employees and run the company without her, not providing her any idea of profits or losses. She now wants to be bought out, but under the corporate agreement she entered, the majority partner can buy her interest out with payment, over a long period of time, at a very low interest rate, such that she would likely be paid $100 per month until her interest is paid off in a few years. It's unfortunate, but she did not, when entering into the agreement, make provisions for minority shareholder rights, and has in effect given the majority shareholder money that he really doesn't have to repay.
By contrast, another client of mine hired me before the fact to review a proposed investment for him. This investor had extensive knowledge in science, and owns a chain of stores in his specific field of expertise. He was approached by a scientist and another businessman about going together and starting up a company that would create, market and sell a new invention that the scientist had created. This invention was something my client could visualize, and he knew that, if created, it could save his own business a lot of money, so he knew it was a potentially good idea.
The scientist and businessman wanted my client to invest a large sum of money for a 25 percent interest in the company. If my client desired, he had the right, within a two-year period, to purchase an additional 25 percent interest in the company for a similar sum of money.
I read the documents over numerous times, and spoke to my client about what he visualized the company doing, and what he wanted from the company. I told him I saw a few problems with the agreement:
1. The scientist and businessman were not putting any money into the company, other than their own "sweat equity." Therefore, they had less to lose.
2. The scientist and businessman would each be a director, and my client would be the third director--which meant he could always be outvoted.
3. My client, though putting forth all the money, would not have a majority interest as a shareholder.
4. In fact, the contract was written so that, after a given time, my client had to re-convey a 10 percent interest in the company to the company's employees, therefore guaranteeing that he would become a minority shareholder.
I told my client that I couldn't speak to the wisdom of the business plan, but I didn't like the fact that he was putting up all the money, yet he could be shut out of the control of the company, and furthermore had no way to force returns or the sale of his stock if the business were successful.
We sent a letter back to the gentlemen, nicely telling them that my client was interested in investing, but only if he could have more safety, and outlined some proposals that would protect my client's rights as a shareholder. He never heard from them again, and far from blaming me for "killing" a deal, he thinks that I saved him from potential trouble.
If you have questions about investing in a small company, contact me at wldeaton@vnet.net.
Kamis, 19 April 2007
Limited Liability Companies, new case
I've written before on this blog that, in my opinion, LLCs are not only as protective as a regular corporation, but that recent caselaw suggests they may be stronger than corporations. A new case from the North Carolina Court of Appeals appears to support this.
In Babb v. Bynum & Murphrey, PLLC, the Plaintiff sues a professional LLC, and one of the members of the LLC (Mr. Murphrey), for alleged wrongful acts committed by the LLC's other member, Mr. Bynum (basically, misappropriation and/or theft of trust account monies held for the Plaintiff).
Plaintiffs stated that they were not following a theory of vicarious liability (i.e., they did not allege that Mr. Murphrey was liable just by virtue of being a member), and the Court appears to tacitly acknowledge that this theory would have gotten the plaintiffs nowhere. Instead, the Plaintiffs proceeded on the theory that the Defendant failed to act to stop the misdeeds of his fellow member. The Court of Appeals held that the "innocent" member had no affirmative duty, absent actual knowledge of wrongdoing, to investigate his fellow member.
This case appears to further buttress the theory that LLCs are strong. Had the defendant law firm been a corporation of some sort, the case most likely would have included additional allegations that corporate formalities weren't followed, or would otherwise argue that the corporate veil should be pierced.
To read the text of the case, go to:
http://www.aoc.state.nc.us/www/public/coa/opinions/2007/060876-1.htm
In Babb v. Bynum & Murphrey, PLLC, the Plaintiff sues a professional LLC, and one of the members of the LLC (Mr. Murphrey), for alleged wrongful acts committed by the LLC's other member, Mr. Bynum (basically, misappropriation and/or theft of trust account monies held for the Plaintiff).
Plaintiffs stated that they were not following a theory of vicarious liability (i.e., they did not allege that Mr. Murphrey was liable just by virtue of being a member), and the Court appears to tacitly acknowledge that this theory would have gotten the plaintiffs nowhere. Instead, the Plaintiffs proceeded on the theory that the Defendant failed to act to stop the misdeeds of his fellow member. The Court of Appeals held that the "innocent" member had no affirmative duty, absent actual knowledge of wrongdoing, to investigate his fellow member.
This case appears to further buttress the theory that LLCs are strong. Had the defendant law firm been a corporation of some sort, the case most likely would have included additional allegations that corporate formalities weren't followed, or would otherwise argue that the corporate veil should be pierced.
To read the text of the case, go to:
http://www.aoc.state.nc.us/www/public/coa/opinions/2007/060876-1.htm
Sabtu, 31 Maret 2007
Owner Financing Property
Perhaps you own a piece of property that you want to sell. If you're like most, you would just like to sell, take your cash, and move on. However, perhaps you should consider "owner financing" your property--that is, letting someone buy your property on payments. Before you owner finance anything, consider some of the advantages and disadvantages, as well as ways to best protect yourself.
Advantages:
1. You spread out your tax burden. If you're making a profit, selling by taking payments can allow you to spread out the taxes you'll pay.
2. You can make money on top of money. If you sell your property and finance the purchase, you can charge interest, which lets you make money in addition to your initial sales profits.
3. You create a larger buyer's pool for your property. By offering owner financing, you can sometimes pick up possible purchasers who otherwise would not be able to buy your property (e.g., someone starting out with no credit, or someone who's got a poor credit history preventing them from getting a loan, but who now can make payments).
Of course, there are some disadvantages as well:
1. You don't get your money up front. This is pretty self-evident, of course, but bears stating. That means if you owe money on your property, you can't pay off the mortgage (and thus, owner financing in such a case will be an imperfect solution). Also, if you need the money from this sale to finance something else, owner financing may not be for you.
2. You will create a long-term relationship with the buyer. You'll be a bit like a landlord, which means you'll be making calls if someone's payment is late, or if you find out the buyer has let his insurance on your property lapse.
3. What if the buyer stops paying? With owner financing, there's always the risk that your buyer, for whatever reason, will stop paying. This means you might have to go through a costly foreclosure procedure, and take back a property that you no longer wanted to own.
STILL INTERESTED? If so, below are some tips to help protect you if owner financing the sale of a property.
1. Do it right and have an attorney draw up the necessary paperwork. Do not attempt to draw up papers on your own. In North Carolina (and probably most other states), the law is very specific about what has to be done to owner finance property. For example, many of my clients had drawn up their own documents that they called "lease/purchase" documents, which stated that if one payment was missed, the buyer could be "evicted" and all payments kept as rent. They believed this was better than a traditional mortgage document, which would take two to three months to foreclose on in the event of a default. Unfortunately, in North Carolina, those documents are not enforceable, and when the debtor stopped paying, my client lost its attempt at an eviction, and eventually had to hire me to sue the people to get out. We got them out--after the debtors had lived in the house rent-free for more than a year.
2. Do your own due diligence on the buyers. Do they have bad credit, or do they perhaps just not have much credit yet because of their age? Are the people going to pose a risk? Run a credit check on the potential buyer through one of the credit reporting services.
3. Shore up your collateral. Offering 100% owner financing is a great way to sell your property. However, if a buyer has little invested in the property, you'll carry more risk. Although it is not always possible, when owner financing, try to get some money down. This of course will reduce the risk that if you foreclose on the property you will incur a financial lost. But more importantly, when a buyer has invested money already into the property, he is less likely to default in his mortgage to begin with.
4. Protect your investment. For so long as you are financing the sale, think of the collateral as "yours"--because one day, you might have to foreclose on it and sell it at a public auction. Therefore, it is in your best interest to make sure the collateral is taken care of.
a. Have your attorney draw up requirements that the debtor will keep the property insured and list you as the mortgagee on his insurance--and make sure that the insurance company mails you proof of the policy annually. You don't want to know how many properties I've seen mysteriously burn down right before the owners were to lose them at foreclosure. Being listed as a "mortgagee" (and not an additional insured) on the policy means your mortgage will be paid off (and you'll get your money) if the property is destroyed--even by an act of the insured!
b. Make sure the property taxes are paid on time. If you find out the debtor is not paying his taxes, it may be an early indicator of trouble.
c. Put in the agreement that you may remedy problems and charge the costs back to the loan balance. If, for example, the debtor fails to pay taxes, or allows a huge hole to open in the roof of a house, you have a self-interest in remedying the problem. If the debtor refuses to remedy the problem, place in the agreement that you can either foreclose or fix the problem and charge the costs to the loan balance.
5. [Advanced] Understand anti-deficiency laws. In North Carolina, the law provides that owner-financed mortgages are non-recourse. This means that if the debtor default, the seller can only foreclose on the property and cannot seek a personal judgment against the debtors. This can be a disadvantage if the sale of the property brings less than what it is owed (e.g., you're owed $90,000 but the property only brings $60,000 at a sale and you don't want to bid any higher to get the property back). First, you need to understand the limitations of the anti-deficiency laws. Second, if you don't like this, in North Carolina you can circumvent the laws by creating a separate entity to finance the property. For example, perhaps I own the property and sell it; however, I can structure the sale so that, though Wesley Deaton sells the property, the buyer is financing the sale with "Wesley Deaton, Inc." This is a bit tricky, and you'll need to seek good counsel so you don't create undesired tax implications (and violate any specific state laws regarding licensing of lenders). However, if you're very concerned about this issue, then setting up an entity lender is an option.
If you'd like to learn more about owner financing property in North Carolina, give me a call at 704-735-0483 to set up a consultation, or email me at wldeaton@vnet.net
Advantages:
1. You spread out your tax burden. If you're making a profit, selling by taking payments can allow you to spread out the taxes you'll pay.
2. You can make money on top of money. If you sell your property and finance the purchase, you can charge interest, which lets you make money in addition to your initial sales profits.
3. You create a larger buyer's pool for your property. By offering owner financing, you can sometimes pick up possible purchasers who otherwise would not be able to buy your property (e.g., someone starting out with no credit, or someone who's got a poor credit history preventing them from getting a loan, but who now can make payments).
Of course, there are some disadvantages as well:
1. You don't get your money up front. This is pretty self-evident, of course, but bears stating. That means if you owe money on your property, you can't pay off the mortgage (and thus, owner financing in such a case will be an imperfect solution). Also, if you need the money from this sale to finance something else, owner financing may not be for you.
2. You will create a long-term relationship with the buyer. You'll be a bit like a landlord, which means you'll be making calls if someone's payment is late, or if you find out the buyer has let his insurance on your property lapse.
3. What if the buyer stops paying? With owner financing, there's always the risk that your buyer, for whatever reason, will stop paying. This means you might have to go through a costly foreclosure procedure, and take back a property that you no longer wanted to own.
STILL INTERESTED? If so, below are some tips to help protect you if owner financing the sale of a property.
1. Do it right and have an attorney draw up the necessary paperwork. Do not attempt to draw up papers on your own. In North Carolina (and probably most other states), the law is very specific about what has to be done to owner finance property. For example, many of my clients had drawn up their own documents that they called "lease/purchase" documents, which stated that if one payment was missed, the buyer could be "evicted" and all payments kept as rent. They believed this was better than a traditional mortgage document, which would take two to three months to foreclose on in the event of a default. Unfortunately, in North Carolina, those documents are not enforceable, and when the debtor stopped paying, my client lost its attempt at an eviction, and eventually had to hire me to sue the people to get out. We got them out--after the debtors had lived in the house rent-free for more than a year.
2. Do your own due diligence on the buyers. Do they have bad credit, or do they perhaps just not have much credit yet because of their age? Are the people going to pose a risk? Run a credit check on the potential buyer through one of the credit reporting services.
3. Shore up your collateral. Offering 100% owner financing is a great way to sell your property. However, if a buyer has little invested in the property, you'll carry more risk. Although it is not always possible, when owner financing, try to get some money down. This of course will reduce the risk that if you foreclose on the property you will incur a financial lost. But more importantly, when a buyer has invested money already into the property, he is less likely to default in his mortgage to begin with.
4. Protect your investment. For so long as you are financing the sale, think of the collateral as "yours"--because one day, you might have to foreclose on it and sell it at a public auction. Therefore, it is in your best interest to make sure the collateral is taken care of.
a. Have your attorney draw up requirements that the debtor will keep the property insured and list you as the mortgagee on his insurance--and make sure that the insurance company mails you proof of the policy annually. You don't want to know how many properties I've seen mysteriously burn down right before the owners were to lose them at foreclosure. Being listed as a "mortgagee" (and not an additional insured) on the policy means your mortgage will be paid off (and you'll get your money) if the property is destroyed--even by an act of the insured!
b. Make sure the property taxes are paid on time. If you find out the debtor is not paying his taxes, it may be an early indicator of trouble.
c. Put in the agreement that you may remedy problems and charge the costs back to the loan balance. If, for example, the debtor fails to pay taxes, or allows a huge hole to open in the roof of a house, you have a self-interest in remedying the problem. If the debtor refuses to remedy the problem, place in the agreement that you can either foreclose or fix the problem and charge the costs to the loan balance.
5. [Advanced] Understand anti-deficiency laws. In North Carolina, the law provides that owner-financed mortgages are non-recourse. This means that if the debtor default, the seller can only foreclose on the property and cannot seek a personal judgment against the debtors. This can be a disadvantage if the sale of the property brings less than what it is owed (e.g., you're owed $90,000 but the property only brings $60,000 at a sale and you don't want to bid any higher to get the property back). First, you need to understand the limitations of the anti-deficiency laws. Second, if you don't like this, in North Carolina you can circumvent the laws by creating a separate entity to finance the property. For example, perhaps I own the property and sell it; however, I can structure the sale so that, though Wesley Deaton sells the property, the buyer is financing the sale with "Wesley Deaton, Inc." This is a bit tricky, and you'll need to seek good counsel so you don't create undesired tax implications (and violate any specific state laws regarding licensing of lenders). However, if you're very concerned about this issue, then setting up an entity lender is an option.
If you'd like to learn more about owner financing property in North Carolina, give me a call at 704-735-0483 to set up a consultation, or email me at wldeaton@vnet.net
Sabtu, 17 Maret 2007
Tips on building your home
A departure from the usual this week, brought about by some questions asked of me by some friends with whom I attend church.
You're in your late 20s or early 30s, and that old house you've been living in just isn't cutting it anymore. One and a half baths, while ok when you were first married, is not enough for you, the spouse, and two little ones. Or perhaps you just want to show the world that you've arrived, and get in that great neighborhood. Or maybe you're just ready for something nicer.
Having a new home custom built for you can be a great experience. You'll have the house your way, and it will reflect your own tastes and style. But if you're not careful, your new home can become a nightmare. That six month construction project may drag on over a year; the costs could run over beyond your budget, and your brand new home could be flawed and even fail to meet code requirements.
How, then, can you make sure that your new dream home won't become a nightmare?
1. Buy below your means. Go against everything our society tells you, and buy less of a house than you can afford. Many of the problems my clients run into when building a house results from them trying to stretch their budget to the very maximum when buying a house. Most of my clients first decided what was the most house they could afford, then tried to pick out a plan meeting that criteria. When you do that, if anything goes wrong, you could have problems. Instead, figure out what you can afford, and either plan to buy less or plan to save more first.
2. Pick your contractor based on reputation, not on price. The second problem I've found with my clients is that, once they've picked out the plan they want (which usually maxes out their budget), they then want to find the cheapest builder. This is often because they've underestimated the cost of their house, and when they submit it for bids, they can't afford most of the contractors. In any given area, there are dozens of builders, and their abilities, honesty and qualities run the gamut. Just looking at their bids, or their slick presentation, will not help you pick the right one. Instead, look at the builders' prior work, speak to their prior customers; better yet, start off by picking builders who've been specifically recommended to you by friends or family who are satisfied customers. Or ask your attorney. Believe me, if any client asks me, I can tell them a half-dozen great builders; and better, yet, if they give me a name, I can tell them the builder's reputation.
I can say the next statement without qualification: in every builder/contractor dispute I've been involved in, when home buyers picked the cheapest home builder's bid, there have always been problems. If one builder's bid is far lower than the rest, be very wary. Some unscrupulous builders will underbid the project to get the job, then surprise his customers with cost overruns. Other builders are not dishonest, but are so inexperienced or unqualified that they cannot accurately quote a project. If they can't quote it accurately, they will probably cause you other problems during the building process.
3. Put everything in writing. Unlike some lawyers, I'm not going to tell you to lock your builder into a set-price contract (i.e., he'll build your house plan for a set fee of $X). For one thing, that's just impractical, and for another, most reputable builders will not agree to it because they can't control the fluctuating prices of materials. Whatever the contract you agree to, PUT IT IN WRITING! Too many home owners are promised things by the builder, such as total estimated cost, estimated completion time, etc., that are never reduced to writing. Make sure the important areas of the contract are put into the contract. For one thing, it will bind your builder legally, and prevent later disputes about what was said. For another, though, it will make sure that you and your builder have a good understanding between each other, and will prevent misunderstandings that can occur when some things are just assumed or are left unsaid.
4. Be conservative. In all your estimations, hope for the best, but plan for the worst. If your builder tells you that your kitchen should cost between $15,000-$17,000, plan on $18,000 or $19,000 just to be safe. If you're told the house will be finished in five months, plan on six or seven. Planning for time or cost overruns will keep you from getting into a budget crunch and will help reduce the stress of those unexpected contingencies that will inevitably arise.
5. Changing your mind costs money. One final thing: the more you change your mind during the building process, the more it will cost you. I represented one custom builder whose clients continuously changed their minds and upgraded their options during the building process. By the time they were done, their house cost 25 percent more than had originally been quoted! Just remember that if you change, for example, the layout of a room or decide to upgrade some of your options, you run the risk of increasing your costs not just because you've decided on something more expensive, but also because you might disrupt the flow and timing of your project, thus causing additional delays and man-hours. If you want to change your mind, that's fine; but be aware of what it's costing you!
If you have further questions about have a new home built in North Carolina, feel free to contact me and set up an appointment at 704-735-0483.
You're in your late 20s or early 30s, and that old house you've been living in just isn't cutting it anymore. One and a half baths, while ok when you were first married, is not enough for you, the spouse, and two little ones. Or perhaps you just want to show the world that you've arrived, and get in that great neighborhood. Or maybe you're just ready for something nicer.
Having a new home custom built for you can be a great experience. You'll have the house your way, and it will reflect your own tastes and style. But if you're not careful, your new home can become a nightmare. That six month construction project may drag on over a year; the costs could run over beyond your budget, and your brand new home could be flawed and even fail to meet code requirements.
How, then, can you make sure that your new dream home won't become a nightmare?
1. Buy below your means. Go against everything our society tells you, and buy less of a house than you can afford. Many of the problems my clients run into when building a house results from them trying to stretch their budget to the very maximum when buying a house. Most of my clients first decided what was the most house they could afford, then tried to pick out a plan meeting that criteria. When you do that, if anything goes wrong, you could have problems. Instead, figure out what you can afford, and either plan to buy less or plan to save more first.
2. Pick your contractor based on reputation, not on price. The second problem I've found with my clients is that, once they've picked out the plan they want (which usually maxes out their budget), they then want to find the cheapest builder. This is often because they've underestimated the cost of their house, and when they submit it for bids, they can't afford most of the contractors. In any given area, there are dozens of builders, and their abilities, honesty and qualities run the gamut. Just looking at their bids, or their slick presentation, will not help you pick the right one. Instead, look at the builders' prior work, speak to their prior customers; better yet, start off by picking builders who've been specifically recommended to you by friends or family who are satisfied customers. Or ask your attorney. Believe me, if any client asks me, I can tell them a half-dozen great builders; and better, yet, if they give me a name, I can tell them the builder's reputation.
I can say the next statement without qualification: in every builder/contractor dispute I've been involved in, when home buyers picked the cheapest home builder's bid, there have always been problems. If one builder's bid is far lower than the rest, be very wary. Some unscrupulous builders will underbid the project to get the job, then surprise his customers with cost overruns. Other builders are not dishonest, but are so inexperienced or unqualified that they cannot accurately quote a project. If they can't quote it accurately, they will probably cause you other problems during the building process.
3. Put everything in writing. Unlike some lawyers, I'm not going to tell you to lock your builder into a set-price contract (i.e., he'll build your house plan for a set fee of $X). For one thing, that's just impractical, and for another, most reputable builders will not agree to it because they can't control the fluctuating prices of materials. Whatever the contract you agree to, PUT IT IN WRITING! Too many home owners are promised things by the builder, such as total estimated cost, estimated completion time, etc., that are never reduced to writing. Make sure the important areas of the contract are put into the contract. For one thing, it will bind your builder legally, and prevent later disputes about what was said. For another, though, it will make sure that you and your builder have a good understanding between each other, and will prevent misunderstandings that can occur when some things are just assumed or are left unsaid.
4. Be conservative. In all your estimations, hope for the best, but plan for the worst. If your builder tells you that your kitchen should cost between $15,000-$17,000, plan on $18,000 or $19,000 just to be safe. If you're told the house will be finished in five months, plan on six or seven. Planning for time or cost overruns will keep you from getting into a budget crunch and will help reduce the stress of those unexpected contingencies that will inevitably arise.
5. Changing your mind costs money. One final thing: the more you change your mind during the building process, the more it will cost you. I represented one custom builder whose clients continuously changed their minds and upgraded their options during the building process. By the time they were done, their house cost 25 percent more than had originally been quoted! Just remember that if you change, for example, the layout of a room or decide to upgrade some of your options, you run the risk of increasing your costs not just because you've decided on something more expensive, but also because you might disrupt the flow and timing of your project, thus causing additional delays and man-hours. If you want to change your mind, that's fine; but be aware of what it's costing you!
If you have further questions about have a new home built in North Carolina, feel free to contact me and set up an appointment at 704-735-0483.
Sabtu, 10 Maret 2007
Buying out your partner, Pt. 2--think ahead
If, in your "partnership" (whether it be in form a two-person LLC, corporation or a true partnership), you believe there is beginning to be inequities in the amount of output you are producing versus the amount of profits you are receiving, you should immediately take stock of your situation. What circumstances am I talking about?
1. Perhaps your partner put up the money, and you're doing the work; or
2. Perhaps you're both 50/50 owners of the company, but feel like you're putting in more time and effort, and/or are producing more profits.
The longer your relationship continues, the more "in-equity" you might build. For example, consider Mr. A and Mr. B who twenty years ago set up a two-man corporation. The corporation owns their company vehicles, their building, and some cash assets invested over the years. At the end of the year, most of the profits are taken out of the company and given in equal shares to the two shareholders.
Over the years, however, Mr. A has developed a niche market in their business. His clients and their jobs are higher-end, require more labor, but produce a larger profit. Mr. B has not grown his side of the business over the years, and in fact, has let a few of his clients drop since he's getting older and doesn't want to work as many hours.
In fact, now, Mr. A brings in approximately 70 percent of the company's gross earnings, and Mr. B only 30 percent. Finally, Mr. A has enough, and tells Mr. B it's time they split up. At this point, if the two can't agree, Mr. A can ask the courts to split up and dissolve their corporation, pay off debts, and then divide the assets. Unfortunately for Mr. A, however, the assets will be split in proportion to stock ownership: 50 percent each; which is not in proportion to the amount worked.
Perhaps Mr. A had, when he set up his company, entered into some sort of agreement by which he could buy out Mr. B at some point. That's savvy, but if the purchase price is determined by the company's value, Mr. A has hurt himself by letting things drag on so long. He's increased the value of the company by his own labor, and is now going to have to pay Mr. B a premium for his stock--stock that rose in value primarily by Mr. A's actions!
The lesson to be learned from this story is that if you enter into a small company or joint venture, be aware that if the labor and/or production starts to skew unevenly, do not let the situation linger, or you may end up not only working harder than your partner, but one day having to pay more for the valuable product you created.
1. Perhaps your partner put up the money, and you're doing the work; or
2. Perhaps you're both 50/50 owners of the company, but feel like you're putting in more time and effort, and/or are producing more profits.
The longer your relationship continues, the more "in-equity" you might build. For example, consider Mr. A and Mr. B who twenty years ago set up a two-man corporation. The corporation owns their company vehicles, their building, and some cash assets invested over the years. At the end of the year, most of the profits are taken out of the company and given in equal shares to the two shareholders.
Over the years, however, Mr. A has developed a niche market in their business. His clients and their jobs are higher-end, require more labor, but produce a larger profit. Mr. B has not grown his side of the business over the years, and in fact, has let a few of his clients drop since he's getting older and doesn't want to work as many hours.
In fact, now, Mr. A brings in approximately 70 percent of the company's gross earnings, and Mr. B only 30 percent. Finally, Mr. A has enough, and tells Mr. B it's time they split up. At this point, if the two can't agree, Mr. A can ask the courts to split up and dissolve their corporation, pay off debts, and then divide the assets. Unfortunately for Mr. A, however, the assets will be split in proportion to stock ownership: 50 percent each; which is not in proportion to the amount worked.
Perhaps Mr. A had, when he set up his company, entered into some sort of agreement by which he could buy out Mr. B at some point. That's savvy, but if the purchase price is determined by the company's value, Mr. A has hurt himself by letting things drag on so long. He's increased the value of the company by his own labor, and is now going to have to pay Mr. B a premium for his stock--stock that rose in value primarily by Mr. A's actions!
The lesson to be learned from this story is that if you enter into a small company or joint venture, be aware that if the labor and/or production starts to skew unevenly, do not let the situation linger, or you may end up not only working harder than your partner, but one day having to pay more for the valuable product you created.
Sabtu, 24 Februari 2007
Buying out your business partner.
Perhaps you've been buddies since high school or college; or maybe mutual interests or kinship brought you together. Over the years you entered into a joint venture (whether as a partnership, an LLC or a corporation). But now, for whatever reason (a falling out, or simply to pursue different interests), you and your business partner have decided to part ways. You're buying him out, and he's moving on. What things do each of you need to consider?
1. Mutual Releases (both): If this is going to be a clean break, the both of you need to execute mutual releases releasing each other from any causes of action or claims you might have against the other. If this is an amicable split, it might not seem necessary, but if you're leaving not on the best of terms, this is an absolute must.
2. Release of Company Liabilities (Seller): If you're the one leaving the business venture, the business still might have some liabilities and debts, for which you are personally liable, such as bank loans which you were required to personally guarantee. Some lawyers simply have the buyer sign an indemnity for you, which simply means that he (the remaining partner) agrees to pay the loans, and to protect you from liability against them. The problem with this is that the bank is not bound by this agreement, and if your partner at some point is unable to make the payments, the bank can still come after you. Sure you've got a contract, but your ex-partner is now bust, so what good is that going to do? Instead, ensure that your break is a clean one by getting the bank to release you from your personal guarantees when you leave.
3. Proper Corporate Filings (Buyer): If you're buying out a fellow shareholder (corporation) or member (LLC), it is important to execute the proper corporate paperwork and filings. For example, if buying out a fellow shareholder in a closely-held corporation, you need to have prepared proper corporate minutes in which the stock certificates are conveyed, and in which the seller resigns from all corporate offices, directorships and registered agency, if applicable. If the seller is a member in an LLC, you must make sure that he resigns as manager and (if there is more than one remaining member of the LLC) that all members consent to the seller leaving and to the sale, if any, of his membership interest.
Buying out a fellow partner (or selling out, as the case may be) can be relatively straightforward, so long as the proper procedures are followed.
If you need further advice on dissolving a venture, or buying out a fellow partner, contact me at wldeaton@vnet.net .
1. Mutual Releases (both): If this is going to be a clean break, the both of you need to execute mutual releases releasing each other from any causes of action or claims you might have against the other. If this is an amicable split, it might not seem necessary, but if you're leaving not on the best of terms, this is an absolute must.
2. Release of Company Liabilities (Seller): If you're the one leaving the business venture, the business still might have some liabilities and debts, for which you are personally liable, such as bank loans which you were required to personally guarantee. Some lawyers simply have the buyer sign an indemnity for you, which simply means that he (the remaining partner) agrees to pay the loans, and to protect you from liability against them. The problem with this is that the bank is not bound by this agreement, and if your partner at some point is unable to make the payments, the bank can still come after you. Sure you've got a contract, but your ex-partner is now bust, so what good is that going to do? Instead, ensure that your break is a clean one by getting the bank to release you from your personal guarantees when you leave.
3. Proper Corporate Filings (Buyer): If you're buying out a fellow shareholder (corporation) or member (LLC), it is important to execute the proper corporate paperwork and filings. For example, if buying out a fellow shareholder in a closely-held corporation, you need to have prepared proper corporate minutes in which the stock certificates are conveyed, and in which the seller resigns from all corporate offices, directorships and registered agency, if applicable. If the seller is a member in an LLC, you must make sure that he resigns as manager and (if there is more than one remaining member of the LLC) that all members consent to the seller leaving and to the sale, if any, of his membership interest.
Buying out a fellow partner (or selling out, as the case may be) can be relatively straightforward, so long as the proper procedures are followed.
If you need further advice on dissolving a venture, or buying out a fellow partner, contact me at wldeaton@vnet.net .
Kamis, 22 Februari 2007
Back after a hiatus
Though many things have been going on in the business of law, and the law of business, I've been on vacation and, when coming back, worked on this blog's sister blog: http://investtheworld.blogspot.com, for a detailed trip report and analysis of Antigua property.
While on holiday in the resort compound of Jolly Harbour Villas, I was surprised to find on site, in addition to two real estate companies and one rental management company, a U.K.-licensed attorney practicing on-site. I thought it brilliant, really. The villas cater to a primarily Brit crowd, number in the hundreds, and have for the past two years enjoyed a market upswing.
One of the real estate agents told me the attorney, though born in the U.K., had a lot of ties with his family to Antigua, and took over his uncle's practice.
It got me thinking, as I always do, about the idea of practicing overseas law. Why?
Well, for one thing, the idea of being in an exotic locale is fairly exciting to me, and better yet, a locale that is sunny and warm all the time.
For another thing, certain countries overseas, and the Caribbean in particular, contain strong privacy, corporate and asset protection laws. In this age, when our government believes it is entitled to full access to our privacy, and various greedy individuals target those whom they believe have more, the ideas embodied in these laws make make sense now more than ever.
I've thought about the idea of opening up an offshore office (either as a satellite or as my main branch), and the idea intrigues and excites me. I think putting myself there is the only way to really provide this service to clients. I know of another lawyer in the metropolitan area whom clients claim can do overseas transactional work. I also learned through a mutual client that he was interested in and/or owned property in a lot of the same areas I'm interested in (Belize, Panama, etc.).
When I talked to him, however, he seemed a bit vague, and the best I could take away from our conversation is that he's set himself up as a middle man between client and overseas counsel. I'm not sure that I personally would like that fit. Sure, I could help set clients up more easily than if they were trying to find an attorney on their own. But if a client is intelligent/savvy enough to want offshore services, could they not talk to an attorney without me?
Also, if the FBI came putting pressure to bear on the client and tried to invade his or her privacy, with an American attorney as a middle man, the government could get its hands on the lawyer, and perhaps threaten him until he talked.
From a more selfish vein, our government is so invasive and suspicious at this point, that if a client ended up doing something illegal offshore (for example, secreting income and not declaring it), the American lawyer could get caught up in that net, even though he might have known nothing about it and simply been a conduit or middle-man. Is that worth it?
By contrast, a lawyer practicing offshore would be a little more removed from our government's tentacles. His office, files and business transactions would take place off American soil, making it at least more difficult for our government's intrusions.
Does anybody know of an American-licensed lawyer who either jointly practices offshore or has moved offshore?
While on holiday in the resort compound of Jolly Harbour Villas, I was surprised to find on site, in addition to two real estate companies and one rental management company, a U.K.-licensed attorney practicing on-site. I thought it brilliant, really. The villas cater to a primarily Brit crowd, number in the hundreds, and have for the past two years enjoyed a market upswing.
One of the real estate agents told me the attorney, though born in the U.K., had a lot of ties with his family to Antigua, and took over his uncle's practice.
It got me thinking, as I always do, about the idea of practicing overseas law. Why?
Well, for one thing, the idea of being in an exotic locale is fairly exciting to me, and better yet, a locale that is sunny and warm all the time.
For another thing, certain countries overseas, and the Caribbean in particular, contain strong privacy, corporate and asset protection laws. In this age, when our government believes it is entitled to full access to our privacy, and various greedy individuals target those whom they believe have more, the ideas embodied in these laws make make sense now more than ever.
I've thought about the idea of opening up an offshore office (either as a satellite or as my main branch), and the idea intrigues and excites me. I think putting myself there is the only way to really provide this service to clients. I know of another lawyer in the metropolitan area whom clients claim can do overseas transactional work. I also learned through a mutual client that he was interested in and/or owned property in a lot of the same areas I'm interested in (Belize, Panama, etc.).
When I talked to him, however, he seemed a bit vague, and the best I could take away from our conversation is that he's set himself up as a middle man between client and overseas counsel. I'm not sure that I personally would like that fit. Sure, I could help set clients up more easily than if they were trying to find an attorney on their own. But if a client is intelligent/savvy enough to want offshore services, could they not talk to an attorney without me?
Also, if the FBI came putting pressure to bear on the client and tried to invade his or her privacy, with an American attorney as a middle man, the government could get its hands on the lawyer, and perhaps threaten him until he talked.
From a more selfish vein, our government is so invasive and suspicious at this point, that if a client ended up doing something illegal offshore (for example, secreting income and not declaring it), the American lawyer could get caught up in that net, even though he might have known nothing about it and simply been a conduit or middle-man. Is that worth it?
By contrast, a lawyer practicing offshore would be a little more removed from our government's tentacles. His office, files and business transactions would take place off American soil, making it at least more difficult for our government's intrusions.
Does anybody know of an American-licensed lawyer who either jointly practices offshore or has moved offshore?
Sabtu, 20 Januari 2007
Limited Liability Companies -- Put to the Test
I've written previously about North Carolina Limited Liability Companies, a form of entity which, I believe, offer greater ease of use than corporations and which appear, according to case law, to offer better liability protection than corporations. My theory is getting ready to be put to the test!
I've been hired to represent a member/manager of a three-man LLC. Mr. X had been the silent partner in a Limited Liability Company set up to build spec houses in a subdivision Mr. X owned. He put up some land and some money, but otherwise stayed out of the day to day operations of the business.
The LLC, due to apparent mismanagement by other managers and their employees, collapsed, and in the process, left owing numerous bills and unhappy customers, who had already paid the company down payments to purchase spec houses. One unhappy customer, who has allegedly lost a sizeable down payment, has now sued not only the company, but the company's three owners, alleging breach of contract, breach of fiduciary duty, and fraud--among other things. During the discovery process that we're now in, what has quickly come to light is that Ms. Plaintiff has had no dealings whatsoever with Mr. X, and admittedly only dealt with one member of the company, and some of the company's employees.
Ms. Plaintiff's lawyer is proceeding under the theory that if one member of the company has defrauded Ms. Plaintiff, then he is entitled to pierce the corporate veil to reach out and get all owners/members of the company.
If this were a corporation, I'd likely agree. If it were found that the corporation's owners had not followed formalities (see the previous blog entry), and that fraud had been committed, I think a judge would not dismiss the action against the corporation's owners.
Under North Carolina's limited liability company law, however, I tend to disagree. North Carolina's law has held that members are not liable for the acts of the company--regardless of any corporate formalities--unless the specific member actually committed the act. In other words, a member who stole $10,000 from a customer cannot hide behind the LLC's shield; however, a member of an LLC whose employee stole $10,000 could hide behind the LLC's shield.
Many cases, thankfully, resolve themselves or settle before a trial. However, if this one does not, it will be an interesting case for a motion to dismiss and, failing that, an appeal to the Court of Appeal to help set precedent.
I've been hired to represent a member/manager of a three-man LLC. Mr. X had been the silent partner in a Limited Liability Company set up to build spec houses in a subdivision Mr. X owned. He put up some land and some money, but otherwise stayed out of the day to day operations of the business.
The LLC, due to apparent mismanagement by other managers and their employees, collapsed, and in the process, left owing numerous bills and unhappy customers, who had already paid the company down payments to purchase spec houses. One unhappy customer, who has allegedly lost a sizeable down payment, has now sued not only the company, but the company's three owners, alleging breach of contract, breach of fiduciary duty, and fraud--among other things. During the discovery process that we're now in, what has quickly come to light is that Ms. Plaintiff has had no dealings whatsoever with Mr. X, and admittedly only dealt with one member of the company, and some of the company's employees.
Ms. Plaintiff's lawyer is proceeding under the theory that if one member of the company has defrauded Ms. Plaintiff, then he is entitled to pierce the corporate veil to reach out and get all owners/members of the company.
If this were a corporation, I'd likely agree. If it were found that the corporation's owners had not followed formalities (see the previous blog entry), and that fraud had been committed, I think a judge would not dismiss the action against the corporation's owners.
Under North Carolina's limited liability company law, however, I tend to disagree. North Carolina's law has held that members are not liable for the acts of the company--regardless of any corporate formalities--unless the specific member actually committed the act. In other words, a member who stole $10,000 from a customer cannot hide behind the LLC's shield; however, a member of an LLC whose employee stole $10,000 could hide behind the LLC's shield.
Many cases, thankfully, resolve themselves or settle before a trial. However, if this one does not, it will be an interesting case for a motion to dismiss and, failing that, an appeal to the Court of Appeal to help set precedent.
Senin, 01 Januari 2007
Corporations: Start the New Year off right!
If you own a small corporation (i.e. you're the sole owner, or your corporation is privately held), mark this week down as a time to hold your annual meeting.
Many small business owners set up a corporation to create a liability shield personally from business activities; however, setting up the corporation is only half the process. Each year, you should hold a corporate meeting to elect new officers, board members, and, ostensibly conduct annual corporate business.
For a small business owner, it might seem silly to go throught the formalities of a corporate meeting; however, the consequences of failing to do so might not be funny. As you know, the main purpose of setting up a corporation is to shield the owner's personal assets from liability arising out of the company's business activities. But that protection will do you no good if a Plaintiff's lawyer is able to "pierce the corporate veil" of your company. Simply put, if you run the corporation as nothing more than an extension of yourself, you might be able to be sued individually for the acts of your corporation.
Before piercing a corporate veil, the Courts look at whether the owner simply disregarded the corporate entity--for example, by mixing personal and corporate funds and, most importantly, by failing to follow the corporate formalities (such as, holding an annual meeting).
As you can see, for the purposes of an annual meeting, the substance of the meeting is much less important than simply having one. How, then, should you conduct your annual meeting?
First, understand that it's not necessary that the annual meeting be live. In other words, you could prepare a printed set of meeting minutes, which are signed off on by all the shareholders, owners and officers of the corporation, without having actually attended a real physical meeting in person. Actually, this is the standard mode of annual meetings for small, closely-held corporations.
How, then, should you conduct your annual meeting? First, if you have not done so, buy a corporate minutes book. Most likely, if you incorporated using an attorney, you have one of these. If not, you can find these for sale on the internet.
Second, mark on your business calendar some time in January to hold (at least on paper) an annual meeting. Your corporate bylaws have probably stated somewhere therein the annual date and time of the meeting.
Third, draw up--or have your attorney draw up--a pre-printed set of annual meetings that you can use year after year. In each annual meeting of shareholders, there should be blanks in which you elect directors. In each annual meeting of directors, there should be blanks in which you elect officers. It doesn't matter that your directors, officers and shareholders stay the same each year. What is important, however, is that you hold the meetings.
If you incorporated through some sort of office supply store or internet forms, this might sound foreign to you. Unfortunately, these outfits often show you only how to incorporate (i.e., file the articles of incorporation). But if they've not created a corporate internal structure (such as bylaws, and annual meetings), your corporations is next to useless in the face of a lawsuit.
If you need help with annual meetings or any other corporate advice, please contact me at wldeaton@vnet.net.
Many small business owners set up a corporation to create a liability shield personally from business activities; however, setting up the corporation is only half the process. Each year, you should hold a corporate meeting to elect new officers, board members, and, ostensibly conduct annual corporate business.
For a small business owner, it might seem silly to go throught the formalities of a corporate meeting; however, the consequences of failing to do so might not be funny. As you know, the main purpose of setting up a corporation is to shield the owner's personal assets from liability arising out of the company's business activities. But that protection will do you no good if a Plaintiff's lawyer is able to "pierce the corporate veil" of your company. Simply put, if you run the corporation as nothing more than an extension of yourself, you might be able to be sued individually for the acts of your corporation.
Before piercing a corporate veil, the Courts look at whether the owner simply disregarded the corporate entity--for example, by mixing personal and corporate funds and, most importantly, by failing to follow the corporate formalities (such as, holding an annual meeting).
As you can see, for the purposes of an annual meeting, the substance of the meeting is much less important than simply having one. How, then, should you conduct your annual meeting?
First, understand that it's not necessary that the annual meeting be live. In other words, you could prepare a printed set of meeting minutes, which are signed off on by all the shareholders, owners and officers of the corporation, without having actually attended a real physical meeting in person. Actually, this is the standard mode of annual meetings for small, closely-held corporations.
How, then, should you conduct your annual meeting? First, if you have not done so, buy a corporate minutes book. Most likely, if you incorporated using an attorney, you have one of these. If not, you can find these for sale on the internet.
Second, mark on your business calendar some time in January to hold (at least on paper) an annual meeting. Your corporate bylaws have probably stated somewhere therein the annual date and time of the meeting.
Third, draw up--or have your attorney draw up--a pre-printed set of annual meetings that you can use year after year. In each annual meeting of shareholders, there should be blanks in which you elect directors. In each annual meeting of directors, there should be blanks in which you elect officers. It doesn't matter that your directors, officers and shareholders stay the same each year. What is important, however, is that you hold the meetings.
If you incorporated through some sort of office supply store or internet forms, this might sound foreign to you. Unfortunately, these outfits often show you only how to incorporate (i.e., file the articles of incorporation). But if they've not created a corporate internal structure (such as bylaws, and annual meetings), your corporations is next to useless in the face of a lawsuit.
If you need help with annual meetings or any other corporate advice, please contact me at wldeaton@vnet.net.
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