Bottom Line Business Insights : Maryland Business Lawyer & Attorney : Wagonheim Law Firm : Mergers & Acquisitions & Contractual Negotiation

Newt Gingrich has been a fixture in the news cycle for a while now.  It seems he’s doing that “will-he-or-won’t-he” run for President dance. One the news shows recently, he had to confront the issue of infidelity. The former Georgia Congressman has been married three times and has often been criticized for the less-than-clean transitions between those marriages.

The former Speaker’s latest round of Sunday morning interviews got me thinking about the cost of infidelity – not just in a presidential run, or even in divorce court, but rather as seen every day in my business practice.

You see, when a person commits to a company – as an officer, director, or even sometimes as an employee under contract, the law and various contracts impose duties; the higher the post in the company, the greater the duty. Chief among those duties is the duty of loyalty. Called different things in different states, the result is the same – you breach it at your own peril. 

In life, there are always temptations. In business, that temptation takes the form of the desire to take more (or all) of a good deal for oneself rather than sharing the proceeds with others. Sometimes, the thought occurs with the possibility of landing a large, new contract or upon hearing of a tremendous sales opportunity.

“Maybe,” the thought goes, “I could set this one up outside the company and triple what I would otherwise get in commission or draw.”

Possibly.

Sometimes, to be sure.

But what of those left on the outside looking in?

Simply put, they can sue. They can go after, and often take, those appealing, better-than-expected profits.  In Maryland, one of the causes of action is known as a “breach of corporate opportunity.” This means, in effect, that one may be held liable for the improper taking (some would say “theft”) of a business opportunity that rightfully belonged to the company. 

Let’s assume that Susan Smith was a shareholder and vice president of ABC Janitorial Corporation.  Upon seeing an opportunity for a large contract on the horizon, Susan set up a new company with her husband called DEF Cleaning.  DEF then snared the contract for itself.  In so doing, it wrongfully claimed one of ABC’s opportunities for itself.  In other words, it took money that ABC could have earned.  It is a safe bet that Susan’s former employer is not going to go quietly into that good night.  They will hold Susan accountable. 

In so doing, the law (as is not always the case) tracks ethics.

The long and short of it is that Susan, as a co-owner and officer of ABC, owed ABC something better than just her full-time, physical presence.  She owed ABC her loyalty.  When she decided to deprive ABC of an opportunity that rightfully belonged to it, she committed the corporate equivalent of adultery.

And in business, just like in marriage, there is usually a price to pay.

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By Guest Blogger: Michael J. Lentz, Esquire

In November, 1787, James Madison, writing under the shared pseudonym Publius in the New York Packet, published one of the watershed documents in the constitutional development of our nation. In the tenth essay, in a series that later became known as The Federalist Papers, Madison argued that political factions were vitally necessary in a republic, because: “Enlightened statesmen will not always be at the helm.” Madison was concerned that competing interests were vital in the absence of an ability to control the qualifications and interests of the elected decision makers. 

Not long ago, I was reminded of Federalist #10 by a question posed by a colleague on a listserv: 

“Can a minor serve as a director of a corporation?”

I think the answer to this admittedly-novel question is probably “Yes, but it probably isn’t such a good idea.” In the course of the discussion, though, I was struck by how little consideration is given to what “statesmen” will guide the helm at most corporations. 

The only qualifications that directors of a Maryland corporation must meet are those set forth in the corporation’s Charter. Many, if not most, Charters are completely silent on the issue, meaning that no one is statutorily prohibited from serving as a director. 

For many small business owners, the qualifications of their company’s board of directors may not seem immediately relevant, since the owner(s) and/or their family members are often the only directors. However, director qualifications can be an important consideration, either as part of a succession /contingency plan or when considering equity financing. 

If an owner-director were to become seriously ill, so as to be unable to discharge the duties of the office, the corporation would likely have to function without that person as a director until his term expired. Directors’ duties are generally non-delegable, so even someone otherwise authorized to manage the director’s financial affairs (such as through a power-of-attorney) would likely not be able to serve as a director. Absent a qualification in the Charter, there would be little the corporation could do to remove the director in the interim.

Perhaps a more common concern arises when a corporation chooses to consider equity financing. The decision to take on an equity investor is a significant one that should not be undertaken lightly . . . see our earlier piece on the risks of getting married without dating first.

If your company decides to take on an equity investor, most substantial investors will request, in addition to equity in the company, some measure of control over the company. This control will usually come in the form of preferred stock that gives its holders the right to elect a certain number of directors. Such directors usually can only be removed by a majority (or super-majority) of the votes cast by holders of the shares that elected the directors. So, equity investors will often request what are essentially unassailable, permanent directorships. 

While the investors own self-interest will usually lead him to elect competent, qualified individuals, there’s neither any guaranty nor any legal requirement that the investor do so. In such cases, the company’s easiest control over such board seats for the long term is a Charter provision setting out the qualifications that such individuals must possess.

Does this situation sound familiar?

Contact us for a free consultation! 

Raise this issue for discussion on Twitter, Facebook, or LinkedIn.

Michael graduated from Georgetown University Law Center in 1998. After spending five years with large Baltimore firms and three years as a solo and small firm practitioner, Michael joined Wagonheim Law in 2006, where he continues to utilize his extensive experience in commercial, bankruptcy, and appellate litigation to work with companies throughout the mid-Atlantic region.

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Not long ago, I released a Podcast exploring employee motivation beyond money. In his book, Drive, Daniel Pink asserted that, given fair compensation, what really motivates employees is:

• Autonomy
• Opportunity for Mastery
• Purpose

 And it is these motivational elements that decrease turnover, increase productivity, and have a direct impact on customer satisfaction.

Last year, Maryland’s legislature turned its collective attention to the notion of corporate purpose. In 2010, Maryland became the first state in the nation to recognize Benefit Corporations, or so-called “B-Corporations” as a new corporate structure category for mission-based, for-profit organizations.  In other types of for-profit business organizations, officers and directors could potentially be held liable for taking actions which did not directly relate to maximized shareholder value. Organization as a B-Corporation protects officers and directors from such shareholder actions and lays the groundwork for companies to “do well by doing some good.”

In 1996, I joined a law firm in which one of the four partners viewed it as his mission to mentor minority, primarily African American, lawyers. We discussed this when we formed the firm. He wanted to actively seek out opportunities to hire people he did not feel were given a fair shot by the majority of law firms in town. In many ways, we felt at the time that profit was secondary. Sure, we wanted to earn money, but we also bought into my partner’s sense of mission. Had the structure existed, we might well have registered as a B Corporation.

The commitment to registering as a B Corporation is not something done lightly. Nor is registration an easy or streamlined process. In order to gain B Corporation status in Maryland, organizations must first register as a Benefit Corporation and report their stakeholder impact according to a third party standard such as the non-profit charity B Lab. Only after certification is awarded will the structure be recognized. 

The reward, however, exemplifies the concept of a “win-win.” The community wins through the impact envisioned by the B Corporation – whether it is hiring the disadvantaged or positively impacting community infrastructure in some way. The company wins…and not just spiritually.   When an employee arrives at a B Corporation, s/he is already pre-screened for mission. In other words, the average job applicant is not just looking for a job, but is someone who already buys into the mission. Right out of the gate, the employee is committed to the company. This stands in stark contrast to the often indifferent workforce which populates many “ordinary” for-profit companies. 

Productivity is higher.

Customer satisfaction is higher.

Turnover falls through the floor.

Win-win

Should your company be acting as B-Corporation? Do you know of a successful B-Corporation?

 Raise it for discussion on Twitter, Facebook, or LinkedIn.

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