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

Perhaps one of the most misunderstood aspects of drafting documents relating to corporate transactions is the function of the documents themselves.  Many business owners believe two widely-held myths: (1) that the contracts signed in connection with a transaction are documents designed to be used in court if and when the deal goes sour, and (2) that in litigation over a contract, it is as least as likely that the jury or judge will find in their opponent’s favor as in the company’s favor. For these reasons, many business owners feel that the cost/benefit analysis when deciding on whether to hire and pay a lawyer to accurately document the transaction comes down clearly on the “costly” side. After all, the reasoning goes, there’s only a 50/50 shot that the company’s interpretation of the contract will prevail in court, so why pay lots of money to a lawyer up front for only a 50/50 shot of recovery later on?

However, corporate transactional documents are less road maps to litigation than they are memorializations of the transaction and guides to performance in the future. If a transactional document is drafted well, it will precisely delineate the responsibilities of each party going forward, and serve as a written reminder of exactly what the parties have agreed to do. This may seem self-evident, but it is surprising how often a poorly drafted or incomplete contract will actually result in confusion or bitter arguments over which party is responsible for what performance and when, all of which can lead to, rather than prevent, litigation.

Whether you conduct business with estimates, proofs, invoices, electronic orders, or purchase orders, you must identify the crucial terms for each transaction and make sure they are contained in a writing signed by the customer. These terms include:

• What each party is supposed to do (or not do)
• When the deadline is for doing it
• What happens if one party doesn’t do what it is supposed to do
• How much you are to be paid
• When you are to be paid
• What happens if you are not paid (e.g., are there interest charges or reimbursement for attorneys’ fees, etc.)
• Who is responsible for payment

In many cases, businesses would do well to develop a “Master Account Agreement” which contains the so-called boilerplate terms which are common to each transaction. These terms would include such things as finance charges, reimbursement for costs of collection, limitations on your company’s liability in case something goes wrong, and where suit must be filed, among other provisions unique to your business. Once the customer signs this Master Account Agreement, each subsequent transaction can be documented by a much more simple purchase order, estimate, or even invoice containing information more specific to that particular matter. Well coordinated documentation will confirm that each transaction is governed by the terms and conditions set forth in the Master Account Agreement.

The decision to examine and reinvent the way a company does business is one of the most important decisions an owner can make. With very few exceptions, the expenditure of some upfront time and money in this effort will save tens, if not hundreds, of thousands of dollars in the years to come.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Before signing someone else’s contract, every business owner should train his or her staff to S.T.O.P.

Scope of Work

Termination

Other Obligations

Payment Terms

Scope of Work.  What is it you are obligating your business to do by signing the contract? The vast majority of problems on a project can be avoided by a precise and well drafted scope of work.  Alternatively, if the scope of work is vague or contains items for which you do not intend to be held responsible, no amount of verbal assurances or agreements can make up for the problems lying-in-wait as a result of a signed contract containing an imprecise scope of work. Do not sign a contract until you are pleased with and intend to be held to the letter of this provision.

Termination.  What are the circumstances under which each side could get out of the contract? In other words, are the exits clearly marked? Depending upon the duration of the work to be performed under the transaction, this can be one of the most important provisions in the document. Often, one party or another can elect to terminate the agreement if one or more key assumptions are not met. For example, a commercial lease may be amended to provide that the prospective tenant may terminate the agreement if the space is not fully ready for occupancy by a date certain. Similarly, an obligation to perform work may be nullified if the other side fails to provide all necessary materials by an established deadline. In deals gone wrong, termination provisions are often the only way to stop the bleeding. 

Other Obligations.  Contracts often make reference to other documents containing information or terms to be included as part of the parties’ agreement.  As an example, this is typical in the construction industry where an agreement between a subcontractor and the general contractor specifically states that the parties are also to be governed by the terms in the general contractor’s contract with the owner, the project plans and specifications, and other documents such as the General Conditions.  Outside of the construction industry, many standard contracts refer to terms and conditions in so-called master agreements, or even those posted on websites. Make sure you know ALL of the terms of the deal before signing on the bottom line. 

Payment Terms.  This is, of course, where the rubber meets the road. Few questions in business are more important than:

• Who is responsible for paying you?
• How much will you get paid?
• When is payment due?
• What are your rights if payment in full is not received?

Surprisingly, many businesses leave the answers to these questions open to chance.  Contracts often do not clearly identify the actual person or company responsible for payment, and the payment terms are often deliberately vague.  In this case as in no other, two sentences in writing outweigh all the verbal assurance in the world.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

This past weekend, I found myself building three raised garden beds for my son’s elementary school. One could easily tell that the project was as low-tech and unsophisticated as construction could possibly be by the simple fact that I was doing it. But there I was, tucked by the side of the school while remainder of the school population was out back enjoying the annual May Day carnival.

The project provided a good opportunity for me to work with my sons, 12 and 8, on some basic woodwork and construction techniques. You can have absolute faith that the word “basic” comes fairly into play because, again, I was doing it. As the morning wore on, it became apparent that the piece of advice I most often doled out was “measure twice, cut once.” I began to reflect on how important this homily is and how often it is ignored in most every walk of life…including business.

Projects are usually entered into with a sense of urgency. It may be because of the need to get started, the rush to beat a deadline or the imperative to show something productive. Whatever it is, the desire to produce something seems often to produce something… well… mediocre. Over the weekend, I couldn’t help but reflect on the fact that so many of the problems crossing my desk can trace their origins to this dynamic.

A few cases in point:

1. Plans and specifications are issued half-baked, kicking significant issues down the road because of the need to get started. The result? Change Order after Change Order after Change Order.
2. Parties to a transaction refuse to spend the time drafting a clear Letter of Intent spelling out their agreement on material terms, only to waste money down the road as attorneys exchange draft after contractual draft attempting to negotiate what should already have been resolved.
3. Banks fail to spend adequate time on commitment letters, preferring to present their borrowers with full loan documentation at the last minute, containing never-before-negotiated terms, severely straining their relationship with the customer
4. Web designers and business owners fail to take adequate time in the planning stages before coming up with the first mock-ups. (Because, as we all know, the design unveiling is the fun part.) The result is almost inevitably less than a perfect match with the client’s hopes, vision, and expectations.

In How Did that Happen?: Holding People Accountable for Results, coauthor Roger Connors submits that successful outcomes hinge upon “effective formation, communication, and alignment.” He explains that success hinges upon:

• Formation of the full plan;
• The investment of time to communicate that plan to all necessary participants; and,
• The need to receive assurance that the plan is aligned with the owner’s vision and the available resources.

Too many short-sighted organizations give in to the temptation of showing results before investing in the planning stage. Banks do it; so do developers, constructions companies, graphic designers, and (in a frightening realization) doctors. 

Instead: On your next project, fight against this temptation. Pay heed to deadline and client expectations, to be sure, but put off the instant gratification of the unveiling for just a little while longer to do things well. 

Chances are you will have built not only a successful project, but a lasting relationship as well.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Last week, in response to popular demand, I discussed one of the two major types of SBA loan: the Section 7(a) Loan (if you missed it, click here. This week, I wanted to finish the discussion of SBA programs by talking about the other popular SBA loan program, the Section 504 Loan. 

The Section 504 Loan is limited to very specific corporate purposes. The loan funds can only be used to acquire major fixed assets for expansion and modernization, such as purchasing land and improvements, construction of new facilities or modernizing obsolete facilities, or purchasing long term machinery or equipment. For these reasons, the 504 Loan is less likely to be the right loan for a startup company.

 A 504 Loan is really two separate loans involving two lenders, but it’s treated as a single transaction and both loans are closed at the same time. One of the lenders is a bank, which takes the 1^st lien position and lends up to 50% of the loan amount. The other lender is a Certified Development Company (or CDC for short), which is usually a nonprofit or local governmental economic development entity. The CDC takes the 2^nd lien position and lends up to 40% of the loan amount. Each lender’s loan will be secured by the assets being acquired.  The SBA’s role, as in the 7(a) Loan, is to act as a guarantor. Here, the SBA guarantees 100% of the 2^nd lienholder’s loan, but doesn’t provide any guarantee to the bank (the 1^st lienholder). The theory behind this guarantee structure is that the bank has greater security for its portion of the loan via its 1^st lien position on the assets being acquired and therefore doesn’t need the SBA’s guarantee. 

Additionally, the principal owners of the business are required to provide personal guarantees to both lenders (are you willing to pledge your house, car, savings, etc. for your business loan?). And since the 504 loan only covers 90% of the financing (50% loaned by the bank and 40% loaned by the CDC), the company must contribute 10% of its own money in order to be eligible for the loan. Thus, the increased likelihood that the 504 Loan is not going to be the right loan for a startup.

So, again, we come full circle to the difficulty of obtaining bank financing and the “theoretical” nature of SBA loans. The 7(a) loan can be difficult enough to qualify for, but in the case of the 504 loan, the company actually has to come up with 10% of its own money, provide personal guarantees, and provide liens on its equipment and real estate to the lenders.  Plus satisfy the underwriting standards of the bank and the CDC.

Now that I’ve touched on the main SBA loan programs, I think it’s important to point out that no bank is required to make an SBA loan. Banks are still free to reject any SBA loan application based on their own lending and underwriting standards, even though the loan would be partially guaranteed by the SBA. In addition to all this, there are also eligibility factors that businesses must meet in order to qualify for any SBA financing. I’ve represented many regional and national banks in lending transactions, so I’ve usually got a pretty good idea which lenders are most likely to make SBA loans. It’s probably worth a discussion if you’re interested in exploring SBA financing.  

Let me add here that I am not trying to discourage any business from applying for an SBA loan. I’m merely trying to illustrate what’s involved in the process, provide some details as to how these loans are structured, and perhaps stimulate some thought by business owners and clients. I think the SBA program can be a wonderful tool where a business can meet the lender’s and the SBA’s credit and eligibility criteria.  I encourage my clients to apply for SBA financing if they meet those criteria, and I am more than happy to help present my clients’ applications in the best possible light.

Finally, let me briefly mention a couple of other SBA initiatives that are geared towards small business: the SBIC program, which is a venture capital program sponsored by the SBA, and the SBG program, which is a surety bond program geared towards construction and contracting firms (SBG stands for Surety Bond Guarantee).

A few words about the SBG program: under this program, the SBA will guarantee a certain percentage of a surety bond where the contractor cannot get the bond issued through ordinary channels (and frequently, new or startup contracting businesses will have trouble obtaining surety bonds). This gives sureties an incentive to issue surety bonds in situations where they might not otherwise have done so. Which in turn gives startup construction businesses greater access to contracting opportunities. Theoretically, of course.

Next week, I’m going to discuss one more possible (and sometimes overlooked) way to finance your startup or business, which will conclude what I have to say about the legal aspects related to financing your company.

Questions? Comments? Concerns? Raise it for discussion on Facebook, Twitter, or LinkedIn.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A week or so ago, I came across a story in the legal press that reminded me of something I wish more of my clients would focus on: Non-Compete Agreements. The story was about a lawsuit filed against Chris Botticella, a former Senior VP of the company that owns Thomas’ English Muffins. It seems that Mr. Botticella had accepted a new position as a senior executive at Hostess, one of Thomas’ competitors in the baked goods space. Thomas’ sued to prevent him from taking the job, and won.

Why? Well, it seems that Botticella is one of only 7 people on the planet – yes, the planet – who knows the secret to how Thomas’ English Muffins are made. And Thomas’ certainly didn’t want him taking that knowledge to one of its biggest competitors. As a result of the court’s decision, my guess is that Botticella is going to have a tough time finding work as counter help at the corner bakery, much less as a senior executive at a large, national baked goods company.

How does a lawsuit over English Muffins relate to YOUR business? Simple:  your people are your greatest asset, and, when they leave, potentially your greatest liability. They literally have the power to make or break your business. Every business guru will tell you this, but then you’re left to your own devices to figure out what it all means, and how to protect your business’ reliance on this sometimes unpredictable asset.

Perhaps the most important way you can protect your business’ customer accounts, secrets, processes, plans, and the like from traveling to a competitor after the defection of a key employee is to require key employees to sign a well-crafted Non-Compete or Non-Solicitation Agreement.

A Non-Compete or Non-Solicitation Agreement will prevent your best sales executive (you know, the one whose accounts resulted in 68% of your gross income last year) from leaving your company for a competitor, and taking her business with her to boot. Additionally, if you’ve got any proprietary systems or technologies, it’s imperative that you protect them. Your competitors will likely pay top dollar to lure away your key sales executive, information systems guy, CEO, or key manufacturing process employee. The loss of such an employee (and your competitor’s gain of that employee) will be felt where it hurts the most:  your bottom line.  Equally as important, they are enforceable.  As recently as 5 weeks ago, Judge Richard D. Bennett of the United States District Court for the District of Maryland reaffirmed in TEKSystems, Inc. v. Bolton not only that a Non-Compete is enforceable if reasonable in scope, but also that it will be automatically extended for the period the employee is found to have been in breach. 

Do you have employees whose loss would or could have a devastating effect on your revenues or your business? If you do, or even if you’re not sure, feel free to give me a call or shoot me an email and we’ll discuss it. I’ll be happy to answer your questions and point you in the right direction. Free of charge. And with no obligation.  You can also read more about Non-Competition Agreements in our recently released Business Owner's Pocket Guide. 

In the next entry, I’ll be writing about some of the important provisions a Non-Compete or Non-Solicitation Agreement should contain, and the real effects of these agreements. Stay tuned.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

I may be a bit younger in years, but I can still recall when a “handshake and a promise” deal actually meant something. Perhaps some of my confidence in another’s word stems from my small-town Mississippi roots. Nonetheless, in today’s economy, your business will need a lot more than a handshake if you want to get paid. Luckily, only a few hours spent with a reputable attorney can present you with a sound contract based on solid terms and conditions, which will save you time, stress and money, should a client try and stiff you on down the line.

Without a mutually agreed upon legal contract in place, any terms agreed upon with a handshake are moot. Entering into a handshake agreement could put a business at risk for losing money not only in the original agreement but also in court fees for legal action against a deceitful client (unjust enrichment, quantum meruit, and the like).

Since we’re not in 1950’s southern Mississippi, and few millennials even know the meaning of such hospitality in business transactions, a good rule of thumb for any business is to ditch the handshake and ask for a signature acknowledging an ironclad contract, complete with terms and conditions. Those terms and conditions should include the most basic items such as:

• Compensation and payment terms
• Changes/ additional services
• Emergency services
• Reimbursable expenses
• Provisions of default
• Dispute resolution
• Governing law

Legal considerations, as stated above, are extremely important to help ensure appropriate compensation for hard work. Some businesses believe that something in writing, though not in legal contract form, is just as dependable. The reality of the situation is a lack of clearly stated legal terms and conditions could leave a business with a higher level of risk for a transaction.

While developing long-standing relationships with clients is important, don’t forget to protect yourself and your business in the process. Shake your client’s hand and exchange the promise to fulfill the contract, but also take a couple of hours with your attorney to put a “gentleman’s agreement” into writing. For the most part, your company’s terms and conditions can and should be standard with every contract, so this will not be an ongoing legal expense. Rather, it will ensure you peace of mind in knowing that should an agreement not go as planned, you have a contract to protect your business. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In the last 12 months, my firm helped our clients close transactions and manage litigation in Maryland, New York, New Jersey, Connecticut, Florida, Delaware, Pennsylvania, Virginia, Texas, and Washington State -- all from our sole office location in Hunt Valley, Maryland.    We're hardly alone. 

Today, geographic boundaries are becoming less and less relevant to businesses of every size and description.  With that globalization (or at least "Americanization") comes the uncertainty of collection.  It is interesting that in an era where electronic communication is so commonplace as to jeopardize the two century old institution that is the U.S. Postal Service, the written contract -- often complete with real, live signatures -- has if anything gained in importance.

This fact was brought home to me yet again when consulting with a client concerning her company's $20,000 claim for arising out of work performed for a North Carolina firm.  The Purchase Order described the work, named the price, and outlined the payment and delivery terms.  And while my client thought it was sufficient at the time, she now realizes that she has no chance to recoup her attorney's fees, will not realize any interest on the overdue payment, and worse yet, has to travel to North Carolina in order to chase her money.

Every contract.  Allow me to repeat...every contract...should state where suit (or arbitration) must be filed in the event of a dispute.  These provisions may be called "Dispute Resolution" or even the technical, legal terms of  "Venue" or "Jurisdiction."  However called, the language must not only provide which state law governs the contract, but also which courts will have "jurisdiction" or power of review over any claims.  Had this provision -- two sentences at most -- been present in my client's purchase order, her customer would have to come to her in order to defend the claim, rather than force my client to throw good money after bad traveling to her delinquent customer's home state.

Lesson learned.

(If you have a contract question...or horror story...send it in.  It may prove useful to others or just serve as a source of amusement in a Schedenfreud sort of way.)

• Email This
• Print
• Comments
• Trackbacks
• Share Link