A Few Key Issues In Review and Approval Of Non-Disclosure Agreements

September 17th, 2014

By Thomas C. Grella

The following is not intended to be a comprehensive review of non-disclosure agreement (sometimes also referred to as “confidentiality agreements”), and should not be taken as an indication that these are the only issues to be concerned with in review of such agreements.  Even though it is always recommended that non-disclosure agreements be reviewed by a qualified licensed attorney, to follow are a few common issues or concerns regarding typical non-disclosure agreements that you might consider as you make your preliminary review or analysis.

  1. Unilateral vs. Bilateral Agreement. There are basically two types of agreements.  The unilateral agreement is one where one party will be providing the information, and the other will be receiving information, and the party providing information is the only party with an interest to be protected in the agreement.  The bilateral (or mutual) agreement is used where both parties may be providing information to each other (such as, for example, in merger negotiations) and therefore both parties have an interest in protection. This type of agreement between parties may come in the form of stand-alone agreements (a document entitled “Non-Disclosure Agreement”, for instance), or they may come as one provision, or a series of provisions, found within a larger contractual agreement (such as an employment agreement or an asset purchase agreement).  The determination of which type of agreement to use (unilateral or bilateral) will depend upon the circumstances, however presentation of a unilateral agreement from the other party in a contract negotiation should not be assumed to be the correct form that is required.  Many situations may seem like circumstances where only one party needs confidentiality protection, however each party should closely examine their interests, and if there is any doubt, this is one type of agreement where the party with a greater interest in obtaining protection is likely to allow an agreement that reciprocates protection.
  2. Description of Confidential Information.  In many cases, the definition of the “confidential information” to be protected can be the longest paragraph in a non-disclosure agreement.  Though it is fair for the party desiring protection to include all of the possible types of information that might be disclosed, those being are asked to sign these types of agreements should be careful to assure that the descriptions are not too broad or vague.  
  3. Covenant of Non-Use.  Each non-disclosure or confidentiality agreement can be expected to have terms where one or both parties agree not to disclose to third parties information obtained, and to return information received once the term of the agreement is terminated or expires.  Agreements among competitors (such as in merger negotiations) should also contain terms where the parties agree that they will not use the information disclosed to them by the other party.  In addition, but related, every non-disclosure agreement should clearly spell out the purpose of the disclosures (ie. merger negotiations, employment negotiations, business sale, etc.); and it should be a narrowly defined purpose.  A properly defined, and very specific, purpose provision might also be the basis for restricting unintended future use of information by a competitor. 
  4. Exclusions from Disclosure Agreement. To follow is a typical provision that is usually found in every agreement:

“Confidential Information shall not include any information which (i) is or becomes available to the public other than as a consequence of a breach of any obligation of confidentiality; (ii) is or becomes known, from a source other than the Party hereto to which it belongs and without breach of any obligation of confidentiality by the other Party hereto prior or subsequent to its receipt from the Party to which it belongs; or (iii) is independently developed by either Party hereto without reference to any information disclosed pursuant to this Agreement.”

 These types of exclusions are very broad. It can be difficult to prove they do not exist. A party to such an agreement might desire to protect its interest by adding one or more conditions to the operation of the exclusions.  Some conditions to consider as requirements to be provided to the party otherwise protected by the terms of the Agreement prior to disclosure are: 1) prior notice of any proposed disclosure, 2) submission of documentary evidence proving a basis for application of the exclusion, and 3) a requirement that the party making a disclosure be able to show that the exclusion was necessary and is defensible upon some elevated evidentiary standard of proof.       

Please feel free to contact any one of our Corporate Practice Group attorneys  if you should be in need of help in interpretation or review of a non-disclosure agreement (or a confidentiality provision within a legal document).  http://www.mwbavl.com/businesscorp.php.

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PLANNING FOR THE SALE OF YOUR BUSINESS: LEGAL CONSIDERATIONS

January 30th, 2014

By: JOHN N. FLEMING

As an attorney who has assisted clients with the sale of their businesses or the purchase of new businesses, I have observed that the process of selling a business can go more smoothly and can result in more money for the seller if the seller plans for the sale or otherwise considers certain legal issues in advance. I have set forth several areas of pre-sale legal planning that a seller should investigate well in advance of any sale to help maximize the value received.

Advisors: Prior to selling your business, visit with your accountant and attorney to discuss the specifics of your business and a general timeline and deal structure that you can expect. You may also consider visiting with a business valuation advisor, a business broker and an estate planning attorney.

Type of Entity: The type of entity, whether it is a corporation, sole proprietorship, limited liability company, or partnership and the applicable tax-election, whether it be subchapter C, subchapter S or other pass-through classification, will have a great impact on the overall deal structure. You should meet with your advisors to understand the implications of these issues. Does your structure maximize value? Can anything be done to maximize value by planning ahead?

Deal Process: In the typical sale transaction, the following documents and steps are often utilized: (1) The potential buyer often enters into a Nondisclosure Agreement pursuant to which the buyer agrees to keep the information confidential, to return the information when finished and to only utilize the information for the evaluation of the business and the due diligence process; (2) The buyer and seller often enter into a non-binding Letter of Intent pursuant to which the basic deal terms are agreed to and which restricts the seller from talking to other potential buyers during the continuing sale process; (3) The parties negotiate an acquisition agreement such as an Asset Purchase Agreement, which is the critical document containing the terms of the actual transaction; and (4) Ancillary documents such as a Non-Compete Agreement, Promissory Note, Security Agreement, Escrow Agreement and Consulting Agreement may be utilized as well. Review the process with your advisors.

Deal Structure: Typically a business is sold either through the sale of the stock in the company or through the sale of its assets. Often, the buyer prefers an asset purchase transaction to attempt to isolate and leave the unwanted liabilities with the seller and to receive a step-up in the basis of the assets purchased. In an asset purchase, the specific assets that are purchased are identified along with the specific liabilities to be assumed. Alternatively, in a stock sale, unless otherwise stated, the purchaser generally receives everything the company owns including its assets and liabilities. Discuss the types of deal structures with your advisors. What structure would be best to maximize your value? What structure would attract more buyers and what structure is the most realistic to expect?

Review Documents: Meet with your professional advisors and review sample documents that would govern a potential transaction. For example, in an asset purchase agreement, the seller will be expected to make certain representations to the buyer relating to the business such as litigation, taxes, compliance with law, financial statements and ownership of assets. Do your answers maximize value or communicate complexity, disorganization, and problems and issues that lower value? Discuss what you would need to disclose. In addition, are you willing to be subject to restrictive covenants, including a non-compete, non-piracy or non-solicitation agreements? These agreements add or preserve value for a potential buyer and are often expected.

Taxes: Discuss with your attorney or accountant the tax consequences of the transaction so that you can maximize what you receive. Once again, the type of entity and the applicable tax election will both impact the deal structure, deal flexibility, taxes due upon sale and how much the seller receives and keeps. Additional tax issues, among others, include the amounts allocated to the assets being purchased and the estate taxes that apply with respect to the seller’s plans for his or her family.

Company Cleanup: To attract and keep potential buyers interested, review your corporate records and minute book to make sure that they are complete and accurate. Sloppy or incomplete records communicate the wrong message. Consider separating your personal items, if any, from the company. Are there personal assets that have become intertwined with the business? Perhaps the company owns a house or boat or artwork that needs to be segregated from what will be sold or otherwise impacts the operational performance of the company. Should land be separated from the business and held in a separate entity which leases the property back to the company? Conduct a lien search on yourself and the company to see what is on file. Perhaps a financing statement relating to an old paid-off loan hasn’t been terminated. Have your advisors review your records with you.

Contracts: Inventory all of your material relationships and contracts. As part of the due diligence process that the buyer will require, the buyer will expect lists and copies of these documents. Review your business to see if you can formalize personal relationships that can be valuable to the buyer. Do you have written contracts with your customers or are they based on course of dealing and history? Can these important contracts be assigned to a buyer or do you need the consent of a third party? Consider the use of employment contracts with non-compete clauses and restrictive covenants for key employees if they are appropriate and add value. Analyze your customer base and supply chain and whether the relationships are reflected in contracts that can be assumed by a buyer.

Estate Planning: Is your estate planning in order and what are the implications of the transaction on your estate planning? Can your estate planning goals be achieved with pre-sale estate planning efforts?

 Business Valuation: What are your expectations regarding how much you should receive in a sale? Discuss with your accountant and attorney the value of seeking a rough or more specific business valuation. A business may be valued a number of ways including the value of the assets, use of benchmarks and multiples related to sales or revenue and the use of earnings multiples. Your advisors may also have worked with business brokers that have successfully assisted their clients in sale or purchase transactions.

Shareholder/Owner Issues: How many owners are there? Are all of the owners or a majority in agreement that the sale should occur? Are their shareholder agreements that are in place? State law may provide that the sale of substantially all of the assets will trigger appraisal or dissenter’s rights for the shareholders of the company. Your attorney should be consulted regarding these issues.

Approval Process: What approvals are necessary to sell your business? In the case of a typical corporation, the applicable state statutes along with the Articles of Incorporation and Bylaws set forth the framework for approval. Generally, in the context of the sale of a business, a sale of assets would be characterized by state law as a sale of “all, or substantially all” of the assets “other than in the usual and regular course of business” and approval must be obtained from the Board of Directors and Shareholders of a selling company. Also, have you entered into agreements or loans or mortgages that are implicated by a sale, restrict a sale or require a third party to approve the sale? Speak with your attorney regarding the approval process necessary to complete the sale transaction.

Conclusion: As with most things, a little planning can help a seller maximize the value received and otherwise make easier what is often a difficult experience. If selling your business is a possibility or a goal, then planning ahead is a wise investment. When forming an entity and starting a business, it is not unwise to even ask at that time what your exit strategy will be. Often it is the sale of the business. While the aforementioned list is not exhaustive, consideration of these issues ahead of time will help you when it comes time to sell.

For help concerning the sale or purchase of a business, contact John at (828) 254-8800, or for more information, please visit http://www.mwbavl.com/attorney?id=13#details.

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John Fleming is a general practitioner in corporate law with an exceptional knowledge of Health Care Law.  John has been named to the 2014 Business North Carolina magazine’s Legal Elite list of the top lawyers in North Carolina and was named in the in Corporate Counsel category. The Legal Elite recognizes the top lawyers in the state in specific business-related practice areas as voted by their peers, and only about 3% of the state’s attorneys are awarded the distinction.

 

 

 

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OVERVIEW OF CHANGES IN NORTH CAROLINA’S LIEN LAWS

January 3rd, 2014

By:  Alston F. Ludwig

Happy New Year!

As we enter 2014 holding tightly to signs of an improving economy, this may be the year you decide to develop property or renovate your existing office space. If that’s you, then we want to take a moment to remind you of the significant changes which occurred to North Carolina’s lien laws last year.  While it’s easy to think lien laws only affect contractors, subcontractors, and suppliers—and they do—the new changes to the lien laws also place obligations on owners of property.  So, whether you’re a second-tier subcontractor, a developer building a new office park, a landlord renovating a warehouse, or just someone wanting to build a new home in North Carolina, it’s likely the new lien laws affect you.  We’ve provided you with a brief overview of some of the more substantial changes.

Overview:

- The major changes in the laws involve the claim of lien on real property and not the claim of lien on  funds.

- An owner must designate a lien agent for any improvement to property that costs more than  $30,000.00.

- An owner may, but is not required to, designate a lien agent for any improvements to the owner’s  existing personal residence.

- After designating the lien agent, the owner must send written notice to the lien agent informing it of  the designation. Notice to the lien agent is automatically sent when an owner designates a lien agent  using www.liensnc.com

- www.liensnc.com will be the primary method whereby owners will designate lien agents and   potential lien claimants will provide notice to the lien agents.

- The lien agent’s contact information must be provided when applying for a permit. The information  will then appear in the permit and must be posted at the work site until construction is complete. If,  for some reason, the contact information is not listed in the permit, then it must be posted on another  sign until the construction is complete.

- If requested directly, the owner must provide a possible lien claimant with the lien agent’s contact  information within seven days of the request.

- Contractors and subcontractors must give lower-tier subcontractors the lien agent’s contact  information within three days of contracting.

- In order to protect a lien claimant’s rights, a lien claimant must give notice to the lien agent within  fifteen days after the first furnishing of labor or materials.

Filing a notice with a lien agent is not filing a claim of lien on real property. The notice ensures a lien claimant will be protected if the real property is sold or encumbered before the statutory deadline (120 days from the date of last furnishing) to file a claim of lien on real property. The requirements to perfect a claim of lien on real property have not been changed by the new laws. Continued compliance with those procedures is necessary.

This overview is not exhaustive and does not represent all of the changes which have occurred. But, hopefully, now you are more aware of the changes which are likely to affect you or your company. We intend to schedule free informational seminars on these new laws at which time we can offer a more in-depth explanation as well as helpful tips. Be on the lookout for scheduled dates in the near future.

For help concerning the new lien laws, please contact Douglas Wilson, Susan Barbour, or Alston Ludwig http://tinyurl.com/m9y4a6w at (828) 254-8800.

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NEW SOLICITATION AND ACCREDITED INVESTOR REGULATIONS FINALLY IN PLACE FOR RULE 506 PRIVATE PLACEMENTS

December 4th, 2013

By Thomas C. Grella

Finally!  After more than a year, the SEC has issued regulations that allow implementation of the provisions of the Jumpstart Our Business Startups Act (better known as the JOBS Act) which eliminate the ban on general solicitation in Rule 506 and Rule 144A offerings.  The Jobs Act, which had bipartisan support (for instance the President, and 10th District of North Carolina Congressman Patrick McHenry, generally on opposite sides on many issues, were two of the biggest supporters of this legislation) was enacted on April 5, 2012.  The Act, by its very terms, could really only be implemented after regulations were created by the SEC.  Because of what appears to me to have been political maneuvering, the regulations necessary to implement that portion of the Act interpreting general solicitation (and several other beneficial aspects of the Act) had to await a change in leadership of the SEC.  That change occurred and finally, after more than a year, regulations are now in place.

The regulations regard both Rule 506 offerings solely to accredited investors, as well as Rule 144A offerings normally to qualified institutional buyers.  Because our Firm has historically helped many of our clients with Regulation D private placement offerings, I will solely focus on Rule 506 offerings in this blog post.  I also note that this blog post is being written to give general information, and is written in familiar terms as opposed to specific legal terminology.

According to the terms of the new regulations, issuers of Rule 506 placements may now engage in general solicitation and general advertising in offering and selling securities (note that I have deleted the word “private” before “placement” because one could argue that the allowance of general solicitation and advertisement makes such a placement in some sense “public”), so long as all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that purchasers actually are accredited.  In the past this form of promotion was disallowed, and issuers in 506 private placements generally had to be able to show some pre-existing personal contact or relationship between those individual people promoting the securities for the issuer entity, and those individual potential purchasers.  Presumably, new forms of promotion will include Internet based marketing and solicitation; but I have even heard promotions of “accredited investor” securities on satellite radio in recent days.

In every Rule 506 offering solely to accredited investors, it was generally believed that the burden was always on the issuer of the securities to assure that investors were accredited, however there was no regulatory help to assure the issuer that it had done enough to prove accreditation, and to keep out of trouble in sales to those who appeared (or falsely represented themselves) to be accredited, but turned out to not be.  The regulations contain what is termed a “non-exclusive list of methods that are deemed to satisfy the verification requirement under Rule 506(c).”

The regulations provide that issuers will need to make an objective determination of “accredited investor” status of a purchaser based on factors provided in the regulations.  The regulations restate that though the burden is always on the issuer to prove the right to use of an exemption (such as Rule 506) from securities laws, the SEC does not believe that Congress intended to eliminate the “reasonable belief” standard (that an issuer must have that an investor is accredited – “…we continue to recognize that a person could provide false information or documentation to an issuer in order to purchase securities…even if an issuer has taken reasonable steps to verify that a purchaser is an accredited investor it is possible that a person nevertheless could circumvent those measures…we believe that the issuer will not lose the ability to rely on Rule 506(c) for that offering, so long as the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was accredited at the time of the sale.”  Affirmation in the regulations of a “reasonable belief” standard, as well as a list of suggested means for verifying accredited investor status will help give some level of assurance to issuers who are offering securities to accredited investors that they do not have any pre-existing relationship with.

The above information is intended only as a general overview of a new regulation (and is not a comprehensive overview either), and not specific legal advice.  The whole regulation may be viewed at the following link:  http://tinyurl.com/mua7e8l  If you need help wading through its extensive contents please let us know at any time (tgrella@mwbavl.com; 828-254-8800).

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WHEN NORTH CAROLINA’S NEW LIMITED LIABILITY COMPANY (LLC) STATUTE GOES INTO EFFECT JANUARY 1, 2014, DO I NEED TO REVISE MY CURRENT OPERATING AGREEMENT?

November 22nd, 2013

By:  Rick Jackson

On January 1, 2014, Chapter 57D of the North Carolina General Statutes goes into effect (“New LLC Statute”) and Chapter 57C is repealed (“Old LLC Statute”).  The New LLC Statute will apply to all LLC’s, even those formed before January 1, 2014.

So is it time to make an appointment with your attorney to review your operating agreement?  Perhaps, but not for the reasons you may think. 

As three of the most significant changes to the Old LLC Statute, the New LLC Statute (1) introduces and emphasizes the concept of “company officials” as an alternative to managers, (2) introduces and emphasizes the concept of “economic interest owner” as distinguished from members, and (3) provides that the New LLC Statute (other than seven enumerated exceptions) may be “supplemented, varied, disclaimed, or nullified” by the operating agreement.

1.  New Definition:  “Company Officials”

The New LLC Statute provides that “company officials”, such as directors and officers, can be used by LLCs as the decision makers for the LLC in lieu of managers.  But the use of directors and officers in an LLC is not new to the New LLC Statute.  The New LLC Statute simply places greater emphasis than the Old LLC Statute on its use as a possible alternative to managers.

The ability to use directors and officers in lieu of managers underscores just how flexible the governance of LLCs can be.  In determining the appropriate decision-making structure of your LLC, it is important to consider whether the use of directors and officers in lieu of managers is, in practice, more efficient (or burdensome) in carrying out your day-to-day management.  Even more important is determining the decision-making authority of the members of your LLC in relation to that of its managers (if manager-managed) or directors and officers, as the case may be.  For example, are there major decisions that should require member approval instead of manager approval?

2.  New Definition: “Economic Interest Owner”

Similar to the definition of “company officials”, the definition of “economic interest owner” is new to the New LLC Statute, but the concept is not.    Under the Old LLC Statute, this concept was referred to as an “assignee”.  Like an assignee, an “economic interest owner” only has the economic rights of a member but not the non-economic rights, such as management rights, derivative action rights, and rights to information.  In contrast, a “member” has both economic and non-economic rights in the LLC.

The concept of “economic interest owner” is most relevant in the context of the buy-sell provisions of your operating agreement.  In general, involuntary events may cause a transfer of a member’s interest in the LLC (e.g. the death of member).  Your operating agreement hopefully provides an efficient way to address these situations, often referred to as buy-sell events.  As a related matter, your operating agreement in general should provide that any recipient of the transferred membership interest is merely an economic interest owner, not a member of the LLC (unless admitted pursuant to the member substitution or permitted transferee provisions of the operating agreement).

3.  Use of Operating Agreement to nullify New LLC Statute 

The phrase “except as otherwise provided in . . . a written operating agreement, . . .” was used throughout the Old LLC Statute.  This meant that the section of Old LLC Statute that this ubiquitous phrase preceded would apply to your LLC, unless your operating agreement contained express language to prevent or otherwise modify its application to your LLC.  In lieu of the repeated use of this phrase, the New LLC Statute more-succinctly and comprehensively provides that the New LLC Statute (other than seven enumerated exceptions) may be “supplemented, varied, disclaimed, or nullified” by the operating agreement.  Here again, this is not a concept that is new to the New LLC Statute.

More importantly, you need to understand those instances in which you do not want the New LLC Statute to apply to your LLC and draft your operating agreement accordingly.  For example, you generally want the bankruptcy of an individual member to automatically trigger that member’s withdrawal from the LLC but there are instances in which you may not want this to automatically happen.  Your operating agreement needs to account for these situations.

In summary, you do not need to make an appointment with your attorney to review your operating agreement solely based on the New LLC Statute, but if you have not addressed the issues described above with your attorney to assure that your operating agreement properly fits your business, now is the time to do so.   

Please contact me if I can assist you in any way with your North Carolina LLC  (rjackson@mwbavl.com; 828-254-8800).

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Rick Jackson is an Attorney with the law firm of McGuire, Wood & Bissette, P.A.   He works primarily with small to mid-size businesses: technology and manufacturing companies; property owners, developers, and homeowner associations; medical and dental practices and hospitals; restaurants and breweries; agricultural and natural product businesses; and nonprofits.  http://tinyurl.com/myoclkw

 

 

 

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BUSINESS ISSUES AND SUCCESSION OF THE FAMILY BUSINESS

November 7th, 2013

By Harris M. Livingstain

There is no greater confluence of legal issues than those that are involved with the transitioning of a family-owned business to the succeeding generation. Whether the business is passive in nature (for example, rental real estate), service oriented or a manufacturing concern, a myriad of issues face the senior generation whose wealth, financial security and sense of accomplishment are tied closely to the business.

The term “family business” is often associated with a business owned by a single family unit, but many such businesses are owned by two or more family units, related or unrelated, and the succession issues in those businesses present more difficult challenges to the owners.  Seventy percent of family businesses do not survive to the second generation, and less than fifteen percent survive to the third.  Those failure rates illustrate the difficulty of business succession planning.

Threshold questions may include when should the senior generation begin the process of transitioning? Are there family members able and willing to take the business into the next generation?  If not, what steps should be taken to ensure the business retains its value for the benefit of the descendants of the owners?  If there are family members able and willing to assume control, what steps have been taken to prepare for the transition to the next generation?  How does the senior generation’s estate plan dispose of control of the business and to whom (that is, those involved in the business vs. those not involved in the business)? Should management position and authority be transferred to the next generation during life so that the senior generation can provide sufficient guidance? If so, how does the senior generation retain sufficient financial security given that the majority of the wealth of such individuals is directly related to the value and cash flow of the business?

What about senior non-family management?  If there is no family member ready, capable or interested in maintaining the business, how does the senior generation insure that these individuals remain with the business to preserve value for possible sale to third party or to the employees, or provide guidance to future family members who may be interested in succeeding but are not yet ready to assume leadership?   Are these non-family employees secured by “golden handcuffs,” or financial incentives (that is, phantom equity plans, life insurance, non-qualified deferred compensation plans)?  Does the business have in place any protections to minimize the threat that such employees may leave and compete either alone or with another business competitor (employment agreement with noncompetition, non-solicitation and non-disclosure of trade secrets)? 

In many situations, the majority of the senior generation’s wealth and financial security is tied directly to the business and this can make it difficult for transition during life.  The benefit of such lifetime transition is the senior generation’s ability to provide much needed guidance, and can often provide gift and estate tax benefits.  In fact, with the current gift tax exemption amount at $5,250,000 per person (increasing to $5,340,000 in 2014), there is great incentive to encourage transition now as Congress may reduce that amount in the future. Employment agreements and post-retirement salary continuation plans or consulting agreements can reduce the concerns over the loss of financial security. If the business is operated on property owned by the senior generation, a long-term lease between the business and the owner can provide post-transition cash flow. If such property is owned by the operating entity, consideration should be given to distributing the property to the senior generation prior to transition, albeit income tax consequences of such a distribution  should be carefully reviewed and weighed against the long-term benefit.  The senior generation can retain a position on the Board of Directors and be paid a director’s fee.  Also, the senior generation can sell his/her business interests to the succeeding generation for a small down payment and the balance paid with a promissory note containing favorable interest rates based on the Applicable Federal Rate (link to current rates http://tinyurl.com/p96bzeh).  There are also techniques to minimize the income tax consequences attributable to such a sale.

The role of a well-thought-out stockholder’s agreement (for corporations), operating agreement (for limited liability companies) or partnership agreement (for partnerships) cannot be overstated. In a single family unit business where less than all of the succeeding generation is involved in the business, such agreements can solve concerns the senior generation may have that passing control of the business to only one member of the succeeding generation may be unfair to the non-involved member(s). These agreements can provide the non-involved (and minority owner) with a “put right” to require the business entity or other owner to purchase his or her interest based on certain trigger events tied to financial performance of the business.  To alleviate the potential financial strain on the business (which will often be the source of funds even if the other owner is the purchaser), the “put” can be based on favorable payment terms and/or only for certain percentages over a period of time.  If there is life insurance on the senior generation, the business can be named as beneficiary (and in certain instances, the business can acquire the policy) and the “put” trigger can be the death of the senior generation and the business or the other owner(s) will have the proceeds (generally, free of income tax to the beneficiary of the policy) to fund the purchase. These agreements can also provide the business entity or family member to whom control of the business has been passed an “option” to acquire the interests of the other family members, also on favorable purchase terms so as to ease the financial strain. If the business is owned by more than one family unit, these agreements can also facilitate the transition and also ensure that the members of the non-participating family unit receive fair value for their share.  

In my experience, emotional and psychological issues of “letting go” have been the major impediments to effective succession planning.   Dealing with one’s mortality is difficult enough without the added burden of the transition of a successful business, often associated with one’s legacy.  However, the “head in the sand” or “let my kids deal with it” approach is what generally defines those businesses that do not last for the succeeding generation and are a major contributor to family discord. Granted, the process can be expensive and time consuming, but it is time and money well-spent.

 

Harris Livingstain is a Partner at McGuire, Wood & Bissette, P.A., and has extensive experience in estate planning and probate matters, including estate tax reduction techniques, and succession planning involving owners of closely-held businesses http://tinyurl.com/ofl7lxc 

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LANDLORD LIABILITY: CRIMINAL ACTS OF A TENANT OR THIRD PARTY

October 22nd, 2013

By Starling B. Underwood III

Chapter 42 of the North Carolina General Statutes provides a clear picture of the rights and obligations of landlords and tenants. However, Chapter 42 does not address the obligations a landlord may have to protect a tenant or visitor from the criminal acts of another. Whether a landlord may be held liable for damage or injury caused by the criminal acts of another depends on whether those acts are foreseeable.

What criminal acts are foreseeable? In order for a criminal act to be foreseeable, the landlord must have prior knowledge that a similar act occurred or could occur. For example, criminal acts could be foreseeable if a parking lot owned by the landlord had poor lighting and landlord had knowledge of multiple instances of criminal conduct occurring in the parking lot. A landlord could also be held liable for injury occurring because of horseplay, if the landlord had reason to know that such activity had occurred in the past. Most reported cases indicate that when a landlord has knowledge of multiple incidents of criminal activity or horseplay, subsequent acts are foreseeable even if the new act is different in scope, location or parties involved. For example, if the landlord has knowledge of multiple robberies occurring on the premises in the past, then it is foreseeable that an assault could occur on the premises as well.

Can the conviction histories of a tenant be an element of foreseeability? North Carolina has not directly addressed this issue. However, other states which have considered the issue have stated that foreseeability cannot be solely based on conviction history unless the prior criminal history has a connection with the property. For example, if a tenant has never before exhibited any violent behavior towards other tenants or visitors but in fact does harm another on the premises, that act is not foreseeable, even if the landlord knew of general mental instability and prior violent behavior on the part of the tenant.

In order to properly protect against liability, landlords need to be proactive. Ask yourself if there are areas on the premises which are poorly lit or seem dangerous. If so, take the necessary corrective action. Take all complaints seriously and document the measures you have taken to prevent against criminal actions.

Starling Underwood is an Associate in the Litigation Practice Group at McGuire Wood & Bissette, P.A.   He has been named a 2014 Rising Star by Super Lawyers magazine and will be included in the February 2014 publication.

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How the Federal Government Shutdown Affects Your Tax Matters

October 8th, 2013

By Jeffrey J. Owen

Regardless of your politics, the government shutdown (or “slimdown” as some are calling it) has affected IRS operations. While we all wait for the government to reopen, taxpayers and practitioners are left in the lurch. So what are we to do when the phone is ringing at the IRS, but nobody is home? The IRS issued some helpful information recently in a Q&A.

1. KEEP FILING—Don’t let your return filings lapse the way the federal government may allow its borrowing power to lapse in a few days. The IRS actually will be checking postmarks when they reopen to make sure your return was “timely filed.”

2. KEEP PAYING—The IRS is open enough to accept your tax payments and deposits, whether made electronically or by check. We are told that the processing of paper returns will be delayed, so make sure that you designate your tax payments by jotting on the memo line the tax return and period the taxes are supposed to credit toward. An example is: “SSN #123-45-6789 2012 1040 tax only.”

3. FORGET APPOINTMENTS—If you have an appointment with the IRS, don’t bother to show up. All offices are closed. Your agent will call you when he gets back in the office following his/her paid vacation to reschedule.

4. OPEN COLLECTION LETTERS—Despite the shutdown, automated collections processes continue via computer. You will still receive your nastygrams from the IRS even though they are not equipped to answer your questions about your alleged underpayment.

5. DON’T BOTHER TO CALL—The 800 numbers are all disconnected except for the delightful automated phone advice tree 800-829-1040 for individuals. In other words, don’t expect to speak to a real human until the government reopens.

This blog post is neither intended as legal advice nor to create an attorney client relationship. For help with your tax case, contact Murphy Fletcher at McGuire Wood & Bissette P.A., 828-254-8800.

For a copy of the Q&A, see:    http://www.irs.gov/uac/Newsroom/IRS-Operations-During-The-Lapse-In-Appropriations

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What You Can Learn From My Summer Vacation

August 21st, 2013

By Sabrina Presnell Rockoff

Our second August post comes from the Chair of our Labor & Employment Team, Sabrina Presnell Rockoff. Sabrina has her own regular blog where she discusses human resources topics at www.mwbavl.com/employmentblog/

Well, it happened. This morning we woke up earlier; the sun rose (or I’m assuming it did somewhere despite the rain); we dropped right back into the routine of eating bowls of cheerios at the kitchen bar; we sat through the car pool line; and just like that—school started again. In classrooms all over the country over the next three weeks, kids are going to be asked in one form or another to share what they learned over summer vacation. In homage to this decades-old ritual, I want to share something you can learn from my summer vacation.

The first weekend in August my husband and I took a trip to Nashville, Tennessee –our own three day “grown up” vacation. I had never spent a lot of time in Nashville, and as a fan of great, old country music, I was mesmerized. We visited the Country Music Hall of Fame, the Ryman Auditorium, the Johnny Cash Museum, and the famous bar Tootsies, where Hank Williams, Sr., would go to drink in between Opry sets (sometimes he made it back for the second set; sometimes, he didn’t). By Saturday at noon, all of the restaurants and bars along the main drag were hopping with live bands. We ducked in and out of several places, hearing everything from original music to songs made famous by Alabama, Little Big Town, Merle Haggard, and Buck Owens.

As I happily sang along off-key with each band, I had two thoughts: 1) I wonder if this place is correctly applying the tip credit for those bartenders (perhaps a post for another day); and 2) I wonder who has the license for that music and if this bar should be allowing that band to play that song. This isn’t exactly an employment law topic, but it is a serious one that you should consider if you have an establishment that allows any type of live music or that plays canned music for your patrons. Whether you are a restaurant or bar with a Friday night cover band or a dentist office that plays music in the waiting room for patients, you could be in violation of copyright laws and not even realize it. Based on recent past experience, even if you don’t realize you are in violation, the companies that own the copyrights to the music may—and legally, your ignorance is no excuse from statutory copyright violations.

Federal copyright laws regulate when copyrighted music can be played for the advantage of a business. If you have a cover band or play other music for your customers, even if they are not directly paying you for the chance to listen to the music, you may still be considered to be playing the music for your own financial benefit as a business owner and/or operator. If you have such music playing in your place of business without having the proper license for the music, you may be in violation of the copyright laws, which provide for statutory damages and attorneys’ fees. The federal copyright laws also allow, in certain situations, for personal liability by the owner/operator, regardless of the corporate structure of the entity involved.

All well and good you may say, but practically speaking, how are these laws enforced? The companies that own the copyrights (just a handful own most copyrights to popular songs) are charged with protecting their rights. So these companies hire individuals to go into places with live music or with canned music that the companies know do not have licenses to play their music. These individuals write down each song they hear played and report that back to the companies. The companies then file a lawsuit. Think it can’t happen to you? It is happening in Asheville, Charlotte and Raleigh.

So what should you do? If you play canned music, for example through a cable music channel, ensure that you have the proper license through the company providing the channel to play the music for customers. If you have live music, either restrict the music that can be played in your establishment to the original music of the musician or negotiate a license from the major music copyright holders. You should also have live music acts sign agreements regarding what licenses they hold and the type of music they agree to play or not to play. These agreements are not an absolute defense to a copyright violation claim, but could be helpful. The federal copyright laws are very specific. Before attempting to review your current agreements or draft new ones, you should consult legal counsel. At our Firm   Rick Jackson  focuses in this area of the law and can help you determine the best way to protect yourself and respect the copyright laws.

Meanwhile, if you would be excited, as I was, to see Bobby Bare sing “(Margie’s at) the Lincoln Park Inn” at the Grand Ole Opry live, we should talk music sometime!

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The Court of Appeals Clarifies the Level of Judicial Scrutiny for Non-Competition Provisions in Franchise Agreements

August 8th, 2013

By Joseph P. McGuire

On August 6, 2013, the North Carolina Court of Appeals issued an opinion clarifying whether the level of judicial scrutiny for a non-competition provision in a franchise agreement should follow the standards for such a provision in an employment contract or the standards for such a provision in a contract for the sale of a business. The issue is significant because it is well-established under North Carolina law that non-competition agreements contained in an employment contract are more closely scrutinized than those contained in a contract for the sale of a business, due to concerns that employees have only their labor to sell and may more readily accede to an unreasonable restriction at the time of their employment than franchisees.

In the case before the Court of Appeals, Outdoor Lighting Perspectives Franchising, Inc. v. Harders, (No. COA12-1204), the plaintiff franchisor appealed an order from the North Carolina Business Court declining to enforce a non-competition provision in a franchise agreement authorizing franchisees to engage in the design, construction, and installation of residential and commercial outdoor lighting products. The franchise agreement prohibited the defendant franchisees from operating another outdoor lighting business within a specified area for a period of two years beginning on the date upon which the franchise agreement terminated or expired.

After expiration of its franchise agreement and upon learning that the defendants were operating an outdoor lighting business, the plaintiff franchisor filed suit to recover damages and injunctive relief. The defendants successfully moved to have the dispute designated for hearing by the Business Court, which is a trial court with offices in Raleigh, Greensboro and Charlotte that specializes in deciding complex business cases. Upon hearing the plaintiff’s motion for a preliminary injunction, the trial court ordered the franchisees to return and refrain from using certain allegedly proprietary information of the franchisor, including customer-related information, manuals and similar protected items. However, the trial court denied the plaintiff’s request for the issue of a preliminary injunction prohibiting the former franchisee from operating an outdoor lighting business. The franchisor appealed the denial of a preliminary injunction.

On appeal, the franchisor urged the Court of Appeals to adopt the standard generally utilized in cases arising from the sale of a business to evaluate the non-competition provision in the franchise agreement, while the franchisees argued that the greater scrutiny applicable to non-competes in employment contracts should govern. Finding that the franchisor-franchisee situation is a hybrid that differs from both the employer-employee and the sale of business arrangements, the Court pointed out that a franchisee is likely to possess a skill set that makes him capable of earning a livelihood in a variety of different businesses, and yet a franchisor is likely to retain and sell to a new franchisee some portion of the good will built up by the departing franchisee. Accordingly, the Court adopted elements of the tests utilized in both the employee-employer and the business sale contexts to analyze the validity of a non-compete in a franchise agreement.

The Court of Appeals concluded that the proper standard in the franchisor-franchisee context is whether the non-competition provision is no more restrictive than is necessary to protect the legitimate interests of the franchisor, with the relevant facts to be considered being the reasonableness of the duration of the restriction, the reasonableness of the geographic scope of the restriction, and the extent to which the restriction is otherwise necessary to protect the legitimate interests of the franchisor. In applying this new standard, the Court determined that the geographic scope of the restriction at issue was not reasonable in prohibiting the defendants from engaging in the outdoor lighting business within the territory assigned to any of the franchisor’s affiliates, especially since two of the affiliates were engaged in lines of business totally unrelated to outdoor lighting. In that the non-competition agreement was impermissibly broad, the Court of Appeals concluded that the trial court correctly determined that the franchisor had no likelihood of success on the merits and affirmed the denial of the franchisor’s motion for a preliminary injunction.

The analysis by the appellate court indicates a flexibility to consider the substance of a hybrid contract that does not fit neatly within prior case law involving either the employer-employee or the sale of business situations, and provides helpful guidance to franchisors and franchisees in evaluating non-compete provisions in their franchise agreements

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This Blog/Web Site is intended and made available to provide information of general interest to the public, and for educational purposes only, and is not intended to offer legal advice about specific situations or problems. No representation is made about the accuracy of the information contained herein. Blog topics may or may not be updated subsequent to their initial posting.  Read full disclaimer