Business Law & Civil Litigation

Business Law & Civil Litigation

“Business law and civil litigation” is a very broad category of legal services, including business formation and transactions, employment matters, litigation, mergers and acquisitions, and bankruptcy.

This section focuses on some common legal issues related to business law.

Business Formation

The choice of entity (c-corp, s-corp, LLC, LLP, partnership, etc) depends on various issues and tax considerations. In general, you and the other investors can enjoy limited liability by forming a corporation, limited liability company or limited liability partnership. However, there are advantages and disadvantages to all three which need to be considered. Both a lawyer and an accountant should be consulted. A lawyer could also assist in negotiating a commercial lease and walk you through the legal issues surrounding the hiring of employees, such as compliance with immigration and discrimination laws as well as protecting the company’s trade secrets and proprietary information.

Although one should consider various alternatives, formation of a limited liability company is a potentially attractive option. The two basic kinds of formation documents a firm such as ours would assist to help form your business are called Articles of Formation and an Operating Agreement. The Articles set forth certain kinds of information describing the type of business and its initial business address and registered agent, and is filed with the appropriate local state agency. The Operating Agreement is a type of document that is somewhat of a hybrid mix of a contract and Bylaws, which sets forth the internal operative mechanisms and relative equity interests of the company among various other factors. It is important that both documents are carefully completed.

There are similarities, such as pass-through tax treatment of revenue, but there are important differences as well. For example, the law contains certain restrictions for the operation of an S-Corporation while other operative aspects of a limited liability company may be more flexible. For example, setting up a limited liability company is typically less expensive. Also, many states’ Limited Liability Company Act contains no residency restriction on equity holder, while there may be restrictions on accepting foreign nationals as shareholders of an S-Corporation. Thus, if one of your co-owners is a Canadian citizen, you may wish to consider forming a limited liability company.

Some companies set up their business with the approach that contractual protections for employment or intellectual property issues can wait. Such an approach is not prudent. There are immediate and cost effective ways of protecting the important assets of the company. For a limited liability company, the Operating Agreement may contain a non-competition clause. Ideally, the company should consider implementing an employment contract that restricts distribution of data and solicitation of customers.

Ordinarily, the company can file Articles of Amendment to shift the type of business entity being used. In doing so, however, it would have to consult with counsel to ensure compliance with the legal requirements of the new type of entity and confirm the resultant tax treatment involved.

Business Transactions

While it may be an enticing idea to fold an entire business acquisition into one simple document with one attorney, such an approach is not appropriate. The seller’s counsel cannot validly represent the buyer in the same deal since that would constitute a conflict of interest. From a practical standpoint, a buyer should perform a “due diligence” review process of the business before purchasing to assess, for example, what kinds of potential liabilities he or she is about to buy. Such factors in turn may have a significant impact on the price one is willing to pay for the business.

When considering a purchase of a business, what kinds of items should I be wary of while proceeding down the path of negotiating with the other person? Is there a possible danger in discussing a purchase without legal documents in place?

One would be wise to consider such an issue when considering whether to buy or sell a business. When preparing transactional documents counsel ordinarily includes a provision called a “forum selection clause.” Simply put, a Maryland purchaser does not want to be dragged down to Florida to litigate a dispute when the business is located regionally. A clause making the location of dispute resolution clear can easily avert this problem.

There are pros and cons to arbitration. Arbitration sometimes has the reputation of supposedly being faster and cheaper, but that is not always the case. Arbitration is a less formalized process with loose evidentiary rules, and your case can be adjudicated by one person, the arbitrator, who may not understand your business and could reach the wrong result. Even worse, the person who loses arbitration has no distinct right of appeal, so you may be stuck with a result that is incorrect. In contrast, the traditional state and federal court system has clearer evidentiary rules and permits appeals to correct reversible error. In some state and federal courts, like many in Virginia, the courts can be faster and more cost effective than arbitration.

It depends on the nature of the acquisition transaction. In general, if a company purchases the assets of another company, it will not be liable for the debts or liabilities of that business. However, there are exceptions to this rule. In Virginia, a company may be liable if it expressly or impliedly assumed such responsibilities, if the circumstances of the transaction qualifies as a de facto merger of the two companies, if the purchasing company is a mere continuation of the other company, or if the transaction was fraudulent. It is extremely important to have the advice and counsel of an attorney in the acquisition process to avoid such pit-falls.

Employment Matters

In the absence of any contract, most states recognize an “employment at will.” This means that the company can terminate an employee for almost any reason. Understandably, many senior employees demand a written contract to give them some security. When a company uses a written contract, the terms of the contract will govern. Therefore, companies need a carefully written employment agreement that provides it with protection, but still allows it to terminate an unwanted employee. In general, companies should include a provision setting forth that the employment relationship is at-will, which will allow you or the employee to terminate the employment relationship, at any time, for any reason, so long as there is no violation of applicable federal or state law. In the event that the company wishes to provide the employee with some assurance of continued employment greater than an at-will relationship, such as with an executive or high level manager, the employment agreement should still contain a list of conduct which would allow the company to terminate the employment relationship.

There may be several bases for a claim, one of which may be derived from a non-compete agreement signed by the employee. However, even with a non-compete agreement in place, an attorney’s review is usually necessary to determine whether the agreement will likely be enforceable in court. If the former employee did not sign a non-compete agreement, the company may still have a claim against the employee if he used company time to start his competing business in breach of his fiduciary duty of loyalty. Again, consultation with competent legal counsel is crucial should your company encounter this problem.

There are a variety of factors that must be considered when protecting your business from a misappropriation of a trade secret or proprietary information. The proactive approach is to have your employees sign trade secret and nondisclosure agreements. Even with this, your legal representative will need to move quickly to protect unauthorized use of such information, and it may be necessary to immediately file an action in court to prevent the use of such information. However, prior to taking these actions, it is best to conduct a thorough, but expeditious, investigation into how the material was obtained by the employee, what specifically was taken and how it is being used to the company’s detriment.

The answers to these questions depend upon what agreements you signed with your former company. Many times an employee will not recall that they signed a non-compete or other restrictive agreement with their former employer. This puts their status in doubt with respect to starting a new, competing business, or signing on with a competitor. This also puts a competitor business who wants to hire the employee in a difficult position, because they do not know if that employee is bound by an agreement that will prohibit them from competing with the employee’s former company or from soliciting the former company’s clients.

It appears that your employee may have breached his duty of loyalty to the company during his employment. The general legal concept is that employees must prefer the interests of their current employer to their own. While they are employed with your company they are not allowed to solicit future business or interfere with your business relationships. Therefore, your company may be able to sue the former employee for the lost revenue for this breach.

Business Law and Civil Litigation

First, you should look to the contract to determine whether there is a provision that governs where either party can bring a claim in case of a dispute arising out of the contract. In the absence of such a provision, you should assess whether the California company had sufficient contacts with your state which would allow you to sue them locally to collect your money, and avoid the extra costs and hurdles of out of state litigation.

As any business owner can attest, disagreements between business partners are quite common in the business world. Unfortunately, many business partners do not take adequate steps at the formation of the relationship to plan for resolving these inevitable disputes. As a result, partners are often forced to turn to the courts to resolve their problems. One way to avoid the likelihood of litigation is for business partners to have an ownership agreement that all the owners sign setting forth how the company will be run and how disputes will be handled and resolved. For corporations, this is usually called a Shareholders Agreement, while for limited liability companies it is an Operating Agreement. But no matter the name, the purpose is the same and they are critical for every company to have in place. Without these in place, litigation can sometimes be the only other means of redress.

It appears that your employee may have breached his duty of loyalty to the company during his employment. The general legal concept is that employees must prefer the interests of their current employer to their own. While they are employed with your company they are not allowed to solicit future business or interfere with your business relationships. Therefore, your company may be able to sue the former employee for the lost revenue for this breach.

You can absolutely sue him, and this is precisely the scenario that should compel every business owner to put in place non-competition and/or other restrictive covenants to protect your hard-earned business. Your claims would be a combination of breach of contract for the non-compete, as well as various torts such as interference with existing business contract relationships, defamation, and potentially common-law or statutory conspiracy to injure business. Lost profits are routinely awarded by courts if these violations are proven, though they will often require the use of an expert witness if the case goes to trial.

This case highlights how critical it is that companies have effective procedures in place for handling and investigating employee claims of discrimination/harassment. The company here would have a good defense to the employee’s claim since she failed to follow the established reporting requirement for her complaint. However, the company should definitely not fire the complaining employee or take any other adverse action against her, since to do so would likely give rise to a viable claim for retaliation.

The first thing is to check the terms of the non-compete agreement, and consult with experienced business and employment counsel to see what the agreement allows you to do to and not to do. If the company did sue you, the likely first step would be for them to seek an injunction against you, which would be a court order prohibiting you from further violating the terms of your non-compete. The problem here is that the employee has already invested so much in his new company and there is a chance the court could shut it down as violating the non-compete. Employees who are thinking about leaving and starting their own companies would be well-advised to consult with experienced counsel well before they actually invest a lot of resources in the endeavor to weigh the risks of any applicable restrictive agreements.

Creditor’s Rights / Bankruptcy

There are various avenues for collection. An important initial step is to become a secured creditor by obtaining a lien on the debtor’s property by docketing your judgment in the county where the company owns any property. Thereafter, you may be able to force a judicial sale to satisfy the debt. If you discover that the company has depleted its assets to avoid paying your judgment, you may pursue an action to reverse the transfers or conveyances.

A debtor cannot ordinarily conceal assets away from a creditor by transferring it somewhere else and getting off the hook. Most states have statutory provisions making it clear that if a person owing money to another tries to shift his or her assets away to avert the debt, such transfer can be reversed if certain legal steps are taken by the creditor. Many states would consider such a transfer to possibly constitute a preferential transfer or fraudulent conveyance, which are prohibited. The creditor should obtain counsel to implement the steps to reverse such transfers and get his money.

This is not uncommon. Some companies try to avert paying their debts by switching office locations and names. If the “new” company is not really new at all but is still essentially doing similar work with similar staff, and is owned by most of the prior owners, it may be subject to “successor liability.” Creditors counsel may be retained to attack the company and perhaps its owner as well to prevent it from skipping out on payment obligations.

Comments or questions are welcome.

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