Forming a start-up venture with others? Consider a Founders' Agreement

Forming a start-up venture with others? Consider a Founders' Agreement

Co-founders of a start-up venture often find themselves excited and enthusiastic about getting their business idea off the ground. Amidst the whirlwind of developing a product or service and forming a team, it can be easy for the founders of the start-up to put legal work on the backburner.  That is often a costly mistake.  This blog post is the first in a series of articles on legal issues facing early stage ventures.  In this installment, we will discuss founders' agreements.

Can I Trademark My Business Name?

Can I Trademark My Business Name?

I am asked this question a lot, and despite the more complex inquiry that it can take to get to this answer, I will save you from that and provide some guidance: in short - yes you can. A trader should trademark a business name because it provides the right to exclusive use, added protection from competitors, increased value of brand and goodwill as well as adding value to the business itself.

What is an Assignment and Delegation Clause? How does it work?

What is an Assignment and Delegation Clause? How does it work?

An assignment and delegation provision is the clause that specifies a party’s ability to assign its rights or delegate its duties under a contract. It is a provision that is often placed in the “miscellaneous” or “general” sections of  contracts, but it should not be thought of as standard “boilerplate” language that never changes. Often times, it will be tailored and altered than in its standard form in order to give one party an advantage over the other.  Most people will skim or not review this provision, and accept the clause as it is written without really understanding what it can mean for them in the future. Contracting parties should carefully consider the potential situations where an assignment would be desired or required, and should carefully draft the clause to address issues of transferability. Here are some key issues in an assignment provision for contracts. Note that, technically, a party assigns its rights and delegates its duties, but this brief overview generally refers to assignments.

Incorporating in Delaware and Taking Advantage of Delaware General Corporate Law

Incorporating in Delaware and Taking Advantage of Delaware General Corporate Law

The decision of where to form a corporation or limited liability company is based on several factors, including location of assets and operations and owner/investor preference. Meanwhile, selecting a jurisdiction for a new subsidiary in a complex corporate structure may be driven primarily by tax concerns. Additional considerations, such as exchange listing obligation, may impact where publicly traded companies wish to incorporate.

A state's corporation law or LLC law can also play a role. The Delaware General Corporation Law ("DGCL") is considered highly advanced and viewed as being very management friendly. Nearly two-thirds of Fortune 500 companies are incorporated in Delaware. Delaware LLC law and practice are similarly advanced. Delaware entities can have internal disputes resolved by the judges-only Court of Chancery, considered one of nation's premier arbiters of corporate law matters due to the large number of prominent business matters it annually adjudicates. Most states do not have a separate court that exclusively handles business litigation cases. Many states base their corporation statutes on the DGCL, while others seek to be equally accommodating.

Customer Considerations For Negotiating Force Majeure Provisions

Customer Considerations For Negotiating Force Majeure Provisions

Clients often ask me what a Force Majeure clause is. It is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. The clause involves situations such as natural disasters, prolonged shortages of supplies, unanticipated or unpredictable government action, and much more. Parties negotiating a contract are free to define force majeure events at their choosing. Ultimately, events that are unforeseeable, unpredictable, and not contemplated by the parties at the time of contracting can generally fall within the force majeure realm.

Avoiding Management Struggles When it Comes to Data Breaches

Avoiding Management Struggles When it Comes to Data Breaches

They can be a nightmare to deal with, but dealing with them is half the battle because the legal problems at stake in the event of a data breach can be devastating. The best way for a company to handle a data breach is to be prepared.

Florida Legislature Updates and Modernizes Florida's Fictitious Name Act

Florida Legislature Updates and Modernizes Florida's Fictitious Name Act

Revisions to the Fictitious Name Act clarify the requirements for registering fictitious names in Florida, and modernize the statute to deal with the myriad of types of entities that now exist. Read on the Legal Newsstand on FantettiLegal.com

You're Ready To Sell, But Is Your Business Ready For Sale?

You're Ready To Sell, But Is Your Business Ready For Sale?

Many business owners have a dream of selling their business one day. For some, the contemplation of selling is not an option because maintaining a business for the family and future generation is the desired goal. Nevertheless, if an enticing offer comes forward, it may be hard to ignore. If you're contemplating selling your business, picture yourself as the prospective buyer. What questions would you ask and what records would you want to see in making your decision?

Eyeing the Exit: Building Value of a Business for Future Sale

Eyeing the Exit: Building Value of a Business for Future Sale

Deciding to build a company in the start-up phase or for a family business, day-to-day operations and growth objectives tend to consume most of management's time and effort. Day-to-day decisions, however, can enhance or diminish the exit value of the business at some point in the future, or can delay a sale. It is plausible that most business entertain the idea of one-day merging or cashing out in a sale of their business through an acquisition of some form. Regardless of the viewpoint, operating the business with a potential exit in mind can steadily increase the valuation realizable in a future sale. 

End of Year Business Counseling – What Situation You May Want to Escape From?

End of Year Business Counseling – What Situation You May Want to Escape From?

As 2018 approaches, year-end projects emerge relating to the termination, formation and conversion of business entities prior to December 31, 2017. People may be stuck in a business they want out of, whether with family, friends, or you took a flyer with an investment opportunity that isn’t working out the way you thought.

Maintaining Company Minutes

Maintaining Company Minutes

Many who organize small businesses, such as corporations or limited liability companies, assume that the benefits of such entities are absolute. One of these benefits is the complete separation of the business from an business owner’s personal net worth. However, these benefits are not maintenance-free. Once your company is formed, it is easy to go back to business as usual and forget to comply with necessary formalities, such as preparing detailed company minutes and resolutions. When properly kept, minutes constitute a record of company proceedings and should be regularly prepared for the following reasons: (i) reducing exposure to personal liability, (ii) proving authorization of major business decisions, and (iii) preserving a credible record for audits.

50/50 Ownership Relationships can be Trouble, Plan Ahead

50/50 Ownership Relationships can be Trouble, Plan Ahead

It is not uncommon for a family business, business among friends, or perhaps boyfriend and girlfriend or husband and wife, enter into a business where the two people want to be ‘fair’ with each other and state they will split everything equally – ’50/50.  This sounds great in theory, but in reality, as the Delaware Supreme Court has taught us in Philip Shawe v. Elizabeth Elting, the business doesn’t always run smoothly and relationship issues/ disagreements on the direction of the business can get in the way of development. Moreover, growth can stagnate because decisions aren’t being made due to deadlock situations and other persistent problems. Take for example, a business founded by two college friends, that own a business 50/50, although one owner gave one percent to his mother. Aside from being business partners, the two founders were initially engaged. The engagement was called off, and the relationship soured and remained hostile. Despite the breakdown of the personal relationship, the business grew to be one of the largest in its industry.

The 5 Most Common Legal Risks That Can Impact Your Business

The 5 Most Common Legal Risks That Can Impact Your Business

The role of the business owner is always changing. Not only do many business not have an attorney or any form of a legal department, but business owners without legal assistances play the dual role or making business decisions and legal decisions. It is important that a business owner find a lawyer that can understand legal consequences, draft legal documents and conduct litigation; otherwise, the business owner is required take on the strategic management of legal risks to protect the value and assets of a company. Absent proper understanding of the issues facing business and how the issues can impact the bottom line of a business, the risks will negatively impact a business without a business owner even realizing it before its too late.

To C or Not to C, that is the Question

To C or Not to C, that is the Question

For shareholders of S corporations and their advisors, avoidance of the potentially catastrophic tax consequences resulting from a “blown” Sub S election is always an issue of paramount importance. Due to superior asset protection, limited liability, tax savings and self-employment tax benefits, many Florida business owners have opted to operate their businesses utilizing an entity organized as a Florida limited liability company (“LLC”) for state law purposes but which has elected for federal income tax purposes to be taxed as an S corporation. For business owners electing to use this type of “hybrid” entity, it is a great method for flow-through taxation benefits. Too often, business owners fail to meet the filing deadline, which is a short timeframe after originally organizing your LLC.  Once the new tax year begins thereafter, you must timely file for the election again to preserve it or else it is lost again. The purpose of this note is to propose a technique that could significantly mitigate the potentially catastrophic tax consequences of a “blown” S election resulting from the failure of the entity to qualify as an S corporation as of the date the S election is made.

Corporate Formalities Matter in the Transfer of Shares of Family-Owned Businesses Family Business Perspectives

For businesses across America, especially small, family-owned businesses, shares in family-owned businesses are often transferred between family members, whether through a sale or gift during a shareholder’s lifetime or through inheritance after an owner’s death. The parties to such a transfer should make sure it is properly documented to reflect the intention to transfer the shares. This reality is something business owners neglect and fail to have a plan in place for any transfer until it is too late. Typically, the documentation for any such transfer is done through the transferor’s delivery of a signed share transfer instrument and the company’s issuance of a share certificate in the new holder’s name. In the absence of proper documentation, the transferee may not have a valid claim to the share ownership. Even worse, the company may find itself in the middle of an ownership dispute if the transferee has attempted to acquire the shares through fraud or deceit.

Courts are starting to take consistent positions on this matter across the United States. A California Court of Appeal recently faced such a situation in Patel v. Clocktower Inn, Inc. The company owned a hotel in California. The hotel was managed by members of the Patel family. One owner, lets call the owner “Owner A,” owned 12 of the shares of the company’s stock, equaling 50%, while three of Owner A’s nephews, collectively, owned the other 50%. Owner A’s two sons worked for the company but did not own any shares. Owner A was in his late seventies and did not read English. Instead, he relied upon the nephews to explain company matters to him Unfortunately, as the Court later noted, “formal corporate procedures were rarely used [and] [b]usiness decisions were often made orally and without formal board of directors meetings [and recorded minutes”] to properly justify sanctioned corporate action.

Owner A either told his sons or led them to believe that Owner A’s shares in the company would pass to them upon his death. According to the Court, however, the nephews did not want to wait until Owner A’s death to claim some of the stock.  In order to do so, the nephews caused the company to hold a shareholders’ meeting pursuant to signed waivers and a notice of consent. The minutes created in connection with that meeting stated that the shareholders “were informed” that Owner A had agreed to transfer three shares each to the nephews “as a gift” and instructed the company’s secretary to issue new shares. Owner A signed the shareholder meeting minutes at the nephews’ urging but without reading or understanding its contents.

The company’s by-laws required an endorsement to effectuate a transfer of any company shares. It was undisputed, however, that Owner A never signed any stock transfer certificate. Instead, when Owner A finally learned from one of the sons that six of his shares were being transferred, Owner A objected and refused to make any transfer. Nonetheless, based upon the supposed transfer, Owner A’s nephews, now ostensibly holding a majority of the company’s shares, took over the management of the company. Owner A then filed a declaratory judgment action against the nephews, and the company, asserting that he never intended to transfer any of his shares and that the claimed transfer to his sons was therefore ineffective.

At trial, the court rejected the nephews’ contention that the shares were effectively transferred through the statement in the shareholder meeting minutes that Owner A had transferred the shares “as a gift.” The trial court also noted that, “[b]eing gratuitous and without consideration, the intention stated in the minutes could not constitute an enforceable contract.” Instead, Owner A “remained free to change his mind until the transfer was completed.” Where Owner A never signed any transfer certificate/assignment and stated that he never intended to transfer the shares to his sons during his life, the transfer was never completed. The trial court thus entered declaratory relief in Owner A’s favor, providing specifically that the minutes did not alter the share ownership and that the allocation of shares remained as it had been before the minutes were created, with Owner A continuing to own 50% of the company’s shares.

The nephews tried to argue that the meeting minutes were an enforceable contract; however, Owner A could not read the minutes nor were they translated for him before he signed the minutes; that Owner A never agreed to transfer his shares to anyone during his lifetime; and that the nephews deceived Owner A into signing the minutes of the shareholder meeting.

This case serves as a reminder that corporate formalities matter when transferring shares of family-owned businesses. Not only do you have to keep the formalities (be certain you have intercompany agreements and keep track of minutes and resolutions), but if the by-laws or other governance documents require delivery of specific signed documents to the company in order to effect a transfer, both the company and the transferee should make sure the transferor has signed and delivered all such documents in accordance with the necessary requirements. Also, while children of family- business owners may wish to speed up their expected inheritance of certain shares in the company, they should not try to avoid the required corporate formalities for a transfer through deception or other maneuvers designed to give the appearance of a present intent to transfer where none exists. Corporate formalities will reign supreme as a method to keep consistency in corporate practice for disputes. Such misconduct will increase the risk that the supposed transfers will be deemed invalid if later challenged by the shareholder of record. It is also entirely likely that, in the face of such misconduct, the shareholder will reconsider his or her estate plan and disinherit the offending heirs entirely.