Archive for the ‘Shareholder Rights’ Category

They say that half of marriages end in divorce. This (perhaps made-up) statistic is equally true for business partnerships. Like an in-love, engaged couple, entrepreneurs often see their business partner relationship through rose-colored glasses. It hardly enters their mind that they could disagree on things, have different visions, and expectations, or that one side would abuse the relationship.

An operating agreement (for simplicity, the term will refer to all types of agreements between business partners, shareholders, members, etc.) is akin to an engaged couple’s prenuptial agreement. But it can and should be much more than that. Like the name implies, it should govern how the business is to work. In particular, what are the agreements among the partners? What role will each partner have in the work, in the management, in the finances? Will any partner receive a salary? How much? Are partners entitled to a job? What fiduciary duties does each owe to the business? How will profits be distributed. What about losses; will the partners have to invest more in the business? Will there be other employees? What happens if there is not enough business income to pay employees? What will the exit strategy/buyout be? Are the parties married to one another for any future business of the same type?

Many entrepreneurs have not even addressed all of these and other critical topics. This can be a recipe for future disagreements, or worse. Sometimes people go into a business in good faith, but they have different expectations about the business. If you are the primary financial backer, is your sweat equity partner expecting a salary from day one? If so, are you okay with funding the salary until the business generates substantial revenues?

Having litigated major and bitter disagreements between business partners, I have seen the ugly divorces of the business world. The infidelity. Desertion. Dishonesty. No one believes it will happen to them, but business partners lie, cheat and steel. They will fire you and freeze you out of a business. They will expose the company to liability. They will become drug addicts or non-functioning alcoholics. They will hire their do-nothing son-in-law who drives you crazy. They will spent all the profits on their own salary and salary of family members. The will start a competing business and try to take all the clients. They will exploit any ambiguities in an “off the shelf” operating agreement you got on-line. They will die, and their clueless spouse will become your business partner (a cross-sell agreement with life insurance is a topic for another day). Or you will die and they will take advantage of your spouse. I’ve seen all these things and more.

Your best first defense against misunderstandings is misdeeds is a specifically tailored operating agreement. This doesn’t mean that it is a panacea, or that you are defenseless. But courts respect operating agreements, especially if they are negotiated and tailored to the business at issue. You hope that your operating agreement keeps you out of court, but if you have to litigate or arbitrate over your business, you will be in a much, much better position. The relatively small amount of time and money that you spend at the beginning of the business formation (or before significant disputes develop) is some insurance against spending that same money hundreds of times over.

By Adam P. Whitney

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Fox Moulder’s motto was “Trust No One.”  Lawyers can understand this paranoia.  Divorce lawyers know spouses cheat.  Criminal lawyers know clients steal and worse.  And as a business and employment litigator, I know that private businesses can be be hurt by the people they trust the most, their employees and their business partners.  This includes both majority and minority shareholders, members of LLC’s, and partners in partnerships.  Sadly, this also includes family members in a family business. 

I refer to all such persons as “partners,” because that is how people generally think of one another.  I think that the term itself, partner, holds a special meaning of trust to the business person, as it should.  It’s no coincidence that the word also means a person with whom one has an intimate relationship, also founded on trust.

With trust, sometimes comes blindness, willful or otherwise.  Maybe this will work fine for you, and you and you, but someone reading this blog has a partner who is cheating them.  The obvious form of this is that the cheating partner is taking more than his or her share from the business.  He is paying his car payments from the company accounts while you pay for your own car.  He secretly increased his salary by 50% without informing you. Maybe’s he’s paying for his mistress’ apartment.  Or his cocaine addiction.  Or his son’s college tuition.  Maybe he’s going on shopping sprees with the company credit cards.  Maybe he fires you when you complain.  Or cuts your salary and forces you out.

Sometimes the partner who is not in charge of the books can cheat as well.  By submitting false expenses. By moonlighting.  By directing the business to his own secret company or a friend’s company.  By accepting and taking the customer’s payments.  Maybe both of you are cheating the other in your own way.

I’ve seen all of these things, and much more happen.  It’s human nature to be tempted in financial matters.  It’s easy to tell yourself that you deserve it, because you work hard.  Your partner is lucky to have you.  Or to tell yourself that you’ll pay back the money next month.  There is always some justification in your partner’s mind; they do not think of themselves as having done wrong.  But partners generally owe one another a strict fiduciary duty of good faith and fair dealing.

The message is obvious.  You need to be aware.  If you sense something is wrong, it probably is.  Be involved in all aspects of the business.  You also need access to the company books and financial records on a regular basis.  You generally have a right to this information.  You want a sharp CPA working for the company who will catch these issues before the problem gets too large. 

If you discover that your partner has cheated you in some way or the other, you do have legal recourse.  I have helped a number of “partners” in these most difficult situations.  Even ones who were not 100% clean themselves.  Call me and start to take some control of the situation.

By Adam P. Whitney

617.338.7000 

 

Sometimes business and family don’t mix well. Family business disputes can be particularly emotional. I’ve seen it all, brothers against brothers, sisters against brothers, sons against fathers, etc., etc. Jealousy and greed can bring out the worst in family relationships. A wise judge recently told me that (when it’s sibling against sibling) sometimes it all comes down to who got the better bicycle for Christmas when the parties were growing up. It’s not really that simple, but there is a kernel of truth there.

I’ve represented both employers and employees in family businesses. When things go bad in these situations, things can get really nasty. The adage that the ones you love can hurt you the most holds true here. I recently settled a case for a fired stockholder-employee for $1.4 million, who was fired by his elderly father after working for the company for thirty years. We alleged that his sister, also a long-term employee, manipulated the elderly father into turning against my client, who was a superstar salesman. This case was reported in Massachusetts Lawyers Weekly as one of the biggest settlements of 2011.

http://masslawyersweekly.com/2012/02/15/son-fired-from-family-business-after-30-years/
http://masslawyersweekly.com/files/2012/01/LargestVS2011.pdf

It’s inevitable that if you have a private business, you will have to consider whether to have family members work there. Sometimes private businesses grow into a family; sometimes your family grows into your business. The more successful the business, the more pressure there will be to hire family members. You may have siblings who need a job. You may have adult children who you want to bring into the business and eventually take over for you when you retire. You may start a business with a son or parent or sibling. All of these things are very common. Things are always hunky dory at the beginning. Maybe even for years.

But, inevitably, personal feelings will get in the way of running the business. Your family members may feel that they are different than other employees. They may feel that the same rules do not apply to them. They may overvalue their worth to the company. They may think of themselves as an owner when they are not. They may be jealous of you as the owner. The opposite is true too. Sometimes the family-member employee is taken for granted. Sometimes other family members are jealous of the other family-member employee who is a superstar, as in my recent case.

If you make decide to hire a family member, here are some general guidelines to avoid some nasty problems:

– Treat your family members like other employees and hold them to the same standards.
– Similarly, try to separate personal feelings and issues with business issues.
– Consider carefully the issue of stock ownership (see my post on terminating stock-holder employees). There are a lot of issues here, such as buy-sell provisions, which are beyond the scope of this post.
– Have clear written employment agreements and comply with the law. Family members can and will sue you for violations of wage statutes, etc.
– Communicate frequently on expectations for salary and ownership potential for the future. Your adult child may think that you are retiring at sixty and giving her the business. You may plan to work until eighty and/or sell the business. These different expectations can lead to big problems.
– Similarly, don’t let issues and problems build for years. Family members can turn into Rogue Employees, too.
– Consider arbitration clauses. Although I’m not always a fan of arbitration, you may not want your family’s dirty laundry aired out in court.

If you are a private business owner or a stockholder in a close corporation, I can help you with these issues. Call me at 617.338.7000.

Adam P. Whitney.

Massachusetts is an employment at will state, so you can surely fire an employee who has no contract for a term if you have just cause to do so, right? If that employee is a stockholder in a close corporation, the answer may well be no. This is a not well-known area of law, and lawyers can easily make mistakes in this area.

Let’s start with general principles. A “close corporation” is usually a smaller business, such as a family business, with a small number of shareholders where the stock is not publicly traded and there is no ready market for the stock and substantial stockholder participation. A great many smaller businesses will qualify as close corporations.

In Massachusetts at least, a stockholder in a close corporation may have a reasonable expectation of continued employment in the business. This is a question of fact, but if the stockholder either invested in the corporation with the understanding of continued employment, or stayed employed with the expectation of continued employment, then the minority stockholder has certain rights to continued employment. The same is true for partnerships, LLC’s and other business entities where the employee holds an equitable interest in the company.

These cases present a special circumstance of the intersection between employment and business/corporate law. Even for those of us who practice substantially in both employment law and business litigation, the cases can be factually and legally challenging. There are often substantial emotional issues involved, as many close corporations involve family businesses or close friends who are shareholders.

Having a reasonable expectation of employment doesn’t mean that a stockholder employee can never be fired. But, there must be a business purpose for the termination. This is a higher standard than just cause. The controlling stockholders have a fiduciary duty of the utmost good faith and fair dealing to a minority stockholder. In addition to having a business purpose for the termination, the controlling stockholders must consider less harmful alternatives to termination. There is no laundry list of less-harmful alternatives, as every factual scenario is distinct. The less-harmful alternatives which must be considered depends on the business purpose for the termination. For example, if the business purpose for the firing is that the employee is not getting along with other employees, less harmful alternatives could include job-coaching or counseling, moving the employee off-site, etc.

The takeaway is that the attorney representing the close corporation which intends to fire a minority shareholder must proceed with great care. It may well be malpractice to advise the close corporation that it can terminate a minority shareholder – even when the minority shareholder has committed some misconduct and is an employee at will – without identifying the business purpose and advising the client to fully explore less harmful alternatives.

If you are the controlling owner of a small business and you are having trouble with a stockholder, call me to discuss your options and obligation. If you are a minority shareholder and you have been terminated, or suspect that you are about to be terminated, I may be able to help you as well (as long as there is no conflict). We have successfully represented both controlling shareholders and minority owners. As always, the above is general information and not legal advice.

By Adam P. Whitney 617.338.7000.

You’re a high level or very successful salesperson or other professional with a noncompete agreement or a nonsolicitation agreement, or the like. Your boss is a dysfunctional tyrant. You want to leave to start your own business. Or you’re a partner, LLC member, or shareholder of a small business and it is not working out. How do you form an exit strategy?

There is no one size fits all strategy, as each situation and set of legal documents are unique. I’ve represented a number of clients in these situations. Although I’m usually on the business owner’s side, representing these clients is rewarding because I help them to leave an intolerable, or at least undesirable, situation. They then become business owners and employers themselves.

Here’s the good news. You can make the leap from indentured employee to successful business owner. Although the first steps are hard, you will probably never look back. You’ll wonder why you didn’t do it sooner. Many of your clients will eventually do business with you. You’ll grow your business and get new clients. You’ll wonder why you ever feared that dysfunctional tyrant who you called your boss, and regret that he got rich on your talent and efforts.

Here’s the bad news. That dysfunctional tyrant may make it hard for you to leave. He may hire expensive lawyers to try to bury you in litigation fees and to get a court order to stop you from earning a living and feeding your family. You will incur some legal fees fighting this, and there is no guaranty that you will win.

I’m not going to lie and tell you that it’s easy, but if you believe in yourself and your abilities to do it better than that dysfunctional tyrant, I can promise that you can get through it, and be a whole hell of a lot happier in your life. I can also promise you that we can come up with a strategy for your situation which, as stated above, must be determined on a case-by-case basis.

No matter what your strategy, there are some basic do’s and don’ts for every employee (or partner, etc.) who is contemplating or planning on leaving to start another business or even to go to another employer. These are common sense, but people get them wrong in their zeal to succeed in their next endeavor. Basically, be honorable and treat your employer the way you would want and expect to be treated once you are the boss of your own business, even if the tyrant doesn’t deserve it.

Do continue to be loyal to your employer. Keep servicing the clients. Keep reporting to the boss. Do your job.

Don’t solicit or recruit clients to come with you while you are still on your boss’ dime. Although this is very tempting, and it would be comforting to know if your best clients will follow you, avoid the temptation. You owe your employer a duty of loyalty and good faith. Moreover, you will look like a dishonest sneak if it comes out in court that you were doing this.

Don’t steal any customer information, company trade secrets, etc. You can recreate your customer list from memory and using the internet (or you may have them socially networked anyway), so don’t do a bush league move and e-mail yourself a list of customers. If you do that, you become the bad guy, and the dysfunctional tyrant looks like the victim.

Don’t assume that non-competes and other restrictive covenants are not enforceable. Generally, they are enforceable. But there may be ways to work around them. You need to consult with a lawyer to understand what you can and cannot do, and what your risks are for doing it.

Do document everything that could support a claim against your employer. Sometimes the best defense is a good offense. If your employer is not paying you commissions, is doing something unethical, sexually harassing you, etc., etc., you may have a good legal or practical defense to get out of a non-compete.

If you’re an interest holder, such as a stockholder of a small corporation, a member of an LLC or a partner in a partnership, there are special considerations. You will need someone to review your company documents to see if there is any built-in exit strategy.

If you are ready to leave the dysfunctional tyrant, give me a call at 617.338.7000. Assuming I have no conflicts of interest (I represent mostly business owners, but none of them are dysfunctional or tyrants), I can discuss some of the options available to you.

By Adam P. Whitney.

Much of what you may think you know about employment contractual issues could be wrong. Is your company exposing itself to liability because of misinformation or a lack of information about contracts? Employment law creates traps for unwary employers. For example, you could be damned by a poorly drafted commission plan, which could subject you to triple damages, costs and attorneys’ fees even where you think an employee is owed nothing. You could be damned by your own personnel manual, which inadvertently creates contractual rights in employees. You could be damned by firing a minority owner of your business (stockholder, partner or LLC Member) without legal advice. Here is a brief guide, which just scratches the surface of these complex issues.

Does a Contract Have to Be in Writing?

Yes and no. Ideally, every employment agreement should be in writing to clarify the rights and obligations of both parties. Sometimes, a simple offer letter will do. To some extent, oral contracts can be enforceable if they can be performed within one year. If the contract cannot be performed within one year, then it must be in writing to satisfy the statute of frauds. Like many things in the law, there are exceptions to these rules. For example, if an employee relied on an oral promise of a contract for a term of years, the employee might be able to enforce the oral promise using the court’s equitable powers? Also, a promise of employment for life can be performed within one year because anyone can die within a year. Thus, an oral promise of employment for life can be enforceable.

Does a Partner in a Partnership, a Shareholder in a Small Corporation, or a Member of an LLC Have Rights Against Being Terminated by the Majority Owners?

Yes, to an extent. This is a very complicated area of the law and depends on the specific facts of each case. In general, if the owner-employee has a reasonable expectation of continued employment, he cannot be fired unless there is a business purpose for the firing and no less harmful alternative. This is because the majority owners owe the minority owner the utmost duty of good faith and fair dealing. Thus, majority owners should seek sound legal advice before terminating or taking other action against a minority owner employee.

Can Other Employees Be Fired Without Cause?

The general rule is that, if an employee is “at-will,” which means that the employment is not for a specified period of time and there is no contractual protection to employment, the employer can fire the employee for any reason or for no reason. If an employee has a specific contract (or if a personnel policy creates rights against termination, as set forth below), usually the employer can terminate the employee only if there is “cause” to do so. Well-drafted contracts define the specific “for cause” reasons for termination.

Also, there are dozens of statutory and common law protections which protect employees from discrimination and other matters. Thus, if the employer terminates the employee without cause, the employee may believe that there is a discriminatory or other reason for the termination.

Does the Employee Manual or Personnel Manual Create an Employment Contract Giving Rights to the Employee?

Yes, no, maybe. Typical lawyer answer, I know, but it is the right answer. A well drafted manual usually will not create contractual rights in favor of employees. However, there are reported cases where a poorly drafted manual inadvertently gives rights to employees that prevent their termination without cause. Employers should have their manual reviewed by a qualified employment lawyer to protect themselves from suit.

Can an Offer Letter Create an Employment Contract for a Term?

Yes. Employers can unintentionally create an implied contract for a term by the wording in an offer letter. Employers should have their offer letters reviewed by a qualified employment attorney before sending them.

Should Employees Be Told of the Reason for Termination?

Probably, but it depends on the situation. What employers should not do is lie or tell a half-truth, even to save the employee’s feelings. This does not mean that the employer has to be harsh or intentionally hurt an employee’s feelings, but if you do not tell the truth at termination and you are then sued, it’s hard to change your story later. The employee’s lawyer will accuse you of changing your story and that your real reasons were discriminatory. Also, you should document the reason for the firing. Employment lawyers have a saying – if it is not in writing, it didn’t happen.

Additionally, there are new statutory requirements about what employers must put in an employee’s personnel file and how the employer must inform the employee of any negative information. All employers should review these new requirements with a competent employment attorney.

Can an Employment Contract Control over Statutes and Common Law?

Generally, no. Although parties are free to set forth the terms of the employment in writing, there are limitations. For example, employees must be paid minimum wages and must be paid either weekly or bi-weekly. These rights cannot be contracted away. An employer also could not have an employee waive an employee’s rights under anti-discrimination or other protective statutes, such as the Family and Medical Leave Act. However, unless there is some statutory or public policy prohibition, parties are free to tailor their agreement as they see fit.

Are Contracts Requiring Arbitration Enforceable?

To some extent, yes, if the contract is well-drafted, fair and reasonable. An employee is always allowed to challenge whether there is a valid arbitration provision, which is an issue for a court, not an arbitrator. Arbitration can also be waived by the party seeking to enforce it. Also, arbitration clauses cannot prohibit employees from filing with the Massachusetts Commission Against Discrimination, or from filing wage claims or other claims with the Attorney General or other governmental entities. Arbitration issues are complex, so if you are an employer who seeks to enforce an arbitration clause, make sure you have it reviewed by a competent employment attorney.

Can an Employer Make Sure that a Worker Is Not Classified as an Employee by Entering Into an Independent Contractor Agreement?

No. In Massachusetts, there is a strict three-part test for determining whether someone providing services for your company is an employee or independent contractor. This is a complex legal and factual question, but in general, if the individual is providing services within your line of business, or you have some control over the individual’s work, or if the employee does not have his own business or profession, the individual will likely be deemed to be an employee. There can be severe penalties and liabilities for misclassifying a worker as an independent contractor, so have a competent employment lawyer review this issue for you.

Does an Employee Have any Rights and Remedies if a Contract Has Been Breached?

Usually, but it depends on the wording of the contract and whether the employee has suffered damages. Employees will normally have a duty to mitigate damages. Thus, an employee must seek another comparable job after termination. The normal damages would be the loss of earnings during the contract term, minus amounts earned or which could have been earned in mitigation. There could be other damages, depending on the wording of the contract and the situation.

Does an Employer Have to Provide Severance Pay?

Generally, no, unless there is a contractual right or a specific, enforceable policy to do so. There may be exceptions to this general rule, but the exceptions do not apply to most employers and employees.

Does an Employee Have a Contractual Right to Bonuses and Commissions?

Yes, no, maybe. Commissions and bonuses are creatures of contract, but can potentially be enforced through payment of wages statutes. One must first look at the specific wording of any written contract or compensation plan, and also examine the course of dealing of the parties and the standards in the industry. If an employer has a vague commission plan or one that favors the employee, the employee may have a contractual right to commissions, even after termination. Worse yet, the employee could be entitled to triple damages and attorney’s fees, litigation costs and interest. Thus, any commission or bonus plan must be very carefully crafted by a competent employment attorney. A “bonus” is usually thought of as being wholly discretionary and, thus, not subject to contractual or statutory rights. However, “bonus,” is just a word used and the word itself does not control. Employers can inadvertently create employee rights to a “bonus” by a poorly worded compensation plan or a course of dealing.

Can an Employer Make any Employee a Salaried Employ by Putting that in the Contract?

No. There are specific guidelines under federal and state law regarding who is an “exempt employee” and who is a “non-exempt employee” for overtime purposes. Contrary to the belief of some employers, you cannot simply pay any employee a salary and not expect to keep track of their hours and pay overtime. You must first determine whether the employee meets the exempt guidelines, which can be very complicated. For example, lawyers and doctors are professionals and can be paid on a salaried basis, as can some (but not all) executives, managers and computer programmers.

The above is not meant to be legal advice, but merely general information. Employment law is extremely complex, and legal advice cannot be given without a full review of the facts and the law. The above may or may not apply to any particular employer or employee.

By Adam P. Whitney 617.338.7000.