Managing to Avoid Legal Issues

 By: Bob De Contreras

Over the past few months we have been running a series of articles on how management focus changes as companies evolve through the different growth phases.  This article applies to all phases, but is probably most valuable to start-ups and companies in the first growth phase.

 In this article we focus on highlighting some of the things you need to know about legal issues, dealing with them, and the lawyers who help you resolve them. 

 Legal Issues

 The major legal issues you will encounter in business are in one of the following areas: 

• Business format/licensing

• Bank/investor relations

• Protection of ideas

• Product protection/liability

• Government regulation

• Commercial contracts

• Employment contracts

• Alliance/partner agreements

 Types of Attorneys

 Like many other professions, corporate lawyers tend to specialize in one or more areas of the law.  These lawyers are not usually the ones who litigate. You will have to search specifically for litigation lawyers, also in specialized areas of the law. It might not surprise you that the specialization areas don’t necessarily match the legal issues you face.  The typical legal specialization areas are: 

• Incorporation and capitalization

• Taxes

• Intellectual property

• Contracts and licenses

• Employment

• Real estate

 If you retain a reputable legal firm, you’ll usually work with three lawyers – an incorporation lawyer, contracts lawyer and intellectual property lawyer to handle your legal needs. 

 Hiring a Lawyer

 When hiring a lawyer, two things are important for your success in finding a good one.  First, get a recommendation from someone you trust.  Second, have a good set of questions for your interview with the candidate lawyer.  The answers you get will help you make the best decision on whom to hire.  The questions to ask should include: 

• Are you experienced with my issue?  How much experience do you have?

• Are you well-connected?  (Within the legal community, business community, courts, etc.)

• Do you have other clients in my industry?  What have you done for them?

• Are you a good teacher?  Will you help me better understand the legal issues and alternative solutions?

• Are you a finder, a minder or a grinder?  (lawyer who sells, lawyer who supports existing clients, lawyer who cranks out the paper)

• Will you be flexible in your billing?  Will you work on a fixed retainer? 

 You should ask yourself some questions too.  What do you need from your lawyer?  What should you watch out for in a lawyer?  Some examples include: 

• Is this a frustrated business person disguised as a lawyer?  A lot of lawyers give you business advice when you think you’re getting legal advice.

• Does this person communicate well?  Are you getting the whole story or just what the lawyer thinks you need to know?

• Is the lawyer’s office conveniently located?  You may need to frequent the lawyer’s office.

• Do I like the person?  You’ll probably be working through some tough issues.  You need to have trust and confidence in your lawyer – start with liking the person.

 What Will You Need a Lawyer For? 

• Prepare and file your articles of incorporation.

• Create your company bylaws.

• Prepare initial board of director resolutions.

• Create the documents that support the company’s capital structure.

• Draft initial contracts and sales agreements.

• Prepare employment offer letters and agreements.

• Prepare investor agreements.

 Documentation and Files 

• File original copies.  Yes, you can work off of fax and photo copies, but for important documents that might be needed in court – file an original copy.

• Use blue ink for signing documents.  This is a good way to see that you have an original copy.

• Don’t save draft versions of documents.  They can be captured for a deposition and the history of changes may lead the court to a different view of the meaning of the final document.

• Only accept changes if in writing.  English is an imprecise language that often leads to miscommunication.  Written legal phraseology is standardized and clearly defined to avoid confusion and lost meaning.

• Initial all pages.  It’s all too easy to change pages in an agreement.  To protect yourself, counter parties should initial each page and sign the last page of the agreement.

 Staying out of Court 

• To avoid issues, plan ahead and get legal advice early.

• If threatened with legal action make an early response to avert a legal suit.

• Use a face-to-face settlement meeting to prevent court.

• Use independent arbitration to avoid court.

 Considerations for the inexperienced 

• Always use a sales agreement to avoid issues of ownership, license, intellectual property, liability, confidentiality, and more.

• Don’t save too much paper – it will make it more difficult for you to find the documents you need when you want them.

• Don’t save too much email – it will make it more difficult for you to find the notes you need when you want them.

• Beware of outsiders pitching ideas to you – if you have it in design and then release it to your clients they can claim it was their idea.

• Have a buy/sell agreement – you never know what’s going to change in the future.

• Have a partner agreement – you never know how the relationship is going to change over time.

 Clearly there are many more considerations, issues, needs and obstacles that require you to retain legal council.  This article is just an attempt to help guide you on the path to retaining the proper legal council to protect you early and before you have a need caused by litigation.

Managing to Avoid Legal Issues Case Study

By: Bob De Contreras

Similar to the main article in this newsletter, this talk with Paladin presents three situations, experiences and issues Paladin has worked with our clients that could have been avoided with proper legal protection and better understanding of the legal advice.

 The Virtual Partnership

 Many of you have heard of common law marriage – a situation where two people are considered legally married after they have lived together for a specified period of time.  This doesn’t seem fair if there was no contract coming out of the process of acquiring a marriage license and signing the “marriage agreement” at the end of the ceremony officiated by an officer of the court.  But, it happens and it’s legal.

 A similar situation can arise in business.  One of our clients hired an executive (employee) to manage operations.  In the conversation during the hiring interview the CEO said that he would make this new executive a partner in the company if he satisfactorily contributed to the business growth.  Within the second year of employment this operations executive decided to leave the company and pursue another opportunity.  He told the CEO that he had contributed to the business growth and therefore he was a partner and he wanted half the current value of the company in a cash settlement on his departure.  There was nothing in writing on the topic of partnership. 

 The legal advice our client received was that he had a verbal contract with the employee and that the employee would prevail in court.  The legal advice – settle out of court.  The result is that it cost the CEO a quarter of the value of the company to settle with the “partner.”  In hind-sight, our client learned to not say anything he didn’t plan to execute on immediately and get every agreement on paper.

 Works for Hire Services Agreement

 One of our clients is in the consulting services business.  She lost some of her intellectual property because she didn’t understand the services agreement she uses and didn’t understand some basics of contract law.

 Her lawyer helped her develop her services agreement and because of the type of work her company did the lawyer wrote what is known as a “works for hire” service agreement for her company’s use.  This type of agreement says that anything developed while working on the contracted services is owned by the client. 

 On this engagement our client’s company used one of their “tools,” intellectual property that the company had developed on it’s own.  The company would have been safe in using the tool on this engagement and there would have been no change of ownership because the tool was developed prior to the engagement with this client. 

 The problem was that the company modified the tool during the engagement to better fit the project.  Because that modification was made during the project, the entire tool became “works for hire” and therefore a copy was now owned by the client.   

The Partner Retired on the Job 

This CEO had a partner for the past 17 years.  The business was a success and they had a good installed base of customers.  The problem was that the CEO’s partner was not doing much work these days.  The partner was collecting a healthy share of the profits, but he was no longer contributing to the company success – in fact he was causing degradation in revenues.

 When we were engaged the CEO and his partner were a long way down the road of debate, lawyers, and buy out options.  They were clearly fighting a war based on emotion and ego.  They were only a hundred thousand dollars apart on their buy out negotiations on a settlement of three million dollars. 

 The partner was ready to take the CEO to court.  They had stopped talking to each other and had relegated negotiations to flaming emails and blazing letters.  Interestingly the lawyers were helping escalate the debate and adding to the environment of hostility. 

 The interesting thing in this case is that human nature was getting in the way of these to executives being human to each other.  We suggested that the CEO back off and take a friendly, reconciliatory and apologetic posture in his negotiations.  We suggested that the CEO talk about his affordability of the settlement.  We wanted the CEO to discuss his sorrow at having to come to this very stressful situation.  We suggested that the CEO talk about how paying the buy out amount was jeopardized by the affordability of the settlement amount.  In other words we suggested that the CEO make this a business discussion rather than hand-to-hand combat.

 The results were amazing.  The CEO sent one letter incorporating the suggestions we had made.  The partner phoned the CEO as soon as he received the letter and after a short discussion agreed to final terms.  The moral of the story is that sometimes we can solve very difficult legal problems by talking through the issues with an open mind and non-aggression.

 Summary

 When it comes to the law, contracts, agreements, and people – nothing is obvious and common sense does not always prevail.  Get agreements in writing and get good legal advice early in the process.  Be reasonable and talk through issues early with your counter party.

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            Bob De Contreras                                                  
            Rich Kramarik