Tuesday, June 26, 2018

Enough With Arbitration Provisions: Litigators Hate Them and GCs Should Too

Arbitration provisions are a common feature of commercial transactions for businesses trying to alleviate the burdens of litigation. In-house and transactional attorneys routinely include arbitration provisions in all flavors of commercial agreements. To put it bluntly: please stop. The professed benefits of arbitration in commercial cases are frequently overstated. Proponents of arbitration argue that it is cheaper and faster than litigation with “expert” arbiters rendering final decisions. Careful examination of these claims suggests that they are an unpersuasive justification for a process that should not be incorporated wholesale into every transaction. This article examines four of the most common justifications for arbitration and suggests examination of the knee-jerk impulse to include arbitration provisions in commercial agreements.

Arbitration is Cheaper

The first fallacy of arbitration proponents is the claim that arbitration is cheaper than litigation. Not true. For a nominal filing fee, litigants can access the full infrastructure of the state and federal court systems. The cost of the judges, law clerks, administrative staff and the court house are all subsidized by taxpayers. Arbitrators charge by the hour, the arbitration provider often charges by the size of the claim and the parties may have to pay a room charge. In practice, it is difficult to complete a single arbitrator arbitration of any size for less than $25,000 in costs. Despite the financial realities of arbitration, attorneys routinely include arbitration provisions that require a three-arbitrator panel in contracts even where the amount of the transaction is likely less than the costs associated with paying the arbitrators.

Proponents of arbitration also claim that legal fees are less when compared with the costs associated with a trial. There is nothing to suggest, however, that an attorney preparing to appear before an arbitrator can prepare any less thoroughly than an attorney representing a client at trial. Moreover, the “arbitration-is-cheap” folks also tend to overlook the possibility of significant litigation associated with getting a case into arbitration. Although courts favor arbitration, such preference must yield to the agreement of the parties as expressed in the arbitration provision. It is not uncommon to litigate the scope and validity of an arbitration clause as a prelude to submitting the case to arbitration. The Pennsylvania Rules of Appellate Procedure make an order denying a motion to compel arbitration or granting a stay of arbitration immediately appealable by right.  Arguing about whether a claim is subject to arbitration and the terms of such arbitration invites a sideshow that can easily dissipate any cost savings realized by the decision to arbitrate.

You Get a Highly Qualified Subject Matter Expert

A common justification for commercial arbitration is the notion that the arbitrator will be a “subject-matter expert” – one that will clearly do a better job than a judge or jury that has no similar expertise. The ideal “subject-matter expert” is a person experienced in deciding cases who can make intellectually honest, clear and decisive decisions. Most arbitrators are lawyers with little subject matter expertise except in the law. Lawyering skills are not necessarily congruent with judicial skills; claiming that they are overlooks the skills and temperament required of a judge and the time it takes to develop them. Crafting arguments and evaluating arguments are not the same thing.

While the “expertise” of lawyer-arbitrators may raise doubts, there are situations in which a specialized expertise – beyond familiarity with the law – may be warranted. It may be more efficient to resolve a dispute with a securities broker in front of a panel that already understands how securities work. Even if a specialized subject matter arbitrator is warranted, such experts may be difficult to find.  Successful industry specific experts are often working in their industries, not serving as arbitrators.

Most commercial litigation, however, does not fall into this category. Commercial litigation comes in a variety of flavors – contracts, fiduciary duties, “business torts” – with widely varying facts that are not easily susceptible to a standardized response. Such cases are commonplace in both the federal courts and Philadelphia’s Commerce Program and judges and juries have resolved them for hundreds of years. Judges and juries can provide a sense of the reasonable expectations or behavior of the parties in similar circumstances. Although there are always (usually well reported) examples of juries doing crazy things, juries get it right most of the time.  Commercial disputes can be complicated but the best litigators find the common-sense proposition in complicated fact patterns and convey it in a way that provides context and relevance.

Arbitrators are also subject to certain pressures that judges are not. Professional arbitrators make money by conducting arbitrations. Leaving one party totally defeated at an arbitration reduces the odds of any repeat business from the losing attorney or their friends. It also brands the arbitrator with being plaintiff or defendant friendly, further reducing the odds of future appointments. This is not fair to the arbitrator who has diligently applied the law to the facts but it is the state of the world. As a result, many arbitrators tend to “split the baby” when it should not be split.

Discovery is Less Painful

The next purported benefit of arbitration is that discovery is shorter and more efficient, thereby achieving cost savings and a prompt resolution. There is nothing about arbitration that suggests that the parties will employ “discovery lite.” Many commercial disputes simply require elaborate discovery. There is nothing inherent in the arbitration process that reduces the discovery grind. Discovery can be just as contentious in arbitration as it is in litigation, or perhaps even more so due to the lack of detailed rules of civil procedure.

In litigation, judges have the power to limit the scope of discovery to prevent undue hardship, harassment or delay. Even before the 2015 amendments to FRCP 26, both state and federal judges engaged in a “proportionality” analysis when evaluating discovery requests. Without the benefit of detailed rules of civil procedure, the scope of discovery in arbitration depends in large part on the discretion of the arbitrator.  In the event of a dispute between the parties on the scope of discovery, arbitrators may choose to look to the rules of civil procedure, his or her own experience or anything else. There is nothing to prevent an arbitrator from allowing wide-ranging, multi-round discovery, increasing costs for all parties.  

Attorneys in the “discovery-is-a-breeze-in-arbitration” group sometimes fail to appreciate the additional annoyance associated with compelling unwilling third-parties to produce information or dealing with an opponent’s unwarranted machinations. Arbitrators lack a court’s power to compel compliance with third-party subpoenas. As a result, extracting information from a third-party often requires the initiation of litigation anyway. Although arbitrators have some ability to punish parties who do not participate in discovery in good faith, many arbitrators are reluctant to do so. 

Forward thinking corporate counsel may try to avoid such discovery tsunamis by including parameters for discovery within the provisions authorizing arbitration. But limitations that seem like a good idea when drafting an agreement can backfire if your client is the one that needs the deposition or the e-discovery to advance or defend their case. Given the extremely liberal pleading procedures that the arbitration rules provide, there is often an enhanced need for discovery in arbitration that makes any contractual limitation on the scope problematic.

Arbitration is Final

The finality of arbitration is often touted as one of its benefits. This justification is based on the unsound premise that finality is always desirable. It is only desirable if you are happy with the result or the costs of continued litigation is likely to eclipse the eventual outcome of the litigation. A party that has lost because of an arbitrator’s error has cause for concern about the finality of the proceeding; elimination of a right to appeal merely adds salt to the wound. In recognition of the perceived unfairness of such an outcome, the AAA rules now contemplate that parties may agree to make an arbitration award appealable to another panel of arbitrators.

Even absent an explicit appeal provision, a disappointed party may attempt to set aside an arbitration award by showing arbitrator bias, fraud, obvious miscalculation and other narrow categories of complaints. Although overturning the arbitration decision may have poor odds of success, the appeal may be disruptive and costly to the non-appealing party. If a trial court elects not to set aside the arbitration decision, the disappointed party may seek to appeal from that decision. Thus, a disappointed party in arbitration has two chances to set aside an award – first to the trial court, then to the intermediate appellate court – before it reaches an appellate court with discretionary jurisdiction. Conversely, a party that began its litigation in the court system has typically only one appeal before it reaches a court with discretionary jurisdiction.

The Take Away

Arbitration is not always inappropriate for commercial disputes. Confidentiality, speed and other justifications may make it the preferred method of dispute resolution in certain circumstances. It is equally true, however, that arbitration does not always performed as advertised. It is sometimes more expensive, less efficient and less effective than it might initially be intuited. A thoughtful and deliberate comparison of the costs and benefits of both arbitration and litigation will lead to more efficient dispute resolution that better serves the interests of all parties. 

Reprinted with permission from the June 20, 2018 issue of The Legal Intelligencer. © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Tuesday, April 24, 2018

'Pittsburgh History': Boring Name, Big Development for Attorney-Client Privilege

You represent a privately held corporation considering a restructuring. You believe that the proposed transaction would violate the securities laws and advise the board of directors accordingly. The board, however, disregards your advice and proceeds with the transaction anyway. It violates the securities laws as you advised and several shareholders initiate derivative claims against the board on behalf of the company. The plaintiffs propound discovery seeking your communications with the board related to the transaction. Can the company assert the attorney-client privilege against plaintiffs? Pennsylvania courts have been surprisingly quiet on this common issue until recently.

A company’s assertion of privilege against a derivative plaintiff creates the unusual problem of a client asserting privilege against those purporting to act on the client’s behalf. Moreover, the people invoking the privilege for the corporation are generally the same people whose conduct gave rise to the derivative claim. Allowing defendants to invoke the company’s privilege may deprive derivative plaintiffs of the information they need to vindicate the company’s interests.  A rule that allows a derivative plaintiff free access to otherwise privileged communications may impact the corporate client’s willingness to seek legal advice for fear that the request or the advice could later be used against it.

Any discussion of a corporation’s assertion of attorney-client privilege in the context of shareholder litigation begins with Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). In Garner, a class of shareholders brought a derivative action on behalf of a corporation against various officers, directors and controlling persons. The plaintiffs sought communications between the corporation and its counsel relating to the conduct giving rise to the plaintiffs’ claims. The corporation asserted the attorney-client privilege seeking to prevent disclosure of the communications. Both the corporation and the American Bar Association, as amicus curiae, asserted that the corporation had an absolute right to assert attorney-client privilege in such circumstances. The plaintiffs took the equally extreme position that the privilege simply does not apply in the context of derivative claims.

The U.S. Court of Appeals for the Fifth Circuit rejected both positions and adopted a “goldilocks” approach that affirmed the applicability of the attorney-client privilege for a corporation involved in litigation with its shareholders, but allowed shareholder plaintiffs to pierce the privilege for good cause: The attorney-client privilege still has viability for the corporate client. The corporation is not barred from asserting it merely because those demanding information enjoy the status of stockholders. But where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.

The court identified a nonexclusive list of “indicia” used to evaluate whether a derivative plaintiff has good cause for piercing the attorney-client privilege: the number of shareholders and the percentage of stock they represent; the bona fides of the shareholders; the nature of the shareholders’ claim and whether it is obviously colorable; the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; whether the communication related to past or to prospective actions; whether the communication is of advice concerning the litigation itself; the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons. Both the Restatement (Third) of the Law Governing Lawyers and the American Law Institute’s Principle of Corporate Governance: Analysis and Recommendations also adopted the substance of Garner.

There are two Pennsylvania cases addressing Garner. They reached contrary results and have not settled the law in this area. In Agster v. Barmada, 43 Pa. D. & C.4th 353, 359–60 (Com. Pl. 1999), Judge R. Stanton Wettick addressed a dispute among owners of a closely held business. A minority shareholder of a medical practice sued the majority shareholder for a variety of claims related to the majority’s diversion of business away from the practice. The minority shareholder plaintiff sought communications between the majority shareholder and the corporation’s counsel arguing that the attorney client-privilege does not apply to such communications. The court rejected this argument and prevented disclosure of the communication. Reasoning that the Pennsylvania Supreme Court had never recognized a conditional attorney-client privilege, the court expressly rejected Garner’s “good cause” analysis as inconsistent with Pennsylvania law.

The only Pennsylvania appellate court to address the attorney-client privilege in the context of derivative litigation did so on an unusual fact pattern. In Pittsburgh History & Landmarks Foundation, 161 A.3d 394 (Pa. Commw. Ct. 2017), a group of former board members of two related nonprofit corporations asserted derivative claims against the president and current board members alleging a variety of misconduct. In response to the lawsuit, defendants formed a committee to evaluate whether the derivative action was in the best interest of the nonprofit corporations. The committee determined that the litigation was not in the best interest of the corporations and defendants filed a motion to dismiss the derivative claims on that basis. The plaintiffs sought all the information provided to the investigative committee, including communications with counsel that would otherwise be privileged. The Commonwealth Court explicitly rejected the holding in Agster and adopted Garner’s “good cause” analysis. It emphasized that the possible exception to privilege only applied to communications that were “roughly contemporaneous with the events giving rise to the litigation,” presumably excluding communications that occur after a derivative plaintiff files suit.

The Pennsylvania Supreme Court granted cross-petitions for allowance of appeal from the Commonwealth Court’s decision and heard oral argument on April 11. If upheld, Pittsburgh History has obvious implications for both derivative plaintiffs and corporate counsel. For the derivative plaintiff, the case provides the potential to access a variety of highly relevant communications regarding the conduct that gave rise to their claims. For corporate counsel, the case injects uncertainty as to whether the attorney-client privilege will apply to communications with a corporation in the event of shareholder litigation. Counsel should advise their client of this possibility and, in the context of a closely held company, consider whether a majority owner should obtain personal counsel in circumstances where the majority owner wants to ensure the application of the privilege.

Reprinted with permission from the April 20, 2018 issue of The Legal Intelligencer. 
© 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. 
All rights reserved.

Wednesday, March 28, 2018

What You Need to Know When Representing a Minority Shareholder in a Corporate Dispute

You represent a minority shareholder of a closely-held corporation and the company is having an off year. The majority shareholder is the sole member of the board and serves in every officer position. She draws significant compensation. Without a business justification, she decides to double her salary and have the company pay the mortgage on her vacation home. Your client is the only other shareholder and likely the only person hurt by the majority shareholder’s self-declared raise. Although the minority shareholder suffers a clear injury, characterizing the injury as direct or derivative can have a significant impact on the outcome of the litigation.

Until recently, minority shareholders in closely-held companies could assert claims for breach of fiduciary duty and corporate waste directly against the majority owner. If the claimant was successful, a court could order the majority shareholder to disgorge the spoils of her behavior and pay them to the minority shareholder. This type of direct recovery is no longer permissible.  Since 2014, Pennsylvania courts have made clear that claims arising from breach of the duties owed to a corporation, even a closely-held one, belong to the corporation and must be asserted on a derivative basis. This requirement creates procedural and substantive complexities when compared to direct claims. Bringing such claims requires strategic and creative analysis and careful attention to detail.

Without a shareholder’s agreement, minority shareholders are largely at the mercy of the majority shareholder. Minority shareholders have no formal ability to direct how the company spends money, compensates employees or hires vendors. Some majority owners use their power to disadvantage the minority shareholder by excessively compensating themselves or causing the corporation to contract with vendors affiliated with the majority on unfair terms. Although the minority shareholder is the party ultimately damaged by this behavior, the Pennsylvania Business Corporation Law (“BCL”) makes clear that “[t]he duty of the board of directors … is solely to the business corporation … and may not be enforced directly by a shareholder.” To obtain redress for the majority shareholder’s misconduct, the minority shareholder is therefore required to assert their claims on a derivative basis on behalf of the corporation. 

In this regime, attorneys representing minority shareholders are required to look for opportunities to assert direct claims in lieu of derivative claims. The same facts that support a derivative claim may also be the basis of a direct claim. This is particularly common when the minority shareholder is involved in the operation of the business.  For example, claims arising from the wrongful termination of a minority shareholder’s employment may form the basis of a direct claim on behalf of the minority shareholder, as well as a derivative claim against the majority shareholder for the breach of duty of care owed to the company. 

Shareholder oppression claims are direct claims and may provide a viable method for a minority shareholder to obtain an individual recovery. Pennsylvania has long recognized that a majority shareholder has a quasi-fiduciary duty not to use their power in such a way as to exclude the minority shareholder from the “benefits accruing from the enterprise.” Carefully structured, a shareholder oppression claim can often address the same conduct that a court might otherwise classify as giving rise to a derivative claim. A claim that a majority shareholder increased their compensation to a level that leaves no profits available to be distributed to shareholders is likely a direct shareholder oppression claim. It may also be a derivative claim if the compensation is excessive by objective measure.

Fraud claims against majority shareholders may also be asserted directly if they arise from a misrepresentation made to the minority shareholder. The misrepresentation, however, must not be related to malfeasance in relation to the company. For example, misrepresenting the financial status of the business to induce a minority shareholder to invest additional capital that is subsequently lost is likely a direct claim. Falsely representing the terms of the majority shareholder’s excessive compensation is likely derivative because it is so closely related to the breach of the majority’s duty owed to the company itself.

When developing claims, keep in mind that counsel’s labeling of claims in pleadings as direct or derivative is not dispositive. Courts look to the substance of the allegations to determine the nature of the wrong.

The distinction between direct and derivative claims presents a variety of challenges in the context of closely-held business disputes. Recognizing the issue at that outset of the litigation and developing theories for asserting direct claims is critical to the successful representation of the minority shareholder.

Reprinted with permission from the February 28, 2018 issue of The Legal Intelligencer.
© 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Thursday, February 22, 2018

Improve Your Writing in the Time it Takes to Read This

“It is perfectly okay to write garbage—as long as you edit brilliantly.” – C. J. Cherryh

Many people think that litigation involves a Perry-Mason cross examination or Jack Nicholson losing it on the stand.  We love courtroom dramas too but the truth is, if you can handle it, is that most commercial cases resolve after a judge decides a client’s case based on written submissions.  This means that in most cases we are professional writers, presenting our clients’ cases not in the courtroom but through written briefs.

Although legal writing can be technical, good writing is good writing.  The same techniques we use to persuade judges are techniques our clients and friends can use to persuade their team, their boss, their board and their clients.  Here are 5 simple tips that will improve your writing right now.

Outline Everything

We outline every brief before we put pen to paper.  In fact, we outline almost everything.  Letters, substantive emails, even this blog post gets outlined.  Your outline does not have to be long.  The outline for this post is scribbled on the back of a magazine. 

The outline does more than organize your writing, it organizes your thought process.  There have been a number of times when we were headed in one direction only to go another after playing with an outline for an hour.  Bad writing is often a result of fuzzy thinking.  If you skip your outline, it will take you twice as long to straighten yourself out.

The more detailed your outline the more detailed your thinking.  Try to make the subject headings in your outline as detailed as possible.  Use a declarative sentence if possible.  Even if you decide not to create separate sections in your piece, using headings in an outline will help to keep you on track.

Learn to Stop Worrying and Embrace the Ugly First Draft

Our best finished product usually starts with an ugly, near stream-of-consciousness, first draft.  Do not even consider rewriting sentences or correcting grammar this round.  We will sometimes simply close our eyes while typing out the first draft to avoid the temptation.  It also has the added benefit of not having to look at the scary empty white space on the page.  Some of us will dictate a first draft. 
The point is to let your ideas flow unimpeded.  Don’t worry about missing punctuation, words or even sentences.  Once you grind out that ugly first draft, put it down for the day without editing or refinement.

When you pick it up again is when writing starts to get more fun.  You can start filling the inevitable gaps, improving flow and adding pithy one liners where appropriate.  If you try to skip the ugly first draft, it never turns out as well.

Stop Using Passive Voice

We have all heard this before but it is true.  If you are not sure whether you are writing in the passive voice ask yourself, “who is the actor in this sentence?”  For example, “plaintiff’s motion should be dismissed.”  Who should be doing the dismissing?  You can’t tell from this sentence and so know it is in the passive voice.  The active voice doesn’t hide the actor – “the judge should dismiss plaintiff’s motion” – and it makes for better writing.  It sounds better and provides more information.

If you find yourself using the passive voice often, consider whether you have an issue with your writing or your thinking.  When we find ourselves using the passive voice, it is often because we do not fully understand our topic and are using the passive voice as a crutch.  Who is the actor in your sentence?  If you do not know, you may need to clean up your thinking.

Please, No Corporate Speak, Made Up Words or Weblish

Corporate speak, made up words and “weblish” continue to work their way into our lexicon.  They do not have a place in your writing.  If you use corporate speak, your reader may not understand you.  Using the word “solution” to describe a product (often software) is a good example.  “We sold the customer a solution that will help them extract more useful information from their database.”  Rather than use a not so subliminal marketing tool, just describe what you sold.  If you use made up words (“I would guestimate that…”), you risk looking like someone who does not have the command of the English language needed to express themselves.  If you use weblish, you sound like a computer (“I don’t have the bandwidth for that…”).

You can usually avoid these issues by asking yourself a few questions.  If I used this term with a family member who knows nothing about my business, would they understand me?  If I looked in a dictionary, would this word appear?  Was this word or term in existence in 1970? If the answer to any of those questions is “no”, then keep it off the page.  

Lose the Adverbs Unless They Really Change the Meaning of Sentence

We are habitual offenders of this rule and often slash “-ly” words from our first drafts.  Overuse of adverbs tends to make your writing wimpy and bloated.  Use them sparingly and only when they change the meaning of a sentence.

The first sentence of this section is a good example.  Removing the adverbs “habitual” and “often” does not change the meaning of the sentence and removing it makes for a stronger sentence: “We are offenders of this rule and slash ‘-ly’ words…”

You can also reduce the tendency to overuse adverbs by using more descriptive verbs.  Rather than saying “he shook my hand very firmly,” you could say “he crushed my hand.”  Using a stronger verb allows you to remove the adverb “firmly.”


Good writing takes time but little changes can have an immediate impact.  Try these the next time you have a scary blank page in front of you.

Thursday, January 11, 2018

When Forming a Business Entity, Equal Partnership Isn't All It's Cracked Up to Be

“The worst form of inequality is to try to make unequal things equal.” ~Aristotle
Aristotle got it right. Some things were not meant to be equal. One quarterback should call the play. One physician should determine the treatment. And one person should steer the ship. Sometimes egalitarianism leads to impasse, confusion and even disaster. Yet, every month enthusiastic clients ask for assistance in setting up new businesses.  The conversation goes something like this: “My partner and I have a great idea for a business!  We want to form a company! We want to split everything 50/50!” 

There is a certain appeal in a 50/50 ownership split.  An equal split means “we share the risks, we share the rewards and we’re in this together!”  Splitting equity equally suggests obvious analogies to a marriage and - like marriages - creates the expectation that the business arrangement is “until death do us part.” Dividing ownership interests equally also avoids awkward conversations about the value of each partner’s contribution and the compatibility of individual goals.

Unfortunately, as in marriages, some business ventures do not work out. Management styles may clash and the business may outgrow the talents of its founders. Partners may pursue divergent personal and professional goals. One partner may be in search of a “lifestyle” business - a business that is essentially a life time job - while the other may be a “serial entrepreneur” intent on starting-up and selling out. In the most extreme examples, a business owner may find his or herself partnering with an irrational or self-interested owner, who puts his own needs ahead of the demands of the business.

Any Decision is Better than None

When managerial control is evenly divided between owners, there generally must be unanimous agreement before the business can act.  In the case of strategic decisions such as entering a new market, hiring a high level executive, or borrowing money, the need for unanimity may result in stalemate. Disagreements over strategic decisions may well reflect good faith differences of opinion in how the business should operate. At worst, however, a disgruntled fifty percent owner can use the veto power to exact concessions from a co-owner that have little to do with business strategy. An owner who is piqued at a partner can refuse to pay employee wages, vendors or company debts unless the other owner accedes to his or her demands.  An owner with signing authority at a bank can abscond or move money out of the other partner’s reach. Feuding owners that give conflicting directives to employees makes for a particularly toxic work environment. Employees may be forced to “choose sides” or decide to look for new jobs.

Once the internal dissension becomes public, third parties may decide to take a defensive posture to avoid being “caught in the middle.” Banks, payroll companies and other vendors may refuse to act without the authorization of both owners. The process can be cumbersome, frustrating and damaging to the business. Customers may be reluctant to make further commitments to an entity whose days seem numbered. Over time, the inability to reach any decision might be more damaging than implementing the “wrong” decision.

But Our Operating Agreement Says That…

There are a variety of devices that can be included in operating agreements and other organizational documents to help reduce the perils of 50/50 ownership. While such provisions offer some relief, they are not a panacea.

Many operating agreements contain “shoot out” provisions. Such provisions allow an owner to offer to purchase the other partner’s interests at a formula price or at a price determined by the offeror.  In the event the offer is rejected, the situation is reversed: the other partner is required to purchase the offering partner’s interests for the same amount.  While such provisions may offer an opportunity for “uncoupling” incompatible partners, there may be practical limits to their efficacy. A purchasing owner must have the financial resources to complete the buyout.  Privately-held businesses may be difficult to value and may not be able to attract third-party financing. Borrowing to fund the buy-out may also weaken the company’s financial posture and potentially trigger defaults with existing bank loans.

Even if an owner is successful in selling his fifty percent interest to the other owner, there may still be continuing obligations to the business. The sale of his or her interest will not extinguish an owner’s obligations under a personal guarantee. Third party creditors may have no incentive to release a departing owner from his guarantee obligations to the business.

When amicable negotiation fails to resolve 50/50 disputes, the parties frequently litigate. Unfortunately many county courts are unfamiliar with shareholder disputes. Some courts deal with fewer than a dozen commercial cases each year.  As a result, the tendency of the court is to act slowly and cautiously, which can prolong the often daily combat between owners and frustrate normal business operations.

The Takeaway

When considering a 50/50 split, understand that a dispute between the owners can have a crippling effect on the business that cannot be wholly mitigated by dispute resolution techniques.  While there are many ways of starting the discussion about equity distribution, one approach is to identify and weight key attributes necessary for business success and then evaluate each partner against such attributes. While such percentage weightings are not necessarily dispositive of equity ownership, they offer an objective approach to discussing roles and responsibilities. Such an exercise may also highlight talent “gaps” which must be filled for the venture to be successful. Allocating a percentage of ownership for future managers and deciding how that will affect the existing owners may make recruiting of high level talent easier and more efficient.

Frank, honest conversations at the beginning of a venture can build trust and lay the foundation for effective collaboration. Recognizing differences in talents, resources, management styles and commitment can lead to proportionate - and appropriate - equity distribution. In a business venture, the greatest inequality really is the effort to make unequal things equal.

Thursday, December 7, 2017

A Reporter Calls to Talk to You About Your Organization: Now What?

Guest Column from Wayne Pollock, Esq. 
Founder and Managing Attorney, Copo Strategies

There you are knee-deep in something business-related at your organization. Maybe you are speaking with an employee about a new process or procedure. Maybe you are speaking with a customer and trying to resolve an issue concerning your company’s services. Whatever it is, you are laser focused on what is front of you. And then, with no warning, your colleague bursts into the room. “You have an urgent phone call,” she says. “A reporter from [your local daily newspaper] is on the line. She has some questions for you about your company’s products and services.” It isn’t clear if these are good questions (“Your business is booming. Why?”) or bad questions (“I’ve received tips about your business from some disappointed customers.”).

What you do and say next could impact the livelihoods of both you and your organization for years to come. So, what do you do?

1. Pick up the phone and thank the reporter for calling, but tell him or her that you will have to get back to them.

Speaking to a reporter as soon as one calls you and thanking him or her for the call sends a signal to the reporter that you value his or her time and that you are willing to have a dialog. These gestures are small, but they are an easy way for you to endear yourself to the reporter and build a relationship with him or her. For a number of reasons, such a relationship could benefit you and your organization down the road thanks to the media exposure this relationship could provide the two of you.

But because this call is unexpected and you are not prepared to respond at this very moment, explain that you were in the middle of an urgent matter and will have to get back to the reporter. Reporters are on deadline frequently and have to put off other tasks to finish what they are working on so that it can be submitted for publication. The vast majority of them will be sympathetic to you and will have no issue with you getting back to them, provided that you do the next step.

2. While on the phone, ask these three important questions.

“What are you working on?”, “What would you like from me or my organization?”, and “When is your deadline?” The reporter’s answers to these three questions will provide you with the information you need to craft a response.

The first answer will guide the substance of your response. It could also provide you and your organization with an early warning that some aspect of your organization is under fire, or could come under fire, by the media, the public, your customers, etc.

The second answer will guide the form of your response and the work necessary to produce that response. Is the reporter looking for a brief response to a legal allegation? Is he or she looking for you to provide detailed answers to a number of questions? Does the reporter want to interview you? These various responses will require differing resources and preparation.

Finally, the third answer will guide your timetable to respond. Does the reporter need a response by close of business today? By later this week? By two weeks from now? This is vital information. And, this kind of question allows you to—again—endear yourself to the reporter and build a relationship by showing that you understand the nature of his or her business and its demands.

3. Identify the people at your organization who should assist with a response.

Now that you know what the reporter is working on, what they want from you, and how long you have to give it to them, you can now strategize about the response. The nature of the response will dictate how much work you will need to do and whether you will need assistance from particular colleagues or service providers. Anytime a reporter calls, you should make sure to notify any marketing or public relations people you work with, no matter if they are in-house or at an outside firm. They might have information about the reporter that could be helpful, and might have even worked with that reporter previously. In addition, they could help you develop the substance of your response and make sure that your response syncs with your previous branding and marketing efforts. 

Moving beyond your marketing/public relations colleagues, the nature of the request will dictate who else you should speak with. Is the reporter investigating an issue that could pose legal problems for you? You should make sure your legal team is aware of the request and seek their input. Does the reporter want to know something about how your organization’s products or services work? You should be sure to involve salespeople, technical staff, or senior executives with knowledge of these details. While “softball” inquiries from reporters are unlikely to require significant input from colleagues, the more significant (and problematic for your organization) the topic the reporter is investigating, the more likely you will need assistance with the response.

4. Draft a response and determine who the spokesperson will be for your organization.

With your response team assembled, you can now draft the response. While, again, the nature of the reporter’s inquiry will dictate the substance and form of your response, there are three overarching rules to follow. First, your response should be substantive. “No comment” or “We decline to comment” are invitations to the public, your clients, your employees, and any other key audiences to engage in conjecture and to assume the worst about any alleged wrongdoing on the part of your organization. Second, your response should be truthful. Any attempt to be deceitful will come back to bite you down the road, and will likely cause more problems than if you were upfront about any unflattering information from the get go. Third, your response should have a persuasive purpose. That could mean convincing would-be clients to consider your organization the next time they are in need of its services, or convincing the public that any allegations of wrongdoing are unfounded and false.

Depending on the reporter’s inquiry, you may need to consider who will be the spokesperson for the organization. Should it be the owner or an executive? Should it be someone with technical background about the subject of the inquiry? Should it be a public relations person? A rule of thumb for determining who the spokesperson should be is that the brighter the spotlight, the higher up the spokesperson should be. If there is a profile of the organization in a prominent media outlet, it should be an executive or owner. If the organization is being mentioned in a trade publication for its use of a particular new technology, the spokesperson should be the person at the organization most knowledgeable about that technology.

Whoever the spokesperson is, if the response is provided in real time through an interview, that spokesperson should practice beforehand with a mock interview. This exercise should include mock “curveball” questions from colleagues to simulate a reporter asking questions that move away from the core of the original inquiry and could catch the organization’s representative off-guard.

5. Respond.

After finalizing your response to the reporter’s inquiry and practicing the response if necessary, you can respond to the reporter in the manner he or she requested. When you do, you should encourage the reporter to contact you if he or she has any questions or needs any additional information from you above and beyond what you have provided (and what he or she might have originally requested). Be sure to let the reporter know if you will be out of the office or otherwise tied up and unable to respond promptly to additional requests over the next 24 hours or so. This may help prevent any missed opportunities for you or your organization to comment further to the reporter concerning any last-minute developments in his or her reporting.

For most people, an out-of-the-blue inquiry from a reporter can be a terrifying experience. Adding to that sense of terror is the fact that a mishandled inquiry from a reporter can lead to heavy damage to an organization’s reputation and prosperity. A strategic and orderly process for handling a reporter’s inquiry—such as the one I described above—can help minimize that sense of terror and ensure that your organization’s response will be serve the organization’s interests no matter what the nature of the inquiry is.

Wayne Pollock is the founder and managing attorney of Copo Strategies in Philadelphia, a limited scope, boutique law firm helping other attorneys and clients make those clients' cases in the Court of Public Opinion. He is also a Director at Baretz+Brunelle, a national communications firm that has been named the "Best PR Firm for Law Firms" by The National Law Journal and the New York Law Journal. Contact him at 215-454-2180, or @waynepollock_cs on Twitter.

Friday, November 3, 2017

Good Deeds Punished? The Legal Risks of Employee Community Service

With the holidays just around the corner, employers are busy planning their company-wide charitable initiatives. To support their employees’ commitment to community welfare, many employers match employee donations to charitable or educational institutions and publicize volunteer opportunities. Some organizations, however, are making a shift to a new way of corporate giving that percolates from the bottom up: encouraging employees to “get involved” through contributions of time and talent. 

More companies are creating Employee Volunteer Programs (EVP), continuous, managed efforts that allow employees the opportunity for hands-on service to the community. Employer programs are varied and innovative. Companies frequently contribute by getting the word out through community outreach that pairs organizations with employee volunteers who have particular skill sets and interests. While some employers provide paid time off for employees who volunteer, others simply permit employees to volunteer during working hours or facilitate participation in charitable enterprises during non-working hours.  This kind of volunteerism has many proven benefits including increasing employee satisfaction, enhancing community perceptions of the employer and providing tangible benefits to the larger community.

Despite good intentions, these “good deeds” come with the risk of liability under the Fair Labor Standards Act (“FLSA”) if not properly managed.  The FLSA is the federal law that governs the calculation and payment of wages.  In some instances, time spent by employees in charitable activities may be considered as compensable time under the FLSA, requiring the employer to pay wages and even overtime to employees for time spent volunteering.

The FLSA does not require employers to pay employees for time spent volunteering for religious, charitable, civic, humanitarian, or similar non-profit organizations when such participation is truly voluntary.  However, when charitable events or participation becomes intertwined with company activities, questions arise as to whether an employee may really decline to participate.  Because of disparities in bargaining power, employees may feel pressure by employers to engage in charitable activities. Such pressure may even be overt. For example, a directive to all employees to participate in a “community day of service” – without any opportunity for an employee to opt out – suggests that participation is not voluntary. Subtle employer pressure – such as reassignment to undesirable tasks for non-participants during the time when others are volunteering – also raises issues.

Time spent working at the employer’s request, or under its direction or control, or for a charity related to the company or the company’s owner, is considered work time. The Department of Labor takes the position that when, at the behest of the employer, employees volunteer to do the same type of work that they perform as part of their normal work duties, the volunteer work must be included in the employees’ hours worked calculations.

Awards for FLSA violations generally include fee shifting. Consequently, an employer who runs afoul of the FLSA will be required to pay the employee’s legal fees. Even if the unpaid wages are small, the imposition of attorneys’ fees could result in a significant liability for an employer.

The Takeaway

The key to avoiding FLSA liability is to ensure that employee participation is voluntary and to avoid any perception that an employee will be penalized if he or she fails to participate. It should be clear that the employees are volunteering their time to the third-party organization directly, not to the company itself.  Employees volunteering in a capacity similar to their paid work—for example, an accounting firm encouraging its accountants to provide accounting services for a charity—is particularly problematic.

Observing the following guidelines may reduce risk of an FLSA violation:
  • The charitable organization must be separate from the business and unrelated in a significant way to the business owners
  • The charitable event does not result in direct economic benefit to the business
  • The time spent at the organization or event is outside of regular working hours
  • The company notices about a volunteer event or opportunity include a statement that the employees are not required to attend or participate  
  • Supervisors are not allowed to direct or control their employees’ participation
  • Employees who choose not to participate in the event are not treated differently than employees who choose to participate
Utilizing these approaches may help to avoid FLSA liability or minimize liability if a claim does arise. We all want to start the holiday season on the right foot, and a methodical, cautious approach may be the only way that the good deeds of the employees do not result in repercussions for the employer.