"The Importance of Being Earnest" How to Dodge Legal Pitfalls that Confront Family and Closely Held Businesses
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"The Importance of Being Earnest" How to Dodge Legal Pitfalls that Confront Family and Closely Held Businesses

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As a business owner, you are a special breed -- unafraid to dream big and take risks, despite being faced with numerous laws and regulations. Whether planning, starting or operating an existing ...

As a business owner, you are a special breed -- unafraid to dream big and take risks, despite being faced with numerous laws and regulations. Whether planning, starting or operating an existing family or closely held business, you need to stay grounded to both boost sales and limit your liability.

As you review, you will gain insights and practical guidance to grow and protect your business.

Subjects discussed are:
-Tools for protecting the family's equity interests
-Protecting patents, trademarks, and copyrights
-Protecting against unfair competition
-Avoiding employment law claims and suits


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  • Alignment of IncentivesAs a family or closely-held business grows and evolves over time, hire outside managementDesire to align incentives and motivate by more than salary Tie their compensation to the success of the business.
  • Economic Rights – dividends, distributions, allocations of profits and losses, proceeds from a sale and other liquidity eventsNotice and Voting Rights – notice of general and special meetings, veto power over unanimous actions (procedural or substantive), director elections, sales of assets, mergers, amendments to governing documentsInformation and Inspection Rights – stock ledger; “books and records” for a proper purpose related to interests as a stockholderFiduciary Duties – applicable to officers, directors and in some cases majority / controlling shareholders; minority shareholder oppression issuesExisting holders have these rights, and we always encourage our clients to follow corporate formalities. However, with a new party, someone with whom you don’t have the history, might make things more difficult
  • These impact when rights are received and how much they getRestricted Stock GrantsVest or allows purchases over timeOften coupled with a purchase option on termination of employment (nominal price for unvested shares, pricing mechanism for vested shares)Encourages longer associationStill entitles holder to “bundle of rights”Stock options – may vest over time or on liquidity eventShould be at FMV to qualify as incentive an avoid 409A excise tax
  • Works for C Corporation, but not S CorporationFlexible LLC structure can be used to limit or further define the “Bundle of Rights”In conjunction with voting agreements, there typically are other restrictions placed on owners
  • Important to review current structure before granting equity interests to new holders; the current agreements may not be appropriate for a non-Family/founder equity holderEXAMPLE: Might be okay to allow family members to give stock to children, but not new managementTax and Accounting ImpactsThere are deferred compensation rules and regulationsInvolve the tax and accounting specialists IN Addition to your corporate lawyer

"The Importance of Being Earnest" How to Dodge Legal Pitfalls that Confront Family and Closely Held Businesses Presentation Transcript

  • 1. The Importance of Being Earnest How to Dodge Legal Pitfalls that Confront Family and Closely Held Businesses October 30, 2013 Bob Kaiser, Jennifer Hoekel, Steve Pozaric, Bill Corrigan © 2013 Armstrong Teasdale Teasdale © 2013 Armstrong LLP LLP
  • 2. Evading Employment Law Landmines October 30, 2013 Bob Kaiser © 2013 Armstrong Teasdale Teasdale © 2013 Armstrong LLP LLP
  • 3. Things You Need to Say Out Loud  99% of Lawsuits are controllable before the plaintiff files suit.  I Don’t Want the Government in My Business.  My Employees Know their rights and they all have Lawyers.  The Courts Don’t Really Want to Run My Business.  I Don’t Want to Invite them In. © 2013 Armstrong Teasdale LLP
  • 4. Sexual Harassment  Fix the Problem before the Court makes you  Have Clear and Understandable Policies  Follow them  Make sure your Supervisors do, too © 2013 Armstrong Teasdale LLP
  • 5. Americans with Disabilities Act  Engage in the “Interactive Process”  Create a record of trying to help the disabled person do the job. © 2013 Armstrong Teasdale LLP
  • 6. Hiring and Firing  Tell the truth and nothing but the truth, even when your goal is to “protect” the applicant or employee from the truth.  Make sure your documents tell the same story you do  Invest the time and energy in your investigation © 2013 Armstrong Teasdale LLP
  • 7. Protecting Your Business with Patents, Trademarks and Copyrights October 30, 2013 Jennifer Hoekel © 2013 Armstrong Teasdale Teasdale © 2013 Armstrong LLP LLP
  • 8. Patents  Consists of a set of exclusive rights granted to an inventor for limited duration  In exchange for the public disclosure of an invention.  Utility patent v Design patent © 2013 Armstrong Teasdale LLP
  • 9. Copyrights  Gives the creator of an original work exclusive rights for a limited time (decades).  Registered at the Library of Congress © 2013 Armstrong Teasdale LLP
  • 10. Trademarks  A distinctive name, word, phrase, logo, symbol, design, image, or a combination  Identifies source  Unlimited duration  Applied for at the USPTO © 2013 Armstrong Teasdale LLP
  • 11. Protecting Your Equity in the Business October 30, 2013 Steve Pozaric © 2013 Armstrong Teasdale Teasdale © 2013 Armstrong LLP LLP
  • 12. The Issue:  Alignment of Incentives: • A desire to reward key members of management (other than the founders or family members) based on the success of the business.  The “easy” solution: • Equity stake in the company. © 2013 Armstrong Teasdale LLP
  • 13. Equity Ownership includes a Bundle of Rights  Economic Rights  Notice and Voting Rights  Information and Inspection Rights  Fiduciary Duties © 2013 Armstrong Teasdale LLP
  • 14. The Challenges  Two main challenges: • What powers or rights do you really want to give these individuals if they own equity? • What to do when these individuals leave the business (voluntarily or not) or are impacted by events such as divorce? © 2013 Armstrong Teasdale LLP
  • 15. Tools to Protect Family or Founder Equity  Mechanisms to issue equity: • Restricted stock grants or purchases • Stock options © 2013 Armstrong Teasdale LLP
  • 16. Tools to Protect Family Equity (con’t)  Mechanisms to control rights • Separate class of equity for non-Family holders/Founders to vary economic, voting and other rights • Shareholder Agreements − Voting agreements / trusts; appointment of directors and managers by certain equity holders − Transfer Provisions © 2013 Armstrong Teasdale LLP
  • 17. Transfer Provisions  Typical Transfer Restrictions and Obligations • General restriction on transfer except pursuant to the agreement • Permitted transfers to controlled entities and trusts, so long as control is maintained • “ROFR” (Right of First Refusal) • “Drag Along” Rights – sale of company / control; typically coupled with a “Tag Along” right © 2013 Armstrong Teasdale LLP
  • 18. Transfer Provisions  Automatic Repurchase Option Triggers • The “Four D’s” – death, disability, discharge, divorce • “Non-sale” transfers – bankruptcy, insolvency, creditor action, dissolution • “Non-permitted transfers” – attempted transfers in violation of restrictions or other breaches of agreements or duties  Price is often variable based on the type of event • It is often discounted in the event of discharge “for cause” or some other breach / wrongful act scenario © 2013 Armstrong Teasdale LLP
  • 19. Alternatives to Equity  Goal - Provide Economic Rewards without Equity-based Rights • Incentive Bonus Plans based on Company and/or Individual Performance • Phantom Stock Plans /Equity Incentive Units • Stock Appreciation Rights Plans © 2013 Armstrong Teasdale LLP
  • 20. Remember:  Important to review current structure before granting equity interests to new holders; the current agreements may not be appropriate for a nonFamily/founder equity holder  Consider the tax and accounting impacts to the Company and the recipient © 2013 Armstrong Teasdale LLP
  • 21. Protecting Your Trade Secrets October 30, 2013 Bill Corrigan © 2013 Armstrong Teasdale Teasdale © 2013 Armstrong LLP LLP
  • 22. Trade Secrets Protecting Your Trade Secrets  What Are They? 1. Economic value 2. Not generally known 3. Reasonable measures taken to keep confidential © 2013 Armstrong Teasdale LLP
  • 23. Trade Secrets Case Pending in Missouri Supreme Court  Central Trust and Investment Co. v. Signalpoint Asset Management, LLC, et al.  Oral Argument – 11/13/13 © 2013 Armstrong Teasdale LLP
  • 24. Trade Secrets  Practical Considerations to Protect Trade Secrets 1) Confidentiality agreement 2) Confidentiality policy – employee handbook 3) Employee exit interview checklist 4) Follow-up letter to departing employee 5) Non-compete agreements © 2013 Armstrong Teasdale LLP
  • 25. Trade Secrets Non-Compete Agreements and Unfair Competition • When are they enforceable? • Recent Missouri Supreme Court decision • Defenses to the enforcement of a non-compete © 2013 Armstrong Teasdale LLP
  • 26. Trade Secrets Misappropriating Computer Data • The Missouri Act • The Federal Computer Tamper Act © 2013 Armstrong Teasdale LLP
  • 27. Questions? William Corrigan, Jr. Robert Kaiser 314.342.4105 314.342.4153 wcorrigan@armstrongteasdale.co rkaiser@armstrongteasdale.com m Steve Pozaric Jennifer Hoekel 314.552.6643 314.342.4162 spozaric@armstrongteasdale.co jhoekel@armstrongteasdale.com m © 2013 Armstrong Teasdale LLP