Trademark, copyright and intellectual property (IP) laws can vary greatly in foreign markets, so it’s vital to seek local legal expertise before doing business internationally, says Michael J. Ioannou, a partner at Ropers Majeski Kohn & Bentley.
“Local law firms know the system, including the politicians and judges,” Ioannou says. “It’s no different than doing business here. If a Florida company has a problem in San Jose, they could send someone, but they would most likely hire an attorney here. It makes sense to have someone like me who has practiced law here for 32 years and worked in the local courts.”
Smart Business spoke with Ioannou about how companies can avoid legal problems when expanding into foreign markets.
What are some important issues to consider before entering a foreign market?
From a general standpoint, you need to understand the business environment. You can accomplish that in India, for example, through the National U.S. India Chamber of Commerce, Confederation of Indian Industry or the National Association of Software and Services Companies, which caters to high-tech companies.
You also should be checking local laws with the help of a local lawyer in the country or near where you want to do business. So, if you’re going to mainland China, there are good attorneys in Hong Kong that can advise you or connect you to counsel in mainland China that they know well.
What mistakes do companies make when doing business overseas?
They might rush into a market without checking other companies’ rights and get sued for infringing IP rights in the foreign country. Apple thought it had acquired rights to the iPad trademark in China from a Taiwanese company, but courts said a subsidiary of that company still owned the rights in China. Apple paid $60 million in a court-mediated settlement. So one route is to buy the trademark, but you still have to ensure that what you’re buying is legitimate.
It’s the same situation with foreign companies coming into the U.S. A client with a chain of Indian restaurants wanted to expand here and found a restaurant on the East Coast that used the name in interstate commerce first — that’s the test for trademarks, first use — but the restaurant didn’t have the trademark registered. Instead of spending money to argue in federal court that the restaurant didn’t have first-time use, the client bought the restaurant and trademark. It was cheaper than paying legal fees in a later dispute over the name.
How can businesses protect themselves from legal problems?
When entering a country, you want to secure trademark rights for your product there. If you can, obtain patent protection, register and apply for a patent in China or India, for example. A patent in the U.S. is not enforceable in India or China. You can stop someone from shipping goods into the U.S. that infringe on a patent here, but you can’t stop a sale occurring in India or China based on a U.S. patent.
Pharmaceutical companies are having problems getting inventions patented in India because there’s a huge market there for generic drugs. India doesn’t even recognize software patents. One client in India was threatened by a U.S. company for IT support services offered here. It was a U.S. patent, so as long as the function that was within the patent claim was being done in India only, the U.S. company couldn’t claim infringement.
What can companies do to fight patent infringement?
In India, for example, you could file a lawsuit in civil court, but that could take 15 years to reach a resolution. However, the entity that’s infringing laws in India may be doing business in the U.S., which would provide another angle to file a lawsuit here for unfair competition. You also may be able to intercept their goods from coming into this country, depending on the nature of the IP rights being infringed.
But if you have a counterfeiter in Shanghai that’s only selling goods there, you have to use the local courts. Things are getting better in terms of that kind of infringement — that’s why you’re seeing a lot more activity to enforce rights in China, for example. Just be cognizant that you can’t expect a perfect day in court as a foreign company coming into these jurisdictions.
Michael J. Ioannou is a partner at Ropers Majeski Kohn & Bentley. Reach him at (408) 287-6262 or email@example.com.
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Two-thirds of businesses experienced some type of attempted or actual payment fraud in 2011, according to recent industry surveys, and more than 25 percent of banks are reporting a rise in attempted fraud incidents. Although not all attempts result in financial loss, when they do it’s typically around $20,000.
There’s also reputation risk and extra work when somebody gets account information and starts utilizing it in an inappropriate manner, says Ted Sheerer, Senior Vice President and Group Manager of Cash Management at First Commonwealth Bank.
“Companies need to understand the risks and take them seriously,” he says. “It may cost a little bit and make things slightly less convenient, but they need to do everything necessary to protect their financial assets. They need to take proactive steps and not wait until a loss occurs.”
Smart Business spoke with Sheerer about guarding against corporate financial fraud.
Why has financial fraud increased?
Fraud has increased primarily because of technology — from software that makes it easy to create authentic-looking checks to phishing scams, viruses and malware that can compromise a network and PCs. A company’s financial assets could be more vulnerable today than ever. However, there are ways to substantially reduce risk.
What are some examples of financial fraud?
If a company’s account and routing numbers get compromised, they can become exposed to individuals generating fraudulent checks. Some businesses, through the utilization of Positive Pay, which matches check issue data, including payee line, with items presented to the bank, can catch this with no financial loss. The bank alerts the business regarding items that do not match, and offers the opportunity to pay or return those checks. Unfortunately, many others wait until they experience a loss before taking steps to implement Positive Pay.
A more current example is corporate account takeover, where a company’s network or specific PCs get infected with a virus or malware, somebody obtains access to the system and then performs keystroke logging. The fraudster can then sometimes capture the necessary credentials to get into the business’s online banking.
How should fraud education be handled?
You can educate employees, especially those conducting company financial transactions, by using the knowledge of your IT staff. If you don’t have an in-house IT staff or want to supplement this education, work with your bank to see if it offers any security or fraud seminars. You also can find local and regional fraud awareness seminars through professional organizations.
How can you prevent or mitigate fraud?
To minimize the potential of check fraud, companies can incorporate security features into their check stock, store checks and digital signatures in a secure environment, segregate financial duties, reconcile accounts regularly, and utilize Positive Pay with payee line protection. If something doesn’t match, the bank alerts the business customer who decides to pay or return it.
With increased electronic fraud, which includes Automated Clearing House (ACH) transactions and wire transfers, it’s important to have ACH block and filter. This stops unauthorized transactions from hitting accounts. Companies should also ask if their bank offers malware detection and/or account takeover detection software. This is sometimes provided for free.
Some other preventative measures are to:
- Understand procedures around user authentication and limit users to those who absolutely need access.
- Establish dual verification for any outbound electronic transactions.
- Have dedicated PCs used only for online banking services.
- Change passwords regularly, don’t share or write down logins, and routinely update anti-virus and malware protection software.
What’s the priority with fraud prevention?
The priorities should be Positive Pay, ACH block and filter, and then everything the organization can do to protect its network.
Many businesses don’t take the necessary preventative steps. Only when companies seriously understand the risks can they partner with their bank to combat financial fraud.
Ted Sheerer is a senior vice president, group manager of Cash Management at First Commonwealth Bank. Reach him at (412) 690-2213 or firstname.lastname@example.org.
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Companies have information that gives each of them a competitive advantage over competitors. Patenting this information is sometimes legally impossible or disadvantageous — patents expire, leaving vitally important information publically exposed.
Some companies choose to treat the information as a trade secret because such a designation can offer legal leverage in certain situations. And unlike a patent, a trade secret can last forever.
A patent expires 20 years from its effective date of filing, and that previously protected invention enters the public domain. With a patent, you’re disclosing how to make and practice an invention in exchange for 20 years of exclusive rights to do so,” says Daniel R. Ling, an associate with Fay Sharpe LLP.
He says many companies, especially smaller ones, don’t often consider the role of trade secrets, but in certain instances companies could be well served by recognizing and protecting such valuable information. But there’s one catch: “You have to take reasonable steps to maintain it as a secret.”
Smart Business spoke with Ling about identifying and protecting trade secrets.
What are some examples of information that could be a trade secret?
Customer and supplier lists, the arrangement of equipment in a factory and certain manufacturing processes are examples of valuable proprietary information that may not rise to the level of something that can be patented. Often, it comes down to that which makes your product better than that of your competitors but can’t be patented because it doesn’t meet the basic legal standards, which are that the invention is new, not obvious, useful and eligible to be patented.
How long does trade secret protection last?
Trade secrets last indefinitely, as long as the information is maintained confidential and the holder of the trade secret continues to take reasonable precautions against disclosure.
How are trade secrets best protected?
There are many methods of protecting sensitive information. If it’s a process that involves multiple steps, a company could isolate the responsibility for each of those steps across multiple locations so the entire process isn’t carried out in one place and a single person isn’t privy to the entire production.
It’s also fairly common to include confidentiality agreements and nondisclosure clauses in employment contracts for not only employees who might be aware of a trade secret in its entirety, but also for employees who may have only some knowledge of the process. Companies with such sensitive information should work with a business attorney to put together those agreements.
What can be done if a trade secret is leaked?
If the trade secret was misappropriated — obtained illegally or otherwise improperly disclosed — there are steps that can be taken to prosecute the perpetrator. The Uniform Trade Secrets Act, the general framework of which has been enacted by 46 U.S. states, offers remedies when a trade secret is acquired through improper means or through a breach of confidence. This can provide some relief to a trade secret holder in the form of injunctive relief (e.g., stopping the use of a misappropriated trade secret), monetary damages and/or attorney’s fees.
However, if the information is developed independently or introduced to the public lawfully, nothing can be done. Further, if the secret that was being held is a patentable idea, another company or individual could secure the rights to it and bar others from acting on it. That’s why it’s important to carefully consider what you hold as a trade secret; if it can be easily reverse engineered it’s not right for trade secret protection.
Regardless of whether the secret got out legally or illegally, once it’s widely disclosed the remedies under the law might not be sufficient to make a company whole again — once it’s out, it’s out. The trade secret holder ultimately has an obligation to take reasonable protective measures to guard its secrets.
Daniel R. Ling is an associate at Fay Sharpe LLP. Reach him at (216) 363-9000 or email@example.com.
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Michael J. Torchia, a managing member at Semanoff Ormsby Greenberg & Torchia, LLC, gave a seminar to executive clients on individual liability several months ago. “Even if some supervisors knew they had liability under a statute or two,” he says, “seeing their actual exposure to 12 or 14 statutes shocked them.”
“I don’t think business owners have any clue how vulnerable they are to being sued under various employment statutes,” Torchia says.
This exposure is prevalent in areas like discrimination cases, and wage and hour claims which include unpaid overtime, exempt and non-exempt employees, and independent contractor status.
Smart Business spoke with Torchia about individual liability and strategies for protection and avoidance.
How are executives vulnerable to individual liability?
Many state and federal statutes explicitly state an employee has a right to relief against the employer and an individual. Some simply define ‘employer’ to include certain individuals. Examples include the Pennsylvania Wage Payment and Collection Law; Fair Labor Standards Act; Family and Medical Leave Act; Pennsylvania Human Relations Act; Pennsylvania Whistleblower Act; Immigration Reform and Control Act; and COBRA. There are also common law court cases allowing an individual to be sued under a variety of claims such as intentional infliction of emotional distress and defamation. Although incorporation helps shield individual assets — as opposed to, for example, a sole proprietor — the corporate veil does not protect individuals here because the statutes specifically allow action against them.
How far into management is the risk?
Generally, if an executive, manager or supervisor is considered a decision maker when it comes to employee issues, especially with regard to compensation, benefits or termination, there could be individual liability. In some organizations, that could be those at the ‘C’ level, president or vice president, but in others a secondary or middle manager could be individually liable.
What about executives who say, ‘I was following orders’ or ‘It was unintentional’?
‘Just following orders’ or ‘company policy’ may help, but is not an absolute defense. And whether the improper act was or wasn’t intentional is only relevant if the statute requires proving intent, bad faith or a knowing violation.
So, how can executives protect themselves?
At a minimum, managers, supervisors and executives should make certain they have adequate insurance. There are a variety of policies for individual exposure, such as employment practices liability, directors and officers, fiduciary liability, and errors and omissions. There are also lesser known policies that cover, for example, inadvertent disclosure of private information.
Another factor is asset protection. In Pennsylvania, assuming the executive is not already named in a lawsuit or under imminent threat of a claim, which could result in a fraudulent transfer claim, assets can be protected by putting a house, cars and bank accounts in joint names with a spouse. If not married, executives may consider increasing contributions to retirement accounts, which are not usually subject to collection.
How can executives and their companies avoid problems in the first place?
Training and education for managers, supervisors and executives — especially your decision makers — is key. They need to know how to handle all aspects of their supervisory duties, such as hiring, discipline, firings and employee complaints.
The company’s written policies should be consistent with the manager training and what is actually done day to day. Policy review and training should occur at least every three years, and sooner if there is turnover or changes in the law. Seminars and in-person training for middle managers is routinely overlooked or disregarded as unnecessary, but that it is one of the most important steps a company can take.
Most often decision-making executives, managers and supervisors are not trying to violate the law. However, with authority to bind the company, they can unknowingly cause liability to themselves or the business.
Michael J. Torchia, Esq. is a managing member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 or firstname.lastname@example.org.
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Business leaders are usually pleased if they are asked to serve on a business’s board of directors.
They should be. Being asked to serve on a board of directors is a recognition that a business leader has achieved success and that he or she has valuable insights into how a business can be profitable. Nonetheless, business leaders should recognize that serving on a corporation’s board carries with it very real responsibilities and risks, says Tim Miller, a partner at Novack and Macey LLP.
“If a board member fails to take the responsibilities of board membership seriously, and instead treats board memberships as an ‘honor’ without responsibilities, or as a chance to periodically play a round of golf with colleagues, it can lead to serious repercussions,” says Miller.
Smart Business spoke with Miller about how to protect yourself should you agree to serve on a board.
What are some potential repercussions of failing to take seriously the responsibilities of being a board member?
A director could be sued for millions of dollars in damages. There are actions filed every day in this country in which stockholders allege that a director breached his or her duties and that this breach cost a company millions of dollars.
Ironically, such suits are filed even when a company is successful; sometimes these suits allege that the company should have been more successful. Even if such a case is meritless, it can cost a lot of time and money in attorneys’ fees to defeat it. In other cases, governmental entities can seek civil or criminal penalties against directors.
Don’t most corporations indemnify board members against losses from such suits?
Yes, most companies agree to indemnify board members against loss suffered by reason of serving as a board member. But if a board member is found to have not acted in good faith, he or she may lose the right to indemnification. And if a corporation becomes insolvent, its promise to indemnify its directors is not worth very much.
Even if a corporation is insolvent, doesn’t insurance protect board members?
Insurance may protect a corporate director. But insurance policies are usually written with exclusions that may leave a director uninsured against particular types of suits.
For example, many policies have an ‘insured v. insured’ exception. If the stock of an insolvent corporation is sold, new management may decide to sue the directors who controlled the company when it became insolvent. In such a situation, the suit may not be insured. Moreover, penalties are usually not insured against.
All of this means that somebody who agrees to serve as a corporate director should try to do the job he or she has agreed to accept.
What duties does a board member have?
A director’s duties differ depending on the state where a business is incorporated, but usually directors are said to owe duties of care and loyalty.
What is the duty of care?
Just as it sounds, the duty of care requires directors to carefully act on behalf of the corporation. As the standard is usually formulated, the duty of care requires that the directors exercise the same degree of care that a prudent person would exercise in the management of his or her own business.
Among other things, this means that directors should attend board meetings, inform themselves of facts necessary to make decisions, exercise their judgment and make prudent decisions.
One of the more important aspects of the duty of care is that a director should make certain that he or she has adequate information to decide matters that come before the board. For example, if asked to approve of a corporation going into a new business, the director should make sure that he or she understands enough to make an informed decision about whether it is wise for the corporation to take such a significant step.
Frequently, rosy forecasts of future profits can distract from the need to be fully informed of risks before making a decision. A director may need to question management, test the assumptions underlying projections, consider what will happen if something goes wrong and ask how risks can be mitigated to make a reasoned decision.
In other words, a director should act as though the consequences of a decision is his or her responsibility — because it is.
What does the duty of loyalty involve?
The duty of loyalty requires that directors act in the best interests of the corporation — not their own best interests. Thus, for example, if a director learns of a business opportunity, he or she may need to refer it to the corporation and not exploit it for the director’s own benefit.
The duty of loyalty also means that, in situations in which matters are brought before the board and a director has a conflict of interest, he or she should recuse him or herself from the decision. For example, if the corporation is going to retain another business in which a director is interested, the director should disclose the conflict and should not vote on that matter. Indeed, the director should attempt to cause the minutes to reflect that he or she has not participated in a decision that could benefit him or her.
Does all of this mean that somebody should turn down a directorship if offered?
No. It means that those offered a directorship should think very carefully about what being a director means and should not accept the role unless they are willing to take it very seriously.
Tim Miller is a partner at Novack and Macey LLP. Reach him at (312) 419-6900 or email@example.com.
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When selecting a contractor for a job, it is important to choose the most fiscally responsible one for the construction project in order to mitigate and manage risk and ensure its timely completion.
Failing to do so puts your company at risk of economic devastation as you are gambling on a contractor or subcontractor whose level of commitment is uncertain or who could become bankrupt part way into the job. However, there is a solution to decrease your risk, says Jack Gaugler, vice president, surety bond specialist, at SeibertKeck Insurance Agency Inc. and the Jack Kohl Agency.
“Surety bonds offer an optimal solution. By providing financial security and construction assurance, they guarantee project owners that contractors are capable of performing the contract and paying specified subcontractors, laborers and material suppliers,” says Gaugler.
Smart Business spoke with Gaugler about how surety bonds can help protect you from a devastating loss.
What is a surety bond?
A surety bond is a three-party agreement in which a surety company assures the obligee (the owner) that the principal (the contractor) will complete a contract as promised.
There are three primary types of contract surety bonds: a bid bond, a performance bond and a payment bond.
A bid bond assures that a bid has been submitted in good faith, that the contractor intends to enter into the contract at the price bid and will provide the required performance and payment bond if awarded the contract. A performance bond protects a company from financial loss in the event that the contractor fails to perform in accordance with the terms and conditions of the contract. A payment bond assures that a contractor will provide certain workers, subcontractors and material suppliers and guarantees they will be paid for work performed under the contract.
Even if a contractor has been in business for 100 years and has a good reputation, past performance is no guarantee of future results. Risk lies in the uncontrollable, unpredictable and the unknown and it is never a good idea to gamble on something that could jeopardize your company’s future. The relationship that an owner has with a contractor is arm’s length, while the surety agent and bond company relationship is a day-to-day partner. A surety has a much greater insight as to contractor’s abilities to perform than an owner.
How is a contractor prequalified?
Surety companies back the performance bonds with their own assets, so they conduct a careful, rigorous prequalification review of the contractor. The goal for the contractor is to get a bond line set up. The bond underwriter’s analyses look at criteria including financial strength, annual and interim financial statements, investment strategies, cost control mechanisms, work in progress (both bonded and nonbonded), cash flow, net worth, working capital and bank and other credit relationships. The underwriter will also look at ability to perform, prior experience on similar projects, equipment and personnel — including strength of management and its structure, past and current workloads and a continuity plan. Finally, it will consider the contractor’s reputation with project owners, subcontractors, suppliers and lenders.
Weakness in any of these areas can cause a contractor to fail. Evaluating each of these areas allows the underwriter to become comfortable guaranteeing that a contractor will be able to complete the job as promised.
Who requires contract surety bonds?
Congress passed a law more than 100 years ago to protect taxpayers from contractor failure by guaranteeing payment from the primary contractor to subcontractors and suppliers. An update to this law, called the Miller Act of 1935, is the current federal law that mandates surety bonds on federal public work projects valued at $100,000 or more. The act removes the risk from the subcontractors involved in the project and places it on the surety company that issues the bond.
State and local governments also require these bonds on public construction projects and each state has its own ‘Little Miller Acts.’
Surety bonds for private projects, while not required by law, are highly recommended. Every major project that could potentially cripple an individual company or a financial institution should require a bid and performance bond for protection. The cost of the performance bond ranges from 0.5 percent to 3 percent of the total contract amount. There is no other risk transfer mechanism that guarantees a construction contract will be completed.
When compared with the cost of contractor failures, surety bonds are a low-cost investment, considering the protection that is provided by them. Thousands of contractors, whether they have been in business for two years or 100, whether they are large or small, fail each year, leaving behind unfinished construction projects with billions of dollars in losses to project owners.
What happens if a claim is made on a surety bond?
The surety company will first investigate the alleged contractor default by working with the principal to make a decision on whether it must perform under the terms of the bond.
Once it has determined default of a contractor under the performance bond, it could conduct a takeover in which it will hire a completion contractor. It could also perform a tender, where a new contractor will be provided to the obligee (owner).
Other options include retaining the original contractor and providing technical and/or financial assistance, or the surety could reimburse the owner by paying the penal sum of the bond.
Without the protection of a surety bond, none of these actions would be possible. To minimize your risk when dealing with contractors, seek the advice of an expert to help maximize your protection.
Jack Gaugler is vice president, surety bond specialist, at SeibertKeck Insurance Agency Inc. and the Jack Kohl Agency. Reach him at (330) 294-1352 or firstname.lastname@example.org.
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Without the protection of a non-competition agreement, most courts are reluctant to prevent a former employee from working for a competitor. However, even when a company has a non-compete agreement with an employee, it may be unenforceable if it is not drafted in accordance with the laws of the state in which the company seeks to enforce it, says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia, LLC.
“There’s a perception that Pennsylvania courts do not enforce non-compete agreements, but that’s incorrect,” says Goldblum. “Covenants not to compete are routinely enforced by Pennsylvania courts to the extent they are reasonably necessary to protect the legitimate business interests of the employer.”
Smart Business spoke with Goldblum about the importance of having properly drafted non-compete agreements in order to best ensure that they will be enforced by a court.
Why are non-compete agreements important?
In conjunction with other restrictive covenants such as a non-solicitation of customers and employees, confidentiality and inventions clauses, non-compete agreements are the best way a company can protect itself from the harm it can potentially suffer in the event an employee leaves the company and then solicits the company’s customers on behalf of a competitor. Although non-compete agreements are fairly common for executives and managers, they are not utilized as frequently as they should be for salespeople and other employees that regularly communicate with a company’s customers.
How does Pennsylvania law differ from other states regarding non-compete agreements?
Many states are less inclined to enforce non-compete agreements than Pennsylvania. For example, California has a statute that prohibits non-compete agreements except in very limited circumstances. Generally, Pennsylvania courts will enforce a non-compete agreement as long as the agreement is narrowly drawn and the company seeking to enforce the non-compete agreement can meet the threshold requirement of having a legitimate, protectable business interest such as customers and customer goodwill, confidential information, specialized training or trade secrets. Pennsylvania courts will not enforce covenants aimed at repressing or eliminating competition to gain an unfair economic advantage.
What should employers know when entering into non-compete agreements with employees?
In Pennsylvania, the offer of employment is sufficient consideration for a non-compete agreement entered into between a company and an employee at the outset of employment. In Pennsylvania, there are four requirements for an enforceable non-compete agreement. The non-compete agreement must be:
- Ancillary to an employment relationship.
- Supported by adequate consideration.
- Reasonably necessary to protect a legitimate business interest of the employer.
- Reasonably limited in duration and geographic scope.
There is no precise formula for what makes a covenant not to compete reasonable. A court will evaluate the circumstances and make a factual determination as to whether it will enforce a non-compete agreement on a case-by-case basis.
If an employer has employees in multiple states, it can include a provision that ensures Pennsylvania law will govern the interpretation and enforcement of the non-compete agreement.
What common mistakes do employers make when entering into non-compete agreements with existing employees?
The most common mistake is to fail to give additional consideration and simply demand the employee sign the noncompete agreement. Continued employment alone is insufficient consideration for a non-compete agreement entered into subsequent to the commencement of the employment relationship.
If the company seeks to enter into a non-compete agreement with an existing employee, it must give additional consideration, which could include many different items such as a promotion, an increase in salary or benefits or a monetary payment.
How can employers determine when and how to enforce non-compete agreements?
When an employee resigns or is terminated, the company should remind the employee of his or her non-competition obligations and provide the employee with a copy of the signed non-compete agreement. If it is subsequently determined a former employee is in violation of the agreement, the company has the right to proceed against the employee in court. The company may seek preliminary injunctive relief to prevent employment in violation of the non-compete and file a breach of contract action against the former employee and seek permanent injunctive relief and monetary damages. Typically, a case against a former employee also includes the new employer for interfering with the company’s contractual relationship with its former employee.
When hiring, a company should always inquire whether potential employees are bound by agreements that could restrict them from accepting employment or limit the performance of their duties. Otherwise, the company could be inviting a lawsuit if it hires an employee who is contractually bound not to compete with a former employer.
How often should an employer review its non-compete agreements?
Noncompete agreements should be reviewed no less frequently than every two years because the laws that govern their interpretation and enforceability change. Legal counsel that is up to date on the ever-changing landscape of employment law in Pennsylvania should review non-compete agreements to determine their compliance with existing law, which will best ensure their enforceability.
Stephen C. Goldblum is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-5961 or email@example.com.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
As an executive, you’ve spent a tremendous amount of time building your company. Choosing to enter into a sale transaction is a major decision that will determine the future of the company you’ve worked so hard to grow, as well as your own.
“Because of that, you want to do all you can to protect the deal if you conclude it’s the best thing for the company, and also to protect yourself from liability,” says Marc Schneider, General Counsel for Stradling Yocca Carlson & Rauth and a Shareholder in the securities and business litigation department.
Taking measures to protect the deal and yourself isn’t just a precaution — it’s a necessity. Schneider warns that these types of transactions are magnets for shareholder challenges, often resulting in lawsuits.
“But if you take the right steps, you’ll be in a very good position to either effectively defend the suit or prevent the suit from ever happening in the first place,” he says.
Smart Business spoke with Schneider about how businesses should approach M&A deals to prioritize shareholders and protect both the transaction and themselves.
Why are M&A deals at such risk from stockholder attack?
Shareholders’ positions change fundamentally — these deals generally mean an exit for them. This simply is not an ordinary transaction, so it receives a lot of attention from shareholders.
And just as importantly, these transactions have received more attention from the plaintiff’s bar over the last few years. As with any other business, the plaintiff’s bar tends to reallocate its resources to more productive uses.
We’ve seen fewer stock price drop cases because recent legislation has made those cases more expensive and difficult to bring. So the plaintiff’s bar has been increasingly focused on M&A activity, which is not as impacted by this legislation.
What should management and the board focus on when considering a deal?
The No. 1 goal is finding the best deal for shareholders, because their responsibility is to those shareholders — not to a deal or their own interests. And the best deal may be no deal; they should evaluate whether there are alternatives to selling that may create more shareholder value. When deciding between deals, the board may also consider factors other than price, such as closing risks and whether the deal includes an effective fiduciary out or a go-shop provision.
What are management and the board’s roles in the M&A process?
Management plays an important role, but that role is shaped both by the nature of the deal and the board’s approach to the deal. The board may decide to have management more involved or less involved.
The board must consider if there are any significant conflicts, such as whether or not members of management will be continuing with the company after the merger and whether their current compensation packages will be impacted. The board should be very active and well informed throughout the process, asking questions of management and the bankers.
How can businesses proactively protect the deal and themselves?
The first step is to do a thorough check of the market for an acquisition, as well as consider strategic alternatives to an acquisition. Think about creating a special committee of independent directors, as well as retaining an investment banker, to help with that market check and to take the lead on negotiations with potential bidders. When the potential bidders seek due diligence, consider an electronic data room to give equal access to all potential, serious bidders so there can’t be any allegations of favoritism.
For the same reason, when management is involved in due diligence or answering questions for potential bidders, consider a chaperone for management, which could be one of the independent directors from the committee or the banker. And you shouldn’t release management to negotiate their own deals for their post-acquisition roles until after the material deal terms are set.
In addition, make sure to do a transparent, accurate, and thorough job telling your story in the preliminary proxy — a critical document. Explain that you have conducted a thorough market check and had a solid process in place. This can help protect your deal and even discourage lawsuits.
Get a lawyer involved early on in the process to help the board and management understand their fiduciary duties and how best to meet them, and to help you put together a good, defensible process.
If named in a merger litigation, what action should a business take?
These types of litigations move really quickly, so it’s critical that you immediately retain experienced counsel that’s used to handling these types of litigations.
It’s also critical that you contact your directors and officers liability insurance carrier right away. Usually, a company has D&O insurance to cover these matters, and you want to act quickly to get the carrier involved in the potential litigation.
Marc Schneider is General Counsel for Stradling Yocca Carlson & Rauth and a Shareholder in the securities and business litigation department. Reach him at MSchneider@SYCR.com.
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