How to avoid pitfalls and missteps in business acquisitions and sales

Structuring, implementing and closing a business acquisition or sale is a complex process fraught with unanticipated consequences for the unwary.

“Proper planning and an experienced team of advisers is essential for a successful transaction,” says Jill M. Bellak, Esq., a member of Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Bellak about how to ensure an acquisition or sale is implemented in a cost effective and timely manner.

What factors into the transaction structure?

The transaction structure can take many forms. The tax consequences to the buyer and seller have a significant impact on determining the structure. For example, if net operating losses are available on the seller side, a stock transaction or merger may be desirable for the buyer to take advantage of these losses as an offset against future income. Similarly, if the seller has significant customer contracts that may be terminated or subject to renegotiation upon a change of control, a stock sale would be more favorable than an asset sale. On the other hand, if the buyer is concerned about liabilities during the seller’s operation of the business, a sale of assets may be the preferable structure.

Why is due diligence important?

The buyer and its team of advisers must review the books and records of the seller’s business, including financial statements, tax returns, employee benefit plans, union contracts, customer and vendor contracts, employment agreements, leases, stock records and minute books. In addition, inspection of the seller’s real estate, facilities, equipment, inventory, vehicles and other personal property is a key part of the process. If real estate is involved, an environmental assessment is performed.

A lien search is undertaken by the buyer’s counsel to determine if there are security interests encumbering the equity interests or assets being sold. Third-party loans must be paid off by the transaction’s close.

A careful and thorough review of the documents and property will flush out issues that must be addressed by the parties and could result in further price negotiations.

What documentation is needed?

A letter of intent is often used by the buyer and seller to outline the principal terms, including purchase price, timing of due diligence and closing, and to restrict the seller from negotiating with or selling to other parties for a specified time period. Typically, the obligation to consummate the acquisition or sale arises when the parties enter into a definitive agreement, which specifies the price, terms and conditions that govern the deal.

The buyer will typically insist on confidentiality, non-solicitation and non-compete provisions in the definitive agreement that restrict the seller from operating a similar business, calling on customers or hiring away the employees. The seller makes extensive ‘representations and warranties’ in the definitive agreement relating to the business operations, title to the stock or assets being sold, compliance with laws, payment of taxes, claims or pending litigation and similar matters.

Disclosure schedules provide detailed information to the buyer regarding the business and typically identify: the owners of the business and the capital structure, the business assets, customer and vendor contracts, leases, employee matters, benefit plans maintained by the seller, debt obligations, violations of laws or regulations and other information that is provided or discovered during due diligence.

While a thorough due diligence investigation is critical, equally important are accurate and complete disclosure schedules, which impact the representations and warranties made by the seller.

What is involved in closing the transaction?

To close the acquisition or sale, the buyer may need to line up financing if it has insufficient cash on hand. Typically, the lender will take a lien on the stock or assets being acquired by the buyer. Other aspects include the transfer or issuance of licenses and permits to the buyer, obtaining consents of landlords, customers and vendors if contracts are being assigned, transfer of title to real estate and motor vehicles, payoff of the seller’s debt obligations, and transfer/hiring of employees. An experienced team of advisers is key to a successful closing.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Tips for business leaders on making the most of their charity

When business leaders choose to give back to their communities, everyone benefits.

“We’re all citizens of the community,” says Kenneth B. Liffman, Chairman of the Board of McCarthy, Lebit, Crystal & Liffman Co., L.P.A. “When we give our time, it should be to make the community a better place to live and work.”

Executives, however, need to be mindful of how they apply their philanthropic efforts to avoid being ineffective, inauthentic or both.

Smart Business spoke with Liffman about philanthropic leadership, offering tips on giving to charity while supporting employees who do the same.

How should organizational leaders choose where they devote their philanthropic time or giving?
The choice needs to be personal and driven by a little fire in your gut, because the more that you do, the more the organization will ask for as they try to get the most out of your involvement.

Pick an organization with a mission that has impacted you, your family or the lives of people in your business. For example, if someone in your family has been afflicted with Alzheimer’s disease, support organizations looking for a cure or that help those in the community who are coping with it.

Leaders should also find ways to use their company to boost employees’ charitable efforts. Make a list at the start of each year of organizations employees support, or the broader causes they are passionate about, such as hunger relief or literacy, and find ways to apply the institutional muscle of the business to these causes.

What are some factors organizational leaders should consider before committing their time to a cause?
Time is the conundrum. Even though you may love an organization and its cause, unless its leadership can use your time wisely, you may not be able to meaningfully participate. Address this upfront. Let the nonprofit know you’re strapped for time and create a plan that makes the most of what you’re able to offer.

Some charities do a good job of presenting commitment options — ways you can apply your time. For example, you might be most effective on a specific committee, as the lead on a special project or heading fundraising efforts.

Ultimately, you want to ensure your time and talents are being put to effective use. Be honest with yourself about the time you can give to a cause. Consider taking part in events that allow you to do two things at once. For instance, walk-runs are increasingly popular because they can be done while spending time with family.

And rather than attend a board meeting in person, phone in.

Business leaders shouldn’t be timid in this aspect. Your time is important. The business you lead provides the means to give back to the community, so you can’t ignore it. If you’re dealing with an organization that is unable to put your time to the best use, consider going elsewhere.

How should an organization that’s inclined to be philanthropic support those in the organization who want to volunteer or donate to charity?
It’s encouraging if a company gives its employees the latitude to attend to their philanthropic commitments as part of the workday. That communicates that philanthropy is central to the company’s values.

Companies should always look favorably on the contributions of its staff. For example, if one of your employees is a board member of a charity, find ways to help their cause — buy a table at a dinner event the charity puts on, or simply match at a certain percentage of whatever they choose to give.

Those leaders who are so inclined, and if the company is in a position that it can, should consider forming a foundation in the company’s name. Through it, you can support the charitable donations of your employees.

Whatever the method, the goal is to help build a better community, not make yourself or your company look good to others. Pick a cause that makes you feel good and enhances your life, something you’re passionate about, and be the example for your friends, family and employees. Show them that you believe in something and you’re willing to be selfless to help those in need.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How sellers can fetch top dollar for their companies in the M&A market

As the economy improves and the M&A market heats up, many small business owners are preparing for the most important transaction in their life: selling their business. Many sellers have never been through this process before and can make costly mistakes.

“Managing a deal is like a second full-time job. And you still have to run your business, all while handling the deal and maintaining confidentiality within your organization,” says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC, who has experience representing sellers in M&A transactions.

Smart Business spoke with Smith about the mistakes sellers often make and how to avoid these oversights.

What mistakes do sellers make?

There are three general areas of concern:

  • Not adequately preparing the business for sale.
  • Not following a good sales process.
  • Poor execution of the transaction.

How could sellers better prepare the business for sale?

Have complete books, records and contracts. Make sure all corporate records, documentation, contracts, leases, employee personnel files, benefit plans, etc. are up to date and complete. Due diligence is not the time to clean up.

Have employment contracts with key employees and restrictive covenants with sales personnel. If possible, put contracts in place with key customers and vendors that a buyer will need.

If you don’t have audited financial statements, or at least accountant-prepared statements, consider getting them. Also, consider working with your CPA to prepare a recast P&L showing what adjustments might be made without the seller (and seller perquisites), which will not be incurred by the buyer.

How does a seller fail to properly maximize the sales process?

Sellers miss out when they fail to create a strategic and competitive sales process. Ideally, sellers want multiple bidders so they can leverage the competitive environment. However, sellers should keep in mind that private equity firms and strategic buyers are very different audiences and adjustments in approach should be made when pitching each.

Have a data room ready to go with documents buyers should see and consider. If some agreements are confidential, prepare summaries, charts or reports. Have a good non-disclosure agreement and know what due diligence you want from a buyer to pick your best suitor.

Finally, the seller wants to negotiate all the key terms of the deal up front in a letter of intent. This is the biggest mistake sellers make. Sellers shouldn’t let buyers make excuses as to why they can’t commit on certain issues or rush the seller into a definitive agreement. The seller will never have more leverage than at the letter-of-intent stage and the deal terms will only get worse for the seller as the transaction progresses.

Where do sellers fall down during a transaction?

Without an experienced M&A negotiator to organize and lead the negotiations —usually a seller’s counsel — sellers will likely stumble. Alone, sellers might not take into consideration the tax implications of the deal, or might not understand that agreeing upon the purchase price is only one small piece of determining the seller’s net, after-tax result from the overall transaction.

There will be earn-outs and holdbacks, consulting agreements and indemnities, definitions of working capital and inventory, and collection of AR. It is in all of these areas that sellers can lose significant value.

Additionally, most sellers are not prepared for the extensive time, effort and emotional drain a deal will take. Deals can take six to nine months from first solicitation to closing, and 30-75 days from letter of intent to closing. The seller also should expect many ups and downs as negotiations wax and wane. Not all issues will go their way.

Sellers should educate themselves before the transaction begins. Hire a good investment banker and an experienced lawyer early in the process. They’ll help quarterback the transaction to the fastest and best solution for the seller.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How companies should handle media attention amid criminal allegations

When companies become tied to a criminal investigation, whether or not it or its employees have actually committed a crime, it can be on trial in both the criminal court and the court of public opinion.

Media coverage today is more than just TV, radio and print media. It now includes the internet and is delivered to personal devices through social media, blogs, videos and podcasts moments after news breaks. Also, while many get their news from social media, the accuracy of that source is often questionable. This has changed how companies handle the public relations aspect of a criminal matter.

“Not long ago, the traditional response to media inquiries regarding alleged wrongdoing by a company was ‘no comment,’” says Rob Glickman, Principal and head of the litigation and criminal practice at McCarthy, Lebit, Crystal & Liffman.

“That can no longer be the way most inquiries are handled. Adverse media attention can ruin a business. Even if a company that becomes embroiled in a criminal case is eventually cleared of any wrongdoing, it can still lose in the court of public opinion and be driven out of business.”

Smart Business spoke with Glickman about how companies should handle the media coverage often associated with facing criminal allegations.

What should companies do once they discover they or any of their employees are subject to a criminal investigation?
The moment a company finds out it or one of its employees is the focus of, or is even implicated in, a criminal investigation, a company can’t simply stick its head in the sand and hope it will all go away.

The company should direct its lawyer, if capable, or an outside law firm that has experience to conduct an internal, independent investigation of the charges. That way, if asked, a company can truthfully let the public know that it is confronting the matter head on, which will hopefully keep public confidence in the company.

What’s the best way for companies to handle media attention when they’re tied to real or alleged criminal wrongdoing?
In the absence of media coverage, it could be best to go silent and focus on the defense of the actual investigation and case. When it heats up, however, most often a company should respond to media inquiries. That can happen in a number of ways.

The CEO or defense lawyer doesn’t need to be the person who mounts a public defense. Communications firms are invaluable in these situations, and can be brought in to manage public relations and media statements.

Crisis communication consultants are best equipped to handle adverse media attention, especially if a company is dealing with a government prosecutor who is leveraging the media to generate public pressure. It’s important that the company forms a response that’s ethical and in the best interest of the company. That often requires the tact of a third-party consultant.

Social media during such events can be a shield and a sword. The medium makes it easier to respond to adverse attention, giving the accused a means of fighting back with appropriate force. Still, any public response should be run past the legal and communications teams before being released.

What should companies avoid doing when they’re in this position?
It’s important that the company doesn’t panic and respond hastily or through an employee without obtaining advice from a legal or a crisis communication partner. Companies can go on the offensive to attempt to assuage the adverse media attention, if at all possible, and put the company in a position to defend itself against the allegations. But they should do so carefully and after an appropriate internal investigation into the allegations.

What do companies in this position need most from their legal team?
The attorney managing the case should be an expert in the subject matter of the investigation. He or she needs experience in the minutiae of what’s being investigated.

Adverse media attention doesn’t necessarily mean a company is headed for public disaster. If handled appropriately, it likely won’t be the death knell for the company.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

Do your due diligence to maximize the terms of your real estate deal

 

When purchasing a commercial property, there is a lot of “homework” that a buyer should do, both before and after signing an agreement of sale. When buyers do preliminary due diligence before signing an agreement of sale, they can avoid costly negotiations for an unsuitable property and negotiate more favorable and appropriate deal terms. Additional due diligence, which is completed during a contingency period after the agreement is signed, can help buyers determine not only if they wish to proceed, but if the deal makes economic sense or if additional modifications to the deal terms are in order.

“The more you know about a property before you commit, and the more you learn about a property before you can’t turn back, the better off you are,” says Catherine Marriott, a member of Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Marriott about how buyers can protect themselves by doing appropriate due diligence before and after an agreement is signed.

What types of due diligence can a buyer begin before signing a letter of intent or an agreement of sale?

Before making any type of binding commitment, buyers should do some preliminary due diligence to determine if any modifications may be required to conform the space to their needs and if desired financing will be available for the project. Buyers should consult with the local zoning office to determine if their use is permitted under the local zoning classification for the property as well as the procedure for any intended improvements. In addition, many commercial property listings will include some pertinent information regarding lease revenue (if occupied) and operating expenses that will be helpful in analyzing the economic outlook for ownership. This can assist buyers with establishing an offering price.

What further due diligence will a buyer do once an agreement of sale is signed?

Just about every agreement of sale will include a contingency for any due diligence that a buyer will want to complete, including, without limitation, property-related inspections and document review, title and financing. Buyers and their team of professionals will negotiate a reasonable time period, usually anywhere from 30 to 90 days, but sometimes longer with new construction or development, to determine if they are satisfied with any and all aspects of the property and terms of the deal. During that time, buyers should examine everything from the physical condition of the property to its financial viability, including physical and environmental inspections, title examination and survey review, lease and operating expense examination, evaluation of the municipal zoning file and any requirements related to development, construction or improvements, and any other due diligence that may be unique to the property or the deal itself. If financing is desired, buyers will also work with their lender to confirm that suitable financing options are available. These inspections could result in a modification of the financial or other business terms of the deal, or ultimately a termination if there are insurmountable issues.

What if the deal is “as-is?”

Even if a property is listed ‘as-is,’ it doesn’t mean that a buyer can’t do inspections or have a right to terminate. Many properties are listed ‘as-is’ to indicate to a buyer that the seller doesn’t wish to negotiate repairs and credits after the business terms have been agreed upon. Buyers should still insist on a contingency period during which they will complete the necessary examinations. Even if they won’t seek to renegotiate the deal, they will be protected from losing their deposit or other potentially costly losses associated with terminating an otherwise binding agreement to purchase the property.

Potential buyers of commercial real estate should do some preliminary homework before making any verbal or written commitments. Also, any eventual agreement should provide a buyer with further opportunities to examine any and all aspects of the property and deal terms, allowing a buyer to walk away or make appropriate modifications to the business terms. Prudent buyers will allow legal and real estate professionals to assist with this process, which can help them avoid costly mistakes.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

 

Open dialogue, respect are key to working well with municipalities

Municipal leaders must evaluate a number of factors when faced with a company pursuing a development project within their borders, says Charles A. Nemer, a Principal at McCarthy, Lebit, Crystal & Liffman. Business leaders who are willing to work with the community to address these details in a constructive fashion demonstrate a level of respect that can often help it move forward more quickly.

“When a business is looking to expand, it has typically studied the situation and crafted a plan that will allow it to capitalize on a particular opportunity,” Nemer says. “This type of project, however, is also likely to impact the municipality to some degree. Thus, it is imperative that company leadership describe the thought process behind the plan and show what it would mean for the community’s future.”

Smart Business spoke with Nemer about how building a stronger working relationship with municipal leaders can lay the groundwork for cooperation on important projects.

Where do companies run into trouble when undertaking capital improvement projects?
Zoning is the most common point of conflict. When a property/business owner seeks a variance for a particular use that is not permitted under the current zoning ordinances, it sets up a debate between the applicant and the municipality.

On the business side, the company can talk about how the new development will create jobs and therefore, strengthen its own market and industry positions. If the company has been around for a long time, it’s an opportunity for community leaders to reaffirm their commitment to the business. When it’s a new business, it could mean an influx of jobs as well as the chance to diversify the local economy. These are all worthy points for the company to make as it attempts to sell the project.

There is another side of the equation, however. What is the effect on the municipality? What would be the larger consequence of rezoning a particular parcel of land? How would it impact traffic? Does this location have the necessary roads, sewers and water lines to support this plan? How would the new development fit in with the other properties in that part of town?

In addition to physical changes, there are economic considerations when a business wants to build or expand. Tax abatements are desirable for businesses that want to minimize expenses, but they take valuable funding away from schools that rely on tax revenue to operate. What is being offered to ensure the schools are not harmed by this change? The burden is on business leaders to prove the worthiness of their plan and to craft it in such a way that the community benefits as well.

What can a business leader do to help this process along?
Business leaders need to show a willingness to sit down and talk about the details of their plan. Ideally, this is done before any applications for variances are filed with the municipality.

The company should work with its legal counsel to put together a presentation that highlights the benefits that would be realized for both the business and the community if the plan is approved. At the same time, it should not attempt to gloss over points that may be a concern to municipal leaders.

The purpose of the meetings is to discuss these potential hardships and benefits of the project and determine if solutions can be found. Open dialogue is an important part of this effort, as is the ability to see the project from other points of view.

Local government leaders are elected or appointed to represent their constituents, which includes business owners as well as the people who live in the community. Business representatives need to understand this dynamic and be mindful of it as they strive to get their project approved.

What role can legal counsel play in this process?
The company should work with an attorney that has experience in municipal law and can rely on that experience to initiate the dialogue between the business and the municipality. This is not something that will happen quickly. It’s about building relationships and patiently working toward a conclusion that benefits both parties. The company’s approach to this dialogue can go a long way toward determining the ultimate outcome.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

Federal law and LGBTQ+ employee workplace discrimination protections

Many states have discrimination laws that provide protections against discrimination on the basis of sexual orientation. For example, New Jersey’s Law Against Discrimination (LAD) specifically prohibits it and, although the Pennsylvania Human Relations Act does not set forth specific protections against discrimination for LGBTQ+ employees and individuals, the Pennsylvania Human Relations Commission (PHRC) has issued guidance that takes the position that it will accept and investigate sex stereotyping claims filed by LGBTQ+ individuals.

Title VII, however, only prohibits employment discrimination on the basis of race, color, religion, sex and national origin. As a result, there is no federal law that expressly prohibits employment discrimination against LGBTQ+ individuals. Nevertheless, certain federal courts have been interpreting Title VII to prohibit employment discrimination on the basis of sexual orientation or transgender status.

Smart Business spoke with Frank P. Spada Jr., an attorney with Semanoff Ormsby Greenberg & Torchia, LLC, about how courts are interpreting employment discrimination for LGBTQ+ individuals.

What are the courts using as a basis to determine what constitutes discrimination?

A 7th Circuit decision, Hively v. Ivy Tech Community College of Indiana, along with recent decisions in the 2nd and 6th Circuit Courts, extended protection from employment discrimination based on sexual orientation. The 2nd Circuit decision in Zarda v. Altitude Express held that sexual orientation discrimination is motivated, at least in part, by sex and should be considered discrimination for the purposes of interpreting Title VII. The Court reasoned that an individual’s sexual orientation cannot be defined without identifying that individual’s sex and therefore ‘sexual orientation is a function of sex.’

In March 2018, the 6th Circuit issued a decision in EEOC v. R.G.& G.R. Harris Funeral Homes, which involved a worker that claimed her former employer terminated her employment because she was transgendered and, at that time, undergoing gender transition. The 6th Circuit held that because the defendant’s decision to fire the worker was based on sex stereotyping and gender discrimination that it would be ‘analytically impossible to fire an employee based on that employee’s status as a transgender person without being motivated, at least in part, by the employee’s sex.’

In which cases has Title VII protection fallen short in the eyes of the courts?

In March 2017 the 11th Circuit, in Evans v. Georgia Regional Hospital, declined to extend Title VII protection to the claims of a lesbian employee who alleged she was terminated based on her sexual orientation. The Court held that a claim under Title VII alleging sexual orientation is not cognizable.

The U.S. Supreme Court denied an invitation to hear an appeal of the Evans case, but in May 2018, the 11th Circuit affirmed a lower court’s dismissal of a gay plaintiff’s claim of sexual orientation discrimination in Bostock v. Clayton County, Georgia. Bostock has again filed a petition with the Supreme Court for a writ of certiorari to decide the issue. The Supreme Court may now be forced to take up this issue to resolve the conflict.

What do these decisions mean for employers in Pennsylvania?

At present, the 3rd Circuit, which covers Pennsylvania, New Jersey, Delaware and the Virgin Islands, has not extended Title VII protections to LGBTQ+ individuals for workplace discrimination. But it is important for employers to understand that they must still comply with state law. Also, New Jersey’s LAD specifically protects employees against sexual orientation or gender identity discrimination and the PHRC has stated that it will accept and investigate sex stereotype claims filed by LGBTQ+ individuals under the Pennsylvania Human Relations Act.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Questions for business owners to consider when estate planning

There is a lot to think about when business owners begin estate planning.

As they think through what to do with what is often the most valuable asset in their estate, they’ll need to determine whether the company will be passed on or sold. In both cases, there are questions that need to be answered to ensure a smooth transition. Otherwise, owners risk devaluing their greatest asset, leaving little to their heirs.

“Regardless of whether the owner decides to maintain the business or sell it and divide the profits, the time to consider and lay plans is early on,” says Kimon P. Karas, a shareholder at McCarthy, Lebit, Crystal & Liffman Co., LPA. “Succession planning shouldn’t start at death or disability. That’s too late.”

Smart Business spoke with Karas about the many considerations business owners should make when determining their estate plan.

What are some of the questions family business owners should ask as they prepare their estate plan?
An early question is whether the owner wants the business to continue, or would rather cash out. Assuming that the owner wants to perpetuate the business within the family, he or she needs to determine how engaged the family is in the business and if they are able to manage and operate it.

It’s important to have a plan for the division of roles. In a situation in which there are multiple children and in-laws, delegation of duties and buy-in are critical.

Sometimes, however, there are children and in-laws who are fine not being in the business. The decision then is how to allow each family member to benefit equally from the business — those who are active in operations and those who aren’t.

How is planning affected when there is ownership or management outside of the family?
When a family business is owned in part by people who are not related, it is important for the owners to discuss early on the terms of that ownership. There should be buy-sell agreements in place as well as a succession plan. Have conversations about what happens if one of the owners would become disabled or die, or when or whether children from any of the owners’ families can join the business, and how ownership transfers as the current owners leave the business.

When the owner’s family is not capable of running the company or the non-family management doesn’t want to report to family members who are not actively involved in the business, ownership needs to take that into consideration.

The decision then is whether to sell the business or plan for the non-family management team to control the business. The owner could create a business advisory committee or trust comprising an accountant, lawyer and business consultants to oversee the company. Whatever is decided, the management team needs to be part of the conversation and comfortable with the decision.

What mistakes do business owners tend to make when it comes to estate planning?
The biggest obstacle is not making a decision. That can lead to conflict as the heirs are left to determine their roles and who deserves what share of the profits without the guidance of the owner.

In the case that the surviving members of the family realize that they can’t run the business and they need to sell, they will be selling from a position of weakness. Word will spread quickly and buyers will know what’s going on and why the company is being sold, and that will hurt the sale price.

Generally, business owners ought to be thinking about how to pass on their business when it becomes clear that the business is realizing steady, continued success and is becoming a significant part of the estate. At that point, collaborate with an accountant, attorney, financial adviser and family to create a plan.

Ultimately, whatever the owner decides shouldn’t be a surprise to the family — they should hear from the owner what roles each family member will have and how they’ll benefit from the business, if at all.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co. LPA

What to do when the golf course adjoining your home is redeveloped

Golf courses throughout the country are closing, and the land is being redeveloped for uses that not only destroy the adjoining owners’ “golf-course views,” but diminish the value of their properties. What, if anything, can the owners do to protect their investments?

Smart Business spoke with William J. Maffucci, an attorney with Semanoff Ormsby Greenberg & Torchia LLC, to find out.

Does paying a “lot premium” for a lot with a golf-course view give the purchaser control over future use of the golf-course land?

No. Payment of a lot premium does not ensure that the purchaser will enjoy a golf-course view for any amount of time.

I’m not saying such purchasers have no legal remedies to protect their investments. But if they do have such remedies, they arise from other facts, not from the mere payment of lot premiums.

For example, as part of the planning and promotion of golf-course communities, the developers often agree to include in the land records restrictions on the way in which the golf-course land could be used in the future. Those limitations are intended for the benefit of future owners of the neighboring lots, who, as a general matter, can enforce them.

But there’s an important distinction to note here: A deed or development-plan provision that restricts the use of land to certain categories of use (such as ‘recreational’) or that prohibits other categories of use (such as residential or commercial development) is not the same as a covenant (or promise) by the developer or golf-course operator to continue using the land as a golf course. Affirmative covenants to operate land as a golf course indefinitely or for any significant period are extremely rare, and it’s unclear whether they’re legally enforceable.

That distinction is important because it changes the legal remedies available to the adjoining or neighboring owners. An order enforcing an affirmative covenant to operate land as a golf course would literally prevent any change of use, but an order enforcing a generic use restriction (such as a prohibition on industrial use) would not preclude new uses (such as farming) that would not violate the restriction.

Is attempting to prevent a proposed change of use the only way adjoining or neighboring owners can protect their investment?

Sometimes the owners have another remedy. If they had been induced to pay premium prices by misrepresentations about the future use of the golf-course land, and if they reasonably relied upon those misrepresentations, they may be able to recover monetary damages through civil litigation against their sellers. The damages would be calculated as the difference between the actual fair-market value of the property and the value that the property would have had if the permitted uses of the golf-course land had actually been restricted in the way represented. The owners might be able to recover additional damages if they can prove that the sellers/developers made the misrepresentations intentionally, knowing that the buyers were certain or likely to lose their golf-course views soon.

Is litigation the only option?

Actually, no. In fact, litigation — which is lengthy, expensive, and uncertain — is sometimes the worst option.

The redevelopment of golf-course land often requires a variance from the municipality. Variances cannot be granted until the municipal land-use authority conducts a public hearing at which neighboring owners have the ability to provide input as to the impact of the proposed development. And owners may have other political avenues by which they may ensure that their concerns are brought to the attention of the local decision makers.

If a golf course is closed and the land is redeveloped in a way that reduces the value of neighboring residential lots, the owners of the lot can, in any case, try to lower their property-tax burdens by filing appeals of the property assessments with the county board of assessments. At the hearings on the appeal, the owners would present evidence (preferably through a professional appraiser) that, as a result of the closure and redevelopment of the golf course, the fair-market values of the appellants’ lots are now comparable to that of other local properties (not close to the former golf course) that have much lower assessments.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

The Supreme Court makes a significant ruling in favor of employers

On May 21, 2018, the U.S. Supreme Court issued its opinion in Epic Systems Corp. v. Lewis, which significantly undermined the power of workers to effectively assert discrimination and wage and hour claims against their employers.

“Epic Systems enables businesses to proactively address the wave of class action discrimination and wage and hour lawsuits that have inundated businesses in recent years,” says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia LLC.

Smart Business spoke with Goldblum about the Epic Systems decision and the impact it will have on both businesses and employees.

What is the background of the Epic decision?

Epic Systems involved three consolidated cases, and tens of thousands of employees at three companies: Epic Systems Corp., Ernst & Young LLP, and Murphy Oil USA Inc. The employees had signed agreements related to their employment that required them to arbitrate, not litigate, work-related claims and prohibited them from joining with other employees in class-action lawsuits against their employers.

The workers argued that their right to file class-action lawsuits over alleged wage and hours violations is protected by the National Labor Relations Act (NLRA), which was passed in 1935 to offer employees greater leverage to collectively challenge unjust treatment on the job, and which made the agreements unenforceable.

The court, in a 5-4 decision, however, sided with the employers, and Justice Neil Gorsuch wrote in the majority opinion that the 1925 Federal Arbitration Act, which favors the right to privately arbitrate disputes, supersedes the NLRA, and therefore the challenged agreements were enforceable.

What is the impact of the Epic decision?

The practical import of the Court’s decision is that private-sector employees may be contractually barred by employers from the right to enter into class-action lawsuits to challenge violations of federal labor laws. Employers may lawfully require employees, as a condition of employment, to enter into agreements that compel arbitration of work-related disputes and that preemptively bar them from pursuing class action claims in court or in arbitration. Employees who enter into arbitration agreements with class waivers may only litigate claims against their employers in an individual arbitration.

How should employers proceed?

While the Supreme Court’s decision in Epic Systems puts to rest facial challenges to the enforcement of class action waivers in arbitration agreements on the basis that they conflict with the NLRA, employees may still challenge such agreements under generally available contract defenses such as ‘fraud, duress or unconscionability.’ To be sure, the plaintiffs’ bar and employee advocacy groups will attempt to expand these and other arguments to challenge the enforceability of arbitration agreements and class action waivers.

One reaction to class action waivers that has already occurred is the filing by plaintiffs’ lawyers of dozens of individual arbitrations at once against a particular company, for which the company is often required to pay.

These continual challenges to the enforceability of arbitration agreements place an increased premium on employers’ careful drafting, implementation and maintenance of agreements and class action waivers. Moreover, although arbitration has traditionally been seen as a low cost alternative to litigation, that is not necessarily the reality. Arbitration can be a costly and time-consuming process.

Employers should also anticipate that Congress may attempt, at some time in the future, to exempt certain claims, such as those for sexual harassment or discrimination, from mandatory arbitration and class action waivers.

The Epic Systems decision resolves certain long-standing issues regarding arbitration and class action waivers, however significant questions and issues remain that employers must confront when determining whether to implement or maintain an arbitration agreement or a class action waiver. Consult with experienced employment counsel to ensure your company’s program is implemented and maintained in a manner that will support its enforceability.

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