How to stay compliant when growing into foreign markets

When it comes to doing business in another country, U.S. companies are confronted with an increasingly complex legal and regulatory landscape. As a result, it is critical for international businesses to find ways to ensure compliance as efficiently as possible. An important, but often overlooked, aspect is selecting and managing local counsel for the most cost-effective compliance result possible.

“Foreign jurisdictions — China is a good example — have legal systems that are becoming much more sophisticated,” says Walter R. “Bob” Bashaw II, Managing Shareholder and Director at Sherrard, German & Kelly, P.C. “The muscles of these legal systems are exercising themselves more every day. That creates a need for companies to build effective compliance programs that are capable of supporting both their U.S. and overseas businesses.”

Smart Business spoke with Bashaw about common mistakes made by companies as they pursue growth in foreign markets, and how to structure compliance departments capable of staying on top U.S. and foreign regulatory requirements.

What common mistakes do businesses make as they grow into foreign markets?

Small and emerging companies doing business overseas often follow business opportunities into foreign markets first and worry about shoring up the legal component of their expansion plans later. Companies naturally balk at spending the time and money it takes to build effective compliance programs. Their cost-control and U.S.-centric mentality, especially in smaller companies, tends to create blind spots.

Ideally, companies should grow their business and simultaneously develop the corresponding compliance systems in lock step with that growth. The best approach is to think about legal compliance as a 360-degree exercise that focuses on both U.S. and foreign laws.

The most effective compliance programs marry technology with experienced counsel. Fortunately, there are more and better technology solutions to assist with compliance than in the past. There are also a lot of great lawyers around the world. Good, old-fashioned, professional advice still remains at the center of developing compliance programs.

It is extremely important for there to be a good partnership between the business principals, U.S. counsel and the lawyers in the countries where the business operates, especially those companies without an in-house general counsel. Finding the right balance between cost and ensuring compliance is the art of the practice. Securing the right professionals with local expertise at the right price is critical. When companies choose or manage local counsel poorly, they can end up spending a lot of time and money for relatively little benefit and unnecessary risk exposure.

What should companies keep in mind as they search for a local lawyer?

When searching for overseas counsel, consider law firms that are local and sophisticated in the areas of law that pertain to your business, have experienced English-speaking lawyers, and can demonstrate cost-effective service.

Hourly rates are not the only factor in assessing cost. Much like finding a good lawyer in the U.S., it requires working through a process to identify candidates and thoroughly interview each until the right one is found. Also, be willing to develop relationships with local counsel as much as possible. We are all human, and like most people our overseas colleagues enjoy working with people they know and trust.

How can companies create a compliance structure that works?

Companies should take a multi-disciplinary, multi-jurisdictional approach to legal compliance. This means establishing the right processes and procedures from the start, and forming a team of people responsible for ensuring on-going training support, auditing and investigation.

The best teams consist of corporate and local business sponsors, compliance professionals, and lawyers in the various jurisdictions in which the company operates. Information should be shared as freely as possible within the team, keeping in mind data privacy, export controls and similar laws. Team members should regularly talk to each other to create a team atmosphere with clear and shared goals.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

How to use stock legends properly to prohibit unwanted transfers of shares

A legend is a statement on a stock certificate that notes restrictions on the transfer of the stock. A great deal of time and thought is put into preparing agreements among shareholders of closely-held companies, especially with regard to the transferability of share provisions. But if the final administrative step at the end is not taken, the restriction may be useless against a third party without knowledge of the restriction.

“Shareholders may agree to restrict the transfer of shares of a company’s stock, but if the restriction is not properly included on the stock certificate, the restriction on transfer could potentially be ineffective,” says Ashleigh M. Morales, an attorney with Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Morales about stock legends and the impact of not properly including them on stock certificates.

Why is a legend important?

Typically, in privately held companies, shareholders will agree to restrict the transfer of stock in the bylaws, a shareholders’ agreement or a buy-sell agreement. Shareholders generally want to restrict the transfer of stock because they want a say in who will be running or owning the business with them. They may not want their fellow owners’ children, spouse or friends running the business with them in the event of an untimely death. In most situations, the other shareholders (or at least a majority of them) have to agree to the transfer of a shareholder’s shares.

What happens if the stock certificate does not include the legend?

Even if all the shareholders agree to a restriction on the transfer of shares, if a third party receives a stock certificate without a legend containing the restriction and without actual knowledge of the restriction, that third party may not be bound by the restriction and may become the owner of the shares against the will of the other shareholders.

Pennsylvania law provides that unless a restriction is noted conspicuously on the stock certificate a restriction will be deemed ineffective except against a person with actual knowledge of the restriction. The legend puts the world on notice that the restriction exists so someone cannot claim they were unaware of the restriction. Most shareholders’ agreements provide that a legend must be included on stock certificates and the legend on the stock certificate should match that language.

How might this affect a company?

Let’s say an owner dies and all of his property passes to his children. And his children find his stock certificates without any legend on them but the deceased owner had agreed to a restriction on the transfer of shares in the shareholders’ agreement. Assuming the children were unaware of the restriction, the restriction would be ineffective as to the children and they would become the owners of those shares. This is a result the deceased owner and his fellow business owners most likely did not intend. And it becomes an even bigger issue if the restriction allowed the company to redeem the shares at a value less than fair market since now the children could demand fair market value for the shares. This could come at a significant cost to the company or the other shareholders in terms of the price to be paid or litigation.

Do shares of a company have to be certificated?

Generally, Pennsylvania does not require shares to be certificated — a company’s Articles of Incorporation will provide whether the shares are certificated or uncertificated. If shares are uncertificated, the company is required to provide the owner of the shares with written notice of the information typically contained on the certificate, including any restrictions on transfer.

Are LLC interests certificated?

Interests in limited liability companies may also be certificated or uncertificated. If certificated, any restrictions on the transfer of a limited liability company interest should be handled like shares of a corporation.

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

Identify your intellectual property or risk losing it

Intellectual property (IP) protection is a critical task that enables companies to safeguard the hard work, expertise and ingenuity of their employees, says Kristen M. Hoover, a patent attorney at McCarthy, Lebit, Crystal & Liffman.

But, to be effective, a plan must be crafted to fit the way an organization functions.

“Each business must create a strategic plan that protects its unique intellectual assets everywhere they’re used,” Hoover says. “To do this, companies need to understand what IP they have and how those assets are deployed both inside and outside their walls.”

Smart Business spoke with Hoover on how to formulate a plan to ensure a company’s valuable IP resources are protected.

What constitutes IP and what assets might companies overlook when designing a protection program?
Many companies think IP protection is exclusive to patents. For some businesses, particularly those involved in innovation, manufacturing or R&D, patents will be a key component to their IP protection strategy. However, patents are not the only form of IP protection. IP can also be protected with trademarks, copyrights, trade secrets and contracts.

Trademarks often don’t receive the level of attention they should. Many companies put off seeking protection or do not think about it until a problem arises. Logos, slogans and business names are all items that should be protected. Trademarks are source identifiers and a key component to a company’s brand identity. They allow companies to be instantly recognizable to consumers and build their reputation in the marketplace.

Copyright protection is often overlooked, too, because copyrights are associated with artistic works. However, there are many business assets such as websites, internal manuals and handbooks that are copyrightable.

Additionally, companies that provide consulting work may have prepared materials or give presentations that should be protected. A trade secret is any confidential business information that gives a business a competitive advantage.

This could be any number of things, such as marketing strategies, data compilations, manufacturing processes, purchasing information, personnel information or customer lists. It’s a term that can be applied broadly and cover a multitude of assets, and often companies are not aware of all the assets that could be protected as trade secrets.

Trade secret protection, however, is dependent on companies handling this information appropriately. An IP protection plan should include proper procedures for handling this confidential information.

How can confidential information be protected?
To maintain confidential information, and therefore trade secret protection, companies must have internal policies that restrict access to confidential information, dictate how employees with access handle this information, and require the use of nondisclosure and confidentiality agreements. All employees should be made aware of these company policies and be required to follow them.

Contracts such as nondisclosure and confidentiality agreements are useful tools to maintain confidential information and protect trade secrets. For instance, nondisclosure agreements provide protection when discussing a potential business venture with another company or potential business partner.

While it may be necessary to share protected information in order to explore potential business ventures, it’s critical to take steps to ensure that information is not shared or used beyond the meeting. The nondisclosure agreement allows parties to share information while keeping it safeguarded and providing a means to seek restitution if it is not.

How can companies effectively assess and shore up their IP vulnerabilities?
Companies should talk with a patent attorney who has experience developing effective strategies to protect these valuable business assets.

This should include a review of all aspects of the company’s day-to-day business in order to gain a clear understanding of what IP the company has that should be protected. By working with an experienced professional who can provide guidance at each step, the process of establishing an effective IP protection plan becomes more affordable and manageable.

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

Treatment of inside salespeople under the Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping and child labor standards affecting full-time and part-time workers in the private sector and in federal, state and local governments. Nearly all employees are covered by the FLSA unless they qualify for one of the exemptions.

Smart Business spoke with Michael B. Dubin, a member with Semanoff Ormsby Greenberg & Torchia, LLC, about the FLSA, why inside salespeople are commonly misclassified as exempt and the consequences of failing to pay overtime to non-exempt employees.

How are salespeople treated under FLSA?

Outside salespeople are exempt from the overtime requirements under the FLSA while inside salespeople are generally non-exempt and are required to be paid overtime for all hours worked over 40 in a workweek.

To qualify for the outside sales exemption:

  1. The employee’s primary duty must be making sales or obtaining orders or contracts for services, or for the use of facilities for which consideration will be paid by the client or customer; and
  2. The employee must be customarily and regularly engaged away from the employer’s place of business. Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephone solicitation of sales is considered one of the employer’s places of business.

Inside salespeople are those generally attempting to make sales over the telephone, internet or by mail. These employees are typically non-exempt and are eligible for overtime pay. However, in certain limited circumstances, an inside salesperson may be exempt under the ‘retail or service establishment exemption.’ To qualify for this exemption, an employer must demonstrate that:

  1. The employee works for a retail or service establishment;
  2. The employee’s regular rate of pay is at least one-and-a-half times the minimum wage; and
  3. More than half of the employee’s earnings in a representative period (not less than one month and not more than one year) are derived from commissions on goods or services.

A retail or service establishment is a business where 75 percent of its annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.

Why do employers misclassify salespeople?

Many employers see no distinction between outside salespeople and inside salespeople since both positions are selling goods or services. As a result, many employers misclassify inside salespeople as exempt employees. When made aware of the misclassification, these employers often ask if they can direct the inside salespeople to go on the road a couple of days a month so they can be characterized as outside salespeople exempt from overtime. The answer is no, because an outside salesperson must be ‘customarily and regularly’ engaged away from the employer’s place of business, which means greater than occasional, but less than constant. Therefore, this attempt to avoid paying overtime will be unsuccessful if challenged.

What is the penalty for failing to pay overtime under the FLSA?

If an employer fails to pay overtime under the FLSA, the employee has a private right of action and can seek any unpaid overtime going back two years from the date of filing the action. If the employee can prove the employer acted willfully in violating the FLSA, they may be entitled to overtime going back three years. The employee may also be entitled to liquidated damages, which can be up to the amount of the back overtime (it doubles the amount owed to the employee), as well as the recovery of attorneys’ fees incurred in the action.

To keep abreast of FLSA requirements, it is prudent to have an attorney experienced in FLSA conduct a wage and hour audit every few years. This process will allow the attorney to review all job descriptions, the actual duties performed and the FLSA classification of each position to determine whether any employees or group of employees are misclassified and to rectify any such misclassification.

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

It’s never too early to begin crafting your business succession plan

Succession planning can be a difficult task for business owners whose sole focus has always been the growth of the company, says Steven P. Larson, an attorney with McCarthy, Lebit, Crystal & Liffman. However, taking steps to secure your company’s future is the best way to protect yourself, your family and your employees following your departure.

“Every business transition strategy, even within the same industry, is going to follow a different path,” Larson says.

“Every approach is unique because it is based on what you want to accomplish and the legacy you wish to leave behind. There are always options, but the sooner you develop a plan, the more choices you will have. Ultimately, your efforts will provide a great deal of relief and guidance to your family and your employees, knowing that there is a plan in place.”

Smart Business spoke with Larson about how to initiate the succession planning process and the importance of starting early.

Where is a good place to begin your succession planning?
There are two primary areas of focus. The first step is to review your basic estate plan, which should include your will, revocable trust, financial power of attorney, health care power of attorney and living will.

These documents provide baseline protection to ensure that upon your death or incapacitation, a trusted individual is ready to step in and manage your affairs. Along those lines, it’s a good time to consider what protective measures you have in place, such as life insurance and disability insurance to cover you in the event of death or incapacity.

The other area of focus is to develop your ideal business succession plan. Here, the options are vast and highly customizable. While some business owners choose to transfer control of the business to a family member, others may elect to remain with the company in a reduced capacity.

Further options include selling the company to a third party or arranging for a management buy-out, either immediately or over a period of time. Typically, this is a lengthy process that can take years to fully develop and implement from beginning to end. It is never too early to begin thinking about the future of your business and what you want your legacy to be.

How does insurance tie in with both estate planning and business succession planning?
Insurance is important for any business owner, but it becomes particularly significant if you own a business that is highly dependent on your presence to succeed or a service business, such as an architectural firm, law firm or medical practice.

These types of businesses cannot function without you. Thus, you need to formulate a plan that clearly spells out what should take place in the event that you are unable to continue due to your incapacity or death. If you wait until this worst-case scenario occurs, it will be too late to get the insurance coverage needed to protect your business and any stakeholders.

Life insurance is utilized frequently during the estate planning process, particularly for business owners. It may be used to fund a buy-sell agreement, pay estate taxes or provide liquidity to your family.

How prepared are most business owners to deal with succession planning?
It’s one area of the business that is often put off for another day.

Succession planning involves asking and answering difficult questions, including when you should step away, if there is someone in the family or business who has what it takes to lead the company, if you have the time to transfer your knowledge to that person, and ultimately, what is your legacy.

Often business owners have a general idea of what they envision the transition looking like, but it takes work to craft the final version of their succession plan.

Business owners, especially those who built the company from scratch, have a deep knowledge of their business. They also recognize the value of the company, but they may not know what it takes to monetize that worth.

It can be eye-opening to go through a business valuation and determine what needs to be accomplished in order to find the right buyer, if that’s the chosen path. It is important to engage the right team of advisers and give yourself time to complete the process to ensure you achieve your end goals.

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

HIPPA and business agreements: what service providers need to know

Anyone who has been to a doctor’s office knows that the Health Insurance Portability Act (HIPAA) protects the confidentiality and security of identifiable patient health information (PHI). Yet, many businesses newly marketing services to the health care industry are not aware of the impact of HIPAA on their business.

“The relationship between health care providers and their service providers who handle PHI requires a written business associate agreement (BAA),” says Jules S. Henshell, Of Counsel at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Henshell about what to consider when signing a HIPAA business associate agreement.

Who is a business associate?

A business associate is any individual or entity that creates, receives, maintains or transmits PHI in the course of performing services on behalf of a HIPAA-covered entity. The HIPAA Omnibus Rule makes business associates of HIPAA-covered entities directly liable for violations of HIPAA and the Health Information Technology Act (HITECH).

What is a business associate agreement?

A business associate agreement is a written agreement, required by HIPAA, between a covered entity and a business associate that describes the rights and responsibilities of each party with respect to the handling of PHI, compliance with HIPAA and implementing regulations known as the HIPAA Omnibus Rule.

How can a company evaluate whether or not a proposed BAA is acceptable?

Certain elements of every BAA are required by law. Other terms are not expressly required. The latter are potentially negotiable. For example, HIPAA does not require that a business associate agree to indemnify a covered entity in the event of breach of PHI, but a covered entity may want such protection. Similarly, HIPAA requires that a business associate agree that the Secretary of Health and Human Services will have access to its books and records. HIPAA does not require that a BAA include such access by a covered entity, but a health care provider may want to audit HIPAA compliance by the business associate.

In addition to review of the terms proposed by the covered entity, the acceptability of a proposed BAA may turn on the following considerations:

  1. Determine if you are a business associate — Will you be creating, receiving or transmitting PHI in the course of performing services? If the services agreement does not entail handling PHI, there is no reason to sign a BAA.
  2. Consider your ability to comply with the BAA commitments — Do you have policies, procedures and safeguards for protecting privacy and security of PHI?
  3. Consider your bargaining power to negotiate — Is the covered entity willing to entertain discussion of the terms of the BAA not required by HIPAA? Contracting officers for large health systems may resist negotiation, but allow for direct discussion between their legal counsel and your lawyer.
  4. Consider whether you will be using a subcontractor to perform — Do you have a subcontractor agreement to ensure that your subcontractor complies with HIPAA? Does it include timeframes that enable you to meet breach notification deadlines in the proposed BAA?
  5. Consider your risk in the event of security breach of PHI.

What is at risk if a business associate violates HIPAA rules?

There are substantial civil monetary penalties for each HIPAA violation. Civil monetary payments totaling $22,855,300 were made to the Department of Health and Human Service’s Office of Civil Rights (OCR) to resolve HIPAA violations last year. In 2016, OCR also announced its first enforcement action directly against a business associate, Catholic Health Care Services of the Archdiocese of Philadelphia. The resolution agreement imposed a $650,000 monetary payment and a corrective action plan, signaling new focus on enforcement against business associates.

Such focus is likely to continue as OCR identifies business associates through ongoing audits of covered entities.

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

Understanding the role lawyers play in a turnaround situation

A lawyer is an integral part of a turnaround team, uncovering legal issues in a way that allows the financial and business advisers to find the best path to turn the company around.

“It’s not the lawyer who is responsible for finding a turnaround solution, but rather he or she serves as a translator between the financial and business professionals, and someone who can assemble and lead the team that ultimately puts together the turnaround strategy,” says Gary Philip Nelson, a shareholder at Sherrard, German & Kelly, P.C.

Smart Business spoke with Nelson about company turnarounds, and what and who should be involved.

What are the first steps in a turnaround?

A key aspect of working with a troubled company is understanding what the lender is trying to accomplish and how it views the borrower; is it just an asset to be managed or is the loan part of an ongoing business relationship between the two?

A lawyer will consider relevant documents pertaining to loans and will do a lien search to see who, if anyone, has judgments or security interests in the debtor. Then the lawyer will assemble and analyze those loan documents, looking for leverage to negotiate more favorable results. A company that owes money and does not have much equity or personal resources will often take whatever it can get from a lender. A company with leverage can have a more even exchange because a vulnerable lender will recognize its vulnerability and try to contain its exposure by giving something up to fix the problem.

With the nature of the relationship understood, a lawyer can help the company find the right set of professionals to identify the problems and lead the turnaround.

When is bankruptcy a more viable option?

Because the cost of Chapter 11 is now very high, the tendency is to attempt a non-bankruptcy court solution through a forbearance agreement, a state court receivership, or other non-bankruptcy solutions that are now more popular because they might be faster and less expensive. These alternatives give companies more control than going through court where creditors have a say or can band together in a lawsuit. They also allow banks and management to focus on the core problem and have a fighting chance to solve it.

A Chapter 11 proceeding can come into play, however, if the company gets into a situation in which it would be profitable if it were not buried in litigation or facing a large volume of personal injury or product liability lawsuits. Going into bankruptcy in these instances could result in the creation of personal injury settlement trusts for the benefit of tort victims, which offer protection to the post-bankruptcy company from mass tort plaintiffs.

What are the unique skills lawyers bring to turnaround situations?

When there are competing liens against a company’s assets, the lawyer can weigh in on who has the first priority so that everyone involved can focus the turnaround discussions on the right parties. If there are liens that exceed the value of the collateral, the company may need bankruptcy to wipe them out because whoever holds them won’t voluntarily give up a lien position, even if there is no value.

Generally, officers and directors owe fiduciary duties to a narrow range of stakeholders. But, in certain jurisdictions, when a company is insolvent, the stakeholder group might expand to include creditors and employees, and result in an expansion of the fiduciary duties of managers and directors to include more constituents. Knowing this, and depending on who is the engaging client, experienced insolvency counsel can help managers or directors take appropriate actions to make a workout successful.

One of the more intricate areas in which a lawyer can help is with employment relationships, such as understanding the company’s responsibilities in collective bargaining agreements, whether it can lay off workers without notice, and what sorts of severance arrangements exist under current employment contracts.

A lawyer equipped with the necessary skills in this field can quarterback a turnaround situation, recruiting the help of service professionals and assigning them tasks while advising a company on whether an out-of-court or in-court solution is the best path. They are a vital part of the process.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Proper planning is a critical piece to a successful business sale

Owners looking to sell their business should begin planning as soon as they can, says Michael D. Makofsky, Principal at McCarthy, Lebit, Crystal & Liffman.

“The sale of a business is one of the most significant events in an owner’s life. An owner is understandably eager to close the deal, monetize and move on to the next chapter,” Makofsky says. “It is not very realistic, however, for an owner to suddenly decide to sell a business, try to do so quickly on one’s own and expect an optimal result.”

Smart Business spoke with Makofsky about steps an owner can take to make the process run more smoothly.

What are the key first steps when you’re looking to sell your business?
You need to know the value of your business before trying to sell it. That goes beyond income, revenue, debts and expenses — it is an understanding of what your company is worth on the open market. You may overestimate the value of your company, only to be disappointed with lower offers from potential buyers.

A valuation can provide a clearer view of the state of the business. With that frame of reference, you are more equipped to handle offers.

A potential buyer will conduct due diligence. Proper preparation can help you as the owner more readily identify information buyers are interested in. Consider the questions a potential buyer might ask. This enhances your credibility and minimizes potential surprises that could lead a buyer to try to renegotiate a deal or walk away altogether.

How can advisers help you get a better deal for your business?
Owners often try to sell their business by themselves. After all, you know your company better than anyone. However, you may not understand how to fairly value your company, how to market it, how to negotiate legal documents, tax implications or how to manage the proceeds.

There are many complexities in mergers and acquisitions that, if not handled properly, can lead to unfortunate results. Assemble a team of professionals who can guide you through the process. Experienced investment bankers, accountants, M&A attorneys and financial advisers can help navigate the transaction.

When you have a strong team of advisers, they can interact with potential buyers and present the best picture of your company. They can also work through issues and mitigate risks, all of which can lead to a successful transaction closing.

When owners contemplate a business sale, many envision selling their entire interest to a third party. This traditional type of sale, however, may not always be possible or in your best interest. Advisers can help develop alternatives that provide flexibility to better meet your needs.

What are some common concerns that come up in a negotiation?
In a purchase agreement, an owner makes representations and warranties regarding various facets of the business. Representations often include statements regarding financial information, payment of taxes, conditions of assets, intellectual property and status of contracts.

You must be able to confirm the veracity of all representations before signing a definitive agreement. With respect to intellectual property, for example, does the company really own what it purports to?

Companies routinely require employees to sign invention, confidentiality and non-compete agreements that assign ownership of intellectual property created by the employee to the company and ensure that employees cannot “set up shop” down the street. Not having effective agreements in place beforehand creates intellectual property risks for a prospective purchaser.

Another example is customer and/or vendor contracts. Are there written contracts in place and are they valid?

Many contracts also require consent from the counterparty prior to assignment, or contain provisions allowing a party to cancel or terminate in the event of a change in control of the business of the other party. To avoid altering these relationships, the process of obtaining consents or waivers of the change in control provisions needs to be managed carefully.

While there are many situations that can disrupt a transaction, advisers can help identify issues like these in enough time to rectify the situation and facilitate a smooth closing.

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

Lessons from sports team deals that can be applied to buying a business

Buying a sports team, in many ways, is similar to the purchase of any other business: Buyer and seller negotiate the price, lawyers do the due diligence and prepare the acquisition agreement.

“The difference, especially with major league teams, is that there is a limited supply — they don’t often come on the market,” says David Lowe, shareholder and director at Sherrard, German & Kelly P.C., who has worked on both major and minor League sports team acquisitions that include the Florida Panthers, Texas Rangers, Buffalo Sabres and Buffalo Bills. “And when they do, there can be fierce competition for them. That competition can result in prices that don’t seem to make any sense if you apply the traditional valuation metrics used in most other acquisitions.”

Smart Business spoke with Lowe to get a behind-the-scenes look at the unique process of buying a sports team and lessons that can apply to other business purchases.

What are some of the unique conditions that apply to the purchase of a sports team?

One primary difference between buying a business and buying a sports team is that buyers of sports teams are applying to be members of an exclusive club. League owners must approve any potential new team owners, and buyers can be surprised by the league rules. For instance, most leagues have limitations on the amount of debt an owner can have on its books. That can limit the ability of a buyer to finance the purchase with a bank deal because it requires that more equity be put into the purchase than might be typical in other industries.

Sometimes it’s a group of owners that want to buy a team, which is not uncommon since the prices are so high. However, all owners must go through the vetting process, which includes extensive background checks and review of assets and liabilities. If approved, there are restrictions put on the owners’ ability to transfer ownership of the team. Every time there’s a transfer, there’s a vetting process.

Many leagues require owners to sign a guarantee that they will, in addition to their equity, put in additional money to pay the team’s bills, creditors, or otherwise keep the team operational. Some of the leagues have more ability to control individual teams than others. The NHL requires all owners to grant the league a proxy on their ownership interest in the team, which allows the league to take control of a team under certain circumstances.

What are potential buyers looking for in sports team deals?

Sports team acquisitions tend to focus on stadium or arena lease terms and what rights the team owner has to control events at that location to generate revenue. Sponsorship contracts, suite and ticket sales and concession vendor contracts are important and are key areas of focus in the due diligence process. New team owners also examine player contracts for guaranteed money obligations.

Media contracts are also important in leagues in which local media contracts are negotiated by individual teams. NHL, MLB and NBA teams can generate significant income from media contracts or by setting up regional sports networks to broadcast their games locally. In the NFL, conversely, the league negotiates most of the media deals.

Buyers of sports teams, as opposed to other types of businesses, are not necessarily looking for year-over-year generation of net profit return. While that’s a consideration, the real upside is in the increase in valuation of the team over time. There currently doesn’t seem to be any abatement in the increase in value of sports teams, especially in the NFL, MLB and NBA where there recently have been high prices paid for teams. Owners can expect, after seven or 10 years, to make quite a bit of return in a sale.

What lessons from buying sports teams can be applied to buying a business?

With the acquisition or purchase of any business, hire lawyers and advisers who are familiar with the industry of the entity being bought. They’ll bring an understanding of the unique features of the business and the industry. They can more easily steer buyers through the process and identify the key business and legal issues more readily than generalists.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

How to protect your business against wage and hour lawsuits

A worrisome trend for businesses is the explosive growth of wage and hour lawsuits. The Department of Labor reports that it receives nearly 25,000 wage and hour related complaints per year, and the number of lawsuits brought against companies under the Fair Labor Standards Act (FLSA) continues to soar — wage and hour lawsuits against companies for violations of the FLSA have increased 456 percent since 1995. These lawsuits can be expensive to defend, extremely disruptive and often result in the payment of significant settlements.

“The popularity of these lawsuits is explained by the potential for recovery,” says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia LLC. “Even a small wage and hour violation can result in large damages when the claim is brought on behalf of all similarly situated employees.”

Smart Business spoke with Goldblum about wage and hour violations and how companies can steer clear of them.

What types of claims are brought in wage and hour suits?

Although failure to pay overtime wages accounts for nearly 40 percent of wage and hour class action lawsuits, these suits can include a variety of other claims including: misclassification of employees, failure to pay for off-the-clock time, failure to pay for meal breaks, and failure to pay compensable time before and after a work shift. A burgeoning area of concern is the failure to pay employees for the use of email and mobile devices outside of working hours.

How can companies decrease the chance of a wage and hour suit?

An internal audit of wage and hour practices by expert outside counsel can identify and help prevent most violations of the law, thereby helping to avoid a lawsuit. The cost for such a review is substantially less than the fees to defend a single claim.

An effective wage and hour audit will include a thorough review of the company’s policies and practices, including a review of employee classifications, independent contractor relationships, timekeeping and payroll practices, employment policies, overtime calculations, and whether and to what extent managers are properly trained with respect to these issues. If violations are found, counsel can offer strategies to correct them and deal with any potential back pay obligations in ways that reduce the likelihood of litigation. After an effective audit, a company will know and understand any existing risks and can take steps to bring the company into compliance.

How important is it to review and revise wage and hour policies?

One of the most vital things a business can do is to periodically have its wage and hour policies reviewed by an attorney well-versed in this area of the law. For example, handbook policies that notify employees of the company’s expectations regarding off-the-clock work and meal and rest periods are a vital tool in defending wage and hour claims. Moreover, a clear policy that states smartphone use during off hours is only permitted with supervisory approval and must be recorded and reported immediately (i.e., within 72 hours) is recommended, as is a statement that ‘off-the clock work is prohibited.’ Employers should additionally ensure that time cards and electronic recording programs contain language that require employees to confirm that they have recorded all time worked. Finally, clearly articulated meal and rest period policies are now a necessity in employee handbooks.

How can companies implement effective time-keeping measures?

Employees and former employees often assert in class action lawsuits that the hours paid were not accurate because the hours were under-reported or not reported by the employee. To prevent this type of claim, ensure that time-keeping practices are well documented and that the reported time is verified by the employee. Best practices for accomplishing this include using a standard system to record all time, either electronically or with an actual punch-clock; having each nonexempt employee record, review and sign off on their time each pay period; implement a signed verification that the hours reported accurately include all time worked for the period; and training supervisors to monitor and review employees’ time records.

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