Intellectual property (IP) is an area regularly overlooked; however, this is a pivotal area of law, especially for entrepreneurs and mid-size businesses.
“We often get calls once a client has already landed in some sort of IP trouble, but many of these issues could have been averted through some simple diligence early on,” says Salil Bali, an Intellectual Property Litigator at Stradling Yocca Carlson & Rauth.
Bali says many people are overwhelmed by the topic and might think it to be in the purview of larger companies.
“Surprisingly, for small businesses, this is an area we have seen affect them the most, and often this impact is significant,” he says.
Smart Business spoke with Bali about the importance of protecting your intellectual property, regardless of the size of your company.
What types of businesses are most at risk when it comes to IP?
Most people, when they think about IP, assume it pertains just to tech-based innovations. However, at some level, every company has IP rights to protect. In today’s world, fewer companies have tangible assets such as equipment, manufacturing facilities or real estate. Instead, the vast majority of companies today have most of their assets based on IP rights. This includes the ‘mom-and-pop’ yoga studio that needs to protect its name, all the way to the biotech company that has inventions to protect. No matter what type or size company you have, there are aspects of IP law that touch your company and those rights need to be protected.
What are some common intellectual property issues entrepreneurs should recognize?
The four main areas of IP affecting business today are trademarks, copyrights, patents and trade secrets. Companies need to be aware of all four areas and how to protect themselves with regard to each.
Trademark law deals with the protection of a word, name, symbol or device used to indicate the source of the goods or services. The purpose is to distinguish from other similar goods or services and prevent public confusion. When determining your brand or company name, you should perform trademark clearance to ensure you don’t infringe on pre-existing marks and that your desired mark is strong and protectable. Discussing such issues with a trademark attorney early on can minimize exposure and create IP assets for a company right out of the gate.
Copyright law deals with the protection and permissible uses of original works of authorship, including photographs, videos and written documents. These issues often arise with hastily launched websites, when companies start loading copyrighted images or text without first getting permission or the appropriate licenses. This could lead to cease-and-desist notices and claims for damages. Similar issues can arise with the use of personal likenesses, especially those of celebrities.
Patent law grants an inventor the right to exclude others from making, using or selling his or her invention. If you have an innovative idea, it’s important to talk with an attorney to determine what is patentable and whether or not your idea infringes on other patents. Doing this early diligence can protect your idea from being abandoned to the public domain or help you sidestep and minimize potential litigation exposure.
As far as trade secrets, companies need to be mindful about how they manage information to make sure secrets stay protected. Early-stage companies often aren’t careful about employment contracts and what information is being divulged to whom. This lack of discipline can adversely affect the company’s ability to claim trade secret protection. If you share sensitive information without outlining the recipient’s duties to hold it in confidence, you can lose the ability to protect your trade secrets.
What are the potential consequences of ignoring intellectual property issues?
The risk of not protecting your mark is that someone else assumes a similar name and thus limits or destroys the value of your brand. Though there may still be recourse, it becomes an uphill battle. An infringement lawsuit by a trademark holder for your use of a confusingly similar mark could cost your company its brand and/or logo, the goodwill associated with them and subject you to potential damages.
The risk with copyright infringement is financial penalties. Unlike patent and trademark laws, there are express damages written into the copyright statute that can be considerable.
The consequence for infringing on a patent is litigation, which may result in an injunction preventing further sales or use of the infringing product. Damages and costs in such cases can quickly add up. Conversely, if you fail to seek patent protection for your innovation, you could permanently lose your ability to protect your invention. When you have a new idea, there are key timelines you should be aware of that can be impacted by public disclosure and sale. You must act quickly to secure your idea or you could lose your rights, even if your invention is otherwise patentable.
With trade secrets, it’s simple: If you don’t protect them, you lose them. As soon as a secret enters the public domain, it’s gone.
How could these problems be avoided?
Often, talking with someone who is knowledgeable can help you understand how to protect yourself from infringement. The costs associated with protecting yourself are proportionately low and can have a big impact on your company’s valuation when you’re looking for funding. The stronger your IP portfolio is, the stronger your company is. However, if these issues are ignored, it can become a costly distraction for you and your company. Taking steps early on to make sure your IP house is in order can pay dividends.
Salil Bali is an Intellectual Property Litigator at Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4278 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth
China’s economy is growing at a fast pace and its government has worked to attract foreign companies, which is opening opportunities for them to get involved in the country’s market.
“There is a demand and need by so many Chinese companies that have capital and want to expand their business but don’t have the technology a lot of U.S. companies have,” says Julia Zhu, senior counsel in Dykema Gossett LLP’s corporate finance group.
There are lots of matching opportunities for U.S. companies that have great technology but don’t have a market or the capital to expand their business, which she says creates a good environment for U.S. companies.
Smart Business spoke with Zhu about how to enter the Chinese market.
What do business leaders need to know about doing business in and with China?
First, it’s about the business structure you want to set up. Choosing a physical presence in the country or a procurement strategy depends on whether the company wants to produce goods or services in China for the domestic market. If the foreign company’s focus is on exporting, it might consider using China as a manufacturing base for finished goods or do production outsourcing, which means a straightforward procurement strategy. This can be good for foreign businesses new to Chinese markets while keeping the option open to setting up local production later.
What are some options in regard to business strategy and structure?
If the foreign business wants to set up a physical presence in China, two of the most popular choices are wholly foreign-owned enterprises and joint ventures.
Having a wholly foreign-owned enterprise means you have the sole responsibility for profits and losses. It takes less time to establish because the foreign company doesn’t need to find a local partner or enter into a joint venture contract. Also, this structure gives the foreign owner greater control over company operations, training and recruitment of employees, and better protection of intellectual properties.
With joint ventures, there are two types — an equity joint venture is typically used for long-term projects, and a cooperative joint venture is better suited for short-term projects.
Generally, joint ventures are preferred when a foreign company wants to enter industries for which the Chinese government has restrictions on investment. The government has a list of all the industries in which companies can invest only through joint venture structure.
A joint venture can also be preferred when a company needs a partner to share its capital burden. Chinese companies can have certain technological or distribution advantages, making a joint venture an attractive choice. Successful joint ventures are imbued with clear rules and clear strategy between partners.
There are some disadvantages, such as statutory features where Chinese law requires unanimous approval from a company’s board of directors for major issues, including capital changes and mergers and acquisitions.
How should location factor into a company’s strategy?
Location can be very critical to the success of foreign investors. They need to look at the nature of their business, as well as incentives offered by the local government, their logistical needs, import and export requirements, and government inspections and restrictions.
The theme now is to go west. The Chinese government has implemented tax policies as a strategy to encourage investors to go west. In some cases, qualified foreign investors can have tax holidays.
When people talk about investing in China, they often talk about first-tier cities, such as Beijing, Shanghai and Guangzhou. However, investors should consider second-tier cities such as Nanjing, Dalian, Wuhan and Chong-qing that have cheaper labor costs, greater government support and less competition.
What protections exist for intellectual property?
Intellectual property (IP) is a big concern for foreign investors. The government has taken measures to improve the IP environment. Although China’s IP environment is risky, many foreign businesses have found a way to work in it. The key is to take a proactive, strategic approach rather than a purely legal approach. Businesses should engage the legal system while reducing dependence on it. While traditional legal methods of protecting IP may not always be effective, copyrights, trademarks and patents should still be registered as an important starting point.
Some companies avoid manufacturing innovative, high-margin products in China and instead focus on mature commodity products with lower margins. Others might develop products in countries with better IP protection and bring them to China to guard certain proprietary details. You can also protect yourself with thorough investigation. Watch markets for products like yours, educate suppliers and employees regarding enforcement, and execute agreements to retain key employees.
How else does the Chinese legal system affect business?
Legal compliance in China is different than in the U.S., where one has the narrow task of following existing laws. In China, legal compliance should not be viewed as a standalone legal requirement removed from corporate activities and results, but as a key driver of project completion and investment returns. For business planning, it’s helpful to divide those compliance issues into several categories, such as actions that cause a project not to be approved; internal operating issues, such as those pertaining to labor; external laws, such as bribery and breach of contract; and investment exit issues. By taking a broad view of compliance and conceptualizing compliance issues as a vital part of business performance, it is possible to formulate a compliance strategy that substantially increases the likelihood of success of foreign business.
Julia Zhu is senior counsel in the corporate finance group at Dykema Gossett LLP. Reach her at (213) 457-1830 or email@example.com.
Insights Legal Affairs is brought to you by Dykema Gossett LLP
For business owners and entrepreneurs, wealth management and planning is not a project, it is a process.
“It’s something you never complete; it’s ongoing in nature,” says J. Harold Williams, CPA/PFS, CFP, president and CEO, Linscomb & Williams, an affiliate of Cadence Bank.
He says that too many people approach wealth management erroneously, thinking, “I’ll get a financial plan done and check that off my list.” However, financial planning is much like designing a blueprint for a house, building it and maintaining it — a process that never ends.
Smart Business spoke with Williams about how to lay the foundation of your financial future while transitioning out of business ownership.
What actions are important for entrepreneurs before year-end in light of the expiring tax provisions such as the $5 million gift and estate tax exemption?
There is a unique condition in 2012 where you can gift, during your lifetime, tax free, just over $5 million. Business owners generally have some complexity to their estate planning, in that ownership of their business is their predominate asset and it is illiquid, which makes it difficult for estate planning purposes.
This special provision in 2012 allows you to transfer a significant portion of your wealth during your lifetime in a way that the future growth on the amount that you gift is not going to be counted in your estate.
For example, if you have a successful family business worth $20 million and you expect that its value will grow, it is possible to take a partial interest in that business this year, as much as $10 million of the value, and gift it into a trust for your heirs. If you gift half of it in 2012 and the business value doubles, the doubling of value in the half that you gave away would not be counted as part of your estate when you die.
There have been a lot of discussions about what the estate tax rate will be in the future. Right now, the estate tax rate is 35 percent, so if you can move appreciation to the next generation and not have it taxed, the result could be a savings of 50 percent of the amount that is transferred. That is a powerful planning concept.
If business owners are considering selling their business, how do they gauge financial security to be sure the income they had previously been earning is adequately replaced?
It is common for business owners who are about to sell, or have just sold their business and are walking away from an attractive paycheck, to begin wondering how they will replace that paycheck.
Before you sell the business, do some planning to confirm that you can sustain the lifestyle you have enjoyed while relying upon a more traditional portfolio of investments. When the business is liquefied, you pay some tax and need to invest the money.
It is likely not possible to get the same returns on an investment portfolio that you got from the business, so it is important to run the numbers and recruit someone who can help you determine the various contingencies. Doing this before you sell the business will allow you to engineer some things into the structure of the selling contract to enhance your ability to sustain your lifestyle.
Are Family Limited Partnerships (FLP) still being used as an estate planning tool, and what is the IRS’s attitude about this?
They are being used, and most cutting-edge estate planning attorneys recommend them as a viable vehicle. FLPs are not particularly loved by the IRS, but they are effective if done right. The main thing is to stay involved with your FLP; don’t just begin one, make a file and put the file away. The IRS could potentially scrutinize an FLP because it gives you a discount on the business interest connected to the estate or gift tax return. It will look to see if this has substance and form.
It is important to be diligent about keeping your records and following proper procedures when creating an FLP. When FLPs are not generating the estate tax savings that are desired, it’s often because the originator paid for a lot of documents to be created and didn’t live with them and make them part of the ongoing planning.
To do it properly means careful coordination with the lawyer who will draft the documents, the accountant who will advise you on tax law and other tax matters, and the wealth manager or planner who helps design the plan on the front end and maintains it on an ongoing basis.
Considering all the new 401(k) plan disclosure rules being issued on plan fees and expenses, how can a business owner avoid the risk of personal liability and make sure they don’t unintentionally violate these requirements?
For business owners, this is a bit of a minefield. In some cases, you might not realize you’re walking through it until it blows up. Generally, regulators look for a good-faith climate of compliance. The important thing is to document everything appropriately and leave a clear trail that shows you are trying to be in compliance.
The government often has a more favorable attitude if it can see you are trying to comply. It doesn’t want to see neglect, so intent goes a long way. It’s an area where, depending on the size of your 401(k) plan, you may need legal counsel to advise you on those policies and procedures.
J. Harold Williams, CPA/PFS, CFP, is president and CEO, Linscomb & Williams, an affiliate of Cadence Bank. Reach him at (713) 840-1000 or firstname.lastname@example.org.
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A hiring plan provides your company with a path forward to reach its goals through its staff. It’s designed to answer questions such as, ‘How do we realize our vision and whom do we need to help us get there?’ Without such a plan, a company may make hires that don’t fit into the overall goals of the company.
“People are a company’s No. 1 asset,” says Jarrod Daniel, CEO of The Daniel Group. “You have to make sure that asset can help your company achieve its goals.”
He says that once a company has set its vision, it should create a hiring plan that outlines who should fill each of the roles that are necessary to succeed. But it is a perpetually evolving task.
“You have to continuously examine your hiring plan and the staff that you currently have in place to determine what can be improved,” Daniel says.
Smart Business spoke with Daniel about comprehensive hiring plans and how they can help a company realize its potential.
What are the elements of a comprehensive hiring plan?
There are quantitative and qualitative elements to your hiring plan, but it starts with knowing what your vision is as a company. You want to bring in the right people and align them with a plan that lays out what you want to achieve as a company, which is your overall vision.
A good hiring plan involves onboarding, sourcing people to determine the right qualifications and setting their career paths within the company. Part of onboarding occurs during the interview by letting people know what is expected from them to help the company reach its ultimate goals. If they know the expectations up front, they can always be working toward that, regardless of the time it might take to get there. Having a career plan for individuals that incorporates what they can potentially do for your business down the line is an important element of hiring.
Otherwise, you have to balance a person’s technical skills with their ability to fit within your company culture. It doesn’t do much good to hire a smart, technically sound individual if that person can’t gel with your company’s culture.
How often should a company revisit and adjust its hiring plan?
You should adjust your hiring plan every single time you want to hire somebody. Things change within your hiring plan, so it has to be flexible. There are many divisions within a company, each with different strengths that help meet the company’s overall goals. Further, each department has a distinct hiring plan, as does each position. It is important to continuously adjust the short-term goals of your plan to stay on track with your long-term goals.
In addition, every time you hire someone, you will also need to plan out your expectations for his or her development in that position. If you continue to have to hire to fill that position, you need to review your plan and your past hires to determine what is going wrong.
How far into the future should the plan project?
That depends on the size of the company and the type of position to be filled, but generally, any time you plan for growth, you have to have a strategy. Say a large company has hiring needs that are project based, in which case, its plan might look four months ahead to determine the manpower necessary to complete a job.
However, if it is a cultural hiring plan — a company looking to hire a new vice president or CEO — it could take a few years because, as you go up the hiring triangle to a position that requires more specific skills and experience, it will takes longer to find a qualified candidate.
A company might also be in a position where it needs to hire to the gap, which refers to the difference in age you have between the people in management — say they’re in their 50s — and the next in line who can do the job, who we’ll say are in their 20s. That’s a significant age gap, so it’s important to make a plan to hire to fill it, say with someone in his or her late 30s.
Who determines the course and goals of the hiring plan?
Management and ownership usually collaborate on the hiring plan. Ownership will determine the plan when a company is just getting started, then management will take over this duty once its members are clear on the company’s vision and can align a hiring plan to meet company goals.
Management and human resources should have a forecast for hiring for a period covering three months, six months and one year. In that forecast, they need to have a hiring plan in place so when the time comes to bring someone onboard, it can happen quickly.
Companies should be working on their hiring plan on a daily basis because things could be going great while you are fully staffed, but anything can happen tomorrow to change that.
How can a staffing firm help a company with its hiring plan?
A staffing agency can serve as a third party that can consult with a company without the bias that might exist from within a business. It can go in and look at the situation from a counseling standpoint to give an objective perspective of the culture and the technological skillsets of the staff and offer clarity.
Staffing firms have seen many hiring plans, and this broader perspective and experience can be applied to companies that are just forming their plans by compiling best practices into a custom strategy.
Jarrod Daniel is CEO of The Daniel Group. Reach him at (713) 932-9313 or email@example.com.
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When a company gets into a position of missing payments on a loan, the loan originator could possibly sell your debt to a third party. Once your commercial loan is sold, the velocity of both money and information becomes critical.
“Don’t panic,” says Brian R. Forbes, a member with Dykema Gossett PLLC. Instead, he suggests being proactive.
“The more proactive and transparent you are, the more likely the asset manager responsible for your loan will internally advocate options that may allow opportunities for a mutually acceptable restructure,” he says.
As a borrower, you have the chance to start your lending relationship over because there is no previous history with your new lender. Forbes says there is a possibility that you can restructure your debt on terms more favorable than offered by your original lender.
Smart Business spoke with Forbes about how to handle your distressed debt after it changes hands.
How do you define distressed debt?
Distressed debt would be any debt or credit that has one or more missing payments, either partially or in whole, or is in imminent danger of missing one or more payments without the ability to cure. If you are a borrower who has reached this critical point, there is a possibility your debt will be sold to a third party.
At what point does debt get sold?
Distressed debt can be sold at any given time. The third party that buys debt often has a different objective than the original lender because they are seeking to maximize their investment returns in a shorter time frame. Since the distressed loan frequently is purchased at a discount, an opportunity exists to negotiate terms more favorable to the borrower. The new lender could potentially offer more creative workouts, such as allowing the borrower more time to refinance, extending payments, stretching amortization or allowing a discounted payoff. A new lender is not always negative for the borrower.
How would you know your debt has been sold?
Most loan sale agreements require a borrower be notified immediately upon the closing of the loan sale. The loan buyer will contact the borrower quickly to ensure all payments due under the loan are going to the buyer and not to the seller. If the debt is in distress and there is a default, a workout specialist or asset manager will contact the borrower for updated information. In the best-case scenario, the borrower’s financial statements are complete and easily reviewed and verified, which enables the asset manager to quickly assess the situation and recommend a course of action.
The anticipation from an asset manager’s perspective is that information flows between parties within a month of closing. If the debt involves real estate, such as an office or apartment building, the asset manager will want to see rent rolls, pro forma financial statements and detailed budgets. The less information the asset manager receives, the more difficulty the asset manager has evaluating the credit and recommending a mutually favorable solution.
What’s at risk once it has reached this point?
The velocity of money and information is critical to the third-party debt purchaser. The new lender is making a decision as to whether there is a workable solution between it and the borrower. Many third-party buyers prefer to work quickly to resolve the asset with the borrower in either a full or, if justifiable, discounted payoff. In order to do this, the asset manager needs accurate information quickly to pursue the most cost-efficient action.
The remedies third-party buyers often exercise if they are forced to operate without the requested information include foreclosure, but generally third-party buyers do not want to own the property. Third-party buyers can enforce other remedies under any guarantees of the loan and pursue their rights against the guarantors and the underlying collateral. Third-party buyers will pursue a general workout strategy if it makes sense for both parties.
What should a company do when its commercial loan gets sold to a third party?
If a third-party buyer purchases your debt, anticipate that the new lender will be proactive in exercising its remedies under the loan documents in an effort to resolve the credit and that you should provide the new lender such information required under the loan documents. Remember, many debt buyers contractually respond to investors and lenders in the same manner as the borrower responds to the lender under the loan documents. It is advisable to have your asset manager well informed of your credit and circumstances in order to facilitate the best solution. Without sufficient information, new lenders often immediately exercise remedies.
Be forthcoming. Obtain counsel and with his or her advice gather and give your accounting information to your new lender who can evaluate and understand your credit as quickly.
What are the best-case outcomes once a company has reached this point?
The best scenario is the borrower obtains the opportunity to keep its business going, resolves a current credit that by its size may be limiting opportunities for the borrower, obtains for any guarantor a release from his or her guaranty for consideration, and either purchases the debt or refinances the debt at a price discount that corresponds to the current fair-market value of the asset serving as collateral or the value of the business. Do not panic. Everyone is interested in finding the best solution, which often means the borrower refinancing the debt with another lender.
Should a borrower get counsel involved?
Retain an expert representing borrowers in this context immediately to determine whether restructuring is viable and the best option. Counsel can help structure the best solution given the facts and circumstances of the underlying credit, while identifying and minimizing potential adverse tax consequences.
Brian R. Forbes is a member with Dykema Gossett PLLC. Reach him at (214) 462-6403 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Dykema Gossett PLLC
Cybersquatting is a fairly common practice that enables another entity to cash in on the goodwill someone else has established with a name or destination on the Internet.
“Cybersquatters direct traffic away from a valid website, often to a website with a list of advertisements that relate to the industry, brand or subject being searched. These ads could actually lead traffic to competitors,” says Sandra M. Koenig, a partner and intellectual property attorney with Fay Sharpe LLP.
While the hope is that visitors realize they’re not on the correct website and move along, some might see a link to the same product or service on the imposter site and proceed to the imposter website instead of seeking out the correct website, she says.
“Worse yet, your visitors might land on a disparaging website where negative things are said about your business,” Koenig says.
Smart Business spoke with Koenig about cybersquatting, how you can reduce your exposure to it, and how an increase in top-level domain name options might make the fight against this type of fraud more challenging.
What is cybersquatting?
When a trademark is used in a domain name with the intent to profit from the goodwill of another existing mark, it is considered cybersquatting. The Anti-Cybersquatting Piracy Act states civil action can be taken against any person who in bad faith uses, registers or traffics in a domain name that is confusingly similar to another’s trademark.
For example, someone might establish a domain name by transposing or omitting a few letters of a brand or company name or introducing or eliminating punctuation between words. They also could use a different top-level domain name — such as .net rather than .com — to confuse potential visitors into landing on their site instead of the site a visitor intended to access.
What is a top-level domain name and what is the Internet Corporation for Assigned Names and Numbers (ICANN) doing with them?
A top-level domain name is everything to the right of the dot, for instance .com or .gov.
ICANN has opened the door for businesses to establish their own top-level domain name beyond the 22 that already exist. The owner of the designation would become the administrator of a contrived top-level domain name, such as .google. A purchaser could also register the name of its brands or establish ownership of a generic name, such as .coupon. However, the window of opportunity to apply for a name has closed and about 2,000 applications, at around $185,000 each, have been made for a top-level domain. All of these applications are being evaluated by ICANN and likely won’t be used until around 2013.
How does ICANN allowing companies to file for and purchase top-level domain names affect cybersquatting?
On one hand, cybersquatters likely won’t seek to purchase these top-level domain names because they cost too much and there is a lengthy examination process required to prove you have the ability to administer it. Also, ICANN has put safeguards in place to eliminate duplication. Domain administrators will likely have protections in place to deal with trademark infringements on top-level domain names. The domain administrators will be controlling who gets to use the name and could potentially keep it for internal purposes or for use with suppliers.
However, for the generic names, such as .green or .wine, there’s a lot of opportunity for cybersquatting. The increase in these names expands the opportunities for cybersquatters to infringe on a company’s reputation.
What sort of resolution can a company pursue from cybersquatters?
If you are the brand holder and someone is cybersquatting on your property, you can take them to court under anti-cybersquatting legislation or pursue relief through less costly arbitration proceedings. In the latter case, you would file a complaint with an arbitration forum designated to handle this type of case and submit evidence of the bad-faith use of your name or mark and why you — and not the cybersquatter — should have the rights to the domain name. If the cybersquatter does not prove its right to the domain, the infringing domain name is either canceled or transferred to you. However, the other party might have a legal right to use the name even though it’s a similar trademark, such as a company with a similar name that works in a different, non-interfering industry.
How can a company protect itself from cybersquatters?
In many ways it is getting more difficult to guard against cybersquatters. Not that long ago the advice one would give would be to think of all the potential misspellings of your brand or company name or variations using punctuation, but it is a lot of work and expense to attempt to get every adaptation registered in your name, especially with the proliferation of top-level domains. However, it is still important to make sure you try to protect yourself in at least the .com and .net fields, and it is also beneficial to own other domains as described below.
Be proactive and protect yourself as best you can. While the increase in domain options will offer legitimate businesses greater possibilities for branding on the Web, it also creates more opportunities for cybersquatters to take advantage of the goodwill you’ve established through your brand and company name.
Here are five strategies to protect against cybersquatters:
- Register your trademarks in the U.S. Patent and Trademark Office.
- Register your important trademarks as domain names with several different top-level domains.
- Register variations of your domain names including common misspellings, typographical errors and punctuation edits.
- Secure disparaging domains, e.g. brandsucks.com, or domains that may put you in an unfavorable light for your industry, e.g. brand.xxx.
- Be aware of the new top-level domains that will be available beginning in 2013 and seek registration for those that might be relevant to your business or industry.
Sandra M. Koenig is a partner and intellectual property attorney with Fay Sharpe LLP. Reach her at (216) 363-9000 or email@example.com.
Insights Legal Affairs is brought to you by Fay Sharpe LLP.
In one way or another, life is always in flux. Transitions sometimes bring opportunity and sometimes pain and sadness. The more thoughtfully we experience them, find the good in them and prepare for the next life phase, the more satisfying life can be. Transitions happen throughout our lives — graduation, a new career, getting married, having children, a sudden increase in wealth, the death of a parent, serious illness or accident, your retirement and the sale of your business, to name a few.
Each transition requires you to adapt to new circumstance, as it can change the way you think, the way you approach taxes and investments, your lifestyle, your advisers, your circle of friends or your lifestyle choices.
“Some people have a real hard time with that,” says Norman M. Boone, founder and president of Mosaic Financial Partners Inc. “When a significant change occurs, some stick close to what they’re used to, while others refuse to acknowledge the change and others simply embrace it.
“Points of transition happen to everybody,” he says. “How you think about, plan and prepare for them and how you adapt your behavior is best done by being intentional, by considering the implications of your decisions, by thinking about your new circumstances and by determining what you need to do to optimize your new situation. Getting good advice can be critical.”
Smart Business spoke with Boone about how to deal with life’s major transitions without compromising your financial future.
Is transition a bad thing? Why or why not?
Transitions themselves aren’t good or bad. The issue, from a financial planning perspective, is how you approach them. Regardless of the type of change, allow yourself time before you make any major decisions.
Having the right professional assist you can help you avoid mistakes and take advantage of opportunities. The best adviser is one who has helped many people with situations similar to yours. People don’t often go through the same major life transitions twice. If you only have one time to experience something, it’s likely you’re going to make mistakes, sometimes minor and other times with important consequences. An experienced adviser can help you avoid those mistakes.
As a caution, be sure to ask yourself, ‘What is this person’s incentive?’ For example, the wrong insurance agent might think more about how much he or she will be paid, rather than what is best for you. You need to ask questions when you’re working with an adviser and understand if he or she has something to gain from the advice being offered.
When you’re going through a transition, you’re typically more vulnerable than at other times in your life. It’s critical to choose your advisers carefully.
Is there reason to be cautious when talking with advisers?
Be open and freely share information with your advisers, once you’ve chosen them. They need the whole picture. However, initially, when you are interviewing advisers or looking for the right one, you can and should be discreet about how much information you share. It’s important to find someone who has the experience, knowledge, capabilities and good chemistry with you, if he or she is going to serve you well.
What is a good way to research potential advisers before meeting them?
Go to your smartest and most objective friend and ask him or her to help you create qualifying questions. Almost every wealth manager, attorney, accountant or insurance agent wants you to pick them, and most are skilled at convincing you that they’re likeable and knowledgeable. You need to be able to get beyond that. It’s important to ask a similar set of questions of each so you can compare their answers — see how they treat your questions, how thoughtful their answers are and who appears to have your best interest in mind.
What are some important characteristics of a wealth management firm helping someone who is in transition?
At minimum, a wealth management firm should be able to clearly explain its investment philosophy and discipline. It also needs to offer proactive advice about taxes, insurance, charitable strategies, debt management and expertise in the full range of personal finance issues.
Perhaps even more critical are the firm’s values and characteristics. Are advisers fiduciaries — do they accept a legal obligation to put your best interests first — and if so, are they willing to put that in writing? Do they disclose all potential conflicts of interest? Do they treat all your questions with seriousness and respect? Are they rushing you to make decisions? Do they offer alternatives and allow you the time to understand, consider and make a choice? Transitions can be unsettling and take adjustment. A good adviser will help you get through that period rather than push you into something prematurely.
It can also be helpful to work with a firm large enough to have a team that offers the skills and resources needed to apply to today’s questions and the needs you’ll have tomorrow. You’ll eventually have more than one kind of transition, and a team is more likely to be able to offer a solution for each, thanks to a greater depth of resources.
What should you keep in mind when entering a life transition that could impact your financial future?
Don’t assume that you understand the situation you’re in, especially when it comes to a major transition, because your choices can have long-term implications. Mistakes can significantly cost you without first getting expert advice. Most times, it’s important to not make a decision until you’ve done research and gotten expert advice. Before acting, ask yourself, ‘How might this impact my life today and in the future?’
Norman M. Boone is founder and president of Mosaic Financial Partners Inc., which is celebrating, this year, its 25th anniversary. Reach him at (415) 788-1952 or firstname.lastname@example.org.
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To finance purchases, a company usually has a number of options, including equity financing from venture capitalists, mezzanine financing, a line of credit or growth capital. But there is also an interesting option called off-balance sheet financing, or project financing, which can help fund large projects and is particularly well suited to the purchase of clean technologies, especially solar development.
“Off-balance sheet financing has been around for a long time — nearly 100 years — and it’s available to many development corporations or manufacturers,” says Scott Reising, senior vice president of the Energy and Infrastructure Group for Bridge Bank.
“But it now is being applied to clean technology companies — those that manufacture renewable sources of power and the infrastructure to support it — because they often struggle to get financing. This is a unique option to finance the purchase and sale of their products,” he says.
Smart Business spoke with Reising about the off-balance sheet financing option and how it can allow companies to fund noncore projects, including those related to clean energy technologies.
What is off-balance sheet financing?
Off-balance sheet financing could be considered a single loan to a specially designed company that has a single purpose. A separate entity or ‘company’ is established on paper that will channel the purchase of a large amount of equipment from a corporate manufacturer to a purchaser. A contractual arrangement is established that allows the purchaser to pay for the product over time to the special, new project company that has been created in the transaction. Oftentimes, through this model, installation is also covered and a fee is assessed for the risk that’s being taken.
This financing structure allows the manufacturer to complete the sale and get paid in full, while the purchasing company receives the goods up front and pays for them over time. As a bonus, the return on investment realized by the purchaser often can offset much of the payment made for the product. This is especially true when financing clean technologies, as the energy savings can be equal to the payments.
What are the advantages of off-balance sheet financing?
The debt being provided is less expensive than the cost of equity. Also, debt terms are amortized over time to match the asset life of the product purchased. Additionally, in project financing, typically there are higher levels of debt, often between 60 and 70 percent. A large portion of the debt is financed over a longer period of time, so it dramatically lowers the upfront cost.
Why might this option be more attractive than other types of financing?
A big corporation’s function is to develop its core business, not to spend time on ancillary things. Even though large corporations can access capital through other means, off-balance sheet financing has its own accounting code as opposed to being in the core business. If you can set up the means through a new project company to finance and manage the maintenance and installation of a clean technology project you’re better off.
On the seller side, the issue is scalability. If a manufacturer of clean technology has to create its own loan to fund a purchase it will likely have to lend funds for each sale, which is unsustainable.
What does a lender need to evaluate a project for this type of financing?
Lenders typically need to quote all information related to the product. They need to understand the technology and would want to have the company get them comfortable from an engineering point of view. A bank will use an outside consultant to verify what the company has stated to be the specifications and performance characteristics. Often a company has its own data to back up its product claims because it wants to prove its technology works and has worked for some time.
Banks also will want to look at the sale and purchase contracts that have been established for the equipment. A bank will need information on the purchaser including its audited financials, creditworthiness, its ability to make payments and its business plan.
How do banks view the creditworthiness of clean technology?
There are three reasons clean technology is being utilized right now. The first is corporate social responsibility, which allows companies to publicize that they are using environmentally friendly and sustainable energy.
Second, renewable products are very cost competitive in terms of present value.
Third, a company stepping into clean technology is making a statement to its customers and competitors alike that it’s going to be there for a long time. To a bank, the perception of longevity increases its willingness to lend.
What should a clean technology company look for in a potential lender?
A clean technology company should look for a lender with a strong understanding of the company’s needs, its products and how it works. It also should seek a bank that has a willingness to work on scalability.
The seller wants to develop a smooth, long-term relationship with its bank in order to provide financing to its buyers, so it should work with a bank that has done this before. Additionally, it should look for flexibility in the financing structure because each buyer has different credit backgrounds, contract needs and risk/reward expectations.
The company also needs the right size bank to handle the volume it wants. If the project size is small, a large national bank might not deal with it. Also, ask if the bank’s credit committee has approved this type of asset in this industry in the recent past and how frequently.
Scott Reising is senior vice president of the Energy and Infrastructure Group for Bridge Bank. Reach him at (408) 556-6508 or email@example.com.
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Over lunch, a CFO recently shared the difficulties C-level management face since the enactment of Sarbanes-Oxley (SOX) with Kathleen M. Marcus, Shareholder at Stradling Yocca Carlson & Rauth and Chair of its Compliance and Corporate Governance Practice Group. He spoke of joining a company whose books and compliance policies are “a mess” and his struggle to put the company on the right path without alienating the team.
“In recent years, SOX and the Dodd-Frank Wall Street Reform and Consumer Protection Act have put a new emphasis on compliance programs,” says Marcus, a former Enforcement attorney with the SEC.
SOX effectively requires a code of ethics for public companies, the implementation of a complaint hotline and raises the bar for management on financial statement accuracy. Dodd-Frank took it to the next level with financial incentives for employees to bypass internal company reporting and become whistleblowers. Today, public and private companies face a very aggressive regulatory environment. For any company concerned about an unwanted visit, letter or subpoena from any number of regulatory agencies, having a legal compliance audit can ease the pressure.
Smart Business spoke with Marcus about what compliance audits involve and how an audit can ensure your policies are up to date.
Why would a company need a compliance audit?
Any business operating in heavily regulated areas, such as the medical device or pharmaceutical industries, government contractors or businesses with international offices or sales, needs to be wary of regulations. Compliance audits are not just for public companies. In fact, the explosion of regulatory enforcement activity has begun to usurp private litigation as the bigger overall threat.
In a company’s early stages of growth, only a few basic compliance policies are required. As companies mature, they frequently enact new policies without revisiting the old ones. This can result in incomplete, inconsistent or outdated policies with large gaps in utility. A compliance audit streamlines the total compliance package, places policies under a single source of control and provides a plan for routine updating and distribution. The audit report is a roadmap for a company to take advantage of all the protections offered by a comprehensive compliance program and provides peace of mind for executives. Notably, compliance audits are not expensive, and some changes can be easily made in-house.
As a former SEC enforcement officer now in the compliance business, what would you say are the key benefits of a compliance audit?
By altering certain high-risk practices, compliance audits can protect individuals and entities from becoming the subject of an investigation. Audits also help facilitate organic conversations about topics such as the wisdom of certain business or reporting practices and corporate risk appetite. In addition, in the critical period following a crisis, a streamlined compliance program ensures pre-designated individuals have a plan for taking immediate action in the best interests of the organization.
When investigations do occur, the audit and/or the policy improvements can provide significant protection for the company and its management. At the onset of an investigation, government regulators routinely request relevant compliance policies. Robust policies lessen sanctions because they demonstrate a genuine culture of compliance and best efforts by management.
With so many compliance-related organizations in the marketplace, who is best suited to perform a compliance audit? And, what does it involve?
A customized compliance audit report developed by an attorney is not discoverable in an investigation or lawsuit. Therefore, hiring an attorney to perform your audit and provide recommendations gives executives control about whether and when to implement changes.
The audit itself is fairly simple. A law firm should first provide an industry-specific audit checklist to help identify existing policies. Be certain to search for policies in various departments, as they may be housed with human resources, the CFO/CEO and/or the legal team.
The audit should then begin with a full policy review by a team of attorneys. Lawyers analyze the policies in their specific practice area and provide assessments. The firm should then author a privileged report highlighting the strengths and weaknesses of each policy and detailing recommendations. Depending on the complexity, a company can choose to close the identified gaps itself or seek help.
Upon request, a law firm should provide training to company personnel. Training is a vital component of compliance, particularly in complex legal areas such the Foreign Corrupt Practices Act or the False Claims Act where enforcement activities are skyrocketing. One estimate suggests the government is recovering $15 for every $1 it invests in the enforcement of False Claims Act violations in the health care arena.
What could happen if a company’s policies are not comprehensive?
If investigated and found in violation, outcomes range from career-ending industry bars for executives to massive financial penalties for management and entities. Government settlements usually involve some aspect of compliance reform. Regulators may mandate:
- The appointment of a compliance monitor paid for by the company to oversee compliance activities;
- Mandatory self-reporting by the company to the government concerning any violation, no matter how small; or
- Stringent amendments to compliance policies.
In contrast, when a company has adopted a comprehensive compliance program, it provides a layer of protection for the company, as well as board members and management. A customized compliance program may prevent an investigation entirely, and should an investigation occur, tailored policies provide an excellent defense.
Kathleen M. Marcus is a Shareholder and Chair of the Compliance and Corporate Governance Practice Group at Stradling Yocca Carlson & Rauth. Reach her at (949) 725-4080 or firstname.lastname@example.org.
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As the country’s population ages, a growing number of people will, unfortunately, suffer from diminished capacity, which can arise from conditions such as Alzheimer’s disease and dementia. “This is occurring more as businessmen and women work into their later years, and they become more susceptible to these conditions that affect their ability to make business decisions,” says Suzanne Fanning, an attorney with Garan Lucow Miller PC and co-chair of the Washtenaw County Bar Association Probate Section.
If someone with diminished capacity to make decisions enters into a transaction, that decision may be later subject to challenge in court.
“If it is established that the person did not have the requisite legal capacity to enter into the contract, the court may set the contract aside, to the detriment of the other party that entered into the contract,” she says.
Smart Business spoke with Fanning about how to take the legal precautions necessary to protect your business when concerns arise about another party’s possible diminished capacity.
What is diminished capacity, and who does it affect?
Diminished capacity is essentially an impairment of daily cognitive functioning, which can impact memory, reasoning, language and insights, all of which are skills critical to good business decision making. While the majority of businesspeople will not suffer from diminished capacity, as the population ages, there is a greater likelihood that it will become an issue.
Diminished capacity can also impact younger businesspeople who have been injured or who suffer from serious illness. This could be temporary, such as when medical treatments impair mental capacity, or permanent, such as when a person is in a serious accident.
What are the signs of diminished capacity?
There are no standard set of criteria, but there are red flags to consider if you are engaged in business transactions with someone who appears to have diminished capacity. These can include memory loss or forgetfulness, problems with the ability to communicate, loss of mental acuity, calculation problems, diminished comprehension, disorientation, inflexibility during negotiations, susceptibility to manipulation or even fraud by third parties.
Are there different standards of capacity for different business transactions?
Yes. Legal capacity has different legal definitions depending on the transaction and the applicable case law and statutes in the state in which you are operating. In Michigan, for example, the legal standard for the capacity to contract is whether the person in question possesses sufficient mental capacity to reasonably understand the nature and effect of the contract.
The more complicated the contract, the higher the level of understanding that is necessary to have the legal capacity to make that contract. In a real estate transaction, such as signing a deed, the standard is whether a person has sufficient mental capacity to understand the business in which he or she is engaged, to know and understand the extent of the value of the property and how to dispose of it.
It is important that businesspeople be aware that a transaction can be set aside by a court if the other party is later found to have lacked the requisite legal capacity at the time the transaction was undertaken. Therefore, it is important to take appropriate steps to protect yourself and your business when concerns arise that the other party may lack the legal capacity to enter into a transaction.
How can you protect your business in the event that your business partner is showing signs of diminished capacity?
One way to address this concern is to create a durable power of attorney, in which you and your partner name each other as the agent to transact business in the event the other suffers from a diminished capacity. You can also name a trusted employee or adviser to this position.
Having a durable power of attorney will also prevent a spouse or family member of the incapacitated person from gaining the authority to transact business matters on that person’s behalf. This is especially important when those family members have little or no experience in business.
What can be done if a client or third party to a transaction appears to have diminished capacity?
One option is to ask for a capacity evaluation by a doctor to ensure that the person has the capacity to enter into that particular transaction. Of course, this topic must be approached with great care. Another option is to make the transaction contingent on a court guardianship or conservatorship in which the court will grant authority to a third party to act on the person’s behalf.
For example, while a person with diminished capacity might not be capable of signing a deed necessary to a business deal, his or her court-appointed guardian or conservator could be granted authority to sign the deed on behalf of that person and proceed with the transaction.
Clearly, such a scenario can be extremely difficult. It may be a client with whom you have worked over many years. It can be difficult to extricate yourself from the relationship, but it may be necessary to protect yourself legally because these transactions can be set aside. It may be a matter of approaching the client’s partner or spouse, explaining that you are having concerns and bringing in a third party to make sure the transaction is protected.
Suzanne Fanning is an attorney with Garan Lucow Miller PC and concentrates her practice in probate and trust litigation and planning. She is co-chair of the Washtenaw County Bar Association Probate Section. Reach her at (734) 930-5600 or email@example.com.
Insights Legal Affairs is brought to you by Garan Lucow Miller PC