Gary Kaplan

Monday, 22 July 2002 10:02

Law Briefs

According to the U.S. Small Business Administration, 90 percent of all businesses in the nation are family owned. As such, this vital part of the economy should be more carefully nurtured.

Unfortunately, statistics show that most family-owned businesses do not have secure futures. The chances of successful passage from the first generation to the next are slim; just three out of 10 family businesses survive the transition. Of those that do survive, only half will continue as viable business entities into the third generation of the family.

While the type and size of the businesses and the relationships among family members differ, the challenges faced by the owners of family businesses often are similar.

Notwithstanding such challenges, two goals predominate in the world of business: success (i.e. profits) and control. Staying focused on these goals where family members are concerned can be difficult or even impossible. And the resulting stress can tear apart both the family and its business. Despite the added stress and complexity of dealing with family members, the ability to stay focused on the goals of success and control often determines whether the family business will survive and succeed.

Longstanding friction among family members often manifests itself in confrontations over titles, salaries, responsibilities, decisions to enter new businesses and investments. These are vital business decisions that should be based on what will be most beneficial to the business-not on extraneous factors such as the ages of siblings, hurt feelings or social goals.

Yet family disagreements often simmer for years, erupting when a business is at one of these crossroads:

  • When the original owner/entrepreneur decides to pass on the company to the next generation.

  • When ownership interests become more diverse among family members.

  • When ownership or control of the business is transferred out of the family (feuds often erupt over the distribution of sale proceeds).

    In addition to bringing in a third-party mediator to oversee disputes, you can take steps to minimize the consequences of family-induced business problems. Consider the following:

  • Make certain that decisions about the future of the company are made early, not late. The principal owners must make firm decisions about who their successors will be and when they will take control.

  • Document all corporate actions to reflect explicitly the intentions of the owners.

  • Seek outside input into the corporate decision-making process. Like public companies, the board of directors of family-held corporations should include outsiders who can see beyond family-based perceptions and help keep a company on track.

  • Integrate each family member/owner's personal finances with their business finances to safeguard their financial interests.

  • Ensure that during key transitions, each family member has his or her own lawyer to advocate potentially divergent positions.

Still, when all is said and done, the best way to keep a family business viable and avoid irreparable missteps is to make decisions based on the best interests of the business. Maximizing the business's potential while dealing fairly with family members will serve everyone's interests in the long term. However, no one's interests are served if, at the end of the day, there is nothing left to fight over.

The complexities of COBRA coverage

COBRA insurance continuation coverage of an ex-employee cannot be terminated when the employer learns that the ex-employee was covered by his spouse's or other medical insurance at the time the employee elected COBRA coverage.

The U.S. Supreme Court held that an employee's coverage under COBRA, or the Consolidated Omnibus Budget Reconciliation Act of 1985, may be terminated only when the employee first becomes covered under another medical plan after electing COBRA coverage. Insurance coverage that was in place when the employee left the job or elected COBRA doesn't disqualify him from continuation of COBRA coverage. The same rationale would appear to apply to employees who are entitled to Medicare benefits at the time they elect COBRA.

COBRA allows some employees the right to continue health insurance coverage through their former employers. However, employees must pay the full cost of this coverage. According to federal law, businesses with 20 or more employees must offer continuation of their group health plan for at least 18 months to employees who voluntarily left the company, who were laid off or whose hours were reduced so as to not qualify for insurance.

Law Briefs is compiled by attorneys from Eckert Seamans Cherin & Mellott, LLC, a national law firm based in Pittsburgh.

Monday, 22 July 2002 09:53

Contract quandary

Whether requiring assistance for Y2K compliance, computer network development, or accounting or inventory systems, virtually every company will, at some time, require the services of a technical consultant or system developer.

Technology systems have become the lifeblood of business operations, and failed or inadequate systems can have a dramatic effect on a firm’s bottom line, unless you take the right precautions from the beginning.

Although not a panacea, well-drafted agreements as part of a systematic approach to the implementation of new technology can help minimize both the likelihood of a catastrophic system failure and the resulting harm.

Agreements that address such technology services should not be drafted in a vacuum, however. Technology agreements are most effective if they reinforce sound technology practices, rather than pose unrealistic or unworkable terms. A contract that articulates the parties’ responsibilities with respect to each step minimizes the risk of protracted and costly disputes because it will require the parties to create benchmarks as the project proceeds.

A well-structured contract, moreover, makes clear that both the designer or consultant and the client bear responsibilities for the success of a project. The duties of the consultant are self-evident. The client, however, must recognize its obligation to provide clear directions respecting its requirements for the proposed system, and the risks (and, possibly, additional cost) associated with changing the project mid-stream.

Contract structure

The starting point for developing the parties’ respective obligations is an understanding of the basic structure of the deal. Do the parties contemplate services to be provided on an hourly or time-and-materials basis, or do they contemplate the delivery of specified software, systems, or other materials? The structure of the deal will affect a variety of contract terms, such as warranties, remedies, termination requirements, etc.

From the client’s standpoint, a contract based on “deliverables” has much to commend it. Payments can be structured to assure progress of the work until completion. In addition, the agreement itself (and supporting materials) enables the client to assess the consultant’s performance.

In general, time-and-materials contracts make most sense with respect to projects of indeterminate scope and duration. Confidentiality, termination, and nonsolicitation are often among the key terms of such agreements with employees.

Key terms

Once the parties have established the structure of their relationship with respect to contracts for deliverables, the agreement should address the following:

Timing of payments and project acceptance. In general, contracts for deliverables provide for a schedule of payments based on the date of delivery and/or “acceptance” of the project (or portions thereof). To avoid disputes over the date payments become due, agreements should clearly articulate the terms for completion of the assignment. Often, a software agreement will allow for payments to become due only after the project is “accepted” by the client after having the opportunity to test it.

Ownership of work and intellectual property. The pricing of a deliverable may depend on whether full ownership will be transferred to the client or just a license. (Under a license arrangement, the consultant would generally be able to sell the same deliverable to other clients.)

Project assumptions/change of scope. Perhaps the greatest source of disputes between technology suppliers and clients stems from their different, but unstated, views on the underlying project assumptions and the pricing that results. The best way to avoid such disputes is to require the parties expressly to identify the assumptions or conditions that form the basis for the project’s pricing. Moreover, the agreement should provide a mechanism for revising the pricing if the assumptions are not met.

The only effective way to avoid disputes over responsibility for project changes is to address them as they arise. The agreement should require all project changes to be agreed upon in writing. Work performed absent such an agreement should be presumed covered under the initial terms of the deal.

Warranties. Most agreements disclaim implied warranties of merchantability and fitness for a particular purpose because they may impose uncertain duties on the consultant. The warranty is often tied to meeting performance specifications identified in the agreement itself. Such a warranty reiterates the need for a clear documentation of specifications for the project.

Take, for instance, potential Y2K liabilities. Because of the substantial liabilities that may arise in connection with date changes related to Year 2000, every technology agreement should specifically address the warranties that will, or will not, be granted with respect to Year 2000.

Non-solicitation. Most businesses are keenly aware of the shortage of qualified technical personnel. To prevent a business from using a consulting engagement as a recruiting tool, most consulting firms require a clause prohibiting the client from hiring or soliciting members of the consultant’s staff. Although such nonsolicitation clauses are generally straightforward, care should be taken to avoid loopholes. For example, clauses should preclude the firms from employing or hiring the subject personnel as independent contractors.

Overall, a well-drafted agreement will reinforce an efficient working relationship between a technology consultant and the client. Although disputes are sometimes unavoidable, a clear statement of the parties’ respective duties can reduce the time and expense needed to obtain a resolution.

Gary Kaplan is a partner in the law firm of Reed Smith Shaw & McClay LLP. He has represented and counseled clients on matters concerning antitrust, international trade, intellectual property, government contracts, securities and economic regulation.