Sign Your Deal NOW!

I’ve seen it happen a thousand times – in fact, I’ve seen it happen twice this week.  Parties to a negotiation reach a “deal” but don’t have documents ready for signature.  So one party takes responsibility for drafting them, but by the time drafts are circulated, one or both parties change their position, back up, get cold feet, reconsider, or whatever else you want to call it – and the deal falls apart.  While that’s not always a bad thing, it often is, and it is also frequently avoidable.

Now, I’m not suggesting that parties hastily enter into deals or sign incomplete or inaccurate agreements.  But, I am saying that well thought out and carefully considered deals are often at their best – that is, closest to the actual “meeting of the minds” that we lawyers talk about – right after negotiations are complete.  This is why it’s important to move quickly from negotiations to definitive documents, to execution. 

Remember, the name of this blog is BizB4Law – when negotiations are complete (and assuming they were well thought out and comprehensive), the “biz” portion is in most cases complete – all that is left is the “law” portion.  While the documents should spell out the business terms agreed to and fill in gaps, it is generally not productive to reconsider or reopen the negotiations – and doing so often means the parties lose the “benefit of the bargain” they had just made.

So all of this means we should follow a few simple guidelines, as follows:

• Make sure your negotiations are as comprehensive as possible.  Discuss and agree on all material terms.
• Include your lawyers as early as possible in the discussions.  If that’s not possible or productive, include them just prior to preparing definitive documents – so that any specific open issues or questions they may have get answered before the parties conclude negotiations.
• Draft definitive documents as soon as possible after negotiations are complete, and stick as closely as possible to the terms agreed to in negotiations.  The document stage is not the time to surprise your prospective business partner.
• If you feel you have to change something from what was agreed to or address something important that wasn’t previously discussed, let the other party know before you send them proposed documents.
• And finally, move from first draft to final draft to execution as soon as possible after negotiations are complete.

These are pretty simple guidelines, but they will help you to avoid disputes and get your deals done.

Be Careful When Contracting With Related Parties

Ever heard the expression, “Good fences make good neighbors.”?  I have a similar opinion as to contracts between related parties.  I’m talking about business contracts between parties who know and trust each other and may even be in related or competitive businesses.  Even in those circumstances, a clear and specific contract is important to avoid misunderstandings and effectuate the parties’ agreement.

Let me give you a recent real life scenario.  My “Client” is in a competitive and sophisticated commodity based business where a few pennies on the input or output side can mean millions of dollars and the difference between profitability and failure.  The Client is owned by a group of individuals that are also owners and operators of competitive businesses (the “Competitors”) in the same industry – this means the owners are both partners and competitors.  To further complicate things, a subset of the owners has a related company (the “Management Company”) that manages the commodity-based businesses (both the Client and the Competitors) for a fee.

So, the Client wants to enter into a contract under which the Management Company would manage the Client’s facilities – in addition to managing its own facilities and the Competitor’s facilities.  This arrangement is filled with conflicts of interest and competitive risks/concerns – in other words, this is a situation where the contract is critical.

I can’t discuss all of the key issues here, so I’ll focus on just a few.  The parties’ proposed contract said the Management Company:  (i) had complete discretion and authority to make decisions and enter into contracts binding on the Client; (ii) could use and share the Client’s confidential information with and for the Competitors’ and the Management Company’s own purposes; (iii) had no limits on competition, solicitation or the allocation of business opportunities; and (iv) had no stated standard of care.  In other words, the proposed contact was A RECIPE FOR DISASTER FOR THE CLIENT.

Now, as it turns out, none of the above provisions accurately reflected the parties’ intentions.  However, because they know each other well and trust each other, they thought they could cobble together any document labeled “Management Agreement,” and they’d just work things out as they went along.  When presented with a series of “what-if” questions, the parties quickly realized that this contract needed a lot of work, and we included provisions addressing the above issues and several others.  The result is a contract that clearly sets forth the parties’ rights and obligations and anticipates and addresses the circumstances that might otherwise result in disputes.  In other words, a contract that facilitates and builds their business relationship rather than threatening it.

Keep in mind that contracts between related parties often present the same (and sometimes even more) risks as other contracts.  Make sure you take care when entering into them – for everyone’s benefit.

Litigation From the Business/Transactional Perspective

My last blog post discussed the importance of contemplating litigation risk (or at least the likelihood of disagreements arising from time to time) in structuring business entities and relationships and in drafting contracts – in other words, anticipate and draft for the potential downside. By doing so, you can actually reduce the likelihood of disputes, and even if they do arise, they will hopefully be resolved in a quicker, less costly and more predictable manner. All of this allows clients to focus on running their businesses and making money rather than fighting legal battles and spending money.

Of course, not all disputes can be avoided or settled.  Sometimes you’re forced to litigate or arbitrate.  Even in those circumstances, however, my experience shows that substantial time, money, opportunity costs and emotional damage can be saved if those disputes are approached from a business/transactional perspective.  So, here are a few very brief thoughts on litigating “from the business/transactional perspective”:

• Approach every disagreement with a “problem-solver” rather than a “warrior” mentality.
• Try to compartmentalize disputes – disagreement about one issue doesn’t always need to poison the entire relationship.
• Never litigate over “a matter of principle” unless your business is able to afford whatever it may cost – and it always costs more than you expect.  Principles cost money and don’t generally enhance profitability.
• Don’t get hung up on who’s right or wrong – focus on the impact to your bottom line.
• Settling early costs a lot less than settling late.
• Consider mediation – it really does work sometimes.
• Litigating and winning almost always still costs you a LOT in legal fees, opportunity costs, and sometimes even reputational damage.
• Even in litigation, conduct yourself in a professional manner and with integrity – you never know who or what will lead to your next business opportunity.
• Just because you didn’t have an arbitration clause doesn’t mean you can’t agree to arbitration later on – it still may save both parties time and money.
• While in litigation, there’s no need to fight over everything.  Fight only the battles that matter – you look better in the judge’s eyes, and you don’t waste money on meaningless victories (or losses).

The bottom line is disputes cost money and take you away from your business.  Choose and conduct your battles wisely – from a business perspective.

Transactions From the Litigation Perspective

The law, like most disciplines, has very few absolute truths.  However, it is my firm opinion that a good business transaction is always better than a lawsuit.  Therefore, it’s critical that business transactions and the underlying contracts be structured to maximize value, reduce risk and avoid uncertainty.  After all, risk and uncertainty often lead to disagreement and sometimes litigation.  Therefore, I recommend that parties approach business transactions and contracts with the mindset (but not necessarily the goals) of a litigator – and then use that mindset to avoid litigation.

I do not mean that parties should be argumentative or take one-sided positions.  Rather, what I mean is the deals should be structured and contracts should be drafted as simply, clearly, consistently and comprehensively as possible.  And once you’ve done that, they should be re-examined, and the following question should be asked:

• Is this the right deal, at the right time, with the right party?
• Is the deal structured as simply as possible?
• Is the contract drafted as clearly and simply as possible?  Is it consistent?
• Which provisions invite differing interpretations?
• Have you covered as many variables/contingencies as possible (you generally can’t cover them all)?
• Have you allocated between the parties as many of the risks/responsibilities as possible (again, you may not be able to cover them all)?
• Have you included appropriate insurance, indemnity and escrow provisions?
• Have you allowed for termination or some other type of walk-away if the deal doesn’t work out?  If so, have you anticipated the likely issues, disagreements and entanglements that can arise at this stage (they can be much different than those at the outset)?
• Have you considered how disputes will be resolved?  Mediation?  Arbitration?  Litigation?  Appraisal?  By whom?  Where?  Who pays?  What law/rules govern?  Etc.
• In light of all of these questions, and even assuming you’re comfortable with all of the answers, is this a deal that should be done?

Thinking like a litigator may be the best way to avoid litigation over your business deals.

Creativity and Problem-Solving Are NOT Optional For Your Lawyer

How do businesses make money?  Typically, they identify a need that is not being satisfied or a problem that needs to be solved, and they satisfy/solve it.  In other words, challenges create opportunities for businesses – something to be overcome, rather than something that prevents you from achieving your objective.  Your business lawyer needs to think this way as well.  Creativity not only solves problems – it makes money.

Very often clients come to me with a specific opportunity they want to capitalize upon, but some sort of roadblock or hurdle that is making this difficult.  That’s both challenging and exciting.  Rather than focus on the problem, I focus on the solution.  That’s what your business lawyer needs to do too.

At the outset, remember that many challenges are simply risks, rather than obstacles.  Some lawyers can’t tell the difference – those are the ones who went to law school because they “love the law” and enjoy analyzing problems rather than identifying solutions.  Before you alter your business course because of an obstacle or problem – make sure that’s what it is rather than merely a business risk that is better evaluated and addressed by you rather than your lawyer.

Assuming there is a real legal challenge, remember that many problems have simple solutions – and it’s the lawyer’s job to find the simplest solution available.  That way, the client can get (back) to making money in business rather than solving problems and spending money working with lawyers.  However, a lawyer really shows/adds value when he/she solves a particularly complicated problem – the kind of problem that, if not solved, kills the deal.

If your business lawyer has never said things to you like –  “What if we did it this way?”  “How about approaching it differently?”  “I think you’d be better off doing this.” Or “We can’t do that, but we can accomplish your goals another way.” – then it may be time for a change.  In other words, if your lawyer is not a creative problem-solver and a calculated risk-taker, then your lawyer is part of the problem itself, rather than part of the solution.  Problems cost money; solutions make money.

Does Your Business Lawyer Know How to Protect Your IP?

Let me start by saying, I’m not a licensed patent lawyer or an IP lawyer by any definition.  No, that ship had sailed by the time I clerked with a major Midwestern law firm and the head of the Intellectual Property Practice Group laughed out loud at my undergraduate double majors in political science and history.  The true practice of intellectual property as a substantive legal area is largely one involving a deep understanding of the sciences (and I don’t mean political science). 

However, the business side of intellectual property (and of course, the business side is what this blog focuses on) requires the ability to identify valuable intellectual property, conduct a risk-benefit analysis, determine what protections are appropriate and affordable under the specific circumstances, and then (and most importantly) work with you to implement and execute a plan to PROTECT and MONETIZE your IP.

So, does your business lawyer need to be a licensed patent lawyer?  No.  What your business lawyer does need are the following skills/abilities:

• Access to a talented licensed patent lawyer in the same firm (and here’s the critical part) who does more than just process and enforce patents and trademarks – one who regularly works on IP matters and understands how they affect your business activities, relationships and agreements.
• A complete understanding of your business and a specific understanding of the types of IP you have or intend to develop.
• The ability to identify risks and opportunities to and for your IP and to inform you when one may outweigh the other.
• Practical experience in structuring and handling mergers, acquisitions, licensing agreements, joint ventures and other transactions involving valuable intellectual property.
• And finally, an open and creative mind to help you to maximize and realize (i.e., monetize) upon the value of your intellectual property.

Whether you are a technology company, a software developer, a manufacturer, an energy company or any other type of business, you likely have valuable IP – make sure you work closely with capable and experienced legal counsel to protect it.

Serving on a Board of Directors – Part 2 – Duties, Responsibilities and Exposure

In Part 1, I suggested that, before you agree to serve on a Board of Directors, you ask some very fundamental but important questions to determine whether you should serve on that particular Board and what the actual and potential ramifications of doing so might be.

In Part 2, I want to be a little more technical (which is somewhat out of character for this blog) by making you aware, at a very basic level, of the legal duties and responsibilities of Directors.  Briefly, those duties and responsibilities (in my words), and certain related relevant concerns and standards for Directors, can be summarized as follows:

• Duty of Care – Directors must act with the care that a similarly situated person in a similar circumstance would reasonably believe to be appropriate.  This includes a duty to be informed, to prepare for and attend meetings, to candidly share information and opinions with other Directors and company management, and to make appropriate inquiries into company matters.  In meeting the duty of care, Directors may reasonably rely on others, such as the Corporation’s attorneys, accountants, outside auditors, etc.

• Duty of Loyalty – Directors need to act in “good faith” and in a manner that they reasonably believe is in the Corporation’s best interests.  This includes, among other things, avoiding, and where necessary disclosing, conflicts of interest, and making “corporate opportunities” available to the Corporation.

• Duty of Disclosure – Directors have a duty to inform their fellow Directors and (in appropriate circumstances) the Shareholders of the Corporation of information that is relevant to corporate decisions, and not to mislead.

• Business Judgment Rule – The business judgment rule is not a separate duty or responsibility; it’s the standard by which Directors’ decisions and actions are measured.  Generally, Directors are presumed to have acted in good faith, on an informed basis and with the honest belief they were acting in the Corporation’s best interests.  If this is the case, a court will not second-guess the Directors’ decisions.

• Confidentiality – Generally, Directors must maintain all non-public information regarding the Corporation in confidence.

Before you agree to serve on a Board, and throughout the time that you serve on a Board, make absolutely certain that you understand the above duties and responsibilities.  If in doubt, speak with the Corporation’s legal counsel, and where necessary, with your own personal counsel.  These duties and responsibilities cannot be taken too seriously.

Serving on a Board of Directors – Part 1 – Know What You’re Getting Into

So, you’ve been asked to serve on a Board of Directors.  If this is the first such invitation, your initial instinct is to be flattered and accept the appointment if for no other reason than it feels good to have people think so highly of you that they want you to serve on their Board.  However, before you rush into this decision, you need to recognize that Board appointments carry with them substantial responsibilities, and in some cases, substantial exposure to personal liability.  Given that fact, you should not rush into such a position.

Here are a number of things to consider and questions to ask before accepting a Board appointment:

• What is the nature of the company’s business?

• What is the company’s reputation and that of its founders, officers, directors, etc.?  Is it a good thing for you to associate yourself and your reputation with this company and those people?

• Do you have any specific knowledge or expertise to contribute to the Board?  In that regard, will you be expected to serve any specific roles on the Board or its committees?

• What is the status of the company from a business, strategic, capital, financial and legal standpoint?  Are you stepping into a good situation, a bad situation, or something in between?

• Who are the other Directors?  Who are the officers?  Have you spoken with them about the company and the Board?

• Who are the company’s service providers – lawyers, accountants, bankers, investment bankers, etc.?  Have you spoken with them about the company?

• How often will the Board meet, and where?

• Will you have the necessary time to devote to the position?

• Will you receive compensation for serving on the Board?  If so, will it be in the form of cash, stock, other?

• Will you be entitled to reimbursement of your expenses?

• Are you expected to buy stock in the company?

• Does the company maintain D&O insurance?  If so, in what amount, and for what types of occurrences?

• What do the company’s governing documents say as to Director indemnification?  Will the company enter into a specific indemnification agreement with you?

These are just a few of the questions you should ask and issues you should consider prior to agreeing to serve on a Board.  In part 2 of this article, I will discuss the specific legal duties and responsibilities that Directors have and what those mean from a practical standpoint.

The Best Business Relationships Take Time, Thought and Planning

A recurring situation that I encounter with clients is the self-created urgency and “irrational exuberance” that sometimes surrounds the early stages of their discussions with prospective business partners, investors and/or key employees, and the really bad (or at least poorly defined) deals that they enter into during this stage.

Although it’s a bit of a crude example, let’s face it, getting to know a prospective business partner, investor or key employee is a little bit like dating; and entering into a binding legal or financial relationship with them is a little like getting married.  Marriages that are entered into hastily rarely work out, and the same can be said for hasty business relationships.

I’ve written other posts about knowing the other party and making sure they’re a good fit.  But that’s only part of what I’m talking about here.  Once you’ve determined that they’re “the one,” it’s equally important to determine and define – the one for what?  And then, enter into written agreements with them that spell this out.

Take a new key employee for example.  The employment agreement is really a combination of marriage contract, life planning, and prenup all rolled into one.  And the company attorney, in some ways, serves the role of protective parent or sibling making sure you’ve carefully thought out what you’re getting into.  You may be “head over heels in love” at this point – so, when you find yourself offering, or when you hear your attorney questioning, terms such as exclusivity, a perpetual term, fully vested non-dilutable stock ownership, no non-compete, etc., etc., take a step back and consider what impact those terms will have on the company currently and in the future (if the relationship succeeds amazingly or fails miserably) – and then craft your relationship and the underlying agreements accordingly.  You will be glad you did in the end.

Now is the Time to Clean Up Your Corporate Affairs

Consider these fact patterns:

• A governmental agency commences an investigation regarding your company.
• Your company applies for a necessary license or permit.
• Your company gets sued.
• A prospective major investor wants to invest $5 million in your company.

What do they all have in common?  Very little, other than in each of these situations it’s extremely likely that you will be asked to confirm that your legal structure and corporate affairs are in order – and if they’re not, it could prove troublesome and expensive at a minimum, or fatal to the deal or even to your company’s survival at the extreme.

So what should you do about this?  Simple – you should ask your legal counsel to quickly audit your corporate books and records to make sure they’re in order; and if they’re not, you should get them in order asap.

You may be asking – what will this cost, and can’t we just wait until the need arises to get our “corporate house in order?”  The answer to the first question is, not as much as you think.  The answer to the second (and related to the first) is, only if you can afford the potential downside of an adverse determination by the agency, licensor, judge or investor.  In other words, if you’re willing to live with the risk of your company being shut down, a plaintiff getting a large judgment against your company (AND EVEN YOU PERSONALLY), or an investor choosing to invest his $5 million with someone else, all because it may save you a little inconvenience or money in the near term – then you don’t need to clean up your affairs.  If, however, you want to make sure your company both survives and has the chance to grow and flourish – then this is something you need to do now.