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Four Elements of a Sound Buy-Sell Agreement

From developing a fool-proof business plan to selecting the perfect partners, you spent a lot of time and energy in tuning your business ownership dreams into reality, but did you take measures to safeguard your company and your interests in it? Life happens, and unfortunately, much of what goes wrong in our lives is out of our control. Divorce, death, and fallouts are a very real possibility, and each can spell financial disaster if not planned for. Fortunately, though one cannot anticipate many life-changing events, they can prepare for them, with a buy-sell agreement. Buy-sell agreements detail what is to become of an owner’s interests in a company should they be forced to leave the company for whatever reason.

It is not enough to have a buy-sell agreement in place. Buy-sell agreements should leave as little room for negotiation or interpretation as possible. At Cloud Willis & Ellis, our business litigation lawyers have drafted numerous buy-sell agreements over the years, each one designed to account for all possible scenarios and risks. In order to do that effectively, we make sure that each agreement includes clauses regarding the following:

Triggering Events
Valuing an Owner’s Interests
Mandatory vs. Optional Purchase
Payment

Detail Triggering Events

First and foremost, a buy-sell agreement should explain what might be cause to enact a buy-sell agreement. Partners at most firms agree that events that may trigger an option or requirement to repurchase an owner’s interest include death, divorce, bankruptcy, disability, an adverse lawsuit judgement, retirement, termination of employment, and/or the attempted sale of one’s interest to a third party. Without such a clause, partners may have difficulty enforcing a buy-sell agreement when the partner in question is unwilling to sell his or her share in the company.

Valuing an Owner’s Interests

Perhaps one of the most debated issues among business partners is how the value of each owner’s interest should be determined. In an ideal world, everyone would have equal share, but the business world is not ideal—it is cutthroat. In order to guarantee that everyone’s interest is calculated fairly and in the same manner, there should be a clause in the buy-sell agreement that details the valuation method to be used. This clause should also answer the following questions:

Who will calculate the value upon the occurrence of a triggering event?
Will the person’s whose share is at stake have an option to appeal the board’s decision?
Will there be a right to a second opinion?

Arriving at a decision regarding valuation methods should not be done lightly, and should only be done after a collaborative discussion between board members, owners, attorneys, accountants, and a financial advisor.

Mandatory Vs. Optional Purchase

A sound buy-sell agreement outlines what triggering events call for a mandatory purchase and sale, and which create an option to purchase or right of first refusal. For instance, the death of an owner might trigger a mandatory purchase and sale, while an attempted sale to a third party might allow for a right of first refusal from the other partners.

How Payments Will be Made

This is not as straightforward as one might think, and most people assume that an agreed upon purchase price will be paid in cash—that is, until they are confronted with a triggering event themselves. In the event of a death, most firms agree that the purchase price should be paid via life insurance, which results in an all-cash payout within six to twelve months after the death. However, other triggering events may require a deposit and a payment plan, which will be fulfilled over an extended period of time. These events may be a sudden disability, retirement, or termination of employment. To prevent confusion when the time comes, a buy-sell agreement should contain a clause that details exactly how the purchase price will be paid upon each triggering event.

Retain the Help of a Birmingham Business Litigation Lawyer

A buy-sell agreement is only as effective as you make it. If you want to ensure that your agreement is foolproof, and that when it comes time to use it there is no room for negotiation or interpretation, hire a business litigation lawyer for help drafting it. Call Cloud Willis & Ellis to schedule a consultation today, or reach out to their firm online.

What You Need To Know About Business Formation & Funding Under the Current Regulatory Environment

Entrepreneur featured an interesting article on February 24^th concerning the regulatory environment surrounding funding a business startup, and how the amount of capital—and how you obtain it—will inevitably influence what type of business you are involved in. This is why working with an experienced business entity/formation and litigation attorney while forming your business—regardless of how small or large that business is—is crucial, as it can help you with issues that come up later on in the business’ lifespan, such as debt restructuring or commercial workouts.

The vast majority of entrepreneurs do not have savings or retirement accounts to get things started; in fact, most do not even have stellar credit or a bulletproof job history, assets that can be helpful in approaching a bank seeking a loan for your startup company. And without collateral and a high FICO, it’s likely that you cannot obtain a bank loan.

While changes coming to Dodd-Frank are expected—and may one day make it easier for banks to make loans to small businesses—until then, entrepreneurs will have to look elsewhere for their startup capital. Some of those options include the following:

Peer-To-Peer Lending

Peer-to-peer lending involves lending to people or entities through online services which match the lenders with the borrowers. These lending companies can often operate at a lower overhead than financial institutions, and thus borrowers can borrow funds at lower interest rates.

While traditionally more expensive than low-interest bank loans, this is still less expensive than many of the payday loan firms. However, this option can sometimes be inflexible and require set daily or weekly payments.

Revenue-Based Financing

Revenue-based financing involves investors injecting capital into a new business and, in exchange, obtaining a percentage of that business’ gross revenues. Many of these investors expect the loans to be repaid within four or five years. This tends to be a more flexible approach and does not require hard assets.

Targeted Loans

Reaching out to community banks and organizations—or even online lenders—who offer loan benefits for very specific groups—such as the underserved or specific minority classes—may help you launch your business in a particular area, or as a specifically-labeled minority-owned business.

Self-Funding

Some entrepreneurs choose to self-fund, i.e. keep their existing job while they launch their entrepreneurial effort.

Know That Things Have Changed…

It is, arguably, easier to launch a business with less capital than was required twenty years ago due to the existence of modern software and other platforms and services (such as apps) that allow you to operate with minimum on-site equipment.

Attorneys Who Can Help

Starting up a new business can be extremely challenging: you have to ensure that you are complying with countless laws and regulations at the local and federal levels. If you have any questions about business formations, the experienced business litigation and corporate law attorneys at Cloud Willis & Ellis can help. We have offices based in Birmingham and Mobile, Alabama, and we’ve helped countless small business clients navigate a broad spectrum of issues. Contact us today to get started.

Resource:

entrepreneur.com/article/283358

Uber Sues after City Oversteps Boundaries in Governing Employment and Independent Contractor Agreements

Uber recent filed suit against the city of Seattle, arguing that the city overstepped its rulemaking authority by interfering with employment and independent contractor agreements between the companies and its drivers.

Specifically, the city’s proposed rules—which were poised to go into effect last month—created collective bargaining opportunities for both transportation network and cab company drivers (including those who drive for Uber and Lyft). Uber is now arguing that the rules are arbitrary and capricious, and fail to properly consider the facts and circumstances of the drivers and the industry, as well as labor law precedent.

The City’s Law & Challenges

Seattle is the first city to pass a law like this. It establishes a process allowing independently contracted drivers the opportunity to form a nonprofit organization to collectively bargain on their behalf. First challenged in court by the US Chamber of Commerce in August 2016, the judge declared that the lawsuit was not yet ripe to bring at that time—i.e. not until the city moved forward with the law’s (or rules’) actual implementation. Following this decision, the city published its rules online, specifying which drivers it would allow to unionize, which working conditions were subject to bargaining, and how organizations could become certified to represent drivers.

Uber’s complaint alleges that the law is inconsistent with fundamental labor laws, which are designed to ensure that every worker has a voice in whether or not they should or would like to be represented by a labor organization. The complaint calls the approach taken by the city “piecemeal,” failing to engage and provide the public with the ability to comment on the proposed rules before they went into effect, as well as omitting representation for thousands of drivers who allegedly won’t be able to vote under the law. The company also alleges that there are significant gaps in the rules, such as guidance concerning unlawful coercion and interference, as well as how future for-hire drivers will be included in the process.

Uber has requested that the Court immediately suspend implementation of the rules and declare them invalid. A hearing on the lawsuit has been scheduled for March 17^th.

Birmingham & Mobile, Alabama Attorneys Dedicated To Representing Businesses

One of the most common types of business disputes are employment-related disputes, thus, it is crucial that businesses in Alabama ensure that their businesses are established and run so as to prevent a broad spectrum of potential conflicts.

At Cloud Willis & Ellis, we have a proven track record of assisting businesses with any and all corporate legal issues such as employment agreements, business plan development, business entity formations, human resources issues, and any and all legal issues related to business law. Contact our offices in Birmingham and Mobile, Alabama for assistance today.

Resources:

law360.com/articles/881820/uber-sues-seattle-to-stop-new-driver-unionization-rule

scribd.com/document/338591732/Uber-lawsuit-against-Seattle?content=10079&campaign=Skimbit%2C+Ltd.&ad_group=&keyword=ft500noi&source=impactradius&medium=affiliate&irgwc=1

What Is The Economic Loss Rule, And How Does It Affect Business Contracts?

The Economic Loss Rule provides that any party who only suffers from economic harm may only recover under a contractual claim, not under tort recovery, as torts traditionally only cover issues related to personal injury and/or property damage.

Regardless, parties who feel that they have been harmed in a business-related dispute will still often seek to bring negligence claims against businesses from time to time. While the Eleventh Circuit (which includes Alabama) recently upheld the Economic Loss Rule, it is important to be aware of this in drafting, negotiating, and reviewing contracts for use with clients, customers, and vendors.

What It Is

The Economic Loss Rule reflects early contract law and the fundamental concept that any claim for damages in contracts is limited to what was or should have been contemplated by the parties at the time of contracting. In other words, in a contractual relationship, the rule prevents one party from bringing a negligence claim against the other simply due to defeated expectations. Of course, there is an exception when personal injury or injury to property is involved, which opens up the door to tort-related claims. For example, under circumstances in which a product does not work, but also does not cause harm to anyone or property damage, the Economic Loss Rule would apply; i.e. the plaintiff can sue for breach of contract, but not under any product liability action. However, if that product does cause injury, the injured party can bring a product liability claim against the manufacturer.

Recent Rulings

While this may sound simple, in fact, it is still a source of litigation, and has been shaped over time: For example, in 2013, a decision that came out of the Florida Supreme Court (in response to a question posed by the Eleventh Circuit) limited the application of the rule to circumstances whereby the parties were not in privity with each other; in other words, while the historical application of the rule only allowed a tort claim where there was no contractual relationship, this decision resulted in completely barring any product liability claims for parties who had an existing contractual relationship.

Most recently, the Eleventh Circuit affirmed the Economic Loss Rule by preventing a plaintiff from filing a negligence claim against a manufacturer. The negligence claim was brought against an electronics manufacturer by a radiologist claiming that the company had been negligent because the radiologist’s MRI scanner was out of date. The radiologist claimed that the machine failed to work due to negligent repairs, however, the contract that existed between the radiologist and the manufacturer featured a servicing date that had long expired before the claim was even filed. The court dismissed the claim, as this was clearly a contract claim attempting to be recast as a negligence claim.

Draft Contracts Strategically With Experienced Attorneys

While the courts have been clear, throughout time, that the Economic Loss Rule prevents recasting contract claims as negligence claims, in order to avoid going to court in the first place, it behooves businesses to spell these terms out in contracts with clients, customers, and vendors, so as to save themselves litigation expenses, even if that litigation simply involves filing a motion to dismiss an improperly-filed claim for negligence.

At Cloud Willis & Ellis, our experienced Birmingham Business litigation attorneys can assist you with all aspects of providing counsel and guidance in navigating simple and complex contracting situations. Contact us today to set up a consultation.

Resource:

americanbar.org/publications/under_construction/2016/winter2016/economic_loss_rule.html

How Will Changes To Regulations Affect Corporate Law & Governance?

On January 30^th, President Trump reiterated his intentions of rolling back Dodd-Frank regulations put in place seven years ago, stating that the law has been a disaster for “the American dream.” While many have focused on provisions in the law which require banks to monitor liquidity and their ability to withstand financial shock, the law actually also has effects on U.S. businesses and corporate governance.

Trump also signed an executive order requiring federal agencies to identify two regulations that would be cut whenever requesting a new regulation, another action that will have a strong impact on U.S. businesses. Many are now asking how the new administration will affect business and corporate law in general.

Dodd-Frank

Passed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) changes the existing regulatory structure by creating agencies dedicated to streamline the regulatory process, increasing oversight of specific institutions—such as banks—regarded as a risk, amending the Federal Reserve Act, and enacting a host of other changes. One of the main intentions of the law was to provide supervision to protect consumers, the economy, and businesses. The law reportedly had an effect on small banks, as some were forced to end certain business practices such as mortgages and car loans in response to the regulations.

Executive Order on Business Regulations

Described as a “two-out, one-in” approach, this executive order mandates that government agencies specify two regulations to drop if/when they request a new regulation, and places the Office of Management and Budget in charge of managing the process. In terms of implementation, the order assigns a significant amount of deference to the director, who decides how costs are measured, what qualifies as “new” and “offsetting” regulations, and overall categories exempted from the order.

Thus far, many businesses have voiced their concerns about the order, noting that it is vague and lacking in important details. Several businesses—including Goldman Sachs, Ford, Facebook, Google, and Airbnb—have indicated that they do not support the move. Others—such as the National Federation of Independent Business—have applauded it as a good first step. Some have also speculated that one of the first regulations to potentially be repealed is the stream protection rule, which bans coal companies from dumping debris associated with mountaintop removal into nearby streams.

Birmingham & Mobile, Alabama Corporate Attorneys

Starting and running a new business can be extremely challenging: you have to ensure that you are complying with countless laws and regulations at the local and federal level. If you have any questions about business or corporate law, or are seeking legal guidance on how to adjust your company’s legal infrastructure given these impending changes, the experienced business litigation attorneys at Cloud Willis & Ellis can help. With offices based in Birmingham and Mobile, Alabama, we’ve helped corporate clients navigate a broad spectrum of issues. Contact us today.

Resources:

nytimes.com/2017/01/30/us/politics/trump-dodd-frank-regulations.html

yahoo.com/news/trump-executive-order-slash-regulations-151135855–business.html

sec.gov/about/laws/wallstreetreform-cpa.pdf

npr.org/2017/01/30/512445032/trump-acts-to-roll-back-regulations-on-businesses

bbc.com/news/business-38800090

Commercial Dispute Negotiation and Resolution Options in Alabama

Business disputes come in a variety of forms and can range in severity from mild inconveniences to serious issues with the potential to bankrupt your company. Fortunately, there are several ways in which business disputes can be resolved. In Alabama, disputes are frequently resolved via negotiation, mediation, arbitration, or in court. If your company is facing a business dispute that needs to be resolved, consult with a competent corporate law attorney in order to discuss your case and select which dispute resolution avenue is most advantageous given your situation.

Negotiation

Negotiation involves any communication between two or more parties in order to reach an agreement or compromise. Negotiations are entered into voluntarily, can be as formal or informal as the parties wish, and involve only the parties and their representatives without a third party neutral leading the process.

Mediation

Mediation is a process that adversarial parties engage in with the aim of settling a dispute or controversy with the help of an independent third party, or mediator. It is the mediator’s job to facilitate open communication and dialog between the parties. Mediation.com notes that most mediations encompass the same key qualities:

Voluntary: Parties engage voluntarily in a mediation and are allowed to leave at any time and for any reason.
Controlled: Each participant has complete control over the outcome of the mediation. In other words, both parties must agree to every term of the resolution and will never be forced into an agreement that they are not comfortable with.
Confidential: Mediations are generally confidential, meaning that everything said and any documents presented during the course of the mediation are not admissible in a subsequent court proceeding (except for the finalized mediated agreement).

Arbitration

Arbitration is similar to mediation in that during both processes the dispute is submitted to neutral third parties for help. However, arbitration is binding, while mediation is voluntary. Arbitration proceedings are less formal than court proceedings, but the arbitrator does control the proceeding and hear evidence in a manner similar to a judge. After the parties present their evidence and arguments, the arbitrator issues a written award that is generally binding. Arbitration agreements are enforceable by a court order if the parties do not voluntarily comply.

Going to Court

Negotiation, mediation, and arbitration are all alternatives to traditional litigation and are collectively referred to as types of Alternative Dispute Resolution (ADR). However, these methods of dispute resolution are not always effective, and as a means of last resort there is always the option of asking a court to resolve your dispute for you. While many people relish the idea of having their day in court in order to prove that they are in the right, keep in mind that court proceedings can be expensive and time consuming. Sometimes putting aside your ego and giving ADR a chance before going to court can be in the best interest of your company.

Need Legal Advice?

If you have a business dispute in Alabama that needs to be resolved, contact the business litigation and corporate law attorneys at Cloud Willis & Ellis, LLC today. Our experienced dispute resolution attorneys would be happy to discuss your dispute with you and represent you in whichever form of dispute resolution makes the most sense given your particular situation. Contact our offices in either Birmingham (205-322-6060) or Mobile (251-545-4844) today.

Alabama’s New Limited Liability Company Law

Deciding to form a legal business entity and selecting the business structure that best meets your needs can be a tricky process. It is important to understand the potential benefits and downsides associated with each type of business structure before selecting one. Additionally, it is also important to be aware that changes to your state’s business code can affect a company’s rights and responsibilities. For example, if you are involved with a limited liability company (LLC) in Alabama, or are considering forming one, it is important to note that the new Alabama Limited Liability Company Law of 2014 governs all LLCs filed since January 1st, 2015, and that it becomes retroactively effective on all LLCs as of January 1st, 2017.

Significant Changes Implemented Via Alabama’s New LLC Law

While Alabama’s new LLC law departs from our state’s current law in a number of different ways, there are a few components of the new law that are particularly important to be aware of. These key changes are outlined below.

Operating Agreements: An ‘operating agreement’ is the agreement that LLC members enter into that governs the business and outlines the members’ financial and managerial rights and responsibilities. Under Alabama’s new LLC law, operating agreements are not required to be in writing and can be oral or implied.
Series Segmentation: The new law allows internal ‘series’ in order to divide liabilities, members, etc. The idea behind a series limited liability company is that one series can be protected against the liabilities of another series. In some situations, this change in the law will eliminate the need for multiple LLCs. However, be aware that the IRS has not yet indicated how it will treat series LLCs for tax liability, and it also is not clear how certain issues in pending litigation, such a general liability, will be treated under Alabama common law.
Right To Contract: The new law removes many of the old default provisions, and almost all of the default provisions that do remain can be contracted around in the LLC agreement.
Conversions: Alabama’s new law provides a one-step conversion between LLCs and other types of business entities. After the conversion takes place, the converted entity will own the same assets and will be responsible for the same liabilities as it did before the conversion took place.
Management: Under the new law, LLCs in Alabama are member-managed, rather than manager-managed, unless otherwise provided in the LLC Agreement. Additionally, a member or a manager’s authority to bind an LLC is governed by the LLC Agreement. If the LLC does not have such an agreement, then agency law governs their ability to bind the LLC.
Reinstatement: LLCs governed by Alabama’s new law can be dissolved and then come back to life.
Ability To Limit Liability Of Members For Breach Of Contract: When drafting the LLC Agreement, an LLC can now waive its ability to hold a member liable for breach of contract.
Clawback Distributions: Under Alabama’s new law an LLC member can now be held liable for receiving distributions in excess of the fair market value of the assets.

Do I Need to Register My LLC?

Under Alabama’s Door Closing Statute (Alabama Code section 10A-1-7.21), a business entity that has not registered in Alabama, and is not a corporation or other organization formed under federal law, may not maintain any action, suit, or proceeding within our state. Alabama’s Door Closing Statute is just one reason why you may want to consider registering your business entity in Alabama. However, there are also many other practical advantages of registering your LLC, including:

Limits certain liability exposure,
LLCs are able to enforce good faith and fair dealing among members,
Encourages equitable income distributions among members,
Provides the ability to limit the authority of certain members/employees to bind the LLC,
Allows conversion of partnerships or other entities to LLCs,
Provides the ability to limit the fiduciary duties of members to only those with ‘oversight’,
Affords remedies against non-performing members,
Allows greater freedom for LLC members to contract privately, and
Enables LLCs to better protect their assets and exposure to all types of potential litigation and/or disputes.

What Can We Do to Help?

If you live in Alabama and are interested in registering your LLC, contact the experienced business law attorneys at Cloud Willis & Ellis, LLC today by calling our Birmingham office at (205) 322-6060 or our Mobile office at (251) 545-4844.

Thinking Of Starting A Business? Middle Market Companies In Alabama Are On The Rise

Starting your own business may seem like a dream come true and be incredibly daunting at the same time. When deciding to form a legal business entity, timing can be everything. According to a recent article in the Birmingham Business Journal, many entrepreneurs have decided that now is the time. The article notes that mid-market companies are on the rise in Alabama.

Middle Market Businesses In Alabama

What is a ‘middle market business’? A middle market business is generally defined as a company with between $10 million and one billion dollars in annual revenues. The Birmingham Business Journal points to a study conducted by American Express, which indicates that middle market businesses in Alabama grew 80 percent between 2011 and 2016. Our state is now home to an estimated 2,500 middle market businesses.

Nationally, middle market firms are very important for job creation. The American Express study found that middle market companies are responsible for a whopping 53 percent of job growth across the nation since 2011. Additionally, mid-market companies employ approximately 25 percent of the American workforce. Although Alabama’s middle market saw huge growth from 2011 to 2016, other states saw even greater growth and therefore Alabama’s growth is ranked 31st nationwide.

New Business Creation Across The Country

Milwaukee’s Journal Sentinel recently reported that new business growth in the United States is very imbalanced geographically. Statistics in support of this statement indicate that between 2010 and 2014 only 2 percent the nation’s counties saw 50 percent of the nation’s total job growth. Additionally, out of the approximately 3,000 counties in the United States, 50 percent of the new businesses started during this time period were clustered in only 20 counties. The article notes that counties with the highest rates of new business formation and job growth included Chicago, Dallas, Houston, Los Angeles, Miami, Minneapolis, San Francisco, and Seattle.

Why are the majority of new businesses and new jobs clustered geographically in such a limited number of counties? While there are undoubtedly many factors that have contributed this the phenomenon, a study from the Economic Innovation Group notes that access to capital is at least partially to blame. Currently, prosperity geographically correlates strongly with the location of venture capitalist investment firms in ‘knowledge economy cities’. Venture capitalists have the ability to fund companies that would not otherwise have the resources necessary to get off the ground. Additionally, venture capitalists are particularly important today because many entrepreneurs are not financially able to secure a business loan from a bank. Many potential business owners lack the capital to fund their own businesses because they lost home equity when the housing market bubble burst and/or because young Americans owe billions of dollars in student debt.

How Can We Help?

If you are interested in starting your own business it is a good idea to consult with a competent attorney who can lead you through the business entity formation process from start to finish. The experienced corporate lawyers at Cloud Willis & Ellis, LLC have offices in Birmingham (205-322-6060) and Mobile (251-545-4844) and are happy to assist you.

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