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Archive for May, 2016

B-Corporations and the Rise of Social Entrepreneurship

May 25, 2016 1 comment

 

A few months back I sat on a panel to discuss Non-Profit Sustainability and Social Entrepreneurship. You can check out the video here.

I was asked to provide some comments on B Corps – or Benefit Corporations.

To cover some basics –

B-Corps have a dual purpose –

  1. To create profit and
  2. “create a material positive impact on society and the environment”

B-Corps also impose heightened fiduciary duties on board of directors, require the Board to consider social/environmental consequences for board decisions.

These “heightened fiduciary duties”  is contrasted with the setting of the traditional corporation – where the shareholders appoint the board of directors who make decisions  to maximize profits to the shareholders.

 

History of B-Corps:

Maryland was the first state to enact B Corp legislation in 2010.

In 2012 – there were 7 states with B Corp legislation enacted.

Today: 31 states (and counting) with B Corp legislation enacted.

Michigan is still not one of those states.

To me, this increase in number of B Corp states acknowledges that millennials and others joining the work force today want to be part of business that does social good.

A question that Michigan legislators must be wrestling with – do we join the trend? Or could allowing for B-Corp formation/conversion, cause a detriment to existing business?

If there is data on that point, I haven’t seen it.

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

City of Lansing Settlement Agreement and a Non-Disparagement Clause with a $10k Penalty

I read an article a few days ago about the City Lansing’s Mayor, Virg Bernero and a settlement agreement he apparently negotiated that included a payout that was made, as reported by the Free Press,  “so everybody would be happy.”

What I found interesting was “the settlement agreement signed by Bernero and McIntyre also includes a non-disparagement clause with $10,000 penalties for any comments either side makes harming the reputation and goodwill of the other.”

Would you sign a non-disparagement clause with that big of penalty attached to it?

I’ve previously delved into the topic of non-disparagement clauses.

The above language interests me because the $10,000 penalty is a pretty big stick to deter “disparagement”.  As a lawyer, if I was approving my client’s signature on that agreement, I’d want to be sure that my client understood what constitutes “disparagement” (in the City of Lansing case, the client was a lawyer – and (in my opinion appropriately) responded to inquiries from the press with a “no comment“).

Courts have held that “disparagement” is plain in its meaning. It is not ambiguous. Therefore, when signing a non-disparagement clause you can have some reasonable certainty in your conduct.

For a further discussion on this topic – see below.

1. Non-Disparagement Clauses in Settlement Agreements.

Often times as part of a confidential settlement agreement, the parties to a dispute will agree not to “disparage” each other.

Disparage – as you will see below – has a fairly common meaning.

‘Disparagement’ is ‘a false and injurious statement that discredits or detracts from the reputation of another’s property, product, or business.’ Black’s Law Dictionary (7th ed. 1999).

stated another way:

(1) To speak of in a slighting or disrespectful way; belittle. (2) To reduce esteem or rank.’ . . . American Heritage Dictionary (4th Ed. 2000)

2. Michigan Case Law Concerning “Non-Disparagement Agreements”

Rarely have I ever seen a non-disparagement clause become an issue. In fact, a review of Michigan case law supports this – I found only a handful of cases in Michigan where the parties litigated over one party’s alleged “disparagement” after a settlement agreement was entered.

One such case was the 2011 case of Sohal v. Mich. State Univ. Bd. of Trs. & Davoren Chick M.D., 2011 Mich. App. LEXIS 915, *12-14, 2011 WL 1879728 (Mich. Ct. App. May 17, 2011).

There, Plaintiff,  a participant in MSU’s internal medicine residency program, entered into a “resignation and settlement agreement” with MSU under disputed circumstances. The Agreement contained a “non-disparagement clause”.

Plaintiff sued and argued that Defendants breached the non-disparagement clause, entitling him to “rescind” the Agreement (and therefore sue under all of the laws that he would have otherwise waived).

One of Plaintiff’s arguments was: “the word “non-disparagement” is ambiguous. (If you’ve read my previous post you can understand why this argument does not win the day.)

The Court was not convinced. It held:

“the term “disparage” in the non-disparagement clause is not ambiguous. While plaintiff attempts to ascribe several “reasonable” meanings to the term “disparage,” and thus the non-disparagement clause, the term fairly admits of but one interpretation.” Citing Meagher v Wayne State Univ, 222 Mich App 700, 722; 565 NW2d 401 (1997).

As the Court noted, “Other state courts have determined that the term “disparage” in non-disparagement clauses of settlement agreements are unambiguous.” (citations omitted).

In closing – non-disparagement clauses are standard clauses (but not universally used). Courts have consistently held that “Disparage” is a plainly understood term. It isn’t an ambiguous term.

Questions?  Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Twitter: @JeshuaTLauka

Categories: Uncategorized

Startups – Don’t Make this Mistake!

May 13, 2016 1 comment

Happy Friday!

A few months back I wrote a post titled Business Startups: Don’t make these mistakes.

I discussed a recent case that highlighted mistakes that business startups can make – including, shutting down a business, then starting a new one just to avoid debts/creditors.

Generally speaking, that doesn’t work!

A May 3rd Cour of appeals decision reiterates this point – and it provides a good explanation of the legal doctrine that holds a successor business entity “liable” for the debts of its predecessor company – we call this legal doctrine the “mere continuation” doctrine.

You can check out the case of Commonwealth Land Title Insurance Co v Metro Title Corp and Metro Equity Services

I. Facts

  • plaintiff filed a lawsuit against Metro Title and Metro Equity Services, asserting that
  • (1) Metro Title formed Metro Equity for the purpose of fraudulently transferring their assets to avoid collection on the  May 2012 default judgment, and
  • (2) Metro Equity was liable for the judgment as a mere continuation of Metro Title under a successor-liability theory.
  • Metro Equity acknowledged that its owner was the owner of Metro Title and Metro Equity, it argued that Metro Equity was not a mere continuation of Metro Title because Metro Equity did not engage in the same business or customer base as Metro Title and Metro Equity did not purchase any of Metro Title’s stock or liabilities.
  • The Trial Court held that Metro was a mere continuation and found it liable. The Court of Appeals affirmed.

II. “MERE CONTINUATION”

The Court stated the law:

“Michigan follows the traditional rule of successor liability. Foster [v Cone-Blanchard Machine Co], 460 Mich [696] at 702[; 597 NW2d 506 (1999)]. Under that rule, the nature of the transaction determines the potential liability of predecessor and successor corporations. Id. “If the acquisition is accomplished by merger, with shares of stock serving as consideration, the successor generally assumes all its predecessor’s liabilities. However, where the purchase is accomplished by an exchange of cash for assets, the successor is not liable for its predecessor’s liabilities unless one of five narrow exceptions applies.” Id. The five exceptions are: (1) an express or implied assumption of liability; (2) de facto -3- consolidation or merger; (3) fraud; (4) transfer lacking in good faith or consideration; or (5) where the transferee corporation was a mere continuation or reincarnation of the old corporation. Id. at 702.”

The Court held that the mere continuation doctrine was applicable in commercial transactions such as this one – and affirmed the trial court’s ruling finding successor liability.

Lesson:

Start up businesses – take advantage of your limited liability protection, but do not think you can avoid your debts simply by starting up a new business entity that is a mere continuation of one you dissolved.

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

twitter: @JeshuaTLauka

Michigan Corporations: Maintain your Corporate Formalities and Keep up your Guard.

This morning I received an e-mail reminder from the Michigan Department of Licensing and Regulatory Affairs (LARA)

Corporation owners are reminded that annual filing fees and statements must be filed by May 15, 2016.

“Annual statements and annual reports can be filed online at www.michigan.gov/fileonline 

LARA sent a reminder that failure to file will result in penalties. LARA also sent a reminder as follows:

“section 922(1) of the BCA provides that if a domestic corporation fails to file its annual report and filing fee for two years, the corporation will be automatically dissolved 60 days after the expiration of the 2-year period. Section 922(2) of the BCA provides that if a foreign corporation fails to file its annual report and filing fee for one year, its certificate of authority is subject to revocation 60 days after the expiration of the 1-year period. A corporation that has been automatically dissolved or withdrawn is not entitled to a certificate of good standing, its corporate name will be available for use by another entity, and no document will be filed on behalf of the corporation

Additional information is available on the Corporations Division website atwww.michigan.gov/corporations or by calling the Corporations Division at (517) 241-6470.

I’m glad LARA sends out these reminders. It is important as a business owner to maintain your corporate formalities.

I previously posted on this subject “Lessons for Business Owners – Keep up your Guard

Questions?

Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

www.dwlawpc.com

Categories: business, business law, startups Tags:

Small Business Owners: Avoid these Pitfalls

Happy Friday, and a conclusion to “Small Business Week”.

President Barack Obama has proclaimed May 1-7, 2016 “National Small Business Week.

I follow the Small Business & Entrepreneurship Council, if you are a small business owner you should check the organization out.

In regards to National Small Business Week, SBE Council president & CEO Karen Kerrigan was quoted this week as saying: “in order to boost opportunity and business growth Washington must focus on advancing policies that are more friendly and supportive”

I agree. I am all for policies that are friendly to small business.

But, I’m not here to talk policy. I’m here to talk about “what not to do” if you are a small business owner.

And what better way to help me illustrate this than a recent court of appeals decision from April 12th.

The case:

Herman v. Jeffrey W. Pickell & Kaleidoscope Books, 2016 Mich. App. LEXIS 700, *1-2 (Mich. Ct. App. Apr. 12, 2016)

Facts:

  • Defendant – Pickell was the sole proprietor of a business: Kaleidoscope Books and Collectibles, located in Ann Arbor, Michigan.
  • Plaintiff – Herman met defendant at some point in the late 1990’s while plaintiff’s daughter was a student at the University of Michigan.
  • Plaintiff frequented defendant’s store due to his interest in collectibles  and other products that defendant sold.
  • The parties each claimed that the other was the first to initiate the suggestion of going into business together. Id. ps 1-2. (I’m picturing this –“You wanted to go in business first, no, YOU wanted to!“)

The Business Terms:

According to the Court, “both parties seemed to agree that at some point they came to an understanding whereby plaintiff would provide defendant with $50,000 in return for a 10% interest in defendant’s business.” Id. pg 2.

Apparently, that’s about all they could agree on.

The Writing that contained the Business Terms: Two Letters:

According to the Court, “[n]o writing existed between the parties before a February 1, 1998 letter from defendant to plaintiff that stated that plaintiff was “a ten percent (10%) silent partner in the business.” Id. pg 3.

“Defendant sent a letter to plaintiff dated June 25, 1998 that stated that plaintiff would “retain 10% ownership . . . until the $50,000 loan is completely repaid.” Id.

(Question: Is Plaintiff a “silent partner”, or an investor with a “loan to be repaid?”)

Addressing these types of ambiguities are the reasons you retain a lawyer beforehand…

Long story short, 10 years went by without communicating, and Plaintiff sued Defendant for breach of a business contract.

I’m not going to tell you how the story ends, you can read that here.

But, these facts give me the opportunity to illustrate a few points for small business owners to consider:

1. Your business agreements should be in writing.

Any business transaction where money is changing hands. should be in writing. Taking on a partner?

Taking on an investor?

Taking on an investor that could convert into an equity partner?

Entering a business contract for services, supplies?

Put it in writing.

2. In writing, prepared by a lawyer, not a letter you drafted yourself.

I’ve written many times in the past on the problems that arise when people decide to be their own lawyers.

Nowhere is this more prevalent than small business. Putting together the documents you need likely is not as expensive as you think, and is worth it considering the cost of litigation.

3. Your business should be incorporated.

The defendant in this case was a “sole proprietor”. He had no liability protection.  He was completely liable for any debts or liabilities of his company. I’ve written on this topic before: Business owners  need to consider forming a limited liability company or a corporation to shield yourself from personal liability of your business debt.

e-mail: Jeshua@dwlawpc.com

twitter: @JeshuaTLauka

www.dwlawpc.com