Focus W UTAH
a sa t c h Fr o n t
A Publication of The Enterprise - Utah’s Business Journal
Things every business owner or manager should know when they receive a bankruptcy notice. Page 2 First considerations when a lawsuit is coming. Page 3 An employment lawyer’s perspective on avoiding sleepless nights. Page 3 Religious rites, rights and wrongs in the workplace. Page 5 The basics of business Buy-Sell Agreements. Page 6 Utah’s immigration laws. Page 7 How limited is your limited liability protection? Page 9 Getting ready to sell your business. Page 10 A change in the Utah Corporations Act regarding majority written consents Page 10
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Things every business owner or manager should know when they receive a bankruptcy notice
Almost every business is affected by There is also the general “catch all” of bankruptcy at one time or another. Whether “cause,” which may include bad faith, it is receiving a notice that a customer has repetitive bankruptcy filings, or certain filed bankruptcy or a need to reorganize in other situations. Getting relief from the bankruptcy itself, bankruptcy is a part of automatic stay isn’t always an option. the modern business landscape. Bankruptcy When it is, it can sometimes be a slow and is a complex area of law that can be con- frustrating proposition. fusing and may sometimes seem • The Deadlines for Filing a counterintuitive. This article will Proof of Claim Are Short. Very address four basic bankruptcy Short. Don’t Blow Them. It is concepts from the perspective of very important to file a proof of a business whose account debtor claim in a bankruptcy if you or customer has filed bankruptcy. receive a notice that creditors can • Don’t Mess with the file claims. Don’t rely on what Automatic Stay. When a debtor the debtor reports that he or she files bankruptcy, an automatic owes you. The notice of a bankcourt injunction goes into effect ruptcy filing that the court clerk to protect the debtor and its propmails to creditors within a week erty. This injunction, known as Douglas Payne or so after a bankruptcy filing the “automatic stay,” is very often contains a notice of a deadbroad in scope. The automatic line for creditors to file claims. stay generally bars everyone from any The deadline is usually only a few months attempts to collect on pre-bankruptcy debt- away. Don’t ignore it. If you don’t file a ors, stops lawsuits against the debtor, stops proof of claim, there is a good chance you foreclosure proceedings, and bars efforts won’t get paid. Be aware that in a lot of to repossess or dispose of collateral. In Chapter 7 bankruptcy cases, the initial short, it stops everything. Like most judg- bankruptcy notice tells creditors not to file es, bankruptcy judges take a dim view of claims at that time. The court will send a people who ignore their orders. Creditors notice of file claims in the future if the who violate the automatic stay run the risk trustee locates enough assets that there will of being held in contempt of court. Judges be some distribution to unsecured credican impose sanctions and award punitive tors. Keep a lookout for a notice in such damages against creditors who knowingly cases. violate the stay. Formal notice of the bankThere may be a few unusual situations ruptcy filing from the court is not neces- where filing a proof of claim may not be sary. Anything that places a creditor on desirable (such as where a creditor has a notice of a bankruptcy filing, whether it is right to a jury trial and does not wish to a phone call, an e-mail, or some other waive it). Consult your lawyer. informal means, is sufficient. If there is • All Is Not Necessarily Lost If You any question whether the automatic stay Receive a Demand to Return may apply, the safest course of action is to “Preferential Payments.” You May Not not risk violating the automatic stay. Check Have to Return the Money. One of the with your lawyer. most painful experiences a business can Unfair, you say? Why should some- have with a bankruptcy is when they are one be able to stop my lawsuit or foreclo- sued or receive a letter from a bankruptcy sure against them in its tracks just by filing trustee (or from the attorneys for a Chapter a paper with the bankruptcy court starting 11 debtor) demanding that the business a bankruptcy case? Congress enacted the return payments it received from a debtor automatic stay to give a debtor a “breath- shortly before a bankruptcy filing. Why ing spell” from creditors so that the debtor should you have to return a payment from can come up with a repayment plan. The someone who owed you money if you did automatic stay also helps implement other nothing wrong? All you did was cash a policies underlying the federal bankruptcy check! And the debtor did nothing wrong code. It shifts things from the state law in paying you, either. Yet the bankruptcy policy of a “race to the courthouse” or code provides for what seems like an “first come, first served” and replaces it extremely unfair use of our legal system with a policy of equal treatment to credi- by allowing bankruptcy trustees or Chapter tors who are similarly situated. It also 11 debtors to recover payments or transhelps preserve any going concern value the fers of property that were made to credidebtor may have. This value can some- tors within 90 days of the bankruptcy filtimes be used to pay unsecured creditors ing. (The reach back period extends to one more than they would receive from the year prior to bankruptcy for payments or liquidation of hard assets. transfers to an insider). These payments Creditors can sometimes get the auto- are referred to as “preferences” or “prefermatic stay modified, which is known as ential transfers” because they could give getting “relief” from the automatic stay. the recipient preferential treatment over The grounds for relief from the automatic other creditors who were not paid. stay include: (1) the creditor is being If your business is the unlucky target harmed because the collateral is declining of such a demand letter or is sued in a in value; and (2) the debtor has no equity preference lawsuit, all is not necessarily in the collateral and the property isn’t necessary for an effective reorganization. see BANKRUPTCY next page
Utah Focus, July 2011
First considerations when a lawsuit is coming Many business owners have experi- sons to act quickly in hiring an attorney. enced the unsettling feeling that comes Perhaps the most important is to ensure when they discover they have been sued or you do not lose any rights or claims by threatened with a lawsuit. If you have not, missing an important deadline. then keep in mind that it could be just In addition, acting quickly can somearound the corner: Recent studies demon- times facilitate a less costly resolution. The strate that the question for most business sooner you hire an attorney, the sooner you owners is not if, but when they will be sued can get advice concerning the possibility or threatened with a lawsuit. and desirability of working A lawsuit not only poses the toward a resolution out of court. obvious potential of financial liaSometimes you may have no bility, but can also cause significhoice but to fight, but finding a cant ongoing expenses and distracbusiness solution to the dispute tions from day-to-day business prior to the commencement of operations. This can be particularly court action when possible is overwhelming for business owners often more cost-effective. with little experience handling 3. Contact Your lawsuits. As with any endeavor, Insurance Carrier. It is quite how you begin will likely have a important to notify your insurLane Molen large impact on how you will end. ance broker/carrier of the claim Here are six ideas for you to conor potential claim to obtain a sider when dealing with a lawsuit: determination whether your car1. It is Important to Protect the rier will defend you against and ultimately Attorney-Client Privilege. A common cover the claim. If you have a broker, they mistake by those unfamiliar with the legal will be able to put all potential carriers on system upon receiving service of a lawsuit notice of the claim. You may have more or a threat of litigation is to immediately than one policy covering the matter. Your discuss the threat with others. This is carrier may have a duty to defend you in human nature when confronted with some- the litigation and in such a case will likely thing unfamiliar and unexpected. The have a say about who your attorney will problem with doing so, however, is that be. communications, whether verbal or writ4. Preserve Documents. After a lawten, between you and others including suit is filed or threatened, you should be those within your company could be sure to preserve documents or other items obtained by the opposing party in a law- related to the subject matter of the threat, suit. Meanwhile, discussions between you and you likely will want to put a stop to and your attorney are legally protected as any automatic document destruction/deleprivate. Before talking to others about the tion programs. The law imposes upon parthreat, hire an attorney and discuss with ties to litigation the responsibility to prehim or her how you can best protect your serve documents and other evidence, even private communications. if you view the items as insignificant or 2. Consider Getting Legal Counsel damaging. Parties that fail to preserve eviImmediately. There are a number of rea- dence may be subject to serious sanctions
An employment lawyer’s perspective on avoiding sleepless nights There are an awful lot of things to heart conversations with everyone you worry about when you are a business meet. Although I am a true believer in such leader, not the least of which is whether behavior and see both moral and business your company is in violation of various value in it, I am not talking about that sort laws. From tax laws to securities laws to of “appreciation” knowledge about your employees. I am referring to true environmental laws to workplace legal knowledge. That is, who, laws to product liability, the legal legally, according to federal and compliance field is huge and everUtah law, is your employee? changing. One of the most comWhen it comes to employmon and costly mistakes that I ment-law compliance, however, have seen business owners and you should be able to rest more executives make in my 23 years easily if you take action in these of employment-law practice is to four areas: assume that certain people who Figure out who your employElisabeth provide services to them are not, ees are. Many companies don’t Blattnerin fact, company employees. know who their employees are. By Thompson Companies often take a narrow this I don’t mean that you should and misguided view that anyone do all the recruiting for your comwho is not receiving a W-2 is not their pany so you have personally approved employee. Through this lens, companies every hire. While that may make sense in readily hire “contractors” on a 1099 basis very small businesses, by the time your to provide various services, and then concompany is of any size at all, recruitment sider themselves free of further worry likely is a task delegated to more than one about taxes, overtime, benefits and discompetent person, and those recruiters crimination laws. often are not the owner, CEO or COO. Nor do I mean you must wander the workplace The truth, however, is that no matter introducing yourself and having heart-tosee EMPLOYMENT page 4
by the court for spoliation of evidence, including simply entering judgment against companies that intentionally destroy important evidence. 5. Prepare a Chronology of Relevant Events. Take time to sit down and write a chronology of events relevant to the claims being made against you. You may wish to prepare it as a letter to your hired attorney and label it as confidential communication. This chronology will assist your attorney in gaining an understanding of the issues that are presented and preparing a strategy to defend against the claim much quicker. It will also potentially save you fees because your attorney may not have to spend as much time investigating the matter. 6. Be Prepared to Talk Plainly About Fees. From the outset you should have candid conversations with your attorney
about his or her fees and the potential litigation costs you are facing. Exact numbers will be impossible to predict at the early stages, but your attorney may be able to give you a ballpark range of what fighting a lawsuit could cost you. You should factor this into your strategy toward resolving the dispute with a business solution. Ask your attorney if it will be possible to recover attorney fees if you win. In the absence of a contract or a statute, the general rule is that each party pays its own fees and costs of litigation.
in Bankruptcy. Scam artists and fraudsters often end up in bankruptcy. If fraud or certain other conduct was committed by an individual who filed bankruptcy, there may still be hope that you can keep the debt owed to you from being wiped away, or in bankruptcy lingo “discharged.” But you have to act fast. The deadline for filing a lawsuit asking the bankruptcy court to except a particular debt from discharge will be listed on the notice of the initial bankruptcy filing from the court. The deadline will be 60 days from the date first set for the first meeting of creditors, which will typically be approximately 3 months after the date the bankruptcy was filed. The bankruptcy code excepts certain types of debts from discharge. Those include the following, provided that a creditor timely files and prevails on a lawsuit within the bankruptcy: • Money, property, or services or an extension or renewal of credit obtained by use of a false written statement; • Fraud or defalcation while acting as a fiduciary, embezzlement, or larceny; • Willful and malicious injury caused by the debtor. It is important to quickly evaluate whether you have such grounds to except a debt from discharge so you can decide whether it makes sense for you to file a lawsuit within the short statute of limitations. If you’ve been diligent but still need more time to investigate the facts, you can file a motion (before the deadline runs) asking the court to give you a little more time. Finally, creditors should think twice before filing a nondischargeability lawsuit on a consumer debt. A court can award attorney’s fees against a creditor that brought a nondischargeability complaint on a consumer debt if its position was not substantially justified.
from previous page
lost. The trustee or Chapter 11 debtor will have to prove the basic elements of their case, among them that the debtor was insolvent when the payment was made and that the payment enabled you to receive more than you would have if the debtor had been liquidated.Even if the trustee can prove all of these elements (and he or she usually can), there are a number of defenses that may let you off the hook, or at least lessen your exposure. For example, the trustee isn’t entitled to recover the payment if it was made as part of a “contemporaneous exchange for value.” The “ordinary course of business” is also a defense, so if the invoice terms are net 30 and the debtor has been paying you within 30 days, you’re probably OK. Courts look at the course of dealings between the parties for this defense, but also look at typical conduct regarding the manner and timing of payment in the particular industry. Another defense is if your business provided value (goods or services) to the debtor after you received the challenged payment and you haven’t yet been paid. There are a number of other technical defenses that you’ll want to explore before responding to a preference demand or lawsuit. It probably won’t make you feel any better if you are the target of a preference demand or lawsuit, but the policy behind allowing recovery of preferences is to enable the bankruptcy estate to give equal treatment to similarly situated creditors. Bringing preferential payments back into the bankruptcy estate lets those funds be distributed to creditors according to the priorities of the bankruptcy code, at least that’s the theory. When dealing with a troubled business that owes you money, don’t obsess over whether a bankruptcy trustee might be able to recover a payment from you if a bankruptcy is filed. It is possible there won’t be a bankruptcy or that the trustee may not chase you. You may also have defenses. So if you are offered a payment, take the money! • There Are Ways to Keep Certain Types of Fraud from Being Discharged
Lane Molen is an associate with Snell & Wilmer. His practice is concentrated in commercial litigation, involving real estate, natural resources, contract disputes and financial services issues. He represents clients of all sizes, including small businesses.
Douglas Payne is a Fabian Law attorney whose practice focuses on business bankruptcy and commercial litigation. He has over 25 years of experience protecting the interests of creditors and other parties in bankruptcy cases and has successfully represented a number of unsecured creditors’ committees in complex bankruptcy cases. He can be reached at (801) 5318900 or email@example.com.
Utah Focus, July 2011
EMPLOYMENT from page 3
what a company calls a worker, people will be employees if the facts show they look and feel like employees, which typically means that the company exercises, or has the right to exercise, sufficient control over the manner and means of the worker’s performance. And if the worker is the company’s employee, the company still has all of the obligations to the worker that it sought to avoid by calling him a “contractor.” Sadly, because companies think “contractors” are not their employees, they often do not meet their obligations. They do not pay their employer’s share of taxes, they do not pay them overtime, they do not permit them to participate in employee stock option plans available to “employees,” they do not protect them from discrimination and harassment, and so on. Moreover, because companies do not think these workers are employees, they do not include them in the employee head-count. That mistake leads companies to an even bigger one: thinking they have too few employees to be subject to a variety of federal laws, such as: • Title VII, which forbids employers with 15 or more employees from discriminating on the basis of race, color, religion, gender or national origin. • The Americans With Disabilities Act (ADA), which forbids employers with 15 or more employees from discriminating on the basis of disability. • The Age Discrimination in Employment Act (ADEA), which forbids employers with 20 or more employees from discriminating on the basis of age. • The Family and Medical Leave Act (FMLA), which requires employers with 50 or more employees to provide up to 12 weeks or 26 weeks of unpaid leave per year to eligible employees depending on the circumstances. The ramifications of this misunderstanding are huge, since the employer is often in the position of having violated its legal obligations not only to the particular worker in question, but to all of its other employees. It is quite a nasty surprise when a company discovers through a Department of Labor (DOL) audit that it got this very fundamental issue wrong. And the likelihood of such a surprise is greatly increased over several years ago, since the Obama administration has made independent contractor/employee misclassification a major focus. Trust me, you will sleep much better at night if you can confirm that the workers that you have been calling contractors really are contractors. If you find that some of them are not, a call to your employment lawyer to get a game plan in place to fix the problem will certainly help. Understand the difference between “salaried” and “exempt.” Many companies operate under the mistaken belief that salaried employees do not have to be paid minimum wage or overtime. In truth, salaried personnel are only exempt from minimum wage and overtime entitlements if their specific situations meet the requirements of one or more designated “exemptions” under the Fair Labor Standards Act (FLSA). The most common of those are
the administrative, executive, professional and outside sales exemptions, but other exemptions also exist. Many of these exemptions have both “duties” and “salary” components that must be met for the exemption to apply. Characterization of employees as “exempt” means that an employer typically is not tracking those employees’ hours, is not worried about whether they have been paid at least minimum wage for all hours worked, and is not paying any overtime for those hours they have worked beyond 40 per week. When the characterization is wrong, exposure can include unpaid regular wages, unpaid overtime at 1.5 times the regular rate of pay, liquidated damages that double the unpaid wages and overtime amounts, plus attorney’s fees. Given that misclassifications often involve whole classes of employees in numerous job titles, the exposure can be daunting. And it can be personal: liability for FLSA violations attaches not only to the company, but to any individuals responsible for the violation (in other words, you).
level in this high-stakes area. Take equal opportunity laws seriously. Once your Utah company has 15 employees, it will be subject to various state and federal laws designed to provide an equal employment opportunity. Those laws prohibit employers from discriminating against employees on the basis of various “protected classes,” including but not limited to race, color, religion, gender, national origin, age, disability, genetic information and veteran status. Unlawful discrimination includes harassment, and it also includes retaliation against employees for opposing unlawful discrimination or complaining about it. Bringing complaints of discrimination in Utah is easy. Employees do not need to be represented by counsel and they have up to 180 days from the date of an adverse action to file an official charge of discrimination with the Utah Antidiscrimination and Labor Division of the Utah Labor Commission (UALD), and up to 300 days to file it with the EEOC. Charges lead to UALD or EEOC investigations and ulti-
It is quite a nasty surprise when a company discovers through a Department of Labor (DOL) audit that it got this very fundamental issue wrong. And the likelihood of such a surprise is greatly increased over several years ago, since the Obama administration has made independent contractor/employee misclassification a major focus. The chances of having a legal problem in this area are high. According to the Department of Labor, 70 percent of employers are misclassifying non-exempt employees as exempt. Certainly many of them are not doing it on purpose. The Obama administration has made nonexempt/exempt misclassification an area of specific enforcement focus. The DOL has substantially increased the number of its investigators since Jan. 1, 2009, and along with that, the number of audits it is conducting. In addition, numerous plaintiff’s lawyers have designed Internet sites to troll for viable FLSA class actions through a series of simple questions asked of your employees. So, if an auditor does not come knocking at your door, a plaintiff’s lawyer just might. Figuring out whether you have an FLSA exemption problem and how best to fix it requires clear and strategic thinking. Sometimes being transparent with your workforce about an audit, an identified problem, and/or the solution will be the best approach from both business and legal perspectives, but far more often such transparency will backfire and exacerbate the problem. Important decisions need to be made about how to identify the existence and scope of the problem; whether to fix all, part or none of it; how and when to fix whatever part you decide to fix; and, perhaps most importantly, how to do all of these things without drawing unwanted attention from your employees or the DOL. These decisions are best made in consultation with your employment counsel. Getting that wisdom and experience on your team will greatly reduce your stress
mately lawsuits in the state agency or in federal court. Lawsuits are time-consuming and expensive, with damages exposure that, depending on the forum, can include equitable relief, back pay, front pay, compensatory damages (pain and suffering), punitive damages, and attorney fees. Because every employee is a member of some protected class, and thus a possible plaintiff, preventing discrimination and harassment should be near the top of every executive’s compliance list. Critical to effective prevention of unlawful discrimination is the creation of a respectful atmosphere in which diversity is welcome and discrimination, harassment and retaliation are not tolerated. Your company should have appropriate discrimination, harassment and retaliation policies; frequently conduct effective discrimination, harassment and retaliation training; conduct meaningful investigations into allegations of discrimination, harassment and retaliation; take prompt and effective corrective action when discrimination, harassment and/or retaliation are found; and regularly audit its effectiveness at preventing discrimination, harassment and retaliation. All of this, however, will be seriously undermined unless you give more than lip service to these policies and practices. For your personal part, you must set the tone for the atmosphere you desire, leading by example in your everyday words and actions. Get your employee handbook and basic employment forms reviewed. I cannot emphasize enough the need to get a real legal review, by a real employment
lawyer, of your employee handbook and your basic employment forms such as applications, offer letters, leave forms and standard agreements (employment, nondisclosure, non-solicitation, non-compete, etc.). I am not talking about a cursory “check the box” review by an HR consultant or your insurance carrier. I am talking about an in-depth legal review designed to assess your policies, procedures and forms against Utah and federal employment law to see whether you are adequately protected and, if not, how you might improve. Your company’s risk of employment law problems increases if your policies are legally flawed. That could involve an outdated FMLA policy, a workplace violence policy that bans all weapons on a Utah worksite, or an LTD policy that automatically terminates employment after a year. Other problems could arise if your policies do not work well with each other, such as an FMLA policy that ignores the ability to substitute PTO or the availability of STD, or if they do not take advantage of available safe harbors, such as by assuring employees that errors in the calculation of wages will be promptly corrected when brought to the company’s attention. Policies that are written in a way that undermines “at-will” employment, such as by referring to “permanent” employment or suggesting “causes” for termination, or that otherwise create contractual obligations also could raise red flags. Similarly, poor forms — such as applications that ask for improper information, offer letters that undermine at-will employment or create confusion over compensation terms, or overly broad or overused non-compete agreements that are unlikely to be enforceable — all create exposure and threaten what you are trying to accomplish: running the most successful and profitable business that you can. A good legal review includes real dialogue between you and counsel about what your company is doing, is not doing, and could be doing better to handle your obligations to your employees, to protect your company from employee claims, and to protect valuable company assets, such as trade secrets and goodwill, that are largely in the control of your workforce. Such a review exposes and can help solve compliance issues on a number of fronts. With these four areas addressed, I can guarantee you that your company’s exposure will be greatly reduced. In fact, you might even nod off early. Elisabeth R. Blattner-Thompson is a partner in Ballard Spahr LLP’s Salt Lake City office. She is a member of the firm’s Litigation Department and Labor and Employment Group. She concentrates her practice on helping employers understand and solve their workplace legal issues. Blattner-Thompson advises companies on employment law compliance and risk reduction, trains workforces on employment law topics, investigates employee complaints and recommends appropriate responses, structures and implements employee training seminars, and defends employers against employee claims and actions. She is experienced in contracts; discrimination, harassment, and retaliation issues; employee medical issues; leave issues; wage and hour issues; reductions in force; and wrongful discharge.
Utah Focus, July 2011
Religious rites, rights and wrongs in the workplace Utah has deep religious roots, extendReligious Harassment ing back to 1844 when 11,000 members of Under Title VII, an employer has an The Church of Jesus Christ of Latter-day affirmative obligation to maintain a workSaints (LDS), led by Brigham Young, set- place environment free of religious harasstled and founded the Territory of Utah. ment. Such harassment comes in two From that original settlement, the state forms: quid pro quo harassment or hostile now boasts more than two million resi- work environment. dents, many of whom are LDS: (see Quid pro quo harassment occurs Religious Breakdown chart). when a harasser requests an Religious Breakdown of employee to comply with certain religious demands (converUtahns Age 18+, 2008 sion to belief or practices) in LDS 48% exchange for tangible employUnaffiliated 16% ment benefits, and where, if the Catholic 10% demand is not complied with, Evangelicals 7% the harasser takes an adverse Mainline employment action against the Protestants 6% employee. Christopher Black Protestant Churches 1% A hostile work environSnow No Answer 1% ment exists when there is offensive conduct aimed at an Other Faiths 1% employee because of that Buddhism <.5% employee’s religion. The conduct must be Eastern Orthodox <.5% so severe or pervasive that it affects the Hinduism <.5% terms and conditions of employment. Islam <.5% Courts will look to the totality of the cirJehovah’s Witnesses <.5% cumstances in determining whether the Judaism <.5% environment was religiously hostile, Non-denominational <.5% whether the conduct was physically threatOther World Religions <.5% ening or humiliating, or whether there was (Pew Forum on Religion and Public Life) merely an offensive utterance. An employer becomes vicariously Against the backdrop of a strong, preliable for religious harassment if the dominant religion in the state — and an employer knew or should have known of increasingly diverse, religious (and nonthe harassment and failed to take prompt, religious) minority — religious discuscorrective action. Where a supervisor is sions, ideas, and practices are naturally creating the hostile work environment, the carried into the workplace. Indeed, the employer may be directly liable. The Utah Anti-Discrimination and Labor employer can assert as a defense that it Division and Utah’s federal district court exercised reasonable care to prevent the adjudicate a variety of religious discrimiharassment and the employee failed to folnation and accommodation claims each low proper policies designed to protect year. him. Over the past decade, the EEOC has Teasing and isolated comments (unless seen a surge in religiously based claims against employers. Now more than ever, extremely severe) will not create a legally employers must understand the legal bal- hostile work environment. The U.S. ance between religion in the workplace Supreme Court has held that a hostile work and the legitimate, operational needs of environment exists only when the workplace is permeated with discriminatory their company. intimidation, ridicule, and insult that is sufOverview Title VII of the Civil Rights Act of ficiently severe or pervasive to alter the 1964 prohibits employers from discrimi- conditions of the victim’s employment and nating against individuals because of their create an abusive working environment. religious affiliation in hiring, firing, or The United States District Court for the creating terms and conditions of employ- District of Utah followed this Supreme ment. Title VII also mandates that employ- Court principle in the 2006 case of ers reasonably accommodate the religious Jacobson v. Utah Department of practices of an employee or potential Corrections. In Jacobson, the court disemployee, unless to do so would create an missed the plaintiff’s religious harassment undue burden on the employer. In general, claim as a matter of law because it found this translates to the following require- there was not “severe and pervasive discriminatory conduct.” Specifically, the ments and restrictions: employee alleged that his supervisor “made 1. Employers may not discipline or repeated religious comments in the office, reward employees because of their reliincluding: telling [him] that he needed to gion. repent; and telling [him] ... that when [he] 2. Employers cannot require participa- is brought forth for judgment, [the supervition or non-participation in religiously sor] will be there to testify; [and] expressbased activities as a term or condition of ing concern for [his] eternal salvation.” In employment. granting summary judgment for the 3. Employers must provide reasonable employer, the court noted that “the stateaccommodation for an employee’s sin- ments were religious in nature and were cerely held religious beliefs and practices, inappropriate in a work setting. Nonetheless, unless doing so would cause undue hard- the court must consider whether they were ship on the employer. abusive and pervasive. The standard in this 4. Employers must intervene and pre- area of law is quite high.” The court ultivent the religious harassment of their mately found that while the comments employees. “were obviously annoying to [the employ-
ee], they [did] not rise to the level of harassment.” Religious Accommodation Religious employees may encounter conflicts between their employment duties and their religious obligations; federal law requires employers to reasonably accommodate religious obligations. Specifically, Title VII requires accommodation of an employee’s sincere religious beliefs and practices unless doing so would cause undue hardship on the conduct of the employer’s business. Religious Belief The law requires only that the employee’s religious belief be “sincerely held.” And religious beliefs need not be wellrecognized to entitle someone to Title VII protection. An employee need not show a clergy note or statement of beliefs to prove his sincerity. But, it is equally clear that Title VII was intended to protect and accommodate only individuals with sincere religious beliefs and not those with political or other beliefs unrelated to religion. Religious accommodation rules do not apply to requirements rooted in nonreligious bases like culture, heritage, or politics. Accommodation The EEOC website declares that a “reasonable accommodation” is a change in a workplace rule or policy to allow an employee to engage in a religious practice. Religious accommodation is necessary unless it would impose an undue hardship on the business. Thus, an employer is not required to provide an accommodation that is too costly or difficult to provide. The employer and employee should work closely together in finding an appropriate accommodation. Some requested accommodations may include allowing a day or more off for a religious holiday, giving weekly time off for one’s Sabbath, accommodating the wearing of religious garb, or providing a quiet place to pray. Employers could modify work schedules, allow shift exchanges, or change existing policy to make these accommodations if there is no undue hardship or expense. As long as the employer has reasonably accommodated an employee’s religious needs, the employer does not need to provide the specific accommodation suggested by the employee, even if the employee’s preferred accommodation would not cause undue hardship to the employer. “Undue Hardship” The U.S. Supreme Court has ruled that anything more than minimal costs on an employer causes an undue burden or hardship. The EEOC has interpreted this to mean that an employer can show that a requested accommodation causes it an undue hardship if accommodating an employee’s religious practices requires anything more than ordinary administrative costs, diminishes efficiency in other jobs, infringes on other employees’ job rights or benefits, impairs workplace safety, causes co-workers to carry the accommodated employee’s share of potentially hazardous or burdensome work, or conflicts with another law or regulation. Best Practices The EEOC has established best practices guidelines for employers when reli-
gious issues arise in the workplace: 1. Inform employees that you will make reasonable efforts to accommodate their religious practices. 2. Train managers and supervisors on how to recognize religious accommodation requests. 3. Develop internal procedures for processing religious accommodation requests. 4. Individually assess each request, avoiding assumptions about what constitutes religious beliefs or practices or what type of accommodation is appropriate. 5. Confer fully and promptly with employees to share any necessary information about the employee’s religious needs and the available accommodation options. 6. Though you are not required to provide an employee’s preferred accommodation, consider the employee’s proposed method of accommodation, and if it is denied, explain why. 7. Train managers and supervisors to consider alternative available accommodations if the particular accommodation requested would pose an undue hardship. 8. When faced with a request for a religious accommodation which cannot be promptly implemented, consider offering alternative methods of accommodation temporarily while exploring a permanent accommodation. Keep the employee apprised of the status of the employer’s accommodation efforts. Claims of religious discrimination are on the rise, and employers should review their policies and procedures to ensure they are in compliance with Title VII and EEOC guidelines and regulations. Religion in the Workplace: Practical Scenarios • A co-worker recently returned from an LDS mission and engages in religious discussion with a non-LDS co-worker during the lunch hour. A supervisor overhears the discussion and tells the returned missionary that he cannot proselyte or discuss religion with co-workers. * Title VII does not prevent consensual religious discussion in the workplace. If the discussion causes disruption in business operations or if a co-worker is unilaterally imposing his religious beliefs on another co-worker, a supervisor may take corrective action. • An employer of a certain faith promotes only employees who share her religious affiliation and beliefs. * Title VII prohibits employers from basing employment decisions, including promotion or advancement, on religious affiliation or non-affiliation. • A co-worker occasionally teases an LDS employee about alcohol. Although the LDS employee tells her colleague to stop, she continues to work and does not report it because the company has no formal reporting policy in place. Later, a manager begins to criticize the employee and frequently tries to get her to drink. The manager throws beer on her during a work party and laughs. * The company is probably not liable for a hostile work environment on the basis see RELIGION page 7
Utah Focus, July 2011
The basics of business Buy-Sell Agreements Three years ago, you and two of your become your partner in her place? If she friends had a great idea for a new compa- established a trust for her children and ny. You formed the company as a corpora- grandchildren before her death, do you tion or a limited liability company, you want the trustee of the trust to be your partner? To avoid these uncereach provided initial capital, the tainties, the business owners company has commenced operashould consider adopting a Buytions, hired employees, sold prodSell Agreement. ucts or rendered services, has developed a good customer base The purpose of the Buyand now the fruits of your labor Sell Agreement is to establish and are starting to become apparent. formalize the owners’ (shareholdYou and your fellow owners are ers’) agreement as to the rights finally getting around to contemand obligations of the company plating what will happen to the and the shareholders, if a triggercompany if one of the sharehold- Bud Headman ing event occurs. The Buy-Sell ers dies, goes bankrupt, gets Agreement can be simple or it divorced, wants to retire or is fired can be extremely complex. The as an employee. These “triggering” events, Buy-Sell Agreement can be a “Redemption and potentially other triggering events, can Agreement” in which the company has the wreak havoc on a business and can result right and/or obligation to purchase the in strained relations among the owners. ownership interest of the departing shareFor example, what if one of the sharehold- holder upon a triggering event, or it can be ers dies? Do you want her spouse to a “Cross-Purchase Agreement” in which
the remaining shareholders have the rights and/or obligations to purchase the ownership interest of the departing shareholder upon a triggering event. Some companies have adopted a hybrid agreement which is a combination of a Cross-Purchase Agreement and a Redemption Agreement. Insurance Although there are various triggering events in Buy-Sell Agreements, the death of a shareholder carries special importance to the heirs and estate of a deceased shareholder. Frequently, if the company or the remaining shareholders do not have insurance on the life of the deceased shareholder, the buy-out promises and requirements are meaningless from a financial point of view. The purchase of life insurance on each of the shareholders is often the most efficient method of making certain that funds will be available to fund the buy-out requirements upon the death of a shareholder. The company and the owner
should consult with experienced insurance professionals to discuss insurance options and costs. Cross-Purchase Agreements The Cross-Purchase form of the BuySell Agreement offers several advantages. If the triggering event is the death of a shareholder, the family of the deceased shareholder will have a tax basis equal to the fair market value of the deceased shareholder’s stock at the date of death, thereby avoiding any income tax consequences as a result of the sale. If the CrossPurchase Agreement is funded by insurance, the life insurance proceeds received by the surviving shareholders are not subject to income taxation. The surviving shareholders purchasing the shares of a deceased shareholder will be entitled to a tax basis equal to the purchase price of such shares. This will result in the purchased shares having a “stepped-up basis.” This stepped-up basis for the purchased shares should reduce future income taxes if the surviving shareholders later sell these shares. The insurance proceeds received by surviving shareholders are not subject to the corporate alternative minimum tax (AMT) which is applicable to C corporations (but not S corporations or limited liability companies) and are also not subject to the claims of the company’s creditors. The AMT avoidance and creditor protection exist because the proceeds are paid directly to the individual remaining shareholders and not to the company. The Cross-Purchase form of the BuySell Agreement carries several disadvantages. The plan is difficult to administer if there are numerous shareholders who must buy a policy for each fellow shareholder. For example, for seven owners to purchase cross-purchase life insurance would require 42 (7 x 6) policies. The number of policies can multiply even further if disability coverage is also part of the Buy-Sell Agreement. Another disadvantage of the CrossPurchase Agreement is that age or insurability can create a disparity in premiums. Younger or healthier shareholders may incur higher premiums to cover older and less healthy shareholders. A possible solution to this drawback is to have the corporation raise salaries to cover the premiums incurred by the owners. Inequities may persist, however, if shareholders’ marginal tax rates applied to the salary reimbursements are different. Additionally, in CrossPurchase Agreement situations the cost of funding the insurance will be greater if the shareholders have a higher tax rate than the corporation. Stock Redemption Agreements Under a Stock Redemption Agreement, the company owns the insurance policies on the lives of the shareholders. When a shareholder dies, the company buys the deceased shareholder’s shares with the insurance proceeds. A prime advantage of the Stock Redemption Agreement is that it is easier to administer for multiple shareholders. An additional advantage to the stock redemption structuring of the BuySell Agreement is that the company will bear the premium differences associated with age disparities among shareholders. see BUY-SELL page 8
Utah Focus, July 2011
Utah’s immigration laws In the last three years, the Utah legis- nal background checks, and pass English citizens to sponsor an immigrant to enter lature has focused on Utah’s immigration tests. In an effort to deter a mass migration Utah for a one-year period, if the sponsor problem. Approximately 110,000 undocu- of undocumented immigrants toward Utah, agrees to pay $5,000 if the immigrant fails mented immigrants currently live in Utah, only undocumented immigrants living in to leave. The planned implementation date a number equivalent to the populaUtah before May 10, 2011, is July 1, 2013. It is likely to face the same tion of Provo. New state immigrawould be eligible for the per- constitutional challenges. tion laws have affected employers, mits. Once the law is imple3. Traffic Stop Inquiry/Arrest through new requirements to use an mented, private employers who Verification. Utah HB 497 allows local online employment verification syscontinue to employ undocu- police officers to inquire into immigration tem called E-Verify. Starting in July mented workers may be subject status during minor traffic stops if the per2009, public contractors in Utah to potential fines of $10,000 son is unable to provide identification were required to use E-Verify or and a one-year business license demonstrating lawful immigration status. another status verification system suspension. The law is sched- Police officers are required to verify immion new hires. Then in 2010, all Utah uled for implementation on gration status once an arrest is made. This employers with 15 or more workers July 1, 2013, or sooner if the law also potentially creates additional liaRoger Tsai were required to use E-Verify to federal government grants a bility for employers who provide transporverify new workers. Despite the lack waiver. Any attempt by Utah to tation or housing to employees. Encouraging of civil fines to penalize employers, implement the law will likely or inducing illegal immigrants to reside in many employers were compelled to enroll face constitutional challenges. the state illegally or transporting illegal in E-Verify due to fear of widespread ICE 2. Immigrant Sponsor Program. immigrants for commercial gain is a thirdraids and audits. This year, Governor The Pilot Sponsored Resident Immigrant degree felony. The ACLU and the National Herbert signed four immigration-related Program (Utah HB 469) is similar to HB Immigration Law Center have filed suit to bills into law, including several that have 116’s work permit program, except that it enjoin implementation. captured international attention. is for foreign workers currently outside of 4. Commission. Utah HB 466 estab1. Work Permit Program. The most the U.S. The program would allow U.S. lishes a Utah Commission on Immigration prominent new law is the Utah Immigration Accountability and Enforcement Amendment (Utah HB 116), which creates a state work permit program for undocumented workers currently in Utah. Under this law, the Utah Department of Safety Holland & Hart would issue two-year work permits after Salt Lake City Office immigrants pay a $3,500 fee, clear crimi-
RELIGION from page 5
Roger Tsai is an immigration attorney with the Salt Lake City law office of Holland & Hart.
1994: 4 attorneys 2011: 78 attorneys ...and counting.
of the co-worker’s actions. The harassment was neither severe nor pervasive and did not effect her terms and conditions of employment. The manager’s actions, likely meeting the severe or pervasive test, probably give rise to a hostile work environment. • A co-worker refuses to sign a workplace pledge concerning tolerance of homosexuals because he believes it is against God’s word and immoral. His manager orders him to sign it and he refuses. He is fired on the spot. * The employer has an obligation to determine whether there was some type of accommodation available for the employee’s religious belief. By firing him on the spot, the employer failed to make any efforts to find a reasonable accommodation. Listed among the Mountain States Super Lawyers Rising Stars Christopher B. Snow represents management in federal, state, and administrative employment matters. He has extensive experience in the areas of wrongful termination, reduction in workforce, Civil Rights (Title VII, Age Discrimination in Employment Act, and Americans with Disabilities Act), Fair Labor Standards Act, Family Medical Leave Act (FMLA), OSHA violations, and qui tam whistleblower actions. His experience also encompasses the enforcement of noncompete contracts and claims for trade secret misappropriations and trademark infringement. Snow chairs Clyde Snow’s Employment Law Practice Group and frequently writes articles for the group’s newsletter, Business as Usual.
and Migration to issue annual reports on the economic, legal, cultural and educational impact of illegal immigration. The law also allows Utah to work with the federal government and with the state of Nuevo Leon in Mexico to facilitate foreign migrant workers through existing federal visa programs. Each of these laws attempts to provide a unique Utah-based solution that differs from Arizona’s law. Organizations like the Salt Lake Chamber, the Sutherland Institute and the United Way have played an influential role in moderating the discussion that created the law through the Utah Compact. Despite thoughtful debate within the state legislature, these state laws are unlikely to do much more than pressure the federal government to act to prevent a patchwork of inconsistent state immigration laws.
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Utah Focus, July 2011
chase the shares of the departing shareholder; or (iii) require that the departing from page 6 shareholder or her estate sell her shares to the Company or the remaining shareholdThe company will not recognize ers. income for tax purposes when it receives • Valuation of the Company. The the insurance proceeds. The company determination of value of a departing must, however, consider the effect of the shareholder’s shares is possibly the most entire transaction (proceeds received and important issue to deal with in the Buyredemption accomplished) on its earnings Sell Agreement. The consideration of the and profits. The earnings and profits will actual value of the company or how the increase with the life insurance proceeds value will be determined can be complex. received and decrease as a result of the There are a variety of valuation alternastock redemption, so the company must tives that are typically used in Buy-Sell attend to the overall net effect on earnings Agreements and there is no right or wrong and profits and consider how that might way to value the company. When drafting affect the dividend policy to shareholders. the valuation provisions of the Buy-Sell A significant disadvantage of the stock Agreement, each shareholder should conredemption form of the Buy-Sell Agreement sider that if he is a departing shareholder, is that the remaining shareholders do not he will want the valuation to be as high as get the benefit of a step-up in basis when possible. If he is a remaining shareholder, the company purchases the deceased share- he will generally want the valuation to be holder’s shares. Although the surviving as low as possible. Some of the valuation shareholders have an increased percentage alternatives are: ownership in the company as a result of the • Agreed-Upon Value Approach. company’s redemption of the deceased Typically, if the shareholders use an shareholder’s shares, they do not acquire Agreed-Upon Value, the shareholders set a any additional shares. For example, if there valuation price when they initially enter were three shareholders each owning 200 into the Buy-Sell Agreement. Thereafter, a shares there would be 600 shares outstand- new price is generally set once per year. ing and each shareholder would own one- The disadvantages of this valuation meththird of the company. If one shareholder od are (i) often the shareholders don’t actudies and the company purchases (redeems) ally set a new valuation and the last the deceased shareholder’s shares, there agreed-upon valuation may be several would be 400 shares outstanding, and the years old; (ii) agreed-upon value and acturemaining two shareholders would each al value may be significantly different; and continue to own 200 shares, but now their (iii) some of the shareholders may not 200 shares would represent one-half rather agree upon a new valuation. I represented than one-third ownership of the company. a shareholder in a business divorce where Compared to the Cross-Purchase the agreed-upon value would have given Agreement, the Stock Redemption struc- the departing shareholder $4,000,000 but turing will create greater capital gains the actual value of the departing shareupon the ultimate disposition of shares if holder’s shares (based upon an indepenmade before death of the remaining share- dent appraisal) was $1,750,000. The differholders. ence between the agreed-upon value and General Provisions of the Buy-Sell the actual valuation cost the parties thouAgreement sands of dollars in legal fees and months of Issues that should be covered by the negotiations. Buy-Sell Agreement include, but are not • Appraisal Approach. The appraisal limited to, the following: method is likely the most accurate valua • Triggering Events. The agreement tion method, but is also the most expenshould define with specificity those events sive. However, for a company that has that are triggering events which (i) require adequate resources, the cost is worth the the company or the remaining shareholders added protection to all parties in obtaining x2 agray 3/4/04 to purchase the shares2 ofcolumn the departing fair and proper valuation. 1:27 Further, aPM trigshareholder; (ii) give the company or the gering event does not occur often in the remaining shareholders the option to pur- life of a company so the cost of an apprais-
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al should not be a frequently recurring expense item. The Buy-Sell Agreement can include a variety of provisions relating to the appraisal, including (i) a procedure as to whether there will be more than one appraiser (one for the departing shareholder and one for the company or the remaining shareholders); and (ii) how the appraiser will be appointed. • Valuation Formula Approach. The valuation formula approach provides that an agreed-upon financial formula will be used to value the company. There are a variety of formulas used in Buy-Sell Agreements, including (i) adjusted book value; (ii) capitalization (multiples of earnings); or (iii) multiples of EBITDA. In a recent transaction the valuation formula was extremely complex based upon a combination of historical and projected earnings and each of the shareholder’s subjective opinion as to the value of the company. Each component of the valuation formula was given a different weight in the overall valuation formula. Luckily the formula was figured out by the finance majors and not lawyers. • How To Fund the Buy-Out. Once a valuation method has been determined, the next important issue is to determine how the buy-out payment will be funded. If the Buy-Sell Agreement is a Redemption Agreement, the company is responsible for paying the purchase price for the shares of the departing shareholder. If the agreement is a Cross-Purchase Agreement, the remaining shareholders are responsible for paying the purchase price of the shares of the departing shareholder. If the triggering event is death, the buy-out can be funded by life insurance. If the triggering event is not the death of a shareholder, there is no insurance to fund the buy-out. In most instances neither the company nor the remaining shareholders have the liquid assets immediately available to fund the purchase price if insurance is not available. If heirs of a deceased shareholder need cash or other liquid assets to pay estate taxes or to fund their living expenses, the inability of the company or the remaining shareholders to fund the buy-out can be devastating. If the triggering event is death, and if Page the entire1 purchase price is funded with insurance, then payment terms are not a significant issue. However, (i) if insurance
is not obtained; (ii) if insurance is initially obtained but later dropped; (iii) if the purchase price for the shares of the departing shareholder is significantly greater than the insurance benefits available; or (iv) if the triggering event is not death, then it is important for the company or the remaining shareholders to have the right to pay the purchase price over a period of years. Frequently, Buy-Sell Agreements provide that the purchase price (if not funded by insurance), is payable over a three to 10-year period with payments made monthly or quarterly. In most cases, interest accrues at a reasonable rate on the unpaid portion of the purchase price and the shares of the departing shareholder are used as collateral for any unpaid purchase price obligation. Conclusion Whether a Redemption Agreement or a Cross-Purchase Agreement should be selected by a particular company and its shareholders is dependent upon many factors, including but not limited to, the costs of insurance, tax ramifications of the receipt of insurance proceeds, the complexity or ease of acquiring insurance and administering the Buy-Sell Agreement, and the desire to obtain a stepped-up tax basis for the shares of the departing shareholder. A company and its shareholders who are contemplating adopting a BuySell Agreement should work with a team of professionals including legal counsel, accountants and insurance professionals. A. O. (“Bud”) Headman of Cohne Rappaport & Segal has more than years of businessfocused legal experience. Headman accumulated his legal experience as a member of the Utah State Bar Association serving on the Securities, Business Law, Administrative Law, and Continuing Legal Education committees and serving as the chairman of the Legislative Affairs Committee between 1990 and 1994. His membership with the American Bar Association included sections on Business and International Law. In 1977 Headman was admitted to practice in Utah and the U.S. District Court. Additionally, he was admitted practice in the District Court of Arizona, the U.S. Supreme Court and U.S. Court of Appeals, Tenth Circuit, in 1992 and 1993 respectively. Headman received his B.S. from the University of Utah in 1974 and remained there to earn his J.D. in 1977.
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Utah Focus, July 2011
How limited is your limited liability protection? A client recently contacted me because does not have to repay a loan taken out by his business had been sued over a contract the corporation or pay the damages resultit entered into with another company. ing from an automobile accident caused by Notably, the other company sued my cli- one of the corporation’s employees. Thus, ent, individually, in addition to his busi- the owners’ personal assets, such as their ness on the sole basis that my client was homes and bank accounts, cannot be the owner and manager of the business. reached by the business’ creditors. My client expressed his confusion as to Accordingly, the owners’ exposure to liawhy he was being sued personally bility is generally considered to for a contract entered into by his be limited to their initial investbusiness. His business is a limited ment. However, such generalities liability company and he did not are overly broad and tend to fade sign a personal guaranty. when applied to specific situaAccordingly, he did not believe tions. that he could be held personally As a practical matter, an ownliable for a contract entered into er’s potential liability sometimes by his business. He was conis not so “limited.” When a small cerned about his potential percorporation or LLC decides to sonal exposure in the matter. I raise funds by borrowing, cauexplained that if the plaintiff wins Casey Jones tious creditors will require the the lawsuit and obtains a judgmajor shareholders or members ment, the business and he are both to personally guarantee the comresponsible for paying the plaintiff its pany’s obligations. In that circumstance, judgment. Consequently, if the business the business owner is clearly on the hook. does not have enough assets to pay the An individual owner is also liable for his judgment, the plaintiff can garnish his per- or her own torts (e.g., negligence resulting sonal bank account or foreclose on his in an auto accident), even if done in the other personal assets to collect the judg- scope of his or her employment for the ment. This article reviews the counsel I company. The doctrine of vicarious liabilgave my client regarding how a business ity (liability of an employer for an act or owner can be held personally liable for the omission by an employee) only adds a debts of his or her business. defendant; it does not relieve the employee Limited liability protection is one of of personal liability. the greatest benefits a business entity can In addition, there are various judicially provide to its owners. Most business enti- created doctrines that may be applied to ties provide limited liability, including extinguish the owner’s limited liability. corporations and LLCs. Other business Although the courts are extremely relucentities, such as general partnerships and tant to apply the doctrine, the limited liasole proprietorships, do not offer the own- bility veil may be “pierced” if a court finds ers limited liability. The “limited liability that the owners disregarded the business veil” protects the business owner’s perentity by operating the company as their sonal assets from the business’ creditors. “alter ego.” This doctrine is known as Specifically, limited liability means the “piercing the corporate or limited liability business owners are not personally liable veil.” It means the business’ creditors may for the business’ debts or liabilities. For example, a shareholder of a corporation sue the business owner personally for the
business’ debts. If the creditor wins the lawsuit against the business owner, the business owner is personally responsible to pay the judgment or else the creditor may enforce its judgment against the business owner. Utah courts consider several factors in determining whether to pierce the veil and hold a business owner personally liable. One factor Utah courts consider is whether the business entity was adequately capitalized. Undercapitalization of a one-owner entity may lead to the limited liability veil being pierced. Thus, a business should be properly capitalized so that is able to pay its obligations. Courts also take into consideration whether the use of the business is to evade a personal obligation of the business owner, to perpetrate a fraud or a crime, to commit an injustice, or to gain an unfair advantage. Another factor courts consider is whether the business observed its business formalities. Thus, a business should hold an organizational meeting when the business is first organized, adopt bylaws for a corporation or an operating agreement for an LLC, issue certificates for stock or clearly provide documentation that the shares are uncertificated if the entity is a corporation, maintain complete business and financial records, hold regular annual meetings and keep minutes, file business income tax returns, ensure named officers and directors are involved and play a role in the business, file annual business renewals with the state, adopt resolutions reflecting approval of all major corporate actions (even LLCs should take steps to document action by appropriate records), pay dividends when possible and maintain arm’s length relationships among the owner and the business.
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In addition, Utah courts consider whether the business owner commingled his or her personal funds with the business. Therefore, a business owner should maintain separate bank accounts for the business and his or her personal accounts. In addition, the business should not pay the owner’s personal bills or personal living expenses with business funds and the business owner should not use the company credit card or funds for his or her personal purchases. This discussion should not be taken to mean that limited liability is easily lost. That is not the case. Limited liability is the essence of a corporation and LLC. On the other hand, it is a risk which should not be minimized or over looked. If you operate the business in a reasonable and businesslike manner and follow the guidelines above, you should enjoy the protections of limited liability. Casey Jones is an attorney at Strong & Hanni Law Firm and a member of the business group at Strong & Hanni. His primary role is to assist clients with legal issues in the areas of business, tax, real estate and estate planning. He is an active member of the Business and Securities Sections of the Utah State Bar. For additional thoughts and discussion, visit , strongandhanni.com. He can also be reached at firstname.lastname@example.org or (801) 532-7080.
Utah Focus, July 2011
Getting ready to sell your business There are three things a business Not having GAAP financials will owner should do to prepare for the sale of place your business at a disadvantage to a business. Two suggestions deal with other target companies that do have GAAP accounting systems and financial state- financials. Buyers want to compare the ments. They apply right now. The third financial condition of one investment suggestion deals with due diligence docu- opportunity to another. They want to comments and corporate cleanup, pare apples to apples. If you which comes into play as you don’t have GAAP financials, you move closer to the sale process. look more like an orange than an apple. Use GAAP If the sale you contemOne of a buyer’s first few plate will not occur for some questions about your business will time, talk to your accountant. include “Are your financial stateStart keeping your books, or even ments GAAP?” GAAP stands for a second set of books, on a GAAP Generally Accepted Accounting basis. That step will pay off Principles. There are a variety of Matthew Wiese when you sell your business, different accounting systems. borrow funds, or seek outside GAAP is the standard system in investment. It will also pay off in the United States and is the sum-total of terms of how efficiently you rules, standards, and conventions operate your business. that accountants follow in recording and summarizing transactions Provide the Buyer with Best and preparing financial statements. Possible Financial Statements GAAP financial statements are not Suggestion #1 was about the same thing as financial records using an accepted accounting maintained for tax reporting. system so the buyer can comMany small businesses keep pare apples to apples. Suggestion their books based on a method, #2 is about how you demonthough not GAAP, that works just strate to a buyer the financial fine. But if you plan some day to Scott Hunter performance of your company. sell your business, keep the followDemonstrating financial ing in mind: If you keep accounting performance is different than records according to GAAP, your business financial results, i.e., how much revenue, will be easier to sell and will probably sell profit, or cash flow your business generfor a higher price. ates. What’s important is presenting finanThe reason is simple: buyers under- cial data that demonstrates how you stand GAAP, and when they review a tar- reached your financial results. You may get company’s financial statements, they own a business that makes money hand expect to see financial information they over fist, but if you don’t have reliable can readily understand. Banks and other financial statements that reflect those lenders also want to see GAAP financials. results, buyers will be less interested in If your accounting system and financial purchasing your company and may pay statements are not GAAP, a buyer will less. need to learn and become comfortable If all other factors are equal, buyers with the accounting system you use and pay more for target companies that have a may require you to convert your financial good set of financial statements. A “good” statements into something that is GAAP. set of financial statements can be described
on a spectrum ranging from “best” to “notso-best.” On the “best” end of the spectrum are financial statements consisting of multiple years of balance sheets, income statements, and statements of cash flows, which have been audited by a quality independent accounting firm. A clean audit opinion means that independent, unbiased, qualified accountants have looked at your financial statements and your accounting methods and have concluded that your financial statements fairly present your company’s financial position. Buyers love clean audit opinions. A small business with audited financial statements is easier to sell than an equivalent business that does not have audited financial statements. The next best to audited financial statements are unaudited GAAP financial statements. As long as your financial statements are GAAP, buyers won’t flee in terror from unaudited financial statements. If your financials are not audited, however, buyers will spend more time and money doing financial due diligence. The deal will move slower, and the buyer may want to decrease the purchase price. There’s also a greater chance the statements may be inaccurate if not audited. At the other end of the spectrum, and by far the least desirable, are unaudited, non-GAAP financial statements. The deal will be much tougher to do and may even limit the number of potential buyers. Anticipate Due Diligence Requests from Buyer This suggestion applies in particular as your finger tenses on that deal trigger. Smart buyers will take a careful, in-depth look at your business. It’s called “due diligence.” You can add a lot of momentum to a deal if you anticipate the buyer’s initial due diligence request, pull together a binder of introductory documents, and clean up problems before they hit the buyer’s
radar. There are two good reasons to begin assembling due diligence documents on your own before the buyer makes a formal request. First, it will speed the deal up and make the transaction more efficient. If it takes two weeks rather than six weeks to pull together the documents that a buyer wants to review, you have moved four weeks closer to closing and receiving payment. Second, it will increase the business value of the company. As you pull together a standard set of due diligence documents, it gives you a chance to spot and solve problems — such as expired business permits, lack of proper corporate documents, a lease that is about to expire — that could delay or otherwise adversely affect a deal. A lot depends on the first set of due diligence documents you send to a buyer. The first impression you want a buyer to have is: “This business looks well managed, I don’t see a lot of problems, and the owner seems to be careful and sophisticated. It will be easy to get this deal done.” This is the first impression you do not want a buyer to have: “What a mess! The books and records are sloppy. They forgot to register their principal trademark. I’m afraid to think of what other problems are lurking out there. This deal is going to be a nightmare.” This article was adapted from Selling Your Business: How to Sell a Business in Good and Bad Times, by J. Scott Hunter and Matt Wiese. Hunter is chair of Clyde Snow’s Business, Mergers & Acquisitions, and Securities Practice Group. Hunter’s practice is focused on two principle areas: capital market transactions and start-up companies and entrepreneurs. Wiese is with Prince Yeates and has more than 14 years of experience, with a practice primarily focused on federal taxation, estate planning, trust and estate administration and business law.
A change in the Utah Corporations Act regarding majority written consents The Utah Legislature recently passed the shares eligible to vote. I believe that Senate Bill 95, which went into effect May many private Utah corporations would 10, 2011 and amended Section 704 of the benefit from adopting amendments to their Utah Revised Business Corporation Act bylaws to include language permitting relating to shareholder majority written majority written consents to become effective prior to the mailing of notice consents to corporate actions to non-consenting shareholders. taken without a meeting. Under the old version of Section 704, if The Need to Amend Bylaws to a corporation’s shareholders be Able to Rely on the New approved a resolution by majority Provision (not unanimous) written consent, The provisions of revised Section the corporation was required to 704 permitting actions by majorprovide notice of the action to ity written consent to become non-consenting shareholders 10 effective immediately do not days prior to the corporation takautomatically apply to Utah coring the approved action. This Bryan Allen porations. Corporations must 10-day notice period frequently adopt amendments to their bylaws creates delays in closing signifiin order to opt in to the new procant investment and exit transactions. visions. In order to opt in, a corporation Under the amended version of Section needs to replace the Action Without a 704, a corporation may amend its bylaws Meeting section (or similar section) of its to permit the shareholders to approve a bylaws with language similar to the folresolution by majority written consent to lowing: be effective immediately, as long as the “Action Without a Meeting. Any corporation provides notice of the majority action required or permitted to be taken at written consent to non-consenting share- a meeting of the shareholders, other than holders within 10 days after the signing of the election of directors, may be taken the consent by the holders in a majority of without a meeting and without prior notice
if one or more consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote were present and voted. Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. Such written consent (which may be signed in counterparts) shall have the same force and effect as a unanimous vote of the shareholders and may be stated as such in any articles or document filed with the Utah Department of Commerce, Division of Corporations and Commercial Code or other governmental agency. If the written consents of all shareholders entitled to vote are not obtained, the corporation shall give written notice of shareholder approval of an action without a meeting not more than ten (10) days following the later of the day on which (i) the written consents sufficient to take the action are delivered to the corporation, or (ii) the tabulation of the written consents is completed. Such notice shall
be given to a shareholder who (i) would be entitled to notice of a meeting at which the action could be taken, (ii) would be entitled to vote if the action were taken at a meeting, and (iii) did not consent in writing to the action. The foregoing notice shall contain or be accompanied by the same material that would have been required under the Act to be sent in a notice of meeting at which the proposed action would have been submitted to the shareholders for action.” Bryan Allen is a member of the corporate transactions group at Parr Brown Gee & Loveless with emphasis on securities, intellectual property transactions, mergers and acquisitions and private investment funds. Allen assists private and public companies with securities offerings, public company compliance, mergers and acquisitions and corporate governance issues. Allen assists companies with licensing, joint venture and other transactions and agreements involving intellectual property and other rights. He also advises hedge funds, commodities pools and other private investment funds on formation, compliance and other matters.
Utah Focus, July 2011
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Published on Jul 18, 2011