First, needless to say, contact your attorney and schedule a face-to-face meeting. Virtual meetings through platforms like Zoom or Teams are helpful, but they are no substitute for a face-to-face meeting, where documents can be reviewed, and plans and strategies agreed upon.

Second, gather and organize all relevant contracts, demands, notices, communications, emails, and text messages exchanged among you, your business, its employees, and the adverse party.

Third, issue a litigation hold to all employees and other representatives. A litigation hold should instruct all employees and other representatives to refrain from deleting or destroying evidence including contracts, notices, communications, emails, and text messages.

Fourth, make sure you understand the contract provisions including, in particular, any notice of default, termination provisions, venue selection clauses, and contract provisions purporting to limit the time in which to submit a claim or file a lawsuit. Frequently, a contract will require notice of default and opportunity to the other side to cure said default.

Fifth, immediately take steps to mitigate or minimize your damages. This may include finding alternative sources of supplies or hiring a replacement contractor to repair, replace or complete your project. That said, you should not engage in remediation work without giving the adverse side an opportunity to inspect the current state of the project.

Sixth, make sure you understand the timing of default occurrences, as many contracts contain shortened limitation periods for filing suits. Furthermore, these contracts may impose restrictions on the venue for legal proceedings and the applicable laws. Many contracts also contain mandatory mediation and/or arbitration provisions which must be complied with.

Seventh, in collaboration with your attorneys, interview key employees and other representatives to determine what information they possess. Additionally, steps should be taken to preserve this information through witness statements or affidavits, if deemed necessary.

Eighth, work with your attorney to establish a litigation budget and litigation plan as soon as possible. However, it’s essential to keep in mind that litigation entails risks and significant expenses. Therefore, it’s crucial to regularly review, update, and revise budgets and litigation plans to accommodate any developments that arise as the litigation progresses.

For more information or to seek counsel from our team of litigation attorneys, please reach out to request a consultation or call us at 216-696-1422.

_____
This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Armoring Your Business in Preparation for Litigation appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Shareholder agreements, which include close corporation agreements, operating agreements, and buy sell agreements, are an important part of any business strategy, providing a framework for sound governance and preventing misunderstandings that may result in litigation.

Close Corporation Agreements

A close corporation agreement, often referred to as a “shareholders’ agreement,” is a legal document that outlines the business’ ownership structure, management, and day-to-day operations. An operating agreement for limited liability companies functions in the same way. A well-crafted close corporation agreement or operating agreement will include mechanisms for decision-making, capital calls, voting rights, winding up and dissolving the entity, and dispute resolution.

Buyout Agreements

A buy-sell agreement, or “buyout agreement,” outlines the terms and conditions for the sale or transfer of shareholder or member equity. Buy-sell agreements may include an agreed upon formula, or a certificate of valuation, for a buy-out of one shareholder or member’s interest. Regardless of the buyout mechanism, it should be understood by all parties, with input from business valuation experts, accountants, and legal counsel. The buy-out mechanism should also be reviewed yearly to ensure it is up to date. Buy-sell agreements may also include rights of first refusal, call options, put options and drag along rights.

Having both a close corporation agreement and buy-sell agreement in place provides numerous benefits to the company and its shareholders or members. They create a framework for sound governance and dispute resolution, facilitate transparent business practices and common understandings, and prepare for the smooth transfer of ownership interest.

While incorporating these agreements into the family business plan would seem like a no-brainer, many closely held businesses operate without them, or with outdated agreements, which risks feuding, financial losses, and lawsuits.

Regular Review

Beyond having these contractual arrangements in place, shareholder or member agreements should be reviewed and updated frequently, especially as your company grows. Purchase price mechanisms should be assessed periodically to ensure that compensation paid upon the death, disability or departure of a shareholder or member is understood and fair to all parties. And life insurance should be maintained to fund a buyout of another shareholder or member’s interest and to fund ongoing business operations.

By referencing and incorporating legal tools and best practices, family run businesses can create a long-lasting foundation for their company’s ongoing success, now and in the future.

For more information or to seek counsel from our team of litigation attorneys, please reach out to request a consultation or call us at 216-696-1422.

_____
This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Legal Strategies to Avoid Disputes in Family Owned-Businesses appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

While litigation costs for family-owned businesses may range from 30 to 150 thousand dollars, the impact of litigation remains nothing short of calamitous for most small business owners, undermining profit, draining resources, and damaging the reputation of a brand.

Litigation can even threaten the existence of the company itself, especially if numerous or complex lawsuits are involved. By focusing on strategies to minimize or avoid business litigation and strengthen legal auditing and compliance, family run businesses can create a long-lasting foundation for their company’s ongoing success, now and in the future.

The following article will consider strategies which small to mid-sized business owners can adopt to avoid litigation or minimize the impact of business litigation. I focus on five (5) key areas where small businesses commonly face litigation:

1. Employment Matters
2. Business-to-Business Contracts
3. Lending
4. Shareholder Agreements
5. Succession Planning

(1) Employment Matters

Employment litigation ranges from lawsuits alleging discrimination, retaliation, unfair labor standards, medical leave, and contract disputes. While it is important to have thoughtful employment policies and procedures in place, it is also important to educate and train your managers and employees in their use. A well written, easily understood and encompassing employee handbook can prevent allegations of unfair and unlawful employment practices and minimize the impact of litigation.

Written employment contracts are typically used for management level and sales employees and should be reviewed on a regular basis to ensure that they adequately address expectations, job duties, termination rights and compensation. Formulas for the award of bonus and commission compensation should be reviewed frequently to ensure the formulas and expectations are understood by the employee and the company’s owners.

(2) Business to Business Contracts

Whether negotiating purchase and sale agreements, purchase orders, supply agreements, or leases, the terms and conditions of the agreement should be clear and unambiguous to meet both parties’ reasonable expectations. The length of the agreement and reasons for early termination should be spelled out.

Business owners should note whether an agreement automatically renews and whether notice of termination is required to avoid automatic renewal. Payment terms should be clear. Business owners should also be mindful of representations, warranties and covenants contained within their agreements.

When submitting or receiving purchase orders, business owners should be mindful of the standard terms and conditions found on the reverse side or referenced and found on a website. If certain purchase order terms are onerous, objections should be noted on any purchase order confirmation.

It is recommended that legal counsel review all written agreements and purchase orders before they are executed. It is also wise to periodically conduct an audit of all your company’s significant business contracts to ensure that your company’s contracting needs are being protected.

(3) Lenders

Business owners need to thoroughly understand their lines of credit, loan agreements, mortgages, security agreements, and guarantees. In particular, the representations, warranties and covenants of your company’s loan agreements need to be accurate to avoid default. Lenders retain many rights and remedies in their agreements and a thorough understanding of those rights is important to set expectations and maintain compliance.

(4) Shareholder Agreements & Succession Planning

It is important for business owners to plan. Shareholder agreements, which include close corporation agreements and buy sell agreements, are an important part of any strategy to plan and to avoid litigation.

Buy-sell agreements must be reviewed and updated frequently. Purchase price mechanisms must be reviewed to ensure that compensation paid upon the death, disability or departure of a shareholder is understood and fair to all parties. Life insurance should be maintained to fund a buyout. And, to the extent that life insurance does not fully fund a buyout, the terms of payment for the balance should not cripple a business’s cash flow.

It is not enough to simply have a close corporation agreement or buy sell agreement in place. Shareholder agreements must be reviewed and updated frequently, especially as your company grows.

(5) Alternative Dispute Resolution

Litigation in the court system is public for anyone, including your competitors and employees, to see. One avenue to minimize or avoid the impact of business litigation is alternative dispute resolution. Including a contractual provision in your company’s agreements requiring mediation and arbitration reduces exposure to expensive and time-consuming litigation.

Key Takeaways:

• Be proactive with legal counsel and have your counsel review key contracts and purchase orders before entering them.
• Periodically review all your company’s key contracts to ensure that your company is in compliance.
• Review and update your company’s employee handbook and educate and train your employees and managers on its use.
• Consider alternative dispute resolution provisions in key contracts.

For more information or to seek counsel from our Litigation group, please reach out to request a consultation or call us at 216-696-1422.

_____
This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Liability & Lawsuits: Strategies to Protect Your Family Business appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.