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Old Posts: From Ryan K. Hew, Attorney at Law, LLLC

Formalities

From: “Let me provide the formalities.”

Hew and Bordenave

To: “Let us provides the formalities.”

From Old Solo to New Partnership

Hey everyone, thanks for visiting our Blawg. I am just letting you know that all the posts prior to January 1, 2017 are from my solo practice. They are from Ryan K. Hew, Attorney at Law, LLLC. In particular, the old: hawaiiesquire.com. I brought the posts to our new site because a lot of the legal information is helpful for business owners and truth be told I loved doing Draw the Law, Boilerplate Blurb, and all the other content. So please continue enjoying them, but I do hope you like the new content from Trejur and me. Mahalo!

-Ryan K. Hew

Draw the Law: Government and Business, Part III: The Legislature

Personal Update

Aloha everyone!

I apologize to all my loyal blawg readers, that have missed on so many months on posts from me.  I have been extremely busy, but have a lot new and exciting information, as well as simple little sketches to help you understand the law.  First off, let me state that my law firm will now be offering notary public services here in the State of Hawaii.  Therefore, if you need something notarized and are in the Kaka’ako area please contact my office to schedule an appointment.

Second, the reason I was not posting for the past several months is I was working for the Hawaii State Legislature for the House Judiciary Committee.  This was fascinating and informative work on the drafting of legislation, and I do recommend any young attorney get some legislative experience if they intend to work in government or even in private practice; it is an invaluable experience, and goes a long way if you intend to do lobbying or public interest work.  With that work finished, Draw the Law should be returning to semi-regular postings, as I will be holding regular office hours at my Ward Avenue location.  Of course with my legislative knowledge, I will be using it for today’s post to follow-up where we left off, and of course I will be talking about the Legislature and how it affects your business.

Lastly, you can expect New Law in the Brief posts, a series of posts of the legislative process, as I have interacted with many local business owners and advocates who have no idea how the Legislature operates, but are interested, and finally there will be new content updates, such as events, one-sheets, slides, etc . . .

Anyway, I’ve written enough on me, let’s get back to Draw the Law!

Draw the Law: Government and Business, Part III: The Legislature

The 3 branches of the federal and local state government balance and check each other.  Specifically, when it comes to lawmaking, the legislature creates the law, while the executive enforces, and the judicial shall interpret the laws application to a case.

So last time I discussed how the judicial branch of the government (both US and Hawaii) interacts with businesses when they sue each other or receive a suit against them by a customer or possibly an agency of the government charged with enforcing the law.  This brings me to the Legislature, as it is the place where the laws are made.  It is what gives a consumer the right to sue you for a defective product, it’s what gives the police and government agencies to chase you down for speeding tickets or having to go to the liquor commission for a license to dispense alcohol.

So why should a business owner care about what the legislature, state or federal or both do?

Let me generalize for a bit, so that you can understand what is happening.  Typically, what happens is that a new industry or business practice is implemented, sometimes with little problems to society, but other times causing problems for people.  In the case when it is not, the company is likely injuring a number of people, but sometimes that injury does not give those people a cause of action (aka a right to sue) the company doing the damage.  Therefore, people become advocates for a change in the law making a company responsible for the harm.  They do so by interacting with their elected official, which may either be a senator or representative and they introduce a bill into the legislative process.  Other times, the change in or the addition of a new law need not come from the advocacy of protecting consumers and clients, but many industries see benefit in engaging the government by either having access to information, resources, or possibly legitimacy.

So here, we have a widget plant in a neighborhood. The community does not like the smoke, and asks their elected official to speak to the legislative body and convince them to pass Bill 55 on the issue.  The legislature then passes Act 10, which orders any widget plant to put a red cap on their smoke stack.

Many times laws do not just benefit one company, but an entire industry. Therefore, the companies that mak up the industry will bandwagon together and form some type of organization to lobby for changes in the law on behalf of the greater whole.  A good example of this is the Hawaii Chamber of Commerce.

So the widget plants do not like putting a red cap on their smoke stack. Red paint is too costly, and they would rather put blue caps, which are more pleasing to the eye. So the widget companies band together to form the Widget Association of America, which hires a lobbyist to make their case heard in the legislature to change the law.

While, some business owners live in a legislative district separate from where their business is located, this should not prevent them from knowing who the representatives are for the area.  The reason being is that the local neighborhood business provides a valuable resource to the community, and in turn that community elects the representative.  Therefore, consider finding out who your representative of both where you live and do business in, and consider joining or forming some type of association to get more involved with the legislative process if you feel that their may be benefits to your business in influencing the lawmaking process, as the laws your legislator passes may affect your business. If you are in the State of Hawaii, you can find out who your elected officials are by using this website and entering your address in the top-right corner search box.

Next time I will touch upon the executive branch, the part of the government charged with enforcing the laws.

LEGAL DISCLAIMER: The information provided here is meant to be general information, and should not be taken as specific legal advice that pertains to any particular situation.  The reader should not base any decisions on the information here to act or refrain from acting regarding a legal problem.  If you believe you have a legal problem please seek legal advice from a licensed attorney in the relevant jurisdiction.

Draw the Law: Government and Business, Part II: The Judiciary

Hello readers, mahalo for stopping by and checking out this second of a series of Draw the Laws on government and its interaction with business.  For this week’s post, and the next two, I fill do a brief survey of the three branches of the US government (as well as the State of Hawaii).  So I am going to start off with one that attorneys are quite familiar with, the judiciary.  Fellow attorneys, this is meant for laypeople and is a bare bones run-through, don’t tell me what I missed because I am trying to keep this brief (pun intended).

Purpose of the Judiciary

The judiciary, if you remember your civics class, is comprised of a series of courts that are meant to apply the laws of the government. It is a formal mechanism for dispute resolution.  While there may be some quibbling over this, the reality is courts and judges do NOT make laws.  They can strike down laws made by legislative bodies that are unconstitutional, this is known as “judicial review.”

The Federal System: US District Courts

The federal court system is broken into different regions, and the starting point for a plaintiff is district court.  If a party does not like the verdict they can always appeal to the appellate courts, which are in turn checked by the US Supreme Court, which rulings affect the entire country.

A lawsuit begins in the judicial system when a plaintiff files a suit.  If this is a federal lawsuit this suit begins its journey in a trial court known as US district court.  Without getting things complicated and preventing you from getting too bored with this post, know that there are several US districts broken apart by region. Further, know that you cannot just file a federal suit and any court can hear it.  The Congress must grant the court the jurisdiction (power) to hear the subject matter of the dispute.  For example, US district courts can hear matters when it is a civil action between citizens of different states.

Why does this matter?  If you are a business here in Hawaii and you get into a contract lawsuit with a California business, the California business may pursue a suit in federal court, which may be more costly than a state lawsuit if it was between two local businesses.

This is why we transactional attorneys put in jurisdiction and choice of forum clauses to prevent a lawsuit in another state and applying the laws of that state when engaging business with someone from another state.

The Federal System: Appeals Courts

The Appeals Courts is where you turn to next if you don’t like the ruling of the District Court.  Just note that Hawaii is located in the 9th Circuit Court of Appeals.

So for a party that loses, and wishes to appeal, that party will find their lawsuit at this level of the judicial branch.  Due to the fact that the US Supreme Court only hears fewer than a 100 cases a year, the United States Courts of Appeals tend to be the final stop for cases appealed.  Further, the process of appealing is expensive and less open in terms of the scope of the lawsuit.  District courts gather evidence and judges or juries make a decision based on the evidence presented.  However, with appeals courts that is NOT the case.  Appeals courts only review the decisions of the US district courts to see if there was an error in law. They do not take in new evidence, such as hearing witnesses, from the parties, and only the parties’ attorneys are allowed to speak to the court.  Therefore, this mechanism as you can see makes it difficult appealing a lower court’s ruling.

In district court the two sides present evidence to the judge or jury through evidence, testimony of witnesses, etc . . . however, once a verdict goes up on appeal the judges at the appellate level can only review what was presented at the lower court and cannot take in new information.

As a business what you need to understand is that if you lose a lawsuit at the lower level, you and your attorney need to weigh the risks and costs of appealing such a loss, and seeing if it is worth it to get an appeal.  Sometimes it is used a negotiation strategy to bring a party that is exhausted from a suit back to settlement talks.

The Federal System: The US Supreme Court

The Supreme Court of the United States (aka SCOTUS) is the highest court in the United States.  It has the ability to hear all federal court cases and over state court cases involving issues over federal law.  It should be known to anyone seeking to get their case to this level is that it is a long and costly road, as you would have had to gone through district court, appeals court, and lost at those rounds, and then ask SCOTUS to hear the case.  The chances of you bringing up a controversy that meets the hearing criteria of the 9 Supreme Court justices is rare as I stated above.  Lastly, there are only certain lawyers and firms that handle Supreme Court cases.

However, the influence of the Supreme Court can be felt throughout the land. The (in)famous decision of Citizens United vs. Federal Election Commission basically held that the First Amendment prohibited the government from restricting independent political expenditures by corporate entities.  Rightly or wrongly, depending your take on this, your business entity, association, or union may spend its money on independent communications, such as television whereby you can endorse or call to vote against specific candidates.

The State of Hawaii Judiciary

Basically, the State of Hawaii’s court system is broken up similarly to the federal system. We have circuit courts that handle different islands of the state, with the First Circuit handling Oahu. After the circuits, we have an Intermediate Court of Appeals (ICA). Finally, the Hawaii Supreme Court functions much like SCOTUS, but at the state level.  For the most part, these courts will handle Hawaii cases and controversies.  Therefore, if your employee sues your company for violating Hawaii worker laws it will be in a state court, and if you lose you may appeal to the ICA, and if the case warrants it the Supreme Court may hear it.

Why does this Matter to Your Business?

So in this example business A had a judgment against it for injuring its customers, and now that the damages are awarded that would invariably effect business B's decision to buy A. Even if the lawsuit is over, does that mean that Business A's practices will lead to another suit? Can it pay off the judgement? All things to consider when entering a lawsuit in the court system is things become public.

While this post is brief in terms of its coverage of the scope of the judicial branch, the main thing I want you to get out of it is that if you are a business consider a) if you go through a lawsuit all of that information becomes public, you are exposing your business information becoming public record; b) because of this is a deal to buyout a company, attorneys go through a “Due Diligence” phase where we basically dig up everything, including court records, that may affect the valuation of the business, including court documents; and c) if you have a business that requires its employees drive on behalf of the organization you may want to obtain a traffic abstract or traffic court report, as it is a part of your duty to make sure an employee is fit for driving for your company.

The courts exist to resolve disputes, and many times your business will engage with customers, clients, other businesses, and the like that the results may not end the way you expected and sometimes that will draw you into the judicial system.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Government and Business, Part I: The Overview

Happy New Year! Pardon the delay, but I have had a lot of work and been trying to deliver new interesting content and helpful services for local small businesses and startups here in Hawaii.
So I hope you all are off to a roaring start with your business plan, startup, second round of financing, or expanding your business to new markets.  However, if you were like me you were concerned with the “fiscal cliff” debate that raged with the US Congress at the beginning of the year.  Now in the upcoming weeks, here in Hawaii, as in Washington DC, lobbyists and stakeholders are preparing for a new legislative session to influence lawmakers.  Many of these lobbyists represent consumer advocacy, environmental protection, trade, and business groups.

So this brings me to a new series for Draw the Law, government and business.  I have a background in government, law, business and politics and I find that many small business owners do not appreciate the interaction of government. I realize that many business owners have not had civics in a while, nor did their class cover the nuances of government, regulation, and lawmaking, but that is why I think these posts should bring some clarity. So let’s get to it.

The Federal System

So let’s start with a refresher, our government is a federal system. This means there is a national government, located in Washington DC, and fifty state governments, one of which is the State of Hawaii, with its state capitol being located in Honolulu.  What this means is usually you have to worry about two sets of laws.  For example, your income taxes, you have federal income tax, and a state income tax.  Another area is labor law; federal law prohibits gender discrimination, as does Hawaii state law.  However, each of the states, in some areas, are allowed exceed federal law, such as how Hawaii law prohibits discrimination against domestic violence victims or gender expression.  Finally, there are some areas that federal law only exists, such as the registration of copyright or patents.

Imagine that there are 2 sets of systems, that there is a federal government in black, and 50 state governments in red. When you start a business you start it in a state and are subject to state taxes, as well as federal taxes.

The Three Branches

So we have two levels of government, but within these layers there are three parts of each government.  There is the Executive branch, which has the United States President if it is the federal government and the Governor of Hawaii if it is the state.  The Executive branch is responsible for carrying out laws. For example, the US Department of Agriculture Food Safety and Inspection Service is the public health agency responsible for ensuring the safety of meat, poultry, and egg products is safe. At the state level the Department of Commerce of Consumer of Affairs of Hawaii is under the governor and is responsible for registering your corporation or limited liability company with the state.

The Judiciary is made up of the courts, which have judges that rule on cases. We have federal courts and state courts, and there are specific rules and procedures that allow a court to have jurisdiction over your case (i.e. they have power to hear your problem).  So for a business, if their product or service injures a customer and the customer goes out, finds an attorney, and then sues the business they will get this resolved in a court.  Another example is if you were an independent contractor and did work for a client for $3,000.00, but never received payment, you could consider suing the client in Small Claims Court.

Finally, there is the Legislative branch, which in my personal opinion most people find confusing, unless they are a politico.  This is the case because of the politics played among all the personalities of senators and representatives. For the United States Congress there is the House of Representatives and the Senate, similarly Hawaii has a bicameral (2 chambers) legislature.  The sole goal of the legislative branch is to make laws.  Therefore, many businesses, by trade or industry, bandwagon together to lobby for the creation of laws that are favorable, such as the US Chamber of Commerce, the National Restaurant Association, as do other groups, such as unions, like the ILWU or HGEA, as they interact at the two levels of government.

The executive branch (blue) is responsible for enforcement, such as through the department of taxation (taxes). The legislature (red) creates laws and lawmakers are subject to lobbyists, voters, and stakeholders influencing them. Finally, the judiciary (green) decides on cases through laws made by the legislature, such as class actin law suits.

Upcoming Weeks

In future weeks, I will go over how public policy affects management of businesses, lobbying, where nonprofits fit in, and how legislation is driven by stakeholders, as well as other topics that business owners interested in government may be interested in.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s With All this Paperwork, Part VIII: Loans with Security Interest

Hey everyone, pardon the delay for this week’s Draw the Law, but many of my clients have been requesting services preparing for the end of the year or getting ready for the coming year.  How about yourself? Do you have New Year resolutions concerning the conduct of your business? Better policies? New agreements? Finally, converting that sole proprietorship into a business entity like a limited liability company or corporation?
Whatever it may be, just remember you will inevitably need good documentation and record keeping, so be sure to set-up a good process for storing all your data and information.

Anyway, let’s get back to Draw the Law, which we are still covering paperwork you may see starting a business.  Last week, I covered a promissory note with a balloon payment type of structure.  Recall, that this is a transaction whereby the loan is paid off by making small  payments throughout the term of the note, but has a large “balloon” payment in the end of the term. Today’s topic is still about loans, but this one focuses on the use of a security interest.  This method is used to provide greater assurances to a lender by providing collateral from the debtor.

So How does this Work?

Typically, a promissory note shall state that there is a secured interest in the promissory note.  It will state who the lender is, the personal property items that a security interest is attached to, and the borrower’s business. In addition, the promissory note commercial lenders, such as banks will prepare additional documentation, usually a security agreement.  If this is an agreement between you and a friend, family, or some other person you and the lender will need follow up on these details.

The security agreement outlines that grantor (the debtor) has assigned a security interest to the grantee (the lender in the transaction) with respect some sort of collateral (the personal property that is being secured for the loan).

Typically what happens is if your business goes under and is unable to repay the loan, the lender now has the right to recover the collateral as a means to satisfy the debt.

So the debtor (black) will put up some kind of collateral (the machine) for a loan (black agreement) for money (in green).  However, if repayment fails (in black) the lender (the bank) has a security agreement (in red) securing the collateral. Further, the lender will notify the public of its secured interest in the machine by filing a UCC-1 statement with the proper agency (in blue).

What Works as Collateral?

Almost anything can work as collateral.  It can be tangible items, such as equipment, fixtures, inventory, but can also be intangibles, such as accounts receivables, patents, or promissory notes owed to you.  However, be aware that the lender will consider the cost and expenses of trying to collect the item, its value after use, the size of the loan, etc . . . and various other factors when even deciding if your collateral is sufficient for the size of the loan.  The special machine you imported from Italy may cost you a huge chunk of money, but if you go out of business the bank will have to find a buyer and may have to rip it out of your store as well so that may not be worth a whole lot to the bank.

When going for a secured transaction (a loan with a security interest) be aware of what you are putting up as collateral.  It may be valuable to you, but the lender giving you money needs to figure out how to extract value from the personal property should you go under to recoup the loan given to you.

Further Documentation by the Lender: The UCC-1

This whole process of securing a loan via a security interest is basically a method for the lender to secure their spot among creditors and know for certainty if your business fails where they are in line against other creditors as to extracting value from the defunct business.  Without getting into a subject matter that law students dread studying for the bar exam, understand that a UCC-1 financing statement (UCC stands for Uniform Commercial Code) may be completed by the lender, which is then filed with the appropriate state agency with regard to the property that has an interest attached to it. This serves as notice to future creditors that the lender holds a lien on the listed assets. However, if your business is successful and can pay off the loan you should make sure that a release is filed in the same public office where the original UCC-1 was filed.

Last Word: Background Check for Buying Businesses

As this is the end of the year, I would like to recognize many people view the New Year as a time to begin new adventures, such as starting a business.  However, remember long ago rather than from starting from scratch you may consider buying an established business.  Why am I bringing this up?  Well, you just learned about security interests whether you are doing an asset purchase or an entity purchase it is wise to do some research.  Sometimes that research includes digging through UCC-1 filings to make sure the business or its assets that you want to buy don’t have outstanding loans or security interests on them.

This is the last Draw the Law post for 2012. Check back in the beginning of next year for new posts!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s with All this Paperwork VII: Promissory Note (Balloon Payment)

Hey everyone, it’s amazing, it’s already December 2012 and it feels like January 2012 was just yesterday.  Anyway, I just wanted to let you know that this is second to last Draw the Law of this year.  There will be one more, continuing the paperwork theme that I have explored for startup owners for the past couple of months.  After which I will do a couple of sporadic updates to the blog and site to continue being a resource for Hawaii small business owners and entrepreneurs. So let’s get to it!
So you started your business, now you need cash to run it.  Several earlier Draw the Laws talked about raising capital and financing your startup.  However, today’s topic is specifically about one of the written agreements that you may want to use.  It is a Promissory Note that uses the Balloon Payment method.

What is a Promissory Note?

Without getting too much in legalese (which I will save for another day) know that a promissory note is a type of negotiable instrument.  A negotiable instrument is a document that promises payment to a specific person.  If you don’t use Paypal or your banking debit card to pay off expenses, you are familiar with a more common negotiable instrument, a check.

For a document to be a promissory note it is dated and signed.  Further, it contains an unconditional promise by the payor to a payee on demand or at a specified future date.  What is a payor and payee?  Click here to find out for the legalese explanation.

For our purposes in this post, know that the payor is the person who is going to pay the payee the money owed.  Put another way, the payor is the person who asked for the loan and then will pay the payee, or the person who made the loan.

Why do I Need this Written Document?

For a promissory note to be valid, notice it has to be signed, thus you need it in writing.  Onto the practical matter, many times people switching out of their careers to pursuit their own business do not have enough cash for equipment or other upfront expensive items.  Therefore, they need a loan.

A bank might not give them credit and the startup owner may be an area that is not Silicon Valley or sufficiently networked to get an investor.  Therefore, they turn to Auntie or Tutu for money.  However, your family member (or friend) may be wary of you repaying the loan and wants to get in writing.  Ignoring the legal part, the effect of memorializing the loan in writing also gives you a metric to measure your business by . . . basically, if you are failing to meet monthly payments to your relative that might say something about your business.

What is a Balloon Payment?

A balloon payment is a way of structuring a loan so that the monthly payments are on the low end and toward the end term of the loan, the payor makes a one big lump-sum payment to pay off the remaining principal.

To understand this concept, let’s start off without the balloon payment.  Let’s say both parties agree that the full amount of the loan, plus interest, shall be paid off in four years.  However, the yearly rate of 8% interest would make it unfeasible for a business just starting to make monthly payments based on that rate scheduled at four years.

So with the balloon payment you reduce the yearly rate to 4% (which would be under a loan over an eight-period), which helps ease the monthly payments, BUT the payor still has to pay the remaining amount within 4 years, but the last payment has “ballooned” due to the reduced monthly payments.

Last Word: Drafting

While, it is possible to draft your own promissory note, and possibly in very causal relationships that might be ok there are other things to consider other than the amount, interest rate, and ending date that an attorney might be helpful for drafting. For example, the date of the installment payments, application of payments, accepting prepayment, loan acceleration, taking a security or collateral, and of course what happens if they fail to make payment.  In addition, you may want to talk to a tax expert because that also may shape the loan and repayment.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

 

What’s with All this Paperwork, Part VI: Authorization Forms

Today’s Draw the Law will be simple, as I am working to get my enewsletter out as well.  Interested in finding out what my practice is about or what else I am up to?  Send me a message and I will add you to the subscription list.  Even if you ever get tired of my newsletter you can always unsubscribe as the service I use is CAN-SPAM Act compliant.  Anyway, let’s get to it.
In last week’s post I discussed notice, minutes, and written consent.  This week I will talk about authorization forms.  This is another piece of paper you will find in a situation with multiple shareholders and officers.  Notice a trend about corporate formality and recordkeeping?

What is an Authorization Form?

This question and this post would be better put into context if I discuss today’s paper in the terms of an “Authorization of Treasurer to Open and Use Accounts” form, which might be called something else depending on who is doing the drafting, but for all effect it authorizes the person who is the treasurer to open bank accounts on behalf of the business as well as other types of financial accounts.

There is no single correct form as this all depends on what the agreement among the board was on what powers were granted in the treasurer.  The authorization can be as wide or as narrow as the corporate body wants to make it.   The point is remember long ago when I discussed agents acting on behalf of the principal.  In this case, the treasurer is an agent of the corporation, who is the principal.  We all know that corporation is a legal person, but as it is not living person it must act through its agents, namely the officers and directors.

Generally, most financial institutions dealing with your corporation’s treasurer will want to see an authorization form and to have it on record as does your corporation’s owners.  Why?  Accountability.  Typically, in these authorization forms some kind of power is being granted.  In the case of the treasurer, it tends to be able to not only open bank accounts, but to also use the money in them.  Therefore, take a look at today’s “Practical Last Word” for addressing this issue.

How Specific Can These Forms Be?

They can be very specific.  In many ways, you can consider them an instruction to how the officers, directors, employees, and other agents of the corporation are to behave. Once again using the issue of the treasurer and bank account.  Instead of a general authority to open and use banks may be you have it so that other officers, employees, and agents can endorse checks (and other instruments) for deposit purposes only.  However, when the corporation has to pay out may be the treasurer can sign out checks that under $5,000.00, but for anything over it requires both the president’s and the treasure’s signatures.  May be the account is a checking account, may be it is for petty cash.  Bottom line: choices need to be made about how you want your organization to look like and operate, but you also need to work with professionals, such as financiers, accountants, attorneys, bank employees to make sure that what you decide on the inside is matched by conduct with outside third parties.

Practical Last Word

In theory, a written agreement should give you a right of recovery against the bad treasurer who abuses their authority.  However, typically the bad treasurer has run off with your corporation’s funds and you cannot find them.  So once again, an attorney can draft safeguards and protocols into your bylaws, employee agreements, etc . . . but it is up to you to enforce them and to watch out who you partner with.  In addition, work with your fellow founders to create checks and balances on the authorities granted when divvying up duties.  Finally, you may want to ask yourself can you trust this person with the money?  If you find yourself trying to have your attorney draft as many safety measures of accounting for the money, multiple signatures needed, and that the treasurer is only allowed to open a bank account with a small amount of money do you really want to be working with that person?

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

 

What’s with All this Paperwork V: Corporate Records

In last week’s post I covered some unique features of an operating agreement.  This week, continuing on our tour of paperwork that startups and small business owners should be familiar with, we go back to corporate paperwork.  Today, I will talk about three general documents that you will repeatedly see running a corporation.  They are Notice, Minutes, and Consent documents.

The Purpose of Creating These Documents

Recall that bylaws are a series of rules that the owners of the corporation, the shareholders, agree to be bound to when running the corporation.  Among these various rules you will discover how meetings are to be announced, what can or cannot be done in a meeting, what constitutes quorum, and a variety of other matters that shareholders and directors must know being a part of the corporation.  For instance, recall that shareholders are not directors.  The shareholders select directors to run the company.  In this vein, the delegated powers between shareholders, directors, and officers may be different from corporation to corporation, and the only way you would know is by reading the bylaws.

Therefore, the bylaws become important for what is considered Notice for Shareholders’ Meetings and Directors’ Meetings.  Further, minutes are used to record the meetings.  Lastly, sometimes instead of holding meetings may be the group will decide to act through signed consent forms.

Sticking to the rules is important because if you remember way back when I started talking about limited liability these documents are a part of the separate entity feature that shows that the people running the corporation are separate from the entity.  The lack of good corporate records and following your bylaws could make the shareholders’ personal assets vulnerable to a creditor or subject to IRS challenges to the legitimacy of the corporation or transactions.

For brevity purposes I will mainly focus on corporate records from the viewpoint of shareholders, as typically in a small startup these shareholders are also the directors that run the company. Let me take each one in turn now.

Giving Notice

So bylaws, dictated by state law, will tell you how to give proper notice of a shareholders meeting.  Why is it important for you to do this correctly?  If proper notice isn’t given to a shareholder, that affected shareholder may have a claim and further the actions taken at the meeting may be null.  Meaning you will have to redo the meeting all over again to take the same action.  Many small corporations like to play politics when a fellow founder and shareholder is not living up expectations by not giving them notice.  This is a big mistake. Like it or not, as a shareholder they are entitled to proper notice of a meeting.

Further, notice that Notice means something particular in corporate law.  Generally, it is in writing, and can be delivered through a variety of means, and finally the manner of delivery will change the timing of effectiveness.

Minutes

At a shareholders meeting the minutes serve to memorialize the actions taken at the meeting. Usually, if there is a position of Secretary, it is their role to record what was said and decided upon so that it serves as a record.  What should be noted is what your bylaws say about quorum, if they default to what the law says, then a majority of shares is considered quorum.  This need not always be the case, but you want to be familiar with your own bylaws and especially quorum.  You may have given proper notice to all the shareholders, but due to unique bylaws the shareholders that show up may not be enough for quorum or to take action.  It all depends.

*This is not legal advice, just for practical purposes: For my minutes, for smaller corporations, I like to put the names of the shareholders at the top, how they appeared for the meeting (in-person, phone, or if you allow via internet), and sometimes their share amounts to see if you have quorum. The main thing is accurately recording what took place, which is why the minutes are usually never approved right then and there, as the secretary preps them for a following meeting for approval.  Once the minutes are approved they are kept with the other corporate records.

Written Consent

Sometimes, you don’t want to hold a meeting for everything.  Thus written consents step in to save your time.  This is especially important for startup corporations, where the founders cannot be burdened to call a meeting for every non-controversial issue to act.  Moreover, with the advent of Internet and tech companies, there may be shareholders in Hawaii, California, and Washington of a single company.  Therefore, it is best to act through written consent, especially when there is agreement among all the shareholders.

However, even if all the shareholders do agree, going back to what I mentioned earlier in this post, you still want to record your acts to be in corporate compliance.  Also they are great tools to deal with after the fact that you messed up on Notice, and did not have a proper annual meeting.  Having all the shareholders sign a consent form will serve to fill the gap of the messed meeting.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s with All this Paperwork? Part IV Operating Agreements

Pardon the gap in my weekly posts, but I was away and setting up my new office.  This week I will be picking up right where I left off as we survey the documents that a startup founder will likely see as they launch a new business entity.

Quick Recap

Last time, I left off with the corporate bylaws.  Recall that a corporation must have bylaws, which is one of the formalities that face a corporation.  Remember that a LLC is a much more flexible entity and need not have an operating agreement, but will default to the rules provided in the statute.  For more on the differences click here.

So Why Draft an Operating Agreement?

Though you technically don’t need an operating agreement there are two practical realities that you face, which is why should get them drafted anyway.  (1) most major banks and financial institutions, as well as any possible investors (though usually they prefer corporations) will want to see your operating agreement.  (2) If you have a multi-member LLC the default rules are just that, they are default, and they may not capture the business relationship you have among your co-founders.  Further, I have recently had several clients lament to me they wish they had taken advantage of the flexibility of a LLC for getting rid of a lazy partner, getting a better handling of the profit/losses and distributions for tax reasons, etc . . . .

Shameless Self-Promotion: Read My One-Sheet!

So I provide this handy-dandy one-sheet that provides a topical overview of the LLC’s operating agreement.  I urge you read it when you have time.  However, as I appreciate you reading this post, today, I would like to cover things not in that one-sheet.

What is NOT Flexible for Laws Governing Operating Agreements?

So, while many people extoll the virtues of the flexibility of the LLC many people do not know what are the default provisions that cannot be changed by the written agreement.  They are non-waivable provisions and I have run into instances that one or a couple members of a startup would like to oust a lazy member, or someone tries to pull a fast one by drafting the operating agreement this not allowable by law.  So I’d like to cover two areas that come up from to time to time.

(1) Access to Information

When you are a tiny company with 2 or 3 founders trying to navigate your way in a deluge of information, massive competitors, and high costs it is easy to get lost in doing what you have to do and one founder takes over recordkeeping, in some ways becoming the overprotective librarian that does not want to let the kids borrow the books from the library.  This is not possible in a LLC.  No member may unreasonably restrict a member’s right to information or access to the records relating to the LLC’s business or its affairs.   Further, the member or the member’s attorney has every right to access the records so that they may exercise the rights and know their duties under the operating agreement.  So they must have the opportunity to inspect and the ability to copy records during ordinary business hours.  However, for the expense and time the LLC may impose a reasonable charge for furnishing and making copies of the records.

(2) Expulsion of a Member

Similar to family attorneys who oversee a prenuptial agreement and then must face the unpleasantness of divorce, I as a transaction attorney face the same, I happily help founders start their business, but every then and now I face the disappointment that the business relationship does not work out.  Expulsion of a member is  not automatic.  Often times, the interested members of the business just stop talking or communicating with the one they are seeking to oust. Do NOT do that, the member, even if they are lazy or have not shown up for a month, is still a member and has rights.  However, they also have duties.   Thus, the nonwaivable rules provide that the LLC or its members have the right to seek a judicial order to expulse the member for the following reasons:

  1. wrongful conduct hat adversely and materially affect the company’s business;
  2. willfully or persistently committed a material breach of the operating agreement or of a duty owed to the company or the other members or under the applicable law; or
  3. engaged in conduct relating to the company’s business which makes it not reasonably practicable to carry on the business with the member.

Last Word: Records Access for Former Members

This two nonwaivable provisions, which I just wrote about invariably sometimes brings up the discussion of former members.  They were once members and having been expulsed they are trying to clean things on their own end for personal reasons.  The LLC cannot still limit access to the records after they are gone.  However, the former member only has the limited right to access the information to when they were a member of the LLC.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.


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FAQ: Should My Startup Issue Stock Certificates?

Sorry, no Draw the Law this week (or next week), as I am working on a something important.  I will announce what it is tomorrow.
As for today, this is a follow-up on a FAQ that a lot of founders and startup corporations ask me.  Should they issue stock certificates?

Is It Required by Law?

As I said last week, no. In Hawaii, a corporation, through its board of directors (under the authority of the articles of incorporation or bylaws) may issue shares without certificates.  In general, most, if not all jurisdictions, have done away with the requirement of a piece of paper signifying ownership in a corporation.

Even social media giant, Facebook, scrapped its plans earlier this year to issue paper stock certificate to its shareholders.  More and more companies are turning to electronic registration as a way to keep track of shares.

What about the Startups?

It’s true large, publicly traded corporations are moving away from the traditions of paper, but does that mean you should.  There are some attorneys who feel you should as it signifies ownership and allows a small group of founders to have a check on each other given the fluidic nature of startups.  Others embrace the digital and just say keep good electronic records and documentation.  Not to mention paper certificates are actually costly to print, which is an added cost your young corporation may not need.

For startups, the founding owners should discuss whether or not they want to issue paper certificates or not.  It really is a personal preference, as some people enjoy having the tangible proof of ownership and nostalgia of the paper.  In fact, Scripophily.com buys an sells original paper stocks for people interested in collecting.  Still others prefer the cheaper method, and just keep an electronic spreadsheet to keep track and just send updates.

If My Startup Decides to Issue Stock Certificates What Does it Require?

Hawaii Revised Statute §414-86 states the following required items to be on a stock certificate if you choose to issue them:

 (b)  At a minimum each share certificate must state on its face:

(1)  The name of the issuing corporation and that it is organized under the law of this State;

(2)  The name of the person to whom issued; and

(3)  The number and class of shares and the designation of the series, if any, the certificate represents.

(c)  If the issuing corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine variations for future series) must be summarized on the front or back of each certificate.  Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge.

(d)  Each share certificate:

(1)  Must be signed (either manually or in facsimile) by two officers designated in the bylaws or by the board of directors; and

(2)  May bear the corporate seal or its facsimile.

Last Word

Personally, on a practical level, I do not think you need them, but that isn’t a legal opinion.  It just has to do with startup expenses and printing out specialized paper may not be necessary and would only drive up your costs at the beginning when you need to focus on your business model.  However, in some cases it may be warranted, but everyone’s situation is different.  Therefore, consider speaking to an attorney to provide advice and their thoughts given your situation on this matter and all that other paperwork that you need!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.