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Episode I: You May Dispense with the Pleasantries, Not the Formalities . . . Don’t Forget to Sign!

*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.

So I am going start this post with one of my favorite movie villain’s quote: “You may dispense with the pleasantries, Commander. I am here to put you back on schedule.”

Except instead of building a space station, I am here to help you build your business by recognizing that while you can skip the pleasantries in business, you should NOT ignore the legal formalities.  I realize some of you business owners find your attorney, CPA, compliance officer, and the like as pains in the butt by sometimes being overly cautious, but please understand that these advisors suggest caution because they see how bad it can get when you don’t follow their advice.  So this post and several that will follow shall focus on legal formalities that I have seen business owners fail to follow.  By failing to observing these simple formalities these owners spent great time and expense trying to fix them, and some of them are unfixable.

Sign Your Papers

So today’s post what am I talking about?  Well, for this post I am talking about something so basic.  Namely, don’t forget to sign your agreements.   Before you laugh, consider how many times some asks you to do something so simple, you procrastinate on it to the last minute because you think it is so simple take care of later.  Consider in that in today’s technological world it is easy to text, email, etc . . . so some people feel, why bother signing a piece of paper?  Let me share a story that I see constantly among current and past clients: the unsigned Operating Agreement/Bylaws/Partnership Agreement.

I have had clients who have gotten into disputes with their business partners.  It might be suspicions, poor communications, changed expectations, but in general the relationship is deteriorating and these former allies, now want the other side out of the business or they want their share bought out.

So by the time the distressed business partner comes to me I will ask, “Where is your Operating Agreement?” I will be using a LLC as an example, but this applies to corporations, partnerships, and in general many relationships.  They usually have an Operating Agreement and aside from the host of other problems, such as lack of adequate protection, incorrect names or usage of terms, etc . . . I get to the end of the document and find it is unsigned.

What’s an Operating Agreement?

Before I continue, let me explain something about an Operating Agreement. This document acts as internal document that sets up the rules and procedures among the members (the owners) of a LLC, and may dictate how one becomes a member, sells their ownership interest, and handles voting, profit-sharing, etc . . . Suffice it to say, you should have an Operating Agreement if you have a LLC, regardless if it is member-managed or manager-managed.  It gives you the rules of interaction.  I have even seen problems where clients did not even bother having an Operating Agreement drafted, which is just worst than not even having one unsigned.

The Problem with Unexecuted Paperwork

Anyway, when your Operating Agreement remains unexecuted (unsigned) or any paperwork for that matter, it would indicate to an attorney that the parties had no intent to be bound by the document.  After all, “why didn’t you sign it?” is the question that comes to mind.

Unsigned documents are just paper with pretty words.  In the law we expect you to take an active act to be bound by those pretty words, and that active act is signing the documents.  The signature serves as evidence.  Consider for a moment that is why even in our electronic world, we make you go through hoops to “click”, “check the box”, or “electronically sign”, basically showing that you “read” the terms and by your action you agree to be bound to them.

So getting back to this situation where the parties have a dispute, but have unsigned paperwork the question remains what were the terms of the contract.  It is true in a lawsuit you can prove there was intent to be bound under the agreement by showing that the parties took active steps to be bound by the unsigned document.

However, don’t you think it is easier just to produce a signed document as evidence rather than cobbling together various pieces of evidence to demonstrate that the parties meant to sign it?

With an unsigned Operating Agreement, you may find yourself stuck with the default rules at law to guide your dispute with regard to fellow members in a LLC.  The defaults rule set at law are very broad and offer very little help in resolving a dispute among members.  So if you are going to take time to prepare a proper Operating Agreement that covers all your bases in a LLC relationship, don’t forget to get it signed by your business partners and sign it yourself, that way at least you know what to look at for guidance when problems start.

Stop back and I will talk about some of the problems you may face forgetting to do your Annual Filings or missing a renewal date!  Mahalo for reading!

Did you Preorder an iPhone 6? Did you Review your Wireless Agreement? (Don’t worry, I know the answer.)

iphone6

So were you one of the lucky ones this morning?  Were you able to pre-order yourself an iPhone 6 or an iPhone 6+?  I was successful in getting an iPhone 6, a gold one with 128 GB if you are interested.  However, I was also able to get a copy of my Wireless Customer Agreement with AT&T, which I find interesting.  Usually, when I make large purchases online, I like to copy and paste the agreements in an MS Word document so that I can analyze them and truth be told consider utilizing their language in my agreements.  Attorneys are always looking for drafting language, copying and pasting speeds up the process for clients, but also for the attorney; it allows us to see how other agreements try to encompass a transaction and reduce it to writing (at least for a business attorney).  Further, when we are developing a new transaction for a client, it helps to see what is out there already in the marketplace. Do we have something novel or is someone else already doing it that way?

Anyway, this post is not about analyzing attorneys, but rather I thought it would be interesting to see how a giant wireless company drafts its agreement and what you are agreeing to, as I find for smaller businesses they are always curious what the “big boys” do for their agreements. Also as I stated, transactional attorneys will use drafting language from another company’s agreement if their client is doing the same or similar, then modify to the client’s needs (not to mention in B2C agreement, if the customer already understands a competitor’s agreement it makes it easier for them to understand if the language is the same).  My last rationale is that in our TL;DR social media culture, I thought I would highlight some provisions I thought were interesting if you were just curious as a fellow user of wireless services.

So here is the pdf version of the Wireless Customer Agreement that popped up on my screen that AT&T made me agree to get my iPhone 6 on preorder so that you can follow along.

I. 2nd Paragraph = Please Read – Are we Tracking You? And You are Agreeing to Arbitration.

Right off the bat, in the second paragraph, in big, bold letters, AT&T’s agreement states:

PLEASE READ THIS AGREEMENT CAREFULLY TO ENSURE THAT YOU UNDERSTAND EACH PROVISION, INCLUDING OUR USE OF YOUR LOCATION INFORMATION (SEE SECTION 3.6). THIS AGREEMENT REQUIRES THE USE OF ARBITRATION ON AN INDIVIDUAL BASIS TO RESOLVE DISPUTES, RATHER THAN JURY TRIALS OR CLASS ACTIONS, AND ALSO LIMITS THE REMEDIES AVAILABLE TO YOU IN THE EVENT OF A DISPUTE.

A. Privacy Issue

So what’s all of that mean? Well, if we go down to Section 3.6, we soon discover that this all about how they handle information that they receive from your “Device” (your phone). One of the relevant parts states the following:

We use that information, as well as other usage and performance information also obtained from our network and your Device, to provide you with wireless voice and data services, and to maintain and improve our network and the quality of your wireless experience. We may also use location information to create aggregate data from which your personally identifiable information has been removed or obscured. Such aggregate data may be used for a variety of purposes such as scientific and marketing research and services such as vehicle traffic volume monitoring. It is your responsibility to notify users on your account that we may collect and use location information from Devices.

Interestingly, the language here tracks with many privacy policies that other companies use and they’ve incorporated it into the agreement.  Additionally, AT&T recommends you see its privacy policy on its website by stating:

Please review the terms and conditions and the associated privacy policy for each Location- Based Service to learn how the location information will be used and protected. For more information on Location-Based Services, please visit att.com/privacy. 

I’ve discussed the differences between a contract and a policy in a Slideshare presentation before if you are curious.  In this case, some of the policies are firmly settled into and a part of the agreement; this is always a decision to ponder when drafting of whether or not to incorporate policies into an agreement, thereby making them a part of the contract.

B. Arbitration

So here is one fun part (well, at least to me), throughout this agreement AT&T strives to make it clear through all capitalization or bolding of letters that you agree to binding arbitration. “What’s ‘arbitration,’ Precious?!?” (Pardon, the dorky humor.)

Well, AT&T tells you what it is exactly in Section 2.1 of the agreement.  Arbitration is NOT court; it is a form of “alternative dispute resolution.”  It is less formal than a court proceeding and tends to be faster in reaching a resolution in a dispute than going to court. With that being said, generally speaking, many feel that arbitration tends to be favorable to the business and anti-consumer.  I’m not here to judge whether or not that is true, but what is clear is that AT&T has its consumer’s waive the ability to go to court (other than small claims) and has also barred class arbitration and class actions.  “Class” actions or arbitrations are where a large number of people who have suffered that same injury from the same person (a business entity is a legal person) band together to pursue a claim.  This type of provision is also seen as anti-consumer by consumer advocates.  For my part and this post, I’m just going to address the question: can they do that?

Yes, the Supreme Court of the United States (SCOTUS) has made clear in recent rulings the applicability of the Federal Arbitration Act to these types of agreements. So if you have a dispute with AT&T beyond small claims court limitations, you are going to have to arbitrate: there is not another option.

It is worth noting here AT&T had a case before SCOTUS on this matter in AT&T Mobility v. Concepcion, 563 U.S. 321 (2011).  Basically, SCOTUS ruled that the FAA preempted state laws (in this case California’s law) that prohibit contracts from disallowing class-wide arbitration, thus allowing businesses to include arbitration agreements eliminating a consumer’s ability to bring a class action suit. So it should come as no surprise with a SCOTUS victory, they are going to include this in their agreements.

II. Section 6.0: Data – Why all the CAPITALIZATION and Bolding?!

So another area that caught my eye, and probably purposefully so by the drafter of this document is Section 6.0.  Why did it catch my eye?  When scrolling down the text one cannot, but help notice the large amounts of bolding and capitalization in Section 6.0.  And of course they are going to do that, it has to deal with one of the biggest contentious areas that people have with their wireless carriers, the data usage plan.

A. 6.1: Overage Charges; No Rollover; and Terminate with or without Cause

So this isn’t exactly news, as many of you already understand this, but I thought I would pull out the line in the agreement that states it for you:

On Data Services with a monthly megabyte (MB) or gigabyte (GB) data allowance, once you exceed your monthly data allowance you will be automatically charged for overage as specified in the applicable rate plan. All data allowances, including overages, must be used in the billing period in which the allowance is provided. Unused data allowances will not roll over to subsequent billing periods.

You will be charged for overages if you are on a rate plan where that is possible, so those of you grandfathered in will probably cling to your rate plans that have no overage charges till you become a grandfather.  Also, no rolling over unused data into another billing period.

Then we have this sentence at the end of Section 6.1:

AT&T RESERVES THE RIGHT TO TERMINATE YOUR DATA SERVICES WITH OR WITHOUT CAUSE, INCLUDING WITHOUT LIMITATION, UPON EXPIRATION OR TERMINATION OF YOUR WIRELESS CUSTOMER AGREEMENT.

Basically, AT&T may terminate your data services, and they do not need a reason to once your wireless customer agreement ends whether it expires or terminates. 

B. Section 6.2: Don’t Do this Stuff as It’s Not the Point of the Wireless Data Service (i.e. Prohibited Uses)

Ok, I am not quoting Section 6.2 (as the relevant part I want to discuss is long), and you are probably getting tired reading this post as it is long, but for those of you have stuck it through all this, much appreciated.

Anyway, for this wall of bolded text, basically, it is AT&T’s intent to prohibit certain behaviors as those uses are probably illegal, harms AT&T’s infrastructure, damages AT&T’s ability to profit, or exposes them to some other liability.  It’s pretty detailed and lists a lot of examples. Also, they save themselves on making sure you understand that the list of examples are not the only ones of Prohibited Use by stating that their listing is “without limitation.”  Of course, if AT&T “believes” you are using their Service in one of these prohibited manners, it may terminate the agreement.

III. Section 10.0: Doing Business in Multiple Jurisdictions.

So I am going to round out this post at the end of AT&T’s Wireless Customer Agreement (seems to be a good place as any to stop), as I tend to do this blog for business owners (small and large), and Section 10 to me highlights what businesses face when they operate in multiple jurisdictions.

Most businesses start off in one state, and then as they become more successful they grow, and that growth is sometimes beyond the state they started in.  Depending on the situation, sometimes you can avail yourself of your home state’s laws and other times when you do business in another state you are bound to follow their laws.  For large businesses, like AT&T they have a myriad of laws that they must follow at the federal level, but individually as to all the states that they have customers in.  Sometimes those state laws force a company to stipulate to things in their agreements, in particular when it is with consumers, due to some states passing consumer protection laws.  Here, in AT&T’s Section 10.0 we see that California, Connecticut, and Puerto Rico (which is not a state, but I’ve been using “state” here for my own convenience) have special provisions.

Therefore, this brings me to a point for all you businesses that have operations in multiple states. While for the sake of ease, and that variations in your operations and systems cost time and money, it is sometimes inescapable due to a state’s laws that your agreements will be regulated.  So you should consider, especially when it comes to your consumer agreements, knowing what the consumer protection laws are if you intend to a comprehensive catchall agreement as AT&T has done here.

Anyway, I think this makes up for my lack of posts for several months.  I will strive to be less wall-of-text on you readers next time and spruce up the next post with pictures, possibly my doodles for a Draw that Law when I get back to it.  As always, mahalo for reading.

-RKH 

BOILERPLATE BLURB: ENTIRE AGREEMENT; INTEGRATION; MERGER.

*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 is the Entire Agreement (aka Integration aka Merger) Clause?

The entire agreement or integration clause basically states that anything not in or a part of the written agreement, is not a part of the agreement.  It is premised upon the parol evidence rule, which is a rule that prevents a party to a written contract from presenting outside evidence that contradicts or adds to the written terms in the agreement.  Basically, you can’t say the final agreement is wrong because you had discussed something different in letters, conversations, or side agreements prior to the final agreement.

Why do we have it?

At a certain point, you either have a deal or not, and while some people prefer handshakes, their attorneys feel that having something in writing is better.  Now, imagine, if we allowed parties that were in dispute of a contract continually bring in evidence that undermined the final written agreement.  It would kind of make settling on the terms of the agreement pointless, wouldn’t it?  So, we limit the understanding of the agreement to what is reduced to writing, bolstered by this clause.

Generic Example

This Agreement sets forth the entire agreement of the parties and supersedes all prior or contemporaneous writings, negotiations, and discussions with respect to the subject matter hereof.  Neither party has relied upon any such prior or contempraneous communications.

Example of a an Entire Agreement Clause in a Consultant Agreement

This Agreement represents the entire understanding between the parties with respect to the subject matter contained in it and supersedes all other written or oral agreements made by or on behalf of Consultant or Client.

Example of Integration Clause in an Employee Agreement

This agreement constitutes the entire agreement of the parties relating to the subject matter of this agreement and supersedes all other oral or written agreements or policies relating thereto, except that this agreement does not supersede or limit the Employee’s rights under any benefit plan.

What about changing the terms of the Agreement?

Well, that’s what the Amendment clause is for, and that is for another post!

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Social Media & the Law Update 09-18-13: Upcoming PNM Class, FB ‘Like’ Constitutionally Protected

FB 'Like' Constitutionally Protected

LEGAL DISCLAIMER: The following information is provided to be just general information, and therefore, 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.
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Exciting news everyone!  My Pacific New Media (PNM) class on Social Media and the Law is next week!  So there is still plenty of time to sign-up.  Here is the general info:

Sep 25, 2013 • Wed • 7:00-9:00pm • 1 mtg • UHM Krauss 012 • $50 (SMCHI $45)

What will I be covering?  Well, as it is a general survey class, I will touching upon areas where the law has inserted itself in the social media sphere, such as today’s more exciting news.

4th Circuit Court of Appeals Rules the “Liking” on Facebook is Constitutionally Protected

For instance, like how a Facebook ‘Like” is protected by the 1st Amendment of the U.S. Constitution (i.e. it is a freedom of speech).  Today, the 4th Circuit Court of Appeals issued a ruling in favor of a former deputy sheriff who had been fired from his job due to “liking” the Facebook page of the man running in opposition to his boss.  Basically, the court felt that by “Liking” a campaign page, it was the “Internet equivalent of displaying a political sign in one’s front yard, which the Supreme Court has held is substantive speech.”  Further, the court, in its unanimous ruling, as to this Facebook issue, stated that, “On the most basic level, clicking on the ‘like’ button literally causes to be published the statement that the User ‘likes’ something, which is itself a substantive statement[.]”

To read the complete ruling, check it out here.

Other Topics at my Class

As stated in my post on Trademark Usage, I attended the ABA’s Annual Conference, so I sat in on a seminar on “Social Media Terms of Use: Case Law Round Up”.  Many of the issues discussed at that seminar are ones I will be focusing on for my PNM class, such as various social media platforms’ terms of use, policies, etc . . . . I have a Slideshare that covers basics on the differences between Policies and Contracts.   What many users fail to realize that Terms of Use are generally binding and enforceable contracts, but that a Privacy Policy tends to be just a company’s call toward a prescribed action.  This is something that social media marketers, consultants, small business owners, and those who use social media as one of their primary marketing tools should consider.  Finally, if you are a responsible decision maker for your organization/business, you really consider having internal dialogue on handling social media in general (whether it be employees, PR, marketing, etc . . .).

Anyway, that is just a sliver of one of the many topics to be covered in my class.  So if you are interested in signing up click here.

Mahalo!

-RKH

Boilerplate Blurb: Assignment.

Assignment Clauses

Generally, in contract law land contracts are freely assignable (meaning they can be transferred).  However, if an agreement possess a restrictive or anti-assignment clause it will prevent this transferring of the agreement.

Thus (anti)-assignment clauses determines whether rights, obligations and duties under an agreement may be transferred in whole in or part to another, and under what conditions. Under U.S. law, contractual rights are freely assignable or delegable, unless prescribed or limited by agreement.

The clause frequently overlaps with “successors and assign” or “parties in interest” clauses that controls whether successors or assignees can assume the rights and obligations under the contract.  Some of the frequently asked questions you should ask yourself about the deal you are doing in regards to the opposite party are the following:

  • Do you want the the ability to delegate tasks in the agreement?
  • Do you want the ability to assign something of value stemming from the contract, such as revenue?
  • Do you want the ability to assign all rights under the agreement to another company that may acquire your business? (remember assignability makes it easier to transfer, thus giving you more options, meaning more value)
  • Do you want to give the other party the ability to assign the agreement? Do you want them to always be responsible to you, even if the agreement is assigned (do you want them to remain on the “hook”)?
  • Do you want the party to specifically do the work or can they use sub-contractors?

Some examples:

Here is a simple assignment clause that makes it so that Person X, must get the written consent from Party A to assign the rights or obligations of the agreement.  It may show up in an independent contractor agreement where Person X is providing services to Company A:

This agreement or any of the rights or obligations thereunder shall not be assigned in whole or in part by Person X without the prior written consent of the Company A.

Here is an example of a clause that restricts the licensee (person receiving the license) to that one license, and they will not be do transfer it to anyone else without the permission of the licensor.  This is typically a clause used in intellectual property or grants of the right to use something, so consider software, logos, grants of access to things, etc . . . . It is in this way a licensor can make “more” single-holder licenses by restricting transfer, and forcing those that want the item in question by entering licensing agreements.

The right of Licensee to hold and use the property of Licensor pursuant to this Agreement is restricted solely to Licensee and shall not be assigned, transferred, sublicensed, encumbered, or subject to any security interest without the written authorization of Licensor. Any attempted assignment will be void and of no effect.

*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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Boilerplate Blurb: Severability.

Well, it’s been a while for a Boilerplate Blurb, but here is one that cuts to the chase (pun intended). The severability (aka savings) clause is used to keep a contract and its various provisions intact if parts of it are deemed illegal or unenforceable in a court.  Why? With written agreements being so long today, and business deals operating as ongoing transactions it is clear that sometimes something once was legal when first drafted may become illegal or unenforceable as time goes on.  However, is that one reason to throw out the whole contract?  Probably not.  Therefore, a severability clause will be used to save parts of the agreement even if other provisions are rendered inoperable, and they read something like this:

If any provision of this Agreement is declared invalid by a court of proper jurisdiction, the provision is affected only to the extent of the invalidity, so that the remainder of that provision and all remaining provisions of this Agreement will continue in full force and effect.

However, sometimes some parts of a contract are so essential the purpose of the contract that if they are voided the severability clause states that the whole contract should be voided.  Finally, it should be noted in many legal jurisdictions, such a clause shall not be applied if it fundamentally alters the contract.

Since it is legislative season here in Hawaii, you should also know that when drafting legislation we attorneys like to use a severability clauses to save laws should the be deemed unconstitutional. This represents another facet of the interplay between the judicial and legislative branches.

*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, 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? 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.


What’s with all this Paperwork? Part III Corporate Bylaws

Last week’s post was about the differences between the internal documents of bylaws and operating agreements, and what their purpose is as opposed to the Articles documents.  This week and next, I will take a closer look at the in-depth documents, bylaws and operating agreements, separately and mention a couple things that startups and small businesses should know about bylaws.

Adopting Bylaws are Required along with Certain Provisions

Recall last week that I mentioned as opposed to a LLC’s operating agreement, that a corporation’s incorporators or board of directors MUST adopt initial bylaws for the corporation.  However, what is also required are certain provisions that control how shareholders and directors behave with regard to the corporation.  Further, there are provisions that the owners of the company may consider.

*The Difference Between “May” and “Shall”

I don’t normally give grammar lessons on my blog, but when it comes to business law, especially corporate documents, many people get bored, confused, (sometimes angry), at the tedium of the words we use.  Thus the need for clarity in the matter.

Without getting into the mechanical linguistics of it all, when “shall” is used it is something that you MUST do, whereas “may” gives you the option of doing the act.  I am going to use an example when it comes to Annual Meetings.

You Must Have Annual Meetings, but You May or May Not State the Place of the Meetings

What does that mean?  Let me show you the relevant statute and break it down:

(a)  A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws.

(b)  Annual shareholders’ meetings may be held in or out of this State at the place stated in or fixed in accordance with the bylaws.  If no place is stated in or fixed in accordance with the bylaws, annual meetings shall be held at the corporation’s principal office.  Notwithstanding the foregoing, the bylaws may authorize the board of directors, in its sole discretion, to determine that the annual meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized under subsection (c).

So notice in section (a) it states that a corporation shall hold a meeting of shareholders each yeah and that the bylaws shall state that time.   However, notice in section (b) it states that these shareholders’ annual meetings may be in Hawaii or not, and that the bylaws may state this place. However, if you do not state a place it shall be the corporation’s principal office.

Please note that is just part of the “Meetings” statute as it is to the Hawaii Business Corporation Act.   What you should take away from it is that there are some provisions required in bylaws and there are others that you have flexibility with.

Why is this Relevant for People Starting a Business?

Yes, paperwork is tedious, but it also creates accountability and a method of controlling your business.  More often than not with a start-up there is the idea person, the money person, and the person who can engineer/produce/implement the idea.  With three people involved there has to be a way to control how the interact.  Further, once the business develops, the goal may be to seek more investment, and thus new additional owners of the corporation (shareholders) join the entity.  Thus the need for bylaws to dictate how this all operates.

Some Other Typical Provisions that Appear in the Bylaws

These other provisions are in no particular order, and some may or may not appear in the bylaws.  Further some of them may be required, and others just appear as it is customary.  The point for a business owner using a corporation should know that some of these things appear in your bylaws, the way you govern your business.

Sample Subjects of Bylaw Provisions:

  1. Special Meetings (as opposed to the Annual Meetings)
  2. Required Officers, Duties of Officers
  3. Record Date (this refers to what date a record reflects what shareholders are entitled to notice of a shareholders’ meeting)
  4. Number if Directors, Director qualifications and Duties
  5. Notice (how notice is given for certain circumstances)
  6. Stock Certificate Signatures
  7. Restriction on Transfer of Stock
  8. Shareholder Agreements

There are other provisions that more often than not appear in bylaws, but this is just meant as a sample.  Finally, please take heed you should consider seeking an expert’s help when drafting your bylaws, as this is a foundational document of your corporation.  I have seen many founders wanting to start fast and adopting poor or wrong bylaws, and then requiring “cleanup” work, which is often more costly and time-consuming after the fact of initial adoption.

*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.