Charlotte, NC Small Business, Workers' Compensation and Estate Planning Attorney

What Comes Next: Succession Planning for Family-Owned Businesses

2/25/2014

Let’s suppose you’ve built a thriving and successful family-owned business. And perhaps you have passing thoughts about retiring someday. What happens when you leave? Who takes over management? Who will own the company?

This is a complex issue. The right people to run the company when the present ownership retires might be the adult children of the owners. Or, some of them may not have the right skills or the interest in the company. Maybe the right person to take over as president of the company is a key employee who isn’t a relative. Or, perhaps another company or set of investors might find value in purchasing your company.

We could list an endless list of scenarios. However, the big question remains, what comes next? The vast majority of family-owned businesses don’t last to the second generation, much less the third generation. Even in the best businesses, making the right transition requires serious conversations and hard questions.

A strong team of advisors is crucial to making this transition. A business attorney can help make sure the company’s records are in good order so that even an unexpected purchase offer can be readily considered. Your company’s CPA can help ensure proper financial records are kept. If the company is large enough, having an experienced CFO will help put the financial house in order, or engaging a fractional CFO on an ongoing basis can provide the same value. Investment bankers and business brokers can also be part of the answer.

Getting a company ready to sell an be a lengthy process. There are sure to be both personal and financial considerations. Today is a good time to start having these conversations.

Below is a link to a very useful article with some great questions built around a real-life situation. It’s worth your time to read:

http://finance-commerce.com/2014/02/how-to-the-delicate-business-of-succession-planning/?utm_content=buffercbbab&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

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What Do Business Owners Need to Know about Snow?

2/11/2014

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For children, snow is a lot of fun, and it can be a great time for parents too as we join them in the fun. But, if you have to go out in the snow and ice, or if you run a business where customers and other people show up during the winter wonderland, you may worry about falls and injuries. Plus, there is the additional worry as a business owner about lawsuits that may arise when someone slips and falls.

Businesses are not required to make their stores or other facilities perfectly safe. Under North Carolina law, they must take what the courts refer to as reasonable step.

What does that look like in practical terms with snow and ice?

First, if it is likely someone might not notice or understand the danger, the business needs to either remove the danger, or put up a warning to keep the public safe. Thus, it is common in supermarkets and restaurants for the staff to put up orange cones to warn about spills, even when they’ve already mopped up.

Second, if a hazard is obvious, an adult is responsible to notice the hazard and choose to avoid it or take their chances. That seems like a fair rule, but most businesses will go a bit further and put up a warning or barricade, or try to remove the hazard if possible. Children are often not assumed to have the same ability to protect themselves as an adult, particularly in the pre-teen years, so extra precautions may be necessary.

So, how can business owners protect themselves from claims of injuries on their premises due to snow and ice? They can plan in advance, trying to identify likely hidden hazards before the storm hits. Then, when the time comes they can execute their plan.

A dose of common sense combined with your company’s lawyer helping you understand your company’s legal duty is time and money well invested. Litigation is costly and lengthy, with an uncertain outcome. Not to mention that we would all like to see people avoid injury.

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Can My Company’s Board of Directors Sell Off All The Company’s Assets?

2/10/2014

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In a corporation, there is a division of power between the owners (shareholders) and the group of people who the shareholders authorize to run the company day-to-day and to set policy (board of directors or BOD).

One big question is, what are the limits of the power of the Board of Directors?

For example, does the BOD need approval from the corporation’s shareholders before selling, leasing, or otherwise disposing of company assets? This matters a good deal, because the shareholders, as investors, typically want to see their corporation follow the basic business plan which formed the basis of their decision to invest.

Thus, if the company’s business plan did not involve selling off or leasing out most or all of its assets, the shareholders would be understandably displeased if that was what the BOD did or wanted to do.

Until recently, the North Carolina Business Corporations Act was pretty fuzzy on this big point.

Until January 1, 2014, the law was that the BOD had to get shareholder approval to sell, lease, or otherwise dispose of “substantially all” of the corporation’s assets. But, there was no guidance in the statute on exactly what that key phrase meant.

One of the good points in the recent changes to NC’s Business Corporations Act is that shareholder approval is now specifically required when the BOD wants to sell, lease, or exchange the Corporation’s property to such a degree that its assets will drop to below 25% of the prior level.

What is that statute does not fit with what the shareholders want?

Suppose the shareholders want to set some other limit or structure the BOD’s power in some different way?

There is a good answer – the new statute specifically states that Articles of Incorporation or By Laws of the Corporation can spell out some different agreement.

This option provides a good example of the importance of good, personalized corporate bylaws and shareholder agreements.

Having frank discussions up front allows all shareholders to consider what they would want, and negotiate a deal that everyone can accept.

It’s much more expensive to fight a lengthy and complex lawsuit over such issues than to have these discussions with all shareholders and the company’s attorney today.

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How Asking For Too Much In a Non-Competition Agreement Gets The Employer Nothing In Court

2/5/2014

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Many companies fear the economic damage that can occur when a key employee starts their own competing company or takes a job with a competitor. Lost clients, departing customers, and reduced profitability are foreseen. They may want a non-compete agreement but may fail to meet the legal requirements to have an enforceable agreement.

One way employers create problems for themselves is asking the employee to give up too much. That is basically what happened in a new North Carolina Court of Appeals case, Copypro, Inc. v. Musgrove.  Copypro spent a lot more money fighting this losing lawsuit than they ever would have getting a clear, enforceable contract that would have protected them against any potential harm when their salesperson, Joseph Musgrove left the company.

The Basic Facts

Copypro is in the office equipment business. They sell and maintain office equipment, but over 90 percent of their revenue is from three to five year leases on office equipment from their eastern North Carolina customer base.

Near the end of 2009, Mr. Musgrove joined the company as a salesperson. He was assigned to Pender and Onslow counties, where Musgrove carried out over 95 percent of his job duties. He did a few deals for friends in other counties which were also included among a laundry list of eastern North Carolina counties where Mr. Musgrove’s non-competition agreement said he could not work for three years after leaving
Copypro for any competing company.

In August 2012, Musgrove took a new job with a competitor after being told his old sales territory with Copypro would no longer be exclusive. The new employer, Coastal Document Systems, is one of Copypro’s competitors but operates solely in Brunswick, Columbus, and New Hanover counties. By way of reference, Wilmington is located in New Hanover County.

Copypro learned Mr. Musgrove had put in a competing bid on an order. Immediately, they filed a lawsuit claiming Musgrove was violating their non-competition agreement. As is typical is a non-compete case, Copypro asked the judge for what is called a “preliminary injunction,” a court order requiring Mr. Musgrove to stop the actions leading to the lawsuit until the lawsuit was over. No work, no pay. That's a big problem for the employee. The opposite result would have been a big financial hit for the employer.

The local judge decided that Copypro would likely win the lawsuit when the evidence was heard. Thus, the preliminary injunction was granted and Mr. Musgrove was ordered to stop selling for Costal Documents Center. In practical terms, he was out of a job in his chosen field.

The Course of The Appeal

The North Carolina Court of Appeals agreed to decide Mr. Musgrove’s appeal before the case was fully decided on the merits. In most instances, that would not have been the case. The Court of Appeals stated that “[a] preliminary injunction is interlocutory in nature,” which means that an order issuing a preliminary
injunction “cannot be appealed prior to [a] final judgment absent a showing that the appellant has been deprived of a substantial right which will be lost should the order escape appellate review before final judgment.” Clark v, Craven Regional Medical Authority, 326 N.C. 15, 23, 387 S.E.2d 168, 173 (1990).”

However, the Court stated that “when the entry of an order granting a request for the issuance of a preliminary injunction has the effect of destroying a party’s livelihood, the order in question affects a
substantial right and is, for that reason, subject to immediate appellate review. See Precision
Walls, Inc. v. Servie, 152 N.C. App. 630, 635, 568 S.E.2d 267, 271(2002).

In other words, not being able to work for any competitor of his old company for three years in 33 counties was too much of a burden to ask Mr. Musgrove to carry until the full trial was over.

Here, a 3 year non-compete was deemed by North Carolina Court of Appeals to qualify.

What The NC Court of Appeals Decided

First, we need to know the basic rule on when an employment non-competition agreement can be enforced.

The agreement must be (1) in writing; (2) cover only a reasonable amount of time and territory; (3) be part of an employment contract; (4) provide reasonable consideration to the employee for accepting its terms; and (5) protect the employer’s legitimate business interest. Where any one of these criteria are not met, the court should throw out the agreement

In Copypro v. Musgrove, the NC Court of Appeals concluded that the non-competition agreement kept the former salesperson from too many types of jobs with Copypro's competitors to be enforceable.  The problem was that Mr. Musgrove was not simply prevented from being involved in sales. He was not eligible to drive a truck or sweep the floor for a Copypro competitor in their full 33 county footprint.

Thus, the Court of Appeals held that there was not “ample comptent evidence to support the decision. Wrightsville Winds Townhouse Homeowners’ Ass’n v.Miller, 100 N.C. App. 531, 535, 397 S.E.2d 345, 346 (1990)" and reversed the trial court and thus denied the company the requested preliminary injunction.

How Did Copypro Asking For Too Much Lead Directly To Them Getting Nothing?

In practical terms, that's probably going to be the end of the story. Fighting through a full trial usually chews the timeframe covered by a non-compete agreement.

The Court of Appeals ruled that Mr. Musgrove should not have been barred for all work with competing companies. Otherwise, the agreement would have likely been enforceable.

Here is a good example of where working carefully with a good business or employment lawyer would have been beneficial. When an attorney understands the client’s business, their business needs, and concerns around the particular type of job an employee carries out, the attorney can create a non-competition agreement that would be rock solid.

Instead, a careful lawyer for Mr. Musgrove took a close look after Copypro had rushed to court, and took the company to task. Copypro may have spent a lot of money on trial and the appeal, but you can be sure that a good contract that would have been enforceable would have been a lot cheaper.

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What Comes Next: Succession Planning for Family-Owned Businesses

What Do Business Owners Need to Know about Snow?

Can My Company’s Board of Directors Sell Off All The Company’s Assets?

How Asking For Too Much In a Non-Competition Agreement Gets The Employer Nothing In Court

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