Winter 2008 Edition

DO-IT-YOURSELF LEGAL TRAPS

By M. Blen Gee, Jr.

There is a very old saying that a person who represents himself in legal matters has a fool for a client. While this rule is not universally true, do-it-yourselfers can cause serious problems for themselves when they try to practice law. Here are a few of the more risky areas:

• Wills - Never do your own will. The rules concerning wills are way too complicated and the consequences of making mistakes are way too serious. (By the way, dying without a will can be just as bad.) Do not try to do an amendment (codicil) to your will without a lawyer for the same reasons.
• Commercial leases - Commercial leases are typically extremely one-sided in favor of the landlord and there are many potential traps. Recent case law in North Carolina has upheld some very onerous terms. You need a lawyer to at least point out the major pitfalls in the lease.
• Franchise agreements - The trend nationwide is for franchise agreements to be extremely one-sided and overreaching. The courts tend to enforce them as written and typically a trial or arbitration is in some other state. You should not sign a franchise agreement without having it reviewed by a competent attorney familiar with franchise law.
• Court - Don't go there alone. In North Carolina, corporations, limited liability companies and similar business entities are required to be represented by a licensed attorney. You cannot represent your corporation yourself (except for small claims court). In your individual capacity, you are allowed to represent yourself, but remember the first sentence to this article. Court procedures are very, very complicated and judges have very little patience with pro se (representing yourself) parties.
• Small claims court - Small claims court is relatively safe for the non-lawyer. However, it normally is a good idea to discuss your small claims case with a lawyer. There may be aspects of the case that are more serious than you realize. Also, a good lawyer can give you some quick tips that may substantially increase your likelihood of success.
• Corporations - If you are the sole shareholder of your corporation, incorporation is relatively simple. However, it is critical that corporate formalities be followed and that the corporation is adequately capitalized. If not, you may find your "corporate veil" can be pierced, exposing you to personal liability. Also the S Election for favorable tax treatment is usually a critical and time sensitive issue. If there is more than one shareholder, a shareholders' agreement is important to address such issues as death, sale of stock to third parties, and management issues.
• Limited liability companies - Same issues as the corporation though you normally would not make the S Election. Choosing to be a "member managed" limited liability company is usually a big mistake. Taxation can be complicated.
• Just a simple partnership - Partnerships are fraught with danger and, except in rare circumstances, are not a good choice for operating your business. You are personally liable for all partnership debts. Also, every partner, even if he owns only a small percentage, can bind the partnership to an unwise contract without the other partners' consent. Taxation issues can be complicated.

LET'S MAKE A DEAL!!

By F. Stephen Glass

So, you are thinking about buying a business or selling your business. Either way, you face a decision that will effect your financial and personal future for many years. Both the buyer and seller should understand the five steps discussed below. CAVEAT: this discussion greatly over simplifies a very complex process.

1. Preliminary Negotiations. Unless a business broker or investment banker is involved, most deals start out as exploratory conversations between the buyer and seller. Often, neither is as prudent as they should be. One issue that tends to come up early in the buy/sell process is setting a price. While opinions vary, many experienced dealmakers prefer to let the other side make the first offer. The thought is that a naive buyer will overpay and a naive seller will tend to under price. By letting the other party go first, a more experienced negotiator stands to gain from their lack of expertise. Experienced dealmakers may not formalize their purchase price until the due diligence process has been completed so that they can take into account quality and quantity of the goods to be purchased.
   
   The preferred approach is to have a well-reasoned strategy for achieving a your before beginning any preliminary negotiations. It pays to remember that there are always two aspects to any deal-the price and the terms. Do not shoot from the hip when responding to an informal proposal (you might shoot yourself in the foot). You have everything to gain and nothing to lose by requesting a window of time before responding to any potential offer. When responding, the best bet is to give a range of potential prices under different scenarios.
   
   Another preliminary issue is confidentiality. Depending on the complexity of the deal, it may be a good idea to enter into a limited confidentiality agreement even before signing a letter of intent.
    
2. Letter of Intent. The goal of the preliminary negotiations is to get a letter of intent. Such a letter basically says that the parties plan to continue good faith negotiations, but on a structured basis. The typical letter spells out the terms agreed upon during the preliminary negotiations and has very broad escape hatches. A typical intent letter defines an orderly process for performing any due diligence work, confidentiality requirements, and public announcements. A letter of intent not only serves as an interim, it can also serve as a road map for drafting the definitive agreement, which will finalize the terms of the deal.
    
3. Due Diligence. Once a letter of intent has been executed, the due diligence process can begin. Both the buyer and seller need to quantify the risks and opportunities inherent in any specific deal. If problems are going to surface, it is better to address them sooner rather than later. Done properly, the information obtained from the due diligence process can be used to start preparing the definitive purchase agreement.
    
4. The Definitive Agreement. Every deal that moves forward reaches the point where it becomes necessary to prepare a definitive purchase agreement. Besides key legal points such as the purchase price and terms, perhaps the most problematic part of any definitive agreement will be the conditions, warranties and representations. These elements of a definitive purchase agreement are attestations about what the buyer is purchasing, pending litigation, or outstanding liabilities. Everything that is involved in the deal must be put into writing in a definitive purchase agreement. If the deal is the purchase/sale of the company's stock, the agreement is a Stock Purchase Agreement. If the deal is for the purchase/sale of the company's assets, it is an Asset Purchase Agreement.
    
5. The Closing. Before closing the purchase, your attorney should determine whether any security interest has been filed against the personal property of the seller's business. As a condition of the sale, the seller must obtain the necessary form that certifies all state employment taxes have been paid by the seller, and the seller must provide a sales and use tax certification showing that all outstanding sales and use tax payments due have been made by the seller. You do not want to end up paying for the seller's unpaid sales or use taxes. Tax regulations require both buyer and the seller to file IRS Form 8594 regarding the purchase price allocation. Penalties for failure to file this form can be extremely large.

RECENT BUSINESS LAW CASE SUMMARIES

By F. Stephen Glass

Pornographic Video Habit Creates Hostile Work Environment for Secretary

A university secretary's sexually hostile work environment claims over a professor's pornographic videotape habit were sufficiently alleged, the Second Circuit held, rejecting a district court's conclusion her work environment was not objectively hostile since she never saw the videos or witnessed the professor watching them or engaging in sexual acts. Her complaint did allege she regularly observed the professor viewing pornographic videos. She also alleged she had to handle such videos while opening and delivering his mail, and she saw pornography web-sites viewed by him on her computer. Moreover, the mere presence of pornography in the workplace can alter the status of women. Thus, the court rejected the university's claim that the conduct was neither aimed at her nor because of her sex. A jury could find that much of the conduct was particularly offensive to women and intended to provoke the secretary's reaction as a woman (Patane v Clark, 2ndCir, November 28, 2007).

EEOC Reaches $4.3 million settlement in national origin bias case.

A Title VII national origin discrimination against one of the largest retail sellers of photographic, computer and electronic equipment was resolved the same day the lawsuit was filed. The EEOC alleged that the company paid Hispanics in its warehouses less than non-Hispanic workers and failed to promote them or provide health benefits based on their national origin. The company will pay $4.3 million in damages.

Alaska Court upheld the termination of an employee for refusal to cut his hair.

An Alaskan appeals court recently held that an Athabascan Indian and Alaska native who was fired after he refused to cut his hair to comply with his employer's grooming policy had no claim for wrongful discharge.

$100,000 Punitive Damages Award Upheld in Failure to Accommodate Case

The Fourth Circuit unanimously affirmed a jury's $100,000 punitive damages award against Fed Ex for its failure to reasonably accommodate a package handler who was deaf under the Americans with Disabilities Act (ADA). FedEx challenged the EEOC's evidence that the package handier'S managers failed to accommodate him and engage in goodfaith efforts to comply with the ADA. However, the circuit court found there was sufficient evidence to support the award: The managers knew of the ADA's obligation to provide reasonable accommodations, which amounted to supplying him with an American Sign Language interpreter, but they failed to do so. The court also held the 12.5 to 1 ratio between the compensatory and punitive awards was not constitutionally excessive (EEOC v Fed Ex Corp, 4thCir, January 23, 2008).

Employee Gave Verbal Notice of Foreseeable Need for FMLA Leave

An employer had sufficient notice of an employee's intent to take Family Medical Leave Act (FMLA) leave, the Third Circuit held. The employee informed his supervisor of his need for possible additional heart monitoring and surgery, and though he was not certain he would need the surgery, he nevertheless conveyed that his health problems were ongoing. In providing notice, an employee need not use "magic words," the court noted. The critical question is how the information conveyed to the employer is reasonably interpreted (Sarnowski v Air Brooke Limousine, Inc, 3rdCir)

Business Tax Law - IRS RELEASES GUIDANCE ON S CORP INSURANCE PREMIUMS

By F. Stephen Glass

The IRS has issued guidance under which two-percent shareholder-employees of an S Corp may deduct premiums for health insurance as an above-the-line deduction. The shareholder may claim the deduction if the premiums are paid or reimbursed by the S Corp under an established plan and the amount paid or reimbursed is included as wages on the shareholder-employer's W-2.

A different treatment occurs if an individual is the sole shareholder-employee of an S Corp. Premiums paid by an S Corp for health insurance covering a two-percent shareholder-employee are treated the same as guaranteed payments made to a partner in a partnership. The payments are included in the shareholder employer's wages and deductible by the S Corp as compensation paid. The shareholder-employee is not entitled to deduct the premiums as an above-the-line deduction. If the two-percent shareholder-employer purchases the insurance in his or her own name rather than through the S Corp, then the individual can only deduct the premiums as an itemized medical expense on Schedule A. [See IRS Notice 2008- 1 for complete information]

About our authors:

M. Blen Gee, Jr. is an honors graduate of the University of North Carolina School of Law. His areas of concentration include business and corporate law, including sales of businesses; business litigation, including arbitration and mediation; franchise law; automobile dealer law; and insurance company insolvency. Mr. Gee has earned the highest peer-review rating for professional excellence and ethical standards by the national publication Martindale Hubbell.

 

F. Stephen Glass is the author of numerous publications on business and business entities as well as estate planning. He is a frequent presenter for the National Business Institute. His practice is concentrated in the areas of business and corporate law, business succession planning and estate planning. He serves on the Cary board of Capital Bank. Mr. Glass has earned the highest peer-review rating for professional excellence and ethical standards by the national publication Martindale Hubbell. He serves on the American Bar Association Business Law Committee on Corporate Governance.

DISCLAIMER: Johnson, Hearn, Vinegar, Gee & Glass, PLLC, provides this newsletter for general information only. The materials contained herein may not reflect the most current legal developments. Such material does not constitute legal advice, and no person should act or refrain from acting on the basis of any information contained In this newsletter without seeking appropriate legal or other professional advice on their particular circumstances. Johnson, Hearn, Vinegar, Gee & Glass, PLLC and all contributing authors expressly disclaim all liability to any person with respect to the contents of this newsletter, and with respect to any act or failure to act made in reliance on any material contained herein. Distribution of this newsletter does not create or constitute an attorney-client relationship between the firm and any reader or user of such information.