Category: Other Start-up Issues

Do It Right!

The adage “an ounce of prevention is worth a pound of cure” may be over-used, but it continues to apply when businesses don’t seek legal counsel. I have seen countless situations in which companies incur substantial costs and lost time to resolve legal issues that would have been entirely avoided if they had given proper attention to the matter at the outset.  Here are four examples:

I recently completed an M&A transaction where the company had a large number of contracts (negotiated on their own, without counsel) with terms that prohibited assignment of the contract unless the other party consented. The part of the agreement that governs assignment in a typical contract is the assignment clause, which usually is included in a group of miscellaneous clauses at the end of the agreement. The inclusion of this clause at the end of the contract, combined with its mundane and perhaps technical language, led the company to assume that it wasn’t important. However, had the company used legal counsel to negotiate those agreements, counsel would have ensured that the language prohibiting assignment included an exception for sale of the company, which is a typical exception. The client’s “economizing” when negotiating the initial contracts by not using counsel resulted in them having to spend many hours and dollars to obtain consent from each third party in order to complete the M&A transaction.

In another M&A transaction that I completed, the selling company was based in the US with US-centric operations but doing business with individuals and businesses around the world. The company did not work with legal counsel to take into account the ramifications of the cross-border aspect of its operations. For example, it did not consider the tax implications of its payments to non-US individuals or the privacy implications of doing business with EU residents. Remediating those defects proved far more expensive and time-consuming than if the company had dealt with counsel who would have taken care of those issues at the outset, avoiding delays in closing the deal.

Also on the subject of privacy, I worked with a client who had to spend significant time and money dealing with individuals and government agencies regarding its use of data collected from customers. The company had a comprehensive privacy policy that seemed to “check all the boxes.” However, the company had “cut-and-pasted” the privacy policy from another company in a related field and used it as their own policy, making only a few modifications. The company was collecting and using data in ways that were contrary to their stated policy, which posed a problem when it was discovered. Had the company taken the time to develop a privacy policy that truly reflected the company’s actual policies and procedures and had that policy been reviewed by privacy counsel, the problem would never have occurred.

Finally, one of my clients came to me with an LLC operating agreement they had created using a low-cost online legal service (names of the client and the online service withheld to protect the guilty!). The two founders of the company had granted a small ownership stake to their first hire, an employee who turned out to be a problem in many ways. The company’s troubles were magnified because their operating agreement provided for the LLC to be managed by the LLC members. As a member, the problem employee holding a small ownership stake had the same rights and authority as the two founders. This would have been easily avoided had an operating agreement provided for management by managers, which is what legal counsel would have advised, rather than management by the members.

At this point, the moral of the story is presumably clear – taking the time and spending the money to call in legal counsel consistently and early will save a company time and money in the long run.

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Selling Your Company 101 – Part 4