A Great New Year's Resolution for Your Business: A Legal Check-Up

By John L. Watkins

One of the best New Year’s Resolutions any business can make is to have a legal checkup. The idea of a legal checkup (sometimes called a legal audit) is to identify potential legal risks and issues and to take proactive measures to resolve or minimize them before they become expensive problems. The nearly universal rule is that it costs less to resolve a legal issue early on - such as through a proper contract prepared with professional assistance - rather than trying to address the issue later, such as through litigation.

The best legal checkups are customized for each business. The legal issues faced by a start-up will be different than those of an established larger business. The legal risks of a trucking company can be quite different from those of a software company.

If a business has in-house counsel, then in-house counsel should coordinate the review, with the assistance of outside counsel as necessary. If a business does not have in-house counsel, it should have a continuing relationship with an outside business attorney, who can handle the work.

Each legal review should be customized, but here are some of the issues to be considered. The items are listed starting with issues that are more frequently faced by small companies and then proceeding to issues more frequently faced by medium-sized or larger companies.

• Has the business properly maintained its registration with the secretary of state or other authorities? Failure to maintain registration (at least in some jurisdictions) can result in dissolution, which can in turn lead to a loss of corporate liability protection.

• Does the business maintain proper corporate or company records? Are corporate minutes and resolutions, for example, maintained and up to date? Failure to maintain proper records may put the corporate liability shield at risk.

• Does the business properly maintain financial records? Are loans from shareholders or members properly documented? Are corporate financial expenditures segregated from personal expenditures? If there are multiple corporations, are separate books and records carefully kept for each company? Again, failure to maintain proper financial records may place the corporate liability shield at risk.

• Does the business have a professionally drafted set of terms and conditions under which it does business? Do the terms and conditions properly limit risks, such as by disclaiming implied warranties and limiting remedies? Have the terms been reviewed recently?

• In addition to customer terms and conditions, are supplier terms and conditions properly documented? Are subcontractor terms and conditions documented? Do suppliers and subcontractors assume an appropriate level of risk in relationship to the transactions? Do suppliers and subcontractors have sufficient financial resources and insurance to back up their obligations?

• Does the business have procedures for protecting confidential information and trade secrets? Are employees who handle the information subject to non-disclosure agreements (“NDAs”)? Do suppliers, contractors, subcontractors or customers have access to the confidential information and trade secrets, and, if so, are they also subject to NDAs? Have the NDAs been professionally prepared and recently reviewed?

• Does the business have other intellectual property in the form of patents, copyrights, and trade secrets? Is the intellectual property carefully managed and protected? Are procedures in place to make sure that deadlines are met and fees are paid?

• Does the company have in place proper security and privacy procedures for its information technology? Has the company determined if there are any special regulatory requirements for data storage, security, or privacy applicable to its industry? Does the company outsource any of its IT, such as to a cloud computing provider? If so, has the company performed proper review and due diligence of the provider’s technology and procedures? Does the contract with the cloud computing provider protect the company’s interests?

• Does the business periodically review its employment and employee benefit procedures? Do key employees have employment contracts with appropriate covenants (which may include, depending on the circumstances, covenants not to compete and non-solicitation covenants)? Have employment contracts been recently reviewed and updated?

Note: There are important changes to Georgia law. Employers in Georgia should, in particular, consult with an employment attorney regarding the changes.

• Has the company carefully assembled and reviewed its insurance coverage? Does the company really know what is covered and not covered? Have the policy limits been reviewed for adequacy? Is there a procedure in place for reviewing endorsements that insurers may add upon renewal that may limit coverage? Have issues such as environmental liability, employment liability, and cyber liability been considered and properly insured? Does the company grant “additional insured” status to customers? If so, has the potential effect on the company’s aggregate policy limits been considered?

• Does the business have procedures in place for handling and documenting potential claims? Are potential claims reported promptly to the insurance carriers? Are claims tracked? Do the carriers and defense counsel provide periodic reports?

Please note that this is not intended to be a complete list, although it should provide a reasonable starting point. If you do not have an in-house attorney, the business should engage a regular outside attorney to learn about the company’s business and serve as a trusted legal adviser. If you do not know how to go about finding an attorney, check out my book, An Insider's Guide on Hiring a Business Attorney, which provides a step-by-step guide for finding, evaluating, interviewing, engaging, and working with a business attorney.