Benjamin Franklin's Words of Wisdom For Closely Held Businesses

By John L. Watkins

Most of my practice currently consists of representing businesses in disputes with their insurance companies and helping international companies do business in the U.S. However, I started my career as a general commercial litigator, handling everything from banking and securities litigation to product liability cases. Although my current firm represents many larger companies, we also represent many middle market companies and family businesses. One staple in this area is what I loosely call the "corporate divorce." 

Corporate divorces happen when business partners (I use the term in the general and not purely legal sense) no longer get along. Perhaps there is a difference in where to take the business. Perhaps one partner has worked hard and built the business when the other has been content to sit back and share in the profits. Perhaps animosities have built over personal issues that really have little to do with the business. 

Often, these animosities divide life long friends and family members. The resulting disputes can be every bit as acrimonious and destructive as a marital divorce. The primary reason that these disputes develop is because the partners never contemplated that their interests would diverge and consequently never planned for it.

One of the greatest citizens that America ever produced was Benjamin Franklin. Before Franklin achieved success as a civic leader, scientist, inventor and diplomat, he was a successful businessman, a printer by trade. Franklin achieved success by hard work and through developing successful alliances and partnerships. Franklin set up a number of his apprentices in their own printing businesses, seemingly without disputes or disagreements. Here is Franklin's advice from his famous autobiography:

"Partnerships often finish in quarrels; but I was happy in this, that mine were all carried on and ended  amicably owing, I think, a good deal to the precaution of having very explicitly settled, in our articles, every thing to be done by or expected from each partner, so that there was nothing to dispute, which precaution I would therefore recommend to all who enter into partnerships; for, whatever esteem partners may have for, and confidence in each other at the time of the contract, little jealousies and disgusts may arise, with ideas of inequality in the care and burden of the business, etc., which are attended often with breach of friendship and of the connection, perhaps with lawsuits and other disagreeable consequences." (Franklin's Autobiography is in the public domain and is available free in Amazon.com's Kindle store).

Franklin's clear and concise advice rings as true today as it did when it was written over two hundred years ago. While technology will change and new businesses will be started and others will become obsolete, human nature is still the same. If you are in a closely held business, whether it be a start-up, small, medium, or large, Franklin's words are some of the best free advice you will ever receive.

Here are a few other thoughts on how business partners can avoid, as Franklin so aptly put it, "lawsuits and other disagreeable consequences":

1. 50/50 is almost never a good idea. Many friends and family members envision a "50/50 partnership" as the ideal business arrangement. Although it may seem like a good idea when the business is starting and goodwill among the participants abounds, 50/50 partnerships seldom end well. When disagreements occur, which they will, 50/50 partnerships result in automatic deadlock, with no way to move forward. Note that, in my experience, there is a direct positive correlation between the success of this business the the likelihood of a dispute. If the participants are unable to agree on a resolution, the only legal solution is often the appointment of a receiver to take control and run the business and sell it or dispose of its assets. Not a happy result.

2. You need an exit strategy from the get go. If you are involved in any venture with more than one investor, you should have an exit strategy in your operating agreement, shareholder's agreement, or partnership agreement from the very beginning. There are numerous options, but typically such provisions provide for one party buying the other out based on an agreed metric. 

3. If you did not document your business arrangement properly at the beginning, do it now. If, as is so often the case, you started a business venture without documenting the relationship among the participants, and there is still good will among the participants, do it now. Just because things are going well now does not mean that harmony will last forever. View the present cordial circumstances as a second chance to do when you should have done when you started the business.

4. Bring in new "partners" carefully. Often, businesses will want to bring in an individual as a "partner," perhaps as a reward for loyal service or perhaps to provide an incentive to a new participant viewed as valuable to the business. Although the concept of an "equity kicker" may seem like a good idea, keep in mind that it creates an additional level of risk and entanglement. Consider other forms of rewards in the form of structured bonuses, etc. If you do bring in a new partner, have an exit strategy if things do not work out.

5. If there is a dispute, see an experienced lawyer sooner rather than later. If things seem to be going south, see an experienced lawyer sooner rather than later. The sooner that a dispute can be resolved the better. Business people almost always, in my experience, underestimate the toll in time, distraction, and human energy that a dispute will impose on a closely held business. Be careful in selecting a lawyer. If all the lawyer can talk about is the fight and taking it to the other side, that may appeal to your raw emotions, but it rarely makes for a quick or relatively painless resolution. Be open to the possibility of mediation, as it is often the best (and least public) way to resolve disputes.

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.

Veterans Old and New: Let's Not Forget

In the last three weeks, I have traveled out of town to Phoenix for a mediation and to our home office in Indianapolis for my law firm's Partners meeting.

On the way back from Phoenix, I was seated next to a young man with very closely cropped hair, who appeared to be traveling with two other young men. We struck up a conversation. He and his buddies had just joined the Army and were on their way to basic training. The young man's story was interesting. A Navajo, he had grown up on the reservation  in a house that did not have running water until he was about ten years old. This would have been in the past decade.

My young acquaintance decided that he wanted to make something out of his life. He told me that he and his buddies had been hanging out and going nowhere. Some had been drinking too much. He wanted to learn skills, see the world and be successful, so he joined up. The Army was honest with him: After basic training, he would go back to a base in Arizona for a short period and would then deploy to Afghanistan.

The other fellow on our row -- a guy who looked to be a few years older than me -- joined the conversation. It turns out that he was an Air Force veteran who had served in Vietnam. He is now a military contractor, assisting the Air Force with logistics. He was returning home to Florida, but had done multiple stints in Iraq and Afghanistan as a contractor. The older fellow offered words of encouragement to our young friend.

As our young friend prepared to leave the plane in Atlanta with his buddies, I thanked him for his service and wished him well. I said a silent prayer for the success and safe return of this young man and his buddies.

Yesterday, I was sitting on another plane next to a young man in an Army uniform. Although he was a young guy, the look in his eyes suggested he had a lot of experience under his belt. Unlike my young friend from the earlier flight, he was not talkative. I asked him where he was headed. He said he was on his way back to Afghanistan, having previously done tours in Iraq and Afghanistan. I thanked him for his service. He did not appear to want to talk more, and I respected that.

Veterans Day is next Thursday. On this day -- which seems to receive so little publicity -- we should certainly remember the many sacrifices our fellow citizens have made during the history of our country to preserve freedom at home and abroad. The sacrifice is not just of lives lost or physical wounds received. It is a sacrifice of families being separated and lives and ambitions put on hold.

It should also be remembered -- as my two recent acquaintances reminded me -- that the sacrifice continues. Young men and women are still serving their country, and are still being sent into harm's way, enduring separation from their families, and putting other ambitions on hold. 

On the other hand, it is also worth remembering the considerable achievements of our men and women in uniform. Without their service, the world would be a very different place, and not for the better.

It is also worth remembering that military service has proven to be a life long honorable career for some, and a springboard to success in the civilian world for others.  My acquaintance from Phoenix volunteered because he felt that military service would allow him to "be somebody," and to lead to a better life. I wish him all the success in the world.

If you see a veteran next Thursday, or if you see a man or woman in uniform, thank them for their service. It's the least we can do.

Barnes & Thornburg Cloud Computing and Cyber Security Blog

My law firm, Barnes & Thornburg LLP, one of the top 100 largest law firms in the U.S., has just launched its Cloud Computing and Cyber Security blog. The firm also just formed a Cloud Computing and Cyber Security Practice team. The team is composed of lawyers in the firm's various offices, and cuts across many other practice areas, including information technology, intellectual property, business, litigation, insurance coverage and international law.

Roy Hadley and I co-lead the team. Roy is an information security and technology lawyer, and deserves the lion's share of the credit in organizing the new team. Right now, Roy and I are also monitoring and contributing to the blog, although we hope and expect other team members will contribute in the near future.

To access the blog, click here.

Thinking About Cloud Computing and Cyber-Security?

By John L. Watkins

Many businesses are thinking about using cloud computing providers for all or part of their IT infrastructure. Cloud providers promise scalability, off-site IT management, availability and security. As with all new technologies, there are many legal issues.

My law firm, Barnes & Thornburg LLP, has recently established a Cloud Computing and Cyber-Security practice team that cuts across many legal disciplines. My partner, Roy Hadley, and I are the leaders of the new team.

Roy is a true information technology specialist. Roy has practiced for many years in the technology space, including serving as general counsel and chief privacy officer of technology companies. I bring the litigation, insurance coverage, and general business perspective. We have many other members on the team specializing in different disciplines, including intellectual property (which is very strong firm-wide at BT), information technology, insurance coverage and recovery, international law, tax, and general business, among others. The collective experience our colleagues bring to this initiative is pretty amazing. The firm will be launching a blog on cloud computing and cyber-security topics shortly.

Roy and I were recently asked to write a primer on the legal issues for the Georgia State Bar’s Technology Section. Click here to read the article. I hope you find it useful. Caveats: This is a general overview written from a general U.S. point of view. There are additional issues in Europe. As a general statement, Europe seems to be ahead of the U.S. in dealing with these issues.

This One's for Casey, Jr.

By John L. Watkins

Yesterday, Margaret and I lost Casey, Jr., our 21 year old black and white Manx cat. He was a stray in the neighborhood, probably about a year old, when we moved into this house many years ago. He looked a great deal like a black and white Manx cat from our former neighborhood named Casey who liked to "make the rounds" and get fed by many, including us. Thus, we took to calling the new cat "Casey, Jr.," and our old friend became "Casey, Sr." Casey, Jr. seemed destined to be our cat.

Anyway, it took a bit of an effort to adopt Casey, Jr. He was perfectly willing to come on the porch and accept food, but was quite feral, and was not about to let anyone pet him or pick him up. Once I finally coaxed him into the house, an almost instant transformation took place. He decided he really liked regular meals and attention, and became quite the Southern gentleman. He was always dapper -- at least until his last year -- looking like he was wearing a tuxedo. He loved being petted and purred on contact. His favorite spot was on Margaret's lap or sitting beside her on the couch.

It's always difficult to lose a pet, but losing this one was really hard. Twenty or so years is a long time to have a pet. Casey was a link to a different time in our lives, when we were young and things seemed a lot simpler.

Casey enjoyed his life and he had a great heart. You really do not expect an animal to reach such a Methuselah-like age, but he just kept on going. Over five years ago, our vet told us he probably had three to six months to live. The vet was wrong, and Casey still had great years ahead of him. In the past year or so, however, he got old and creaky, and, as old animals tend to do, just could not keep on weight despite having a healthy appetite. Even at the end, Casey's heart and spirit were willing, but the rest had just worn out. We miss him and always will.

If this has touched you, there are two things I would like you to consider doing. First, if you have been thinking about adopting a dog or a cat, do it. And if you are considering a pet, please adopt one from a shelter, or take in that dog or cat your kid brought home. We support Furkids, a no-kill shelter in our part of town. A few weeks ago, we visited its open house. I cannot tell you how many wonderful cats and dogs were there waiting for homes. Trust me, that free "DSH" (domestic short hair) or friendly mutt will make just as good a pet as a purebred.

Second, please consider giving to a shelter in your area. It doesn't matter if it is just a few dollars. Any amount helps. In these lousy economic times, the shelters are really struggling to keep open. If you need a suggestion, the previously mentioned Furkids is a great organization, as is the Atlanta Humane Society.

What About Clients?

By John L. Watkins

One of my favorite legal blogs is What About Clients, written by Dan Hull and others from the Hull, McGuire firm. The key point of the blog is that the focus of what we do as lawyers should always be the client. A great reminder for all of us.

Dan is another guy with Midwestern roots and an international outlook. He "gets it." With great content written in a pithy and entertaining style, the blog is a must read.