Client Alert: Corporate Diligence - Things to Consider During Troubling Times

Date: August 2, 2010

Minute Books & Corporate Records.  In an era of increasing litigation, keeping accurate, detailed corporate minutes is critical.  In addition to their standard function of recording and reflecting decisions made by company management and directors and the deliberation of those decisions, corporate minutes can help establish that company directors have met their fiduciary obligations and have executed a sound decision-making process.  Conversely, poor minute keeping can result in protracted litigation to determine the care that went into a board's decision to act.  It is vital for a company to keep an accurate, precise and complete record of director decision-making and oversight.  Furthermore, the failure to maintain such corporate formalities could result in a piercing of the corporate veil action and allow claimants to reach the assets of a company's shareholders. Our Corporate attorneys can assist you in updating your company's books and records. 

Reductions in Force.  Reductions in the labor force are prevalent and not expected to cease.  With an increasing lack of employment opportunities, many employees who suffer a job loss during hard financial times take legal action.  When facing the need to reduce the workforce, companies should be vigilant about taking steps toward reducing the risk of liability. 

  • Be aware of the regulatory framework regarding terminations, such as the WARN Act, COBRA rights, wage and hour laws pertaining to payment of vacation or various deductions of wages, and other statutes. Consult with employment counsel to ensure compliance.
  • Examine existing obligations under severance policies, collective bargaining agreements, or individual employment agreements.
  • If offering incentives or severance, be careful of the notice periods and other requirements for obtaining valid releases of claims, particularly those under the Age Discrimination in Employment Act.
  • Review the makeup of the population being let go in order to avoid any adverse impact on any protected group.
  • Consider alternatives to layoffs, such as furloughs, reductions in pay, etc. This process will supply you with ready answers to questions and suggestions raised by the employees.
  • Communicate openly and often with your employees. Provide information in writing when possible, and be sure to give referrals to resources that can provide placement assistance or other benefits.
  • Be compassionate and, where possible, be generous. Employees who understand the decisions and do not feel taken advantage of are far less likely to sue.

Additionally, our Labor and Employment attorneys can assist you in any reductions in force (RIF) or other situations you may be considering.  We can also assist you in a review of your employment policies and procedures, including updating or preparing an employee handbook. 

Advances to the Corporation.  Companies may require an infusion of capital in order to meet their working capital needs.  It is important to formally document these infusions of cash as loans to the business if, in fact, that is what they are.  At a minimum, there should be a resolution by the Board of Directors or other governing entity approving the borrowing of such funds from the principal of the business, and a written promissory note expressing a rate of interest and a maturity date.  The business could even grant a secured position in its assets by entering into a security agreement with the principal who is lending money to the entity.  These formal steps go a long way in establishing an owner's position as a creditor of the company or better yet, a secured creditor.  Simply putting the money into the company or worse, making direct expenditures on behalf of the company, will subject the owner to a claim that such infusions are simply capital contributions, i.e., equity contributions, rather than debt positions in the company.  If the company struggles and creditors of the company make demands, equity positions are always last, making a debt position desirable. Our Corporate attorneys can assist you in structuring and document capital infusions, securitizing stockholder/member loans, assisting your company in connection with raising debt or equity funds, and otherwise assist you with company planning options and alternatives. 

Intellectual Property.  Our Intellectual Property attorneys can help you evaluate technologies, assess the scope, quality and sufficiency of your IP portfolio, assess exposure to IP disputes, advise on IP policies, and help draft appropriate safeguards into your licenses and IP agreements with employees, officers, consultants, and outside parties. 

Leases.  Property owners are facing significant vacancies in their office buildings. Companies leasing space in an office building should approach their landlords to renegotiate leases with the goal of improving cash flow.  If your company's lease term is close to expiring or you have an option to terminate your lease, take an extension on your lease or waive the termination option in exchange for a reduction in rent going forward.  Property owners that focus on the long-term viability of their real estate are willing to make concessions to retain tenants. Our Real Estate attorneys can assist you in reviews of leases and negotiations with landlords and documenting the resulting changes. 

Cost Reductions.  Besides the landlord, there may be other vendors from whom you can negotiate concessions in order to increase the company's cash flow in the form of reduced rates, discounts, agreements to forebear, or even write-offs.

Estate Planning.  One silver lining to the reduced valuations of the current economic market is the opportunity to make gifts of company stock or interests to children, grandchildren or other family members.  The reduced valuations mean that the federal and state gift transfer tax costs are reduced.  Any future appreciation in the company equity transferred would be removed from the transferor's estate and would grow for the benefit of his or her family members. Our Estates and Trusts attorneys can assist you in any estate planning needs. 

Property Taxes.  If the company has significant real estate holdings, there may be an opportunity to reduce costs of the business by appealing the most recent tax assessments for such properties. Our Real Estate attorneys can assist you with tax assessment appeals. 

Equity Incentives.  With cash flow being critical for businesses, companies may consider implementing an equity incentive plan so that the company can incentive its employees by granting stock or other equity bonuses rather than the usual cash bonuses. Our Corporate attorneys can assist you in designing, drafting and implementing an appropriate equity incentive plan or phantom equity plan. 

Reverse Stock Splits & Share Repurchase Programs.  Again, with depressed valuations, a company can streamline its ownership structure by conducting either a reverse stock split or a share repurchase program.  A reverse stock split is a transaction in which a corporation reduces its authorized shares and reduces the number of outstanding shares issued to each stockholder by the same proportion.  Most corporate laws allow the company to purchase the existing fractional shares for their fair market value. Minority shareholders could be potentially cashed out by conducting a reverse stock split.  A share repurchase is simply a voluntary program of offering to purchase the outstanding equity interests in the company.  Our Corporate attorneys can assist you with any corporate restructuring or recapitalization plan.