Tag: corporation

You’ve Been Sued: How to Avoid Early Missteps

Litigation doesn’t have to be catastrophic for a growing company, but it can quickly spiral out of control if not handled properly.  This article will explore issues to consider when your company is faced with a lawsuit

 

Stop All Communications

Most lawsuits don’t come out of the blue.  They usually are preceded by a back-and-forth with the other person or company, sometimes through counsel but often without.  Emerging companies understandably need to keep costs in check, so it is not uncommon for a company to try to deal with a brewing dispute on its own.  But once litigation hits, it is important to put pens down and consult counsel immediately.  Everything you write or say – internally, to the other side, or to anyone else (except your attorney) – can be obtained by the other side during the lawsuit’s discovery process.  You don’t want anyone to write or say something in the early hours of the lawsuit that unnecessarily pins the company down or hurts it later in the litigation.

Preserve Documents and Files

Although it sounds mundane, it is crucial that the company preserve all documents and files that may be relevant to the dispute.  In a nutshell, the company will need to preserve every document that relates to the issues raised in the lawsuit.  And “document” includes both hard copy documents as well as emails, text messages, voicemails, electronic files, and everything else that contains relevant information.  It encompasses more than just the important documents or communications.  It includes anything that bears on the claims asserted in the complaint and your potential defenses to those claims.

Preserving evidence includes obvious things, like not deleting emails, text messages, or electronic files, and not throwing away hardcopy files.  But it also includes less obvious steps, like turning off any settings in your email system that automatically purge messages after a set period of time or after the mailbox reaches a certain size.  It also includes preserving data and files on individual laptops, desktops, and other devices, if that data isn’t saved on a company server or other system.  There are potential landmines everywhere, and failing to preserve relevant evidence – called spoliation – can dramatically affect a case.

Gather the Facts and Understand the Law

It is important to gather and understand the underlying facts as soon as possible.  This involves not only reviewing relevant documents, but also talking to key players who were involved in the matter.  While the process doesn’t have to be exhaustive at this early step, it must be deep enough for the company to be able to make a reasonable assessment of the case.

If there are good facts, you want to know them.  If there are bad facts, you need to know them early, so you can factor them into your decision about how to proceed.  You will need to assess the facts, good and bad, in light of the relevant law and begin to assess the strengths and weaknesses of the plaintiff’s claims, as well as your likely defenses and any potential counterclaims you may have against the plaintiff.

Other things you and counsel should consider at the outset are: whether the company has insurance that may cover the lawsuit and any potential settlement or judgment that results; whether someone else has an obligation to indemnify the company in connection with the lawsuit; whether the lawsuit was filed in the right court; whether the plaintiff was required to bring the claim in arbitration rather than court; whether the plaintiff waited too long to sue such that one or more claims may be barred by a statute of limitations; and whether the company has any counterclaims it could assert against the plaintiff.

Establish a Plan

Armed with an understanding of the facts and the relevant law, you should establish a plan for how to proceed with the lawsuit.  Should you fight to the end?  Is it better to settle early?  There’s no one-size-fits-all answer to those questions.  The answer will be unique to your company, the lawsuit you’re facing, and the opposing party with whom you’re dealing.  You should weigh each potential outcome, including the cost to reach that outcome, and assess how it will impact your company.  Be wary of sacrificing business goals for the sake of litigation.

Your plan for the case does not have to be static.  It can change over time, as the litigation unfolds.  Even when you have thoroughly analyzed the available facts at the outset of a case, the landscape almost always changes as the case proceeds and additional evidence comes to light.  Your strategy can evolve with the landscape.

Prepare for the Long Haul

Litigation can be painfully slow.  Few things in litigation happen quickly, and it usually takes more than a year to get to trial, and sometimes two or three years depending on the type of case.  After the Complaint is filed and served, there typically will be motions practice, additional pleadings, and an extended period of discovery where the parties gather and produce relevant documents, depose fact witnesses, and retain expert witnesses to provide reports and give testimony.  It is a long process, and parties should be prepared for the possibility that it could take years for the case to wind its way through it and get to trial.

Settlement Considerations

Although you need to prepare your case as though it will go to trial, the reality is that almost all cases eventually settle.  Some cases are resolved through direct discussions between the parties (typically through counsel).  Others are settled through the use of a mediator, who serves as an independent third party to foster settlement discussions and attempt to resolve the dispute.  Mediation is voluntary, and the mediator cannot force either party to settle.  But an effective mediator can bring a fresh perspective to a lawsuit, giving each side an unvarnished view of how a judge and jury may see their case.  That alone can serve as a useful reality check to parties who have been living with a case for months or years and may have difficulty viewing it dispassionately.

Conclusion

No company wants to be sued.  But the odds are that your company will face at least one lawsuit in its lifetime.  By knowing what to expect and being proactive when it happens, you can avoid some of the pitfalls that strike less prepared companies.  And by approaching it with a clear plan and developed strategy, you can put your company in the best position to prevail in the lawsuit or resolve it on favorable terms.

Read more about Legal Issues for High-Growth Technology Companies: The Series.

© 1998-2018 Wiggin and Dana LLP
This post was written by Joseph C. Merschman of Wiggin and Dana LLP.

The Tail of a Dog with Two Hats: Fifth Circuit Upholds “Golden Share” Held by Creditor Affiliate

On May 22, 2018, the United States Court of Appeals for the Fifth Circuit issued its decision in Franchise Services of North America v. United States Trustees (In re Franchise Services of North America), 2018 U.S. App. LEXIS 13332 (5th Cir. May 22, 2018). That decision affirms the lower court’s holding that a “golden share” is valid and necessary to filing when held by a true investor, even if such investor is controlled by a creditor.

The backdrop of mergers and acquisitions leading up to this case need not be retold in detail to understand the holding’s significance, but some context is helpful. Franchise Services of North America, Inc. (“FSNA”), one of North America’s largest car rental companies, filed for chapter 11 bankruptcy without the required consent of its sole holder of preferred stock, Boketo, LLC (“Boketo”). Boketo was a minority shareholder that had invested $15 million in FSNA  making it FSNA’s single largest investor. Boketo is a wholly-owned subsidiary of investment bank Macquarie Capital (U.S.A.) (“Macquarie”), an unsecured creditor of FSNA’s by virtue of an alleged $3 million claim for fees incurred in connection with the aforementioned transactions. When Boketo invested $15 million in FSNA, it required FSNA to re-incorporate in Delaware and add a “golden share” provision to its corporate documents, i.e. Boketo’s affirmative vote of its preferred share was required for certain corporate events, such as filing bankruptcy. Nonetheless, FSNA eventually filed for chapter 11 in the Southern District of Mississippi without seeking Boketo’s consent, fearing that shareholder Boketo—controlled by creditor Macquarie—would not consent to filing.

Macquarie and Boketo filed motions to dismiss the case for a lack of corporate authority under FSNA’s amended corporate charter. In doing so, Macquarie donned two hats—that of a shareholder through Boketo and that of an unsecured creditor with a $3 million claim. FSNA asserted that Macquarie used Boketo as a “wolf in a sheep’s clothing” to equip a creditor with shareholders’ blocking rights under an allegedly unenforceable “blocking provision” or “golden share.” FSNA implied the tail had been wagging the dog—that Macquarie made the $15 million investment through Boketo to avoid the cost and inconvenience of trying to collect some portion of its $3 million claim in FSNA’s bankruptcy. The bankruptcy court denied Macquarie’s motion because case law and public policy forbid a creditor from preventing a debtor’s bankruptcy filing. However, it granted Boketo’s motion, given its status as a voting shareholder. The Fifth Circuit affirmed, and found FSNA’s theory that Macquarie chased $3 million with $15 million “strain[ed] credulity.”

FSNA’s various legal arguments each fell flat. First, FSNA sought a ruling that “blocking provisions” or “golden shares” (similar, but not identical, concepts), in general, are unenforceable under Delaware law. The Fifth Circuit declined to offer such an advisory opinion. Second, FSNA contended that even if Delaware law allowed these types of provisions, federal policy forbids them. This, too, failed to move the court, since the corporate charter did not eliminate FSNA’s ability to file bankruptcy. Instead, it specified which parties’ consent was necessary to authorize a bankruptcy filing, placing the decision with shareholders. Third, because authority to file bankruptcy is a matter of state law, FSNA argued that Boketo could not exercise its blocking right under Delaware law, and that Boketo had owed a fiduciary duty to facilitate the filing. The Fifth Circuit held that Delaware law, flexible by nature, allows a corporate charter to assign rights to shareholders that would ordinarily be assigned to directors/management, but declined to go so far as to determine whether such provision was valid under Delaware law. In addition, the court refuted FSNA’s fiduciary duty argument because only controlling minority shareholders owe fiduciary duties, and here, Boketo was a non-controlling minority shareholder. The court explained that the standard for minority control is a “steep one,” and that courts focus on control of the board—i.e., whether the minority shareholder can exert actual control over the company. While Boketo made a sizeable investment in FSNA, it only had the right to appoint 2 out of 5 directors and therefore could not exert actual control over the board. FSNA pointed to Boketo’s hypothetical ability to prevent bankruptcy as evidence of actual control, but the court distinguished such theoretical control from actual exertion thereof. The court keenly noted that FSNA defeated its own control argument when it filed bankruptcy without Boketo’s consent—if Boketo was a controlling shareholder, then once again the tail must have been wagging the dog.

Franchise Services highlights the potential for a creditor to essentially step into a shareholder’s shoes and assert shareholder rights pursuant to a corporate charter’s blocking provision or “golden share” by virtue of wearing two hats through a parent and subsidiary.

© 2018 Bracewell LLP.

This post was written by Logan Kotler and Jason G. Cohen of Bracewell LLP.

A short United States Department of Justice memorandum with big legal consequences

On Jan. 25, 2018, the United States Department of Justice (U.S. DOJ) issued a memorandum limiting the use of federal agency guidance documents in civil enforcement actions that could have far reaching consequences in the private sector. See here.

Under the directives contained in this memorandum, U.S. DOJ attorneys are instructed not to use noncompliance with federal agency guidance documents that have not gone through formal rule-making under the Administrative Procedures Act as evidence of violations of applicable law in federal civil enforcement actions. In particular, the U.S. DOJ instructs its attorneys that they may not use a private party’s noncompliance with an agency guidance document for presumptively or conclusively establishing that a party violated an applicable statute or rule that an agency has delegated authority to implement. The memorandum continues by saying “[t]hat a party fails to comply with agency guidance expanding upon statutory or regulatory requirements does not mean that the party violated those underlying legal requirements; agency guidance documents cannot create any additional legal obligations.”

In the past, federal agency guidance policy has been used by agencies as well as the U.S. Department of Justice as evidence of whether a regulated party has complied with federal statutes. For example, this use of guidance policies for enforcement decision has been regularly used by numerous federal agencies, such as the EPA, OSHA, SEC, Labor, the Treasury, FTC and many other federal agencies, in referring matters to the U.S. DOJ for enforcement of the federal statutes and regulations that these agencies have delegated authority to administer.

The U.S. DOJ memorandum will provide creative lawyers with new ammunition for negotiation with federal agencies when those agencies use noncompliance with their guidance as evidence of violations of laws that carry significant civil penalties for such actions. In addition, these same creative lawyers in the private sector will use the memorandum as evidence that a federal agency should not use guidance documents as evidence for important agency decision making such as permit decision making or related important agency decisions that have important consequences for the regulated community.

 

Copyright © 2018 Godfrey & Kahn S.C.
This post was written by Arthur J. Harrington of Godfrey & Kahn S.C.
Read more of the National Law Review’s  Coverage of Government Regulations.

New Jersey Extends EDA Loan Program to Minority or Women Owned Businesses

Governor Christie signed A1451 into law this week making EDA loans through the Urban Plus Program available to small, minority or women owned businesses located in designated New Jersey regional centers or metropolitan planning areas as if such businesses were located in urban centers.   Minority or woman owned business enterprises (MWBE) must be certified through the Department of Treasury.  As a qualification, MWBE applicants must demonstrate that the business is operated and controlled by a management team of women or minorities and such company is owned by a majority of minorities or women. The business must be involved with a commercially useful function and the minority or female ownership and management must be real, substantial, and continuing and not merely in name only.

 

© 2018 Giordano, Halleran & Ciesla, P.C. All Rights Reserved.
This post was written by Melissa V. Skrocki of Giordano, Halleran & Ciesla, P.C. 

SEC Whistleblower Awards: Can You Hear Whistles Blow? Valued At More Than $100 Million, You Bet You Can!

Some very loud whistles have been blowing across corporate America since 2011 – whistles valued at $107 million, in fact. The United States Securities and Exchange Commission announced on August 30, 2016, that since its whistleblower program began in 2011, they have awarded more than $107 million total to 33 individuals who voluntarily provided the SEC with original and useful information that led to a successful enforcement action. Whistleblower awards can range from 10 percent to 30 percent of the money collected when the SEC’s monetary sanctions in a matter exceed $1 million.

The SEC encourages employees to report suspected wrongdoing, because they, according to Acting Chief Jane Norberg, “are in unique positions behind-the-scenes to unravel complex or deeply buried wrongdoing.” And, last year alone, employees responded by providing nearly 4,000 tips to the agency. With this kind of incentive from the SEC and other government agencies, as well as a growing number of successes in whistleblower lawsuits, it is more important than ever for companies to get advice on a regular basis. Moreover, companies must be strategic and proactive in their approach to implementing an effective whistleblower protection and anti-retaliation system.

Key elements of an effective whistleblower protection and anti-retaliation system include:

  1. Clear and visible leadership commitment and accountability. This is truly the most important piece of the puzzle. Without sincere support from the top, no internal whistleblower program can succeed.

  2. The creation of a true “speak-up” organizational culture focused on prevention, including encouraging employees to raise all suspicions and issues quickly and insuring the fair resolution of such issues.

  3. Independent, protected resolution systems for employees and third-parties who believe they are experiencing retaliation as a result of raising concerns.

  4. Specific training to educate all employees about their rights and available protections (including both internal and external programs).

  5. Specific training for managers who may receive complaints or information from employees, requiring the manager to be considerate of the employee making the report, to be diligent, and, most importantly, to act on the information with no corporate tolerance of the “just telling me as a friend, not as a manager” excuse.

  6. Internal monitoring and measurement of corporate compliance efforts and the effectiveness of the speak-up and non-retaliation culture, without contributing to the suppression of employee reporting.

  7. Independent auditing to determine if the whistleblower protection and anti-retaliation system is actually working.

Post written by Denise K. Drake of Polsinelli LLP.