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Tilting the Scales

Business Issues with a Legal Slant

Sony vs. N. Korea – Let Capitalism Fight Totalitarianism!

Posted in *Weighing In - IMHO, Legal Risk Management

Cyber terrorism, North Korea, Sony, extortion, free speech, The Interview, international relations, journalistic ethics, cyber security… can it get any better than this?

Implausible - a C grade comedy movie The Interview about two hapless TV journalists recruited by the CIA to assassinate a sitting world leader North Korean Supreme Leader Kim Jong-un.

Appalling - Sony’s capitulation to terrorism and extortion and the horrific precedent leaves speechless any advocate of free speech. Who would have thunk it?

What Happened?  Poor judgment closely followed by really bad judgment.

Poor Judgment.

Imagine a large Chinese film studio produces a comedy where President Obama is mockingly portrayed by a bumbling black buffoon of a man who has no business running a country and is flamboyantly assassinated. Americans would be rightly offended and would cry racism followed by widespread condemnation of both the studio and the movie. Although Americans may accept lampooning themselves, much of the world does not. This was not the first depiction of the killing of a living international leader: Charlie Chaplin’s “The Great Dictator” about Adolf Hitler, and “Team America: World Police,” about former North Korean leader Kim Jong Il. The difference? Now you can attack the film studio without bombs and guns.

Really Bad Judgment.

Capitulating to demands of “someone” which, by many accounts, may be multiple groups posing as the “Guardians of Peace.” Even President Obama chastised Sony as doing “the wrong thing when it backed down and pulled The Interview in the face of North Korean hacker threats.” Ignoring the $44 million to produce the movie, by caving to the “Guardians of Peace” Sony emboldens other hackers to harass companies with the expectation of similar results.

Proposal:

Win-Win for Capitalism and Free Speech Sony could have released the movie online through its own streaming service Crackle and distributed it through Netflix, Hulu, Vudu, iTunes, or any one of the other online video services. By reaching more people, safely, Sony could potentially make more money than in theaters. Many would have watched / bought online just to snub the North Korean hackers. And, in doing so, Sony could possibly turn negative press into positive PR.

Good Call – The Theaters.

The theaters made the right decision not to show “The Interview.” Although the Department of Homeland Security dismissed the emails as not credible, the theaters were forewarned. As Tilting reported in a January 2013 article “Have Gun, Will Travel: Owner’s Liability to Patrons for Violent Acts,” the best, and perhaps only, viable defense to the movie theater that suffered a mass shooting was that there was no past history of violent acts and no violence had been threatened.

Tilting the Scales in Your Favor.

Better to use sound judgment at the beginning, than try to catch up later. Poor judgment can be forgiven. Poor judgment followed by really bad judgment is hard to overlook.

HAPPY HOLIDAYS and a PROSPEROUS NEW YEAR!

Previous Tilting Articles:

An Invitation to Investors Risks Losing Control of Your Business

Posted in *Way Out - Advice, Legal Risk Management

Cleve and I recently discussed how a business owner’s divorce might result in losing control of the business. While loss of business control by marital divorce is a real threat, many business owners lose their companies through “business divorces” after squabbling with their investors.

Some new businesses are overnight successes, like Ben Distiller’s Texas Whiskey Distillery in San Marcos, Texas. Ben’s craft whiskeys caught on with connoisseurs around the world, gaining Ben a great reputation and huge orders for his whiskey – but without the inventory to fill the demand. Although Ben was rich in ideas, he was cash-poor – so to raise money for expansion he sold a controlling interest in his distillery to venture capitalists from California. Ben’s management style clashed with his investors – Ben wanted to maintain the same high quality product he built his reputation on, but his investors wanted to ramp up production to generate cash flow. Ben’s complaints resulted in the investors locking him out of the company he founded.

What can Ben do?

Not much. By selling a controlling interest in his company, Ben has ceded control of the company to his investors – all too common a tale. So what should Ben have done?

Tilting the Scales in Your Favor – Dealing With Investors.

Before jumping on the cash wagon, Ben should have consulted a lawyer before dealing with the venture capitalists. David Earhart, a Gray Reed corporate and M&A attorney, notes that VC’s will almost always demand control of a company, but a clever attorney can help a business owner retain as advantageous a position as possible. For example, when setting up the company Ben could have retained ownership of the intellectual property – i.e., the whiskey recipes – and licensed the IP to the company for a set period of time, thus giving him negotiating leverage with the VC’s. Other things to consider are to:

  1. Stay Capitalized: Too many business owners get into trouble when they realize – too late – that they are undercapitalized. Plan ahead and start negotiations with investors before you need their money – and are desperate enough for it to fully cede control of the company.
  2. Consult an attorney. A good corporate attorney can negotiate with investors and draw up corporate documents that give you the best possible terms for retaining some control over your company.
  3. Structure the Company and Shareholder Agreements: Set up the Company and Shareholder Agreements on the best possible terms on the front end, giving the most leverage possible.
  4. Choose Board Members and employees wisely: Make sure your board members and employees are experienced and capable, to prevent VC’s from demanding a wholesale replacement of your loyalists with members loyal to them.
  5. Get an employment contract: Ben could have secured an employment contract minimizing the grounds to fire him and maximizing his benefits if he is removed.
  6. Get a business divorce: If all else fails, negotiate an exit and a buy-out from the company. You will need an attorney involved to advise you on the best terms and navigate the shoals of possible non-competition and trade secret agreements.

A Real Life Example

Our example above was based on the real-life case of Balcones Distilling in Waco, Texas. After a bitter fight, Balcones’ founder and master distiller was just bought out of the business he started by the investors who bought a controlling stake in the business. For those wise souls interested in good whiskey, more information is available here.

Previous Tilting Articles: Protecting your Business from a Lack of “Wedded Bliss”; How to Dissolve a Business

Will Over-Serving Your Guests Ruin Your Holiday (Legally Speaking)?

Posted in *Way Out - Advice, Around the Holidays

The middle of the holiday season means more than just busy shopping malls.  It is also the time when many people host holiday parties.  After attending Mora Rounds’ holiday party and consuming several adult beverages, Bitu Tipsy agreed to drive her friend Shannon home.  Shannon did not know Bitu had been drinking.  Unfortunately, Bitu crashed her car into a building, sending Shannon to the hospital.  Shannon hires a lawyer, who learns that Mora kept serving Bitu even after she was clearly intoxicated.  Does Shannon have a claim against Mora?

Non-Employers are not responsible for over-served guests

Many times when people host a party at their home, one of their initial concerns is that they don’t want to over-serve any of their guests, not only for their guests’ safety but also because of a perceived potential liability to third parties.  But that perception is not reality in Texas.  A social host owes no duty to prevent someone from drinking and driving.  In fact, a social host is not liable for making alcohol available to individuals under 21, including minors.  This policy applies both to guests and to third parties – the social host owes no obligation, even if it knows the guest is intoxicated.

But employers may be responsible for their employees

While social hosts do not owe a duty, employers may owe a duty to exercise reasonable care over their intoxicated employees if the employer affirmatively exercises control over the employee.  For example, if an employer tells a noticeably intoxicated employee to leave the holiday party, the employer owes third parties the duty to exercise reasonable care to prevent the employee from causing an unreasonable risk of harm to others.  This can be done by placing the employee into a cab.  Conversely, if the employer takes no affirmative action, it has no duty to control the conduct of its employees.  Unlike social hosts, however, Texas courts conflict over whether an employer owes a duty to an intoxicated employee when the employer affirmatively exercises control over the employee.

Tilting the Scales in Your Favor

The best move you can make this holiday season is to hire a third party to serve alcohol at your party, especially a party for your employees.  Not only will it reduce (and possibly eliminate) your liability risk, but it will free you up to socialize with your guests.  Have a safe and happy holiday season!

Does My Business Need Riot Insurance?

Posted in *BTW - Noteworthy, Property Issues

Broken windows, looting and fires were some of the lasting images from the Ferguson, Missouri riots.  And if you looked at those pictures closely, you may have noticed that a substantial number of the damaged businesses were locally-owned, “mom and pop” shops.   And if you are a business owner, you couldn’t help but ask yourself how would you pay for the damage if there was a riot in your community.   Fortunately, most commercial property and business owner insurance policies include coverage for property damage due to riots.  Some policies also include “business interruption” coverage for lost income when damage is so substantial that the business has to shut down until repairs are completed.  Again, coverage depends on the specific policy.  So, a business owner would be advised, as part of their year-end evaluation of their business, to review their policy with their insurance agent to ensure their business is covered for such an event.

Divorce – Four Business Reasons for a Prenuptial Agreement

Posted in *BTW - Noteworthy, Family Issues, Legal Risk Management, Money

With an ongoing Oklahoma divorce case in mind last month Tilting wrote about Tigh A. Knott, his wife Lucy Knott and how a business owner’s divorce can impact his business and affect his partners. The real players were Harold Hamm and his wife Sue Ann.

Last week the court granted Oklahoma oil tycoon Harold Hamm (aka “Tigh”) a divorce from Sue Ann. Harold was ordered to pay her $323 million before end of 2014 and $7 million a month for 93 months. Harold’s fellow shareholders were relieved. Why? Because Hamm gets to keep his company and they don’t get Sue Ann as a member of the board. A larger property award might well have required Harold to sell controlling interest to get enough cash. Or, worse yet, placed his ex-wife on the board.  Could Harold aka “Tigh” have avoided betting his company?

Absolutely. Either or both of a prenuptial agreement and a company agreement (signed by his wife) could have sidestepped the drama.

The Facts. Harold Hamm is a self-made oilman and the chief executive and majority shareholder in Continental Resources. His foresight and timely investments in the Bakken Shale formation and fracking technology turned his company into a powerhouse and made him a billionaire 18 times over. Due to a lack of planning – a prenuptial agreement or a company agreement – Harold’s ex-wife was awarded over two billion – that’s “billion” with a “b” – dollars worth of marital assets, including a payment that Mr. Hamm must make to his wife of almost one billion dollars. The payment is so large that the presiding judge ordered that it be secured by a lien on twenty million shares of Mr. Hamm’s stock in Continental, valued at over one billion dollars. A copy of the Court’s 80-page long Memorandum Order can be found here.

Tilting the Scales in Your Favor – 4 Reasons to Sign a Prenuptial Agreement.

  1. Protect your business: If you own your own business, a divorce can cause that business a myriad of problems. Protect it with a prenuptial agreement and perhaps a company or shareholder agreement.
  2. Protect your partners: If you have partners, failing to have a signed shareholder agreement with all owners and spouses risks that, upon any divorce or death, the affected spouses may well become your partners with the right to participate in business decisions.
  3. Protect you (and your business) from debt: If most of your net worth is tied up in the value of your business and you have to split it with your spouse, then you either have to sell your stock or go into enough debt to pay off the divorce court’s property award. The right prenuptial and / or company agreements can avoid that risk.
  4. Protect your Business Valuation: Absent an agreement otherwise, a business can be valued a number of ways. Those signing your company agreement can agree in advance the method by which a partner’s ownership interest is valued and how a surviving spouse or ex-spouse will be paid, saving both time and money.

Previous Tilting Articles: Protecting your Business from a Lack of “Wedded Bliss”; How to Dissolve a Business;

Fracking! Come and Take It!

Posted in *BTW - Noteworthy

Believing that she could no longer endure around-the-clock noise, dust and truck traffic in her residential Denton neighborhood, Lisa Frick and friends collected signatures to put a proposed ordinance on today’s ballot Generally Providing That Hydraulic Fracturing Operations are Prohibited in the City of Denton. Frack Petroleum Company, among others, argues that the City of Denton cannot unilaterally prohibit fracking operations anywhere because state rules outweigh local laws and because landowners have a right to the value of their land (and minerals) which cannot be taken without compensation. Who’s right?

Hydraulic fracturing, or “fracking,” (or, perhaps correctly spelled “fracing”) is a well-stimulation process used to maximize the extraction of underground resources including oil, natural gas, and geothermal energy that injects water, sand and chemicals under high pressure into a well, cracking the rock shale.

The Facts as reported by both sides of the vote – Vote For the Ban and Denton Taxpayers for a Strong Economy (you might be able to guess who emphasized what).

  • There are over 281 active gas wells permitted within the Denton City Limits
  • In 2013 Denton established a 1,200-foot setback from homes for new wells
  • Existing Denton drilling permits are vested under an ordinance with a much closer setback – some 200 feet from homes and parks
  • New rule is inapplicable to wells with existing permits, subject to fracking at any time
  • Drilling protects local economy, jobs, revenue to schools / colleges and local government

The Issues –  “Come and Take It” – Who wins when

Denton and Individual Surface Owners challenge Texas, Drillers and Property Owners

Individuals argue that Fracking –

  • Contaminates the water supply
  • Depletes water supplies
  • Harms air quality
  • Causes earthquakes*

State and Mineral Owners, predictably, deny these claims and argue that -

  • State agencies have strong track record of monitoring and regularly modernize
  • Only Texas Railroad Commission and, in some instances the Texas Commission on Environmental Quality have authority to adopt oil and gas drilling rules
  • If passed, the Denton Ordinance would be an “unconstitutional taking” of the mineral owners’ valuable property rights
  • Contaminated water is not caused by the fracking process, but something else

Denton Mayor Chris Watts says, if his city adopts a fracking ban today, “It may be just the beginning for us,” said Watts, an attorney. “The vote is not the end of the story. It may just be the beginning. It may be decided at the courthouse or at the statehouse.”

My insightful Gray Reed partner Charlie Sartain and expert Oil and Gas attorney regularly blogs about Energy and The Law and has several compelling and humorous entries worth your read:

What’s Going On in Denton, Texas?
Truth and Illusion in the Fracking Debate
Frac(k)ing, Parr v. Aruba, and Minority Oppression
In Wyoming, a Higher Burden for Chemical Disclosure Exemption?
Barnett Shale Drilling Increased North Texas Ozone – Fact or Fiction?
Hydrocarbon Exposure Reconsidered

Also, check out this Tilting the Scales article.

* Earthquakes and other claimed fracking risks will be addressed in greater detail, especially if Denton votes to ban fracking tonight.

 

Ebola: Individual’s Freedoms v. Community Health Concerns – Who Wins?

Posted in *Weighing In - IMHO

Last month I wrote about employers’ potential liability for Ebola in the workplace.  Now state governments are seeking to quarantine citizens to protect against the possibility of a health epidemic.  An inherent conflict exists between individual freedoms and the government’s interest to protect public health. Can the government quarantine an individual? What happens if the individual ignores the directive?  We got some answers to these questions today.

Even though she tested negative for Ebola and is not showing any symptoms,  a nurse returning from West Africa to treat Ebola patients was ordered quarantined by both New Jersey and Maine.  The nurse is now threatening to sue for what she calls a violation of her “basic human rights.”  Earlier today Maine asked a court to order the nurse quarantined because she violated the state’s quarantine order by riding her bike in public.

The quarantine orders from the governors of New Jersey and Maine appear to be a reaction to the CDC’s missteps in Dallas, especially allowing a nurse who had treated “patient zero” to fly when the nurse told the CDC she had a fever.  At a hearing today, the Maine court refused to quarantine the nurse, but ordered her to self-monitor, coordinate all travel with public officials, and immediately notify officials of any symptoms.

The court’s decision is spot on.  I’m a proponent for protecting the public health, and the government should do everything to ensure that an Ebola “outbreak” doesn’t occur in this country. Yet, here both sides should use some common sense.  Maine doesn’t need to lock this nurse in her home for 21 days, especially when she’s not showing any symptoms and tested negative for the virus.  The nurse should be allowed to go out in public, but she should take steps to minimize her interaction with people (like yesterday when she rode her bike on a dirt path to avoid coming in contact with people) and should take other steps to regularly monitor her condition so that, if she does show symptoms, she can be immediately treated and isolated from the public.

Individual rights and community concerns can and should be reasonably balanced, particularly when there is little to no basis for real concern.

Divorce – Impacting Your Meddlin Hands Partners!

Posted in *Way Out - Advice, Family Issues, Legal Risk Management, Money

To the other four minority owners who enjoyed the meteoric rise of Meddlin Hands Cleaning Products, when Lucy Knott sued their majority partner Tigh A. Knott for divorce, the divorce was anything but routine. Lucy wants half of the business and day to day participation. With no company agreement, the other shareholders face the prospect of an inexperienced partner they never selected. What are Meddlin Hands’ options?

Bleak. Without a company agreement, Meddlin Hands and Tigh A.’s other partners have limited choices – allow Lucy to own half of Tigh A.’s stock and participate in the daily affairs of Meddlin affairs, sell Meddlin Hands and divide the profits, or lend Tigh A. the money to buy out Lucy (at a price that is likely to be at a premium under the circumstances) to permit Tigh A. to remain a partner and serve on the board. Doing so allows the remaining owners to sidestep a disinterested and inexperienced spouse meddling in the business of Meddlin Hands. If Meddlin Hands has ready access to capital or credit, having the business lend Tigh A. half of his interest to purchase from his wife is the likely option. Still, the cash cost is not the end of the repercussions to the shareholders and the company – the detrimental effect upon Meddlin Hands’ reputation, the cooling of any interest from possible buyers, and the risk that all shareholders spend significant time in court dealing with aggressive tactics of divorce attorneys rather than tending to the day to day business of Meddlin Hands.

The rest of the story? Tigh A. and his wife reconciled. He later passed away, and Lucy became a shareholder and a board member anyway – with full majority control.

Tilting the Scales in Your Favor – A Business with Partners.

If your business has third party owners and is going to succeed, its long term viability requires adequate forethought that goes far beyond the LegalZoom.com formation. You need a good shareholder / company agreement. Failing to have a company agreement that makes adequate plans for death, divorce and disability, among other issues and risks, is likely to create problems for any successful business like Meddlin Hands. On the other hand, if your business is not successful, none of this matters.

More than just forming your business entity, whether you and your investors become partners, shareholder or members / managers, your operating agreements should include provisions to protect the interests of the other owners if one of the owners gets divorced, including considering:

  • A requirement that unmarried shareholders provide the company with a prenuptial agreement prior to marriage along with a waiver by the owner’s spouse-to-be of his or her future interest in the business; or MORE LIKELY,
  • A prohibition against the transfer of shares without the approval of the other partners or shareholders and the right, but not the obligation, of the partners or shareholders to purchase the shares or interest of one or both of the divorcing parties so that the other owners can maintain their control of the business, which should be signed by all of the spouses.

Tilting the Scales in Your Favor – If Your Business is Only You and Your Spouse.

If you own your own business, and whether you work with your spouse or not, and if you believe the business is likely to be successful, there are six key steps you should consider before and also after a divorce is filed –

  1. Plan Ahead. Sign a prenuptial, shareholder or buy-sell agreement
  2. Make Sure Your Lawyer is Working for You. Discuss how to streamline the process.
  3. A Team of Smart Advisers is Key. Double check your decisions with trusted advisers.
  4. Hire One Business-Valuation Firm. Accept the one value rather than fighting over two.
  5. Avoid the Two-Headed Monster. Rather than split the business in half, get creative with debt or other assets.
  6. Prepare for the Lasting Effects of Divorce. There are lasting emotional and financial effects of divorce. Figure out what you must do to stay focused.

Previous Tilting Articles: Protecting your Business from a Lack of “Wedded Bliss”; How to Dissolve a Business

Ebola in the Workplace – Dangerous to Employers

Posted in *Way Out - Advice, Legal Risk Management

Returning from a trip to West Africa with some college buddies, Ben X. Posed, a waiter at Chotchkie’s, showed up for work with a fever, muscle aches, a strong headache, and stomach pains.  Begging his boss Dee Manding for the rest of the day off, Ben complained of his aches and pains and told of his overnight stay where one of the villagers recently died from Ebola.  Dee Manding refused any time off explaining he was short-staffed.  The next day Ben was hospitalized with a confirmed case of Ebola.  Are Dee Manding and Chotchkie’s liable if other employees, or patrons, contract Ebola?

Yes. If Dee and Chotchkie know or suspect that Ben has Ebola or another deadly, communicable disease, Dee owes a duty to protect his other employees and possibly his customers from exposure.

Employer’s Duty to Protect?  An employer must use ordinary care to provide a reasonably safe workplace.  For example, a hospital owes a duty to insure that its health care workers know they are treating a patient with HIV positive once the hospital learns that information. Even if the disease is rare and it is unlikely that someone would contract it, an employer still owes a duty to warn its employees.  Recently a railroad unsuccessfully argued it owed no duty to warn its employees that mosquitoes can carry West Nile virus, losing its argument that was common knowledge.  According to the Centers for Disease Control, Ebola is a “rare” disease and outbreaks have occurred “sporadically” since the disease was discovered in 1976.

Must the Employer Protect the Public? Because Chotchkie’s was aware of Ben’s recent travels and showed symptoms associated with Ebola, but then told Ben he had to work, it is likely that the restaurant owes a duty to protect its patrons from exposure to Ben. Chotchkie’s owes a duty to prevent foreseeable injury because it knew of Ben’s condition and exercised control over Ben – refused to allow him to go home.  Chotchkie’s also owes a duty to customers and visitors to keep its premises, safe from any unreasonable “condition” that it knows or should have known. That includes surfaces that Ben’s bodily fluids might have on them, such as if Ben wiped sweat from his brow and then touched a door handle. Chotchkie’s needs to disinfect the door handle or warn its guests not to touch it.

Tilting the Scales in Your Favor

Sick employees present a double danger: if highly contagious, perhaps liability for infecting other employees and guests; and, even if not highly contagious, presenting the risk of lost company productivity caused by other sick employees in the workplace. Certainly if an employee complains of Ebola-like symptoms or other similarly rare and deadly diseases, send them home to seek medical treatment.  Arguably, even employees who are coming to work to protect their PTO should be instructed to leave immediately and seek medical treatment.  In the worst of cases, an employer should consider closing the office, or the parts the employee(s) accessed that day, and have them cleaned.

Texting Trouble: Who’s Liable?

Posted in *Weighing In - IMHO, Employment & Labor, Legal Risk Management

I.M. Dense, a stockbroker employed by BI Lough was driving to a non-business event when he struck and injured a motorcyclist. On personal time, in a personal vehicle and using a personal cell phone, Dense admitted that he was responding with text messages to “cold call” responses from earlier in the day. “Cold calls” are a common practice at BI Lough. Did I.M. Dense break the law? Even if he did not commit a crime / violation, is he responsible just for being on the phone? What about Dense’s employer BI Lough?

Texting Against the Law?

Maybe. It depends upon where I.M. Dense was and how old he is. If he is under 18 or in a school zone, he broke state law. Texas state law prohibits anyone under the age of 18 from driving and using wireless communications devices or from using a handheld device in a school zone. If I.M. Dense was texting and driving within the city limits of any one of 23 Texas towns including, for example, Austin, El Paso and San Antonio, he violated a city ordinance. Being ticketed for violating a city ordinance does not carry the same penalties as a state moving violation that would affect Dense’s driving record.

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