Confidential folder isolated on a white backgroundGrowth in the DFW metroplex is booming, and the City of Flourish is one of the driving forces. Unfortunately, the City has had a difficult time keeping up its infrastructure with the growing population.  Recently the City selected a bid from Slab Mixer Co., a concrete pipe manufacturer, for culverts for a project widening some of the City’s streets.  After the City and Slab signed their contract, a group of Flourish citizens, concerned with how the City’s spending might affect their taxes, requested a copy of the contract under the Texas Public Information Act (TPIA).  When the City notified Slab of the request, Slab asserted that some of the terms in the contract needed to be redacted because they would give Slab’s competitors an advantage in future contracts.  Does Slab have the right to do that?

Background on the Texas Public Information Act

The Texas Public Information Act provides the public with the right to access information the government collects, subject to approximately 60 exceptions.  Tex. Gov’t Code §§ 552.221, 552.101-.154.  One exception is “information that, if released, would give advantage to a competitor or bidder.”  Id. at § 552.104(a).  Historically, the Texas Attorney General’s Office, which is charged with interpreting the Act and maintaining its uniformity, has taken the position that this exception only protects the governmental body, and not a private party.  In other words, the AG believed the Act only allowed a governmental body to protect information that would place it at a disadvantage with other governmental bodies inside and outside of the State of Texas.

Do Private Parties Have a Right to Protect Their Bid Information? 

Yes.  In 2015 the Texas Supreme Court in The Boeing Company et al. v. Paxton held that “a private party may assert the exception to protect its competitively sensitive information.”  The Court found that the plain language of the exception was not limited to a governmental body’s right to protect that information.  It also noted that the governmental body had the right to defer to the private party to assert its competitive interests were at stake and request that the competitively sensitive information be withheld.  Thus, Boeing had standing to assert the exception, but would have to show that the information requested, “if released, would give advantage to a competitor or bidder.”

What about Citizens’ Right to Know How Much Their Government is Spending? 

Some have claimed the Texas Supreme Court’s decision in Boeing has given governmental bodies a carte blanche loophole to avoid turning over any information about their contracts.  According to these critics, the Court’s decision allows the governmental bodies to assert that disclosing that information would give an advantage to the successful bidder’s competitors in the future.

While it’s a superficially appealing position from a taxpayer’s perspective, it ignores another argument that the governmental bodies assert to protect disclosure of this information.  As mentioned above, the governmental bodies have asserted the exception protects disclosure of sensitive information that the body believes will give other governmental bodies an advantage.

For example, the Boeing case points out that the Attorney General ruled the exception protected disclosure of information concerning the Texas Governor’s marketing meetings with businesses in other states because the State is competing with other states to recruit those businesses to relocate. The release of that information would give other states the advantage to approach those businesses with competing or better incentives.

Proposed Legislation

Companion bills (HB 792 and SB 407) have been filed in the Texas House and Senate to address the Texas Supreme Court’s decision in Boeing.  If enacted, the legislation would make clear that the exception only allows a governmental body to protect information that it believes would harm its competitive interests.  It would also apply an “exception to the exception” that would require governmental bodies to disclose that competitive information after the body awards the contract.  HB 792 was recently referred to committee. SB 407 was referred to committee, where it was discussed but not voted upon yet.

Tilting the Scales in Your Favor

That depends on how your business has been affected by the competitive bidding process.  If you have won bids in the past, and your proposals contain proprietary information that gives you a competitive advantage, you should ask the governmental body to redact that information if anyone requests it under the TPIA.  On the other hand, if your business has consistently lost out in the bidding process, you may want to press the Legislature to pass HB 792 and SB 407 this session so that you can see your competitor’s proposals and try to figure out how you can match, or beat, them in the future.

 

This is the fourth installment of a series discussing potential pitfalls that JR and Sue Ellen Pawlenty, who own Pawlenty Energy, should be wary of when they are trying to sell their business. Recently, Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; and Successfully Selling Your Business: 4 Tips – No Matter the Buyer. Today, we’re going to discuss why it’s important for your business’s financial records to be in order.   

Avoid Losing the Sale

Many business sales begin with a letter of intent that gives the buyer a due diligence period to investigate and evaluate the business.  Inaccurate financial statements will send up a red flag for potential buyers and probably cause them to walk away from the sale.

Potentially Avoiding Litigation

When there’s a falling out between the buyer and seller after the sale, particularly where the business isn’t doing as well as it was before the sale, the buyer usually complains that the seller’s financials were inaccurate. Although you can’t control whether the buyer sues you, you can create a paper trail during the course of the sale that will make it easy to present your defense.  One way to do that is to pay your accountant to perform an audit of your financial statements before you put the business up for sale.

Boosting Your Business’s Market Value

Inaccurate financial statements might also lead to a below-value sale. For example, if your financial statements inadvertently omit the extra $100,000 in revenue you made last month, the business doesn’t look as valuable to a prospective buyer, meaning you will probably sell the business for less than it is actually worth.  You should also consider having the business appraised.

Other Important Records

If your business is regulated by the local, state or federal governments you want to make sure all of your required licenses are in good standing.  Potential buyers who discover that a business’s licensing is not in compliance will question whether the business’s financial records are also sloppy.

If you incorporated your business, you need to make sure that you have filed all necessary documents with the secretary of state.

You may also want to consider obtaining an environmental audit of the property where your business operates if you handle hazardous chemicals.

Tilting the Scales in Your Favor

Although getting your financial and other documents in order may take some time and cost some money, doing so before you put your business up for sale will save you from surprises later on. If a buyer finds flaws, it will delay the sale, may cost you the sale and may have cost you other potential buyers while you were trying to fix these problems.

 

Business For SaleAmong the growing number of business owners looking to sell their business, JR and Sue Ellen Pawlenty are in the market to sell their company Pawlenty Energy. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls and So You Might Sell Your Business Someday: Do You Need a Broker?  For multiple reasons, such as family, health, age or interest, you have decided to sell your business. Now what do you do?

4 Tips – No Matter the Buyer

  1. Get your House in Order – all of your records, especially financial records should be reviewed by a competent accountant and be consistent with GAAP accounting methods.
  2. Assemble your Asset Financial Information for Buyer Due Diligence – contracts with buyers, employee policies and contracts, and overall business structure for legal and tax implications.
  3. Business Valuation – get an early idea from a competent valuation adviser and ask your expert for ideas to improve valuation, including identifying and perhaps courting your current competition. Careful: it may not be worth what you think, know what you need to retire.
  4. Plan – identify specific shareholder objectives and a transition plan. If your primary plan is a family transition plan, WAIT, there’s much more!

9 Specific Tips for Succession Planning of a Family Business

Family businesses account for a staggering 50 percent of the gross domestic product of the U.S., and it is not just in small storefronts or website businesses: 35 percent of Fortune 500 companies are private or public companies that are controlled by families. Key issues for succession planning include:

  1. Generational Transition – only a third of all family businesses successfully make the transition to the second generation.
  2. Alignment of Family Interests – alignment becomes more problematic as members retire and turn over the reins to the new generation and expect retirement income from the company.
  3. Balancing Financial Returns – buyout agreements are challenging when retiring family members look to the balance sheet value rather than an earnings capitalization model.
  4. Interfamily disputes. Family member interests may not be aligned, becoming even more difficult upon a family owner’s divorce or death and the surviving spouse holds stock (and voting rights) but is not actively contributing to the business.
  5. Estate and Inheritance Issues. Taxes and probate upon a family owner’s death can complicate business continuation.
  6. Identify and Groom the Successor. Identify a competent successor then develop them to assume the headship of the business by on-the-job training, working under mentors and advisors, and delegating before the actual passing on of the baton.
  7. Document the Succession Plan. A concrete, straight forward and not open to interpretation at a succession plan should be written: identifying the successors both in ownership and management; roles of both active and non-active family members in the business; and the support system for the successor from family members as well as the company.
  8. Create a Plan for the Transition. Establish how the business will be handed over – will the successor purchase the company, or will it be gifted? And when? If sold, what purchasing options will the older generation offer the successor? Minimizing taxes to all is critical.
  9. Communicate. The Plan must be timely communicated to the family and those active within the business, as well as non-active members, preferably by the current ownership. Every family member and employee must fully understand how the succession will work, and what their part is within it all. 

Tilting the Scales in Your Favor

You can’t sell your business like you sell your car. It’s more like selling your house, but even more challenging than just timing the market, de-cluttering the inside and slapping a coat of paint on the outside. Beyond just the physical assets and the economic climate, you are dealing with people – employees, customers and vendors. Even more complicated is the addition of continuing family ownership, management and control to the mix. It takes time, planning, decision making and then decisive communications to all concerned for success. Success won’t happen overnight; failure almost certainly will happen if you don’t.

With 2015 upon her, Cinda Bossey is making her action item list for her business, Bossey Boots.  Although the bulk of her time and efforts are spent on getting the business running and generating revenue, occasionally she asks herself whether she has cleared all of the necessary legal hurdles.  What should Bossey ask her attorney?

When the calendar turns the page to a new year, many people reflect on what happened in the last year and create a list of tasks designed to improve their business in the upcoming year.  Several years ago Jamie Ribman, who used to write for Tilting, published a similar New Year’s article.  We wanted to remind you of those and some additional legal resolutions to help get your business off to a fast start in 2015.

Get Incorporated

Whether you just started a new business, or you’ve been in business for a long time, it is important to make sure you establish an entity for your business and not operate as a sole proprietorship.  Running your business through an entity may provide tax advantages, and can also help limit your liability.

Review and Update Corporate Documents

As Jamie pointed in his article, reviewing your corporate documents is like getting your annual physical – no one likes it, but a checkup can be a good thing.  Several things may have changed in your business during the past year:

  • You changed locations
  • You added or lost a partner
  • You elected new officers or directors
  • New tax laws

Take the time to go over your corporate documents with your attorney to make sure everything is in order.

Company Agreements

If you own the business with other people, even if it is a spouse or other family member, it is very important to have a company agreement establishing each co-owner’s rights and obligations.  As we have previously talked about on this blog, 50/50 business relationships can be fraught with problems.    Having company agreements in place are very beneficial in the event there is a significant change in your personal life (such as death or divorce) or if you and your co-owners decide to go your separate ways.

Customer Contracts

Abraham Lincoln (who was an attorney) famously said, “He who represents himself has a fool for a client.”  Many clients draft their own contracts to use with their customers, or borrow a form contract used by one of their competitors.  Most business litigation disputes involve contracts that were drafted and negotiated by parties who did not involve an attorney.  If you have just formed your business, use an attorney to help you draft a solid form contract.  If you are an existing business, it is always good to have your contract reviewed annually so that it can be updated based on any changes in the law.  The old adage penny wise, pound foolish applies here: it is better to spend a little bit of money to have your attorney prepare or review a proposed contract than to pay that same attorney a lot of money to litigate over that same contract.

Employee Issues

If you have employees, it is important to have a handbook that sets forth company policies to protect your business from liability.  You want to make sure that your handbook is tailored to your business.  And like your corporate documents, you want to make sure your handbook is reviewed each year and updated to reflect any changes in the law.  And depending on what type of business you are in, you may want to consider having certain employees sign non-compete and non-solicitation agreements.  Our colleague Michael Kelsheimer recently wrote a great blog article on employee handbooks, and I recommend you review it.

We hope that 2015 is a joyful and prosperous year for you and your business!

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

Richard and Rachel Rich married 30 years ago and enjoyed a tempestuous union ever since. One year prior to their marriage, Richard started up a small computer products company, Orange Computers. During the marriage, Orange Computers’ business skyrocketed after the introduction of their premier line of attractive digital personal assistants. Even after taking his business public, Richard still owned a majority share of Orange’s stock and was believed by the public to be the digital guru responsible for its success.

Continue Reading Protecting your Business from a Lack of “Wedded Bliss”

Jeff Leach (LRM associate and Texas House Representative), helped us recap 5 bills of critical interest to you and your business passed in the last Session.

DRUG TESTING FOR UNEMPLOYMENT BENEFITS (SB 21)

Drug testing required to receive unemployment benefits IF employer required pre-employment drug screening.

The legislation, effective September 1, mandates if someone submits an initial claim for unemployment benefits, they must submit to a drug-screening assessment, consisting of a written questionnaire, by the TWC if their occupation required pre-employment drug testing. If a reasonable likelihood of drug use is found, the applicant will have to pass a drug test to be eligible for unemployment benefits. Seven other states have passed similar measures.

BUSINESS TAX CUTS (HB 500)

Improving Texas’ positive business climate.

House Bill 500 offers over $700 million in business tax relief and makes the $1 million small business tax exemption permanent.  HB 500 also provides for a franchise tax deduction for businesses that are relocating to Texas.

SCHOOL DRIVING LAWS STRENGTHENED (HB 347)

Statewide ban on handheld cell phone use on school property.

Unless the vehicle is stopped or the driver is using a hands-free device, House Bill 347 prohibits someone from using a wireless communication device while on public or private elementary or middle school property.

EDUCATION (HB 5)

Reforms: A new accountability system, new end of semester exams, and academic planning flexibility.

We must not only teach our students how to pass tests and graduate high school, but we must also train them and prepare them for the jobs of tomorrow. With House Bill 5, the Legislature instituted sweeping reforms to Texas public education.  HB 5 institutes a new standard course of study for high school students and substantially reduces the number of end-of-course exams public high school students must pass to graduate, from 15 to 5. HB 5 also establishes a new accountability ratings system evaluating schools on academic performance, financial performance, and community and student engagement.  Finally, HB 5 changes how students who do not wish to attend college can enroll in vocational, career and technology-related courses.

WATER (HB 5, HB 1025 & SJR 1)

Water: Long-term, affordable and sustainable water supply projects.

Water, not oil, is the foundation upon which the Texas economy is built.  The 2012 State Water Plan says the total needs are projected to increase by an astounding 130% over the next 50 years.  A series of bills (H.B. 4, H.B. 1025 and S.J.R. 1), creates long-term financing assistance for water supply projects. Two billion dollars from the state’s “Rainy Day Fund” will pay for the water plan via a new State Water Implementation Fund for Texas (SWIFT), a special fund outside of the state treasury to implement the new plan.  Texas voters must approve the funding structure via a constitutional referendum. 

Pizza the Action is a major distributor of pizza dough and toppings and provides these products to many large national pizza chains.  Pizza the Action’s top sales person, Eaton Wright, just announced that he was resigning and that he had accepted a position with The Pie’s the Limit, an upstart competitor in the very same industry.  Wright did not have an employment or non-competition agreement with Pizza the Action.  While Wright has ostensibly done nothing yet, Pizza the Action is concerned about Wright providing his new employer with Pizza the Actions’ customer lists, customer data and financial pricing information.  Is there anything that can be done to stop him?

Yes.  During this past legislative session, Texas became the 48th state to enact (its version of) the Uniform Trade Secrets Act (“TUTSA”). TUTSA, which goes into effect September 1, 2013, will provide companies with greater protection of their trade secret information across Texas.  Previously, Pizza the Action may have found it difficult to obtain a temporary restraining order or injunctive relief against Wright without some proof of actual misappropriation of trade secrets.  TUTSA, however, now authorizes injunctive relief for actual and threatened misappropriation.  Pizza the Action could now arguably seek injunctive relief based on the “inevitable disclosure doctrine” where circumstances suggest that Wright would inevitably make use of their trade secret information as part of his new position.  Other significant changes include:

  1. an expanded definition of trade secret (includes lists of actual and potential customers or suppliers as well as financial information);
  2. safeguards to protect allegedly trade secret information during the pendency of the litigation (e.g. through protective and sealing orders);
  3. provisions for the award of attorneys’ fees to both the plaintiff and defendant; and
  4. the availability of exemplary damages (act to exceed twice the economic damages) where the plaintiff establishes willful or malicious misappropriation by clear and convincing evidence.

 Tilting the Scales in Your Favor

The TUTSA seeks to put Texas in step with other states and provide increased predictability for those seeking to assert claims in Texas courts for trade secret misappropriation.  Companies will now have a statute in their arsenal as opposed to merely relying upon employment agreements and case precedent.  Given the increased certainty in the law, businesses should consider choosing Texas as the governing law for their agreements as well as modifying their agreements to reflect the recent changes.  As the ultimate determination of whether information constitutes a trade secret will be case specific, businesses should be able to demonstrate measures taken to safeguard trade secret information and should clearly identify such information as “confidential.”