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Legal Health Check for Businesses

©Copyright 2003-2013 Whittington Law Associates, PLLC

The following is Whittington Law Associates, PLLC's list of items for a legal health check for businesses. The list represents the different categories in which we often do work and does not concern all legal issues, but is intended simply to trigger your thoughts about potential problems. It may be that in many of the categories you perceive no problems and legal review would not be cost effective; you may want us to take a closer look at others.

Here is the list:

1) Buy-Sell.

If your business is a closely-held corporation, is there a buy-sell agreement among shareholders in case of deadlock or death or transfer? We should take a look at the buy-sell agreement and compare its provisions to the desires and resources of the parties. The following are critical issues in most buy-sell agreements:If your business is a closely-held corporation, is there a buy-sell agreement among shareholders in case of deadlock or death or transfer? We should take a look at the buy-sell agreement and compare its provisions to the desires and resources of the parties. The following are critical issues in most buy-sell agreements:

(a) Does stock ownership coordinate appropriately with your estate planning?

(b) Does it have objective standards? The main purpose of a buy-sell agreement is to obviate the need for negotiation at a difficult time.

(c) Does it assure the remaining parties' ability to control the stock?

(d) Does it give the remaining parties the ability to choose their future partner?

(e) If the parties do not have unlimited resources, does it provide a financing arrangement to give necessary time to raise money?

(f) Does it provide a mechanism to pay estate taxes of a deceased party or income taxes of a withdrawing party? Does it do so at the lowest tax rates?

2) Corporate.

(a) Does your business form adequately limit your personal liability? Have you considered a limited liability company (LLC), an S- corporation, a C-corporation, or a limited partnership form?

(b) Review of articles, by-laws and minute book. Do they meet your needs and follow the legal requirements? Are the various requirements being followed (such as frequency of meeting dates and use of all corporate titles)? Is anything cumbersome? Are significant corporate actions entered in the minutes?

(c) Are your annual reports up to date?

(d) Is the company qualified in all the states where it is doing business?

(e) Is there provision for protection of the Subchapter S status if new shareholders are accepted?

(f) Is there a shareholders' agreement and, if so, does it meet your needs?

(g) Do you have appropriate officers' and directors' indemnities and/or insurance?

3) Employment matters.

(a) Does the company have the ability to terminate employees at will or on reasonable cause? In this regard, are there any employee manuals, policy statements, contracts, or side agreements, or understandings with employees (these could be deemed part of the employment contract by a court)? Have employees signed employment agreements/understandings stating that they understand they may be terminated for cause?

(b) Have employees signed non-competition agreements?

(c) Have employees executed secrecy agreements relating to inventions, patents, customer lists, and other confidential business information?

(d) Do you have an adequate sexual harassment and anti- discrimination policy in place? Are you adequately applying it?

4) Intellectual property.

(a) Does the company have patents, trademarks, or copyrights? If so, are the filings up to date and have future filing dates been diaried?

(b) Does the company have any licenses under patents of others, and does it license anyone else to use its products?

(c) Does the company have valid licenses for all the computer software it uses?

5) Distributors.

(a) Is there a standard distributorship agreement (domestic/international)?

(b) Does the company have the ability to terminate the distributors on reasonable cause and on reasonable terms?

(c) Do the distributor agreements violate any special state statutes?

(d) Have you had any difficulties with distributors?

(e) Does the company make any attempt to enforce pricing recommendations with distributors? (This could be an antitrust violation.)

6) Suppliers.

(a) Should we review the legal terms, including "fine print" specifications, contained in standardized purchase orders?

(b) Do you negotiate individual contracts with any large suppliers?

(c) Any problems with returning faulty merchandise?

(d) Are you dependent on any supplier? If so, consider a long-term supply agreement or purchase of the supplier.

7) Product.

(a) Do you give a product warranty? If so, consider legal limitations in the warranty language. Consider also language to limit implied warranties.

(b) Have you had any major product problems?

(c) Are any of your products especially dangerous?

(d) Do you have appropriate products liability insurance?

8) Debt.

(a) Do you have any major credit agreement with lenders or investors? Are there any problems in loan administration or contract documents which should be reviewed? Are you in conformance with all covenants thereunder? Is there any potential for renegotiating or substituting new lines of credit?

9) Benefits.

(a) Do you have appropriate employee benefits (medical, pension, workers' compensation insurance, etc.)?

10) Real estate/leases.

(a) Are your properties/facilities sufficient and appropriate for your needs?

(b) Do you have appropriate title to all real estate you own?

(c) Will any leases be renegotiated in the near future?

(d) Are there any problems under existing leases?

(e) Do you have a signed hold harmless agreement for premises liability?

11) Personal Property.

(a) Do you have appropriate title or lease arrangements for any manufacturing equipment?

(b) Is your equipment insured?

(c) If you loan money to others, have you adequately documented the loans? Do you have adequate security? Is your security properly secured by real estate and UCC filings? (If not, it may not give any protection.)

(d) Do you own or lease your computer equipment? Could you save money by selling and leasing back such equipment?

12) Customers.

(a) Should we review standard invoices/sales contracts?

(b) Do you use letters of credit for foreign customers? If so, have they worked smoothly and do they give you adequate protection?

(c) Do you have any collection problems?

(d) Are you satisfied with the level of your uncollectables?

13) Regulatory.

(a) Do you have all licenses or permits necessary for the operation of your business? Have you had any past violations? Are you aware of any environmental violations? In this regard, consider whether you have any toxic effluent.

14) Litigation.

(a) Are you aware of any potential disputes? If so, we can help you most by addressing them before they turn into litigation, and helping you develop facts, making litigation more winnable. It is also easier to negotiate a settlement before positions harden.

(b) If you are threatened with suit, you may be entitled to have your insurance company defend you at its own expense. If you do not address this immediately, you may waive this valuable right. Also, insurance coverage issues are complex, and you will usually fare better if you are represented in the process.

(c) You may be entitled to indemnification from someone else. If these rights are not promptly asserted, they may be lost.

We hope this list is helpful. If you would like to discuss any of the items, or any other matter, feel free to call us. We would be pleased to assist with your legal needs.

© Copyright 2003-2013 Whittington Law Associates, PLLC

 

 

 
35 South Main Street   •   Hanover, NH 03755   •   (603) 643-2755   •   Also in Woodstock, VT
 

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