Almost every modern business is organized under some sort of limited liability platform. Perhaps this is in response to what the press has dubbed a “frivolous lawsuit problem.” Nevertheless, these platforms are a great starting point for any business, especially when it comes to insulating the owners from external liabilities like suits from customers. Significantly less press attention is focused on the fact that most business litigation is actually a result of internal conflicts, such as suits between and among owners, shareholders, directors, partners, members, and officers. A problem I often come across is that most people do not understand that, in the future, serious complications among owners and partners can arise due to merely electronically filing the bare minimum to get your limited liability status.
When I am retained by entrepreneurs to help start a business, the last topic anyone wants to discuss is circumstances that would trigger the dissolution of their newly formed organization. I usually get the same response, “we are all good friends and we will work that out.” The fact is, entire books of case law exist that are filled with cases beginning with a phrase similar to, “they were all friends, and then…”
In Florida, whether you choose to be a Florida Corporation, a Florida Limited Liability Company, or a Limited Partnership, the respective business organization statute calls for an additional internal governance document to be drafted. These are bylaws for Corporations, operating agreements for Limited Liability Companies, and partnership agreements for Limited Partnerships. In my opinion, the internal governance document is the single most important document an organization may have. It is a binding agreement between the business owners and managers, outlining internal relationships, as well as duties to the business and each other. It explains your rights as an owner, the procedures for voting and resolving disputes, as well as, the un-mentionable: dissolution. Most importantly, this document is, after all, an agreement and, in most cases, your agreement overrides any statutory rules that contradict it.
So that fact that all the owners of the business are currently great friends, is actually the best reason to resolve all of the issues before an event occurs that can only be resolved through litigation because there was no agreement.
As I explain to anyone that I assist with business formation, there are lots of free and cheap resources online that can aid in the legal end of starting a business. In fact, most of the initial electronic filing, registering of a tax ID number, and a state sales tax number, can easily be done without attorney supervision or paying one of these incorporation services that we hear advertised on the radio. The internal governance documents, however, can get rather complicated. The owners of a newly formed business can receive a great benefit from having their legal duties to each other, as well as their organization, thoroughly explained to them. If I could recommend having an attorney for any one part of the business formation, it would be to assist in drafting the internal governance documents.
That being said, I know that not every business, or start-up, is in a position to afford an attorney and, in the business world, one will not be assigned to you. I think that people would be surprised how many business attorneys, such as myself, would be willing to provide their assistance solely to form that initial relationship, and to help your business get to a position where you can not only afford to, but are glad to retain us to assists with all your legal needs.
The Virginia Supreme Court recently granted a writ of appeal in a noncompete case from the Fairfax County Circuit Court. In Home Paramount Pest Control Companies, Inc. v. Justin Shaffer,
the issues before the Court include whether the lower court erred in
finding the noncompete overly broad. In finding the noncompetition
agreement unenforceable, the Fairfax Circuit Court considered the scope
of the restricted activities, but did not consider the portion of the
agreement in light of the narrow geographic scope of the restriction
which applied only to certain limited geographic boundaries within
Fairfax County.
Noncompetition agreements in Virginia are strictly construed against
the employer, but a court will enforce the parties’ agreement if it is
reasonable and narrowly tailored to protect the legitimate business
interests of the company. In assessing the enforceability these types
of restrictive covenants, Virginia courts scrutinize three aspects for
reasonableness: (1) duration of the restriction; (2) geographic scope
of the restriction; and (3) breadth of the restricted activities.
In Virginia, the enforceability of noncompetes is governed by common
law principles (i.e., case law and precedent). Thus, the body of law on
this subject is constantly evolving with each new court decision. The
Virginia Supreme Court’s decision in this matter will shed further light
on employer's ability to restrict post-employment activities of its
workers.
Employers should take notice that the Internal Revenue Service (IRS) has announced a standard business mileage reimbursement rate of 51 cents per mile for 2011. The business mileage reimbursement rate is used by many employers for computing the appropriate employee reimbursement amount in instances where an employee uses a personal vehicle for a work-related purpose. The new mileage reimbursement rate, which takes effect on January 1, 2011, represents a slight increase from the rate set by the IRS in 2010 of 50 cents per business mile driven.
Employers with an established personnel policy should update their employee handbooks by year-end to reflect this change. Those employers who do not have an established policy for reimbursing employees for business miles traveled in personal vehicles should consider instituting a mileage reimbursement policy for 2010 and adopting a good mileage log reimbursement form for employees.
Over the coming months, the SCC plans to further expand the services available on its SCC eFile website. Specifically, Virginia corporations and limited liability companies will be able to submit organizational documents electronically and pay associated fees on the SCC eFile website. Additionally, Virginia businesses will be able to file Uniform Commercial Code (UCC) documents and pay UCC filing fees online.
The Virginia Supreme Court has granted the appeal of a Fairfax County business who is challenging a controversial special tax established to fund the extension of the Metrorail to Dulles International Airport. FFW Enterprises, a commercial real estate company in Tysons Corner, filed the appeal after a Fairfax County Circuit Court judge granted the Fairfax County Board of Supervisors’ motion for summary judgment in June of last year.
At issue in the case is whether the Fairfax County Board of Supervisors’ creation of a special tax district to fund the county’s share of the Dulles Metrorail expansion project is constitutional. The county charged commercial and industrial real estate owners in the special tax district 22 cents per $100 of assessed property value (in addition to their normal property taxes), but exempted residential property owners.
It is FFW Enterprises’ position that the tax is unlawful because the Virginia Constitution requires a uniform application of taxes, so that tax burdens are equally distributed amongst commercial, residential, and industrial tax payers.
This is an important case for Fairfax County businesses and residents alike as the Virginia Supreme Court’s determination will have a substantial impact on how Fairfax County finances its share of the Metrorail expansion project.
A decision from the Virginia Supreme Court should come later this year. We will keep you updated on any new developments with this case.
Governor McDonnell announced today that he will propose reinstating a tax deduction for Virginia employers in the biennial budget in hopes of spurring economic development. Since 2004, Virginia law has allowed companies to claim the federal Internal Revenue Code Section 199 Domestic Production Activity Deduction, which encouraged U.S. manufacturing. The tax break initially allowed a 3 percent deduction, and was increased to 6 percent then 9 percent. However, this deduction is set to gradually phase out by 2014. Governor McDonnell asserts that the elimination of the deduction would result in an estimated $30 million tax increase for Virginia employers, and is proposing an amendment to prevent this result.
McDonnell said in a statement that “[t]his is a pro-job creation amendment that will help keep employers in the commonwealth, encourage businesses to locate in Virginia and give us a further advantage over other states.” Major employer, Northrop Grumman, which is weighing whether to locate its headquarters in Virginia or Maryland, would qualify for the tax break.
The amendment will have no fiscal impact in FY 2011, according to the Governor, and an estimated $10 million in FY 2012. The Governor has until midnight Tuesday to send any further amendments to the budget to the legislature, which will be considered on April 21.
Small businesses with Federal contracts have to be especially mindful of ensuring compliance with equal employment opportunity (EEO) requirements. The failure to comply with the EEO guidelines set forth in Executive Order 11246 (which prohibits employment discrimination by Federal contractors and subcontractors as well as federally-assisted construction contractors and subcontractors) may very well result in the cancellation of a contract, termination, suspension (in whole or in part), or the debarment of the contractor. As the Office of Federal Contract Compliance Programs (OFCCP)requires contractors to engage in their own internal EEO compliance analysis, small businesses often run afoul of satisfying their obligations under Executive Order 11246.
To ensure compliance with the basic EEO requirements imposed by Executive Order 11246 -- and to avoid the wrath of the OFCCP – contractors should adhere to the following OFCCP guidelines:
Don’t Discriminate! Contractors must refrain from engaging in workplace employment discrimination on the basis of race, color, religion, sex, or national origin. Although most people think of intentional discriminatory acts, employment discrimination can also arise when a neutral policy or practice has an adverse impact on the members of any race, sex, or ethnic group.
Post an EEO Poster. Federal contractors must post OFCCP’s EEO poster in a location that is easily seen (e.g., a lunchroom, break room, or locker room).
Include an EEO Tag Line in Employment Advertising. Contractors should include a sentence in all solicitations and advertisements for employment stating that “all qualified applicants will receive consideration for employment without regard to race, color, religion, sex or national origin.”
Keep Records. Contractors must maintain their personnel records and employment records including job descriptions, job postings, job offers, applications and resumes, interview notes, tests and test results, written employment policies and procedures, personnel files, and time-keeping records.
Develop and Maintain an Affirmative Action Program. Contractors with 50 or more employees and a contract of $50,000 or more must develop and maintain a compliant affirmative action program (AAP).
Small businesses with Federal contracts should regularly review their EEO policies and procedures to ensure that they are compliant with Executive Order 11246. Certainly, given the potential penalties, it is better to be safe than sorry!
The dispute began between Worldwide Investigations & Research, Inc. (Worldwide) and BNX Systems Corporation (BNX) over the intellectual property rights to software BNX developed under a contract with Worldwide. While a Florida case over the issue was pending, BNX filed for bankruptcy protection in the Eastern District of Virginia, Alexandria Division and sought to liquidate its assets. Worldwide objected to the sale of assets that it claimed ownership over; however, such claim was rejected by the Bankruptcy Court.
Shortly thereafter, Worldwide filed a complaint seeking a determination of the ownership rights to some of BNX’s assets, and a separate objection to BNX’s motion to sell its assets. Moreover, the president of Worldwide asserted in a letter to the U.S. Department of Commerce that the sale would violate export restrictions. The latter action resulted in a government inquiry and caused a delay in the sale process.
As a result of Worldwide’s actions and court filings, BNX asserted a claim against it for abuse of process and tortious interference with business expectancy. In its counterclaim, BNX argued that Worldwide intentionally interfered with the sale of its assets by filing false claims. Most importantly, it claimed that Worldwide and its president filed false claims in order to delay the sale process in hopes that Worldwide would be able to purchase the assets at a reduced price. The bankruptcy court ruled in favor of BNX, awarding it over $300,000 in damages.
However, the Appeals Court vacated the entire award. The Court determined that BNX failed to prove the existence of a business expectancy – noting that a business expectancy must be “based upon something that is a concrete move in that direction.” BNX’s argument that it had a business expectancy in having an auction process free from the effects of improper filings was rejected by the Court.
Given the interests of competing companies in today’s marketplace, it is not surprising that tortious interference claims are routinely seen in courts. As this case illustrates, claims for tortious interference with business expectancy will be dismissed where the plaintiff merely alleges, in general terms, that a defendant has interfered with potential business opportunities. Virginia courts have also held that the following also do not satisfy this standard: sales to unidentified potential buyers; retroactive promotions; and continuing to do or remaining in business.
The Virginia Federal Court in Alexandria recently issued a decision on the “first breach rule” in a contract dispute case. In Tandberg Inc. v. Advanced Media Design Inc., the defendant was precluded from enforcing the contract against plaintiff because it committed the first material breach by failing to pay invoices. Not only was the defendant prevented from recovering for subsequent breaches by the plaintiff, the Court summarily awarded the plaintiff over $3 Million for its unpaid invoices.
The Court noted that the Virginia cases applying the first material breach rule are not entirely uniform. However, the decision recognized the weight of authority supporting application of recent Virginia Supreme Court cases which precluded enforcement of a contract by the contractual party committing the first material breach, even where the parties continued performing under the contract.
In order for the "first breach rule" to be applicable, the party must have committed a material breach. What is a material breach? A breach that is “so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract.”
This case stands for two propositions - (1) failure to pay invoices in a timely fashion will almost certainly constitute a material breach; and (2) the contractual party to commit the first material breach of an agreement releases the other party's subsequent contractual obligations.
Yesterday, in the case of Hertz v. Friend, the U.S. Supreme Court ruled on the issue of what constitutes a principal place of business under a diversity jurisdiction analysis. In a unanimous decision, the Supreme Court held that a corporation’s principal place of business is its “nerve center” -- the place where the corporation maintains its headquarters, so long as the headquarters serves as the actual center of direction, control, and coordination of the corporation’s business operation.
The location of a corporation’s principal place of business is an important consideration in the determination of whether a federal court has jurisdiction to hear a case. As federal courts are of limited jurisdiction, they can only hear cases if there is federal question jurisdiction (i.e., the plaintiff has alleged a violation of the U.S. Constitution or a law of the United States) or diversity jurisdiction (i.e., the amount of money at issue is at least $75,000 and none of the plaintiffs are from the same state as any of the defendants.) Under a diversity jurisdiction analysis, a corporation is treated as a citizen of any State in which it is incorporated and of the State where it has its principal place of business.
For years, practitioners and courts alike have struggled with a uniform test for determining a corporation’s principal place of business, particularly in instances where corporate headquarters and executive offices were located in one State but plants or other centers of business activity were located in other States.
While I agree that yesterday’s Supreme Court decision should bring greater clarity to the issue of what constitutes a corporation’s principal place of business, the “nerve center” test is far from perfect. As technology evolves and businesses become increasingly mobile (and, in some instances, virtual), the task of determining a company’s nerve center will be easier said than done.
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