Monday, September 21, 2009

Buy/Sell Agreements 101 - Understanding the Basics

By Thomas L. McLain

Whether your small company is a corporation or a limited liability company, most legal advisors recommend that buy-sell provisions be a part of your company documentation. Buy-sell provisions accomplish at least two purposes. First, by specifying the terms pursuant to which an equity owner may sell or transfer an equity interest in the company, the buy-sell provisions provide continuity of ownership and control. Second, buy-sell provisions provide liquidity in the event of the death or disability of an equity owner. By spelling out up front the terms pursuant to which these and other goals are accomplished, the owners should eliminate anxiety, pain, and real controversy later. However there is a lot to consider and this outline of the basics of buy-sell provisions will prime the business owner for an effective consultation with their company attorney.

Types of Buy-Sell Structures. In the case of a corporation, the buy-sell agreement is a stand-alone agreement. In contrast, in the case of a limited liability company, the buy-sell provisions are typically incorporated into the operating agreement. In either case, there are two types of buy-sell structures based upon how the payments are actually made.

· Redemption structures. This type of structure contemplates that the company purchase the equity interest of the selling equity owner.
· Cross-purchase structures. This type of structure contemplates that the remaining owners purchase the equity interest of the selling equity owner.

Triggering events. When an event occurs that causes the buy-sell provisions to be applied, it is said to be a triggering event. There are a variety if triggering events and some of the most common are summarized below.

· Death. The death of an equity owner is usually a triggering event, either based on the theory that the estate of the deceased owner will need liquidity, or based on the theory that the remaining owners do not want to be forced to deal with a representative of the estate. Sometimes the death of an equity owner gives the representative of the estate the right to force the purchase of the equity interest; other times, the death of an equity owner gives the company or the remaining equity owners the right to force the sale of the equity interest.
· Disability. Permanent disability is a triggering event for most of the same reasons that death is a triggering event. If the company has disability insurance, then the terms of the buy-sell provisions need to be coordinated with the terms of the disability insurance policy.
· Bankruptcy. The bankruptcy of an equity owner is almost always a triggering event because having a pre-determined method for the valuation and sale of an equity interest reduces the involvement of the company in the bankruptcy process and provides liquidity.
· Voluntary or Involuntary Departure. Some buy-sell provisions allow the company to force the sale of the equity interest of an equity owner who is no longer involved in the company as a result of a resignation or termination.
· Divorce. Some buy-sell provisions allow the company to force the sale of the equity interest of an equity owner who becomes a part of a divorce proceeding. There are pros and cons to divorce as a triggering event and these need to be considered.
· Proposed Transfer. The most common triggering event occurs when an equity owner decides to sell or transfer their equity interest to a third party. If it’s a sale, there is typically an opportunity to match the terms of the sale. If it’s a transfer, there is typically an opportunity to approve or disapprove the transferee.

Valuation. One of the key reasons for adopting buy-sell agreement is to provide a rational approach to business valuation in the case of a departing equity owner. Some buy-out provisions use different valuation techniques depending on the nature of the departure: For example, the valuation for a departing owner who has been terminated for cause by the company may be less favorable that then valuation used for a payment to the estate of a deceased equity owner. Some of the mechanisms used for valuations include:

· Book Value. Usually the least favorable to the departing equity owner.
· Market value. This method is implicitly used when a departing equity owner has a bona fide third party offer and that offer must be matched by the company or remaining equity owners.
· Appraised Value. Appraisals may or may not give full value to the business due to the variety of methodologies that can be used and discounts applied.
· Agreed Value. Many buy-sell agreements use this method. All equity holders agree to a value of the business on an annual basis.
· Insured Value. In the case of a cross-purchase agreement funded by insurance, the amount of insurance will often be used as the measure of the value of the company. Key man life insurance can also provide a value.

Terms of Sale. In instances where the buy-sell provisions have been triggered as a result of a bona fide offer from a third party, then the terms of the sale are usually dictated by the terms of that third party offer. In other instances, there are several different considerations. For example:

· Should the departing equity owner be able to force the purchase of the equity interest? The answer to this may depend on the circumstances; for example, it may be appropriate to allow a representative of an estate to force the purchase of the equity interest.
· Should the company be able to force the sale of the equity interest? The answer to this may depend on the circumstances; for example, it may be appropriate to allow the company to force a sale of the equity interest in the event of a divorce.
· Should the company or the remaining equity owners be required to borrow the purchase price from third parties? If not and the buyers may use notes, the interest, term and payment schedule of such obligation will need to be determined.
· Should any debt obligations be secured by the equity interest being sold or other security?

Other. There are many other things that can be considered in connection with a buy-sell agreement

· Non-compete. Although not common, buy-sell provisions may include non-competes and other restrictive covenants.
· Exceptions. There are often exceptions to the buy-sell agreement, particularly in the area of transfers. An equity owner may be allowed to transfer all or a portion of an equity interest to a close relative without there being a triggering event.
· Business Continuity. Particularly in the case of buy-sells structured as a redemption that are funded by insurance, additional life insurance may be purchased to make sure that the company receives funds to recover from the loss of a key owner. If so, this needs to be coordinated with the buy-sell provisions.

Tuesday, September 15, 2009

Corporate social media/networking policies; Part 2 - Framework

By Thomas L. McLain

For companies, the fundamental problem with social media and social networking is that employees use them to manage not only their professional relationships, but also their personal relationships. While this dual purpose component of social media may not seem any different than email, the very public nature of social media makes it far different. Part 1 of this series on corporate social media/networking policies established the need to develop policies to address micro-blogging sites such as Twitter, professional networking sites like LinkedIn, social networking like Facebook, and information sharing sites such as Digg, YouTube, and Flickr. In this Part 2 of the series, the framework of a corporate social networking policy will be outlined.

Definition of Social Media. Any social media policy needs to contain a definition of the term "social media" so that employees will know what will be governed by the policy. Social media applications are all Web 2.0 applications; applications that essentially allow real time interaction and collaboration over the Internet. The definition should describe generically the sorts of Web 2.0 applications that are included within the definition and it should also contain a non-exclusive list of specific applications.

Company Social Media Philosophy. A company needs to determine how far its policy will extend in the workplace and beyond. In the workplace, it will want the policy to govern company-sponsored communications, or "official communications," and personal communications. Common topics for official communications include: proactive sales/marketing, reactive sale/marketing (monitoring social media and reacting to "bad press"), direct inquiry customer service, reactive customer service (monitoring social media and reacting to problems), and human resources recruitment. Official communications and personal communications outside the workplace will also have to be addressed. The philosophy should stress that regardless of whether personal communications or official communications are involved, employee productivity is not to suffer as a result of involvement with social media.

Mechanics. Employees will often already have social media accounts so the policy will need to require disclosure to the corporation of all social media accounts. Accounts which will be used for official communications will need to be reviewed for consistency with the public image the company wishes to portray. The company should also have the passwords to all accounts from which official communications are sent. Employees need to understand that accounts will be monitored and that violations of the policy may result in the termination of the employee.

"Playing the Game" and Online Demeanor. Many social media sites are set up so that a participant needs to endorse others in order to gain credibility; however, such endorsements may give the appearance that the company is actually giving the endorsement. Thus, the company has an interest to protect in connection with any social media account used by an employee that identifies the employee as an employee of the company. The policy will need to be defined and require that the employee exercise appropriate business behavior. This requirement will need to be supplemented by training. Employees must not forget that, despite the informality of the communications, the comments they make online are public and essentially permanent.

Compliance. The policy will need to be conformed to all other policies, such as the company's email, confidentiality, privacy and communications policies. The policy will need to remind employees to protect proprietary and confidential company information and trade secrets.

Legal Issues, Monitoring, Training and Enforcement. Whether addressed directly in the corporate social media policy or indirectly outside of the policy, these topics will be discussed in Part 3 of this series.

Tuesday, September 1, 2009

We need a social media/networking policy?!? Why, what could possibly go wrong?

Corporate Social Media Policies- Part 1

By Tom McLain

Do companies really need to develop policies to address social networking or social media? The answer to this question may be surprising – Yes. Or, in light of reports of the NFL's recent decision to implement restriction on the use of Twitter (a micro-blogging site) on game days, maybe a "yes" is not so surprising. Still, the NFL is a lot different than most businesses and the fact that it feels the need to put limits or bans in place does not necessarily mean that other companies should. The reality is that the social networking/media phenomenon may be falling below the radar screen of management of many companies for many reasons, including the informality of the media. However, there are some very real dangers that need to be considered.

At the outset, the terms "social networking" or "social media" are themselves misleading, due to the inclusion of the word "social" and due to mistaken belief that, because they occurs on a computer over the Internet, they are not a serious endeavor. For example, it is easy to dismiss social networking as just a new way to chat or gossip. However, a better way to think of social networking it is "computer-based" networking. Company executives understand the concept of networking in the traditional sense – meeting with people in face to face settings that may or may not be social for the purpose of advancing one's business. "Social networking" needs to be thought of in the same terms – its just traditional networking facilitated by computers instead of being face to face.

It is also a mistake for company executives to dismiss or underestimate the social media phenomenon as a fad or as something that is reserved to a small number of people. In August, 2009, a video was produced (for the Internet, of course) entitled "Social Media Revolution" that provided some amazing statistics:

1. By 2010 members of Generation Y will outnumber Baby Boomers;
2. The fastest growing segment on Facebook is 55-65 year-old females;
3. There are over 200,000,000 blogs and 54% of bloggers post content or "tweet" (post on Twitter) daily;
4. What happens in Vegas no longer "stays in Vegas," but shows up on YouTube, Flickr, Twitter, Facebook…

Quite simply, the raw numbers associated with social media are huge and so the question quickly becomes whether social media has any real power, reach, or impact. There is little doubt that the sheer numbers have caught the attention of sales and marketing teams. Consider the following additional statistics from "Social Media Revolution:"
1. 78% of consumers trust peer recommendations, while only 14% of consumers trust advertisements;
2. People care more about how their social group ranks products and services than how Google ranks products and services;
3. 34% of bloggers post opinions about products and brands and 25%Internet search results for the world’s top 20 largest brands are links to user-generated content.

Very quickly, two things become evident: first, the sales and marketing groups of any company will be forced to begin using social networking and social media to promote the company's products and services and, second, the sales and marketing groups of any company will be forced to begin monitoring social networking and social media to manage negative publicity about the company's products and services.

Given the informal nature of these media, there will be a stronger need to establish guidelines on how to promote products and services and how to defend them, particularly with respect to company-sponsored communications or "official" activities. Unfortunately, it’s the "unofficial" activities that can raise even higher levels of concern.

One of the aspects of social networking and media is that user profiles of the party doing the communicating typically indicate where the person works. Moreover, the communications themselves are public and may be of endless duration. So informal, unofficial communications by employees are of considerable potential concern. It is easy to imagine all manner of scenarios which could lead to embarrassment if not liability for the company. For example, suppose a public company employee is active on Twitter and well identified as a mid-level manager for the company. Suppose further than an unrelated but unscrupulous twitter user decides to use twitter as a part of a pump and dump stock scheme for that company. If our mythical company employee were to innocently pass along information from the unscrupulous Twitter user simply because he was proud of his company and that information was false, would our mythical company employee be an accomplice to the pump and dump scheme? Perhaps not, but the circumstances could prove to be highly embarrassing.

Thus, there are several points which need to be addressed in any social media policy adopted by a company. Such policies will need to address communications that are made on behalf of the company or clearly in a person's capacity as an employee. The policy may also need to address communications made in other capacities. The details of how to develop a social media/networking policy will be discussed in later blog posts, but some of the things to be weighed and considered are:

1. "Official Communications"

(a) Procedures used to approve communications?

(b) Personnel authorized to communicate?

(c) Subject matters to be communicated?

(d) Require a separate "official" account?


2. "Unofficial Communications"

(a) Require a separate "personal account?"

(b) Disclosure to company of all accounts?

(c) No references to the employee's company affiliation?

(d) Disclaimer?

(e) During office hours
(1) Time restrictions?
(2) Subject matter restrictions?
(3) Network restrictions?

(f) During personal time
(1) Subject matter restrictions?
(2) Other restrictions?