Thursday, July 24, 2014

Texas Supreme Court Removes Shareholder Oppression Remedies

On June 20, 2014, the Texas Supreme Court issued a decision making carefully negotiated and drafted shareholder agreements a necessity for minority shareholders. In Ritchie v. Rupe, the Court ruled that no longer can minority shareholders of a closely held corporation force the majority shareholders to buy-out their interest through a claim of “oppressive” conduct. In the Ritchie case, the Plaintiff claimed that by refusing to buy out the Plaintiff’s shares, or even allow outside buyers to purchase the shares, the Majority were engaged in “oppressive” conduct.

Under Texas Business and Organizations Code 11.404, a receiver can be appointed to rehabilitate a domestic entity when “the actions of the governing persons of the entity are illegal, oppressive, or fraudulent.” Previous law held that a cause of action for oppression could be brought when majority shareholders used their majority position to “freeze out” minority shareholders, and Courts could force majority shareholders to buy out the minority shareholders at a certain price. However, the Texas Supreme Court in Ritchie ruled that a claim for shareholder oppression must show that the corporation's directors or managers "abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation."

Therefore, a minority shareholder may prevail under this definition only if the minority shareholder’s own interest is harmed and the entity itself is harmed by such actions. The Court explicitly rejected a common law tort for shareholder oppression including other remedies, such as a buy-out remedy. The Court effectively acknowledged that sometimes the detriment of minority interests can be for the benefit of the Company and allowable under current law. Further, the Court ruled that when an action for oppression is correctly brought, the statute allows only a one remedy: appointment of a receiver to rehabilitate the company when necessary to protect the assets and business from damage to parties at interest.

However, the Court clearly stated that other claims and remedies are still available to protect minority shareholders.  Minority shareholders may still bring derivative suits on behalf of the corporation for breach of fiduciary duty, breach of contract, fraud, fraudulent transfer, unjust enrichment, and quantum meruit, and other causes of action. However, the Court removed the ability of minority shareholders to force the majority shareholders to buy out their interest simply because they disapprove of how the company is being managed.

Majority shareholders should take away from this case that unless there is proof of harm, or significant risk of harm to the corporation, or some other claim that can be brought by the company for wrongful actions of a shareholder, then what is in the best interest of the company is what majority shareholders should be concerned about. The takeaway for both minority and majority shareholders should be to carefully consider, negotiate, and agree to terms in shareholder agreements that layout the rights and powers held by either majority or minority shareholders. Failure to carefully consider such “what if” scenarios before they happen can easily become a costly mistake for either side. 

Tuesday, July 8, 2014

Estate Planning for Business Owners

It’s something you may hear casually thrown about at the office, or maybe something you even say it to yourself after you barely avoid an accident on your way to work—I need a will.  And while everyone needs a will, small business owners have very special needs that they themselves may not even realize.

Your business, and the value you have built into it, is the greatest asset you can preserve for your heirs.  Surprisingly, many business owners do not have a clear plan of action for how to protect that asset if they should suddenly be “out of the picture.”

First of all, every business owner should incorporate their business into some form of filing entity (corporation, limited liability company, limited partnership, etc.).

Second, every business owner should have a written agreement which controls the governance of their company.  This is especially true if there is more than one equity owner, but still prudent even if owned by a single individual.

Finally, every business owner should have a will which acknowledges and cooperates with the written agreement that controls the business.  Nothing is more frustrating than having to litigate two documents which conflict with each other after the person who signed them is long gone.

When creating these documents you should contemplate the following questions:

1.      Who will run the business after I am deceased?
2.      Who will own the business after I am deceased?
3.      How will the above transfers take place?
4.      Will my business have enough capital to survive the transfer?
5.      Should I integrate life insurance into my business planning?
6.      How will this affect my business partners (if any)?
7.      How will this affect my creditors (loans, lines of credit, etc.)?

Having a defined and well thought out plan, will make a difficult time easier for those you leave behind.  Additionally, the plan will also give you a plan should you suddenly be disabled or otherwise unable to maintain your previous duties, and can also serve as a jumping off point for a retirement plan.  And as all good business plans, they should be made with the advice of financial and legal professionals with very careful consideration given to continued smooth operations. At the Vethan Law Firm, P.C., we work with business owners and financial planning professionals to help them protect and preserve what they’ve built. We assist business owners with choosing the best corporate form for their business, drafting the written agreements that outline and describe management of the business, and work with or recommend financial planning professionals to help ensure the final plan is effective and accomplishes the business owner’s goals. 

Wednesday, July 2, 2014

The Legal Plan To Your Successful Business

Your business is formed.  The organizational paperwork is filed with the state.  You know your products and services, your rate of return, your market, and your brand.  You’ve got the right property leased or purchased for your operations, and you’ve found a great manager.  Your business partner is the best.  Your business plan is solid.  You and your team are working hard and building your dream.  And then it all goes wrong; your “great” manager is suddenly a competitor, taking three key sales employees with him. What went wrong? Most likely the answer will be found in your business’s legal plan, or the lack of such a plan, that documents and organizes the relationships and rights that define and protect your business’s interests.
Nobody knows a business better than the people who intimately grow it.  But building and maintaining a business requires the forethought and devotion of starting and maintaining a family. And a business, like a family, must be prepared for when things go wrong.  For example, do your operations fit the organizational structure you created?  Have employees given access to confidential information signed non-disclosure agreements? Have key managers and sales personnel signed covenants not to compete? Are the rights and obligations of you and your business partners or shareholders clearly defined in company documents, such as shareholder agreements? Have overtime and tax withholding policies been formulated and properly implemented?
A legal plan is a thoughtful review of your policies and procedures to ensure that your methods are sustainable and supported by the stability of the law.  It corresponds to the components of a business plan, in order to support your operations and expectations, to see your business from multiple points of view, and to provide your business with the best protection of the law.  It may be understood in terms of people and relationships with overlapping interests and expectations: 
(1) your customers and your target market;
(2) your suppliers, subcontractors and vendors;
(3) your employees, independent contractors, management and most confident leaders;
(4) your partners or co-owners; and
(5) the sum of it all:  your profits, intellectual property, and tested methods of business. 
            A legal plan will help to sustain your vision, surpass your goals and protect what you have built.  Contracts for purchases and sales should match your expectations.  The roles and responsibilities of the people who work for you must meet the changing mandates of federal labor law, and the regulations of the Texas Workforce Commission.  The trust you put into your managers and senior employees should be protected with non-compete agreements that fit the limitations imposed by Texas law. Your trademarks should fit your activities, and your formational documents should fit the relationships that define your operations. 

A legal plan maintains the structure of a business.  It helps to prevent problems from happening and to minimize unnecessary risk, so that you can build your business.  At the Vethan Law Firm we listen to business owners.  We represent business owners.  It is all we do.  We welcome you to share your needs to plan for your business’s present and future.

Monday, June 23, 2014

Texas’s New Law on Trade Secrets

Prior to the enactment of the Texas Uniform Trade Secrets Act (“TUTSA”), misappropriation of trade secrets was a common-law cause of action, often brought by trade secret owners against individuals who had taken trade secrets and were using or disclosing the trade secrets to the detriment of the owner. Trade secret litigation can be expensive, and under the common law, there was no way for a plaintiff to recover attorney’s fees. However, there was a way around that shortcoming.

Enter Texas’ civil theft statute, known as the Texas Theft Liability Act. The civil theft statute allows an individual to file a civil lawsuit for several different types of theft, such as theft of property or theft of services. Prior to September 1, 2013, it also allowed an individual or business to file a lawsuit for theft of trade secrets.

A key feature of the civil theft statute is that it allows a court to award attorney’s fees to the prevailing party. There are no special requirements, other than that the party prevail. Thus, attorneys representing plaintiffs claiming misappropriation of trade secrets would bring two claims in one lawsuit:  a claim for misappropriation of trade secrets, and a second claim for civil theft.  By filing the civil theft claim, a plaintiff stood a chance of recovering their attorney’s fees if they won the lawsuit.

TUTSA amended the Texas Theft Liability Act, and eliminated theft of trade secrets as a basis for bringing a civil theft lawsuit. Thus, after September 1, 2013, it is no longer possible to bring a civil theft lawsuit in conjunction with a misappropriation of trade secrets case; TUTSA is now the sole remedy in Texas for misappropriation of a trade secret.

TUTSA does allow for attorney’s fees to be recovered, but only in limited circumstances. TUTSA provides that a court may award attorney’s fees to a prevailing party in situations where a lawsuit is brought in “bad faith,” or where a plaintiff proves “willful and malicious misappropriation” by a defendant. While not as broad as the relief provided for by the civil theft statute, TUTSA does appear to recognize that in some circumstances it is unjust to deny a prevailing party the possibility of recouping its attorney’s fees.

As the TUTSA is still in its infancy and has yet to be litigated in many cases, it is important for both Plaintiffs and Defendants in trade secret litigation to be on the cutting edge of legal developments.  Hiring a lawyer who specializes in this area of law is critical for either early success (in the form of prosecuting or defending both Temporary Restraining Orders and Temporary Injunctions) and for success at trial.

Wednesday, May 28, 2014

What are Trade Secrets, and how are they protected?

When most people think of trade secrets, they envision the Coca-Cola secret recipe. Or they think of the KFC's eleven secret herbs and spices. Rarely do business owners take the time to consider what trade secrets their own company may possess. While Coke and KFC's recipes may be famous examples of trade secrets, most companies, in one form or the other, have their own trade secrets that should be valued and protected. 

So what IS a trade secret? What constitutes a trade secret varies based on what industry a company is in. For example, Google's famous algorithm that directs internet travelers to relevant search engine results is an extremely valuable trade secret. A trade secret can include any formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers. 

Under the recently passed Texas Uniform Trade Secrets Act ("TUTSA"), to qualify as a trade secret the secret must create independent economic value from not being known or easily ascertainable by others. Stated differently, just having a secret will not create a trade secret. Just as Coca-cola could sell its secret recipe to an interested buyer, the secret must have some real value or potential value. Examples of trade secrets can include everything from client lists, recipes, business plans, future projections, and training, all the way to "negative know-how," which is knowledge that doing things a certain way does NOT work.

Because of differences in industries certain secrets are harder to protect than others. A client list in a highly specialized field is much more protectable as a trade secret than a client list where the customers can easily be identified. The question is how easily can a secret be recreated by a competitor? Similarly, if a secret is something that would be valuable if a competitor learned it, a business owner should attempt to protect it. 

Before TUTSA was passed the factors that courts traditionally considered to determine if something is a trade secret were:

1. The extent to which the information is known outside of the business;

2. The extent to which  the information is known by employees and others involved in the business;

3. The extent of the measures taken to guard the secrecy of the information;

4. The value of the information to the business and to competitors;

5. The amount of effort or money expended in developing the information, and,

6. The ease or difficulty with which the information could be properly acquired or duplicated by others.

After the passage of TUTSA, these traditional factors that courts considered were, in theory, overruled by law. However, with a lack of new cases interpreting the TUTSA law, these factors will most likely still serve as a guide that Courts will consider moving forward. These factors also give a business owner a good way to evaluate how they are protecting their own trade secrets or confidential information.

Even if a business owns a valuable secret, reasonable efforts must be taken to keeps its secrecy. This step may sound simple but most trade secrets are lost by companies because they do not take precautions to keep the valuable secret that gives their business an edge in their industry from walking out the door. 

So how do you protect valuable trade secrets?

The first step that all business owners should take is to determine what information is confidential and valuable to the business and treat it as such. The information should be guarded and limited to only those people who need to know it. This does not require a vault or other extravagant means to accomplish. For example, if the trade secret is digital, make sure that it is password protected. Just as a business owner should not leave cash in an unlocked register, trade secrets that provide value to your company should not be left unprotected. 

One of the simplest steps that a business owner can take to protect their trade secrets is to have employees sign confidentiality agreements. Simple steps like having all employees sign confidentiality agreements, having visitors who are given access to a business’s trade secret sign non-disclosure agreements, and restricting access to confidential information serves two purposes: first, it helps to establish a business’s argument that they have valuable trade secrets, and second, it provides a separate cause of action against a person who violates an agreement, even if a court determines the information was not a trade secret but merely confidential or proprietary.

All business owners in Texas should value their company’s trade secrets and take the time to identify and protect them. Identifying the intellectual property that makes a company more valuable and competitive prevents what is the most common reason for losing trade secret protection: inadvertent disclosure.  If business owners take the time to think of their trade secrets and confidential information as assets of the company with real value, they will better recognize when something threatens that asset. 

The Vethan Law Firm, P.C. is a full service business and trial law firm representing clients in corporate, commercial, trademark, and copyright matters, as well as complex contract and commercial disputes. If you or your business is in need of immediate aggressive representation in a business, commercial or intellectual property law matter, take a moment to meet with us to discuss how we may be of service to you. 

Wednesday, May 21, 2014

Tit for Tat; or why one party’s breach doesn’t mean you can do whatever you would like

It seems to be a common understanding amongst persons that if you enter into an agreement with someone, but they don’t do what they promised in that agreement, then you don’t have to do what you promised.  Unfortunately, that is only partly true.

In the law this common understanding can translate into one of two doctrines.  The first is called “failure of consideration.”  The second is called “prior material breach.”

A failure of consideration occurs when, because of some supervening cause arising after the contract is formed, the promised performance fails.  Cheung-Loon, LLC v. Cergon, Inc., 392 S.W.3d 738, 747 (Tex. App.—Dallas 2012, no pet.).  For example, you enter into a contract to buy a used car over the phone.  However, when you arrive to pick up the car, you find it has (in between the time when you agreed to purchase the car and when you arrived) been struck by lightning burned into cinders and scrap metal.  A total failure of consideration is ground for cancellation or rescission of the contract. Cheung-Loon, LLC v. Cergon, Inc., 392 S.W.3d 738, 748 (Tex. App.—Dallas 2012, no pet.); citing Food Mach. Corp. v. Moon, 165 S.W.2d 773, 775 (Tex.Civ.App.-Amarillo 1942, no writ). In the above example, the loss of the car would be grounds for you to cancel or rescind your deal with the seller.

The doctrine of prior material breach has been described as “a fundamental principle of contract law. Henry v. Masson, 333 S.W.3d 825, 840-41 (Tex. App.—Houston [1st Dist.] 2010, no pet.).

The doctrine provides “that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from further performance.” BFI Waste Sys. of N. Am. v. N. Alamo Water Supply Corp., 251 S.W.3d 30, 30–31 (Tex.2008) (per curiam).  This reflects the common understanding.  However, there is a caveat.

If after the breach, the non-breaching party continues to insist on performance by the party in default, “the previous breach constitutes no excuse for nonperformance on the part of the party not in default and the contract continues in force for the benefit of both parties.” (emphasis added) Chilton Ins. Co. v. Pate & Pate Enters., Inc., 930 S.W.2d 877, 887 (Tex.App.-San Antonio 1996, writ denied) (quoting Houston Belt & Terminal Ry. v. J. Weingarten Inc., 421 S.W.2d 431, 435 (Tex.Civ.App.-Houston [1st Dist.] 1967, writ ref'd n.r.e.)); see also Gupta v. E. Idaho Tumor Inst., Inc., 140 S.W.3d 747, 756 (Tex.App.-Houston [14th Dist.] 2004, pet. denied).

Therefore, if someone has breached an agreement with you, you must elect between two courses of action—continuing performance under the contract or ceasing to perform.

If you treat the contract as continuing after the breach, you will be deprived of any excuse for terminating his own performance. Long Trusts v. Griffin, 222 S.W.3d 412, 415–16 (Tex.2007) (per curiam); Hanks v. GAB Bus. Servs., Inc., 644 S.W.2d 707, 708 (Tex.1982); Gupta, 140 S.W.3d at 756; W. Irrigation Co. v. Reeves Cnty. Land Co., 233 S.W.2d 599, 602 (Tex.Civ.App.-El Paso 1950, no writ).  Alternatively, you may treat the contract as breached and sue for damages.

This may seem common sense, but there is a trap.  What if the agreement is not as simple as buying x for y dollars.  What if there are multiple moving parts, and the seller has only breached one part?

For example, what if you agree to buy a business with no liabilities for $100,000.00 in ten equal monthly payments.  Subsequently, in the first month of operation you discover the business does have liabilities of approximately $10,000.00.  It may seem common sense to simply tell the seller you are offsetting the liability against one of the monthly payments you owe them.  In fact, in many cases the seller will agree to such an accommodation.  However, what if the seller refuses?

The buyer then has two choices: (1) continue to perform, that is, send the ten monthly payments of $10,000.00 as payment for the business and also sue for damages (in this case for $10,000.00); or (2) declare the whole contract in breach and rescind the deal, which would include returning the business and then suing for damages based on loss of the benefit of your original bargain (the value of the business you thought you were buying minus what you agreed to pay for it).  There is no legitimate legally supportable middle ground.  You cannot refuse to make the monthly payment and insist on an offset while retaining the business.  If you refuse to make the monthly payment, you are opening yourself up to liability.  If you elect to treat the contract as continuing after a breach and continue to demand performance, you obligate yourself to perform fully. See Long Trusts, 222 S.W.3d at 415–16.

If you are getting into a high dollar agreement, you ought to have competent legal counsel from the date the first serious offer is made, but when that high dollar agreement has problems you absolutely must have competent legal counsel quickly. Doing otherwise exposes you to unnecessary risk.

Wednesday, May 14, 2014


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The Federal Labor Standards Act (FLSA) is a multi-faceted statute that came into existence at the end of the Great Depression.  That law, which was dormant for several decades, took on new vigor in the past decade, becoming more vigorous with the Great Recession.  The goal of the law is laudable:  provide fair working conditions for employees, and compensate them for the time worked, all within a reasonable work week.  The law created the concept of overtime, to pay non-exempt employees overtime for hours worked in excess of forty hours per week.   However, the FLSA places the burden on employers to track employee time to determine if overtime is warranted.  For many small to mid-sized businesses, especially businesses in the energy and medical services sector, it is one of the most draconian laws targeted at employers.  Many business owners walk into the cross hairs of the FLSA because of simple failing:  inadequate record keeping.

For hourly employees, a business owner must have procedures in place to generate and maintain documentation of the number of hours each employee works each day and each work week (a work week need not be Monday to Friday, but it must encompass a week).  If an employer does not maintain employee time sheets and related documentation, an employee may merely allege the number of hours he or she worked (even the time they spent surfing the internet) – without providing the business owner the opportunity to argue that the employee’s estimates are not accurate.  For a single employee, a business owner’s failure to keep records may cost the business thousands of dollars, and several thousand more in attorney fees.  When employees band together in a class action lawsuit, this can bankrupt an otherwise healthy medium-sized business.

There are exemptions to the FLSA, such as basic categories for some employees who conduct sales or who provide administrative services.  However, FLSA exemptions have limited parameters, and any business owner seeking to claim shelter under them must tailor the employee’s role and responsibilities to the exemption.  Arguing after suit has been filed about possible exemptions, or exemptions thought to exist, is an expensive, slow process that has an excessive and destructive effect on smaller and medium-sized businesses.

To prevent these consequences, there are a few simple first steps in the direction of safety for your business.  Maintain accurate records.  Classify your employees according to their roles and responsibilities.  Pay your employees at least the minimum wage and legal overtime rates.  Make sure that your divisional managers and administrators maintain reliable and consistent records.

At the Vethan Law firm, we are a full-service business law firm.  We work closely with businesses to ensure that their operations match their needs, as well as their policies and procedures, and that their operations fall within the bounds of the FLSA and other laws.  We also work with businesses that have been sued under the FLSA, and counsel companies about available options to defend these lawsuits.