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Author Archives: David W. Kuhnsman

  1. Maryland Clarifies Fiduciary Duties of Directors in its General Corporation Law

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    On October 1, 2016, an amendment to Maryland’s General Corporation Law (MGCL) went into effect that resolves what in recent years has become an open question in Maryland law: what are the duties of corporate directors?

    The scope of the fiduciary duties owed by corporate directors is a topic Maryland’s General Assembly has addressed before. In 1976, Maryland adopted the MGCL, its version of the Model Business Corporation Act. The MGCL sought to codify the common law fiduciary duties that had traditionally governed the conduct of corporate directors to that point.

    Then, in 2009, a Maryland Court of Appeals decision determined that the MGCL was only the beginning of the fiduciary obligations of directors in Maryland, not the end. In Shenker v. Laureate Education, Inc., 411 Md. 317 (Md. 2009), the Court held that Maryland law continued to recognize common law fiduciary obligations that went beyond those contained in § 2-405.1 of the MGCL, though the Court did not go so far as to define what all of those common law fiduciary duties were. Shenker, 411 Md. at 335–336. The Court also did not explain what factual scenarios might trigger these undefined, common law fiduciary duties.

    Because it did not define what all of the specific fiduciary duties of corporate directors were or when these duties were triggered, the Shenker decision introduced considerable uncertainty into Maryland corporate law. Subsequent Court of Appeals decisions added little clarity and even muddied the waters further by looking to the legal standards of other states for guidance. For example, in Sutton v. Fedfirst Fin. Corp., 226 Md. App. 46, 85–86 (Md. 2015) the Court of Appeals, lacking Maryland authority on the question, looked to Delaware courts for assistance in deciding what factual scenarios might trigger fiduciary duties beyond those articulated in the MGCL in the context of a merger transaction.  

    The 2016 amendment to the MGCL undoes some of the confusion caused the Shenker line of cases by clarifying that the only fiduciary duties owed by corporate directors are those listed in § 2-405.1. As amended, § 2-405.1(i) of the MGCL states:

    This section: [i]s the sole source of duties of a director to the corporation or the stockholders of the corporation, whether or not a decision has been made to enter into an acquisition or a potential acquisition of control of the corporation or enter into any other transaction involving the corporation.

    The MGCL makes it clear what these duties of a director are. Directors have a duty to act: “(1) In good faith; (2) In a manner the director reasonably believes to be in the best interests of the corporation; and (3) With the care that an ordinary prudent person in a like position would use under similar circumstances.” § 2-405.1(c).

    In addition, the 2016 amendment to the MGCL makes the following notable changes:

    • A provision of the MGCL (formerly § 2-405.1(g)) was removed so that stockholders may sue directors directly in certain circumstances for a breach of their fiduciary duties to stockholders, not just derivatively.
    • For the purposes of the MGCL, § 2-405-1(a) now defines an “act” as including not just an overt action, but also “an omission, a failure to act, or a determination made not to act….” These changes make it clear that fiduciary duties may be breached by omissions or by determinations not to act as well as by overt acts.

    Maryland’s revisions to the MGCL bring needed clarity to Maryland corporate law. With these revisions, directors have a clearer picture of their fiduciary obligations to stockholders. In addition, stockholders have additional statutory options to seek a remedy if those fiduciary obligations are breached.

  2. Tips for Preparing Your Small Business for Sale

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    If you are planning to sell your small business in the near future, there are a few basic steps you can take to prepare your company for the sale process and which will help save time and headaches down the road and preserve a robust valuation of your company.  Part “clean-up” and part “dressing for success”, based on my experience with numerous mergers and acquisitions of privately-held companies, the following simple steps can give you a head start on the formal deal due diligence process and allow you to present an attractive merger and acquisition candidate to investment bankers and potential buyers.

    At the outset, six to twelve months prior to when you are interested in offering your company for sale, meet with your company’s legal counsel and accountants to discuss your goals and seek their advice regarding optimum deal structure, investment banker recommendations and next steps.  Your legal and accounting professionals will then work with you to address the following items:

    Legal

    • Corporate articles, bylaws, minutes, shareholders’ agreements and similar records for a limited liability company or partnership need to be reviewed by counsel and updated/revised as appropriate so that they are current, complete and compliant with current law.
    • Equity ownership must be clearly recorded in the company records and all stock certificates or units of membership interest properly issued including any restrictive legends.
    • Options need to be reviewed to determine how many are exercisable, by whom and when. An option chart should be prepared.
    • Any questions as to equity ownership need to be resolved at this time and properly documented.
    • All contracts, agreements and leases should be reviewed for limits on assignment.
    • Review all documents pertaining to ownership of assets so title is clear.
    • Have counsel obtain a report of all UCC-1 financing statements of record providing a perfected security interest in company assets. If a secured creditor has not filed a termination statement for a debt which has been paid in full then such creditor should be notified in writing to promptly file the required termination statement.
    • Pending litigation, arbitration and other disputes should be settled as may be appropriate.
    • Employment, non-compete, confidentiality and inventions and IP assignment agreements need to be in place and compiled for reviewed. Typically, some agreement has slipped through the cracks and not previously executed.
    • Personnel files should be reviewed by counsel for compliance and completeness.

    Accounting & Tax

    • Audited or reviewed financial statements should be completed as scheduled.
    • Pro forma quarterly financial statements need to be current.
    • Financial projections should be prepared for the next three fiscal years.
    • Contract “pipeline” report should be prepared.
    • File all tax returns, pay all taxes and have complete records of each.
    • Any outstanding tax disputes should be settled.
    • Valuation of the company completed by accountant or other valuation specialist.  It is important for you to have your own valuation to set expectations and help with negotiations, if necessary.
  3. Real World Business Contracts – Key “Do’s & Don’ts”

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    An exciting moment for any entrepreneur is reaching an agreement with regard to providing deliverables or services to a customer or receiving same from a vendor.  You have had discussions with your counterpart and exchanged a few emails to reach an “agreement”.  You are confident that you have negotiated a good deal and your counterpart assures you that if it does not work out, no worries.  But how best to get the deal you think you have negotiated?  Here are a few helpful pointers from the real world of contracting.

    Always GET IT IN WRITING!

    If the terms you think you agreed to are not in writing, in the event of a dispute, you (probably) lose.

    • Are all material terms in the written contract? Leave them out at your own peril.
    • Who drafts? Party drafting the document will have more control over the content of the contract.
    • Who signs? Must have authority to bind the party.
    • Where is the fully executed document? Easy to save appropriately, but if lost adds another hurdle to enforcing the contract.  If never signed, then a bigger problem.

    “It must be enforceable, I found the contract on the Internet.”

    • Really?!?!
    • Avoid “recycling” documents.
    • Facts and circumstances change.
    • Laws and regulations change.

    “It’s our standard form contract, we never revise it.”

    • Wrong!
    • Most “form” contracts are revised all the time.
    • Terms and conditions can be negotiated.
    • Side documents can memorialize a revision without harming the sacred “form”.
    • Need to consider relative negotiating leverage. Big v. small business.  Legal counsel can help your small business level the playing field.

    “How does my company get out of this?”

    • Is there a termination clause? Easy to include in contract.  Without it, your company’s options are limited and expensive.
    • Is there an end date? Simple and helpful provision often overlooked.
    • What are the deliverables and have they been provided or performed and have they been accepted? Dispute likely if specs and acceptance procedure are unclear.
    • Who has breached first? May be a last ditch way for you to get out if other party has breached the contract first

    “Why is my small business providing a line of credit to a Fortune 500 company?”

    • Because you agreed to it.
    • If you are a subcontractor, do not agree to payment after the prime contractor gets paid by its customer.

    “The Customer never pays on time.”

    • Probably no late payment penalty in the contract…so why pay on time.
    • Know your customer.
    • Actually manage each customer account.
    • Be proactive at first slow payment.

    Consult with an attorney… BEFORE YOU SIGN.

    • Helps you get the deal you think you are getting.
    • Helps avoid problems and expenses down the road.
    • Helps level the playing field with the other party.
    • Difficult to “un-ring the bell” once you sign.
    • Talking to an attorney at a dinner party doesn’t count unless its your attorney.