Law Office of Adam P. Whitney Blog
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A Minority Owner's Right to Inspect LLC Records or Corporate Books and Records

An LLC (Limited Liability Company) Member in Massachusetts has a right to inspect certain records of the LLC. This includes basic information, such as the certificate of organization, the names and addresses of all Members and Managers, and a copy of the operating agreement.

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Don't Cause Self-Inflicted Harm to Your Business because You Thirst for Revenge

Think carefully before you embroil your company in a lawsuit. Lawsuits are expensive and risky. A lawsuit can backfire in several ways. You can face counterclaims. You can be charged with the legal fees and costs of your opponent if your claims are not well grounded. You expose your company to producing private business documents and testifying under oath, which can open you up to more problems.

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Does Your Business Need an Outside General Counsel?

Big companies have their own attorneys on payroll and at the ready. As likable as most attorneys are, businesses would not keep them on the payroll unless they added value. A general counsel acts as a strategic partner. She understands the business, puts it in the best legal position, and protects it from potential liability. When a dispute arises and a business needs immediate legal action, things go much better when an attorney who is already familiar with the business and issues is ready...

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'Dogged' found at https://flic.kr/p/732b7n by JD Hancock (https://flickr.com/people/jdhancock) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)
'Dogged' found at https://flic.kr/p/732b7n by JD Hancock (https://flickr.com/people/jdhancock) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

Employment Severance Agreements Should Be Drafted or Reviewed By Your Attorney

Severance agreements, also called separation agreements or sometimes settlement agreements are legal documents that can greatly impact legal rights and obligations. Some may consider these standard legal documents. While there are many standard provisions, careful drafting and review are in order. Even experienced attorneys make mistakes when drafting these documents. While they seem simple and straightforward, they are more complicated than one would think and there are many traps for the...

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Massachusetts Employers Should Prepare for the New Pregnant Workers Fairness Act

Synopsis: This new statute amends Chapter 151B, Section 4 and provides substantial rights to employees and applicants based on pregnancy and pregnancy-related conditions.

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The Massachusetts Wage Act as it Applies to Directors and Investors

Subtitle: The President or CEO of an Underfunded Corporation or LLC Is in a Unique Position to Face Double Financial Disaster

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Termination of Minority Shareholder or LLC Member Employment

Employees who are shareholders of a private corporation, family business or limited liability company (“LLC”) may not be subject to the employment-at-will rule in Massachusetts. This means that the majority owner or owners cannot simply fire a minority owner-employee at their whim.

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LLC Operating Agreements and Business Divorces

An operating agreement (and other types of agreements between business partners, including shareholder agreements, partnership agreements and joint venture agreements) should govern how the business is to work. In particular, what are the agreements among the partners? What role will each partner have in the work, in the management, in the finances? Will any partner receive a salary? How much? Are partners entitled to a job? What fiduciary duties does each owe to the business? How will...

A Minority Owner's Right to Inspect LLC Records or Corporate Books and Records

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An LLC (Limited Liability Company) Member in Massachusetts has a right to inspect certain records of the LLC. This includes basic information, such as the certificate of organization, the names and addresses of all Members and Managers, and a copy of the operating agreement.

Minority LLC Members who feel that they are being oppressed or frozen out will want to obtain as much information as possible, including especially financial information. A Massachusetts LLC must, by statute, have an office in the Commonwealth where it must keep certain records. These records include the following:

  1. Income tax returns for last three years; and

  2. Financial Statements, if any, for the last three years.

Any Member of the LLC shall be allowed to inspect and copy the records, at that member's expense, and at reasonable times. Subject to the provisions of the Operating Agreement or standards set by the Manager(s), each Member shall also be allowed to obtain “true and full information regarding the state of the business and financial condition of the limited liability company, [. . . inluding] other information regarding the affairs of the limited liability company as is just and reasonable.” M.G.L. c. 156C, Sec. 10.  How to determine what is "just and reasonable?"  The wise majority owners should develop uniform standards regarding access to documents to prevent a claim of unfair treatment by the minority owner. The test is whether a request is “reasonably related” to the Member's interest. A minority owner that makes repeated and numerous requests may be seen as being a pest or having an ulterior motive. By contrast, a Delaware court (addressing a similar statute) ruled that the following were “proper purposes” for requesting documents from the LLC: (1) putting a valuation on one's ownership interest; and (2) investigating potential wrongdoing by the majority.

If the majority owners refuse a request for information, the minority owner must determine what action to take. There are no “LLC Police” to call. A minority owner will have to file suit to obtain the documents it wants. If there are enough facts to support such a claim, a minority owner can also bring a claim for a freeze out, which occurs when the majority owners violate their fiduciary duties to the minority owner and frustrate her reasonable expectations of ownership.  A Member's ownership interest in an LLC is considered personal property and a Member is entitled to obtain an accounting from a fellow Member, but you will have to file suit for an accounting. At least one Massachusetts court has held that a Member of an LLC is entitled to an accounting from a controlling Member or Manager where there is a fiduciary relationship between the parties. By contrast, there is no right to an accounting against the LLC itself because there is no fiduciary duty owed by the LLC to the Members.

The rights to records of a minority shareholder of a Massachusetts corporation are similar, but not identical to the rights of an LLC Member. A shareholder should be able to articulate specific facts regarding possible mismanagement or wrongdoing by the controlling interest in order to see financial records, meeting minutes and other business records (other than the basics).

The takeaway is to first check the Operating Agreement or Shareholder Agreement or other company documents and then the statute to determine what documents a minority owner is entitled to. Both sides should consider carefully whether their dispute over records can be resolved without resorting to litigation. Perhaps an independent mediator could help the parties resolve their dispute before both sides incur substantial legal fees.  In other situations, someone is being unreasonable or someone is hiding something. This is a recipe for contentious litigation, so you better lawyer up if you think that the minority owner is being unreasonable or has an ulterior motive, or if you think that the majority is hiding something. As always, this post contains general information in a cursory fashion and is not legal advice.

By Adam P. Whitney, Esq.

617.338.7000

Don't Cause Self-Inflicted Harm to Your Business because You Thirst for Revenge

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Think carefully before you embroil your company in a lawsuit. Lawsuits are expensive and risky. A lawsuit can backfire in several ways. You can face counterclaims. You can be charged with the legal fees and costs of your opponent if your claims are not well grounded. You expose your company to producing private business documents and testifying under oath, which can open you up to more problems.

As a successful business, you have to deal with some dirty, rotten scoundrels. These could include competitors, current or former business partners, former employees or other business enemies. They may pull various dirty tricks on your business. Steal your key employees. Defame you. Falsely report you to government agencies or authorities. They may even file frivolous lawsuits against you or your clients. If you are feeling paranoid, it’s only because they are out to get you.

These dirty tricks can hurt your business. It is human nature to be enraged and want to fight back. Resist the temptation to go off half-cocked and respond in kind. Take a deep breath. Tell yourself that it is just business. Now start plotting your revenge.  Plotting is the key word. Speak to an experienced business litigator about the risks and rewards of various courses of action. You may greatly hamstring your own position if you do not plan carefully.

For example, don’t defame your opponents just because they have defamed you. Defamation law, which includes libel and slander, is surprisingly complicated. Unless you are 100% sure that the nasty letter/e-mail you are about to send is not even arguably defamatory, you probably should not send it.

Just because someone sues you does not mean you can or should sue them back. They may have a right to sue you or to report you to the government. These are protected activities under the Massachusetts Anti-SLAPP Statute. A lawsuit or counterclaim in this situation could subject your company to having to pay the other side’s attorney’s fees and costs, much to the delight of the scoundrel who took actions against you.

The takeaway is that businesses can get themselves in serious trouble when they act to harm a competitor, even when the competitor drew first blood. It’s like in sports when the referee always notices the player who reacts to a dirty play with one of his own. Your reaction, or over-reaction, may get your business in trouble and may even mask the original bad act by your business enemy.

The best revenge is to continue your success and crush your competitors in the market. You also may have a legitimate legal claim against them that will allow you to sue for your damages. While you should only file legitimate suits seeking legitimate damages, litigation may send an additional message that you will not be a punching bag. Sometimes there are other legal and ethical guerrilla tactics for particularly unsavory scoundrels.

There is no legal advice here. Contact a business litigator in your jurisdiction if you need legal advice on this topic.

By Adam P. Whitney, Esq.

617.338.7000

awhitney@awhitneylaw.com

Does Your Business Need an Outside General Counsel?

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Big companies have their own attorneys on payroll and at the ready. As likable as most attorneys are, businesses would not keep them on the payroll unless they added value. A general counsel acts as a strategic partner. She understands the business, puts it in the best legal position, and protects it from potential liability. When a dispute arises and a business needs immediate legal action, things go much better when an attorney who is already familiar with the business and issues is ready for action.

Many private businesses cannot justify the cost of a full-time general counsel on the payroll. But could your business benefit from a long-term relationship with an outside general counsel? Think of the benefit of having a lawyer who understands your business and how you operate. You can quickly vet issues, including complex employee termination issues, contract issues, client issues, government issues and competitor issues. Your lawyer can keep you up to date on changes in the law so that you make the necessary changes in your handbook. He can train you and your managers on how to avoid legal traps. An outside general counsel is ready to immediately send a letter to competitors, ex-employees or others who pose a threat to your business.

If you think that having an outside general counsel is expensive, try not having one. If you leave your company exposed, one bad lawsuit can kill your bottom line or even put you out of business altogether. Owners can sometimes face personal liability, so not just your business assets are at risk. Businesses often reach out to an attorney after an issue has arisen. While this is certainly better than not hiring an attorney, the business will be scrambling to bring the lawyer up to speed. There won't be time to see if the lawyer is a good fit for the company and how it operates. An attorney who values a long-term relationship will also be more conservative with billing compared to an attorney who sees your business as a one-time billing opportunity.

By contrast, having a lawyer who you know, like and trust at the ready will greatly reduce your stress should a sticky legal situation arise. Smaller issues can be nipped in the bud before they grow into vexing lawsuits. Having an attorney who understands how you like to approach problems could make all the difference. Successful business owners and managers are smart, driven and great decision-makers. The right outside general counsel will be a trusted advisor who will provide perspective along with guidance to allow you to make the best decisions.

By Adam P. Whitney, Esq.

617.338.7000

Employment Severance Agreements Should Be Drafted or Reviewed By Your Attorney

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Severance agreements, also called separation agreements or sometimes settlement agreements are legal documents that can greatly impact legal rights and obligations. Some may consider these standard legal documents. While there are many standard provisions, careful drafting and review are in order. Even experienced attorneys make mistakes when drafting these documents. While they seem simple and straightforward, they are more complicated than one would think and there are many traps for the unwary.

Businesses Should Have Every Severance Agreement Drafted or Reviewed by an Experienced Employment Attorney

If you use the severance agreement you found on the internet or that a general practitioner drafted 5 years ago, you do so at your peril. While severance agreements are, at their essence, contracts, they are also governed by a myriad of state and federal employment laws as well as agency decisions and court rulings. As a result, an agreement that was sound five years ago may not be today. Moreover, what applies to one employee may not apply to another.

Why does this matter? For example, if you don't include the right language, the release in your Severance Agreement could be ineffective against Wage Act claims and leave you exposed to triple damages and attorneys' fees. You also need specific language for Age Discrimination claims in order for them to be waived. As you may know, there are new state and federal employment laws going into effect quite frequently (including marijuana laws and pregnancy discrimination and accommodation laws), which might need to be addressed.

Even the contract issues are not as simple as you might think. For example, if you have an existing noncompete agreement with your employee, you have to be careful regarding your merger clause. Otherwise, you could inadvertently void your noncompete agreement. Employers sometimes make mistakes such as this.

Executives and Other Employees Should Have their Severance Agreements Reviewed by an Experienced Employment Attorney

Even if it is a friendly split, look out for your own best interests. When you sign a severance agreement, you will be waiving substantial rights and perhaps taking on substantial obligations, such as noncompetes or non-solicitation provisions or a duty to cooperate. A recent case report in Massachusetts demonstrates why you need professional assistance. An executive entered a severance agreement and inadvertently waived his right to valuable stock options. Although the right was not specifically addressed, the court ruled that the general release provisions controlled, and the executive was out of luck.

While severance agreements are sometimes not negotiable, sometimes they are. You might get a better deal or at least clarify problem language if you hire a lawyer to advocate on your behalf. Consider if the peace of mind and chance at a better deal would be worth the relatively small dollars.

Or you can rely on the company lawyer to do what's best for you (not really).

By Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

Massachusetts Employers Should Prepare for the New Pregnant Workers Fairness Act

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Synopsis: This new statute amends Chapter 151B, Section 4 and provides substantial rights to employees and applicants based on pregnancy and pregnancy-related conditions.

Goes into effect: April 1, 2018

Applies to: All employers with 6 or more employees; Existing Employees and applicants

Obligations: Provide accommodations for pregnancy related conditions, including lactation;

Engage in good-faith interactive process to determine an effective, reasonable accommodation;

Accept documentation from a wide range of professionals, not just doctors, including nurses, occupational therapists, midwife and others;

If needed, provide leave of absence, more/longer unpaid breaks, time off, modified schedule, temporary transfers, light duty, job restructuring, modification/acquisition of equipment or seating, assistance with manual labor;

Provide private place (not-bathroom) for expressing breast milk;

Reinstate employee after leave of absence with same position and benefits or equivalent position

Prohibitions: Forcing undesired accommodations on employee;

Forcing a leave of absence;

Retaliating against employee who exercises her rights;

Refusing to hire or promote pregnant employee or applicant

New policy needed: Required by statute to have a handbook, pamphlet or other means of notice by April 1, 2018;

must also give notice to new employees as well as employees who give notice of a pregnancy-related condition

New Training: Training of H.R. and managers recommended

Violations: Violations can result in liability for damages, including back pay, front pay, emotional distress and other compensatory damages, punitive damages, civil fines and attorneys' fees and costs.

The above is not legal advice, but just a synopsis of this important new statute that provides pregnant employees and applicants with substantial new rights. Take your obligations seriously and comply with these obligations to avoid liability.

By Adam P. Whitney

617.338.7000

The Massachusetts Wage Act as it Applies to Directors and Investors

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Subtitle: The President or CEO of an Underfunded Corporation or LLC Is in a Unique Position to Face Double Financial Disaster

Last week's decision from the Massachusetts SJC provides guidance on how investors and board members can reduce their exposure for Wage Act claims. See Segal v. Genitrix, LLC, Slip Op. (Mass. SJC, Dec. 28, 2017). Because I litigate these same issues,1 I found the 37-page decision to be a good read. Most business people won't have the time or the interest, but the decision can be found here: https://law.justia.com/cases/massachusetts/supreme-court/2017/sjc-12291.html. Although not reported in the decision itself, the SJC overturned a judgment of over $1.75 million for Segal, the former President of Genitrix, LLC, against two former board members and investors.

As most employers now know, the Wage Act provides strong protection to Massachusetts employees. There are virtually no defenses. If wages are not paid to a Massachusetts employee, liability attaches. Once suit is filed, the company will be found liable for triple damages, attorneys' fees, interest and costs. Smart businesses and lawyers settle wage claims quickly unless there is a particular defense or factual dispute. Wages include hourly pay, salary, vacation pay, and commissions that are due and determinable.

Many of the cases that are now litigated and appealed involve personal liability under the Wage Act. A Massachusetts Corporation must designate a president and treasurer. Those individual officers are considered agents of the corporation who have the management of the corporation. They are liable under the Wage Act by the express text of the statute. The statute provides as follows:

“The president and treasurer of a corporation and any officers or agents having the management of such corporation shall be deemed to be the employers of the employees of the corporation within the meaning of this section.”

In recent years, the SJC has ruled that the term “corporation” also includes Limited Liability Companies. Left somewhat unclear, at least until last week, was whether and under what circumstances investors (including LLC Members and stockholders) and directors could be found personally liable as “officers or agents having the management of such corporation.” The ruling in the Segal v. Genitrix, LLC case is largely favorable to investors and directors.

This post is too short to get into all the nuances of Segal v. Genitrix, LLC and its antecedents. Briefly, the SJC reasoned that the Wage Act “does not impose personal liability on board members, acting only in their capacity as board members, or investors engaged in ordinary investment activities.” Id. at p. 2. The Court went through a long and well-reasoned analysis to conclude that “to impose such liability, the statute requires that the defendants be 'officers or agents having the management' of a company.” Id. Normally, they are not agents and normally they do not have the management of the corporation. There must be particular facts to support both conditions in order for personal liability to attach (which facts were not present in the Segal v. Genitrix, LLC case).

Anyone involved in an LLC or corporation or other entity should be concerned about potential personal liability. We now have a clear picture of ways to do that. Careful crafting of LLC Operating Agreements, corporate shareholder agreements, and other corporate documents are a crucial starting point. An investor and/or director who is not named as an officer and is willing to give up a certain level and type of control can virtually eliminate personal liability under the Wage Act.

The other lesson to glean from this line of cases is the subject of the subtitle of this post. Be wary of being named president or treasurer or manager of an LLC or corporation. Sophisticated investors may be setting you up to be the scapegoat if the business entity is underfunded and cannot pay its employees. As set forth above, Segal was the President of the Company. He apparently will not recover his unpaid wages. He was the President. The buck stopped with him. But it could have been even worse. He could have been stuck with the exposure of triple damages and attorneys' for other unpaid employees on top of not being paid himself (the decision indicates that one other employee was paid after threatening a Wage Act claim).

While most people will not feel sorry for the President or CEO of a corporation or the Managers or other executive officers of an LLC, these individuals are in a uniquely precarious position. When a company is struggling, they may be the last to be paid, as Segal was. Once the company is penniless, there may be no viable targets for a lawsuit by the executive officer. The executive officer may then face insult and further injury on top of injury. He or she may be left personally liable for not just the unpaid wages of others, but triple that amount plus the reasonable attorneys' fees of the other employees. Plus costs and 12 % interest on the base amount for good measure. That might be your reward for working for free and trying to keep the company afloat through tough times.

If you are contemplating running a business as a President, CEO or Manager, etc. and you are not the majority investor, protect yourself with the proper agreements. If you are already the captain of a sinking ship where employees are not getting paid, consult with a qualified attorney immediately to see how you can protect yourself as much as possible.

By Adam P. Whitney 617.338.7000

1I obtained a settlement for a corporate executive of $255,000 in a Wage Act claim against several members of an LLC Board of Managers and a judgment of over $640,000 against another Board Member who served as the de facto CEO (subject to appeal).

Termination of Minority Shareholder or LLC Member Employment

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Employees who are shareholders of a private corporation, family business or limited liability company (“LLC”) may not be subject to the employment-at-will rule in Massachusetts. This means that the majority owner or owners cannot simply fire a minority owner-employee at their whim.

The first step is to figure out if the minority stockholder or other minority owner has an expectation of continued employment. Obviously, among the first things to look for is whether there is any type of employment contract, offer letter or the like. The shareholder agreement or stockholder agreement should also be closely examined. If it is well-drafted, it should clearly express the owners' intentions of whether there is some right or expectancy for continued employment (yet another reason to have a well-drafted agreement).

After looking at the written documents, things get murkier. Did the business partners all quit their jobs and start employment with the company when it was formed? That fact would suggest an expectation of employment. By contrast, if the stock or LLC Membership was inherited, an expectation of continued employment is less likely to be found.  Every situation is different.

We must then look at why the majority owner(s) want to fire the minority owner. Is there a business purpose for the firing? Have the majority owners considered other less-harmful options to termination? Are all the owners being treated equally? Has the minority owner committed some fireable offense? These issues must be considered with the understanding that the shareholders and members normally owe one-another a fiduciary duty of the utmost good faith and fair dealing. The majority owners should not fire the minority owner simply to advance their own financial interests.

Sometimes majority owners fail to do their due diligence. Shareholder suits can be costly and impose significant liability. See Fay v. Faytex, No. 0983CV01117, Plymouth Superior Court, ($1.4 Agreement for Judgment in favor of terminated shareholder).

If you are a majority owner and you are considering terminating a minority owner, or if you are a minority owner and you have been terminated, are about to be terminated, or are otherwise being frozen out of a corporation or LLC, you should obtain legal advice sooner rather than later.

This post contains only general information and not legal advice. These issues are complex and tricky and this post cannot substitute for legal advice as it applies to your situation.

By Adam P. Whitney 617.338.7000

LLC Operating Agreements and Business Divorces

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An operating agreement (and other types of agreements between business partners, including shareholder agreements, partnership agreements and joint venture agreements) should govern how the business is to work. In particular, what are the agreements among the partners? What role will each partner have in the work, in the management, in the finances? Will any partner receive a salary? How much? Are partners entitled to a job? What fiduciary duties does each owe to the business? How will profits be distributed? What about losses? Will the partners have to invest more in the business if there is a shortfall? Will there be other employees? What happens if there is not enough business income to pay employees? What will the exit strategy/buyout be? Are the parties married to one another for any future business of the same type?

Many entrepreneurs have not even thought about these and other critical topics. This can be a recipe for future disagreements, or worse. Sometimes people go into a business in good faith, but they have different expectations about the business. If you are the primary financial backer, is your sweat equity partner expecting a salary from day one? If so, are you okay with funding the salary until the business generates substantial revenues?

Having litigated major and bitter disagreements between business partners, I have seen the ugly divorces of the business world. The infidelity. Desertion. Dishonesty. No one believes it will happen to them, but business partners lie, cheat and steal. They will fire you and freeze you out of your own business. They will expose the company to liability. They will become drug addicts or non-functioning alcoholics. They will hire their do-nothing son-in-law who drives you crazy. They will spend all the revenues on their own salary and salary of family members. The will start a competing business and try to take all the clients. They will exploit any ambiguities in an “off the shelf” operating agreement you got online. They will die, and their clueless spouse will become your business partner (a cross-sell agreement with life insurance is a topic for another day). Or you will die and they will take advantage of your spouse. All these bad things, and worse, happen. If these things are happening to you, get competent legal help asap.

Your best first defense against misunderstandings and misdeeds is a specifically tailored operating agreement. This doesn’t mean that you are defenseless without one or with a poor one. You still will have rights. But courts respect operating agreements, especially if they are negotiated and tailored to the business at issue. You hope that your operating agreement keeps you out of court, but if you have to litigate or arbitrate over your business, you will be in a much, much better position if you have a good one. The relatively small amount of time and money that you spend at the beginning of the business formation (or before significant disputes develop) is some insurance against spending that same money hundreds of times over in legal fees.

By Adam P. Whitney 617.338.7000