Wisconsin Business Law Blog : Waukesha, New Berlin, Oconomowoc Corporate & Real Estate Lawyer & Attorney

The Patient Protection and Affordable Care Act of 2010 became law on March 23. It was immediately followed by the Health Care and Education Tax Credits Reconciliation Act of 2010. These two laws make up what is now known as "Health Care Reform." In a series of articles, I intend to acquaint you with the most significant provisions of these acts which cover well over 2,000 pages. Each will be a snippet of what the laws contain.

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             In these tough times, lots of businesses have been closing. In fact, for the fist time in our many years of practice, we’re hearing clients tell us that there is not enough business for both them and their direct competition – that if things continue as they are, they will both go out of business. In fact, they’ve become somewhat friends talking about it. Then the idea comes to one of them: could I pay my competition something to get them to shut down? The answer generally lies in the federal antitrust

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Social media includes such Internet applications as Facebook, Twitter, LinkedIN, MySpace and blogging. When people started using such media, many thought it was purely for personal reasons and basically ignored its business implications. That is no longer true. In fact, with hundreds of millions of people using social media, it is rapidly the phone and even email as a primary form of communication.

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For decades, the US Government and 24 states have had laws regulating corporate spending to support or oppose candidates running for office. In a most extraordinary US Supreme Court case decided on Thursday, January 21, 2010, justices overruled parts of a 63 year old law which prohibited businesses and unions from producing and running their own campaign ads.

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A recent Court of Appeals case, Town of Cross Plains v. Kitt's Korner, Inc. 2008AP546 illustrates the risk involved in opening a new business on the assumption that a possible change in zoning will not effect its operation if the business is already up and running.

In that case, an adult entertainment business was opened on a parcel which, at the time it commenced operation, was zoned in such a fashion that such a business was not a prohibited use.  The owner of the business naturally incurred costs in the start up of the business.  The owner was aware of the fact that an ordinance amending the zoning to prohibit such a business on the land in question was coming up for vote, but apparently believed that his expenditure, and the actual operation of the business for a period of time prior to any adoption of the proposed ordinance, would create a situation in which his business would be "grandfathered in" even if the amendment to the zoning ordinance was adopted.

Although the law does recognize that, in certain fairly rare circumstances, expenditure of funds based on a reasonable reliance that zoning will not be changed can create vested rights which will not be impacted by zoning changes, the Court of Appeals held in this case that there could be no reasonable reliance because the owner was aware of the pending vote on the ordinance amendment, but chose open the business regardless.  Expenditures made were made despite the fact that the owner new that zoning prohibiting the business was contemplated and could be adopted.

When opening a business, it would be prudent not only to review current zoning, but also to inquire whether any modifications in zoning are being considered.

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In a recent decision, Star Direct, Inc. v. Del Pra  www.wisbar.org/res/sup/2007ap000617.htm the Wisconsin Supreme Court determined that where an employment contract contains restrictive covenants which address separate specific interests of employers, the fact that one of those covenants is overbroad and therefore illegal does not necessarily render other covenants unenforceable.

The contract in that case contained provisions restricting the employee from engaging in business similar to that of the employer, restricting him from contacting past and present customers of the employer, and requiring the employee to hold certain information derived from the employer confidential.  The court determined that the covenant restricting the employee from engaging in similar business was overbroad, but that the other covenants addressed separate legitimate concerns of the employer which would remain enforceable.  Therefore, those covenants are divisible from the invalid covenant.

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According to Section 19.36(3) of the Wisconsin Statutes, the records of those entering into contracts with government constitute public records, and therefore open to public inspection upon request, subject to specific exemptions set forth in the law.  As governments generally, and particularly local governments, look more and more to private contractors to perform or assist in performing public services, businesses that enter into such agreements must be aware of the ramifications of this statute.

This statute has not been construed to apply to any record of a public contractor, but rather to records which are specifically related to performance of the contract.  As those records are deemed public records, they should not be destroyed except in accordance with the law (normally, public records are to be retained at least 7 years).  Also, since such records are, in effect, presumptively open for inspection by the public, businesses which contract with government must understand that a public records request applicable to such records may be used as an informal discovery device by parties seeking to make a claim against the business or the government.

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Similar to the required practices of maintaining a Corporation, it is a good idea to keep the important documents and minutes recording important transactions and happenings of an LLC in a minute book, to be maintained at the main business office and at the office of your attorney who can then remind you to annually file your annual report and update your minutes.  

Statutory requirements for Wisconsin LLC's are less than that of a Wisconsin corporation. However, it is important to note that pursuant to Wisconsin Statutes, a LLC is required to file an annual report, keep certain written records, including copies of the LLC's tax returns, records of the LLC members, the value of each member's contributions to the LLC, records of the times at which, or the events upon which, any additional contributions are agreed to be made by each member.

The minute book would be an appropriate place to keep much of this information. In addition, even though "formalities" such as annual meetings are not required of LLC's, following such formalities can be important to help protect the limited liability benefits provided by the LLC law in Wisconsin.   For example, maintaining an LLC minute book is one of the things you can do to help ensure that the "limited liability veil" is not pierced. When the courts "pierce the limited liability veil", they assign liability to individuals for actions that the limited liability company performed. It is not uncommon for plaintiffs to name individuals associated with a corporation or LLC as defendants in any litigation against a LLC or corporation.

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In today’s economic world, marketing is more important than ever. The people who are bringing in business are the ones who are out there courting it. That’s why I am happy to share with you a special opportunity. For the next 48 hours only, my colleague Paula Black is offering a collection of FREE bonus gifts to anyone who purchases her latest book: "The Little Black Book: A Lawyer’s Guide To Creating A Marketing Habit in 21 Days." Designed to help lawyers integrate marketing into their daily lives, this book is quick, easy and inspirational. And by purchasing it within the next 48 hours you will receive special access to information and resources from more than 30 experts. A compilation of advice from some of the most sought-after experts in the legal arena, "The Smart Lawyer’s Toolkit" gives you instant admittance to an incredible collection of tips and information. Click here for details…but do it fast!

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Legislation allowing employees bringing successful discrimination claims against businesses to obtain compensatory and punitive damages along with reimbursement for back pay, reinstatement, costs and attorneys fees, has been adopted by the Wisconsin Legislature and sent to the Governor for signature.  2009 Senate Bill 20, www.legis.state.wi.us/2009/data/SB20-SSA1.pdf, previously commented on in this blog, will apply to acts of employment discrimination which are first committed on the effective date of the act, which will be the day after its publication, or on the second day after publication of the 2009-11 biennial budget, whichever occurs later.

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A constructive dividend generally refers to a situation where the IRS re-characterizes certain corporate “expenses” as dividends thereby excluding certain corporate deductions and increasing the corporation’s tax (along with possible penalties and interest). Examples of disallowed expenses include: (a) unreasonably large salaries; (b) low interest or no interest shareholder loans; and (c) unreasonable rent payments to affiliates. Thus, it is wise for closely held business owners to document all transactions between the corporation and its officers/directors/shareholders. The documentation should preferably include reasoned analysis where appropriate to avoid issues like the situation recently explained in Yates v. Holt-Smith 2008AP000017 05-14-09. In Yates, the court found that the alleged bonus payment was in fact a constructive dividend and also forced the corporation to pay said dividend despite one equal shareholder's objection to said payment. A well documented minute book, along with a detailed buy sell agreement, may have avoided this result and (I assume) lots of litigation expenses

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When prices are constantly increasing, it is easy to say: "wouldn’t it be nice if prices would just fall as often as they go up?" I’ll tell you why the answer is "no," and discuss some business concepts directly dealing with this question.

In a perfect capitalist system (without government intervention), there are two inputs and two outputs:

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Local Governments in particular are generally eager to provide assistance to businesses, and to "do business" with private companies, especially in the current economic climate.  Reductions in shared revenues available from the state, layoffs of employees and the closure of businesses by local employers have placed renewed emphasis on economic development incentives.  In addition, calls to cut governmental expenses may lead government to look to the private sector to provide certain services that have traditionally been provided by government itself.

Laws such as the federal Freedom on Information Act, and of the states promoting open government such as Wisconsin's Open Meetings Law and Public Records Law, however, can create difficulties for private businesses seeking to take advantage of public funding and opportunities particularly where a private business is required to provide information it believes confidential or proprietary to governmental entities.

The Wisconsin Supreme Court recently expanded the definition of "governmental entity" for purposes of Wisconsin's open government laws in the case of State v. Beaver Dam Area Development Corporation, 2008 WI 90 to potentially include economic development corporations of the kind communities have been making agreements with in an effort to promote business development.  Economic development corporations typically assist communities in obtaining and negotiating with potential businesses to locate and operate withing the communities.  Various factors are to be considered in making the determination whether such corporations constitute governmental entities, such as the extent of funding provided by local government, and the extent to which public officials may participate in the operation of such corporations.  If they are found to constitute governmental entities, they would be required to comply with the Open Meetings Law and Public Records Law, which could make their meetings, operations and records open to public review and scrutiny.

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The 2009 Wisconsin Budget Bill contains proposed changes in condemnation law which may substantially impact on the ability of business property owners to successfully challenge condemnation or contest the amount of compensation awarded.

The Wisconsin Department of Transportation is sponsoring the proposed modifications.  Currently, an owner of land subject to condemnation may recover attorneys fees incurred in litigation with a condemnor.  The DOT's proposal would limit the amount of an owner's attorneys fees paid by the condemnor to 1/3 of any increase in the amount proposed as an award by the condemnor prior to an attorney's involvement.  For example, if an owner is offered $50,000 for property, and through litigation the award is increased by settlement or judgment to $200,000, resulting in an increase of $150,000, the amount of attorneys fees for which the condemnor is liable will be $50,000.

The DOT claims that this change in the law will not result in any decrease in the amount an owner receives for the property being taken.  However, the likely result will be that property owners will be less likely to contest condemnation and condemnation awards, and more willing to accept the amount they are initially offered.

The fact that the law currently allows the owners of business property to recover all their attorneys fees provides owners with a great deal of leverage in negotiating successful compensation awards when their property is taken by the state.  If the law is changed as proposed, the governmental entity seeking compensation will be placed in a much better position, and property owners will be much more inclined to accept the governments offer rather than contest the matter through litigation.

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In D.L. Anderson’s Lakeside Leisure Co. v. Anderson, 2008 WI 126 (filed 2 Dec. 2008) the Wisconsin Supreme Court addressed the interplay between tradenames, noncompete agreeements, and tort law. Anderson involved an asset purchase agreement whereby Seller agreed to sell certain assets, including seller’s tradename, to buyer and seller agreed to a noncompete agreement with buyer. The lower court found that the Seller breached the noncompete agreement and infringed on the tradename that Buyer purchased. On appeal, the Seller argued that the noncompete agreement restricted the tradename rights the buyer purchased; thus, any action against defendant must be controlled by contract law, not tort law. The Buyer argued that the noncompetition clause prohibited other commercial use of the tradename not covered by tradename protection. The Supreme Court found that it was not reasonable to read the noncompetition clause language as Seller wants; “to do so would mean that the expiration of the noncompetition clause after seven years would render the tradename purchase meaningless” and that “the tradename infringement claim arises under the contract only in the sense that the contract is the instrument by which the tradename was purchased. A separate tort may be perpetrated once the tradename belongs to the purchaser.”
 

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Almost always, when a business seeks money from a lender to finance the enteprise or enters into a commercial lease for space to run the business operations, the individual business owners themselves will be required by the bank or the landlord to execute personal guarantees of the loan or lease as appropriate.  The owners often do so without really understanding not only what ramifications that personal guarantee can have on their own personal non-business related assets (and those consequences are extremely important to consider and truly require a separate article addressing just the issues involved therewith), but also they fail to understand what their rights are with respect to the other guarantors in case the loan or lease is defaulted on by the business entity.  Unfortunately, in today's current economic climate, this issue is coming up more often that anyone would like.

In Wisconsin, even if both or all of the guarantors did not sign the same guarantee, but signed separate guarantees of the same obligations, in the absence of a separate agreement governing the rights of contribution between co-guarantors, a right to contribution exests for each "co-guarantor" against all other co-guarantors if he or she has paid more than a fair share of the common obligation.

This "right of contribution" means that the co-guarantor that has paid more than his or her fair share of the underlying business obligations has a cause of action in court against the other co-guarantors.  The Wisconsin courts have held that this right is based upon the belief that those who insure or become a surety with another ought to share the results of a default. 

This also means that if more than one person guarantees the debts/obligations of the business their fair share will likely be held to be their proportional amount of such debt, not necessarily their proportional ownership in the underlying entity.  Therefore, if you are a minority shareholder about to personally guarantee a loan or lease of the business, make sure that you limit your exposure under such guaranty and rights of contribution to your ownership percentage in the business, or whatever other percentage you can agree upon with your fellow guarantors, and get it in writing. 

Otherwise, for example, if you are a 30% owner in a business with one other owner who owns the remaining 70%, and you both sign a personal guarantee of a business bank loan, you could be on the hook for 100% of the loan as between you and the bank and then would be limited to seeking only 50% of the loan as between you and your fellow guarantor.  Therefore, "your fair share" could be more than you expected.

Please seek the advice of counsel before entering into personal guarantees of significant obligations.

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Businesses are rarely run by a single person.  Instead they are run by a team of persons, each bringing certain expertise which in combination with the other gathered talents create a unique mix that is designed to make the business succeed.  In the same fashion, the owner or owners of a small business often need the strength found in this teamwork approach to deal with the wide variety of business challenges each business owner faces.

There are some basic functions that each business must accomplish and some added functions unique to each business.  The most common functions include:  capital formation and management, risk management, marketing, legal issues, accounting and tax issues, and general advice.  Let's take these one at a time.

Each business will either raise capital from within its owner-investors or its creditors or both.  The stakeholders then become the owners and the lenders.  If the lender is an institutional bank, it often provides other services, as well, such as depository and lending services, financing inventory and receivables, factoring, and the like.  For that reason, it is often helpful to look for a banker as an adviser on the Business Advisory Team.  This person will provide a great perspective from the standpoint of a lender.

It is impossible to avoid all risks.  On the other hand, it is possible to manage the risks to which a business subjects itself so that it may succeed in the long run.  Commercial insurance agents who have dealt with clients facing all kinds of risks become well tuned to see which risks are manageable and which risks put the business in jeopardy.  Bringing such a person to the team will strengthen the team by helping the group assess how much coverage to carry, whether to enter into certain risks, and how to deal with claims when they arise.

The global economy has changed how business now must sell their goods or services.  It is important not only to have a plan, but to have someone able to help direct that plan in a new arena of websites, blogs and twitters.  Many things have now become commodities, and the only differentiating thing about the products are the way they are marketed.  Get a good marketer on your team.

Anyone can sue anyone.  To have a good defense, you need a good offense.  To do that, you need a good legal mind on your team.  Don't worry about whether that lawyer "does it all."  Just be sure they have enough experience to direct your group the right direction in the event of a legal problem.

Accounting and Tax are two very specialized areas.  Look for a CPA who is personable and willing to spend the time not only crunching the numbers, but meeting to explain what they mean and what result will most likely occur if certain changes are made.

Finally, consider who you would go for advice under certain very difficult situations, such as a discovery that a key employee was stealing from you.  That adviser may be someone as close to you as a spouse or a trusted clergy person or other intimate adviser. 

In summary, your Business Advisory Team would probably include at least your:

• Banker
• Insurance Agent
• Marketing Person
• Lawyer
• CPA
• Spouse or Trusted Friend

Such a team, coupled with advisers dealing with your business's special characteristics will lend a lot to insuring the success of your business.

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