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Wisconsin Business Law Blog

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Wisconsin Benefit Corporations, a Profit/Non-Profit Hybrid

Posted in Business Formation, News and Recent Decisions, Operating a Business, Tax



We do a lot of non-profit work. Oftentimes, we are working with new startups that are driven by strong social motivation, but to form and survive need investment capital. This puts us at a crossroad: do we go non-profit and non-stock or conventional corporation? Now, Wisconsin, joining 33 other states, has another alternative: the Benefit Corporation.

Non-profit corporations must have certain characteristics in order to qualify as exempt entities under section 501(c) of the Internal Revenue Code. Charitable organizations qualify under 501(c)(3). Such qualification requires a charitable “purpose” and further requires that in no case may the corporation dissolve and distribute anything to its members or board, but instead, must go to another similarly organized entity. It also allow its donors to deduct contributions to the organization. Its income is not taxed.

If an entity is motivated to protect investor’s capital, make a return on such capital and distribute proceeds upon dissolution to its owners, then it is a “for profit” entity. As such, its income is taxed.

In the past, such entities could not “crossover.” They were one or the other. With the enactment of Chapter 204 of the Wisconsin Statures, on November 27, 2017, Wisconsin now allows corporations to be profit driven and to exist to promote one or more public purposes.

Why is this so important? Because, in the past, the directors of a non-profit had no owners to be responsible to. They promulgated the non-profit’s purpose, regardless of its impact upon the bottom line. Directors of profit corporations owed a fiduciary obligation to the owners to act in their best interests — which oftentimes meant they had to act primarily in consideration of what their actions would do to the bottom line. In addition, for-profit directors could consider three other factors in their decision making:

  • the effect upon employees
  • the impact upon customers
  • how their actions would be perceived by the communities within which they served

Under new Chapter 204, benefit corporation directors may now consider the following additional factors:

  • the effect upon subsidiaries and suppliers
  • any impact upon the local or global environment
  • the interests of customers as beneficiaries of the corporation’s benefit purposes
  • the short term and long term interests of the corporation
  • the ability and extent to which it may accomplish the corporation’s benefit purposes
  • other factors the directors or officers deem important

Note how the last item is a huge “catch all!”

So, what are these “public benefits” that the new benefit corporation must espouse? “A benefit corporation shall have a purpose of creating general public benefit.” Sec. 204.201(1) Wis. Stats. A “General public benefit” is “a material positive impact on society and the environment by the operation of a benefit corporation taken as a whole, through activities that promote some combination of specific public benefits.” Sec 204.120(5) Wis. Stats. Under that section’s subsection (7), “Specific public benefits” are:

  • (a) Providing low-income or under-served individuals or communities with beneficial products or services.
  • (b) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business.
  • (c) Preserving the environment.
  • (d) Improving human health.
  • (e) Promoting the arts, sciences, or advancement of knowledge.
  • (f) Increasing the flow of capital to entities with a public benefit purpose.
  • (g) The accomplishment of any other particular benefit for society or the environment.

The owners may sue directors who fail to consider the corporation’s benefit purposes. Directors are broadly protected if they do. Sec. 204.301(3) Wis. Stats. There shall be a designated “benefit director” who shall have the powers to carry out the statute’s intent. Sec. 204.302 Wis. Stats. The law promotes transparency, inasmuch as the corporation has to provide its shareholders an annual statement that includes:

  • objectives to promote public benefits, as set by the board
  • standards the board adopted to measure progress
  • factual information regarding the success of meeting objectives
  • an assessment regarding the success of meeting objectives

The articles or bylaws may extend such transparency by making such statement available to the public. Sec. 204.401 Wis. Stats.

While the concept of a benefit corporation is quite new, it may be the right form to do business for owners who are motivated to solve social or environmental issues. It assures such owners continued control in order to achieve such goals. Such goals may be used to promote the corporation and may be seen by others dealing with the corporation as a consideration when doing so. Employees may be drawn by such purpose; customers may choose to buy from such a company; communities may be proud to bring such operations into their midst; and owners may benefit by improving the world and making a profit at the same time!

If you, or any group you work with is interested in exploring this new form within which you may do business, please contact our business law experts at Schober Schober & Mitchell, S.C. at (262)785-1820.

Other reading:

Navigating U.S. Export Barriers: What All Small Businesses Should Know About Complying with U.S. Export Control Regulation

Posted in Operating a Business, Other Legal Issues

By:   Ngosong Fonkem[1]

This article was originally posted on the “State Bar of Wisconsin’s Business Law Section Blog.”

The first five rounds of the scheduled seven rounds of the modernization and renegotiation of the North American Free Trade Agreement (“NAFTA”) has drawn to a close. Although the current administration has made reducing the U.S. bilateral trade deficits with its trading partners the benchmark for measuring success,[2] exports of U.S. made products to unauthorized end-user, end-use, or destination country without the required export license can lead an unaware U.S. exporter into legal trouble. This is of particular concern to small and medium-size businesses (“SME”) who often lack resources to employ necessary staff or counsel to assist them to navigate the very complex and cumbersome U.S. export control regulations. The U.S. International Trade Administration (“ITA”) reports that SME account for ninety-eight percent (“98%”) of all U.S. exporters,[3] and three-fourths of the exported items are controlled under U.S. export control regulations.[4] Thus, an elementary understanding of U.S. export regulation is vital to any small business looking to expand and benefit from new markets abroad.

What is an Export?

 The starting point for any export control compliance analysis is to understand how an export is defined under U.S. law. Specifically, if an item leaves the U.S. border via carried mail, email, fax, upload or download, mentioned in a phone conversation, or a U.S. exporter accepts a foreign client visit to its facility or permit visual inspection of plans or blueprints, such items or actions are considered an export and are thus subject to U.S. export license requirements.[5] Further, all foreign origin items shipped or transmitted through the U.S. are also considered exports.[6]

Which Federal Agencies Regulate Exports?

All U.S. exporters must fully comply with all applicable U.S. export regulations. Because these laws are administered by several different federal agencies, navigating through the myriad of applicable regulations is a daunting task. Although numerous federal agencies administer exports control regulations,[7] three agencies are of significance. These three agencies are within the following federal departments: The Department of Commerce, the Department of State, and the Department of the Treasury. First, within the Department of Commerce, the Bureau of Industry and Security (“BIS”) enforces the Export Administration Regulations (“EAR”). The EAR regulates the export and re-export of non-military and “dual use” commodities, software, and technology. The EAR also contains the Commerce Control List (“CCL”), which requires licenses for certain exports. Second, within the Department of State is the Directorate of Defense Trade Controls (“DDTC”) that administers the International Traffic in Arms Regulations (“ITAR”). ITAR contains the U.S. Munitions List (“USML”) and controls defense articles, defense services, and related technical data as these terms are defined by the USML and the Arms Export Control Act. Third, within the Department of Treasury is the Office of Foreign Assets Control (“OFAC”) that administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals. Note however that in 2009 the U.S. government began implementing the Export Control Reform Initiative (“ECRI”), which will make significant changes to existing export control system.[8] As of August 2015, Phase Two of the planned three phases is nearly complete.[9] When fully implemented, the ECRI will create a single control list, single licensing agency, unified information technology system, and enforcement coordination center.

What are the Penalties for Non-compliance?

 On June 22, 2016, the BIS published new Administrative Enforcement Guidelines,[10] which aimed to promote greater transparency and predictability to the administrative enforcement process. Further, based on the BIS guidelines, fines for export violations can reach $1 million per violation in criminal cases and up to twenty years prison term, while for administrative cases, it can result in penalties of up to $250,000 and a denial of export privileges.[11] Further, based on the enforcement actions that have been carried out so far by the various agencies, it appears penalties have been applied non-discriminately for each export violation.

 What are the Processes for Determining Whether an Export License is Warranted? 

First determine whether the product at issue has an Export Control Classification Number (“ECCN”) by checking the product against the EAR. The EAR will list reasons why that particular product falls under BIS control. Use this information to determine whether an export license is required, based on where the product is being exported to. Any product that does not have and ECCN is designated as EAR99, which usually does not need an export license, unless it is exported to an embargoed country or in support of a prohibited end-use. If the product is controlled, compare the ECCN against the Commerce Country Chart in the EAR to determine whether or not a license is required. Last, the U.S. maintains a list of restricted parties, which are persons or entities that U.S. exporters are prohibited from exporting to without a license. This may include EAR99 items that otherwise do not require a license based on the country of export. It is important to note that even the most harmless product might be intended for uses not envisioned by the U.S. exporter.

Disclaimer: The views and opinions expressed in this article are those of the author and do not

necessarily reflect the official policy or position of Addison-Clifton.

[1]Ngosong Fonkem, JD.MBA.LLM.BA is a senior advisor at Addison-Clifton LLC, focusing on its Asian Market Services practice sector. His professional legal and business experience is diverse, working cross-culturally in the USA and internationally on a variety of issues involving commercial transactions and government procurements, energy consulting, compliance and risk management, and fulltime member of the Faculty of Law at Multimedia University in Malaysia. Ngosong received his B.A. from University of Wisconsin-Green Bay (2008), J.D./MBA from West Virginia University College of Law (2011), and LL.M. from Tulane Law School (2012).

[2] USTR Releases NAFTA Negotiating Objectives. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2017/july/ustr-releases-nafta-negotiating. https://ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf

[3] “Profile of U.S. Exporters Highlights Contributions of Small- and Medium-Sized Businesses,” International Trade Administration, April 8, 2015.  Available at http://blog.trade.gov/2015/04/08/profile-of-u-s-exporters-highlights-contributions-of-small-and-medium-sized-businesses.

[4] Data is obtained from a 2013 National Small Business Association and Small Business Exporters Association Exporting Survey. “2013 Small Business Exporting Survey,” National Small Business Association and Small Business Exporters Association, at p. 13. Available at www.nsba.biz/wp-content/uploads/2013/06/Exporting-Survey-2013.pdf

[5] 15 CFR §734.2(b)(1); 15 CFR §734.2(b)(4). https://www.bis.doc.gov/index.php/documents/regulation-docs/412-part-734-scope-of-the-export-administration-regulations/file

[6] Id.

[7] Some of these federal departments and agencies include, Department of Energy, Department of Agriculture, the Drug Enforcement Administration, Food and Drug Administration, Nuclear Regulatory Commission, and etc.

[8] https://2016.export.gov/ecr/

[9] Id.

[10] https://www.bis.doc.gov/index.php/enforcement/oee/penalties

[11] https://www.bis.doc.gov/index.php/enforcement/oee/penalties

 

Author’s Bio and contact information.

Ngosong Fonkem graduated from West Virginia University College of Law 2011 (JD/MBA) and Tulane Law School 2012 (LLM), is a senior advisor at Addison-Clifton LLC, Brookfield, Wisconsin, where he assists U.S. and foreign companies with day-to-day compliance with U.S. trade laws and related audits, investigations, intervention, and civil enforcement proceedings; and doing business in Asia.

You Can Lead an Issuer to Rule 506(c), but You Can’t Make Them Advertise

Posted in Business Formation, Business Litigation, Operating a Business

This article was originally posted on the “State Bar of Wisconsin’s Business Law Section Blog,” and was written by Attorney Lindsay M. Fedler.

Many people believe most capital is raised by companies (“Issuers”) making initial public offerings or trading on major exchanges such as the NYSE or NASDAQ. Notable 2017 examples include Snap! (parent company for social media app Snapchat) and real estate site Redfin. Generally, issuers must register publicly offered securities with the Securities and Exchange Commission (“SEC”) – a process involving extensive information reporting and expense.
However, most companies opt to raise capital from the private markets through private offerings exempt from registration if certain conditions are met, which reduces their regulatory burden, costs, and time required to raise new capital. Private offerings have increased substantially since the beginning of the Great Recession.[1] A large portion is raised through Regulation D, which is comprised of three rules: Rule 504, Rule 506(b) and Rule 506(c). Between 2009 and 2014, ten times as many private Regulation D offers were made (about 163,000) as there were public offerings (about 15,500).[2]
Today, over 90 % of issuers engaging in private offerings use the exemptions available under Rule 506. Two key terms applying to Rule 506 exemptions are “accredited investor” and “bad actor”.
An accredited investor[3] can be:
• Institutional, such as a bank, private business development company, or certain types of charitable organizations and trusts;
• A person associated with the issuer, such as a director, executive officer, or general partner;
• Individual investors meeting net worth or income requirements:
o Income: Individual or joint income must have exceeded $200,000 or $300,000 respectively in the previous two years (with no reasonable expectations of a change in the current year);
o Net Worth: the investor’s individual or joint net worth must exceed $1 million dollars (excluding the value of the investor’s primary residence); or
• An entity in which all equity owners are accredited investors.
If certain persons or entities involved in the offer and sale of the issuer’s securities engage in conduct which constitutes a disqualifying event under the definition of a “bad actor,” the issuer cannot use Regulation D exemptions.[4] “Covered persons” include:
• The issuer, its predecessors and affiliated issuers;
• The issuer’s directors, executive officers, general partners, managing members, and any other participating officers;
• Beneficial owners of 20% or more of the issuer’s voting securities;
• Promoters;
• Investment managers (if the issuer is a pooled investment fund); and
• Any person compensated for soliciting investors.
Disqualifying events[5] include:
• Criminal convictions, court injunctions and restraining orders involving the purchase or sale of securities, falsified SEC filings, or other securities related business.
• Final orders of certain state and federal regulators, certain SEC orders, and US Postal Service false representation orders.
• Suspensions or expulsions from memberships in a self-regulatory organization (SRO) such as FINRA, or from association with an SRO member.
Only events occurring after September 23, 2013 are disqualifying.[6] Disqualifying events occurring before September 23, 2013 must still disclosed to prospective investors.[7] A “look back” period of five to ten years may apply, measured from the date of the disqualifying event. For example, the date of the final order issued by a state securities regulator triggers the look-back period – not the date(s) of the underlying conduct.
There are some exceptions to bad actor disqualification. The issuer will not be disqualified if it shows it did not know and could not have reasonably known that a disqualified person participated in the offering, or the court or regulatory authority entering the relevant order, judgment, or decree advises in writing that disqualification under the rule should not result as a consequence.[8]
Rule 506(b) and (c)
In 2012, Title II of the JOBS Act amended Rule 506, directing the SEC to permit general solicitation and advertising in some Rule 506 offerings. As a result, the Rule 506(c) exemption allowing for general solicitation and advertising so long as all investors are accredited became effective on September 23, 2013. Rule 506(b) preserves Rule 506 as it existed before the adoption of Rule 506(c).
The exemptions under Rules 506(b) and (c) share several characteristics. Under both:
• Issuers may raise an unlimited amount of funds through the offer and sale of its securities to unlimited accredited investors;
• Prior to the sale of securities, issuers must decide what information should be provided to accredited investors, and ensure that it does not violate antifraud provisions of the securities laws; and
• The securities are not subject to the specific registration requirements of states where they are offered and sold, in contrast to Rule 504. While issuers must still file a notice form and pay a fee to the state(s) where the securities will be offered, there are no additional requirements above what is needed to complete Form D. Some states mandate electronic filing of Rule 506 document through the Electronic Filing Depository (“EFD”). For information on electronic filing procedures, check out https://efdnasaa.org, containing contact information for actual human regulators in each state to answer all questions related to Regulation D filings.
506(b)
In addition to raising unlimited funds from accredited investors, an issuer may sell its securities to up to 35 non-accredited investors under the 506(b) exemption. The issuer must reasonably believe each non-accredited investor has enough knowledge and experience in financial and business matters to properly evaluate the investment, otherwise known as the “sophistication” requirement, which is somewhat open to interpretation. Frequently, an issuer requires the prospective investor to complete a questionnaire certifying the investor as accredited or non-accredited, and if not, whether the investor has sufficient knowledge or experience in financial and business matters to make an informed decision about the investment.
Issuers must provide non-accredited investors with disclosure documents about the issuer and its securities depending on the offering size, and any information distributed to accredited investors.[9]
Advertising in connection with the offer or sale of 506(b) exempt securities is strictly prohibited. Issuers may approach investors if a substantive, pre-existing relationship exists.
506(c)
Unlike 506(b), under 506(c) an issuer may advertise the offer and sale of its securities under 506(c), through social media, email, and more traditional media (print and radio). No substantive pre-existing relationship with the prospective investor is required.
However, an issuer relying on 506(c) may only sell to accredited investors, with more stringent requirements for verifying the investor’s accredited than under 506(b).
Self-verification by a prospective investor of accredited status is insufficient – the onus is on the issuer to verify accredited status under 506(c). The SEC suggested several non-exhaustive ways to meet the verification requirement for accredited investors under 506(c)(2)(ii)(A)-(D):
• Income verification. Review investor’s two most recent years’ tax returns and obtain the investor’s written representation of a reasonable expectation of reaching the necessary income level in the current year.
• Net worth verification. Review bank and/or brokerage statements, tax assessments, or independent appraisal reports within the prior three months plus the investor’s written representation that all liabilities necessary for determining net worth were disclosed.
• Third party verification. Confirmation from a broker, investment adviser, attorney, or CPA verifying the investor met the accredited investor requirements in the past three months.
• Prior investor self-verification. If the investor purchased the same issuer’s securities as an accredited investor in a Rule 506(b) offering prior to September 23, 2013 and continues to hold the securities, the issuer can obtain the investor’s certification at the time of the sale of securities under Rule 506(c) that he or she qualifies as an accredited investor.
An accredited investor qualifying based on joint annual income or net worth requires the issuer to review documentation for and obtain a written representation from both spouses.
The stricter verification requirements result from the possibility that participation of non-accredited investors in a 506(c) offering using advertising makes the issuer ineligible under both 506(b) and (c). If an issuer using 506(c) does not advertise but inadvertently sells to a non-accredited investor, the filing can effectively be revised to a 506(b) exemption. However, once advertising is introduced, the offering will forever be a 506(c) offering and cannot be converted to a 506(b) offering allowing for sophisticated non-accredited investors.
Rule 506(c)’s Impact on Issuers
One big advantage of raising capital under Rule 506(c) is the ability to advertise to a far larger market than under Rule 506(b). However, issuers have been slow to embrace Rule 506(c), with the vast majority of Regulation D filings continuing to be made under Rule 506(b). Perhaps the field of private offerings has prohibited advertising for so long that issuers are wary of using it without more regulatory guidance, or maybe it’s the more stringent verification requirements for ensuring all investors are accredited, especially where advertising is used pursuant to Rule 506(c).
Some third party platforms are attempting to bridge the gap as a middleman for accredited investors and issuers. These platforms verify investors’ accredited status for the issuers advertised through the platform, in exchange for compensation or some portion of the proceeds raised. The platform also accepts some responsibility for “drawing the line” for advertising content of the issuer.
While Congress intended Rule 506(c) to expand investment opportunities and access to capital, time will tell if issuers take advantage.

[1] S. Bauguess et al., Securities and Exchange Commission, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014, 10 (2015). (https://www.sec.gov/dera/staff-papers/white-papers/30oct15_white_unregistered_offering.html)
[2] Id. at 7.
[3] 17 C.F.R. § 230.501(a)(1)-(8).
[4] 17 C.F.R. § 230.506(d)
[5] 17 C.F.R. §§ 230.506(d)(1)(i)-(viii)
[6] 17 C.F.R. § 230.506(d)(2)
[7] 17 C.F.R. § 230.506 (e)
[8] 17 C.F.R. § 230.506(d)(2)
[9] 17 C.F.R. § 230.502(b)(2)


Lindsay Fedler, University of Wisconsin Law School 2013, is an attorney with the Wisconsin Department of Financial Institutions in Madison, Wisconsin where she specializes in the areas of securities and franchise laws and regulations at the state and federal level, and prosecutes enforcement actions on behalf of the Division of Securities. She may be reached at lindsay.fedler@wisconsin.gov . The Department of Financial Institution’s website is www.wdfi.org .

How to Dissolve Your Unneeded Wisconsin Corporation

Posted in Buying, Owning and Selling a Business, Operating a Business

Sometimes keeping a corporation going serves no useful purpose. If you have such a corporation, here are some useful steps to consider.

Typical corporate terminations involve both a “liquidation,” the act of converting all corporate assets to cash, paying all outstanding bills, and distributing the remaining cash to the shareholders in exchange for their stock, and a “dissolution,” the legal steps necessary to end the corporation’s existence.

Five actions (and their associated paperwork), generally cover what needs to be done:

  1. Approving an intent to dissolve;
  2. Creating a Plan of Liquidation;
  3. Filing Articles of Dissolution;
  4. Completing the Liquidation; and
  5. Limiting future liability.
Empty Board Room

Empty Board Room of Inactive Corporation

The first step is accomplished at either a joint Shareholder and Director meeting with an appropriate action taken, or by unanimous execution of a joint Shareholder and Director Consent Resolution. At that time , a Plan of Liquidation will be approved, generally setting the timeframe within which the corporation’s assets will be converted to cash and bills will be paid; the shareholders will also sign over their stock certificates for a proportionate “liquidating distribution.” The Articles of Dissolution are then filed with the Department of Financial Institutions.

A Plan on Liquidation should reference that the Corporation’s Accountant will file Form 966 entitled “Corporate Dissolution or Liquidation”, a necessary action.

Once the initial resolution is passed, all future actions can be summarized as “winding up the affairs of the corporation.” See Wis. Stat. § 108.1405. After the Articles of Dissolution are filed, the Directors and Officers retain authority to act with respect to such wind up activities. This includes allowing an officer to sign the corporation’s final tax return as well as checks to shareholders, which will complete the liquidation.

Finally, in order to shorten the time claims may be filed against the corporation, it is advisable to publish a Notice of Dissolution per Wis. Stats. § 180.1407. Specific creditor’s claims may be further barred by following a simple Notice procedure set forth in Wis. Stats. § 180.1406.

If you or anyone you know needs to consider ending the existence of a corporation, please consider calling on our business law team at Schober Schober & Mitchell, S.C. You may reach us at (262) 785-1820 or (262) 569-8300.

 

Key Employee Non-Competes: Strategies for Enforceability

Posted in Buying, Owning and Selling a Business, News and Recent Decisions, Noncompete Agreements

For many business owners, retaining key employees is a paramount concern of running their business. Employers often have invested a significant amount of training, heavily rely upon their key employees for revenue and business operations, and, in many cases, the employee is a likely candidate to take over the business. Beyond these reasons, a business owner may also fear that a key employee will be poached by a competitor which would result not only in a loss of the investment, but also risk the business’ competitive advantage or risk losing customers to the employee.

One strategy to alleviate this fear is to have the employee sign a non-competition agreement. We’ve written on our blog about the importance of having a carefully drafted non-competition agreement in the past, but it’s worth a reminder that a poorly drafted non-competition agreements risks a court voiding the whole agreement even if only one contract term violates the law. This is the case because Wisconsin has a statute (Wis. Stat. sec. 103.465) that imposes certain restrictions on the enforceability of non-competition agreements between employees and employers. The statute puts heavy scrutiny on the terms and surrounding circumstances of a non-compete agreement, and typically favors the employee.

However, a recent Wisconsin Court of Appeals case, Karsten v. Terra Engineering  & Construction Company, reminds us that it is possible for non-competition agreements to be scrutinized outside of the context of the statute, under a less restrictive method called the “rule of reason”. Under the rule of reason, the terms of a non-competition agreement and the surrounding circumstances of its negotiation still must meet certain elements, but this method is much less restrictive and therefore, the agreement is more likely to be enforced by the courts. Notably, under the “rule of reason”, if the court thinks the non-compete’s terms are unreasonable, rather than voiding the whole agreement completely, the court can modify the scope of the contract to what it thinks is reasonable. This is a huge advantage compared to the penalty of voiding the entire contract under 103.465. The Karsten court ruled that the statute “does not apply” and that the rule of reason applies to a non-compete  “when the [non-competition agreement] is not a condition of employment and the employer does not possess an unfair bargaining advantage over the employee.”

With that in mind, what are some ways that these agreements can be drafted and/or negotiated in order to avoid being scrutinized under 103.465?

  • Don’t use employment as the consideration for the contract! Provide an adequate bonus or benefits such as deferred compensation plans or the purchase of life insurance, in exchange for their agreement to the non-compete. Many employers expressly state in the agreement that the consideration is the employer employing the employee in the first place, or if negotiating with a current employee, the continued employment of the employee (implying that they will not continue to be employed if they do not sign).
  • Don’t expressly state that you have the right to terminate the employment of the employee for breaching the covenant! Most employees are employees at will, so therefore could be terminated with or without cause (provided there aren’t any discriminatory reasons for your termination). Because of this, even if there’s a separate employment agreement, there’s really no reason to expressly tie breach of the non-compete to your right to terminate.
  • Play Fair! The courts require that there is not unfair bargaining advantage by the employer. Consider giving the employee the opportunity to ask questions, to negotiate the consideration they’re receiving, encourage them to speak to legal counsel, and don’t threaten any negative consequences regarding their employment for their failure to sign. Providing language in the agreement that acknowledges that the parties understand the terms and their legal effects may also be helpful in achieving this goal.

Non-compete law is constantly evolving in Wisconsin. The business attorneys at Schober Schober & Mitchell, S.C. keep a close eye on these changes to ensure our clients are always in the best position to mitigate risks in their business.

Questions? Contact me at jmk@schoberlaw.com.

Wisconsin Residential Weatherization Program Eliminated

Posted in Real Estate, Uncategorized

A recent Wisconsin law change in Wisconsin has a big impact for those interested in investment property in Wisconsin. As part of the Wisconsin biannual budget signed into law in September 2017, the State of Wisconsin has discontinued its “rental weatherization” program. This program required either a Seller or Buyer of residential real estate to ensure that the property met certain energy efficiency standards such as the installation of storm windows and proper insulation on hot water pipes. Typically, the party responsible for bringing the property into compliance with the weatherization code in a real estate transaction is negotiated in the property sales contract.

To ensure that the weatherization standards were met, on each transfer of real estate, the party responsible for bringing the property up to code was required to have a document recorded with the deed transferring the real estate. If the Seller was responsible, they would have to obtain and record what is called a “Certificate of Compliance”. A Certificate of Compliance required the Seller to hire an inspector to determine whether the property was up to code, and if it was not, incur the cost of bringing the property up to code in order for the inspector to issue the Certificate.   If the Buyer was responsible, they were required to execute a “Stipulation Agreement” in order for the Register of Deeds to accept the deed transferring the property to the Buyer. A Stipulation Agreement required the Buyer to obtain a Certificate of Compliance within one year of purchasing the property. This program has now been eliminated so neither party is responsible for doing so.

Though in many situations taking steps to improve energy efficiency may still be more cost-effective for residential real estate investors, this change gives property owners more flexibility in determining what improvements are necessary and when they should be made. This change may encourage more investment in residential real estate in the state.

Though this eliminates one consideration for those interested in investment properties, there are many other legal considerations you may not be aware of when entering the process of purchasing investment properties. If you are looking to begin  investing in residential real estate  or looking to expand your current portfolio, contact the attorneys at Schober Schober & Mitchell, S.C. We will be happy to help.

Corporation vs. LLC: Which Should You Choose?

Posted in Business Formation, Buying, Owning and Selling a Business, Operating a Business, Tax

If you’ve decided to create a startup business, one of the many decisions you face is the choice of what type of limited liability entity to form. In Wisconsin, the most typical choices are either the Limited Liability Company (“LLC”) or corporation. I frequently have people ask me whether I can help them set up an LLC for their business, and who often think, for whatever reason, that the LLC is their only option. My first response is always, “Is there a specific reason why you want to be an LLC?” and go on to explain that while there are some specific exceptions to this rule, a corporation is almost always the best type of limited liability entity for a startup small business compared to the LLC.

Why the Corporation is a Better Option

More Developed Law. In Wisconsin, the LLC has only been around since 1991, while the corporation has been around since 1848. Why is this relevant? There’s almost 160 years of law on corporations in Wisconsin, while there’s only 26 years of law on the LLC. This means there’s more settled law on issues with corporations and much more uncertainty within the law of LLCs. Where there are legal issues coming up in relation to your business, wouldn’t you rather have more certainty from years of developed corporate law than venture into the relatively undeveloped realm of LLC law?

Tax Considerations. Some argue that the LLC is preferable because it offers pass-through taxation to its members, meaning all income and loss the business has in a given year is spread according to the members’ equity stake in the business. You can easily elect for S-Corp status with the IRS to avoid the dreaded “double taxation” of C-Corporations and still get the same pass-through tax treatment given to LLCs. Corporations that elect S-Corporation treatment do have specific guidelines in regard to the number of owners, and the types of owners, but generally, those are irrelevant to most startups and small businesses. Since electing S-Corporation status allows for the same pass-through tax treatment for corporations, this puts the LLC and the Corporation on a level playing field.

Another huge tax benefit of the S-Corporation election is that, as an owner of the business, you only pay self-employment tax on the income that is attributable to the fair market value of your services provided to the business. If you are an LLC without a S-Corp election, you are taxed under Subchapter K of the Internal Revenue Code, and then must pay self-employment tax on all income allocated to you, no matter whether that income is attributable to your services as employee or not. For most small startup businesses, the owner also provides services as if she were an employee of the business, meaning that the employee/owner has to pay a self-employment tax on any income allocated to that individual in addition to income tax. In 2017, the self-employment tax is 15.3%.

In an LLC with no S-Corp election, no matter whether that allocated income is actually attributable to the services provided by the owner/employee, or whether that LLC level income is allocable to services provided by the employee owner and an employee non-owner, the owner pays all of the self-employment tax, AND income tax on top of that. For example, if an LLC had $100K of income that was allocated to the owner, the owner would pay the 15.3% self-employment tax as well as income tax on that amount, even if the owner only provided $50K worth of services as an employee of the LLC.

If the company had elected to be an S-Corporation, the employee/owner would only pay self-employment tax on the amount of income on the $50K attributable to her services as an employee/owner, and the remaining amount could be a tax-free “S-Corp” distribution that merely reduces the owner’s basis in corporation’s stock. This is a huge tax advantage, potentially saving thousands of dollars a year for S-Corp shareholders. Electing S-Corp is generally a good idea if your startup has employees or multiple owners, but you should always consult with a licensed CPA regarding whether this election would be beneficial to your particular business situation before doing so.

Investment Considerations. Finally, if you’re ever looking for equity investors like angel investors or venture capital groups, they generally prefer investing in corporations over LLCs. This is because, angels and VCs don’t want the extra income allocated to them for their share of profits from a pass-through tax structure at their higher tax rates, and prefer that their return on investment is paid through dividends (currently taxed at lower tax rates than ordinary income). When your business gets to the stage of looking for outside investment, depending on what your investors want, if you’ve elected S-Corp, you may want to revoke that S-Corp election to allow your investors to get the lower dividend rate, which is much easier than converting from an LLC to Corporation. Hopefully though, by that point in your business, you’re successful enough that the corporate level tax won’t be detrimental!

The Bottom Line

While there are situations where the LLC may be preferable for your particular business situation (which I’ll discuss in my next post), the corporate form is often still the better choice for most startups and small businesses . Choosing the type of entity now may seem like an insignificant decision now, but it may have a large impact on your business down the road. It’s best to consult with your legal professional to help you make the right choices when setting up a limited liability entity for your business. If you’re a startup that has already formed a limited liability entity or are thinking about starting a business and have questions about which type of entity to choose, email me at jmk@schoberlaw.com or call me at 262-569-8300 to set up an appointment to discuss your options.

Business Docket Coming to a Courthouse Near You!

Posted in Business Litigation, Buying, Owning and Selling a Business, News and Recent Decisions, Operating a Business

The attorneys at Schober Schober & Mitchell, S.C. are excited about the recent news that a Commercial Court Docket (“CCD”) will be coming to circuit courts in the Fox Valley, as well as in Southeastern Wisconsin– right here in Waukesha County! On February 16, 2017, the Supreme Court of Wisconsin voted 5 to 2 to adopt a pilot program that creates a separate commercial court docket in these judicial districts. This specialized commercial court will be solely responsible for resolving disputes pertaining to businesses brought in these judicial districts.

Depending on the type of dispute brought in these circuit courts, a case may automatically qualify for placement in the CCD. Cases qualifying for the CCD  will begin being assigned in these courts starting July 1, 2017. Some examples of the types of cases that qualify are those involving internal governance issues, business torts and restrictions in trade, merger and acquisition issues, securities, intellectual property, and franchise issues. Initially, the judges assigned to the CCD will be chosen by the Supreme Court. The Court has said that it will likely choose those judges with business law backgrounds, at least for the initial rotation during the three years of the pilot program.

This is a welcome change to both the legal and business landscape here in Wisconsin, and will hopefully be here to stay. Twenty-Six other states in the U.S. have created some type of special commercial court docket in their states, and studies have shown that this has had a positive impact on communities as a whole within those states. Here are a few reasons why this addition should be celebrated by all Wisconsinites:

With at least the initial judges overseeing the CCDs having demonstrated business law backgrounds, parties will have greater confidence that resolutions of complex commercial disputes will  reflect an understanding of the realities of day to day business issues;

The CCD should attract more businesses—whether they be start-ups or established companies—to relocate and do more business in Wisconsin, because of increased confidence that disputes will be resolved more quickly, fairly, and at a lower cost. This creates jobs, greater tax revenue, and increased quality and quantity of services available to businesses and consumers alike;

Separating commercial issues from the civil docket should significantly speed up litigation time, giving businesses greater incentive to fully litigate complex issues. This creates consistency and reliability in the law for the entire business community, and also reduces costs for businesses that otherwise might be deterred from litigation for purely economic reasons; and

In states that have created commercial court dockets, there has been an increased level of capital investment by venture capital groups and angel investors into start-ups and other early-stage businesses—something Wisconsin desperately needs to help foster growth of the many entrepreneurs and startups seeking to grow in this state.

Have questions or comments about the new Commercial Court Docket and how it might impact you or your business? Contact one of the attorneys at Schober Schober & Mitchell, S.C.

Federal “Right to Yelp” Law Enacted

Posted in News and Recent Decisions, Operating a Business, Technology Related Topics

Effective March 14, 2017, consumers will have what is being called by some, a “Right to Yelp”. The Consumer Review Fairness Act of 2016 (“CRFA”) was enacted in December 2016, and prohibits businesses from inserting provisions into customer contracts that prohibit the customer from giving a derogatory online review about the business.

These provisions have been termed anti-derogatory provisions, and are used to give a business a contractually based legal right  to remove a negative consumer review that the business believes could damage its reputation. Typically these contractual provisions are buried in form contracts (defined by the CRFA as contracts where the customer had no opportunity to meaningfully negotiate the terms). Examples of these types of agreements are the terms of use of almost every business’ website, or even your Apple service agreement. The CRFA now prohibits businesses from using anti-derogatory provisions, and provides for penalties for businesses that do so.

What This Means for You

From the consumer standpoint, the CRFA encourages an organic and free-flowing information marketplace in regards to customer reviews, and allows the public as a whole to have the most accurate picture of a business’ services. In the “Google” age, consumers have come to rely upon the accuracy of reviews on sites and mobile phone apps like Yelp, YP, Facebook, and the Better Business Bureau. Consumers use these sites to determine which professional service to use, what restaurant at which to eat, and which products to buy. The CRFA ensures that these review sites are able show the full picture to consumers.

On the other hand, the CRFA limits a business’ legal options in protecting their business’ reputation. Businesses can now only remove reviews that are slanderous, libelous, or defamatory, and, for the most part, must go to court to do so. With the law prohibiting businesses from creating a contractual right to remove negative reviews, the business is forced to prove in court that the statement was actually defamatory, a much taller task than a breach of contract action.

How to Manage Negative Reviews

In light of the fact that many sites like Yelp and BBB are already flagging businesses using these anti-derogatory review provisions in their contracts, many businesses may have stopped using these provisions already. However, the question still persists: how do you get rid of the negative reviews without resorting to litigation?

Here are a few suggestions:

Many sites have options for you as a business owner to claim your business on their site so you can publicly respond to reviewers. In the event of a negative review, you have the opportunity to respond, clarify the situation, as well as take an opportunity to publicly show your commitment to customer service. This then puts it on the reviewer to give you a reasonable response. Hopefully this interaction will either diffuse the situation, lead the reviewer to remove his/her post, or result in the reviewer responding inappropriately, thereby ruining his/her credibility. Make sure you’ve claimed your business on these sites so you can do this!

If the negative review lingers, how can you make that review an anomaly? First, learn from it, and strive to prevent whatever caused the negative review. This should lead to a higher rating over time. Second, encourage (and that doesn’t mean bribe) your customers to leave you a review at the end of your customer relationship so you can gain a higher rating. One interesting method I’ve seen for those businesses interacting with customers electronically, is that the businesses ask their customers about their experience through electronic communication. This gives them the option to answer whether their experience was positive and negative. If it was negative, the business links the customer to a private feedback page where they can make their comment to you privately. If they select positive, link them to a page asking them to review you on whatever review site you suggest. Though it doesn’t stop the negative reviewers from then taking their frustrations to Yelp, or the like, you may reduce the risk of a negative review by allowing an unsatisfied customer to blow off some steam.

If the comment is actually personally derogatory or defamatory, there are options on most sites that allow you to flag the comment to the site administrator to get the review removed.

The business attorneys at Schober Schober & Mitchell, S.C. stay updated on new legal issues affecting Wisconsin businesses. To ensure your business is complying with this new law, or for any questions you may have, email me at jmk@schoberlaw.com.

How the Tom Brady Arbitration Decision Affects Your Business

Posted in Business Litigation, News and Recent Decisions, Operating a Business

For those of you who follow professional football, you are no doubt aware that Tom Brady, the 4-time Super Bowl winning Quarterback for the New England Patriots, recently came back from a suspension for (allegedly) deflating footballs. But why would I bring this up on our firm’s business law blog? Beside the implications for your fantasy football team, the reason is because Brady’s suspension was in large part a result of something called an arbitration clause in his contract.

Brady is represented by the NFL Player’s Association (the “NFLPA”), a union that advocates on behalf of players (who are employees) through a collective bargaining agreement with the National Football League (the “NFL”). In negotiating some provisions of NFL player contracts, the NFL and NFLPA have agreed to submit all disputes between the players (the employees) and the NFL (the employer), to what is called arbitration. Arbitration is a common way for private parties to resolve any disputes instead of going to court, and the decision to arbitrate is typically agreed upon between the parties in whatever contract governs the parties’ relationship.

To many, arbitration is a preferable method of dispute resolution for a few reasons:

The parties can specifically choose arbitrators to resolve their dispute that are knowledgeable in the particular area of dispute, and avoid the risk of drawing a circuit court or federal court judge without the background in that area;

Arbitration is not necessarily subject to the stringent rules of evidence found in trial court; and

Except in limited circumstances, the decision of the arbitrators is final and binding upon the parties, meaning protracted litigation and appeals are unlikely.

In Tom Brady’s case, he tried arguing that one of those limited circumstances should overturn the arbitration decision against him. United States Courts and Wisconsin Courts have a strong policy of deferring to arbitration decisions and only overturning them in circumstances where it is clear that the decision was corrupted, there was some evident bias, where there is evidence and meaningful procedural misconduct, or where the arbitrator exceeded his or her power at some point in the arbitration.

Brady’s arbitration was unusual because the arbitrator was Roger Goodell, the Commissioner of the NFL. Brady’s argument was that Goodell acted with evident bias, that there was procedural misconduct, and that Goodell exceeded his power as an arbitrator. After having the arbitration decision overturned in circuit court in 2015, in summer 2016, the 2nd Circuit Court of Appeals (in New York) finally ruled against Brady, deciding that the actions of Goodell were not egregious enough to upset the policy of deferring to arbitration decisions. Ultimately, Brady accepted the suspension, foregoing an opportunity to take the case to the United States Supreme Court.

 

Ok, But What Does This Have to Do With Your Business?

            The Brady case is another illustration that contractually opting for arbitration is preferable for those who prioritize cost-effectiveness in dispute resolution. The law that defers to arbitration in the United States doesn’t just apply to high-profile athletes and employers bringing in billions of dollars in revenue like the Tom Brady and the NFL. Because of this, the likelihood of an arbitration decision being overturned is low for all parties who opt for it to resolve their disputes.

For all businesses, when entering into contracts with third parties like vendors, employees or customers, both parties have incentive to minimize the risks involved in your relationship, many of which are uncertain and unforeseeable. You can even agree how costs will be allocated based upon which party is successful. Where a dispute arises, opting for a cost-effective and time sensitive solution to limit the litigation through arbitration may be a preferred option over going to state or federal court.

Not every contract calls for an arbitration clause, however. Because of US Courts’ policy to not upset arbitration decisions, opting for arbitration to resolve your disputes also means that you will have to live with the consequences of the decisions, even when it goes against you. Accordingly, arbitration should be opted to only in strategic situations, and contracts containing such clauses should be drafted by an attorney who has knowledge of the risks prevalent in your particular industry as well as local contract law. If you have any questions about how you can manage your business’ risks through arbitration clauses, contact one of the business attorneys at Schober Schober & Mitchell, S.C. We would be happy to help.