Perspectives - Pastore

7 Questions to Ask Potential Business Partners About the Firm

Posted on October 2, 2023 by Kelly McElroy

Business partnerships can be very successful when they work.

These alliances are utilized to monetize relationships that bring in top-line revenue. They can also serve as a catalyst for more opportunities that will lead to top and bottom lines. Almost half (44%) of companies create alliances for new ideas, according to BPI Network. Harvard Business Review says most of tech’s executives (94%) envision partnerships as a fundamental part of their overall business plan.

Despite the promise, however, research finds that most business partnerships fail.

This type of angst makes the interviewing process even more important. The next time you need a new business partner, make sure a series of questions is asked about how prospective partners expect to play nicely with the existing operations, as well as each existing partner.

Business Partnership Insight: 1. What are your expectations of each owner?

Figuring out how each business partner fits together is an important question that you will need to address sooner rather than later. The topic of gross negligence, when a partner harms another by failing to provide a certain standard of care, is one of the more common reasons why business partnerships fail. Assessing each partner’s motivation, which is closely tied to expectations, should jibe with the business partnership agreement and operations plan to increase chances for success.

Business Partnership Insight: 2. What is your vision for the firm?

This question asks about what the prospective business partner wants from the venture. New business partners can bring new thoughts, ideas and motivation that can propel the company forward. New energy, however, doesn’t always have a positive impact. Are the prospective partner’s goals in line with the other partners? Would the candidate’s management style elevate the firm? Breach of Partnership/Operating Agreement is another common legal problem that can doom a business partnership. The best time to discuss alignment is during the interview process.

Business Partnership Insight: 3. How would you manage the departure of a partner?

This is why you need a comprehensive business partnership agreement. Depending on how many partners you have in the firm, the departure of a business partner can be quite involved in varying degrees. Typically, there are four options. The fastest option is for the remaining partners to buy out the shares of the departing partner. If the departing partner played a large role in the company, then perhaps selling the business would be the best option.

Dissolving the business, on the other hand, could be the best option. This option could also be spelled out in the business partnership agreement to avoid a potentially lengthy legal battle, which is possible when one partner disagrees.

Replacing the departing business partner is another option. Although it would take more time than a buyout, it wouldn’t impact the resources of existing partners and would create an opportunity to bring on someone with a different perspective and skill set.

Business Partnership Insight: 4. What experience do you have with business partnerships?

Being an employee and being a business partner are two different things. Partners, for example, must act in good faith and fairness as part of their fiduciary duty to other partners.

Mismanaging company funds, damaging the firm’s reputation or “goodwill” and putting the company at legal risk due to your own negligence would be examples of a breach of fiduciary duty.

Along with ownership comes more legal responsibilities that must be considered.

Business Partnership Insight: 5. What is your experience with sales and margins?

In sports, it has been said that winning is the best deodorant. Success tends to cover missteps and miscues.

In business, top-line sales and margins are important factors when determining success. When those two items are realized, however, there could be finger-pointing. The setback could also encourage business partners to lose interest as they put their energy behind other entities. Partnership abandonment is a real legal issue for business partnerships, and it is another reason why you need to work with a trusted legal advisor to ensure all possible outcomes are covered in writing before they occur in your business partnership.

Business Partnership Insight: 6. How can this firm take it to the next level in the next 12 months?

This question is about resources and how they will be utilized. When asking about the path forward, a prospective business partner will have to disclose specifics about the “how” as well as the “why” behind the plan.

In the big picture, business partners are very important, in-house resources that should be utilized fully based on areas of expertise. Delegating the work can be a challenging area for partners. Failure to delineate authority is another common legal issue that surfaces with business partnerships. The operating agreement should contain enough detail so partners understand how they can make a meaningful contribution while staying in their own lane.

Business Partnership Insight: 7. Looking ahead 12 months, you believe that you made a great decision by joining this partnership. What are the two reasons?

This question asks, “What do you want?” in a different way, which tends to draw more specifics about the prospective business partner’s intentions. The more insight that the existing partners gather before an offer is made, the better for the entire venture. Making time for due diligence will pay dividends figuratively and literally.

(Paul Fenaroli is an Associate Attorney at Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8470 or pfenaroli@pastore.net.)

12 Questions to Ask Potential Business Partners About Themselves

Posted on October 2, 2023 by Kelly McElroy

Business is another word for relationship.

And that is where things get interesting.

Like marriages, many business partnerships fail. To compound matters, there is also a greater likelihood that it will end in a legal proceeding.

As an executive, how can you sidestep both negative outcomes? Well, you can start by selecting better business partners. The next time you find yourself looking for a business partner, spend more time upfront asking probing questions that can reveal possible red flags for you in the long run.

Remember, the secret to better answers are better questions. Feel free to pull from the following to increase the chance of a successful partnership:

What can you tell me about yourself?

This question seems quite innocuous, but it is extremely strategic. The response will tell you how well the prospective business partner can communicate, which is an important factor in any successful partnership. The answer should be tailored to the opportunity, not a recap of the person’s life. In addition to communication skills, this question will reveal if the person conducted due diligence before the interview.

What is your “why?”

You never really know someone until you know what they want. Motivation is key, so ask about it early in the process.

What does success look like?

We all want to be successful, but what does that really mean? For some, it may mean growth or money. For others, it may mean more control over their time. These are different looks at success. Get clarity sooner rather than later.

A breach of the partnership agreement, for example, is a common cause of a failed business partnership. During the interview process, you must ascertain whether the prospective business partner has a vision of success that jibes with the partnership agreement, which typically includes insight into business operations.

What is your competitive advantage?

Learning about a prospective business partner’s strengths could help you determine the business structure. In the partnership agreement, you could spell out how each partner would be responsible for their respective areas of expertise.

What are your areas for development?

Identifying weaknesses is just as important as learning about strengths. This information will give you a more complete picture of where this person would fit in the organization—if at all.

Gross negligence occurs when a partner harms another by failing to provide a certain standard of care. Make sure areas of development for each partner are addressed from the onset.

How would you describe your management style?

Are you a visionary leader or a transformative one? Do you take charge yourself or delegate? Knowing the management style of all your business partners speaks to expectations, teamwork and, ultimately, business operations. Before profit and losses, it is about intangibles.

How would you describe your communication style?

You can’t be a leader without followers, and you can’t have followers without communication. Communicating tends to be the make-or-break variable in any equation involving a relationship. So, does the prospective business partner have a passive or aggressive communication style? Or is it more assertive? Assess the words, tone and actions during the interview. Now, ask yourself: How would this person fit in with other partners?

Unfortunately, failure to delineate authority is a common reason for business partnership breakups. To ensure the partners aren’t shirking their responsibilities or overstepping into another partner’s area, communicate in terms that all parties understand and reinforce in the partnership agreement.

What will you need from the other business partners to be successful?

From day one, it is important that your team members are put in the position to succeed—because when they win, you win. Learning about which resources they will need in advance will help you to determine the true cost of bringing this person on board. Do the requests logically align with the roadmap that was presented? Is it realistic?

Can you describe your current workday at your most recent firm?

Past behavior may not be a guarantee of things to come, but people tend to be creatures of habit. You should know in advance if the prospective business partner believes in working around the clock or four hours a day. This expectation could have a positive or negative impact on the rest of the partners.

Partnership abandonment happens, which can result in a breach of fiduciary duty. The partnership agreement should define partnership work and business operations to make expectations clear and concise.

What is your exit strategy?

This question is another way to ask about the person’s “why” in an inconspicuous manner. When you want an honest answer to an important question, make sure you ask for it several times in different ways. The composite will tend to be the real answer.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

How to Break Impasse With 50/50 Business Partnership

Posted on October 2, 2023 by Kelly McElroy

Most business partnerships don’t last.

Harvard Business Review says the fail rate for corporate alliances ranges in the 60% to 70% neighborhood.

So, would a 50/50 business partnership improve your odds? Maybe. Fewer “voices” could make things easier or more challenging.

The reasons for the breakup, regardless of the number of partners, have remained consistent over the years:

Lack of communication
Different goals and expectations
Lack of participation/inclusion

Knowing the five ways to break an impasse in a 50/50 business partnership could help resolve the issue in question as well as the outcome.

Mediation

Mediation is an effective way to solve disputes in business partnerships. Unlike litigation, which tends to pit one partner against the other, mediation is a collaborative process without winners and losers.

The mediator serves in the role as a facilitator who helps each partner contribute to the solution—not like a judge who passes a verdict.

Choosing mediation also keeps the matter private, protecting the company’s brand and reputation by not undermining public confidence in your operations.

Arbitration

Arbitration is a procedure both parties approve that delivers a binding decision on disputes. A private dispute resolution can be advantageous because it comes with a timetable that can be controlled by the parties involved. In addition, there are no appeals.

Besides finality and speed, arbitration also offers other benefits. The proceedings are confidential matters, and the financial cost can be set beforehand, which turns an otherwise expensive unknown into a number that is predictable.

Divide Company

One way to maximize a business relationship is to divide tasks and responsibilities among each partner based on their strengths and expertise. If one partner is stronger at marketing and sales, for example, then have that person concentrate on that area. This simple strategy allows the business partnership to create better results and efficiencies.

Well, the same can be said for breaking up the business partnership. If an impasse remains, dividing the company along the lines of each business partner’s existing responsibilities might make the most sense. It could allow each partner to start another venture with their “piece” or add their portion of operations to another business partnership so they retain a certain level of value.

Ideally, each partner should lay out this outcome in the business partnership agreement from the onset with guidance from their lawyer.

Buy-Sell Options

The business partnership agreement should spell out several exit options, especially for 50/50 ventures. A buy-sell provision could be a preferred choice among the two partners. Essentially, it means one partner would buy out the other partner at fair market value. To accomplish this option, a third-party appraisal would be required from a professional who was agreed upon by both partners.

A challenge could occur if both partners want to buy out each other. This type of contingency would need to be documented in the business partnership agreement.

Dissolve Business Partnership

If certain contingencies are not addressed at the onset of a business partnership agreement, such as what happens if both partners—or neither partner—want to buy out the other, then dissolving the partnership could be the last remaining option to end a 50/50 business relationship impasse.

Working with an attorney at the beginning of your business partnership would ensure that the agreement would be comprehensive so it would address—and therefore eliminate—many possible deadlocks and headaches before they happen.

What is a Partnership Business

Alliances are often created in the first place to capitalize on the skills, talents and relationships of others. A business partnership, for example, is an agreement between two partners or more with assets and liabilities on an ongoing venture.

Being part of a business partnership can create several advantages that an entrepreneur couldn’t do alone. For example, a partner can pool their time, talent and resources, fostering new thoughts and problem-solving approaches. In addition, partners can share the workload that matches their individual expertise to improve outcomes and efficiency.

These important details would need to be spelled out in a business partnership agreement to ensure everyone’s expectations are aligned. In fact, the business partnership agreement often turns out to be a make-or-break document, so don’t skimp. More substance upfront will only help support unity in the business partnership.

Partnership Business Examples

A general partnership is one of three common categories of business partnerships. Essentially, a general partnership means all the partners share financial and legal aspects equally, including debt for which each partner is personally accountable.

A limited liability partnership protects the partners from legal action. This type of business partnership, which is common among professional service providers such as doctors and accountants, limits legal exposure from one partner to another. So, if one partner is involved in a legal proceeding, the other partners are shielded from the outcome.

A limited partnership has one general partner personally liable for the business partnership’s debts and at least one silent partner with limited financial and legal liability based on the amount invested. Silent partners are not involved in the day-to-day management of operations.

Whether you are involved in a 50/50 business relationship or not, an impasse is bad for business. Move forward with invaluable counsel from your attorney.

Business Partnerships: How to Improve Odds of Survival?

Posted on October 2, 2023October 2, 2023 by Kelly McElroy

Whether it involves two parties or more, a business partnership has followed a certain convention of thought for decades.

Start with a comprehensive business plan and a business partnership agreement with clear, understandable metrics that capture the sense of accomplishment for your alliance. Systems and procedures should be part of the overall structure built for success.

That’s the winning recipe, right? Well, not necessarily. Researchers Jonathan Hughes and Jeff Weiss, who authored “Simple Rules for Making Alliances Work” in the Harvard Business Review, believe more rules are needed to improve the long-standing fail rate for business partnerships, which hovers around 70%. Although the research focuses on corporate alliances, it has implications for the intricacies of business partnerships.

Based on their findings, the researchers propose several complementary rules to elevate conventional wisdom.

Business Partnership Insight: Place more value on working together

A solid business plan and contract are crucial, but those two instruments alone are not enough. When it comes to business partnerships that fail, the paperwork is rarely called into question while communication and trust grind to a halt.

Diversity of ideas is one of the benefits of starting a business partnership. Aren’t two heads still better than one? More ideas often lead to more opportunities and improved efficiency.

The notion of working together implies two-way communications that can counter many possible negatives associated with business partnerships, such as confusion. Of course, the business partnership agreement would spell out areas of responsibility. But once you drill down to day-to-day activities, it can quickly become gray areas that fester. Is your partner really working as hard as you? Is he moving into my area of expertise, which could create further internal conflict?

Hughes and Weiss recommend that alliances, such as business partnerships, put less emphasis on the business partnership arrangement and more energy behind the working relationship.

Business Partnership Insight: Highlight Progress, Goals

Building a successful business partnership is a process. The wins don’t happen overnight, especially when the relationship is a new one.

Achieving desirable outcomes takes an investment of time, money and third-party resources that come in the form of more relationships, which most likely will be time-consuming and inconvenient—although worth it. In a practical sense, this effort, which could take 12 months or multiple years, could lead to barren monthly reports for the foreseeable future.

Blank reports can lead to lower morale and lost confidence. It would also feed a popular negative about business partnerships, which centers on personalities. When interacting with another person, you will have to navigate their quirks and emotional levels on a daily basis. In sports, it has been said that winning is the best deodorant because everything smells bad when you are losing. A slew of negative reporting, especially at the beginning of a project or relationship, could tip the scales in the wrong way.

Researchers urge business partnerships to place emphasis on “means” metrics as opposed to “ends” numbers. For psychological reasons, highlighting the road to success will go a long way to sustaining the effort so all partners feel the initiative is moving forward—although not complete yet.

Business Partnership Insight: Transform Differences Into Opportunities

Matching strengths and differences are often driving forces why two parties should partner together.

However, the difference in backgrounds and experiences can quickly turn into a negative for the business partnership. Assuming one way to solve a problem at another company would work in the current partnership may be naïve. Resenting the other partner without working toward finding common ground would be unproductive.

The researchers reference a real-work example of two companies partnering in an alliance when good faith and communications started to break down. Company executives created working sessions with team members from each company to address differences between the companies. Individual competencies and culture were issues that topped the list, which is why so few were initially open to joining the conversation. When the negatives were highlighted, the reluctance stopped and team members began to provide frank feedback, which ultimately turned the tide and allowed the two entities to work more closely together.

Eliminating differences and embracing collaboration serve as the third complementary rule from the researchers.

Business Partnership Insight: Find Collaboration Beyond Structures

In most situations, corporate structure is a framework that leads to positive outcomes. Sometimes, however, it can feed the blame game when surprises become negative.

There is nothing more draining to productivity than team members spending their energy pointing fingers and assigning fault to others. Instead, researchers recommend that the partners discuss how each contributed to the problem and what they can do to address it today and prevent it tomorrow. Refusing to tear down the other partner preserves the relationship, avoiding a situation where information could be withheld out of self-preservation—something that wouldn’t be positive for a company.

Reaching a stage of collaboration underscores the chief competitive advantage of any business partnership.

3 Keys to Launching Legal Cryptocurrency ICO

Posted on October 2, 2023 by Kelly McElroy

Money is going digital.

In 2013, you could count the number of active cryptocurrency coins on both hands.

Today, there are 8,832 active coins and tokens, according to CoinMarketCap.

Launching a successful Initial Coin Offering (ICO) continues to be the main mechanism for bringing these digital assets to the marketplace. In cryptocurrency, an ICO is a crowdsourcing way to raise money for a new coin or application. Investors purchase tokens related to a product or service that are expected to increase in value based on demand. However, in many cases, several types of cryptocurrency may offer some form of utility, but they don’t always offer an ownership share in the organization or a portion of revenue, which is a key difference between ICOs and initial public offerings (IPOs) for stock equities.

The timing of the offerings is another important difference. For ICOs, they occur in the beginning when a coin is publicly launched. For IPOs, they tend to happen once the company is established and looking to expand by diluting ownership.

Since 2019, $19 billion has been raised through ICOs, while only $969 million has been raised through equity crowdfunding, according to research from CB Insights. The inclusive nature of the offerings has made them popular worldwide. For example, anyone with a digital wallet can participate in an ICO and the market is open around the clock in every time zone, which has made it easier to build large investor followings.

To increase the odds of launching a successful ICO, your coin will need to be set up for success. Here is a checklist of essential items:

Cryptocurrency Attorney Insight #1: Legal Assistance

The first must-have is legal advice from a trusted lawyer with crypto and blockchain experience.

As a member of the Connecticut Crypto Forum, which Pastore LLC has sponsored since last May, we have helped cryptocurrency and blockchain startups succeed, while others have struggled because they were not savvy about regulation.

Your attorney will need to assess whether your ICO is promoting coins that are deemed securities by the SEC. Market professionals may be promoting the sale of coins without determining if securities law is applicable to the digital assets, which could result in a violation of the Securities Exchange of 1934.

The Howey test will help you understand the legal nature of crypto at your ICO.

In 1946, the U.S. Securities and Exchange Commission (SEC) v. W.J. Howey Co. created the basis for specific factors that separate a security from a commodity. In the decision, which involved citrus grove buyers, the investors only needed to supply capital to the arrangement, while all the other details were managed by others. This point underscores the basic tenets of an investment contract. The four factors include 1) an investment, 2) a common enterprise, 3) a profit expectation and 4) generated from the work of third-party participants.

Cryptocurrency Attorney Insight #2: Marketing Expertise

A whitepaper is a crucial document that spells out a looming problem and positions the coin as the solution. Biographies are also important. In the beginning, startups are only ideas, while the team members are the product that investors want to support.

The blockchain architecture should be disclosed and key topics, including energy consumption, interoperability and scalability, should be addressed for investors. The tokenomics of the coin, which includes supply and demand issues, should also be included in the document. What is the total supply? The current supply? Will coins be “burned” or permanently removed from circulation? These questions should be addressed.

The whitepaper should include a roadmap, which includes important dates and milestones, in addition to the amount of money raised and its intended use.

Web company Dev Technosys estimates that cryptocurrency companies should budget 10% to 20% of their funding target to support its marketing program.

As part of the outreach program, a website is an important part of the puzzle. It’s the center of your brand’s online universe. Cryptocurrency organizations tend to opt for a clean, simple one-page site that scrolls down to company news, industry awards and affiliations, as well as the roadmap and background of team members.

Cryptocurrency Attorney Insight #3: Technical Experience

There are several technical aspects a cryptocurrency team must consider to improve its chances of a successful ICO.

First, a security audit for your soon-to-be launched crypto coins leverages code analysis that discovers problems in the applications. This exercise needs to be part of your pre-launch process and stated in the marketing materials to build confidence among investors.

An emphasis on blockchain development, however, cannot be understated. Development is about maintaining the platform by managing various usages such as distributed applications, smart contracts and digital currencies. As a reference point, Ethereum may have the highest number of developers with 5,758. Since Bitcoin was established in 2009, it is estimated that there are more than 23,000 developers in the field today.

And the most crucial, make-or-break, technical endeavor? Getting your coin on an exchange. The exchange listing creates many “abilities” for cryptocurrency coins, ranging from credibility, visibility and accessibility for investors. Of course, price stability is one of the biggest benefits.

Bottom line, considering any potential legal ramifications of your cryptocurrency coins first and foremost will create an environment for a successful ICO—and productive venture.

The Howey Test: Would Your Crypto Offering Pass or Fail?

Posted on September 25, 2023 by Kelly McElroy

Before you launch your next crypto token, you should see if you can pass the test.

It is not the smell test with investment bankers.

The Howey test will help you understand if your crypto is one of many digital securities which would present more legal responsibilities, such as disclosure and registration requirements.

The U.S. Securities and Exchange Commission (SEC) v. W.J. Howey Co. was a 1946 Supreme Court decision about citrus grove buyers in Florida. The Howey Company sold citrus groves to investors who leased the land back to Howey. The company’s employees managed the groves and sold the fruit on behalf of the investors. Both the company and the investors profited from the venture.

The investors only needed to supply capital to the arrangement, while others took care of all the other details. An investment contract is what you get when your transaction passes the Howey test.

Of course, this concept impacts things beyond citrus fruit. It is also applicable to the cryptocurrency market. In fact, there are four factors to consider which separate a security from a commodity:

An investment
A common enterprise
A profit expectation
Generated from the work of third-parties

In the U.S., the SEC has deemed bitcoin not to be a security. The issuer, an anonymous Satoshi Nakamoto, released all 21 million tokens at once as part of a contract. None of the tokens went to him or a company treasury. When the tokens were released, they had no value, and when they gained value, Nakamoto did not receive any benefit.

In effect, he removed any possible connection between “common enterprise” from the other factors, which disqualifies the venture as a security under the Howey test.

SEC Chair Gary Gensler said, “at the core, these (altcoin) tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group,” during an interview with New York Magazine.

However, Rostin Behnam, the chairman of the Commodity Futures Trading Commission (CFTC), said Bitcoin is not the only commodity. He called another crypto coin—Ethereum—a commodity during a hearing before the Senate Agriculture Committee. In fact, Ethereum has been listed on CFTC exchanges for some time.

An interagency council comprised of state and federal banking officials, as well as commodity, securities and consumer protection groups, agreed in a report that there is not a comprehensive regulatory framework for digital assets. Hence, the reason for differing stances within the industry.

Right now, asset classification dictates how digital assets are regulated. If it is a payment, then it falls under the purview of Money Services Business and the Office of the Comptroller of the Currency. Likewise, CFTC oversees commodities, and the SEC has jurisdiction over securities.

Recently, the SEC has filed a complaint against Binance and Coinbase, alleging that they are selling unregistered securities. The complaint mentioned several coins that could be viewed as securities: Polygon, Cardano and Solana. Soon after the announcement, Robinhood—another crypto exchange—delisted the three mentioned coins.

Binance.US has decided to become a crypto-only exchange, ending US dollar deposits and withdrawals. The SEC wants a federal judge to freeze the exchange’s assets, including $2.2 billion in crypto and $377 million held in dollars.

Either the Coinbase case or the Binance case could make its way to the U.S. Supreme Court, which could in effect create the path for industry regulation with its ruling. As part of a possible outcome, the High Court could also rewrite the Howey test or revise it in relation to digital assets.

At the 2023 Global Exchange and Fintech Conference, Gensler said congressional action is not needed because the laws are already on the books. “Not liking the law, not liking the rules is different than not hearing it or not getting it,” he said. However, this view fails to recognize that the current regulatory framework is not black and white for investors and institutional players.

Under federal securities laws, a company must register with the SEC before offering or selling securities. As part of the registration process, an issuer must disclose financial statements that have been audited by a public accounting firm. These documents provide important information that helps investors make informed decisions about their investments.

As the digital financial assets space grows, more large corporations can be found with crypto on their balance sheets. A 2022 Deloitte Global Corporate Treasury Survey found that 40% of interviewed finance executives said they have already implemented blockchain or they are considering it.

In the short term, issuers will need to work with a law firm with expertise in crypto and digital currencies to navigate the impact of the courtroom rulings and the subsequent new era of regulation on their business.

Make sure your company will be able to pass the test in the evolving legal landscape.

7 Ways to Align Executive Pay with Dodd-Frank

Posted on September 25, 2023 by Kelly McElroy

Connecting executive compensation with financial performance took a while to implement—and it wasn’t easy.

Toward the end of last year, the U.S. Securities and Exchange Commission voted 3-2 to accept the “clawback” rules, which are intended to discourage senior leadership from making risky corporate decisions for short-term gain, resulting in restated financial statements.

In short, the SEC called out two types of triggering events involving material and non-material changes to financial statements. And the last part, referred to as “Little Rs,” is why the SEC vote was not unanimous.

Two SEC Commissioners, Hester Peirce and Mark Uyeda, voted no because the new rule included non-material changes.

SEC Chair Gary Gensler, however, supported the rule, citing the fact that corporate restatements have increased to nearly 75% from 35% in recent years. “If the financials are inaccurate, why should executives be getting paid incentive comp on financials that were inaccurate,” he said in an interview with Thomson Reuters.

Here are seven insights to ensure your executive compensation is aligned with the Dodd-Frank Act:

Require Shareholder Advisory Vote

Public companies are required to hold a non-binding advisory vote for their shareholders on the topic of executive compensation at least once every three years.

Although the frequency vote gives shareholders four options, including “abstain,” making the vote an annual tradition is the best practice.

At the end of May, Russell 3000 companies have only failed 1.5% on Say on Pay, according to Harvard Law School Forum on Corporate Governance. The current failure rate is 130 basis points lower than last year. In addition, the percentage of Russell 3000 companies receiving more than 90% support (i.e., 78% vs. 75%) is also higher than last year.

Investors are now able to vote on the compensation of the top executives in a public company, which includes the CEO, CFO and at least another three highly paid executives.

Bolster Independence for Compensation Committee

The compensation committee balances investor expectations along with a company’s financials to form employee retention strategies. In recent years, however, the role has evolved. Two-thirds of surveyed companies have expanded the role of their committee by expanding the charter or the name as well as the charter, according to the Center On Executive Compensation.

Institutional investors are driving change with more focus on the environment, talent and diversity and inclusion. New topics like human capital metrics, safety and wellbeing, culture and employee engagement are now falling under the compensation committee’s purview.

Strengthening independence requirements for committee members is more important than ever.

Added Disclosure on Conflicts for Consultants

Compensation consultants can serve as an invaluable resource for up-to-date pay rates, ongoing compensation trends and incentives to foster employee performance.

The Dodd-Frank Act requires more disclosure about the portion of compensation consultants and any potential conflicts. Stock exchanges must have listing standards that create greater independence for all compensation committee members, including consultants.

For example, exchanges must consider the source of all compensation to the director and whether the director is affiliated with the issuer via a subsidiary or affiliate.

Oversight of CEO/Rank Employee Ratio

The Dodd-Frank Act requires public companies to disclose the CEO pay ratio, which compares a CEO’s compensation to pay for median employees.

In 2021, CEOs were paid 399 times as much as a typical worker—a 1,460% increase since 1978. The shift in executive compensation to stock-related investments, which represents roughly 80% of the gains over the decades, is cited as one of the driving forces by the Economic Policy Institute.

Even though the SEC strongly encourages companies to follow generally accepted accounting principles (GAAP) metrics to ensure integrity, companies are only required to provide the CEO pay ratio without context or a long discussion, which can be found, however, in the compensation and analysis parts of a proxy statement.

Disclose Pay Versus Performance

Last summer, the SEC adopted amendments to require companies to disclose information that links executive compensation and financial performance.

For the five more recent fiscal years, the amendments require companies to provide a table of executive compensation and financial performance measures, including total shareholder return, as well as the total shareholder return of companies in the registrant’s peer group, its net income and a financial performance metric of the company’s own selection. Companies are also required to provide a list of three to seven financial performance measures that they deem important for connecting executive compensation and company performance.

Mandate Recovery Policies for Restatements

The SEC requires companies to implement policies to recover awarded, incentive-based compensation resulting from an accounting restatement from past and existing executive officers, no matter the level of involvement. As a result, stock exchanges must have listing standards that require companies to adopt a written “clawback” policy, which they will disclose as an exhibit in Form 10-K and on the cover of annual reports.

All types and sizes of restatements can trigger a clawback, including ones that materially impact the financial statements in the current year and ones that don’t from prior fiscal periods.

Companies must recover the compensation that is erroneously awarded and received by an executive in the three years preceding the date of the restatement.

Disclose Hedging

A company must disclose the ability of employees, officers and directors who can use equity securities granted as compensation to hedge. The company must comply by disclosing the practices in full or providing an accurate summary. If the company doesn’t have any hedging policies, then it must disclose that hedging is permitted.

Companies should review their current hedging policies with an attorney and consider updating or streamlining the document. Does your current policy cover the correct category of employees or enough detail about transactions?

Review these items carefully with an attorney to make sure pay is aligned with the Dodd-Frank Act.

6 Ways to End Partnership Disputes

Posted on September 25, 2023 by Kelly McElroy

Business partnerships are not always meant to last.

And that includes the successful ones.

Countless reports pin the fail rate at around 70% in the first year. A lack of a detailed partnership agreement upfront usually plays a role. Some partners want to work on the business, while others may want to work in the business. For a couple of months, that arrangement may work. But once it’s clear the other partners are working 25 hours a week, and you’re grinding more than 60 hours, things will change.

Communications may become strained or end.

Regarding the “successful” business partnerships, life tends to get in the way, and some partners may want to retire at some point.

Like any business transaction, always begin at the end. Before you spend so much energy on the entry point, invest the time in your exit strategy.

The odds make it clear that your business partnership will end in some type of dispute.

But what are your options?

Here are six possibilities to consider:

Business Attorney Insight: Mediation

Discussing the disputed matter(s) with your partner should yield results, but it may take a trained mediator to get the job done. Mediators help open the lines of communication and characterize each stance in less provocative ways.

Bringing each partner back to the overall mission—the good of the company—should help create a path forward since it’s the reason each partner signed on in the first place. Focusing on the project as opposed to personalities will increase your odds of resolution.

Business Attorney Insight: Buy Out

You should have included a buyout provision in your partnership agreement. However, if that is not the case, then leverage your buy-sell agreement, which generally is included in partnership agreements.

A buyout agreement should be drawn up by your attorney and given to the exiting partner. You should also work with a financial advisor who can help put dollar amounts on assets. Please do not use a boilerplate template that you found online. Every partnership, not to mention the situation, is unique, and this type of transaction typically involves too much value to leave to a form letter.

Business Attorney Insight: Sell

Like many of the other options, selling can be relatively easy or difficult.

If your partnership agreement addresses what happens when partners sell their interests, this matter should be over quickly. Some agreements provide the existing partners with first dibs on the exiting partner’s equity.

However, if the partners are only given the right of first refusal, then this adventure could take time if it’s shopped around. And then, the question becomes about how the daily operations of your company will be impacted with a potentially disgruntled partner looming around the office and representing the company with A-list clients.

Business Attorney Insight: Freeze-Out

A freeze-out merger happens with a majority stakeholder in a company with another company that they own and control. Then, the majority shareholder submits a tender offer to the original company to force out the minority shareholders. If it’s successful, all the assets from the original company may be moved over to the newly created company.

The courts prefer a merger to another case, so they tend to rule in favor of these mergers, especially if the majority stakeholder makes a strong connection to a corporate purpose backed by sound business judgment.

This is another reason you have an attorney on your team.

Business Attorney Insight: Dissolution

Refer to your partnership agreement for this one. Most agreements include how the assets will be divided and distributed when the relationship is dissolved.

If your partnership agreement doesn’t include this provision, then you may be subject to the Uniform Partnership Act of 1997, which was proposed by the National Conference of Commissioners on Uniform State Laws to govern business partnerships in the United States. To date, 37 states, including Connecticut, have ratified the agreement (check with your lawyer for details).

Dissolution may end a partnership, but not the operations of a company, which shifts its activities to closing accounts, as well as selling and disposing of assets. This part could take many months, depending on the size and complexity of your company.

Business Attorney Insight: Litigation

Business partnerships include more than one agreement.

There’s one for the partnership and another for operations. There are agreements for employment and non-compete terms. Typically, there are also non-disclosure agreements to protect company investments.

If any of these contracts are breached, then that could trigger litigation for resolution.

Examples could include misuse of company assets, failure to disclose potential conflicts of interests and sharing copyrights or trade secrets.

One day, your business partnership will end. Consult with your business attorney for a favorable outcome to your hard work.

5 Reasons Why Your Non-Compete Agreement Doesn’t Work

Posted on September 25, 2023 by Kelly McElroy

The Federal Trade Commission is considering making non-compete agreements a federal issue by banning them.

According to research, one in five employees have a non-compete, which is about 30 million Americans. The FTC claims a ban would lead to better job opportunities and increase wages by $300 billion a year.

Companies would have to find another strategy to protect investments. But it could take years for a final outcome, accounting for passage and pending court challenges.

Right now, however, employers have a bigger concern: Are their existing non-compete agreements enforceable?

The answer presents a real issue for too many companies—and they don’t even know it.

Here are five common reasons why non-compete agreements fail:

Attorney Alert: No Consideration

This is one of the most common problems with enforceable non-compete agreements.

When you onboard a new employee, employers should make the signing of a non-compete agreement part of the process. To create a valid agreement, you must offer the new employee “consideration,” which means an exchange of value. Because you ask new employees to sign on day one, you can write into the agreement that the job and future compensation are consideration for the signature.

If you need an existing employee to sign a non-compete agreement, you will have to put more effort into it. Maybe it is a new title, more money and/or different responsibilities at the company. The “consideration” doesn’t have to be large, but it needs to be real and distinguishable.

Otherwise, you may have an unenforceable non-compete agreement that you assumed was valid.

Attorney Alert: Too Long in Duration

The objective of non-compete agreements is to protect the company, not to punish your employees. Asking for a non-compete for the rest of someone’s life is a non-starter.

Courts have ruled favorably, however, on shorter terms. Generally speaking, six months is practically a certainty. Yet, more than two years could get tricky. If it involves an acquisition, you may be able to get three years.

In any case, you should consult with your lawyer because these matters, especially the ones involving longer terms, tend to be decided on specifics. So, make a small investment to spend time with your trusted counsel—you will thank yourself later.

Attorney Alert: Reliance on a Template

Don’t fall for convenience and use a template for your non-compete agreement. And that goes for older, outdated forms your company has used since its inception.

Every industry is different. Every company is different. Types of proprietary information and confidential relationships vary quite a bit.

What if your company crosses state lines? What if your company has employees who work in different states? When it comes to law regarding non-compete agreements, each state makes the call.

Your leadership team should protect its interest by consulting with an attorney to ensure nothing is lost in the future.

Attorney Alert: No Assignment Provision

When acquiring a company, too many companies forget to obtain non-compete agreements from key personnel at the other company. This oversight can be costly.

One reason for the miscue, in part, is the assumption that the acquired company had included an assignment provision in their non-compete agreements. An assignment clause allows one party to transfer negotiated rights to another party—without re-opening negotiations.

Assignment provisions (i.e., Company A or assignee) can make things easier. Without them, you will have to ask the incoming employees to sign another non-compete agreement, which could prompt talks regarding more consideration.

Some states may prohibit or limit assignment clauses, so review them with your attorney.

Attorney Alert: Not Compliant With State Law

In addition to being a case-by-case matter, non-compete agreements hang on a state-by-state basis.

For example, these agreements are not enforceable in Oklahoma and California. Nine other states prohibit non-competes for employees who earn more than a set amount. Iowa and Kentucky only prohibit the agreements for health care workers.

In Connecticut, “reasonable” non-compete agreements are enforceable. But that means several details will have to be reviewed to determine validity: Is it too long or too restrictive? Is it fair? Does it prevent the employee from making a living?

Your lawyer will guide you down the right path.

(Joseph M. Pastore III is Chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or jpastore@pastore.net.)

5 Reasons Why Business Partnerships Fail

Posted on September 25, 2023 by Kelly McElroy

William Proctor and James Gamble figured out how to do it in 1837.

Ben Cohen and Jerry Greenfield found out that success could be sweet in 1978.

Larry Page and Sergey Brin started their own brand of digital domination in 1998 before most knew what they were talking about.

Today’s stock market is filled with prosperous corporations that began with a business partnership. Although those who succeed tend to grab the headlines, all the rest fade away.

According to BLS data, 45% of new businesses fail during the first five years and 65% fail during the first ten years.

Hiring an attorney at the onset of a business partnership can dramatically increase your chances of a favorable outcome. Lawyers can help partners decide the best corporate structure and draft documents that will add clarity and resolve disputes to keep the organization moving forward.

Unfortunately, business partnerships that don’t work with a lawyer as their first step bear more uncertainty.

Here are the five most common legal claims that cause business partnerships to fail:

Attorney Alert #1: Breach of Partnership/Operating Agreement

Don’t enter into a business partnership without a written agreement that clarifies many important variables, such as your responsibilities, compensation and exit.

In fact, negotiating the partnership agreement should be part of your process to determine if this company is the best fit for you. The time spent on this dialogue will be invaluable.

For example, how are profits distributed? What happens when one partner doesn’t want to take the distribution in that year? Will you have the right of refusal when your partners bring forward a prospective partner? How will each partner exit without harming the interest of the company?

A thoughtful partnership agreement will go a long way to building stronger relationships—and mitigate one of the most common causes of failure for business partnerships.

Attorney Alert #2: Breach of Fiduciary Duty

Fiduciary duties are included in business partnerships.

The interests of the partnership, for instance, should be held paramount compared to your own self-interests. This is referred to as the Duty of Care. You should also avoid self-dealing situations where you benefit at the expense of your partners—also known as the Duty of Loyalty.

Failing to account for company funds, sharing trade secrets or acts that benefit a competitor are also examples of a breach of fiduciary duty.

In an attempt to mitigate this potential cause for business partnership failure, partners could be required to review their fiduciary duties in writing and sign their names periodically to keep these responsibilities top of mind.

Attorney Alert #3: Failure to Delineate Authority

When partners enter a business venture, it is often assumed that each partner will work an equal amount. And that’s why issues happen.

Andrews Campbell, who published “Collaboration Is Misunderstood and Overused” in the Harvard Business Review, writes that success depends on three circumstances: 1) partners need to be truly committed to working with each other, 2) partners have high respect for each other’s expertise, and 3) each partner has the skill to bargain with each other over cost and benefits.

The last circumstance could be the sole reason to hire an attorney to draft documents to increase the odds that the collaboration will be a success. For instance, each partner should clearly understand their responsibilities as part of operations and the leadership team. Blurred lines will lead to disagreements and a waste of time of redundancies.

A semblance of hierarchy needs to be established so the company can move forward. Delineated authority would ensure that all mission-critical areas are covered by the partners.

Attorney Alert #4: Gross Negligence

Partners are responsible for providing a certain standard of care. When that doesn’t happen and harm is caused, a matter of gross negligence can cause irreparable damage and end the partnership.

Mismanaging partnership funds, failing to abide by contracts and hiring unqualified, key personnel could trigger a claim of gross negligence.

A court would apply the business judgment rule, which is a standard that examines if the action in question was done in good faith with the care of a “reasonably prudent person” and with the understanding the partner is acting in the best interests of the company.

If gross negligence can be proven, unfortunately, it would knock down that level of protection.

Attorney Alert #5: Partnership Abandonment

When a partner decides to leave, it could trigger dissolution almost immediately, depending on the partnership agreement.

However, if the departing partner has not acted in the best interest of the partnership, it could be grounds for a lawsuit.

It may make sense to review the partnership agreement before resentment and business losses kick in. Often, a buy-out option is stated in well-drafted agreements and incorporation papers to lay the groundwork for a soft landing for all parties.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or jpastore@pastore.net.)