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Corporate Formalities as a Means of Preserving the Corporate Veil and Avoiding Lawsuits

A benefit of having a corporation is that a corporation is recognized as a legal "person," separate and distinct from its individual directors and officers and it offers limited liability to these directors and officers.  Clients often ask us if they can sign leases or other contracts before their company is incorporated.  We typically frown on this practice because the corporation should be operated in a manner which maintains its separate identity.  This requires that the corporation abide by certain formal legal requirements, including signing in one’s executive capacity after incorporation and not before.   A recent case, Hugh W. Brown, Jr. and Alabama MBA, Inc. v. W.P. Media, Inc., No 1061314 (Ala. February 20, 2009) decided by the Alabama Supreme Court deals with this issue in a contractual setting. 

Before Mediation

Mediation was a term unknown to lawyers twenty five years ago outside of some collective bargaining agreements.  Today it has become an almost automatic step in the litigation (or even pre-litigation) process.  Lawyers recommend it and clients accept it as a routine exercise in virtually every case.  Like every other legal exercise, it comes at a significant cost to the client.  Few lawyers or clients ever question its necessity.  They should.

Right to Publicity

The right of publicity is generally defined as an individual's right to control and commercially exploit his or her name, likeness and persona for profit.  The right is generally invoked in the context of commercial speech, when a company has used a public figure’s name, likeness or persona in connection with a product and created a false and misleading impression that the public figure is endorsing the product.
Contrary to popular belief, publicity and privacy rights are not governed by federal law, but are instead the subject of state laws, and the degree of recognition of the right of publicity varies from state to state.  To date, around half of the states are on record as recognizing the right of publicity. (See Right of Publicity: An Overview).  The other states do not recognize these rights, or they are recognized under other theories such as misappropriation and false representation. As such, one will need to look closely at their state law to see if and how their courts have interpreted and applied the right to privacy.

Obama’s Pick for Administrator of the Small Business Administration

My personal opinion on the economic crisis is that it is going to be the small business owners that pull us out.  That said, they have got a ways to go: the home equity lines, the car loans, and the credit cards are now a traditional source of financing.  The outlook looks dim, and it seems to be getting worse with more small businesses using credit cards.  (See Small Business Outlook Dims.)

Enter on the scene Obama’s SBA pick, Karen Gordon Mills, of whom little has been written in the main stream media. (See Obama Picks Venture Capitalist as New SBA Administrator.)

Perhaps the lack of fanfare is because the SBA does not touch many small businesses.  Its function is limited and while extremely useful to some, it is of no use to others.  It serves to support a niche of the population (the entrepreneur) that typically does not want or ask for advice and support (although they probably need it). Their financing reaches only a fraction of small businesses, and even that number is dwindling (see related post, Small Business Administration – Political Heads Up).

The choice of Ms. Mills is curious as well because she is a venture capitalist.  VCs have a goal to grow companies; in fact, they usually grow them to such scale and with such speed that the companies will no longer be small, and thus no longer within the purview of the SBA.  Consequently, the SBA has an awkward and reluctant relationship with the VC world.

I think Ms. Mills can do a lot of good, however, if she focuses on small business as a whole and realizes that most small business cannot and should not have as their capital model venture capitalism.  If Ms. Mills focuses on developing financing programs that work for all stakeholders (including business lenders and business borrowers), and if the SBA will foster the small business community as a whole,  then hopefully it will provide meaningful help to the entrepreneurial community.  We shall see.

Mike Goodrich, Goodrich Law Firm, LLC

Alternative Investments

With decline of the stock market, investors are turning from the stock market to alternative investments.  These alternative investments range from the widely known – hedge funds and promissory notes – to  little known niches – Star Wars action figures and vintage guitars.  To some, these more exotic items offer the excitement of making money in a less known field, but the risk associated with these investments and the opportunity for fraud is omnipresent. 

Judicial Dissolution as Your Last Resort

Push is coming to shove more and more often within our small to medium-sized business clients in this tough economic environment. As a result, we hear the dirty words “judicial dissolution” thrown around often and haphazardly.

For those who are unfamiliar with judicial dissolutions, the Alabama Code (and most other states) allows a company to be dissolved and the company’s assets to be distributed if the directors (or managers in an LLC) are deadlocked as to the management of company affairs, such that the company can no longer continue. This process is typically only pursued when the company’s management or shareholders have irreconcilable differences. I’ve witnessed judicial dissolutions threatened in several contexts, but I rarely see a director/manager actually get to the point of filing such a petition with a court. My general observation is that asking a court to oversee the pro rata distribution of company assets is an unnecessary, time consuming and expensive affair that should be avoided to the extent possible.
However, the following are some of examples where I have seen judicial dissolutions actually filed: 

Arbitration Pitfall

A recent decision by the Alabama Supreme Court should raise concern among members of the business community who for years have reflexively favored arbitration over the judiciary as a method for resolving disputes.  In a decision released in September, the Alabama Supreme Court held that manifest disregard of the law will no longer be a proper ground for vacating, modifying or correcting an arbitrator's award.  Do contracting parties really Intend (or desire) that an arbitrator should have the authority to disregard the law in determining and calculating an award?  If not, how can contracting parties avoid such a result?

At least two alternatives are available.  First, the contracting parties can simply omit any reference to arbitration in the contract.  Depending on the nature of the contract, if either (or both) parties believe that the law might be more favorable to their position, they can negotiate an agreement without an arbitration provision.  Second, an arbitration provision could expressly limit the authority of the arbitrator so as to make it clear that he or she is not empowered to disregard the law in determining or calculating an award.

  If your business is one whose contracts routinely contain arbitration provisions, you should consult your legal counsel to determine if and how you can protect your company  from the possibility of an arbitrator disregarding the law with impunity.

Paul  Liles, The Liles Firm

Barbie v. Bratz: Employers Beware of Employee Contracts with Previous Employers

On August 26, 2008, a federal jury awarded toy giant Mattel a $100 million dollar verdict in their copyright infringement lawsuit against MGA Entertainment, Inc.  The case centered around MGA’s Bratz dolls, which are highly stylized fashion dolls popular among "tweens", or girls 7 to 12.  MGA and its CEO were told to pay a combined $90 million in three causes of action related to Mattel’s employment contract with Mr. Carter Bryant, the designer who developed the Bratz concept.  These causes of action include intentional interference with contractual relations, aiding and abetting breach of fiduciary duty, and aiding and abetting breach of the duty of loyalty.

The jury awarded damages of $20 million against MGA and $10 million against MGA’s CEO in each of three causes of action - intentional interference with contractual relations, aiding and abetting breach of fiduciary duty, and aiding and abetting breach of the duty of loyalty.  It also found that MGA owed Mattel $6 million for copyright infringement, while MGA’s CEO owed $3 million in distributions he received from Bratz-related sales, and MGA Hong Kong owed $1 million.  The jury found that Mr. Bryant developed the concept while working at Mattel.  Mr. Bryant settled with Mattel on the eve of trial in a confidential settlement. 

Questions still abound after entry of this verdict, however.  For example, still at issue is (a) may MGA continue to make and market the Bratz dolls and (b) if so, will MGA have to pay Mattel royalties for these rights?  Mattel will seek an injunction in an attempt to prevent MGA from ever producing another Bratz product.

Small Business Administration – Political Heads Up

Although we have not heard much about the SBA this political season, I am expecting to hear more about it in the coming months.  First, I am anticipating at some point a discussion about the 8(a) program, which certifies women and minority owned businesses and consequently provides preferences to certain minorities.  Second, I am anticipating a debate over the role of the SBA in solving the credit crisis.  As with anything related to government processes, predicting the outcome is futile; however, both of these issues relate to small business owners and will have important consequences for them.