Hot Legal Issues In This Economy For Material Handling & Industrial Equipment Businesses

transcript

Hot Legal Issues in this Economy for Material Handling

& Industrial Equipment Businesses

Jeremy SilbermanDavid Cassidy

Mo BauerGary Marks

Charles Bruder

The material provided herein is for informational purposes only and is not intended as legal advice or

counsel.

Protecting Your Dealership Under State Franchise and

Dealer Protection LawsJeremy Silberman

THE ECONOMY:EFFECT ON THE INDUSTRY OUTLOOK FOR RECOVERY

The Manufacturers Alliance/MAPI May 2009 Economic Report:

“January-to-March, inflation-adjusted material handling orders were 56 percent below order activity one year ago. The material handling equipment business took a sharp dive at year end 2008 and the contraction continued in the first quarter of this year. The sharp decline in industrial activity caused factory utilization rates to drop precipitously, which in turn lessened the need for general purpose material handling equipment.”

The Manufacturers Alliance/MAPI May 2009 Economic Report:

85,03876,664

62,104

31,000

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2006 2007 2008 2009 (est.)

United States Forklift SalesClass 4 & 5 (Internal Combustion)

Source: Industrial Truck Association; 2006 – 2008 Shipments; 2009 Estimated Orders.

4,9694,497

2006 2007 2008 2009 (est.)

Northern New JerseyForklift Orders Class 1 – 5

2009 estimate based on annualizing Jan - May 2009 Orders.

Projected Timing for Recovery of New Equipment Sales

Material Handling Equipment lags:• Federal Reserve Board’s Industrial

Production Index by 9 – 12 months• Consumer Confidence Index by 12

months• Housing Starts by 21 monthsSource: MHIA March 2009 Material Handling Equipment Manufacturing History and Forecast Report.

THE NEW JERSEY FRANCHISE PRACTICES ACT

New Jersey Franchise Practices Act –

Protection Against Termination• “It shall be a violation of this act for a

franchisor to terminate, cancel, or fail to renew a franchise without good cause.”

• “For purposes of this act, good cause . . . shall be limited to failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise.”

N.J.S.A. 56:10-5

Indirect Termination“It shall be a violation of this act for any franchisor directly or indirectly … to terminate, cancel, or fail to renew a franchise …” N.J.S.A. 56:10-5

Proper Notice of Termination “It shall be a violation of this act for any franchisor directly or indirectly … to terminate, cancel, or fail to renew a franchise without having first given written notice setting forth all the reasons for such termination, cancellation, or intent not to renew at least 60 days in advance of such termination …” N.J.S.A. 56:10-5

Injunction Against Termination“Any franchisee may bring an action against its franchisor for violation of this act in the Superior Court . . . to recover damages sustained by reason of any violation of this act and, where appropriate, shall be entitled to injunctive relief …Such Franchisee, if successful, shall also be entitled to the costs of the action including but not limited to attorneys fees.” N.J.S.A. 56:10-10

Standards of Performance“It shall be a violation of this Act for any franchisor, directly or indirectly to … impose any unreasonable standards of performance.”

N.J.S.A. 56:10-7(e)

Other ProtectionsIt is a violation of the Act for a manufacturer to:• Prohibit dealer associations and the right of dealers to

organize; • Require or prohibit a change in management unless the

manufacturer has good cause, stated in writing, to require or prohibit the change;

• Restrict the sale or transfer of any equity in the business to the spouse, child, heirs, employees or managers of the business, so long as it is not a sale of control of the franchise.

N.J.S.A. 56:10-7

Sale or Transfer of Franchise• Dealer must give written notice of the buyer’s

name, address, statement of financial qualification, and business experience.

• Manufacturer has 60 days to approve the sale or advise of unacceptability on the basis of the buyer’s (a) character, (b) financial ability, or (c) business experience.

• If no reply in 60 days – approval is deemed granted.

N.J.S.A. 56:10-6

New Jersey Franchise Practices Act

Must meet six requirementsto be protected by the Act

What can you change in your business to ensure that you meet the six elements?How would you prove in court that your business meets the six elements?

Qualifying for Protection of the Act

1. Written arrangementIt does not matter whether the agreement actually uses the word “Franchise.” It may be a Sales Agreement, or Dealer Agreement, or any other kind of agreement. It is still a “franchise agreement” if the business meets the six elements of the Franchise Act.

Qualifying for Protection of the Act2. Place of business in New Jersey where the

franchisee displays for sale and sells the franchisor’s goods or services. But …“Place of business shall not mean an office, a warehouse, a place of storage, a residence or a vehicle.”

You need some sales activity at your facility – not just storage of goods and back office operations. What can you do to ensure some retail sales at your place of business? (e.g. a showroom or a parts counter).

3. Gross sales of products or services between manufacturer and dealer exceed $35,000 in prior 12 months.

4. More than 20% of gross sales are derived (or intended to be derived) from the franchise.

Document your revenue stream by product brand • Equipment sales: new and used• Parts sales• Service work: warranty and non-warranty

5. License to use the trade name, trade mark, service mark.

Not necessarily a formal trademark license, but must show the public that there is a relationship between the dealer and the manufacturer. Does the manufacturer give you guidelines on how their trademark must appear?Document your use of the “license.” Do you use the trademark in your advertisements? Yellow page ads? Uniforms? Letterhead?

6. “A community of Interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise.

You must demonstrate substantial “Franchise specific investments” - - -

What equipment, software, training, advertisements, signs and logos, etc. have you bought over the life of the business specifically related to selling and servicing this brand?

Be Prepared• Document, Document, Document… all of your

proofs of each requirement now and on an ongoing basis as a regular business practice.

• Save all proofs of use of the trade mark, “franchise specific investments,” and revenue from selling and servicing the product, training customers, etc.

• Save all documents from all your interactions with the manufacturer; letters, emails, agreements, dealer meeting notes and presentations, etc.

For at least as long as the relationship exists.

Pennsylvania

• No specific franchise protection statute• However, Pennsylvania courts have

recognized some level of protection against termination without good cause.

PennsylvaniaPennsylvania Supreme Court Decision:Atlantic Richfield Company v. Razumic, 480 Pa. 366 (1978)Definition of a franchise:“In its simplest terms, a franchise is a license from the owner of a trademark or trade name permitting another to sell a product or service under the name or mark. More broadly stated, the franchise has evolved into an elaborate agreement by which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services.”

Pennsylvania“In exchange, an Arco dealer such as Razumic [the dealer] can justifiably expect that his time, effort, and other investments promoting the goodwill of Arco will not be destroyed as a result of Arco's arbitrary decision to terminate their franchise relationship. Consistent with these reasonable expectations, and Arco's obligation to deal with its franchisees in good faith and in a commercially reasonable manner, Arco cannot arbitrarily sever its franchise relationship with Razumic. A contrary conclusion would allow Arco to reap the benefits of its franchisees' efforts in promoting the goodwill of its name without regard for the franchisees' interests.”Atlantic Richfield Company v. Razumic, 480 Pa. 366 (1978)

Employee Free Choice Act: Where It Stands

and What It Means to

EmployersDavid Cassidy

What Is The EFCA?An Act to “amend the National Labor Relations Act to establish an efficient system to enable employees to form, join, or assist labor organizations, to provide for mandatory injunctions

for unfair labor practices during organizing efforts, and for other

purposes.”

EFCA in a Nutshell• Gives workers the choice of whether to form a

union through majority sign-up or through the National Labor Relations Board election process

• Guarantees a first union contract through mediation and arbitration

• Strengthens penalties for violations against workers who are trying to organize or negotiate a first contract

http://edlabor.house.gov/employee-free-choice-act efca/

Certifying A Union

Certifying A Union Today

Campaign PeriodCurrent System

• Authorization cards from 30% = petition for election

• Employer provides union with roster of eligible employees

• Election date = no less than 10 days from the day the roster was released

• 2007 median period - 39 days from the date the petition was filed (NJ: 42 Days)

Voluntary Recognition/Card Check • Employer can agree to voluntarily

recognize a union via a card check• 51% permits the union to be

voluntarily recognized by the employer• Employer may reject voluntary card

check and force secret ballot

Campaign Rules - Employers

• Don’t make negative predictions about the effect of the union on business

• Don’t question or surveil employees regarding their voting choices or leanings

• Don’t offer incentives for voting against unions• Not only includes wages and benefits but

any other type of working condition• Don’t hold campaign meetings within 24 hours

of balloting• Don’t Discipline, Discharge, Discriminate or

Retaliate

Different Rules for the Unions

• Unions may…• Promise higher

wages/benefits/changes without accountability

• Contact employees at their homes and repeatedly inquire about their vote using union members or co-employees

Secret Ballot Elections• Conducted by NLRB• Represented at the election by an observer• Union must receive a majority of the votes

cast• Majority of voters – Union certified as exclusive

bargaining representative for the unit• No Majority – Certified as no union

• Either way, no election in that unit for at least one year from the date of election results

Secret Ballot

S A M P L E

The EFCA WAY!

Authorization Cards

Privacy?

The Union is in…

Now What??

Negotiating With The Union

Out with the old…In with new…

Current labor negotiations under

the NLRA

Proposed changes under the EFCA

The Negotiation Process

Under Current Law

• Each negotiation is decided by the parties on a case-by-case basis

• There is no requirement to reach a final resolution

• Both sides have leverage• Employer – Last, best

contract offer and lock outs

• Union – Strike, picket and handbill

Under the EFCA

• Resolution WILL be reached• If an agreement can’t be

reached, parties are sent to mediation

• If mediation doesn’t work, parties are sent to mandatory arbitration

• Arbitration• First contract and binding

for two years

Binding Interest Arbitration

• Arbitration decision would be binding for two years, unless parties agree otherwise

• Rules to be issued on how it will work

ULP Remedies – Ouch!What they are, and the price to pay under current law and

Employer Unfair Labor Practices

• Interfere/restrain/coerce employees in exercising their rights to engage in concerted activity or union activity

• Dominate or interfere with formation or administration of union

• Discriminate against employees based on union actions• Includes filing charges or taking part in a proceeding

for the NLRB• Refusal to bargain with the lawful representative

Penalties for EmployersCurrent Penalties

• Remedial back pay and reinstatement

• Possible Injunctions• Posting Requirements• New Elections• Bargaining Orders

• Extreme cases only• Priority granted to

allegations of ULP by the Union

EFCA Penalties• In addition to previous

remedies…• Treble Back Pay• Mandatory Injunctions • Civil Damages

• $20K per violation• No change in remedies

against Unions• Provisions grant priority

to allegations made by unions and employees against employers

Planning for the EFCAHow to prepare for the

worst case scenario

Don’t Stand PAT!1. Plan

– How to minimize exposure to unionization

2. Analyze– Perform a critical audit of your own

vulnerability3. Train

– Pro-actively educate while you still can

Plan• Passive approach = No approach• Speak NOW or Forever Hold Your

Peace• Explain to Company Leaders how

the EFCA will impact your Company• A union may be in place literally

before you know it

Analyze• Perform a self-audit to determine if you

are really vulnerable• Industry• Wages/Benefits• Employee morale• Union activity in the area• Supervisor competence• Communication methods

Leadership• The best union organizer is a bad

manager…• Poor leadership (NOT pay or

benefits) is the primary issue that leads to unionization

• Employers have the most power to remedy poor leadership

Policies and Practices

Policies• Is your handbook

written in plain language?

• Are your policies comprehensive?

• At Will employees?

Hiring Practices• Train Managers

on how to hire• Hire from positive

sources

Train Your Managers• Train you managers to focus on

employee relations• The primary reason given for unionization is

frustration with supervisors• Teach supervisors

• What leads to unions and how to avoid them• How to spot early signs of unionization• What to say and what NOT to say

Contingency Planning • Create a rapid response

communication plan• Develop a “Ready to Go”

Campaign that can be launched if you learn of union activity

• Be ready to train managers on TIPS

Will It Pass?

Political Support

"We will pass the Employee Free Choice Act. It's not a matter of if—it's a matter of when. We may have to wait for the next President to sign it, but we will get this thing done." – Barack Obama, 3/4/07

Status• The bill passed unchanged through

the House of Representatives• The Bill has not been offered to the

Senate for a vote at this time• The President is a co-sponsor of

the Bill and will sign the Bill if it comes to his desk

What now?

Magic Number = 60

Magic Word = Compromise

Collecting From Financially Distressed

CustomersMo Bauer

Factors Leading toFinancial Distress

• Liquidity Crisis• Asset-Based Loan Default• Loss of Major Client/Customer• Loan Maturity and Unable to

Refinance• Drop in Revenue• Increased Operating Costs

Red Flag Factors• Industry in Distress• Payment Terms Expanding, i.e. Late

Payments• The Rumor Mill – Other Creditor

Comments• Continual Empty Promises

Should We Continue to Do Business With Distressed

Customer• Assess Import of Distressed Customer to your

business• Size-Up Customer’s Ability to Find a

Replacement• Request Financial Statements from Customer,

including Bank Loan status• Assess Amount of Customer debt that you are

prepared to write-off and set threshold accordingly

• Place Customer on COD Basis.

Legal Pursuit of Collections

• Know Legal Rights• Contractual Rights and Remedies• Lien Rights, i.e. recorded UCC

statements, warehouseman lien, artisan lien

• Demand Letter or Default Letter• Collection Complaint

Should We Do Business With a Chapter 11 Debtor?

• Access to Financial Information of Debtor

• Business Terms• Administrative Expense Claim• Emotions v. Profit

Available Information Schedules of Assets and Liabilities and Statement of

Financial Affairs Budget for Use of Cash Collateral and DIP Financing Monthly Operating Reports Counsel to Creditors Committee Other Creditors Disclosure Statement Provides Historical Financial

Information and Forecasts The Web, Court’s Website, Newspaper Articles, etc.

Executory Contracts• An Executory Contract is a contract in which

both parties still have continuing obligations• Examples: Residential or Commercial Leases,

Certain Equipment Leases, Service Contracts, License Agreements, and Collective Bargaining Agreements

• A non-Debtor party is required to continue with performance under the contract

• Motion to Assume or Reject Lease or Contract

Equipment LeasesEquipment Financing

• True Lease vs. Disguised Security Interest

• Motion for Stay Relief• Motion for Adequate Protection• Assumption of Lease• Sale of Equipment

Claims Process• Bar Date (Deadline to File a

Claim)

• Filing a Proof of Claim

• Motion Objecting to Claims

Preference ActionsAdding Insult to Injury

• Preference Payments – Typically, any payment received within 90 days of the Petition Date

• Dunning Letter from Debtor or Liquidating Trustee’s Counsel

• Defenses• Contemporaneous Exchange • New Value• Ordinary Course of Business or financial

affairs of the debtor and the transferee or made according to ordinary business terms

Sales of Assets in Chapter 11

• Notice of Asset Sale • Sale Free and Clear of All Liens, Claims and

Encumbrances• Assumption and Assignment of Executory

Contracts• Payment of Arrearages• Adequate Assurance of Future Performance

• Higher and Better Offers

When to Consider Filing for Bankruptcy Protection for Your

Business

Gary Marks

• May not always have the luxury of time to plan for bankruptcy

• Considerations• If possible, file at a time when debtor’s business cycle is

such that it is flush with cash. Consider the seasonality of the business.

• Avoid bank set-offs• Insurance issues• Whether to apprise lender and major suppliers in advance• Time limits on whether to assume or reject a lease could

dictate the timing of the petition, especially in retail cases with a large number of leased locations

Pre-Bankruptcy Planning and Timing of Filing Petition

Dealer Agreements May Precipitate A Bankruptcy

Filing• Termination notice given by manufacturer

and notice period both expire before dealer files petition. Dealer agreement can be terminated and cannot be resurrected in subsequent bankruptcy.

• Termination notice given by manufacturer prior to dealer filing petition, but dealer files during the notice period• If dealer has no right to cure, mere passage of time

alone will not stay termination of the Agreement• If dealer has a right to cure, the termination is

stayed and the dealer will have the chance to cure and reorganize its business

Types of Insolvency Proceedings

• Chapter 7• Chapter 11• Assignment for benefit of creditors

Alternatives to Insolvency Proceedings

• Out of court workout with principal lender

• Out of court workout with key trade creditors

Succession Planning — Minimizing Costs and Risks

When Transitioning Your Business to a Family Member

or Selling to a Third PartyCharles Bruder

What is Succession Planning? –

An Overview • Equity gifts to family members• Transfers to trust/controlled entity• Equity grants to key family member

employees• Sales to third parties

Gifts of Equity to Family Members Potential Pitfalls

• Gifting limits• Valuation Issues• “Overgifting”

Gifts to Family Members - Intentions?

•Outright Gifts vs. Gifts with Restrictions–What do you intend to give?

• Stock Value?• Voting Rights?• Dividends?• Transfer restrictions?• Shareholder agreement issues?

– Buy/Sell Agreements?

Transfers to Trusts/Controlled Entities• Types of Techniques

• Grantor Trusts• Family Limited Partnerships (FLPs)

• Use of these vehicles may allow for the transfer of equity in your company at a discounted value, while permitting you to retain some “control” over the transferred assets

Transfers to Trusts/Controlled Entities • Many of the same potential pitfalls as outright gifts

to family members• However, valuation issues require additional

scrutiny• Use of trusts/controlled entities has gained

additional IRS scrutiny during the past few years• The IRS has had some success in challenging

equity valuations, particularly for minority discounts

• Additional costs associated with implementation and maintenance of trusts/controlled entities

• Potential estate inclusion if not properly structured

Equity Grants to Family Member Key Employees• If a family member is also a key employees of the

company, there are a variety of equity and equity-based incentive compensation techniques available• Stock option plans• Restricted stock arrangements• Stock bonus plans• Stock appreciation rights• Phantom stock arrangements• Deferred compensation arrangements

• With these latter 3 techniques, the employee does not receive actual equity, but rather the value of same

Equity Grants to Family Member Key Employees

• Remember, there must be a true employee relationship

• Certain restrictions may exist on family member stock ownership

• Non-family member employee relations issues• Employment-related grants raise many of the

same issues as outright gifts

Sales to Third Parties - Considerations

• Sales Structure - Stock vs. Equity• Cash vs. debt vs. equity• Post-sale rights

• Right of first refusal• Right of repurchase• Collection rights on debt default

Sales to Third Parties - Employee Sales?

• Do your employees have any interest in purchasing the company?• Can use equity-based employee benefits

plans to facilitate a transfer• Employee Stock Ownership Plan (ESOP)• Employee Stock Purchase Plan (ESPP)• Stock options

Sales to Third Parties – What about you?

• What do you plan to do post-sale?• Cash flow needs• Earn-out?

• Post-sale employment?• Employee vs. Independent Contractor• Duties and responsibilities

Question & Answer SessionThank you for coming!

Hot Legal Issues In This Economy For Material Handling & Industrial Equipment Businesses

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