Law Focus

LawJuly 2011 A Publication of The Enterprise - Utah’s Business Journal

W

a s a t c h F r o n tFocusFocus

W

U T A H

.

INSIDE

Things every business owner or manager should know when they receive

a bankruptcy notice.Page 2

First considerations when a lawsuit is coming.

Page 3

An employment lawyer’s perspective on avoiding

sleepless nights.Page 3

Religious rites, rights and wrongs in the workplace.

Page 5

The basics of business Buy-Sell Agreements.

Page 6

Utah’s immigration laws.Page 7

How limited is your limited liability protection?

Page 9

Getting ready to sell your business.

Page 10

A change in the Utah Corporations Act regarding majority written consents

Page 10

2 Utah Focus, July 2011

Skilled attorneys.Creative solutions.

Let us know how we can help with your legal business needs.

AREAS OF PRACTICE

Bankruptcy

Business & Corporate

Complex Litigation

Employment

Energy & Utilities

Environment & Natural Resources

Real Property

Tax & Estate Planning

www.fabianlaw.com

(801) 531-8900

215 South State Street, Suite 1200Salt Lake City, UT 84111-2323

DATE:

CLIENT:

PROJECT #:

5” x 13.5” Black and White Ad

Proof 1

Almost every business is affected by bankruptcy at one time or another. Whether it is receiving a notice that a customer has filed bankruptcy or a need to reorganize in bankruptcy itself, bankruptcy is a part of the modern business landscape. Bankruptcy is a complex area of law that can be con-fusing and may sometimes seem counterintuitive. This article will address four basic bankruptcy concepts from the perspective of a business whose account debtor or customer has filed bankruptcy. • Don’t Mess with the Automatic Stay. When a debtor files bankruptcy, an automatic court injunction goes into effect to protect the debtor and its prop-erty. This injunction, known as the “automatic stay,” is very broad in scope. The automatic stay generally bars everyone from any attempts to collect on pre-bankruptcy debt-ors, stops lawsuits against the debtor, stops foreclosure proceedings, and bars efforts to repossess or dispose of collateral. In short, it stops everything. Like most judg-es, bankruptcy judges take a dim view of people who ignore their orders. Creditors who violate the automatic stay run the risk of being held in contempt of court. Judges can impose sanctions and award punitive damages against creditors who knowingly violate the stay. Formal notice of the bank-ruptcy filing from the court is not neces-sary. Anything that places a creditor on notice of a bankruptcy filing, whether it is a phone call, an e-mail, or some other informal means, is sufficient. If there is any question whether the automatic stay may apply, the safest course of action is to not risk violating the automatic stay. Check with your lawyer. Unfair, you say? Why should some-one be able to stop my lawsuit or foreclo-sure against them in its tracks just by filing a paper with the bankruptcy court starting a bankruptcy case? Congress enacted the automatic stay to give a debtor a “breath-ing spell” from creditors so that the debtor can come up with a repayment plan. The automatic stay also helps implement other policies underlying the federal bankruptcy code. It shifts things from the state law policy of a “race to the courthouse” or “first come, first served” and replaces it with a policy of equal treatment to credi-tors who are similarly situated. It also helps preserve any going concern value the debtor may have. This value can some-times be used to pay unsecured creditors more than they would receive from the liquidation of hard assets. Creditors can sometimes get the auto-matic stay modified, which is known as getting “relief” from the automatic stay. The grounds for relief from the automatic stay include: (1) the creditor is being harmed because the collateral is declining in value; and (2) the debtor has no equity in the collateral and the property isn’t nec-essary for an effective reorganization.

There is also the general “catch all” of “cause,” which may include bad faith, repetitive bankruptcy filings, or certain other situations. Getting relief from the automatic stay isn’t always an option. When it is, it can sometimes be a slow and frustrating proposition.

• The Deadlines for Filing a Proof of Claim Are Short. Very Short. Don’t Blow Them. It is very important to file a proof of claim in a bankruptcy if you receive a notice that creditors can file claims. Don’t rely on what the debtor reports that he or she owes you. The notice of a bank-ruptcy filing that the court clerk mails to creditors within a week or so after a bankruptcy filing often contains a notice of a dead-line for creditors to file claims.

The deadline is usually only a few months away. Don’t ignore it. If you don’t file a proof of claim, there is a good chance you won’t get paid. Be aware that in a lot of Chapter 7 bankruptcy cases, the initial bankruptcy notice tells creditors not to file claims at that time. The court will send a notice of file claims in the future if the trustee locates enough assets that there will be some distribution to unsecured credi-tors. Keep a lookout for a notice in such cases. There may be a few unusual situations where filing a proof of claim may not be desirable (such as where a creditor has a right to a jury trial and does not wish to waive it). Consult your lawyer. • All Is Not Necessarily Lost If You Receive a Demand to Return “Preferential Payments.” You May Not Have to Return the Money. One of the most painful experiences a business can have with a bankruptcy is when they are sued or receive a letter from a bankruptcy trustee (or from the attorneys for a Chapter 11 debtor) demanding that the business return payments it received from a debtor shortly before a bankruptcy filing. Why should you have to return a payment from someone who owed you money if you did nothing wrong? All you did was cash a check! And the debtor did nothing wrong in paying you, either. Yet the bankruptcy code provides for what seems like an extremely unfair use of our legal system by allowing bankruptcy trustees or Chapter 11 debtors to recover payments or trans-fers of property that were made to credi-tors within 90 days of the bankruptcy fil-ing. (The reach back period extends to one year prior to bankruptcy for payments or transfers to an insider). These payments are referred to as “preferences” or “prefer-ential transfers” because they could give the recipient preferential treatment over other creditors who were not paid. If your business is the unlucky target of such a demand letter or is sued in a preference lawsuit, all is not necessarily

Things every business owner or manager should know when they receive a bankruptcy notice

Douglas Payne

see BANKRUPTCY next page

Many business owners have experi-enced the unsettling feeling that comes when they discover they have been sued or threatened with a lawsuit. If you have not, then keep in mind that it could be just around the corner: Recent studies demon-strate that the question for most business owners is not if, but when they will be sued or threatened with a lawsuit. A lawsuit not only poses the obvious potential of financial lia-bility, but can also cause signifi-cant ongoing expenses and distrac-tions from day-to-day business operations. This can be particularly overwhelming for business owners with little experience handling lawsuits. As with any endeavor, how you begin will likely have a large impact on how you will end. Here are six ideas for you to con-sider when dealing with a lawsuit: 1. It is Important to Protect the Attorney-Client Privilege. A common mistake by those unfamiliar with the legal system upon receiving service of a lawsuit or a threat of litigation is to immediately discuss the threat with others. This is human nature when confronted with some-thing unfamiliar and unexpected. The problem with doing so, however, is that communications, whether verbal or writ-ten, between you and others including those within your company could be obtained by the opposing party in a law-suit. Meanwhile, discussions between you and your attorney are legally protected as private. Before talking to others about the threat, hire an attorney and discuss with him or her how you can best protect your private communications.

2. Consider Getting Legal Counsel Immediately. There are a number of rea-

sons to act quickly in hiring an attorney. Perhaps the most important is to ensure you do not lose any rights or claims by missing an important deadline. In addition, acting quickly can some-times facilitate a less costly resolution. The sooner you hire an attorney, the sooner you can get advice concerning the possibility

and desirability of working toward a resolution out of court. Sometimes you may have no choice but to fight, but finding a business solution to the dispute prior to the commencement of court action when possible is often more cost-effective. 3. Contact Your Insurance Carrier. It is quite important to notify your insur-ance broker/carrier of the claim or potential claim to obtain a determination whether your car-

rier will defend you against and ultimately cover the claim. If you have a broker, they will be able to put all potential carriers on notice of the claim. You may have more than one policy covering the matter. Your carrier may have a duty to defend you in the litigation and in such a case will likely have a say about who your attorney will be. 4. Preserve Documents. After a law-suit is filed or threatened, you should be sure to preserve documents or other items related to the subject matter of the threat, and you likely will want to put a stop to any automatic document destruction/dele-tion programs. The law imposes upon par-ties to litigation the responsibility to pre-serve documents and other evidence, even if you view the items as insignificant or damaging. Parties that fail to preserve evi-dence may be subject to serious sanctions

by the court for spoliation of evidence, including simply entering judgment against companies that intentionally destroy important evidence. 5. Prepare a Chronology of Relevant Events. Take time to sit down and write a chronology of events relevant to the claims being made against you. You may wish to prepare it as a letter to your hired attorney and label it as confidential communication. This chronology will assist your attorney in gaining an understanding of the issues that are presented and preparing a strategy to defend against the claim much quicker. It will also potentially save you fees because your attorney may not have to spend as much time investigating the mat-ter. 6. Be Prepared to Talk Plainly About Fees. From the outset you should have candid conversations with your attorney

about his or her fees and the potential liti-gation costs you are facing. Exact numbers will be impossible to predict at the early stages, but your attorney may be able to give you a ballpark range of what fighting a lawsuit could cost you. You should factor this into your strategy toward resolving the dispute with a business solution. Ask your attorney if it will be possible to recover attorney fees if you win. In the absence of a contract or a statute, the general rule is that each party pays its own fees and costs of litigation.

Lane Molen is an associate with Snell & Wilmer. His practice is concentrated in commercial litigation, involving real estate, natural resources, contract disputes and financial services issues. He represents clients of all sizes, including small busi-nesses.

Utah Focus, July 2011 3

lost. The trustee or Chapter 11 debtor will have to prove the basic elements of their case, among them that the debtor was insolvent when the payment was made and that the payment enabled you to receive more than you would have if the debtor had been liquidated.Even if the trustee can prove all of these elements (and he or she usually can), there are a number of defens-es that may let you off the hook, or at least lessen your exposure. For example, the trustee isn’t entitled to recover the pay-ment if it was made as part of a “contem-poraneous exchange for value.” The “ordi-nary course of business” is also a defense, so if the invoice terms are net 30 and the debtor has been paying you within 30 days, you’re probably OK. Courts look at the course of dealings between the parties for this defense, but also look at typical conduct regarding the manner and timing of payment in the particular industry. Another defense is if your business pro-vided value (goods or services) to the debtor after you received the challenged payment and you haven’t yet been paid. There are a number of other technical defenses that you’ll want to explore before responding to a preference demand or law-suit. It probably won’t make you feel any better if you are the target of a preference demand or lawsuit, but the policy behind allowing recovery of preferences is to enable the bankruptcy estate to give equal treatment to similarly situated creditors. Bringing preferential payments back into the bankruptcy estate lets those funds be distributed to creditors according to the priorities of the bankruptcy code, at least that’s the theory. When dealing with a troubled busi-ness that owes you money, don’t obsess over whether a bankruptcy trustee might be able to recover a payment from you if a bankruptcy is filed. It is possible there won’t be a bankruptcy or that the trustee may not chase you. You may also have defenses. So if you are offered a payment, take the money! • There Are Ways to Keep Certain Types of Fraud from Being Discharged

in Bankruptcy. Scam artists and fraud-sters often end up in bankruptcy. If fraud or certain other conduct was committed by an individual who filed bankruptcy, there may still be hope that you can keep the debt owed to you from being wiped away, or in bankruptcy lingo “discharged.” But you have to act fast. The deadline for filing a lawsuit asking the bankruptcy court to except a particular debt from dis-charge will be listed on the notice of the initial bankruptcy filing from the court. The deadline will be 60 days from the date first set for the first meeting of creditors, which will typically be approximately 3 months after the date the bankruptcy was filed. The bankruptcy code excepts certain types of debts from discharge. Those include the following, provided that a creditor timely files and prevails on a law-suit within the bankruptcy: •Money, property, or services or anextension or renewal of credit obtained by use of a false written statement; •Fraudordefalcationwhileactingasa fiduciary, embezzlement, or larceny; •Willfulandmaliciousinjurycausedby the debtor. It is important to quickly evaluate whether you have such grounds to except a debt from discharge so you can decide whether it makes sense for you to file a lawsuit within the short statute of limita-tions. If you’ve been diligent but still need more time to investigate the facts, you can file a motion (before the deadline runs) asking the court to give you a little more time. Finally, creditors should think twice before filing a nondischargeability lawsuit on a consumer debt. A court can award attorney’s fees against a creditor that brought a nondischargeability complaint on a consumer debt if its position was not substantially justified.

Douglas Payne is a Fabian Law attorney whose practice focuses on business bank-ruptcy and commercial litigation. He has over 25 years of experience protecting the interests of creditors and other parties in bankruptcy cases and has successfully represented a number of unsecured credi-tors’ committees in complex bankruptcy cases. He can be reached at (801) 531-8900 or [email protected].

BANKRUPTCYfrom previous page

First considerations when a lawsuit is coming

Lane Molen

There are an awful lot of things to worry about when you are a business leader, not the least of which is whether your company is in violation of various laws. From tax laws to securities laws to environmental laws to workplace laws to product liability, the legal compliance field is huge and ever-changing. When it comes to employ-ment-law compliance, however, you should be able to rest more easily if you take action in these four areas: Figure out who your employ-ees are. Many companies don’t know who their employees are. By this I don’t mean that you should do all the recruiting for your com-pany so you have personally approved every hire. While that may make sense in very small businesses, by the time your company is of any size at all, recruitment likely is a task delegated to more than one competent person, and those recruiters often are not the owner, CEO or COO. Nor do I mean you must wander the workplace introducing yourself and having heart-to-

heart conversations with everyone you meet. Although I am a true believer in such behavior and see both moral and business value in it, I am not talking about that sort of “appreciation” knowledge about your

employees. I am referring to true legal knowledge. That is, who, legally, according to federal and Utah law, is your employee? One of the most com-mon and costly mistakes that I have seen business owners and executives make in my 23 years of employment-law practice is to assume that certain people who provide services to them are not, in fact, company employees. Companies often take a narrow and misguided view that anyone

who is not receiving a W-2 is not their employee. Through this lens, companies readily hire “contractors” on a 1099 basis to provide various services, and then con-sider themselves free of further worry about taxes, overtime, benefits and dis-crimination laws. The truth, however, is that no matter

An employment lawyer’s perspective on avoiding sleepless nights

Elisabeth Blattner-

Thompson

see EMPLOYMENT page 4


what a company calls a worker, people will be employees if the facts show they look and feel like employees, which typically means that the company exercises, or has the right to exercise, sufficient control over the manner and means of the worker’s performance. And if the worker is the com-pany’s employee, the company still has all of the obligations to the worker that it sought to avoid by calling him a “contrac-tor.” Sadly, because companies think “con-tractors” are not their employees, they often do not meet their obligations. They do not pay their employer’s share of taxes, they do not pay them overtime, they do not permit them to participate in employee stock option plans available to “employ-ees,” they do not protect them from dis-crimination and harassment, and so on. Moreover, because companies do not think these workers are employees, they do not include them in the employee head-count. That mistake leads companies to an even bigger one: thinking they have too few employees to be subject to a variety of federal laws, such as: • TitleVII, which forbids employerswith 15 or more employees from discrimi-nating on the basis of race, color, religion, gender or national origin. •TheAmericansWithDisabilitiesAct(ADA), which forbids employers with 15 or more employees from discriminating on the basis of disability. • The Age Discrimination inEmployment Act (ADEA), which forbids employers with 20 or more employees from discriminating on the basis of age. •TheFamilyandMedicalLeaveAct(FMLA), which requires employers with 50 or more employees to provide up to 12 weeks or 26 weeks of unpaid leave per year to eligible employees depending on the circumstances. The ramifications of this misunder-standing are huge, since the employer is often in the position of having violated its legal obligations not only to the particular worker in question, but to all of its other employees. It is quite a nasty surprise when a company discovers through a Department of Labor (DOL) audit that it got this very fundamental issue wrong. And the likeli-hood of such a surprise is greatly increased over several years ago, since the Obama administration has made independent con-tractor/employee misclassification a major focus. Trust me, you will sleep much better at night if you can confirm that the workers that you have been calling contractors really are contractors. If you find that some of them are not, a call to your employment lawyer to get a game plan in place to fix the problem will certainly help. Understand the difference between “salaried” and “exempt.” Many compa-nies operate under the mistaken belief that salaried employees do not have to be paid minimum wage or overtime. In truth, sala-ried personnel are only exempt from mini-mum wage and overtime entitlements if their specific situations meet the require-ments of one or more designated “exemp-tions” under the Fair Labor Standards Act (FLSA). The most common of those are

the administrative, executive, professional and outside sales exemptions, but other exemptions also exist. Many of these exemptions have both “duties” and “sala-ry” components that must be met for the exemption to apply. Characterization of employees as “exempt” means that an employer typically is not tracking those employees’ hours, is not worried about whether they have been paid at least minimum wage for all hours worked, and is not paying any overtime for those hours they have worked beyond 40 per week. When the characterization is wrong, exposure can include unpaid regu-lar wages, unpaid overtime at 1.5 times the regular rate of pay, liquidated damages that double the unpaid wages and overtime amounts, plus attorney’s fees. Given that misclassifications often involve whole classes of employees in numerous job titles, the exposure can be daunting. And it can be personal: liability for FLSA viola-tions attaches not only to the company, but to any individuals responsible for the vio-lation (in other words, you).

The chances of having a legal problem in this area are high. According to the Department of Labor, 70 percent of employers are misclassifying non-exempt employees as exempt. Certainly many of them are not doing it on purpose. The Obama administration has made non-exempt/exempt misclassification an area of specific enforcement focus. The DOL has substantially increased the number of its investigators since Jan. 1, 2009, and along with that, the number of audits it is conducting. In addition, numerous plain-tiff’s lawyers have designed Internet sites to troll for viable FLSA class actions through a series of simple questions asked of your employees. So, if an auditor does not come knocking at your door, a plain-tiff’s lawyer just might. Figuring out whether you have an FLSA exemption problem and how best to fix it requires clear and strategic thinking. Sometimes being transparent with your workforce about an audit, an identified problem, and/or the solution will be the best approach from both business and legal perspectives, but far more often such trans-parency will backfire and exacerbate the problem. Important decisions need to be made about how to identify the existence and scope of the problem; whether to fix all, part or none of it; how and when to fix whatever part you decide to fix; and, per-haps most importantly, how to do all of these things without drawing unwanted attention from your employees or the DOL. These decisions are best made in consulta-tion with your employment counsel. Getting that wisdom and experience on your team will greatly reduce your stress

level in this high-stakes area. Take equal opportunity laws seri-ously. Once your Utah company has 15 employees, it will be subject to various state and federal laws designed to provide an equal employment opportunity. Those laws prohibit employers from discriminat-ing against employees on the basis of vari-ous “protected classes,” including but not limited to race, color, religion, gender, national origin, age, disability, genetic information and veteran status. Unlawful discrimination includes harassment, and it also includes retaliation against employees for opposing unlawful discrimination or complaining about it. Bringing complaints of discrimination in Utah is easy. Employees do not need to be represented by counsel and they have up to 180 days from the date of an adverse action to file an official charge of discrimi-nation with the Utah Antidiscrimination and Labor Division of the Utah Labor Commission (UALD), and up to 300 days to file it with the EEOC. Charges lead to UALD or EEOC investigations and ulti-

mately lawsuits in the state agency or in federal court. Lawsuits are time-consum-ing and expensive, with damages exposure that, depending on the forum, can include equitable relief, back pay, front pay, com-pensatory damages (pain and suffering), punitive damages, and attorney fees. Because every employee is a member of some protected class, and thus a possi-ble plaintiff, preventing discrimination and harassment should be near the top of every executive’s compliance list. Critical to effective prevention of unlawful discrimi-nation is the creation of a respectful atmo-sphere in which diversity is welcome and discrimination, harassment and retaliation are not tolerated. Your company should have appropriate discrimination, harass-ment and retaliation policies; frequently conduct effective discrimination, harass-ment and retaliation training; conduct meaningful investigations into allegations of discrimination, harassment and retalia-tion; take prompt and effective corrective action when discrimination, harassment and/or retaliation are found; and regularly audit its effectiveness at preventing dis-crimination, harassment and retaliation. All of this, however, will be seriously undermined unless you give more than lip service to these policies and practices. For your personal part, you must set the tone for the atmosphere you desire, leading by example in your everyday words and actions. Get your employee handbook and basic employment forms reviewed. I cannot emphasize enough the need to get a real legal review, by a real employment

lawyer, of your employee handbook and your basic employment forms such as applications, offer letters, leave forms and standard agreements (employment, non-disclosure, non-solicitation, non-compete, etc.). I am not talking about a cursory “check the box” review by an HR consul-tant or your insurance carrier. I am talking about an in-depth legal review designed to assess your policies, procedures and forms against Utah and federal employment law to see whether you are adequately protect-ed and, if not, how you might improve. Your company’s risk of employment law problems increases if your policies are legally flawed. That could involve an out-dated FMLA policy, a workplace violence policy that bans all weapons on a Utah worksite, or an LTD policy that automati-cally terminates employment after a year. Other problems could arise if your policies do not work well with each other, such as an FMLA policy that ignores the ability to substitute PTO or the availability of STD, or if they do not take advantage of avail-able safe harbors, such as by assuring employees that errors in the calculation of wages will be promptly corrected when brought to the company’s attention. Policies that are written in a way that undermines “at-will” employment, such as by referring to “permanent” employment or suggesting “causes” for termination, or that otherwise create contractual obligations also could raise red flags. Similarly, poor forms — such as appli-cations that ask for improper information, offer letters that undermine at-will employ-ment or create confusion over compensa-tion terms, or overly broad or overused non-compete agreements that are unlikely to be enforceable — all create exposure and threaten what you are trying to accom-plish: running the most successful and profitable business that you can. A good legal review includes real dia-logue between you and counsel about what your company is doing, is not doing, and could be doing better to handle your obli-gations to your employees, to protect your company from employee claims, and to protect valuable company assets, such as trade secrets and goodwill, that are largely in the control of your workforce. Such a review exposes and can help solve compli-ance issues on a number of fronts. With these four areas addressed, I can guarantee you that your company’s exposure will be greatly reduced. In fact, you might even nod off early.

Elisabeth R. Blattner-Thompson is a part-ner in Ballard Spahr LLP’s Salt Lake City office. She is a member of the firm’s Litigation Department and Labor and Employment Group. She concentrates her practice on helping employers understand and solve their workplace legal issues. Blattner-Thompson advises companies on employment law compliance and risk reduction, trains workforces on employ-ment law topics, investigates employee complaints and recommends appropriate responses, structures and implements employee training seminars, and defends employers against employee claims and actions. She is experienced in contracts; discrimination, harassment, and retaliation issues; employee medical issues; leave issues; wage and hour issues; reductions in force; and wrongful discharge.

EMPLOYMENTfrom page 3

It is quite a nasty surprise when a company discovers through a Department of Labor (DOL) audit that it got

this very fundamental issue wrong. And the likelihood of such a surprise is greatly increased over several years

ago, since the Obama administration has made independent contractor/employee misclassification a major focus.


Utah has deep religious roots, extend-ing back to 1844 when 11,000 members of The Church of Jesus Christ of Latter-day Saints (LDS), led by Brigham Young, set-tled and founded the Territory of Utah. From that original settlement, the state now boasts more than two million resi-dents, many of whom are LDS: (see Religious Breakdown chart).

Religious Breakdown of Utahns Age 18+, 2008

LDS 48% Unaffiliated 16%

Catholic 10% Evangelicals 7%

Mainline Protestants 6%

Black Protestant Churches 1% No Answer 1% Other Faiths 1%

Buddhism <.5% Eastern Orthodox <.5%

Hinduism <.5% Islam <.5%

Jehovah’s Witnesses <.5% Judaism <.5%

Non-denominational <.5% Other World Religions <.5%

(Pew Forum on Religion and Public Life) Against the backdrop of a strong, pre-dominant religion in the state — and an increasingly diverse, religious (and non-religious) minority — religious discus-sions, ideas, and practices are naturally carried into the workplace. Indeed, the Utah Anti-Discrimination and Labor Division and Utah’s federal district court adjudicate a variety of religious discrimi-nation and accommodation claims each year. Over the past decade, the EEOC has seen a surge in religiously based claims against employers. Now more than ever, employers must understand the legal bal-ance between religion in the workplace and the legitimate, operational needs of their company.

Overview Title VII of the Civil RightsAct of1964 prohibits employers from discrimi-nating against individuals because of their religious affiliation in hiring, firing, or creating terms and conditions of employ-ment.TitleVIIalsomandatesthatemploy-ers reasonably accommodate the religious practices of an employee or potential employee, unless to do so would create an undue burden on the employer. In general, this translates to the following require-ments and restrictions: 1. Employers may not discipline or reward employees because of their reli-gion. 2. Employers cannot require participa-tion or non-participation in religiously based activities as a term or condition of employment. 3. Employers must provide reasonable accommodation for an employee’s sin-cerely held religious beliefs and practices, unless doing so would cause undue hard-ship on the employer. 4. Employers must intervene and pre-vent the religious harassment of their employees.

Religious Harassment UnderTitleVII, an employer has anaffirmative obligation to maintain a work-place environment free of religious harass-ment. Such harassment comes in two forms: quid pro quo harassment or hostile work environment. Quid pro quo harassment occurs

when a harasser requests an employee to comply with cer-tain religious demands (conver-sion to belief or practices) in exchange for tangible employ-ment benefits, and where, if the demand is not complied with, the harasser takes an adverse employment action against the employee. A hostile work environ-ment exists when there is offen-sive conduct aimed at an employee because of that

employee’s religion. The conduct must be so severe or pervasive that it affects the terms and conditions of employment. Courts will look to the totality of the cir-cumstances in determining whether the environment was religiously hostile, whether the conduct was physically threat-ening or humiliating, or whether there was merely an offensive utterance. An employer becomes vicariously liable for religious harassment if the employer knew or should have known of the harassment and failed to take prompt, corrective action. Where a supervisor is creating the hostile work environment, the employer may be directly liable. The employer can assert as a defense that it exercised reasonable care to prevent the harassment and the employee failed to fol-low proper policies designed to protect him. Teasing and isolated comments (unless extremely severe) will not create a legally hostile work environment. The U.S. Supreme Court has held that a hostile work environment exists only when the work-place is permeated with discriminatory intimidation, ridicule, and insult that is suf-ficiently severe or pervasive to alter the conditions of the victim’s employment and create an abusive working environment. The United States District Court for the District of Utah followed this Supreme Court principle in the 2006 case of Jacobson v. Utah Department of Corrections. In Jacobson, the court dis-missed the plaintiff’s religious harassment claim as a matter of law because it found there was not “severe and pervasive dis-criminatory conduct.” Specifically, the employee alleged that his supervisor “made repeated religious comments in the office, including: telling [him] that he needed to repent; and telling [him] ... that when [he] is brought forth for judgment, [the supervi-sor] will be there to testify; [and] express-ing concern for [his] eternal salvation.” In granting summary judgment for the employer, the court noted that “the state-ments were religious in nature and were inappropriate in a work setting. Nonetheless, the court must consider whether they were abusive and pervasive. The standard in this area of law is quite high.” The court ulti-mately found that while the comments “were obviously annoying to [the employ-

ee], they [did] not rise to the level of harassment.”

Religious Accommodation Religious employees may encounter conflicts between their employment duties and their religious obligations; federal law requires employers to reasonably accom-modate religious obligations. Specifically, Title VII requires accommodation of anemployee’s sincere religious beliefs and practices unless doing so would cause undue hardship on the conduct of the employer’s business.

Religious Belief The law requires only that the employ-ee’s religious belief be “sincerely held.” And religious beliefs need not be well-recognizedtoentitlesomeonetoTitleVIIprotection. An employee need not show a clergy note or statement of beliefs to prove his sincerity. But, it is equally clear that Title VII was intended to protect andaccommodate only individuals with sin-cere religious beliefs and not those with political or other beliefs unrelated to reli-gion. Religious accommodation rules do not apply to requirements rooted in non-religious bases like culture, heritage, or politics.

Accommodation The EEOC website declares that a “reasonable accommodation” is a change in a workplace rule or policy to allow an employee to engage in a religious practice. Religious accommodation is necessary unless it would impose an undue hardship on the business. Thus, an employer is not required to provide an accommodation that is too costly or difficult to provide. The employer and employee should work closely together in finding an appro-priate accommodation. Some requested accommodations may include allowing a day or more off for a religious holiday, giv-ing weekly time off for one’s Sabbath, accommodating the wearing of religious garb, or providing a quiet place to pray. Employers could modify work schedules, allow shift exchanges, or change existing policy to make these accommodations if there is no undue hardship or expense. As long as the employer has reasonably accommodated an employee’s religious needs, the employer does not need to pro-vide the specific accommodation suggest-ed by the employee, even if the employee’s preferred accommodation would not cause undue hardship to the employer.

“Undue Hardship” The U.S. Supreme Court has ruled that anything more than minimal costs on an employer causes an undue burden or hardship. The EEOC has interpreted this to mean that an employer can show that a requested accommodation causes it an undue hardship if accommodating an employee’s religious practices requires anything more than ordinary administra-tive costs, diminishes efficiency in other jobs, infringes on other employees’ job rights or benefits, impairs workplace safe-ty, causes co-workers to carry the accom-modated employee’s share of potentially hazardous or burdensome work, or con-flicts with another law or regulation.

Best Practices The EEOC has established best prac-tices guidelines for employers when reli-

gious issues arise in the workplace: 1. Inform employees that you will make reasonable efforts to accommodate their religious practices. 2. Train managers and supervisors on how to recognize religious accommoda-tion requests. 3. Develop internal procedures for processing religious accommodation requests. 4. Individually assess each request, avoiding assumptions about what consti-tutes religious beliefs or practices or what type of accommodation is appropriate. 5. Confer fully and promptly with employees to share any necessary informa-tion about the employee’s religious needs and the available accommodation options. 6. Though you are not required to pro-vide an employee’s preferred accommoda-tion, consider the employee’s proposed method of accommodation, and if it is denied, explain why. 7. Train managers and supervisors to consider alternative available accommoda-tions if the particular accommodation requested would pose an undue hardship. 8. When faced with a request for a religious accommodation which cannot be promptly implemented, consider offering alternative methods of accommodation temporarily while exploring a permanent accommodation. Keep the employee apprised of the status of the employer’s accommodation efforts. Claims of religious discrimination are on the rise, and employers should review their policies and procedures to ensure theyareincompliancewithTitleVIIandEEOC guidelines and regulations.

Religion in the Workplace: Practical Scenarios

•Aco-workerrecentlyreturnedfroman LDS mission and engages in religious discussion with a non-LDS co-worker dur-ing the lunch hour. A supervisor overhears the discussion and tells the returned mis-sionary that he cannot proselyte or discuss religion with co-workers. *TitleVII does not prevent consen-sual religious discussion in the workplace. If the discussion causes disruption in busi-ness operations or if a co-worker is unilat-erally imposing his religious beliefs on another co-worker, a supervisor may take corrective action. •Anemployerofacertain faithpro-motes only employees who share her reli-gious affiliation and beliefs. *TitleVII prohibits employers frombasing employment decisions, including promotion or advancement, on religious affiliation or non-affiliation. •A co-worker occasionally teases anLDS employee about alcohol. Although the LDS employee tells her colleague to stop, she continues to work and does not report it because the company has no for-mal reporting policy in place. Later, a manager begins to criticize the employee and frequently tries to get her to drink. The manager throws beer on her during a work party and laughs. * The company is probably not liable for a hostile work environment on the basis

Religious rites, rights and wrongs in the workplace

Christopher Snow

see RELIGION page 7

Three years ago, you and two of your friends had a great idea for a new compa-ny. You formed the company as a corpora-tion or a limited liability company, you each provided initial capital, the company has commenced opera-tions, hired employees, sold prod-ucts or rendered services, has developed a good customer base and now the fruits of your labor are starting to become apparent. You and your fellow owners are finally getting around to contem-plating what will happen to the company if one of the sharehold-ers dies, goes bankrupt, gets divorced, wants to retire or is fired as an employee. These “triggering” events, and potentially other triggering events, can wreak havoc on a business and can result in strained relations among the owners. For example, what if one of the sharehold-ers dies? Do you want her spouse to

become your partner in her place? If she established a trust for her children and grandchildren before her death, do you want the trustee of the trust to be your

partner? To avoid these uncer-tainties, the business owners should consider adopting a Buy-Sell Agreement. The purpose of the Buy-Sell Agreement is to establish and formalize the owners’ (sharehold-ers’) agreement as to the rights and obligations of the company and the shareholders, if a trigger-ing event occurs. The Buy-Sell Agreement can be simple or it can be extremely complex. The

Buy-Sell Agreement can be a “Redemption Agreement” in which the company has the right and/or obligation to purchase the ownership interest of the departing share-holder upon a triggering event, or it can be a “Cross-Purchase Agreement” in which

the remaining shareholders have the rights and/or obligations to purchase the owner-ship interest of the departing shareholder upon a triggering event. Some companies have adopted a hybrid agreement which is a combination of a Cross-Purchase Agreement and a Redemption Agreement.

Insurance Although there are various triggering events in Buy-Sell Agreements, the death of a shareholder carries special importance to the heirs and estate of a deceased share-holder. Frequently, if the company or the remaining shareholders do not have insur-ance on the life of the deceased share-holder, the buy-out promises and require-ments are meaningless from a financial point of view. The purchase of life insur-ance on each of the shareholders is often the most efficient method of making cer-tain that funds will be available to fund the buy-out requirements upon the death of a shareholder. The company and the owner

should consult with experienced insurance professionals to discuss insurance options and costs.

Cross-Purchase Agreements The Cross-Purchase form of the Buy-Sell Agreement offers several advantages. If the triggering event is the death of a shareholder, the family of the deceased shareholder will have a tax basis equal to the fair market value of the deceased shareholder’s stock at the date of death, thereby avoiding any income tax conse-quences as a result of the sale. If the Cross-Purchase Agreement is funded by insur-ance, the life insurance proceeds received by the surviving shareholders are not sub-ject to income taxation. The surviving shareholders purchasing the shares of a deceased shareholder will be entitled to a tax basis equal to the purchase price of such shares. This will result in the pur-chased shares having a “stepped-up basis.” This stepped-up basis for the purchased shares should reduce future income taxes if the surviving shareholders later sell these shares. The insurance proceeds received by surviving shareholders are not subject to the corporate alternative minimum tax (AMT) which is applicable to C corpora-tions (but not S corporations or limited liability companies) and are also not sub-ject to the claims of the company’s credi-tors. The AMT avoidance and creditor protection exist because the proceeds are paid directly to the individual remaining shareholders and not to the company. The Cross-Purchase form of the Buy-Sell Agreement carries several disadvan-tages. The plan is difficult to administer if there are numerous shareholders who must buy a policy for each fellow shareholder. For example, for seven owners to purchase cross-purchase life insurance would require 42 (7 x 6) policies. The number of policies can multiply even further if disability cov-erage is also part of the Buy-Sell Agreement. Another disadvantage of the Cross-Purchase Agreement is that age or insur-ability can create a disparity in premiums. Younger or healthier shareholders may incur higher premiums to cover older and less healthy shareholders. A possible solu-tion to this drawback is to have the corpo-ration raise salaries to cover the premiums incurred by the owners. Inequities may persist, however, if shareholders’ marginal tax rates applied to the salary reimburse-ments are different. Additionally, in Cross-Purchase Agreement situations the cost of funding the insurance will be greater if the shareholders have a higher tax rate than the corporation.

Stock Redemption Agreements Under a Stock Redemption Agreement, the company owns the insurance policies on the lives of the shareholders. When a shareholder dies, the company buys the deceased shareholder’s shares with the insurance proceeds. A prime advantage of the Stock Redemption Agreement is that it is easier to administer for multiple share-holders. An additional advantage to the stock redemption structuring of the Buy-Sell Agreement is that the company will bear the premium differences associated with age disparities among shareholders.


The basics of business Buy-Sell Agreements

Bud Headman

see BUY-SELL page 8

In the last three years, the Utah legis-lature has focused on Utah’s immigration problem. Approximately 110,000 undocu-mented immigrants currently live in Utah, a number equivalent to the popula-tion of Provo. New state immigra-tion laws have affected employers, through new requirements to use an online employment verification sys-tem calledE-Verify.StartinginJuly2009, public contractors in Utah were required to use E-Verify oranother status verification system on new hires. Then in 2010, all Utah employers with 15 or more workers were required to use E-Verify toverify new workers. Despite the lack of civil fines to penalize employers, many employers were compelled to enroll inE-VerifyduetofearofwidespreadICEraids and audits. This year, Governor Herbert signed four immigration-related bills into law, including several that have captured international attention. 1. Work Permit Program. The most prominent new law is the Utah Immigration Accountability and Enforcement Amendment (Utah HB 116), which creates a state work permit program for undocu-mented workers currently in Utah. Under this law, the Utah Department of Safety would issue two-year work permits after immigrants pay a $3,500 fee, clear crimi-

nal background checks, and pass English tests. In an effort to deter a mass migration of undocumented immigrants toward Utah, only undocumented immigrants living in

Utah before May 10, 2011, would be eligible for the per-mits. Once the law is imple-mented, private employers who continue to employ undocu-mented workers may be subject to potential fines of $10,000 and a one-year business license suspension. The law is sched-uled for implementation on July 1, 2013, or sooner if the federal government grants a waiver. Any attempt by Utah to implement the law will likely

face constitutional challenges. 2. Immigrant Sponsor Program. The Pilot Sponsored Resident Immigrant Program (Utah HB 469) is similar to HB 116’s work permit program, except that it is for foreign workers currently outside of the U.S. The program would allow U.S.

citizens to sponsor an immigrant to enter Utah for a one-year period, if the sponsor agrees to pay $5,000 if the immigrant fails to leave. The planned implementation date is July 1, 2013. It is likely to face the same constitutional challenges. 3. Traffic Stop Inquiry/Arrest Verification. Utah HB 497 allows local police officers to inquire into immigration status during minor traffic stops if the per-son is unable to provide identification demonstrating lawful immigration status. Police officers are required to verify immi-gration status once an arrest is made. This law also potentially creates additional lia-bility for employers who provide transpor-tation or housing to employees. Encouraging or inducing illegal immigrants to reside in the state illegally or transporting illegal immigrants for commercial gain is a third-degree felony. The ACLU and the National Immigration Law Center have filed suit to enjoin implementation. 4. Commission. Utah HB 466 estab-lishes a Utah Commission on Immigration

and Migration to issue annual reports on the economic, legal, cultural and educa-tional impact of illegal immigration. The law also allows Utah to work with the fed-eral government and with the state of Nuevo Leon in Mexico to facilitate foreign migrant workers through existing federal visa programs. Each of these laws attempts to provide a unique Utah-based solution that differs from Arizona’s law. Organizations like the Salt Lake Chamber, the Sutherland Institute and the United Way have played an influ-ential role in moderating the discussion that created the law through the Utah Compact. Despite thoughtful debate within the state legislature, these state laws are unlikely to do much more than pressure the federal government to act to prevent a patchwork of inconsistent state immigra-tion laws.

Roger Tsai is an immigration attorney with the Salt Lake City law office of Holland & Hart.


the sky is not the limit.

As the largest law firm based in the Mountain West, we’re used to setting our sights high. It gives us an affinity for clients with similarly lofty goals. We’ve developed a focus on client service that guides us from the courtroom to the boardroom along the Wasatch Front and beyond.

To learn what a difference our attitude might make for you, contact Greg Lindley, at (801) 799-5800; 222 South Main Street, Suite 2200, Salt Lake City, UT 84101.

Salt Lake City Santa Fe Washington, D.C.

Jackson Hole Las Vegas Reno

Colorado Springs Denver Denver Tech Center

Boulder Carson City Cheyenne

Aspen Billings Boise www.hollandhart.com

Holland & HartSalt Lake City Office1994: 4 attorneys2011: 78 attorneys...and counting.

Utah’s immigration laws

Roger Tsai

of the co-worker’s actions. The harassment was neither severe nor pervasive and did not effect her terms and conditions of employment. The manager’s actions, likely meeting the severe or pervasive test, prob-ably give rise to a hostile work environ-ment. •Aco-workerrefusestosignawork-place pledge concerning tolerance of homosexuals because he believes it is against God’s word and immoral. His man-ager orders him to sign it and he refuses. He is fired on the spot. * The employer has an obligation to determine whether there was some type of accommodation available for the employ-ee’s religious belief. By firing him on the spot, the employer failed to make any efforts to find a reasonable accommoda-tion.

Listed among the Mountain States Super Lawyers Rising Stars Christopher B. Snow represents management in federal, state, and administrative employment matters. He has extensive experience in the areas of wrongful termination, reduction in work-force, Civil Rights (Title VII, Age Discrimination in Employment Act, and Americans with Disabilities Act), Fair Labor Standards Act, Family Medical Leave Act (FMLA), OSHA violations, and qui tam whistleblower actions. His experience also encompasses the enforcement of non-compete contracts and claims for trade secret misappropriations and trademark infringement. Snow chairs Clyde Snow’s Employment Law Practice Group and fre-quently writes articles for the group’s news-letter, Business as Usual.

RELIGIONfrom page 5


The company will not recognize income for tax purposes when it receives the insurance proceeds. The company must, however, consider the effect of the entire transaction (proceeds received and redemption accomplished) on its earnings and profits. The earnings and profits will increase with the life insurance proceeds received and decrease as a result of the stock redemption, so the company must attend to the overall net effect on earnings and profits and consider how that might affect the dividend policy to shareholders. A significant disadvantage of the stock redemption form of the Buy-Sell Agreement is that the remaining shareholders do not get the benefit of a step-up in basis when the company purchases the deceased share-holder’s shares. Although the surviving shareholders have an increased percentage ownership in the company as a result of the company’s redemption of the deceased shareholder’s shares, they do not acquire any additional shares. For example, if there were three shareholders each owning 200 shares there would be 600 shares outstand-ing and each shareholder would own one-third of the company. If one shareholder dies and the company purchases (redeems) the deceased shareholder’s shares, there would be 400 shares outstanding, and the remaining two shareholders would each continue to own 200 shares, but now their 200 shares would represent one-half rather than one-third ownership of the company. Compared to the Cross-Purchase Agreement, the Stock Redemption struc-turing will create greater capital gains upon the ultimate disposition of shares if made before death of the remaining share-holders.

General Provisions of the Buy-Sell Agreement

Issues that should be covered by the Buy-Sell Agreement include, but are not limited to, the following: • Triggering Events. The agreementshould define with specificity those events that are triggering events which (i) require the company or the remaining shareholders to purchase the shares of the departing shareholder; (ii) give the company or the remaining shareholders the option to pur-

chase the shares of the departing share-holder; or (iii) require that the departing shareholder or her estate sell her shares to the Company or the remaining sharehold-ers. • Valuation of the Company. Thedetermination of value of a departing shareholder’s shares is possibly the most important issue to deal with in the Buy-Sell Agreement. The consideration of the actual value of the company or how the value will be determined can be complex. There are a variety of valuation alterna-tives that are typically used in Buy-Sell Agreements and there is no right or wrong way to value the company. When drafting the valuation provisions of the Buy-Sell Agreement, each shareholder should con-sider that if he is a departing shareholder, he will want the valuation to be as high as possible. If he is a remaining shareholder, he will generally want the valuation to be as low as possible. Some of the valuation alternatives are: • Agreed-Upon Value Approach.Typically, if the shareholders use an Agreed-UponValue,theshareholderssetavaluation price when they initially enter into the Buy-Sell Agreement. Thereafter, a new price is generally set once per year. The disadvantages of this valuation meth-od are (i) often the shareholders don’t actu-ally set a new valuation and the last agreed-upon valuation may be several years old; (ii) agreed-upon value and actu-al value may be significantly different; and (iii) some of the shareholders may not agree upon a new valuation. I represented a shareholder in a business divorce where the agreed-upon value would have given the departing shareholder $4,000,000 but the actual value of the departing share-holder’s shares (based upon an indepen-dent appraisal) was $1,750,000. The differ-ence between the agreed-upon value and the actual valuation cost the parties thou-sands of dollars in legal fees and months of negotiations. • Appraisal Approach. The appraisalmethod is likely the most accurate valua-tion method, but is also the most expen-sive. However, for a company that has adequate resources, the cost is worth the added protection to all parties in obtaining a fair and proper valuation. Further, a trig-gering event does not occur often in the life of a company so the cost of an apprais-

al should not be a frequently recurring expense item. The Buy-Sell Agreement can include a variety of provisions relating to the appraisal, including (i) a procedure as to whether there will be more than one appraiser (one for the departing share-holder and one for the company or the remaining shareholders); and (ii) how the appraiser will be appointed. • Valuation Formula Approach. Thevaluation formula approach provides that an agreed-upon financial formula will be used to value the company. There are a variety of formulas used in Buy-Sell Agreements, including (i) adjusted book value; (ii) capitalization (multiples of earn-ings); or (iii) multiples of EBITDA. In a recent transaction the valuation formula was extremely complex based upon a com-bination of historical and projected earn-ings and each of the shareholder’s subjec-tive opinion as to the value of the company. Each component of the valuation formula was given a different weight in the overall valuation formula. Luckily the formula was figured out by the finance majors and not lawyers. •HowToFundtheBuy-Out.Onceavaluation method has been determined, the next important issue is to determine how the buy-out payment will be funded. If the Buy-Sell Agreement is a Redemption Agreement, the company is responsible for paying the purchase price for the shares of the departing shareholder. If the agreement is a Cross-Purchase Agreement, the remain-ing shareholders are responsible for paying the purchase price of the shares of the departing shareholder. If the triggering event is death, the buy-out can be funded by life insurance. If the triggering event is not the death of a shareholder, there is no insurance to fund the buy-out. In most instances neither the company nor the remaining shareholders have the liquid assets immediately available to fund the purchase price if insurance is not available. If heirs of a deceased shareholder need cash or other liquid assets to pay estate taxes or to fund their living expenses, the inability of the company or the remaining shareholders to fund the buy-out can be devastating. If the triggering event is death, and if the entire purchase price is funded with insurance, then payment terms are not a significant issue. However, (i) if insurance

is not obtained; (ii) if insurance is initially obtained but later dropped; (iii) if the pur-chase price for the shares of the departing shareholder is significantly greater than the insurance benefits available; or (iv) if the triggering event is not death, then it is important for the company or the remain-ing shareholders to have the right to pay the purchase price over a period of years. Frequently, Buy-Sell Agreements provide that the purchase price (if not funded by insurance), is payable over a three to 10-year period with payments made monthly or quarterly. In most cases, inter-est accrues at a reasonable rate on the unpaid portion of the purchase price and the shares of the departing shareholder are used as collateral for any unpaid purchase price obligation.

Conclusion Whether a Redemption Agreement or a Cross-Purchase Agreement should be selected by a particular company and its shareholders is dependent upon many fac-tors, including but not limited to, the costs of insurance, tax ramifications of the receipt of insurance proceeds, the com-plexity or ease of acquiring insurance and administering the Buy-Sell Agreement, and the desire to obtain a stepped-up tax basis for the shares of the departing share-holder. A company and its shareholders who are contemplating adopting a Buy-Sell Agreement should work with a team of professionals including legal counsel, accountants and insurance professionals.

A. O. (“Bud”) Headman of Cohne Rappaport & Segal has more than years of business-focused legal experience. Headman accu-mulated his legal experience as a member of the Utah State Bar Association serving on the Securities, Business Law, Administrative Law, and Continuing Legal Education committees and serving as the chairman of the Legislative Affairs Committee between 1990 and 1994. His membership with the American Bar Association included sections on Business and International Law. In 1977 Headman was admitted to practice in Utah and the U.S. District Court. Additionally, he was admitted practice in the District Court of Arizona, the U.S. Supreme Court and U.S. Court of Appeals, Tenth Circuit, in 1992 and 1993 respectively. Headman received his B.S. from the University of Utah in 1974 and remained there to earn his J.D. in 1977.

BUY-SELLfrom page 6

GET OUT OF LINE

F i r s t G o v . g o vThe official web portal

of the Federal Government

For government information by phone, call 1-800-FED-INFO (that’s 1-800-333-4636).

U.S. General Services Administration

Now you don’t have to wait in line for government services and information because now the government is officially online atFirstGov.gov. Lose the wait.

2 column x2 gray 3/4/04 1:27 PM Page 1


A client recently contacted me because his business had been sued over a contract it entered into with another company. Notably, the other company sued my cli-ent, individually, in addition to his busi-ness on the sole basis that my client was the owner and manager of the business. My client expressed his confusion as to why he was being sued personally for a contract entered into by his business. His business is a limited liability company and he did not sign a personal guaranty. Accordingly, he did not believe that he could be held personally liable for a contract entered into by his business. He was con-cerned about his potential per-sonal exposure in the matter. I explained that if the plaintiff wins the lawsuit and obtains a judg-ment, the business and he are both responsible for paying the plaintiff its judgment. Consequently, if the business does not have enough assets to pay the judgment, the plaintiff can garnish his per-sonal bank account or foreclose on his other personal assets to collect the judg-ment. This article reviews the counsel I gave my client regarding how a business owner can be held personally liable for the debts of his or her business. Limited liability protection is one of the greatest benefits a business entity can provide to its owners. Most business enti-ties provide limited liability, including corporations and LLCs. Other business entities, such as general partnerships and sole proprietorships, do not offer the own-ers limited liability. The “limited liability veil” protects the business owner’s per-sonal assets from the business’ creditors. Specifically, limited liability means the business owners are not personally liable for the business’ debts or liabilities. For example, a shareholder of a corporation

does not have to repay a loan taken out by the corporation or pay the damages result-ing from an automobile accident caused by one of the corporation’s employees. Thus, the owners’ personal assets, such as their homes and bank accounts, cannot be reached by the business’ creditors. Accordingly, the owners’ exposure to lia-

bility is generally considered to be limited to their initial invest-ment. However, such generalities are overly broad and tend to fade when applied to specific situa-tions. As a practical matter, an own-er’s potential liability sometimes is not so “limited.” When a small corporation or LLC decides to raise funds by borrowing, cau-tious creditors will require the major shareholders or members to personally guarantee the com-

pany’s obligations. In that circumstance, the business owner is clearly on the hook. An individual owner is also liable for his or her own torts (e.g., negligence resulting in an auto accident), even if done in the scope of his or her employment for the company. The doctrine of vicarious liabil-ity (liability of an employer for an act or omission by an employee) only adds a defendant; it does not relieve the employee of personal liability. In addition, there are various judicially created doctrines that may be applied to extinguish the owner’s limited liability. Although the courts are extremely reluc-tant to apply the doctrine, the limited lia-bility veil may be “pierced” if a court finds that the owners disregarded the business entity by operating the company as their “alter ego.” This doctrine is known as “piercing the corporate or limited liability veil.” It means the business’ creditors may sue the business owner personally for the

business’ debts. If the creditor wins the lawsuit against the business owner, the business owner is personally responsible to pay the judgment or else the creditor may enforce its judgment against the busi-ness owner. Utah courts consider several factors in determining whether to pierce the veil and hold a business owner personally liable. One factor Utah courts consider is whether the business entity was adequately capital-ized. Undercapitalization of a one-owner entity may lead to the limited liability veil being pierced. Thus, a business should be properly capitalized so that is able to pay its obligations. Courts also take into con-sideration whether the use of the business is to evade a personal obligation of the business owner, to perpetrate a fraud or a crime, to commit an injustice, or to gain an unfair advantage. Another factor courts consider is whether the business observed its business formalities. Thus, a business should hold an organizational meeting when the busi-ness is first organized, adopt bylaws for a corporation or an operating agreement for an LLC, issue certificates for stock or clearly provide documentation that the shares are uncertificated if the entity is a corporation, maintain complete business and financial records, hold regular annual meetings and keep minutes, file business income tax returns, ensure named officers and directors are involved and play a role in the business, file annual business renew-als with the state, adopt resolutions reflect-ing approval of all major corporate actions (even LLCs should take steps to document action by appropriate records), pay divi-dends when possible and maintain arm’s length relationships among the owner and the business.

In addition, Utah courts consider whether the business owner commingled his or her personal funds with the business. Therefore, a business owner should main-tain separate bank accounts for the busi-ness and his or her personal accounts. In addition, the business should not pay the owner’s personal bills or personal living expenses with business funds and the busi-ness owner should not use the company credit card or funds for his or her personal purchases. This discussion should not be taken to mean that limited liability is easily lost. That is not the case. Limited liability is the essence of a corporation and LLC. On the other hand, it is a risk which should not be minimized or over looked. If you operate the business in a reasonable and business-like manner and follow the guidelines above, you should enjoy the protections of limited liability.

Casey Jones is an attorney at Strong & Hanni Law Firm and a member of the business group at Strong & Hanni. His primary role is to assist clients with legal issues in the areas of business, tax, real estate and estate planning. He is an active member of the Business and Securities Sections of the Utah State Bar. For additional thoughts and discussion, visit , strongandhanni.com. He can also be reached at [email protected] or (801) 532-7080.

How limited is your limited liability protection?

Casey Jones

Subscribe or advertise 533-0556 www.slenterprise.com

We MeanBusiness


There are three things a business owner should do to prepare for the sale of a business. Two suggestions deal with accounting systems and financial state-ments. They apply right now. The third suggestion deals with due diligence docu-ments and corporate cleanup, which comes into play as you move closer to the sale process.

Use GAAP One of a buyer’s first few questions about your business will include “Are your financial state-ments GAAP?” GAAP stands for Generally Accepted Accounting Principles. There are a variety of different accounting systems. GAAP is the standard system in the United States and is the sum-total of rules, standards, and conventions that accountants follow in record-ing and summarizing transactions and preparing financial statements. GAAP financial statements are not the same thing as financial records maintained for tax reporting. Many small businesses keep their books based on a method, though not GAAP, that works just fine. But if you plan some day to sell your business, keep the follow-ing in mind: If you keep accounting records according to GAAP, your business will be easier to sell and will probably sell for a higher price. The reason is simple: buyers under-stand GAAP, and when they review a tar-get company’s financial statements, they expect to see financial information they can readily understand. Banks and other lenders also want to see GAAP financials. If your accounting system and financial statements are not GAAP, a buyer will need to learn and become comfortable with the accounting system you use and may require you to convert your financial statements into something that is GAAP.

Not having GAAP financials will place your business at a disadvantage to other target companies that do have GAAP financials. Buyers want to compare the financial condition of one investment opportunity to another. They want to com-

pare apples to apples. If you don’t have GAAP financials, you look more like an orange than an apple. If the sale you contem-plate will not occur for some time, talk to your accountant. Start keeping your books, or even a second set of books, on a GAAP basis. That step will pay off when you sell your business, borrow funds, or seek outside investment. It will also pay off in terms of how efficiently you operate your business. Provide the Buyer with Best

Possible Financial Statements Suggestion #1 was about using an accepted accounting system so the buyer can com-pare apples to apples. Suggestion #2 is about how you demon-strate to a buyer the financial performance of your company. Demonstrating financial performance is different than

financial results, i.e., how much revenue, profit, or cash flow your business gener-ates. What’s important is presenting finan-cial data that demonstrates how you reached your financial results. You may own a business that makes money hand over fist, but if you don’t have reliable financial statements that reflect those results, buyers will be less interested in purchasing your company and may pay less. If all other factors are equal, buyers pay more for target companies that have a good set of financial statements. A “good” set of financial statements can be described

on a spectrum ranging from “best” to “not-so-best.” On the “best” end of the spectrum are financial statements consisting of multiple years of balance sheets, income state-ments, and statements of cash flows, which have been audited by a quality indepen-dent accounting firm. A clean audit opinion means that inde-pendent, unbiased, qualified accountants have looked at your financial statements and your accounting methods and have concluded that your financial statements fairly present your company’s financial position. Buyers love clean audit opinions. A small business with audited financial statements is easier to sell than an equiva-lent business that does not have audited financial statements. The next best to audited financial statements are unaudited GAAP financial statements. As long as your financial state-ments are GAAP, buyers won’t flee in ter-ror from unaudited financial statements. If your financials are not audited, however, buyers will spend more time and money doing financial due diligence. The deal will move slower, and the buyer may want to decrease the purchase price. There’s also a greater chance the statements may be inaccurate if not audited. At the other end of the spectrum, and

by far the least desirable, are unaudited, non-GAAP financial statements. The deal will be much tougher to do and may even limit the number of potential buyers.

Anticipate Due Diligence Requests from Buyer

This suggestion applies in particular as your finger tenses on that deal trigger. Smart buyers will take a careful, in-depth look at your business. It’s called “due dili-gence.” You can add a lot of momentum to a deal if you anticipate the buyer’s initial due diligence request, pull together a bind-er of introductory documents, and clean up problems before they hit the buyer’s

radar. There are two good reasons to begin assembling due diligence documents on your own before the buyer makes a formal request. First, it will speed the deal up and make the transaction more efficient. If it takes two weeks rather than six weeks to pull together the documents that a buyer wants to review, you have moved four weeks closer to closing and receiving pay-ment. Second, it will increase the business value of the company. As you pull together a standard set of due diligence documents, it gives you a chance to spot and solve problems — such as expired business per-mits, lack of proper corporate documents, a lease that is about to expire — that could delay or otherwise adversely affect a deal. A lot depends on the first set of due dili-gence documents you send to a buyer. The first impression you want a buyer to have is: “This business looks well man-aged, I don’t see a lot of problems, and the owner seems to be careful and sophisti-cated. It will be easy to get this deal done.” This is the first impression you do not want a buyer to have: “What a mess! The books and records are sloppy. They forgot to reg-ister their principal trademark. I’m afraid to think of what other problems are lurking out there. This deal is going to be a night-mare.”

This article was adapted from Selling Your Business: How to Sell a Business in Good and Bad Times, by J. Scott Hunter and Matt Wiese. Hunter is chair of Clyde Snow’s Business, Mergers & Acquisitions, and Securities Practice Group. Hunter’s prac-tice is focused on two principle areas: capital market transactions and start-up companies and entrepreneurs. Wiese is with Prince Yeates and has more than 14 years of experience, with a practice primar-ily focused on federal taxation, estate plan-ning, trust and estate administration and business law.

Getting ready to sell your business

Matthew Wiese

The Utah Legislature recently passed Senate Bill 95, which went into effect May 10, 2011 and amended Section 704 of the Utah Revised Business Corporation Act relating to shareholder majority written consents to corporate actions taken without a meeting. Under the old version of Section 704, if a corporation’s shareholders approved a resolution by majority (not unanimous) written consent, the corporation was required to provide notice of the action to non-consenting shareholders 10 days prior to the corporation tak-ing the approved action. This 10-day notice period frequently creates delays in closing signifi-cant investment and exit transactions. Under the amended version of Section 704, a corporation may amend its bylaws to permit the shareholders to approve a resolution by majority written consent to be effective immediately, as long as the corporation provides notice of the majority written consent to non-consenting share-holders within 10 days after the signing of the consent by the holders in a majority of

the shares eligible to vote. I believe that many private Utah corporations would benefit from adopting amendments to their bylaws to include language permitting majority written consents to become effec-

tive prior to the mailing of notice to non-consenting shareholders.The Need to Amend Bylaws to

be Able to Rely on the New Provision

The provisions of revised Section 704 permitting actions by major-ity written consent to become effective immediately do not automatically apply to Utah cor-porations. Corporations must adopt amendments to their bylaws in order to opt in to the new pro-

visions. In order to opt in, a corporation needs to replace the Action Without a Meeting section (or similar section) of its bylaws with language similar to the fol-lowing: “Action Without a Meeting. Any action required or permitted to be taken at a meeting of the shareholders, other than the election of directors, may be taken without a meeting and without prior notice

if one or more consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote were present and voted. Directors may not be elected by written consent except by unanimous writ-ten consent of all shares entitled to vote for the election of directors. Such written con-sent (which may be signed in counterparts) shall have the same force and effect as a unanimous vote of the shareholders and may be stated as such in any articles or document filed with the Utah Department of Commerce, Division of Corporations and Commercial Code or other govern-mental agency. If the written consents of all shareholders entitled to vote are not obtained, the corporation shall give written notice of shareholder approval of an action without a meeting not more than ten (10) days following the later of the day on which (i) the written consents sufficient to take the action are delivered to the corpo-ration, or (ii) the tabulation of the written consents is completed. Such notice shall

be given to a shareholder who (i) would be entitled to notice of a meeting at which the action could be taken, (ii) would be enti-tled to vote if the action were taken at a meeting, and (iii) did not consent in writ-ing to the action. The foregoing notice shall contain or be accompanied by the same material that would have been required under the Act to be sent in a notice of meeting at which the proposed action would have been submitted to the shareholders for action.”

Bryan Allen is a member of the corporate transactions group at Parr Brown Gee & Loveless with emphasis on securities, intel-lectual property transactions, mergers and acquisitions and private investment funds. Allen assists private and public companies with securities offerings, public company compliance, mergers and acquisitions and corporate governance issues. Allen assists companies with licensing, joint venture and other transactions and agreements involv-ing intellectual property and other rights. He also advises hedge funds, commodities pools and other private investment funds on formation, compliance and other mat-ters.

A change in the Utah Corporations Act regarding majority written consents

Bryan Allen

Scott Hunter


2010 Book of ListsNow available for $85

Call 801.533.0556 to order today

The Enterprise.Online and mobile.

• Read the entire paper online as a PDF file, or on your iPhone/Android or iPad

• Access additional content posted daily

• Interact with advertisers, the editors and other readers

• Find and act on new business opportunities

• Network with potential partners, vendors and customers

• Print • Online • iPhone/Android • iPad

If you're a current subscriber and would like to upgrade your subscription to include online access to The Enterprise, please visit www.slenterprise.com and click on "Already a Subscriber?" on the right hand side of our home page. Fill out and submit the form and you will be contacted by our subscription department to verify your account status.

www.slenterprise.com

AVAILABLENOW!

Questions? E-mail Sarah Ujifusa [email protected]

Date post:	21-Feb-2016
Category:	Documents
Upload:	vaughn-taylor
View:	219 times
Download:	0 times