Articles Posted in Corporations

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Those endless representations and warranties in your acquisition agreement aren’t just for your merger and acquisition lawyer. Ignore them at your own risk.

Mergers and acquisitions in San Jose and elsewhere are a lot more complex than those of the past when deals were closed with a handshake. As acquisition documentation becomes more extensive, companies frequently turn to mergers and acquisitions attorneys to assist them with their transactions. One issue on which an attorney will focus deals with the representations and warranties of a seller.

A seller’s representations and warranties, which are the commitments that a seller will make to a buyer concerning the state of the seller’s business, make up one of the more extensive sections of an acquisition agreement and serve a number of functions. This is because they allocate between the buyer and seller many of the risks existing in the buyer’s business.

Representations allocate risk in a fairly straightforward manner. The seller will make a statement of fact regarding its business. If the seller’s statement is wrong, and the buyer is damaged as a result, the seller will compensate the buyer for any damages the buyer incurs.

An example helps illustrate the point. Let’s say that the seller states that it has paid all of its taxes, a very common representation. After the closing, the business that was sold gets hit with a sales tax audit, and is found to have underpaid its sales taxes. Because the seller’s representation was wrong (i.e., it hadn’t paid all of its taxes), the buyer, all other things being equal, can look to the seller for reimbursement for the amount of the additional sales tax liability.

The situation above describes the simplest form of risk allocation in an acquisition agreement. In this form, the seller bears the risk whether the seller knew there was a problem or not.

Some types of risk allocation shift risk only if the seller knew there was a problem. These representations, sometimes referred to as knowledge-qualified representations, allow a seller to escape liability in a representation if the seller did not know a problem existed.

In our sales tax example above, let’s say that the representation stated that the seller did not know of any nonpayment of taxes. Let’s also say that the seller’s officers were completely unaware that they had failed to pay any sales taxes. In that situation, the seller would not be liable for the sales tax liability.

Because acquisition agreements are prepared by lawyers, the concept of knowledge can mean different things. For example, does knowledge mean the subjective knowledge of the seller’s CEO, or the subjective knowledge of all of the seller’s employees? Does knowledge mean just what is in employees’ memories, or should employees be required to look through their files? If employees are required to look through files, should they also be required to look through other documentation, such as public records and other resources? For these reasons, it is critical that the concept of knowledge be defined so that the seller knows what they have to do to satisfy the representation, and both parties know how the risk is to be allocated.

What if the seller wants to allocate the risk of an item back to the buyer? When a seller makes a representation that he or she knows may not be entirely correct, the seller will disclose an “exception.” The seller provides this disclosure in a schedule commonly attached to acquisition agreements, known as a “disclosure schedule,” or a “schedule of exceptions.” Unless the agreement specifies otherwise, a buyer cannot recover for damages for an item that has been disclosed.

Going back to our sales tax example, if the seller knew there was a problem, the seller would describe the problem in a disclosure schedule. The seller would say something like “Seller underpaid its sales tax liability for the periods 2008 through 2010, which liability seller believes to be between $50,000 and $75,000.” The buyer could not thereafter bring a claim for reimbursement for the later assessed tax liability as a result of the seller’s disclosed exception.

As I mentioned above, representations and warranties, and their accompanying disclosures, are heavily negotiated. One point of contention is whether the risk of an item, even when disclosed, should be allocated to the buyer. Buyers with sufficient leverage will force the seller to remove the disclosed item, or affirmatively accept the risk associated with the item. Another point of contention is what the concept of knowledge means, and whether knowledge can qualify a particular representation. For these reasons, it is critical to spend a lot of time understanding the representations and warranties of any acquisition agreement so that you can understand the risks that may exist for you in a deal.

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Cut the cost of your old unpaid traffic tickets in half! If one of your new year’s resolutions involves clearing out that old traffic ticket that you either failed to show up in court for, or just didn’t pay on time, a new Santa Clara County amnesty program may be right for you. From January 1, 2012 through June 30, 2012 you may be able to get rid of an outstanding traffic case that was due in full before January 1, 2009 by paying 50% of the fine. The case must have been within Santa Clara County, which includes the cities of Santa Clara, San Jose, Sunnyvale, Cupertino, Milpitas, Monte Sereno, Palo Alto, Mountain View, Los Altos, Los Altos Hills, Saratoga, Campbell, Los Gatos, Morgan Hill, and Gilroy.

To determine whether you are eligible for to participate in the amnesty program or to find out more information, you may go to the Santa Clara County Court’s website .

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With the new year comes new laws, and businesses in the San Jose area should be aware of the new California employment laws that are on the books in 2012. Ensuring compliance with these new laws is good for the bottom-line, as it will make for happy employees, who will in turn make for satisfied customers. Making sure that your business complies with the new laws put on the books each January 1st may help your company avoid employment-related litigation.
Hiring Practices
Starting in 2012, employers may no longer obtain consumer credit reports about employees and job applicants. There are exceptions to this law, particularly for positions requiring access to bank or credit card information and other personal information, positions that include access to $10,000 or more during the daily course of business, positions involving signatory authority, and management positions.
Also, at the time of hire, employers must now provide notice to new nonexempt employees of the following information: pay rate; overtime rate; form of pay (hourly, salary, commission, other); a list of allowances that are included as part of the minimum wage; name, principal address, and telephone number of the employer; and the regular pay day designated by the employer. The employer must provide written notice to employees within seven days of any changes to this information.
Finally, the penalty for willfully misclassifying employees as independent contractors is now between $5,000 and $25,000. This five-fold penalty increase underscores the importance of properly classifying new hires.
Employee Leave
All employers with five or more employees must maintain and pay for a group health plan for any eligible female employee who takes Pregnancy Disability Leave for up to a maximum of four months during a 12 month time period. These benefits must remain at the same level as though the employee had been working during the leave. These requirements extend beyond those of the federal Family and Medical Leave Act.
The law regarding organ and bone marrow donor leave has also been clarified for 2012. During a one year period, employees are allowed 30 days of leave for organ donation and 5 days of leave for bone marrow donation, with the law now stating that the leave days are to be calculated as business days.
Discrimination Law
The California Fair Employment and Housing Act (FEHA) has been amended to prohibit employers from discriminating against employees based on genetic information, including genetic tests of an employee or his or her family members, and the existence of a disease or disorder in family members of the employee. FEHA differs from a similar federal law in that FEHA applies to employers with five or more employees, while the federal law covers employers with 15 or more employees.
FEHA has also been updated to clarify that discrimination on the basis of gender identity or gender expression is prohibited. Previously, only the term gender identity was used. Gender expression is defined as, “a person’s gender-related appearance and behavior whether or not stereotypically associated with the person’s assigned sex at birth.” Employee dress codes must allow employees to dress in a manner consistent with both the employee’s gender identity and gender expression.
Additionally, health care service plans and health insurance policies issued to California residents must provide equal coverage to domestic partners as that provided to spouses. While this has been the standing policy in California, the new law ensures that employers located outside California and with a majority of employees located outside of California must comply with California law as it pertains to California residents.
Wage and Hour Laws
Employees alleging violations of the minimum wage may now recover liquidated damages as a result of a complaint heard before the Labor Commissioner. Liquidated damages, which serve to punish the employer, are permitted in an amount equal to the unpaid wages owed to the employee. Put simply, for every dollar an employee is awarded in unpaid wages, the Labor Commissioner is authorized to award an additional dollar in penalties. Previously, employees could receive liquidated damages only after filing a complaint in civil court.
In the prevailing wage arena, which applies to specified state or federal public works contracts, the minimum penalty for wage violations has been raised from $10 to $40 per day for each worker paid less than the prevailing wage, and the maximum has been raised from $50 to $200.

When it comes to new year’s business resolutions, some cannot fall by the wayside. Resolving to make sure that your business is in compliance with the new California employment laws for 2012 is an easy resolution to keep, and one that will help keep your employees happy and avoid costly litigation.

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Mileage Rate:

Keeping up to date with the standard mileage rate is important for me as a business lawyer because I often drive to meetings, as well as for my small business clients in San Jose and all over Silicon Valley who will be using that rate to figure out their tax deduction for miles driven in the operation of their businesses. In addition, it is also usually the rate at which businesses agree to reimburse their employees for miles driven while on the job. The IRS has confirmed that the standard mileage rate for the use of business vehicles in 2012 will remain the same as it was for the final six months of 2011, at 55.5 cents per mile (which was higher than the previous 51 cents in early 2011). The mileage rate for medical and moving expenses actually goes down by half a cent to 23 cents per mile, but the mileage rate used when driving for charity is still unchanged at 14 cents per mile.

401(k) Contribution Amount:

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Many profit-driven companies in California interested in providing a positive social and environmental impact experienced the problem of maintaining a fiduciary duty to their shareholders and being charitable and green at the same time. Effective January 1, 2012, this should be less of a problem as the state has adopted two different types of corporations – the “flexible benefit corporation” and the “benefit corporation” – offering businesses in Silicon Valley and elsewhere in California, the opportunity to operate with a view toward both increasing shareholder value and fulfilling socially beneficial goals.

The primary differences between the two corporations, often called “B corporations“, lies in the purpose flexibility allowed, and the extent of disclosure required. Greater flexibility means greater disclosure.

Purpose

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During the past few months, we have seen an increase in hiring from small startups and larger corporations here in San Jose and other parts of Silicon Valley. At this time of year, when companies are about to review Forms W-2 and 1099 for their workers, it is a good time for a reminder about California worker reporting requirements. In California, when a company hires a new employee, it is required to report this to the Employment Development Department (the “EDD”) within 20 days of hire, regardless of whether the employee is full-time or part-time, or the amount of compensation.

If a business hires an independent contractor and pays the contractor more than $600, or enters into a contract with that individual for $600 or more, within a calendar year, the business is required to report the hiring to the EDD within 20 days of making a payment. Although the hiring of a new employee need only be reported once, the hiring of an independent contractor must be reported every year. However, if a company contracts with another business that provides a tax identification number rather than a social security number, the company hiring that business does not need to report to the EDD.

It is wise for a company to report to the EDD contractors it expects to pay in January of each year (e.g. continuing contracts) when the company prepares and reviews 1099s for the prior year. There is no penalty if a company reports a contractor and then the contractor does not actually perform services in the new year. However, the EDD could assess a penalty against a business for each failure to report a contractor within the required time frames. Source: Spidells California Taxletter Vol. 33.10.

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Starting in April, 2012, the EDD will calculate an ex-employee’s unemployment claim differently than it does now. Currently, the EDD calculates the unemployment claim based on a lookback period of one year ending two quarters prior to the termination of employment. In April, 2012, the EDD will calculate the claim based on a lookback period of one year but ending one quarter prior to the termination of employment. This is a good reason to convert to online filing if you haven’t already. For online filers, the EDD will already have this information and the change will be seamless to your business. However, if you do not file online, the EDD may not yet have your wages report for the prior quarter, or may simply not have processed it yet. In that case, you will receive a request for wage verification, and the employee will receive a request for proof of wages claimed. As the employer, you will have 10 days to complete the form and mail it back.

Source: Spidells California Taxletter Vol. 33.11, November 1, 2011, pages 130-131.

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As always, be careful when dealing with employees. I recently was contacted by a small business owner in Sunnyvale who was irate because her previous business attorney assisted her with a new alternative workweek schedule and all the employees agreed. Then, years later, they had to lay off some employees and the terminated employees just made a claim for overtime for all the hours worked over eight in a day. Because the alternative workweek was not agreed to in a secret ballot, it was not upheld by the Labor Board and her company had to pay significant amounts to several ex-employees.

In the past few years, I’ve noticed that more and more small businesses and corporations in San Jose and throughout Santa Clara County have moved a portion, or all, of their employees from a standard five day, eight hours a day workweek to a four day, ten hours a day workweek. A company that is interested in implementing this type of alternative workweek schedule must go through the proper process for implementing the schedule, or the company may risk misclassifying employee hours worked and end up paying penalties and fines for the misclassification. If an alternative workweek schedule is implemented correctly, an employer may be exempt from paying overtime to employees working up to ten hours a day, four days a week. Alternative workweek schedules can be proposed for an entire work unit or as a part of a menu of options for a work unit.

In California, there are several actions that must be taken before an alternative workweek schedule can be adopted by a company. A company cannot simply impose the new schedule on its workforce. One required action is for the company to hold a meeting with employees who would be affected by an alternative workweek schedule. The meeting is held so that the employer can discuss the effects of the alternative workweek on the affected employees and the employees can vote on the proposed schedule.

The following are some steps that should be taken before the vote can take place:

• The employer must first provide a written notice to the affected employees. The notice will inform the employees that the company would like to adopt an alternative workweek schedule, and invite them to attend a meeting to discuss the effects of the alternative workweek and vote on the proposal. The written notice, which must be provided 14 days before the actual vote, should disclose the effects of the proposed arrangement on employees’ wages, hours and benefits, and include meeting logistics.

• The proposed alternative workweek schedule must be adopted in a secret ballot election by at least two-thirds of the affected employees in the work unit. The secret ballot election must be held during regular working hours at the employees’ work site.

• Ballots for the election can only be cast by the affected employees.

• The results of the election must be reported by the employer to the Division of Labor Statistics and Research within 30 days after the results of the vote are final. The report must be given in letter format and must include the date of the election, a final tally of the vote (number of “yes” and “no” votes), the size of the unit considering the change to an alternative workweek, the nature of the employer’s business, contact name and phone number. This information becomes public record.

• The letter must be sent to the following address:
Division of Labor Statistics and Research
455 Golden Gate Avenue, 9th Floor
San Francisco, California 94102

• If a work unit votes in favor of an alternative workweek schedule, employees who are affected by the change may not be required to work those new work hours for at least 30 days after the announcement of the final results of the election.

If an employer adopts an alternative workweek schedule consisting of four, ten hour days, the employer must still pay overtime pay of 1½ times the hourly rate for any hours worked in excess of ten hours per day up to twelve hours, and double time for any hours worked over twelve. The employer must also have a standard five days, eight hours schedule available for employees who are unable to work the four day schedule.

If you have any questions about implementing an alternative workweek, talk to a professional with experience in this area and don’t assume that if all the employees agree everything will be fine.

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Whether your company is a large manufacturer corporation in San Jose or a small service partnership in Los Gatos, you will eventually be forced to deal with terminating an employee. Terminations can be especially daunting because they are one of the most common reasons companies are sued. Therefore, whenever possible, it is important to plan and prepare for a termination before actually firing the employee.

I recently helped an LLC in Santa Clara set up a progressive discipline plan for their company in order to set up systems to assist management and employees before someone gets to the termination stage. Before an employee is fired, many companies use a form of progressive discipline when dealing with employee problems. Under progressive discipline an employee receives greater disciplinary measures when employment continues to be unsatisfactory. It is imperative that all disciplinary actions are documented in writing. If a system of progressive discipline is used, all managers should be trained on that system. If managers are not properly trained, a disgruntled employee may have a stronger claim for wrongful discharge than if the system had not been used at all. Whether a system of progressive discipline is used or not, it is critical that all disciplinary actions be documented.

If a termination is inevitable, you should have a plan in place before firing an employee. However, there are times when you must fire an employee immediately, without any prior planning, because he has done something that poses a threat to other employees, your company or your clients. Prior to termination, you should review any termination procedures in the employee handbook, to the extent they exist, to ensure that your company is following its own procedures. If you are worried about an employee making a claim against the company upon termination and you want to request the employee release the company from all claims, you should contact an attorney to assist you in preparing a severance agreement.

On termination, you must provide the former employee with the final paycheck including any accrued but unused PTO or vacation pay, a change of status notice, and the EDD pamphlet “For Your Benefit, California’s Programs for the Unemployed.” If the employee is a shareholder or option holder, you should review all applicable documents prior to the termination for notices or deadlines related to termination of employment. However, do not give the employee legal or tax advice regarding those documents or their rights.

When conducting a termination, conduct it in a neutral, private place such as a conference room. Have the final paycheck and change of status notice ready for the meeting. If you are offering a severance agreement, have that agreement prepared as well. Many employees will not sign the severance agreement immediately so be sure to give them the allotted time in the agreement to sign it and don’t give the employee any severance payments until the severance agreement has been signed, or 8 days later if the employee is over 40 and therefore subject to age discrimination rules.

You should always have two managers present during a firing. During the meeting, tell the employee within the first few minutes that he is being fired and tell the employee why he is being terminated. Although you do not need a reason to fire an at-will employee, you may not do so for the wrong reason (e.g. discrimination), so be careful in what you say. Also, if you say the termination is a result of restructuring, but the reason is really poor performance, the inconsistency may be used against you if the company is sued. Do not argue with the employee and do not be so complimentary that the employee wonders why he is being terminated. You are not required to give employees a written reason for termination. However, if you decide to, be sure that your legal counsel reviews those reasons. Avoid any reference to anything that could be considered evidence of discrimination, especially if you are terminating someone who is in a protected class. Always be courteous to the employee. You should also explain any benefits, such as COBRA, that the employee may receive. Have someone take notes during and after the termination to document the process and what was said at the meeting. Lastly, you should remind the employee of any continuing obligations to the company, such as confidentiality.

Once an employee has been terminated, be sure to get any company keys, cell phone or laptop that the employee had. Also be sure to change phone codes, computer passwords, alarm codes or other passwords that the employee may have had access to.

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Silicon Valley is experiencing a “war for talent,” even as the nation struggles with unemployment. The Bay Area has not been unaffected by unemployment, but with the number of high technology startups based in cities such as Palo Alto, Mountain View, San Jose, and Santa Clara, companies are finding themselves competing for talent. The value of human capital is greater than ever, which is why it is essential for companies to perform assessments on their employees. Employees can be a company’s most valuable asset or its greatest liability.

Conducting employee performance reviews is one of the most important and often most dreaded tasks of management. Employee reviews take a lot of time and cause a lot of stress for managers even if the reviews are generally positive. Many employers try to avoid employee performance reviews. However, regardless of the size of your company, not conducting performance reviews can really hurt you both in productivity and in an increased risk of employment-related litigation.

I recently worked with a San Jose consulting business that was sued by a former employee of the corporation. The company had a salesperson in their Mountain View office that was drastically underperforming, but had never documented those failures in any way. The corporation eventually fired her and the salesperson then sued the company for wrongful termination. An employee file documented with poor performance reviews could have made that case go away much faster, and kept the settlement offers much lower. Below are some suggestions to make the most out of review time.

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