Springfield Business Journal Articles


Avoiding The Courthouse

Owning or operating a business today involves much more than just selling a product or service and keeping customers happy. Management is spending increasing amounts of time complying with new governmental regulations. The last thing any business needs on top of the already burdensome requirements imposed by government fiat is to find itself a defendant in a lawsuit. Here are some tips for staying out of the courthouse so that you can concentrate on the business of growing your business.

1. Shareholder Agreements: Many businesses have investors or more than one owner. As we all learned on the playground during childhood, people don't always get along. Minority shareholders may not like how the company is being run and might file suit to enforce their minority rights. An angry co-owner might sell his or her interest to your competitor or worst enemy. The best way to avoid these problems is with shareholder agreements or buy-out agreements. These agreements can include rights of first refusal that allow you to keep out undesirable new investors or owners. They can also include pre-determined buy-out prices – either set by formula or through stipulated sums. The permutations and possibilities are almost endless. Take the time to address these issues now rather than leaving them for a judge or jury to decide.

2. Soliciting Investors: More often than not, businesses are started or grown through management pounding the streets to raise money. Failure to strictly observe state and federal securities law, however, may give disgruntled investors an enormous advantage in any future dispute, and may also give them an incentive to file an otherwise marginal lawsuit. Therefore, consult legal counsel familiar with this area of the law before soliciting money from potential investors – even if they are family or close friends. Chances are that applicable regulations are not at all onerous. However, it's best to do it right from the start rather than refunding all the money you received plus more.

3. Trade Names: Just because you incorporate your business or file for an assumed name does not necessarily mean that you have the right to use that perfect name for your business. Spend the time to make sure that your trade name is available or risk the chance that the time and effort spent in promoting that name will be wasted when you are successfully sued for infringement. The easiest way to do this is with a trademark search. Again, consult with a lawyer experienced in this area.

4. Unhappy Employees: The most likely lawsuit you will face will be from your own employees. Reduce the chances of these lawsuits by becoming familiar with basic human resource law. Obvious areas of concern include discrimination and sexual harassment. It should go without saying that these should be strictly avoided. However, for those who grew up in a different era, be warned that previously acceptable conduct is now actionable. Spend a day and attend one of the many seminars that are periodically put on for business owners on this topic. Also, familiarize yourself with the growing number of state and federal statutes that govern the employment relationship. In my experience, many business owners simply don't know about many of the recent statutes – such as the Victim's Economic Safety and Security Act. A summary of some of the more recent Illinois employment laws can be found in my January 2004 article. Finally, take the time and prepare an employee handbook that sets out all of the major employment issues. If you strictly comply with a well written handbook, you should gain the upper hand in any suit filed by an employee or former employee.

5. Form Contracts: Many businesses use written contracts regarding the services or products it sells. However, use standard or form contracts with caution. Each business is unique, and few (if any) "standard" documents provide the desired level of protection for your business. For example, a well written purchase order can substantially increase your chances of collecting on a bad account without resorting to a lawsuit or avoiding a lawsuit from a disgruntled buyer. What warranties do you provide or exclude? Do your contracts provide for payment of legal fees if successful in a lawsuit? What are the terms of payment? Who bears the risk of loss if goods are damaged in transit? What might be right for the "generic" business might not be right for you.

6. Be Reasonable: Businesses exist to make money, not to litigate to "prove a point" or because of the "principle." Of course there will be times when, if sued, a business must fully and completely defend itself. However, if a reasonable settlement can be reached, that is often the best solution. Settlement offers finality on terms acceptable to you, rather than as determined by a judge or jury. Don't eschew settlement simply to prove a point.

by Thomas C. Pavlik, Jr.
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