Seller’s Remorse: Can You Get Your Company Back?

Starting, building, and then selling a business is the modern version of the American Dream. Many times, however, a business owner does not sell 100% of his stake in the company. Some transactions feature an arrangement where the new owner takes control of a majority stake in exchange for a lump sum payment, while the original owner retains a minority interest and continues to receive payments in some form. The seller will often remain with the company for a set period in some capacity, perhaps through a consulting agreement or other employment relationship.

While many of these transactions run their course with two satisfied parties, there isn’t always a happy ending. Unfortunately, the buyer may not be able to profitably manage the business, and the buyer’s ability to make any required continuing payments may be affected. Perhaps the buyer exaggerated its financial health or made promises regarding management strategies that it cannot keep.

The sale of a business is an inherently complex transaction, and the possible remedies available to a seller will always depend on the precise terms of the relevant agreements or other transactional documents. Nonetheless, there are a few legal theories that will apply to almost all business sales.

Rescission – This is an “equitable” remedy that a court may impose if the court finds that one or more grounds to rescind (or void) a contract exist. Grounds for rescission may vary by state, but the most common reason occurs when one of the parties has made misrepresentations about a material term of the contract. In such a case, the seller can argue that the buyer fraudulently induced the buyer into signing the sale documents. For example, the buyer of the business may have made inaccurate statements about the buyer’s financial condition, placing serious doubt on its ability to fulfill any continuing obligations to the seller. Rather than waiting for a seemingly inevitable bad result, a seller may be able to sue for rescission of the agreement(s) involved, and regain control of his business.

Anticipatory repudiation or anticipatory breach – If the buyer of the business has continuing obligations to the seller, and he makes an unequivocal statement that he will not be able to meet such an obligation, then the buyer has anticipatorily repudiated or breached the agreement. It is important to note that the statement cannot be merely doubtful or indefinite. The party must clearly state, through words or actions, that he will not perform according to the agreement. For example, if the buyer has stated that he will not make a payment by the specified date, then the seller does not have to wait for the deadline to pass. The seller can seek to have the contract rescinded immediately.

Breach of contract – A buyer may have simply violated one or more of the various, complex agreements comprising the transaction. While the buyer might have had a transactional attorney draft or review the sale documents, having business trial attorneys examine the operative agreements provides a fresh set of eyes to identify any issues that may have been overlooked. Trial attorneys may be able to craft an offensive strategy that will allow a seller to leverage his way into a more satisfactory situation.

Legal theories and procedures can vary depending upon the state or jurisdiction involved. A business seller should always consult with an experienced business trial attorney in his area to determine his options.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer,  Kansas City business litigation,  Kansas City employment litigation, Kansas City securities attorney, visit http://www.ggbtrial.com.

Non-Compete, Non-Solicit, and Confidential Information Agreements in the Securities Industry, PART FIVE

PART FIVE

Plan Ahead and Protect Your Interests

Many investment professionals do not fully comprehend the dramatic impact that a restrictive covenant can have on their books of business and their careers. They often assume that because things seem great at the time they are hired, their interests and the new firm’s interests will never diverge. Some firms believe that their employment agreements will always be enforceable, whatever their terms may be, and they do not properly consider the cost of actually enforcing the provisions. It is important that the investment professional and the firm each have their own counsel to advise them on issues involved, and to assist in the negotiation process. Using some foresight in drafting such agreements can result in less cost and frustration for both parties if (or when) the investment professional decides to move on.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

Saving Client Dollars with Requests for Admission

Requests for admission (“RFAs”) are concise statements of fact directed to the opposing party in a civil lawsuit. The opposing party must admit or deny each statement. Any statement not denied is treated as a proven fact in the case. In the federal and state courts of Kansas and Missouri, a party has 30 days to admit or deny RFAs. If not denied within the time permitted, the statement is deemed admitted.

RFA’s are cheap, effective and underutilized. They are an excellent device to narrow disputed issues at nominal cost, shorten depositions, and especially useful to obtain three categories of information.

1. Dates and chronology.

For example, the defendant in a failed transaction may request the following admission.

Admit plaintiff and defendant did not negotiate the asset purchase agreement before January 1, 2008.

Admit – Deny

If the plaintiff admits the request, then attempts to offer evidence of misrepresentations before January 1, 2008, the defendant may have grounds to exclude the evidence. As another example, a director defending a corporate negligence case may request the following admission.

Admit the defendant did not serve on the board of directors after January 1, 2008.
Admit – Deny
If the plaintiff admits the request, then seeks to hold the defendant responsible for board decisions after January 1, 2008, the defendant may have a factual defense based on this single admission.

2. Foundation for key exhibits.
For example:
Admit Exhibit 1320 is a true and accurate copy of the original document.
Admit – Deny
Admit Exhibit 1320 is a record of regularly conducted activity within the meaning of Rule 803(6) of the Federal Rules of Evidence.

Admit – Deny
If the opposing party admits these requests, he can no longer object to the authenticity of Exhibit 1320, nor can he raise a hearsay objection to Exhibit 1320. Trial attorneys should use RFAs to eliminate foundation objections for their most important documents.

3. Revealing baseless allegations.

Where a plaintiff has made allegations on information and belief, an RFA can be effective to show the allegation is a shot in the dark. For example:

Admit the plaintiff is aware of no witness who would testify the defendant was involved in preparing any Form 10-K for the Securities & Exchange Commission.

Admit – Deny
Admit the plaintiff is aware of no document that would prove the defendant was involved in preparing any Form 10-K for the Securities & Exchange Commission.

Admit – Deny
Admit the plaintiff is aware of no evidence that would prove the defendant was involved in preparing any Form 10-K for the Securities & Exchange Commission.

Admit – Deny
This trio of requests, at a minimum, will reveal the form of evidence the defendant can expect against her. However, if the plaintiff admits all three requests, the defendant may have grounds to strike parts of the petition or complaint. RFA’s can be used to keep opposing parties and lawyers careful with their claims.

Counsel should seek opportunities to expand their use of RFA’s, not only to improve discovery, but to save client dollars. Moreover, RFAs can focus the attention of opposing counsel to specific strengths and weaknesses, which may lead to early and productive case resolution.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

Non-Compete, Non-Solicit, and Confidential Information Agreements in the Securities Industry, PART FOUR

PART FOUR

Enforcement of Restrictive Employment Provisions

In conjunction with provisions regarding competition, solicitation, and confidentiality, most restrictive employment agreements will include language regarding the enforcement of those provisions. Specifically, most agreements state that a representative agrees that, in the event the representative breaches the agreement, the former employer will have suffered “irreparable harm” and will be entitled to preliminary injunctive relief. Irreparable harm is a prerequisite for a court’s determination that the former employer is entitled to an injunction (or court order) against the former employee that prevents the employee from competing, soliciting clients or employees, and/or using any confidential information of the employer.

If a firm believes that a former representative may have violated one or more provisions of an employment agreement, it will often send what is known as a “cease and desist” letter demanding that the former employee immediately stop any activities prohibited by the agreement. Many times, either directly after sending such a letter or without even doing so, the firm will retain an attorney to seek a temporary restraining order in the appropriate local court.

A temporary restraining order (TRO) is an emergency remedy that an allegedly harmed party can seek to protect its interest and maintain the status quo. Due to the “emergency” nature of the requested legal relief, courts may (and usually do) issue TRO’s without hearing from the defending party (in this case the former employee). As indicated by its name, however, a TRO is not a permanent prohibition, and only remains in effect until such time as the court has an opportunity to hear from both parties regarding the next stage of the injunctive relief process, the preliminary injunction.

If the court grants a party’s request for preliminary injunctive relief, the injunction generally remains in effect through the remainder of the litigation, and it may be eliminated, altered, or extended into a permanent injunction. If the former firm is a FINRA member (i.e. a broker-dealer) and the former employee is an associated person (i.e. a registered representative) under FINRA Rules, then the parties are required to arbitrate their dispute through FINRA Dispute Resolution (arbitration). This means that the firm will have to file a concurrent arbitration claim with FINRA at the same time the firm files a complaint or petition in state or federal court.

FINRA Dispute Resolution is unable to hear claims for injunctive relief, so the parties must go before an appropriate local court to determine whether any injunction will be issued. After the preliminary injunction hearing, the dispute shifts from the local court to a FINRA arbitration panel formed regarding the arbitration claim. The FINRA arbitration panel will then have the opportunity to hear the remainder of the case, and award any monetary damages or permanent injunctive relief, if warranted.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

Non-Compete, Non-Solicit, and Confidential Information Agreements in the Securities Industry, PART THREE

PART THREE

Confidential or Proprietary Information Provisions

Brokerage and advisory firms obtain and develop a large quantity of private and confidential information regarding their clients, products, compliance practices, and business methods. There is a great deal of regulation regarding the protection of client information, and firms have an interest in safeguarding certain information. To further that interest, they require their representatives to sign one or more documents acknowledging the confidentiality of certain information, and agreeing that the information is the property of the firm.

While the firm may be concerned about its responsibilities under Regulation S-P or the Gramm-Leach-Bliley Act, regulatory issues are not the firm’s only concern. A major motivation behind such clauses is to prevent a departing representative from taking information that may help them identify clients and the status of their accounts, their immediate investment needs, etc. when the representative leaves. Thus, the inclusion of such provisions is usually just as much for competitive reasons as it is to ensure compliance with information regulation.

Confidentiality provisions are also included in an effort to give certain information, such as client contact and account details, “trade secret” status for the firm. The overwhelming majority of states have adopted the Uniform Trade Secrets Act (or have a similar statute), which grants certain information special status as a “trade secret” if the information and circumstances surrounding its creation and safeguarding meet the statutory requirements. Assuming information does have trade secret status, then firms can include a claim for damages against a departing representative for “misappropriating” the information. This just means the former employee has taken the protected information without authorization and has used it for his or her own benefit.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

Non-Compete, Non-Solicit, and Confidential Information Agreements in the Securities Industry, PART TWO

PART TWO

The key distinction between a non-competition provision and a non-solicitation provision is that a “non-solicit” attaches to specific customers or individuals. While there is also a time period during which the non-solicit is in effect, such a provision does not restrict an investment professional from continuing to engage in the same or similar business as his former employer. It simply keeps the representative from soliciting individuals in which the former firm claims a protectable interest.

Clients

Non-solicitation clauses are perhaps the most commonly contested provisions in an investment professional’s employment contract. Although the language in these clauses can vary, the intended effect of such a provision is to prohibit a departing representative from “soliciting” clients that he or she served while the representative was with the former firm. To be enforceable, there must be a specified time period during which the prohibition on solicitation will be in effect. These time periods are generally from six months to two years. The longer the time period, the less likely it will be that a court would uphold the provision.

Employees

In addition to non-solicitation clauses related to clients, many firms will also include a prohibition on the solicitation of firm employees by a departing representative. These are called “anti-raiding” provisions because they seek to prevent a former employee (or his new firm) from “raiding” the former firm’s other representatives or employees and recruiting them to join the new firm. Courts often recognize that a firm has an interest in protecting its ability to do future business by not having one departing employee effectively transfer over a significant portion of the firm’s employment roster to a competitor.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

Non-Compete, Non-Solicit, and Confidential Information Agreements in the Securities Industry, PART ONE

PART ONE

Control over client relationships has long been a battleground within the securities industry. Firms have increasingly sought to exercise control over any and all information regarding securities clients and their accounts. The utilization of restrictive employment agreements between firms and the investment professionals they employ has become so commonplace as to be almost universal throughout the industry. While many classify these agreements as simply “non-competes,” there are usually multiple restrictive provisions in the same employment agreement that can have different effects on a former employee’s ability to conduct future business. It is important for investment professionals to understand these different restrictions, and the potential effects each type of provision can have on their livelihoods.

“Non-Compete” Provisions

A non-competition provision restricts a former employee from the simple act of engaging in a similar business or activity as that of the former employer. For example, an agreement might state that a former employee agrees that he or she “may not engage in the sale of securities or financial products in a 100-mile radius from the former employee’s branch office for a period of three (3) years.” Almost all non-compete provisions feature both a geographic (spatial) restriction and a time (temporal) restriction.

A non-compete is a very broad prohibition on any activities that may be related to the business in which the former employee was engaged with the former employer. It is important to understand that it does not simply apply to any customers or prospective customers that the departing representative was servicing during his or her time with the employer. It intends to prevent the former employee from competing against the employer with any customers, either old or new, by engaging in the same or similar business activities as the employee did with the former employer.

Because a broadly drafted non-compete provision can have such an enormous impact on an individual’s livelihood and on healthy business competition, courts are generally hesitant to enforce non-compete provisions. That does not mean any non-compete provision will not “hold up” in a court or FINRA arbitration, however. Depending on the law in a particular state, a court may be permitted to “blue pencil” or revise a non-compete provision that the court considers to be overly restrictive. Going back to the previous example, the court may find that a 100-mile radius and a three (3) year time period impose too much of a burden on the former employee, and go too far in stifling fair business competition. So, the court may “blue pencil” the contract at issue so that the non-compete features only a 50-mile radius and a one year time period.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

Welcome to the New GGBtrial.com

Gaddy Geiger & Brown is pleased to announce the redesign of its website, www.ggbtrial.com. While the site looks better than ever, the content has been greatly expanded to provide extensive, up-to-date information about the firm, its attorneys, and their practices.

Innovative Pricing – GGB is committed to providing innovative and flexible pricing for its clients. The new Innovative Pricing page on ggbtrial.com explains the alternatives available. GGB recognizes that the billable hour is no longer the preferred method of pricing legal services for many clients. The firm works with clients to creatively and proactively address their concerns in analyzing and budgeting legal expenses.

Recent Results – Law firms are measured by results. Now you can follow the results obtained by GGB on the new ggbtrial.com. The Recent Results page provides visitors with summaries of the latest GGB case results available to the public. Remember, though, that many of the firm’s best results cannot be disclosed to the public.

GGB In Depth – Most importantly, the new ggbtrial.com features a continuously updated legal blog regarding the firm’s practice areas. Visitors can review regular posts about litigating in Kansas City-area courts, business disputes, white-collar criminal issues, securities regulatory updates, and legal industry news, among many other subjects. GGB In Depth will allow visitors to get to know the firm and its attorneys by reading what Gaddy Geiger & Brown has to say about the issues affecting the firm’s clients and the areas of the law that concern them the most.

These new site features will provide visitors with a more in-depth look at GGB and its attorneys. If prospective clients want any additional information, they will still be able to utilize ggbtrial.com’s Contact Us feature to ask any questions they may have about the firm. Gaddy Geiger & Brown looks forward to sharing even more information about its background, its successes, and its future.

GGB Adds Benjamin Prell as Of Counsel, Expands Securities Practice

Gaddy Geiger & Brown is pleased to announce the addition of Benjamin Prell as Of Counsel, and the expansion of the firm’s securities practice.

Mr. Prell adds a specific area of expertise to the firm with his experience in securities arbitration, securities compliance and enforcement defense, and investment professional registration and employment issues. He has represented individual investors across the nation in arbitration claims and mediations, defended financial advisors in employment claims asserted by their former brokerage or investment advisory firms, advised investment professionals regarding securities regulatory problems and employment situations, and assisted registered investment advisors in creating and revising compliance programs. Mr. Prell serves as the Chairperson of the Kansas City Metropolitan Bar Association’s Securities Law Committee, and is a member of the Missouri Secretary of State’s Securities Advisory Committee.

The addition of Ben Prell to the firm is a natural complement and progression to GGB’s considerable experience in business disputes, employment litigation, regulatory investigations, and white-collar criminal defense. Individuals or businesses that have regulatory issues or disputes involving securities law and regulation can be even more confident that Gaddy Geiger & Brown will be an excellent advocate for them. Clients who are subject to securities investigations or enforcement actions can expect GGB to give them excellent counsel at every step of the process.

Prior to joining GGB, Mr. Prell practiced with Stafford + Associates, a securities boutique law firm, and before that, with the Kansas City office of Armstrong Teasdale, where he specialized in general business and commercial litigation. He earned his law degree, cum laude, from American University’s Washington College of Law in Washington, DC. While he was in Washington, he gained a government security clearance and worked in the Public Corruption and Government Fraud Section of the U.S. Attorney’s Office for the District of Columbia. He also participated in the nationally-recognized D.C. Law Students in Court clinical program.