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Implementing Data Security Is Like Eating An Elephant

Mon, 28 Oct 2024 13:02:57 GMT

We all know how to eat an elephant. One bite at a time at a time, of course. Implementing a comprehensive data security program is no different – for many it’s a monumental task. It can only be accomplished by setting out a manageable, step-by-step plan. Easier said than done? Probably, but that doesn’t mean a process that is impossibly difficult.

The new Massachusetts data security regulation goes into effect on Monday, March 1. If you have not yet begun to plan for the deadline, then likely either you are unaware of the requirements, or you are feeling overwhelmed by them. And who would blame you in light of the seemingly endless list of tasks:

Develop a written information security plan (WISP);
Identify all foreseeable risks in your organization by examining every nook and cranny where data enters, leaves or is stored;
Implement security policies and procedures and train your employees
Secure all paper and electronic records; provide encryption
Obtain written assurances from all vendors that they are compliant
Regularly monitor and review to insure compliance

You know that it is vitally important, both because it’s legally required and because it’s the right thing to do to protect your customers. But where to begin? Do you need professional assistance – a lawyer or specialized IT firm to accomplish this task? That really depends on the size and nature of your business, the data that requires protection and how much time and energy you are willing to devote to the process. Many businesses are probably capable of accomplishing a lot on their own. For the most part, the regulation is a straightforward recitation of the tasks needed to comply. But is that the best use of your time? Noted author and business consultant Andy Birol would caution business owners to judge very carefully those tasks that they choose to do by themselves and those that are properly delegated.

Consider the learning curve required to become proficient in an area that is not a part of your core business. While security is an ongoing and continuous process, monitoring and maintaining a plan is far less cumbersome and time consuming than creating it in the first place. Most businesses will prefer the comfort and efficiency of working with outside professional assistance at least to get the plan created and implemented. Even if you hire professionals, you will still need to be involved in the process. They cannot do it without your participation and that of your senior management and department leaders. And responsibility will not stop there; security needs to be an integral part of your corporate culture from top to bottom, which means it must become the responsibility of everyone in the organization.

So pull out the regulation, review it, create an action plan and start in on the list. Otherwise, hire the professionals. Either way, the time is now.

Terminating your Lease-Myths and Misunderstandings

Mon, 28 Oct 2024 13:02:56 GMT

When do I have to vacate my apartment? Can I leave in the middle of my lease? Can I stay few days longer if I need time before my new space is ready? My landlord says I have to get out before noon on the 31st because he needs time to clean the apartment for the new tenants - can he do that? I am a landlord - can I start showing the apartment before my tenant’s lease is up? Do I have to give notice?

Whether you are a landlord or tenant, it is important to know your rights and responsibilities when it comes to ending your lease or occupancy agreement. Under a written lease, the tenant is entitled to occupy the premises until midnight on the last day of the lease; likewise, the tenant is obligated to pay rent through that date. Setting aside various special circumstances (such as active military duty, breach of the lease or other violations by the landlord, or you are a victim of domestic violence) there is no right to leave early unless it was negotiated as part of the written lease. And there is no right to stay longer, just because it might be more convenient.

If you are a month-to-month tenant at will, things are little bit different. Either the landlord or tenant can terminate the tenancy, but typically that needs to be done at least a full month in advance. Thus, notice on March 7 would not terminate the tenancy until April 30. And as with the lease, the tenant is entitled to stay until midnight on the final day of the occupancy.

Generally speaking, a landlord has the right to enter an apartment to inspect, make repairs and to show prospective tenants. Except in cases of emergency, such as a water leak or fire, this should only be done during normal business hours. Also, as a matter of best practices, it is a good idea for the landlord to contact the tenant and arrange for a mutually convenient time to enter. Tenants do not like surprise visits. But tenants should also understand that there are many circumstances where a landlord cannot easily arrange a visit in advance.

The best situation for both landlords and tenants is to do your best to speak with one another and coordinate the end of lease together, in advance. The landlord will want to know as soon as possible when the tenant will be out so that he can get the apartment ready for the next occupant. And tenants want to know that the landlord will not be bothering them needlessly. There is also value in having a brief walk through ahead of time to know if there is damage (even if not caused by the tenant, the landlord wants to know so that he can fix anything before the next tenancy begins), make arrangements for cleaning, trash disposal, and so forth.

Of course, as with most legal issues, there are always exceptions to the general rules. For instance, all of this assumes that there are no significant problems—the rent was paid on time, the apartment was in good condition and the parties left each other alone as much as possible.

Truth or Delusion? - Myths and Misunderstandings about the Massachusetts Data Security Regulation. Part I

Mon, 28 Oct 2024 12:59:54 GMT

As of this past Monday, the nation’s “most comprehensive data protection law” went into effect, yet many questions remain as to how the regulation will be interpreted and enforced. The law was promulgated by the Office of Consumer Affairs and Business Regulation. While OCABR put it together, the Massachusetts Attorney General is charged with enforcement. As of this writing, I found nothing posted on the AG’s web site that addresses interpretation or enforcement. So business owners and their legal and technical advisors are left to their own best guess.

More surprising, many business owners are not even aware of the new law or mistakenly believe that it does not apply to them. For instance, here are several myths surrounding the new law:

Myth 1 – “Businesses located out of state do not need to comply.” This is false. The regulation applies to any business wherever located that has access to “Personal Information.” Personal Information, or PI, is a Massachusetts resident’s name in combination with certain identity or financial data, such as a social security number, driver’s license, bank or credit card account number, etc. The regulation does not distinguish between an in-state or out-of-state business.

Myth 2 – “The regulation only applies to bigger businesses with several employees and volumes of Personal Information. It doesn’t apply to small Mom and Pop businesses.” This is false. The regulation applies even if you have just one employee or customer as long as you have access to Personal Information.

Myth 3 – “I am in a health care or financial services business that is already regulated under federal privacy laws (i.e. HIPAA or GLBA), so we are already covered.” This is false. The federal laws are extensive but they do not perfectly overlap with the Massachusetts regulation. For instance, those laws are geared toward patients and customers, but Massachusetts also includes employees. And the requirements for the written information security plan (WISP) are not identical. That said, there are similarities in the requirements, so an organization that is already comfortable with HIPAA or GLBA probably will not have to do very much to achieve compliance in Massachusetts.

In my next article I will explore additional myths.

Podcast - Massachusetts Data Security Regulations

Mon, 28 Oct 2024 12:59:07 GMT

I recently had the opportunity to talk with Nick Fishman, co-founder of EmployeeScreenIQ who interviewed me on the Massachusetts Data Security Regulations and what they mean to businesses. Here's a copy of the interview. Check out the EmployeeScreen blog at https://blog.employeescreen.com/ to learn more about pre-employment screening and the comprehensive methods EmployeeScreenIQ uses to ensure thorough, accurate checks to meet global risk management needs of businesses.

EmployeeScreenIQ Podcast with Nick Fishman

Truth or Delusion? - Myths and Misunderstandings about the Massachusetts Data Security Regulation. Part II

Mon, 28 Oct 2024 12:58:23 GMT

In my previous article, I discussed the lack of guidance from the Attorney General on implementation and enforcement of the new Massachusetts data security regulation. The law is aimed at protecting residents from identity theft by requiring practically every business with employees or customers in the state to implement a written information security plan (WISP). I also began a list of common misunderstandings relating to the new regulation. Here are a few more myths.

Myth 4 – “I have no employees. All payments are processed through a third party service. I never see or handle checks or credit cards so I am not required to have a WISP.” This is probably true. For instance, you could be an Ebay seller who works from home and takes payments only through Paypal. As long as you never have access to any Personal Information (PI), you would be exempt from the regulation.

But just a slight change to this scenario requires compliance. A financial planner works from her home and has no employees. Her function is to advise her clients on investments, but clients make their purchases directly from the central office. She never takes any payments directly. But she does receive applications for new accounts when she signs up new customers. The application has the client’s social security numbers and other identifying information. So even if she sends those immediately to the home office, she still has “access” to PI and thus will need to implement a security plan.

Myth 5 – “There are so many businesses that are subject to the law and most do not yet have a WISP. The attorney general will never know if we haven’t complied.” This may be true, but are you really willing to risk it? Penalties alone are up to $5000 per violation. You will also be obligated to pay any damages suffered by victims of identity theft. And what about the harm to your reputation? I doubt that the Attorney General or a court would have any sympathy for such a callous disregard for the law that is intentional and willful. On the other hand, a business that may have a security breach, but that can show that they were making a good faith effort to meet industry best practices will probably not be subject to the most severe penalties. According to Scott Schafer Director of the Consumer Protection Division of the Massachusetts Attorney General’s Office, the attorney general will be less likely to bring enforcement actions against businesses that can show that a breach was inadvertent and that they were striving to achieve industry best practices for data protection.

Myth 6 – “Our company has implemented state-of-the-art electronic security, including firewalls, antivirus, antimalware and email encryption. Our data is locked down tight and cannot be accessed without double password authentication. Surely we have fulfilled the requirements under the regulation.” This is false. These are certainly important steps toward compliance, but the requirements of the law are much more extensive. To begin with, the regulation applies to both electronic and paper records. As well, companies are required to conduct a review of existing systems and procedures and create and implement a comprehensive written information security plan (WISP).

Hopefully this list will help you understand the scope and breadth of the new regulation. If you have not yet started your compliance plan, the place to begin is a review of the regulation and consulting with your legal and technical advisors.

Identity Theft and Credit Card Receipts – Is Your Slip Showing?

Mon, 28 Oct 2024 12:57:25 GMT

I’d like to think that it’s common knowledge that credit card receipts can be a prime opportunity for identity theft. However, too many of us simply crumple the receipts and throw them in the trash without a care. If the receipt shows your full credit card number and expiration date, this is an invitation for a criminal to go on a shopping spree at your expense.

Federal law is intended to help protect against this problem. A few years ago, congress amended the Fair Credit Reporting Act 15 U.S.C. 1681 to require all merchants to truncate credit card numbers on the receipts that they give you at the register. This means that the receipt you receive should not show more than the last 5 digits of the card number. The remaining digits and the expiration date should be unreadable. Even if you threw out this receipt, it would be impossible for an identity thief to use the information.

Although this law went into effect in 2006, I occasionally receive receipts that are not in compliance. These are usually the two-part variety – white on top and yellow below, but it can happen even on the type that print out two separate receipts at the time of purchase (one that you sign and return and the other you keep).

Earlier this month, I had the pleasure of taking my eldest son on the big college tour – 10 schools in five days. Visiting the schools and the time with my son were terrific; the lengthy drives and staying at a different hotel each night not so much. What was interesting was the receipt I received from one of the major hotel chains where we stayed outside of Washington, DC. To my surprise, this nationally recognized chain provided me with an illegal credit card receipt, showing my full card number and expiration date. Needless to say, I did not toss that one in the trash, but kept it until I got home and could shred it. But imagine how many patrons think nothing of it or simply tell the clerk to just throw it out?

I came to learn hotels are apparently the biggest offenders when it comes to data security. Being a maven of sorts on the topic, I happened to see in the March 18 Wall Street Journal that data breaches are heaviest at hotels. According to their sources, 38% of breach investigations in 2009 involved hotels, twice as high as the next highest category. The culprit is typically the point of sale software used to accept payment, much of which is not compliant with Payment Card Industry (PCI) standards.

I have sent a complaint to the hotel chain. They are currently investigating my concern. Let’s see what happens.

20 Year Sentence for Identity Theft

Mon, 28 Oct 2024 12:57:24 GMT

As cyber-thief extraordinaire Alex Gonzalez is sentenced to twenty years in prison, I find it ironic that his brilliance is outweighed by his stupidity. Gonzalez pleaded guilty to the massive theft of credit card numbers by hacking into TJX, BJ’s and many other payment servers. Certainly some amount of talent was required to perform these acts. And yet he was caught because he couldn’t keep his mouth shut. He apparently left quite a trail of breadcrumbs on the Internet when he bragged about his conquests to friends on line.

While the new data security regulation in Massachusetts is designed to curtail this sort of sensational crime, the problem we face in trying to stop identity theft is lacking focus where perhaps it is needed most. Small businesses are considered significantly more vulnerable than any other segment. And to me this makes sense. I don’t imagine that the local hardware store, pizza shop or hair salon has too much security built around their employee records that are probably stuffed into an unlocked file cabinet in the back room. And their credit card processing and email are only as good as the bargain basement companies that have sold them the services.

Certainly the regulation is aimed at, and applies to, even these small businesses. It is a sweeping and comprehensive piece of legislation that will clamp down on all but the most determined of thieves—but only if it is followed. The problem lies in the difficulty of obtaining compliance. I’m guessing that most small business owners are not even aware of the regulation (at least those with whom I have spoken are not). And those that are aware of it will not likely take the time and spend the money needed to prepare and implement a WISP (written information security plan). I analogize this problem to the modesty panels in the public restroom – they cover up most of what might be seen, but there is a big gap at the bottom. Someone who wants to peek in certainly could. While it should not be necessary to hire a lawyer skilled in compliance issues to prepare and educate the store owner on their WISP, the reality is different.

I have some ideas on improvements that will help small businesses. Look for these in future articles.

Earth Day Triggers New Law That Burdens Homeowners And Contractors

Mon, 28 Oct 2024 12:46:33 GMT

This year, Earth Day heralds a surprise for home owners who live in housing built before 1978. On April 22, the Renovation, Repair and Painting Law (RRP) takes full effect, imposing new compliance burdens for any contractors who work in older homes, and higher costs for the owners. Any project that disturbs painted surfaces must be performed by a certified contractor following rigid procedures aimed at minimizing contamination from lead found in older paint.

Lead paint presents serious health hazards particularly for young children and infants. Small amounts of lead that are ingested or inhaled can impair brain development and cause other serious nervous system and other disorders. Use of lead paint in residential dwellings was banned in 1978, but homes built earlier are at risk of containing lead paint. Contractors who may disturb painted surfaces on older homes must be certified by the EPA in the safe handling of dust and debris that is generated by the work.

The regulations require that the areas affected by the work be completely sealed off and contained so that any dust or debris that may contain lead will not contaminate soil or spread through the air. After the work is completed, the worksite must be thoroughly cleaned and the waste generated must be properly stored and then removed from the site. This is no small task. Anyone who has lived through any renovations at their home knows how much dust is created and how difficult it can be to contain.

The new law is very comprehensive, although numerous challenges remain. One of them is insuring that contractors are aware of, and comply with, the new law. As of March 6, less than 2% of licensed contractors in Massachusetts had received the necessary certification to be in compliance. Another is forcing homeowners to absorb the substantial added costs of work area containment. But perhaps topping the list is determining how exactly the EPA plans to carry out enforcement –with many recent regulations, there simply is not the necessary manpower or budget to insure that the law will be followed.

What are your thoughts about the new law? How will the new EPA rule affect you? Please share by leaving your comments.

Homeowners Hurt When EPA Scratches Opt-Out

Mon, 28 Oct 2024 12:45:19 GMT

As I mentioned in my previous post, the new Renovation, Repair and Painting regulation (RRP) went into effect last week on Earth Day, April 22. The regulation is intended to help reduce the risk of lead poisoning by requiring special precautions when performing work on homes built before 1978. Property owners must hire EPA-certified contractors who have to completely seal off the areas where the work is performed (both interior and exterior), carefully remove all dust and debris, provide special handling and disposal of construction waste materials and take other steps to reduce the spread of lead-based materials that may be ingested or inhaled.

For most homeowners, the requirements are likely to be both burdensome and costly. The number of certified contractors is very small. While many more are seeking certification, classes are limited in size and scheduling. Contractors who obtain the certification will be in higher demand and will have a competitive advantage which will likely be reflected in higher prices when working on older properties. As well, even a simple project will require hundreds of dollars in added materials, training, disposal and time charges in order to assure compliance.

In an effort to ameliorate some of the challenges imposed by the regulation, the EPA had established an “opt-out” that would allow certain homeowners to be exempt from the regulation. Specifically, if there were no pregnant women or children under 6 years of age living at the premises, then the owners could sign a waiver that would permit them to opt-out of the new rules.

However, the opt-out has now been eliminated. Just as the new regulation took effect, the EPA also announced a revised regulation that eliminates the opt-out effective 60 days following publication with the Federal Register.

In many respects, the decision to remove the opt-out is probably a good one, particularly in densely populated communities. Work performed at one property can create dust and debris that may contaminate the ground or air near another where there may be children at risk. Even work done strictly within an interior space will result in dust and waste products that, when removed from the property, could also be a hazard if not handled properly. But what about properties that are far removed from their neighbors? Should the same rules apply? The EPA does not distinguish between apartments in the city and homes located on rural farm lands. Everyone must comply with the new rules.

Have you been affected by the new regulation? Do you know someone who has? Please share by leaving a comment below.

Six Ideas to Help Small Businesses with the Massachusetts Data Security Regulation

Mon, 28 Oct 2024 12:43:48 GMT

I recently had breakfast with my good friend, Cherie Hafford, and we talked about the Massachusetts Data Security Regulation and how much of a burden it creates, especially for small businesses (more on the Regulation here and here). The Regulation is supposed to be scalable – that is, the degree of compliance should be proportionate to the size of the business and its resources. But for small businesses, even the most stripped-down, basic plan will still require considerable time and money—time and money that most business owners simply do not have or will not spend.

The Regulation likely affects millions of businesses around the country and perhaps the world. Read literally, the law is not confined only to Massachusetts businesses; it applies to any business wherever located that has customers or employees in Massachusetts. So if a small crafts shop in Santa Fe accepts a check from a customer in Cambridge, the shop must implement a written information security policy, or WISP. And a gas station in Orlando that accepts a credit card from a tourist who lives in Quincy would have to comply with the Regulation even if they had no idea where the customer lived.

Did the state go too far? Setting aside the constitutional and enforcement challenges, was there perhaps a simpler way to achieve the goals that would not impose such a burden on small businesses that are already struggling?

Here are six ideas on how to fine tune the law to make compliance easier and achieve the same objectives:

Many businesses that accept credit cards never store the account numbers. They simply swipe them in a POS device and hand the card back to the customer. Why not make that activity compliant with the Regulation without the need for any written plan?

Same thing with checks. Most businesses that accept checks want to get the money into their accounts as quickly as possible. How about a rule that says businesses are compliant if they deposit checks within two business days and keep the un-deposited checks under lock and key until they are deposited?3) Focus the regulations on the banks, credit card companies and the businesses that provide the POS devices and connections. Require that the data be locked down tightly and impose substantial penalties for a breach. The standards already exist – i.e. PCI (Payment Card Industry) standards.

Businesses that have employees need to have their social security numbers on file for payroll, benefits and other purposes. Just as with checks, if they are kept under reasonable security and only employees with a need to know or see the information are permitted access, then this should be deemed to be in compliance without the need for any further written plan. The Regulation could set forth a simple plan that if adopted and followed will be deemed to be compliance.

Work within the parameters of the Fair Credit Reporting Act to reinforce the rights of victims of identity theft. There are far fewer victims than there are businesses who need to protect the information from possible misuse.

Do more to educate businesses about the various practices that reduce the risks of identity theft. For years, we have seen signs in restaurants telling employees to wash their hands before going back to work. Maybe there should be similar signs in the human resources and finance departments advocating safe practices with sensitive financial information?

Of course no matter what is done, there will still be dishonest people who will take advantage of a situation and cause harm to others. This is not to excuse careless or negligent business practices –enforcement should still require a reasonable degree of caution and vigilance. But the new Regulation ignores the practical reality of small business and imposes too many requirements that may be unnecessary.

Please share your own ideas on the Regulation by posting a comment below.

The Worst Mistake a Landlord Can Make

Mon, 28 Oct 2024 12:42:14 GMT

There are many ways in which landlords can cross the line and get into serious trouble with their tenants, but perhaps the easiest is by misappropriating their security deposit. The security deposit belongs to the tenant, not the landlord. Period. End of story.

Yes, the landlord may be entitled to retain the security deposit at a later time, but only after jumping through several very important technical hurdles. Until then, hands off!

The Massachusetts statute governing residential security deposits is chapter 186, section 15B. It is long and confusing. Nevertheless, the statute carries heavy penalties. A landlord who mishandles a tenant’s deposit, even by mistake, may be obligated to reimburse the tenant for three times the deposit, plus attorney’s fees, plus any court costs incurred.

The basic principal is to avoid any co-mingling of the security deposit with other money. The trouble often begins when the landlord first receives the deposit. In essence, the landlord becomes a trustee of the tenant’s money. Since the deposit must be kept separate from other money, the tenant should not give a single check that combines the security deposit with any other payments. The security deposit should be paid with a separate check or money order. Payment should be made directly to the security deposit account and not to the landlord. Accepting cash for the security deposit is ill-advised since there is no way to distinguish between cash belonging to the landlord and that of the tenant. It doesn’t matter that the cash is later deposited in a separate account – the violation has already occurred.

Once accepted, the money must be placed in a separate bank account that is properly labeled as a security deposit account. In the event that the landlord becomes subject to claims of creditors, the tenants’ money must be held in an account that is clearly identified as escrow funds that do not belong to the landlord. The money may be placed in an account with other security deposits as long as the account is properly labeled and contains none of the landlord’s money.

Another common mistake by landlords is keeping any last month’s rent in the same account as the security deposit. Unlike the security deposit, last month’s rent is money that does belong to the landlord – it is simply rent that was paid in advance. So putting it in the same account with the security deposit would result in co-mingling and would be a violation of the statute.

The security deposit needs to stay in the account until the end of the tenancy. The only exception is if the tenant does not pay the rent. Here is another trap for the unwary landlord. The landlord may not deduct rent from the security deposit if the tenant has withheld paying rent for a valid reason. However, tenants often do not tell the landlord immediately why they are withholding their rent. So a landlord who is quick to withdraw funds from the account without verifying the reason for the lack of payment may be in for a nasty surprise later.

Of course, the primary purpose of the deposit is to protect the landlord in case of unpaid rent or damage beyond reasonable wear and tear. In order for the landlord to apply the security deposit, he or she must have taken several other important steps designed to protect the tenants before the deposit can be applied. These include providing a statutory “Statement of Condition” and detailed receipt at the outset of the tenancy, notification of the bank account where the money is held, paying annual interest, and providing a sworn statement itemizing any damages that are being claimed, together with evidence of the repair or cleaning costs.

The bottom line for any residential landlord is to consult an attorney to be certain you understand your rights and obligations before accepting a security deposit. The modest cost for this advice will pale in comparison to the penalties that may be faced after the damage is done.

Are you a landlord or tenant? Do you have questions about housing or real estate investment? I would love to hear from you. Please click below to let me know any comments or concerns.

Identity Theft Protection – As Easy As Changing Your Oil?

Mon, 28 Oct 2024 12:41:08 GMT

Do you change your own oil? Most of us are capable of performing this simple maintenance on our vehicles, but we choose not to. After all, it is messy work, requires a few specialized tools, and disposing of used oil can be a hassle. To boot, the cost of an oil change at the local service station, specialty stores like Direct Tire or Pep Boys and even the dealerships is relatively modest.

So what’s the connection with identity theft? Identity theft is a big problem that is affecting more and more people each year. At a minimum, the problem creates a great deal of aggravation and considerable worry. At worst, it can cause debilitating harm to your credit, making it difficult or impossible to buy a car, rent an apartment, refinance your home or even get a job.

To combat this problem, many companies such as LifeLock, TrustedID, IdentityGuard, ID Watchdog and others offer services that they claim are designed to help you prevent, identify and correct any problems that may arise due to identity theft. They claim to do this through a multi-faceted approach that includes removing your name from pre-approved credit card mailing lists, providing annual copies of your credit reports and searching the web for potential indicators that your identity has been compromised. And then when a problem occurs, they provide counseling and guidance on how to repair the damage.

Until recently I was not very much in favor of identity theft protection services. After all, many of the features offered by these services are items that anyone can easily accomplish on their own, just like changing your oil. For instance, under federal law, consumers are entitled to receive a copy of their credit report from each of the three major credit bureaus once each year. Likewise, anyone can sign up at www.optoutprescreen.com to limit unwanted credit and insurance offers. And much of the information needed to repair credit damage is readily available on line (The FTC has extensive information available here). So why then should anyone pay on the order of $100 or so each year when they can do this all for free?

The reality is that we are busy people. Or we’re not perfectly organized. Or we just don’t trust that we are going to dot all the i’s and cross all the t’s. Just as with the convenience of the oil change services, there is clearly a place for these identity protection companies even if all they are doing is something that we can do ourselves.

However, before engaging in such a service, be certain that you know exactly what you are getting and what you are not. For instance, many people may mistakenly think that the “million dollar” guarantees offered by these services will pay them money to cover substantial loss of income or provide other compensation if they are forced to pay higher interest rates on mortgages or car loans due to damaged credit. Read the fine print very carefully – in many cases, they do not make any direct payments to the consumers except possibly to reimburse certain limited expenses. To the extent that any significant money might be paid, it is primarily for lawyers and other professionals who they hire to clear your name. Lost income, if it is covered, is very limited (i.e. only for the time off work spent fixing your identity).

More important, the insurance may not even be available unless you can show that your loss was due to a failure of the service and not some other cause. Identity theft is tricky business and there are many ways that thieves can get hold of your information. The protection services cannot possibly stop all of the leaks, so unless it is their fault that you have a problem, their insurance may not be available to help you fix the problem.

What are you doing to protect your identity? Have you used one of these services? Has it been of any value? Do you have questions about identity theft? Please fill out a comment or send me a note.

Arbitration Clauses in Business Agreements - The Dark Side

Mon, 28 Oct 2024 12:40:21 GMT

I used to believe, naïvely perhaps, that arbitration was a sensible way to resolve business disputes. I bought into the hype that arbitration would be resolved more quickly and in a more cost-effective manner than traditional litigation. I was also impressed by the promise that so-called experts would be resolving the cases rather than judges with little experience in the issues.

I have come to learn that the opposite is true. In two recent matters which affected my clients, arbitration proved to be the worst of all worlds. And I am apparently not alone, as I have spoken to many other attorneys with similar experiences and read about still more.

As for cost, the cases proved to be far more expensive than traditional litigation. After all, my clients were paying for their own attorneys, but also paying one half of the cost of the arbitrator -- himself a highly paid attorney. In the traditional courtroom setting, the judge is paid by the taxpayers.

The matters were not resolved any faster, either. The parties were still able to present endless motions and propound considerable discovery which forced the matters to drag out for many months. And the arbitrator is paid his fees every step of the way.

Finally, and perhaps worst of all, the decision-makers clearly had no grasp of the issues and their importance. Decisions were made that overlooked substantial and material facts and misapplied the law, leaving my clients in a far worse position than had they been in court. At least in court, when a decision goes this far awry, the parties may have the option to take an appeal and ask for another look by a second set of judges. And while the appeals courts are typically compelled to accept the facts as found by the trial court, they are nevertheless equipped to insure that the law was applied correctly in light of those factual findings. If nothing else, the threat of a reversal through an appeal can drive parties to a settlement that they might not otherwise achieve. In arbitration, the arbitrator's decision is final and there are virtually no grounds for appeal, no matter how bizarre and idiosyncratic might be the decision.

This is not to say that I would forgo arbitration in all instances. I still believe there is a place for arbitration, particularly for partners in a business who are situated on relatively equal footing. But aside from this very limited circumstance, I am hard-pressed to believe that there is any benefit to arbitration. And while both parties face the risk of an unjust decision, all sense of fairness seems to be lost. In my view, arbitration and arbitrary are really one and the same.

Get Paid in Full and On Time - Five Essential Terms to Include in Your Contracts

Mon, 28 Oct 2024 12:39:25 GMT

As a small business owner, you depend on prompt payment for your success. So often I find that collection problems are directly related to misunderstandings about what is expected of each party. Written contracts help avoid confusion, document the understandings, establish trust and elevate you to a more professional level. Your contract does not need to be a 12-page document full of boilerplate and legalese. In fact, keeping things simple and easy to read can often serve you and your customers best. The scale of the job and other circumstances will dictate how detailed the contract need be, but depending on your business and the scale of the job, a single page with just a few paragraphs might be all you need.

Here are five essential elements that you should include in your contracts:

Scope of Work. Clearly set forth exactly what you will be doing for your customer. Many times, it is also very helpful to state items that are not included, especially if there are common misunderstandings on those issues. For instance, if you are in the business of developing web sites, are you including search engine optimization (SEO) as part of your services? If you provide weekly lawn care, does this also include regular fertilizing? If not, say so to avoid any mistaken assumptions.

Time for Performance. We all want to know when will the job be finished. In this on-demand electronic world, people come to expect instant gratification. Avoid any concern that your client thinks you are taking too long by listing in your contract when the work will be completed and what sort of events may cause excusable delays. If your work depends on the weather or obtaining essential information from your client or other parties, that should be stated. (Bonus tip - communicate regularly with your client, especially if things are not going as expected.)

Payment Terms. Your client should understand exactly when you will expect to be paid, how much and what types of payment you will accept. If you need to purchase equipment or materials, are those paid up front? For bigger jobs that may take an extended time, will there be milestones and interim deliverables that will trigger payments? Write those out.

Termination Provisions. Can you or your client terminate the agreement? If so, under what circumstances? Will there be any refunds allowed for termination?

Penalties . What happens if you or your client do not follow the terms? Can you specify what will be the damages? Is a refund all you will be offering? Does any extended balance carry interest? Will you charge any collection or attorney’s fees if you are not paid?

What is this going to cost to set up? Do I need a lawyer? These are valid questions. There are on-line resources to help produce contracts, but certainly there is no substitute for having the guidance and expertise of an attorney to ensure that your specific issues are properly addressed. The cost will vary from attorney to attorney and situation to situation, but setting up a basic template appropriate for your business should cost far less than the headaches associated with trying to collect after an avoidable misunderstanding. And many attorneys (including me) will offer a free consultation.

Share Your Space - "Get Out of My Face!" The Importance of Roommate Agreements

Mon, 28 Oct 2024 12:36:48 GMT

Share Your Space - "Get Out of My Face!" The Importance of Roommate Agreements

One of the difficulties faced by young people, especially those in our pricier urban areas, is finding an affordable place to live. It’s a natural and inevitable reaction to seek out roommates or housemates to share the expense.

With every relationship, there is the potential for conflicts and problems. In the case of roommates, this is exemplified by the popular TV series, “The Big Bang Theory,” where Sheldon Cooper insists that his roommate, Leonard Hofstadter, sign the infamous “Roommate Agreement,” a voluminous document that includes a host of crazy provisions such as adoption of an official flag, obligations on Leonard to drive Sheldon to work, and a clause on cooperation to destroy Godzilla.

But for the rest of us, the reality is that what may have seemed like a very workable arrangement at the beginning, turns out not to be so over time. Different schedules, food, and music choices can be very annoying. If one party is unable to afford the rent or other charges, that leaves the other person paying more than their fair share. And if one party has their significant other move in (or just spend lots of time in the apartment), that can really be an imposition on the other roommate(s).

In most cases, a landlord will not get involved in these internal disputes and will expect that the rent and other expenses will be paid promptly. Otherwise, all of the occupants will face eviction and/or other legal action. And with a long-term lease, this means that the roommates will have to find a way to resolve these differences or face significant financial consequences.

While the Big Bang Theory roommate agreement is obviously taken to absurd extremes, I recommend that unrelated parties execute at least a simple memorandum of understanding that covers the basic issues that can arise. For instance, set forth exactly who will pay what amounts, when they are due, how to split utilities, cable, and other expenses, what happens if bills are not paid promptly, and procedures to follow if one roommate wants or needs to vacate the premises. Also consider general rules and regulations concerning noise, guests, significant others, cleaning, food, and supplies, resolving grievances, etc. The parties may also want to include some sort of guarantee or co-signing by the roommates' parents (obviously depending on the parties’ ages and station in life), and possibly a security deposit that is pooled to cover missed payments or other financial issues.

Of course, a written agreement is no assurance that the terms will be followed, but it helps to reduce misunderstandings and mistaken assumptions and provides a framework for managing what might otherwise be a source of added tension.

Offers to Purchase Real Estate - Protect Your Deposit and the Deal

Mon, 28 Oct 2024 12:36:47 GMT

Offers to Purchase Real Estate - Protect Your Deposit and the Deal

Are you shopping for a new home or condominium? Are you selling? Have you made or accepted an offer yet? No doubt you were asked to sign a standard offer form that brokers commonly use when you’re ready to get to business. Here in Eastern Massachusetts, very commonly the brokers use the Greater Boston Real Estate Board (GBREB) form, but there are others and some use their own standard forms. Do you really know what you are signing when you put your John or Jane Hancock on that offer? Is it safe?

Most people don’t think they need to have a lawyer at this stage. And for many that’s probably true. But the offer sets the table and the tone for the bigger contract, namely the purchase and sale agreement which is signed a short time later. So here are a few tips and tricks to avoid problems that can come up later if you’re not careful.

As a Buyer, Your Deposit is at Risk. Most people support their offers with a small deposit, called “earnest money” usually $1,000. They think that the money is fully refundable if they don’t proceed with the deal. And that’s typically correct-- very few brokers or sellers would try to keep that money if a deal was not concluded, but could they? Well, if you work from the language that is on the standard offer form, then yes, you could lose that money. Here are three important changes you should make to reduce that possibility:

Mutually Acceptable Purchase and Sale Agreement. The GBREB offer form specifies that the parties will sign the “Standard Form Purchase and Sale Agreement.” However, that agreement is frequently modified heavily by attorneys to provide additional protections for their clients, whether buyers or sellers. Delete “Standard Form” and add in “mutually acceptable.”

2. Home, Radon and Pest Inspections. The standard forms include these contingencies, but I don’t like them. For instance, to cancel based on the home inspection, there must be “serious structural, mechanical or other defects.” And the repairs must cost more than a specified minimum. In the case of bugs, the property must be found to be “infested.” These quoted terms can create misunderstandings and disagreements. I prefer that my buyer clients be able to cancel if for any reason they are not satisfied with their inspections. Simple fix – ditch the standard form contingency addendum and simply write in “subject to satisfactory home, pest and radon inspections in paragraph 8 where there are some extra lines.

3. Mortgage Contingency. These can be tricky in today’s market. Seller’s will expect that the buyer is prequalified. Many will not accept a mortgage contingency. Even though that is called a “cash sale,” this does not mean that the buyer cannot get a mortgage; all it means is that there is no mortgage contingency that would let the buyer get out if they did not get their loan. If that happened, they would risk forfeiting their deposit.

2. Do You Know What You Are Getting? You might assume that the various kitchen appliances, laundry machines and other items in the home are included in the sale. However, if these are not specified in the offer, then they might be excluded. Likewise for sellers, if there is something you plan on taking with you, like the refrigerator or an heirloom light fixture attached to the structure, be sure to note these exclusions both with your broker and on the offer form. On the GBREB form, there is a very small area at the top for “Special Provisions.” That’s the place to list anything that is included or excluded in the purchase. You don’t need to squeeze it all in the small space on the form – simply create an addendum if needed.

3. What Is On The Outside? Are you expecting that the small storage shed or above-ground swimming pool is included in the sale? Do you want the large sculpture in the garden removed before closing? Either way, these types of things should be spelled out in the offer.

4. Boundaries Can Be Deceiving. It’s easy to guess that the edge of the grass, the stone wall or other prominent features in the yard might be the boundary between you and your neighbor. Or you might assume that the swing set is entirely on their land. Or that the driveway is exclusively yours and not shared. And most of us wouldn’t think twice of asking the broker. But if those boundaries are important, the only way to be sure is with a proper survey. I have had clients find out after closing that their yard was much smaller than they expected. If you plan to build a tennis court or put up a shed, then you have to know what’s yours and what is not. You will need a survey contingency added to your offer.

This is just the start of the kinds of things to consider when initiating a purchase. The best advice is to consult with a real estate attorney at the start of the process. I offer a package price to help you budget your expenses while having the security of having a lawyer on board from the very beginning.

Do you have a legal question or issue? Are you just not sure how to proceed? I offer a free initial consultation. Please call or email me or fill out my contact form and I will be in touch very shortly.

Six Things You Must Do When You Start Your Own Business – Where LegalZoom, RocketLawyer And Other “Low Cost” Formation Websites Fall Short

Mon, 28 Oct 2024 12:36:46 GMT

Thanks to the Internet, starting a new business doesn't have to be an ordeal. There are many websites, like LegalZoom and RocketLawyer that will guide you through the process of incorporating or filing an LLC. But is that enough? Hardly. A primary purpose of filing is to protect you from claims against your personal property and family assets. You need some comprehensive (but not costly) legal advice that these sites cannot offer. In fact, they tell you right up front that they do not offer legal advice.

Besides the legal filings to incorporate or form your LLC, there are other important steps you can and should take to help avoid or minimize personal claims. Without them, you may be nearly as vulnerable as before.

So here are six things you should do when you do set up your new business.

Purchase ample insurance. Every business has different exposures and risks. A manufacturer will have very different concerns than a retailer. A liquor store will have different risks than a coffee shop. But at the end of the day, if claims are made against your company, insurance can be the difference between staying in business and closing your doors. Or worse if a creditor tries to hold you personally liable. Work closely with both your lawyer and a skilled insurance agent and consider all of the issues that may result in liability.

Follow the proper formalities. Both corporations and limited liability companies have various legal procedures that must be followed or you risk that a creditor may seek to hold you personally liable for any claims. You must file annual reports and pay excise taxes to remain in good standing with the secretary of state. Corporations are also required to hold annual meetings of the directors and shareholders and document those meetings with proper minutes. Even at a startup, there are various recommended documents beyond those needed by your state. An attorney can help you identify those procedures and create systems to be sure they are followed.

Open separate bank accounts and keep proper books and records. Even if you are the only shareholder or owner of your company, creditors can try to make claims against you personally if you co-mingle money from your business and personal lives. Work closely with a good accountant who can instruct you on how to set up your accounts, how to maintain and document them, how to handle receipts and pay bills, etc. Any money that is moved back and forth from your personal to your business accounts should be carefully documented to avoid claims of improper co-mingling of assets.

Document loans and capital contributions. Small businesses frequently need infusions of cash. If you are putting in your own money, it is best to document it very thoroughly. That includes distinguishing between a loan, which will be repaid, and a capital contribution, which is a permanent investment that typically cannot be recovered until the business is sold or through another liquidation event. Loans should be documented with a proper promissory note and other paperwork, and there should be a repayment schedule. If a loan is not documented properly, the money will very likely be considered a capital contribution which creates challenges for taking it back out later, especially if you are scrutinized by creditors.

File a trade name certificate. If you are operating your business using a trade name (also referred to as a “dba” or “doing business as”), be certain to follow the requirements for registering that name. Failing to do this properly can support claims against you personally if you use an unregistered trade name.

Prepare these other important documents. Do you have partners? Disputes between owners can paralyze or destroy a business. A written agreement between the owners is highly recommended to help minimize the impact if there are irreconcilable differences among stakeholders. Will you have employees? Will they have access to confidential information or your client lists? Consider employment agreements that contain non-compete and non-disclosure obligations. What about client contracts? These can help avoid misunderstandings and facilitate getting paid. Please click here to see an article on contracts that I wrote recently.

And here is one more important tip:

Hire a lawyer. There are many considerations when forming your business. For instance, you can file papers in your own home state, or you might choose a different state because it has better laws. When forming the business, you will likely specify your business purpose. Often, do-it-yourselfers will choose a narrow purpose and this may limit you in the future if you want to change or expand. And what about the choice of entity? Many of these websites have charts to explain the various differences, but it is impossible to include every possible nuance. For instance, your choice may change if there are multiple owners or investors or if you plan to sell or go public at a later point. Hiring a lawyer now can save lots of money in the long run. And working with a lawyer who is skilled at helping start-ups might cost less than you think.

Do you need help starting a business? Let’s chat and I will show you how I can help. Send me an email, fill out my contact form or call the number above. It costs you nothing for my initial meeting or call.

Businesses and Landlords Under Pressure Due To Covid-19 (Corona) Virus

Fri, 25 Oct 2024 20:42:45 GMT

Getting Paid and Holding off Creditors Becomes a Big Challenge

The headlines are frightening, but for many of you, there is no need to turn on the television or read the papers. You are already out of work, your businesses are shuttered, or your tenants have stopped paying. With orders to shelter in place, avoid crowds, close bars and restaurants, cancel sporting, religious and other large events, the effects are already here. Businesses large and small, and landlords, both commercial and residential, will be feeling tremendous pressure very soon if they are not already. Customers and clients will stop paying their bills or stop seeking your goods and services. Tenants will have little or no ability to pay their rents. But your creditors will still be insisting that their rents and other bills be paid. How are businesses and landlords going to cope?

Patience is a virtue in these trying times. When it comes to your own customers, you will certainly want to do whatever you can to offer relief from those who cannot pay their bills and provide incentives for customers to continue purchasing goods and services. Customer loyalty will mean a lot when the economic situation improves.

Landlords may be less concerned about “customer loyalty,” and insist on getting paid now. But keeping tenants happy and in their apartments or business locations will make it easier for you to recover later when the money begins again to flow. The last thing you need is a large percentage of vacancies that need to be filled.

While you may be more than willing to offer your customers and tenants relief, your bank or trade creditors might not be as understanding. What about them? They also have their own bills to pay and shareholders who depend on the success of those operations. It is a vicious circle.

I can help you navigate these challenges. I will guide you while you try to balance a customer’s obligations and the desire to keep them loyal while still getting paid. Just as important, I will work to buffer you from creditors who must be kept at bay for you to stay in business.

While your own gentle touch might be enough to hold your creditors at bay, if it is not, you may need a stronger approach. You may be under a contract that includes a force majeure clause that relieves a party from its obligations made impossible due to unforeseen circumstances. Those are typically meant to protect against so-called “acts of god,” such as fires or floods, and other events that are considered beyond the control of the contracting parties. Would such a contract provision apply to a pandemic? Or is this just an unforeseen business fluctuation that would not be covered?

And what if you don’t have a contract or the contract does not include such a clause? Is there an implied force majeure clause that may be invoked for protections? You may be able to rely on common law frustration of purpose doctrines, but each situation will need to be carefully reviewed.

Even if your case is strong, you still need to persuade your creditors. Most of you are simply going to be looking for temporary relief to allow you to get through the current crisis and then time to get back on your feet. Some may require more drastic measures, such as complete relief from all or a substantial portion of what may be owed. You don’t necessarily want to file bankruptcy just to get there if that can be avoided. The most important thing is to have a strong voice who can express your concerns and present practical and viable solutions to all concerned.

Controlling Legal Costs With Fixed Fee and Retainer Agreements

jayakrishna.varikoti@townsquareinteractive.com (Jayakrishna Varikoti) — Fri, 25 Oct 2024 20:42:44 GMT

Controlling Legal Costs With Fixed Fee and Retainer Agreements

Looking out my window, there are two black tupelo trees, each rather non-descript and scraggly – not much to look at. But come the later part of September, these two trees provide a brilliant show of bright red color on branches that seem almost invisible, suspending the foliage in a sort of anti-gravity display. They are the first serious sign of Fall, just before the rest of the yard goes to color. And even though the days are still warm, cold nights and raking leaves are just around the corner.

Fall is also the fourth and final quarter of the year for many business owners as they work hard to close out with positive results. This is also the time to plan for the year ahead. And planning means budgeting and a hard look at what expenses may be incurred.

One of the more difficult and unpredictable expense items for many businesses is forecasting their legal costs. Any business that consumes legal services will struggle with this line item in their budget – they cannot foresee what matters will emerge during the year and their lawyers are not much help. Typically, the lawyers will not be pinned down to a particular cost because they fear that there are too many issues relating to a matter that will be outside of their control. Most lawyers work strictly on an hourly basis leaving the client to trust that the attorneys will do their best to work efficiently. But there are no real incentives to do so. And the attorneys are reluctant to consider caps or alternative billing that will help their clients plan. Thus, the hourly billing model survives, and businesses continue to struggle to manage their legal costs.

Wouldn’t it be better if the lawyers would partner with their clients to develop alternative billing strategies that would allow greater predictability and certainty and create incentives on their providers to work efficiently? This is precisely what I try to accomplish. I offer two services that can help make legal costs more predictable and control expenses. These are fixed fees and retainer agreements.

Fixed Fee Agreements. In my fixed fee agreements, I will handle a specific matter or a discrete sub-task at an agreed-upon rate. Typical examples would be drafting and negotiating contracts, handling routine complaints and managing corporate documents. This becomes a win/win for my client and for me. My client now has a predictable cost that can be assigned to each new piece of business for the legal work, and I know exactly what I will be paid for the work performed. Another bonus for me is that my billing is greatly simplified.

Retainer Agreements. My retainer agreement is perfect for clients that are frequently needing my advice but who worry that the cost for smaller transactions or day-to-day issues will break the bank or budget. For these clients, I charge a monthly fixed amount that covers all of their ad hoc legal questions and issues, reviewing contracts, resolving routine complaints, and other simple transactions. Clients who are fearful of making a quick phone call to counsel or arranging a small research task need not be concerned over excessive billings.

My retainer arrangement is especially useful where I can serve as a liaison between my business partner clients and their outside law firms. I become completely familiar with the inner workings of my client's business and with that insight, I can then manage and control legal resources on the outside. A busy executive in a smaller company does not have the time, resources or understanding to effectively manage their other attorneys and this relieves them of that burden.

If you would like to discuss cost savings on your legal expenses, please contact me either by phone, email or through this web site. And please pass this along if you know someone else who is a regular consumer of legal services.

Don’t be Eclipsed by the Hype – 5 Things You Should Know Before Renting Out That Spare Bedroom

Fri, 25 Oct 2024 20:42:35 GMT

Don’t be Eclipsed by the Hype – 5 Things You Should Know Before Renting Out That Spare Bedroom

In just a few days, half the country will experience a total eclipse of the sun. There is much excitement and nervousness in towns from Oregon to Georgia. People everywhere are traveling to the totality zone to catch a peak. Hotels, Bed and Breakfasts, and most campsites have long waitlists; so naturally, many people who want to be part of the phenomenon have limited options.

If you own a home with a spare bedroom or you have free space in your apartment, you may be tempted to rent out that space to a complete stranger using one of the many short-term rental services, like Airbnb, HomeAway, and others. You might even make your yard available for anyone willing to pay a few bucks to pitch a tent.

These services are very popular. For hosts, the apparent ease of making some quick cash and meeting new people is alluring. Most rentals probably go smoothly or these services would not have lasted so long or grown so fast. And they are not just for one-off spectacles –every city has its share of conventions, sporting events and tourism locales that would make your vacant space a prime candidate for guests.

With all the good news, there are a fair number of horror stories – people who trash their apartments, do drugs or run a brothel, those that won’t move out or put up false complaints to get a refund. I would assume these probably are not common occurrences even though they get a lot of attention. And there are lots of articles online about these problems and how to avoid them.

But one area that doesn’t seem to get as much attention is the legal barriers and issues that can arise. There are many, but here are five things you must consider before signing up your first guests.

State and Federal Law. Some states have laws on the books or they are considering new laws that will directly regulate hosts who rent out their properties. Typically, these will be concerned with revenue (i.e. taxes), reducing affordable housing, health and safety. They might also be designed to protect the hotel industry by restricting competition. You best know about these laws in advance and be certain to follow them.

You should also have a very good understanding of your state’s tenancy laws. For instance, you do not want to inadvertently create a long-term occupancy requiring a formal eviction which might happen if you rent to the same person for more than 30 days. And short of that, you might be subject to rooming house laws.

There are also federal and state discrimination laws that apply to rental housing.

You will need to consult with an attorney to get a complete picture of what might apply to you.

Local Laws. Counties, cities, and towns may enact ordinances about rental housing, rooming houses and the like. These may directly or indirectly regulate the short-term rental industry. There are also health and safety codes that must be followed, and the rules may be different for an income property than they are for a homeowner. Check with your local authorities before entering into your first rental agreement. Airbnb lists some of these on their web site, but that should be your starting point only -- do not rely on a web site for legal advice.

Leases, Condos, Co-Ops, and Homeowners Associations. If you rent, or if you live in a condominium or coop, then check your documents very carefully. Landlords, condo associations, co-op boards, and homeowner associations frequently have language in the governing documents that prohibit or restrict sublets or short-term rentals. Or they can make use of other language in the condominium documents such as business use restrictions to prohibit short term rentals. Making a mistake here can get you evicted, fined or both.

Insurance. Do NOT assume that your homeowners or renters insurance will cover you for property damage or if someone is injured. Check with your agent or the insurance company and make sure that he or she knows you are considering a rental. Ask them to review your policy for coverage and/or exclusions that would affect you. Any type of loss, especially due to personal injury, could be catastrophic if you do not have adequate coverage. The last thing you need when that happens is a fight with your insurance company. The rental companies might provide hosts with coverage, but you should study exactly what coverage is provided, including the types of events, the nature of claims that can be pursued and the limits of the policies. If you don’t understand what these are, then work with your broker or agent and ask them if you have sufficient coverage or if you should purchase more.

Terms and Conditions. Be sure to read and understand the terms and conditions of the rental company. These will govern your rights and obligations both to your guests and the rental company. You should also be aware that these companies have the right to change their terms and conditions and frequently do make changes.

Are you considering renting space in your home or apartment? Do you need advice on avoiding issues with guests and the rental companies? Would you like assistance reviewing your lease or condominium documents? Please contact me either by phone, email or through this web site. I am pleased to offer a free initial consultation and reasonable rates.

What Is a Shareholder Agreement and How Can It Help Your Business?

Alec.Livermore@townsquareinteractive.com (Alec Livermore) — Fri, 25 Oct 2024 20:27:50 GMT

What Is a Shareholder Agreement and How Can It Help Your Business?

If you own a business with one or more partners, then having an ownership agreement that sets

forth your various rights and responsibilities can help in the case of unforeseen circumstances.

These agreements are known variously as ownership, partnership, shareholder or membership

agreements, depending on the structure of your business, but they are all designed to do the same

thing. They can assist with transitioning a business through a wide range of difficulties such as

the death or disability of an owner, resolving fundamental disagreements on management, and

setting forth the rules for the sale of a member’s interest, among other challenges.

Here are some of the important provisions that may be desired in an ownership agreement:

Clarify Ownership Structure and Value: The agreement defines the interests of each

owner in the business. It outlines the number of shares or membership percentage held by

each owner. It can also set a value for each owners’ share or a formula through which the

value can be calculated in the future. This clarity helps prevent disputes over ownership

and reduces the likelihood of misunderstandings.

Protect Owners’ Rights and Resolve Disputes: The agreement sets out the rights and

privileges of owners, including voting rights, dividend entitlements, and the right to

inspect corporate records. It ensures that owners are treated fairly and equitably,

protecting their interests within the company. And in the event of a fundamental dispute,

the agreement can provide mechanisms for resolving these quickly with minimum

disruption, such as mediation or arbitration.

Establish Decision-Making Procedures: Ownership agreements typically outline

procedures for decision-making within the business, including voting procedures for

major actions such as mergers, acquisitions, changes to the company's capital structure,

borrowing and adding or removing owners. This helps streamline decision-making

processes and ensures that key decisions are made in accordance with agreed-upon

guidelines.

Define Management Roles: Ownership agreements often address the roles and

responsibilities in the management of the company. This may include provisions

regarding the appointment of directors or managers, the selection of officers, and the

delegation of day-to-day management tasks. Clear delineation of management roles helps

prevent conflicts and ensures efficient corporate governance.

Address Transfer of Shares: If an owner desires to sell their interest, will that be

allowed? What happens in the case of bankruptcy or other seizure of an owner’s assets by

creditors – what will happen to the business? Ownership agreements typically include

provisions governing both voluntary and involuntary transfers of an ownership interest.

Provisions may include rights of first refusal, restrictions on transfer to third parties or

limits on voting rights, and procedures for selling or transferring to other owners. These

provisions help maintain stability within the ownership structure of the business and

prevent unwanted third-party involvement.

Address Other Exit Strategies: Ownership agreements often include provisions

addressing exit strategies, such as buy-sell agreements or provisions for the orderly

disposition of shares in the event of death, disability, retirement, or voluntary withdrawal from the company. These help ensure continuity of ownership and facilitate smooth

transitions during unexpected periods of change.

Protect Minority Shareholders: For minority shareholders who may have limited

influence or control over business decisions, an ownership agreement can provide

safeguards to protect their interests. This may include provisions for minority protections,

such as veto rights over certain decisions or mechanisms for resolving disputes with

majority owners, whether individuals or a group of owners acting as a block.

In summary, an ownership agreement is a vital tool for establishing clear guidelines and

expectations among stakeholders, protecting their rights and interests, and promoting effective

governance. Whether your business is large or small, having a well-drafted agreement can help

mitigate conflicts, preserve value, and promote long-term success. Of course, No agreement can

guarantee that things will always go smoothly or that there will not be difficulties trying to

resolve challenges. But having an ownership agreement can certainly help avoid unnecessary

conflicts or aid in finding resolution if they should arise.