The Costs of Restructuring A Business

Canada's Slaw raises a point with its Focus on Employees: The Hidden Costs of Restructuring a Business that I think often gets overlooked when restructuring a business (whether in or out of bankruptcy) - the employees. Yes, we know they are there but do we really pay attention?

Planning for a business restructuring often takes months; yet in my experience, insufficient resources are typically devoted to managing the human resources consequences, leading to significant additional or ‘hidden’ costs. The following are some examples of strategies that can mitigate costs and losses associated with terminated or disaffected employees:

* Rumours of a pending sale of a business or layoffs are worrisome and distracting to employees, resulting in lost productivity, higher benefit costs, poorer client relations and service, and attrition of key employees. Emphasize the importance of taking steps to maintain confidentiality throughout the planning or negotiating stages.
*

How fairly employees believe they and laid off co-workers were treated during the restructuring will affect retained employees’ commitment and productivity. Consider what if any steps you can take to minimize the chances that employees will become disaffected and/or leave as a result of the restructuring.
*

If you are considering providing ‘working notice’ of termination for employees, consider the hidden costs of such a plan including increased benefit claims and costs, the potential negative impact on service to clients and customers during the working notice period, and the risk that those employees will not complete critical tasks or facilitate a transition prior to their termination. Offering a closing bonus or increased severance offer payable at the end of the working notice period dependent upon maintaining service levels or completion of the key tasks, is one way to manage those risks.
*

If the sale or closure of a business or business unit is delayed, do not expect that an extension of employees’ working notice will be welcomed by those employees. One consequence of that event is that any negotiations for the final severance packages, if not yet settled, will be negatively affected. If it is reasonably foreseeable that the sale or closure date may be delayed, consider the benefits of agreeing to more generous severance package terms in exchange for an early settlement coupled with a right for the employer to later apportion what part of the severance will consist of working notice and pay in lieu of notice.
*

Business owners who have agreed to sell their business but stay on as an employee after the closing are usually not prepared for and/or underestimate the difficulties associated with the change in control and culture that inevitably occurs. Ensure that any new employment agreements have good severance provisions that can be triggered by the former owner/now employee, and minimize any linkages to payment of the sale proceeds with the length of employment, post-closing.
*

If retention of key employees is a condition of sale, determine what is necessary to secure their employment, or continued employment. Key employees’ leverage increases as costs to negotiate and implement the sale have been incurred, and as closing nears. Consider the relative risks of early communication of a sale that may not close in order to secure key employees, versus the costs of not securing key employees early.
*

Consider the culture of an acquired business when imposing new employment contracts. Even when a purchaser agrees to offer employment to current employees on substantially the same terms, if the form of employment contract (i.e. formality, tone, or one-sided language) is at odds with what the employees are used to, the employee-purchaser relationship will get off to a bad start. That in turn may affect the employees’ willingness to buy into or adapt to operational changes implemented by the purchaser, or result in loss of productivity or other costs associated with attrition.

What does it take to start an Indiana partnership?

The following pretty much condenses Indiana's law on forming a partnership:

... Copenhaver v. Lister, 852 N.E.2d 50, 58 (Ind. Ct. App. 2006). To form a partnership, parties must join together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits. See id. In addition, to establish a partnership relation between parties, there must be: (1) a voluntary contract of association for the purpose of sharing profits and losses, which may arise from the use of capital, labor, or skill in a common enterprise; and (2) an intention on the part of the parties to form a partnership. Id. The intention that controls in determining the existence of a relationship is the legal intention deducible from the acts of the parties. Id. The intention to form a partnership must be determined by examining all the facts of the case, and the conduct of the parties reveals their true intentions and the construction they placed upon any agreement. See id.

What may not be so clear is that the "partners" may not know that they are partners. No formal partnership agreement is required - only actions as listed above.

Which makes partnerships a bit dangerous for the unwary. See partners can be held liable for the actions of other partners even without the first partner's knowledge and all the partners' personal assets are on the line.

The Madness of Litigation: Citigroup and Wachovia and Wells Fargo

At some point, every lawyer must look at his client and ask if the law suit is worth proceeding to trial or to settlement. This post looks at reports on the attempted Citigroup buyout of Wachovia as an example of this process.

The New York Times' DealBook blog has The Mad Legal Dash for Wachovia. It details the suits filed with commentary. Even now worth reading to understand the strategy of a lawsuit.

Then there was this from the ABA Journal: Judge Holds Weekend Court at Home Over Wachovia Buyout Tussle.

Meanwhile, yesterday's New York Times reports Wells Fargo Wins the War for Wachovia. Today DealBook has Citigroup Walks Away, but Legal Wrangling Continues:

But, lawyers said, Citigroup’s case will not be easy to make. Wachovia and its board have strong defenses of their actions. Corporations have obligations to protect the interests of investors, and for Wachovia to ignore a higher bid for the company would arguably have been a breach of those duties.

Then there is the issue of the bailout legislation signed into law last week by President Bush. A provision in the legislation appears to invalidate bank acquisitions “in connection with any transaction” in which the F.D.I.C. uses its authority. It is not clear what that “in connection with” language means: Citigroup has argued that it means that the deal between Wachovia and Wells Fargo was prohibited, while Wachovia is likely to argue that the bailout provision invalidated its agreement with Citigroup.

In other words, there is plenty to keep a horde of lawyers busy for years.

Business Divorces

What can be the most difficult thing about running a business? Ending it.

The Iowa Law Blog has a brilliant post on the subject: How to Avoid the Business Divorce.

I say brilliant because I say about the same thing to all potential business start ups:

Every business partnership (whether in a corporation, LLC or true partnership) should consider a buy-sell agreement from the outset. As Central Iowa financial planner Art Dinkin says, Begin with the End in Mind.

A buy-sell generally covers how an owner can sell shares and how to value those shares. Further, a good buy-sell agreement sets forth what happens in the event of death, disability, retirement, divorce, bankruptcy or other considerations.

Effective buy-sell agreements will generally require a right of first refusal. This means if one owner finds an outside buyer for his shares the owner must first offer those shares to the other existing owners. This protects the owners from suddenly running the business with someone they did not intend to have as a partner.

I especially look at the buy-sell agreements for limited liability companies. I had a bad experience in trying to get a client out of one (he did) and I am twice shy when once bitten.