Serving on a board of directors of a non-profit entity(1) is an opportunity to improve your community and help others, but it comes with certain obligations.

Each non-profit entity, in general, must have a board of directors(2).  There must be at least one director, but the number can be changed as provided in the by-laws(3).  Directors are elected by the members of a company, and unless the by-laws specify otherwise, the director(s) has a one year term and can be re-elected for five successive one year terms(4).  If the by-laws provide, the directors can be broken into groups and have their terms “staggered”.  For example, there may be two directors elected for a one year term and three directors elected for a two year term.  Directors may be removed with or without cause by the members(5) or by a court decision that the director who is being removed has engaged in fraudulent conduct, grossly abused the position, or inflicted harm on the entity(6).  Directors are responsible for appointing and/or removing officers (7).

The Board of Directors have responsibilities.  Generally, unless the by-laws otherwise provide, the BOARD is vested with all authority to act on behalf of the entity, and all of the affairs of the entity are managed under the direction of, and subject to the oversight of the BOARD(8).  The officers only have such authority as allowed to them by the by-laws or resolution by the Board(9). Stated alternately, the Board is ultimately responsible for actions of the officers and actions of the entity.  Unless it is unreasonable to do so, the Board may rely on officers to perform those responsibilities assigned to them(10).  As to particular actions/votes on resolutions, every director is required to act: in good faith, in the best interests of the entity, based on the same care “…person in like circumstances would reasonably believe appropriate…”, and based on appropriate inquiry under the facts and circumstances of the matter under consideration(12).  In making their “inquiry” directors can rely on the representations and reports of officers, employees, lawyers and CPAs employed by the entity(13).

There is personal liability for directors(14).  Directors are liable if they receive an improper financial benefit from the entity.  This can be a transaction where the director has a direct or indirect interest.  There is no liability(15) if the transaction was “fair” at the time it was entered into, or if it was approved by the Board after the director’s interest in the transaction was disclosed and was approved by the Board WITHOUT the vote of the interested director(16).  A director will also be liable if they intentionally inflict harm on the entity.  This could arise from intentionally inflicting harm on the entity and/or intentionally withholding information from the Board(17).  Directors are personally liable if their actions violate criminal law, such as assault or embezzlement.

If you serve on the board of a non-profit entity and need assistance with, or review of, your by-laws, or if you would like further information about board operations and responsibilities, contact the Kreamer Law Firm, P.C. at 515-727-0900 or at www.kreamerlaw.com.

[1] This article will only address non-profit corporations. Trust operate somewhat differently and are primarily governed by the terms of the trust establishing the entity.

[1] Iowa Code 504.801(1) Trusts operate somewhat differently

[1] Iowa Code 504.803

[1] Iowa Code 504.804 and 805

[1] Iowa Code 504.808

[1] Iowa Code 504.810

[1] Iowa Code 504.841(1) and Iowa Code 504.844(2)

[1] Iowa Code 504.801(2)

[1] Iowa Code 504.842

[1] Iowa Code 504.831(3)

[1] Iowa Code 504.831(1) and (2)

[1] Iowa Code 504.832((1)(b)(4)

[1] Iowa Code 504.831(5)

[1] Iowa Code 504.901

[1] Iowa Code 504.833

[1] Iowa Code 504.836

[1] Iowa Code 504.831(2A)

Just because someone may be a majority owner of a company does NOT mean the company can do whatever they please.  Minority owners have substantial rights and remedies to protect their interests.  Minority owners may not feel in control, but this does not mean they do not have power. 

 

A minority owner, in the context of business, is someone who holds less than 51{7643a07be85def2dedbecc56bad3bab67e83a7c22b809f3c7a47a1fa73b8911c} interest in the company, and this may be a group or an individual.  It’s an identification of who does not have the majority of the ownership.  The minority owner, is to some measure, the opposite of the majority owner.  Normally, the minority shareholders come to be when there is an entrepreneur who has a brilliant dream and is able to convince others to invest in him/her.  The entrepreneur than sells interest of the business to those people who want to participate, and they buy-in to a minority interest, leaving the entrepreneur “in control”.

 

In a Limited Liability Company (LLC), there are two types of structure.  One type of structure is member management and the second type is manager managed.  In a member managed LLC, everyone who owns a piece of the company gets to vote.  They get to run the business electively as members.   If there is no specification in an operating agreement that the LLC is to be managed by managers (or if there is no operating agreement) ALL members have equal rights to management of the company.  In a manager managed LLC, the operating agreement specifies that there will be managers.  The managers may, but do not have to be, members.  The members are the ones who vote to elect a manager.  Conversely, the manager managed LLC must have directors and those directors are charged with running the company.  This is important because ultimately, it is the directors or managers responsibility to run the company.

 

Corporations are set up a bit differently.  In a corporation, all management is vested in (one or more) directors.  In corporations and manager-managed LLCs, the directors/managers are elected by shareholders/members.  There are exceptions to this though.  Unless there is a contrary provision in the articles of incorporation or operating agreement, directors/managers are elected one at a time and are removed by a majority vote.  Unless there are special provisions in the Articles of Incorporation or Bylaws each share gets one vote.  Voting in a LLC is controlled by its operating agreement.  Directors and managers are charged with the operation of the company, which means they hire, fire and determine the salaries for employees (which also includes officers).

 

There are opportunities for abuse of minority owners.  Areas in which problems may occur are sometimes seen in salaries.  The directors who are representing the majority owners decide they need excessive salaries and/or benefits.  A director could also decide to withhold distributions (dividends).

 

We also see that when a business gets sold, we find that the sale price can sometimes include different types of considerations for the majority owner or for the officers of the company.  If there is a lousy manager, their dealings could fall under the Business Judgement Rule.  The Business Judgement Rule is if in good faith the manager is exercising their judgement, the fact that things didn’t quite work out as anticipated, is not exactly the type of thing that is designed to be a protection for the minority owner.  On the other hand, if the manager is advertently acting or engaging in self-indulgence, then you have a situation whereby the Business Judgement Rule factors in.  It is important who runs the company, because everyone who runs the company gets an equal vote in the company.  What is meant by this is, if you have two directors, and one director is represented by the majority, and the second director is the minority owner, they each get one vote in making decisions, so it is an indirect link between ownership, capital accounts and voting rights.  More importantly, you have to look at what the applicable documents define the role of the manager(s) or director(s).

 

There can be protection for minority owners which would be written as provisions in the bylaws or operating agreement.  All shareholder/members have the right to access, inspect, and copy business records.  These records include minutes of meetings and financial and accounting records.  The directors, managers and officers have a duty to the company and ALL owners.  Their actions must be in good faith, in reasonable belief of the director /officer to be in the best interests of the corporation, and there must be a reasonable basis for decisions being made.  Otherwise, the minority owners can sue for damages or injunctive relief if directors or officers fail to meet this level of care.  When it comes to the sale of substantially all assets or dispositive merger, the sale requires unanimous consent of the LLC members.

 

There is a different type of protection for corporations.  In a corporate setting, they have what is called a shareholder that votes against action to be taken.  Shareholders who vote against the sale or dispositive merger^[1] have the right to have their shares purchased by the corporation at “fair value” and if necessary can get their legal fees paid by the corporation.   This provides a right for the majority to buy-out a minority, but it does have to be at fair market value, whatever it may be at the time, by statute.  This is one of the differences between Corporations and Limited Liability Companies.

 

In a Samson option to dissolve a business, a court can order the dissolution under certain circumstances.  One situation is when directors/managers are deadlocked in the management of the corporate affairs, and the shareholders are unable to break and the deadlock is injurious to the corporate business affairs.  Another condition may be if the directors, managers, or those in control of the company have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent.  A court may also dissolve a business if the company’s assets are being misapplied or wasted.

 

When a company is dissolved, it cannot carry on ANY business EXCEPT as appropriate to liquidate its business assets and activities.  After all creditors are paid, the assets are distributed to owners (pro-rata).  There are some assets, like intellectual property, that may have to be valued and distributed “in-kind” to owners.  For corporations, in lieu of a judicial dissolution, the remaining shareholders can purchase the complaining shareholder’s shares at “fair value”.

 

What is to be learned by this, is don’t cheat minority partners.  Make sure there is a clear agreement among all the parties as to what their rights are going in.  For instance, how do directors get picked, how do operating agreements get amended, who gets what and when do they.  These are important things to question and think about.

 

Contact the Kreamer Law Firm, P.C. at 515-727-0900 or info@kreamerlaw.com if you need assistance dealing with co-owners of your company from a West Des Moines lawyer who knows business law.  Kreamer Law Firm also specializes in Wills, Trusts, Estate Planning, Powers of Attorney, and Probate issues.  Give us a call today. We get things done®.

[1] Abuse could be selling on terms which wind up benefiting the majority shareholders; or refusing to sell on terms which could benefit minority shareholders. A dispositive merger is where the company owned does not survive.

[2] Iowa Code 489.407(1)(a)

[3] Iowa Code 489.407(3)(f)

[4] Iowa Code 489.407(1)

[5] Iowa Code 489.407(2)(a) and (b)

[6] Iowa Code 490.803(2)(a) Can be changed by vote of Shareholders

[7] Iowa Code 490.801(2)

[8] Iowa Code 490.803(3), Iowa Code 489.407(3)(e)

[9] Iowa Code 489.407(2)(c), Iowa Code 490.803(3), and Iowa Code 490.808

[10] Iowa Code 490.721(1)

[11] Iowa Code 489.110(1)

[12] Iowa Code 490.801(2)

[13] Iowa Code 490.1602(1) and Iowa Code 489.410

[14] Iowa Code 490.830(1), Iowa Code 490.84.(1) and Iowa Code 489.409

[15] Directors, managers, and officers have a duty to make decisions with the care that a person in a like position would reasonably believe to be appropriate. See Iowa Code 490.830(2), Iowa Code 490.831, Iowa Code 490.832(3), Iowa Code 489.409(8). This confers some responsibility to investigate the factual basis for the decisions being made.

[16] Iowa Code 490.831, Iowa Code 490.842(3) and Iowa Code 489.701(2).

[17] Iowa Code 490.1301 et. seq.

[18] Iowa Code 490.1331

[19] Iowa Code 489.407(2)(d) and (3)(d). The impact of an operating provision varying this requirement (per Iowa Code 489.110) is unclear.

[20] Iowa Code 490.1430(2) and Iowa Code 489.701(d) and (e)

 

 

 

Very few people sell multiple numbers of businesses.  Accordingly, MOST businesses are sold by “first time” sellers.  The purpose of this article is to provide you some insight on the steps you should take in the course of selling your business.

• Self-Assessment
  • Are you in fact selling a business?
    • If you are the key employee and if you have all the contacts it is possible you are selling a JOB and not a business.
    • The hallmark attributes of a business (as distinguished from a job) are:
      • They maintain and follow established systems and procedures
      • They produce regular, reproducible results
      • Reoccurring clients/products
      • There are no indispensable employees (including YOU)
  • Why are you selling this business?
    • Unprofitable businesses rarely sell. Commonly they simply close.
    • Burn-out and retirement can be seen as an opportunity for a change on both leadership and ownership.
    • Looming industry changes can dissuade a buyer.
  • Who are the most likely buyers for the business?
    • An internal buyer (family member or key employee)
    • An external buyer (most often a competitor or someone in the industry seeking to enter the market)
  • Consider a pre-sale audit
    • Do a SWOT (strengths, weaknesses, opportunities and threats) assessment
    • Do an appraisal of the BUSINESS
    • Do an internal review of your legal infra-structure
      • Employment agreements with key employees including non-compete agreements
      • Agreements with key vendors
      • Lease agreements
      • Assignability of key contracts (including the foregoing)
    • Do an internal review of your “systems’ and procedures.
  • Identify “QUALIFIED” buyers
    • Qualifications of a buyer in a successful transaction include:
      • Experience with either the particular business or the industry in which the business is operating
      • MONEY
    • Business brokers exist and can perform a VALUABLE service (for which they intend to be paid)
      • NORMALLY the Seller (or the Seller’s business) pays the broker.
      • NORMALLY the broker represents the Seller
      • Brokers can sometimes provide industry insights due to specialization (example a broker who deals primarily with restaurants may have insight into the local restaurant market).
      • Brokers primarily provide potential Buyers with information given to them by Sellers. Brokers sometimes, but rarely, verify Seller information.
      • As with all professionals, some brokers/brokerage firms are better than others.
    • Selling a business which is subject to a franchise can be tricky.
      • Franchisors normally are permitted to withhold franchise rights if the buyer does not “qualify” as a franchisee.
      • “Qualification” can be based on experience or finance or both.
      • If a potential buyer would otherwise qualify as a franchisee they are a better candidate to buy the business.
  • Determine an “Asking Price” for the business
    • IT IS AS RARE AS A WINNING THE LOTTERY FOR A SELLER TO GET THEIR ASKING PRICE
    • An appraisal provides some indication of and independent assessment of the value of the business. These are as much art as they are science.
    • Sellers most often establish pricing based on:
      • How much they think they “need” to sell the business in order to:
        • Fund their retirement
        • Meet their subjective valuation of their efforts
      • ULTIMATELY, the BUYER determines the price of the business since they are the ones paying
    • Although no one wants to “leave money on the table,” it is important that the buyer is able to make a reasonable income.
    • The tax implications of the deal structure can influence the asking price
      • A Seller may take/get less for a stock sale v. an asset sale
      • Allocations of total consideration among non-compete agreement, consulting agreement, lease or other assets can influence the asking price
    • Assemble a team to assist you which should include:
      • Qualified business lawyer
      • Banker
      • CPA
  • Executing a Confidentiality Agreement
    • This is like dating- the parties begin to find things out about each other.
    • These are commonly signed before any information is given out about the Seller
    • While not a “standard” form, these agreements are generally all similar
    • After confidentiality agreement is signed the Buyer normally receives a significant amount of information about the Seller
  • Executing a Letter of intent
    • This is like going steady or dating exclusively- there is a significant interest in entering into the relationship.
    • It is normally non-binding (either party can still walk away from the transaction)
    • MANY transactions do NOT employ a letter of intent
    • This establishes the broad parameters of the transaction
      • Price- Normally 4 to 6 times 3year average adjusted taxable income
      • Terms of payment
      • Outlines, in broad terms, additional agreements (Seller consulting agreement; Seller non-compete; leases)
      • Outlines, in broad terms, contingencies to closing such as obtaining bank financing or franchisor approval
    • Be careful of broker provided documents. Sometimes these create a binding agreement before Buyer is ready to commit to the transaction
  • Due diligence (not really an isolated step)
    • This may commence upon the signing of the confidentiality agreement or may be deferred to the signing of the contract.
    • Due diligence refer to the Buyer’s investigation of the Seller and the confirmation of the information provided by the Seller. The investigation should be quite thorough and should include discussions with:
      • Key employees- and FORMER employees
      • Key customer/clients
      • Key vendors
      • Key industry individuals
    • Seller may restrict due diligence until there is a contract in place to avoid upsetting Seller’s employees, Seller’s customer/clients, and or Seller’s vendors/creditors
    • The due diligence investigation is- by far- the most important part of the transaction
    • Often the CPA firm of the Buyer takes the lead in conducting the due diligence
    • Regardless of when the due diligence period commences, Buyer should not close the transaction until they have fully satisfied itself with the results of the investigation and/or the future action Buyer may take as the result of the findings
    • Remember: past results may not reflect future performance
  • Executing a Contract
    • This is like the engagement of the parties to the transaction
    • This is the legally enforceable document which outlines ALL of the fine points of the deal
    • The contract will specify the terms of payment
      • Normally there is some nominal payment at the time of signing the contract for sale
      • About 75{7643a07be85def2dedbecc56bad3bab67e83a7c22b809f3c7a47a1fa73b8911c} of the total sales price gets paid at “closing”
      • About 25{7643a07be85def2dedbecc56bad3bab67e83a7c22b809f3c7a47a1fa73b8911c} of the total sales price gets paid in the form of a promissory note from the buyer
        • Terms and interest rate vary from deal to deal but 3-5 years is not uncommon
        • This loan is normally subordinated to other financing and therefore gets paid last. Hence it has the highest risk of non-payment
        • Because this often represents a significant portion of the “profit” on the transaction, it is important that it gets paid. Hence, the importance of having a qualified buyer will be able to conduct the business in a manner which will provide payment
    • The BULK of the document comes from the representations and warranties
      • These are the written memorialization of the assurances the parties give each other as part of the transaction.
      • These normally include statements as to:
        • Proper formation
        • No undisclosed liabilities
        • No pending legal actions (either governmental or private action)
        • Compliance with laws rules and regulations
        • Title to assets
        • Payment of taxes
        • Required approvals of the transaction
        • MANY other issues
      • Although Buyer checks into many of these matters as part of due diligence, Seller can be liable for representations and warranties which turn out to be untrue
  • There are often disclosure schedules attached to the contract which provide additional information. Example: a disclosure statement may supplement whether there are any outstanding contracts
  • There are often MANY revisions before a contract is finalized
  • The contract may establish post-closing obligations. These might include:
    • A covenant that the Seller not compete
    • An agreement that the Seller will help train the Buyer
    • A requirement that the Seller favorably introduce Buyer to customer/clients and vendors/creditors
    • A requirement that the Buyer provide the Seller with information about the business’ operations until the full purchase price is paid
    • Depending on the type of transaction
• Closing of the Transaction
  • This is BOTH the wedding (for the Buyer) and the divorce (for the Seller)
  • Takes place after all pre-conditions have been met and approvals have been obtained
  • This is when the “real” money changes hands, the transfer documents are signed and exchanged and the buyer takes control of the business
  • Most transaction “problems” come to light in 6-24 months following closing

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