2. Creation of a Business Plan
To attract outside capital requires a business plan that describes the company, its products, and its
anticipated performance. Key issues in negotiating the terms of investment include—
• Disclosure of trade secrets and a confidentiality agreement.
• The degree of ownership and control the venture capitalist will receive in exchange for the capital
contribution.
CASE SYNOPSIS—
Case 43.2: Halo Technology Holdings, Inc. v. Cooper
Halo Technology Holdings, Inc., was the parent company of HTH Emp., Inc., which was known as New Empagio.
Randall Cooper and others managed New Empagio. To pay off a $20 million loan to the subsidiary, Halo sought to sell
it. Cooper allegedly discouraged potential buyers. He and others (the Cooper Group) then obtained capital from the
Primus Group to buy New Empagio themselves. Primus signed a nondisclosure agreement with Halo. Meanwhile, the
Cooper Group obstructed other potential buyers and drove down New Empagio’s value. Primus offered Halo $14.5
million, which the seller rejected. Unable to find another buyer, Halo, and later New Empagio, filed for bankruptcy. The
two firms filed a suit in a federal district court against Cooper and Primus on charges of breach of contract, wrongful
interference with a business relationship, and others. The defendants filed a motion to dismiss.
…………………………………………………………..……………………………………………………………………
Notes and Questions
What fact missing from the circumstances of this case was most important to Halo’s cause of action and,
if it had existed, could have led to a different result? Halo’s efforts to find a buyer for New Empagio had failed to
advance to a point where a reasonable probability of a contract with a potential investor was realistic. Thus, the basis
for Halo’s claims was limited. It could not argue much more than that a buyer might have been interested if the
circumstances had been otherwise. This missing element was important—with it, the plaintiff might have alleged that
the defendants had tortiously interfered with a contractual relation, just as New Empagio did.
1058 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 43.2
There was an important legal distinction in the duties that the defendants owed to Halo and New
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 43.2
Why did the court dismiss Halo’s claims? The court dismissed Halo’s claims “at this point in the litigation”
because it found that Halo had no standing. Recall from Chapter 2 that a party must have a sufficient stake in the
C. SECURITIES REGULATION
1. Private Offerings
2. Public Offerings
Public offerings may raise large amounts of capital but must be registered with the SEC and applicable state
agencies. Full registration is complex. The Small Corporate Offering Registration (SCOR), a simplified
process, for small businesses has been adopted by the SEC and in forty-three states.
VII. Shareholder Agreements and Key-Person Insurance
Provisions should be made, in writing, to establish the result should partners or shareholders die or become disabled,
or disputes make decision making impossible.
A. SHAREHOLDER AGREEMENTS
A shareholder agreement defines relative ownership rights and interests.
1. Buy-Sell Agreements
2. Buy-Sell Agreement Provisions
A buy-sell agreement might include—
1060 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
* The price of the shares that will be sold.
B. KEY-PERSON INSURANCE
To protect against the risk that a key person may become disabled or die, business enterprises typically obtain
key-person insurance.
VIII. Contract Law and Small Business
Small businesses are subject to the common law of contracts. As a general rule, a contractual agreement should be in
writing: if a dispute arises, there will be written evidence of the terms.
A. CONTRACT FORMS
An attorney might be consulted for this purpose.
B. POTENTIAL PERSONAL LIABILITY
A businessperson who incorporates will want to enter contracts as an agent of the corporation, not in an indi–
vidual capacity. The same principle applies to negotiable instruments. The same advice applies to partners and
partnerships.
IX. Employment Issues
Businesses with fewer than fifteen employees are exempt from federal laws prohibiting employment discrimination
and certain other federal acts, such as the Family and Medical Leave Act of 1993. Some states have similar exemptions.
The regulations of the Occupational Safety and Health Administration have no small-business exceptions.
A. HIRING EMPLOYEES
Legal issues important at the hiring stage include—
1. Employment Contracts
2. Verification of Applicants’ Credentials
Applicants’ credentials and job experience should be verified.
CHAPTER 43: LAW FOR SMALL BUSINESS 1061
Most states require that an employer to carry workers’ compensation insurance. Premiums are initially based on
the size of a payroll and the amount of risk involved in the business. Rates may be raised or lowered, depending
on the business’s safety record.
C. FIRING EMPLOYEES
1. Employee Files
2. Severance Pay
A law may govern the timing of a final paycheck, but severance pay is not required.
3. Wrongful Discharge
An action for wrongful discharge may follow a termination in bad faith (such as in violation of an
employment contract).
D. INDEPENDENT CONTRACTORS
1. Benefits of Independent Contractors
Advantages of using independent contractors include—
2. Liability for Misclassification of Workers
A disadvantage of using independent contractors is the lack of control over how they do their work. But
misclassifying a worker can result in additional tax liability.
TEACHING SUGGESTIONS
1. Discuss the effects that the increasingly competitive global business community has on the choices represented by
the topics in this chapter. Does global competition influence such decisions as the form of organization a
business selects? In what ways does such competition affect an enterprise’s employment practices,
attraction of outside investors, and use of trade names and other intellectual property? As an example of the
2. Ask students to play the role of small businesspersons and discuss some of the issues raised in this chapter: which
business form to choose, how to attract business capital, how to enter into business, how to maintain control of a
1062 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
business, and so on, and the legal ramifications of the business decisions in these areas.
Cyberlaw Link
Does the existence of the Internet make it easier, more difficult, or no different to be the owner of a small
business?
DISCUSSION QUESTIONS
1. What are the roles that an attorney may fulfill in representing the interests of a client? An attorney may act as a
2. How does a potential client find an attorney? A potential client may consult friends, relatives, local or state bar
associations, a professional directory, or the telephone directory. What is the relationship between an attorney and his or
her client? An attorney and a client sign an agreement outlining services and fees. The client must disclose all relevant
3. What are factors to consider in deciding whether to engage in a lawsuit? Factors to consider before filing a lawsuit
4. In choosing a business form, which factor is the most important? No single factor takes precedence. Much of the
5. What is the primary consideration in choosing a corporate name? The name must be different from that used by
6. What should a business do to protect its trade secrets? To protect trade secrets, companies may require
7. How does the common law of contracts affect entrepreneurs? As a general rule, a contractual agreement should
8. Does the fact that a business is exempt from specific employment laws mean that the enterprise can ignore
those laws with impunity? Not necessarily. For example, a business that is not subject to specific federal or state
9. What are some of the important legal considerations when hiring employees? The person hired should be
10. What are some of the important legal considerations when firing employees? Good cause for terminating a
worker should be documented to succeed in suits for unlawful discrimination or some other legal violation. There may a law
governing the timing of a final paycheck, but severance pay is not required. Termination should not be in bad faith. To avoid
suits for defamation or misrepresentation, employers should be cautious in commenting both to employees and to other
employers.
ACTIVITY AND RESEARCH ASSIGNMENT
Ask students to find out what is required to pay taxes as different forms of business organizations. The Internal Revenue
Service publishes a pamphlet on business taxes that students might find useful. Ask students to research further what is
required if the enterprise has employees. What about state and local taxes?
1064 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
Footnote 5: 1 Cache, L.L.C., applied for credit with DBL Distributing, Inc. Gary Bracken, the president of 1 Cache,
signed the application, which stated that “[t]he undersigned agrees to unconditionally guarantee payment.” The signature line
was captioned “By:” and “Owner/Corporate Officer/Partner/Principal” was printed underneath. A later version stated, “The
undersigned agrees to personally guarantee payment.” Bracken signed the later version with the hand-written notation
“president, only in his representative capacity.” 1 Cache filed for bankruptcy. DBL filed a suit in a Utah state court against 1
Cache and Bracken, asserting that he was personally liable for 1 Cache’s unpaid debt. The court dismissed DBL’s claims. DBL
appealed. In DBL Distributing, Inc. v. 1 Cache, L.L.C., a state intermediate appellate court reversed and remanded for a
possible trial on the contested facts. “[A] corporate signatory is not individually liable on an instrument that he signs in a
representative capacity,” but “[t]o relieve an individual signer from liability, the signer’s corporate capacity must be clear from
the form of signature.”
Should the court have issued a summary judgment in DBL’s favor on the issue of the executive’s liability for
the debt? Not based on the record in this case. “The guarantee language contained in Gary Bracken’s 1999 credit application on
behalf of 1 Cache, and his failure to limit his 1999 signature to his corporate capacity, create the possibility of personal liability
Suppose that Bracken had signed the credit application “Gary Bracken, president, for 1 Cache, L.L.C.” Would
he have been personally liable for the debt to DBL? Why or why not? No, because Bracken’s signature would have
included “limiting language” that clearly indicated his corporate status and his signing of the application on the firm’s behalf
(“president, for 1 Cache”). Yes, because the contract stated that the signatory personally guaranteed repayment of the debt,
and as the court stated, “clear language of personal guarantee in a document can result in personal liability despite a corporate
signature.”
If Bracken had submitted the application online, with “Gary Bracken, president, for 1 Cache, L.L.C.” typed in
the space for a signature, would he or 1 Cache have been bound to repay the debt? Explain. Yes, the application would
likely have been binding and either Bracken or his firm, or both, would have been liable for the debt. A typed signature in an e-
document can be as binding as a written signature in a hard copy if the parties to a transaction have agreed. Agreement can be
implied when the creditor makes the application available online, and the debtor fills it out and submits it via the same medium.
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What are the primary factors to consider when choosing a business form? Factors to consider when choosing a
business form include: (1) Limitations on liability. Some business forms limit the personal liability of the owner or partner of a
CHAPTER 43: LAW FOR SMALL BUSINESS 1065
firm if, for example, a court awards damages to a customer injured on the premises. Forms that limit this liability include
corporations, limited partnerships, limited liability corporations (LLCs), and limited liability partnerships (LLPs). (2)Taxes. Sole
proprietors and partners pay taxes on business income as individuals. Most corporations involve the imposition of a double tax,
first on the corporation, which pays tax on its profits, and then on the shareholders, who pay taxes on the profits that are dis–
2. What are some of the important considerations in discharging an employee? Unless otherwise specified, an
employee can be discharged for any reason. An employer would not want a discharge to be in bad faith, however, because an
employee might then bring an action for wrongful discharge. The employer’s defense to such a suit would be to have, and to
have documented, good cause for the termination. Another consideration in the context of employee discharge is to avoid
discrimination (for example, terminating only women or minorities). Employers with fewer than fifteen employees are not
REVIEWING—
LAW FOR SMALL BUSINESS
APC, Inc., is a venture capital firm that invests in new businesses to help them grow. Wyatt Newmark owns and
serves as a chef at “Earp’s,” a restaurant with a Western design that he operates as a sole proprietorship. Newmark has
five employees at his restaurant—three servers, another chef, and a janitor. Newmark has had great success and hopes
to expand or franchise the business. Newmark, who has not even retained an attorney for his small business, has
approached APC for an investment. Ask your students to answer the following questions, using the information
presented in the chapter.
1. What approaches may APC take in order to invest in the restaurant, and what are the legal implications of
each approach? An LLC would be a common form as it limits the liability of the parties. It can be structured in almost
2. If APC takes an equity interest, the restaurant will need a new legal organizational form. What form would
you recommend? Why? The LLC allows limited liability and allows the parties to come to an operating agreement
that lays out which party is responsible for which part of the operation and how it can be expanded in the future if
3. In order to preserve the opportunity for growth and a possible franchise, what legal filings should
Newmark’s entity undertake? Assorted licenses such as tax and health are needed for any restaurant. If this one
4. What is the difference between employee status and independent-contractor status? Which form of
employment relationship would be more advantageous to Newmark? Why should employers be cautious
when designating workers as independent contractors? It is in the best interest of both parties that Newmark be
CHAPTER 43: LAW FOR SMALL BUSINESS 1067
an employee. He will be a leader, perhaps president, but most important is that as a part owner he will have a strong
financial interest to make the operation a success. APC wants him to have that interest. As an independent contractor,
not only could he be easily dismissed by APC, but he could not have an equity share to build nor would he participate in
managerial control. The IRS would certainly consider such a key person an employee, not independent contractor, so
there is no need to irritate the IRS or other taxing authorities.
DEBATE THIS:
The new penalty tax on employers that do not provide health insurance for their employees should apply
to all employers, not just those with fifty or more employees. If the current new health care reform law remains
as is, then all those employers with fewer than 50 employees will not be punished if they do not provide health care
insurance for their employees. That means that many American workers will continue to be without this valuable
insurance.