NJ Business Law Blog

The Importance of Attending to Corporate Formalities

Business Law: Corporate Formations: On this blog, we have previously discussed the fact that registering a business name with the State may be insufficient to adequately protect the corporate owners from individual liability. (Please see Simply Registering a Company Name is Insufficient to Avail Business Owners of the Protections of the Corporate Shield). The logical next step for a business owner would be to move beyond the sole proprietorship model and register the business with the State.

However, it is important to keep in mind that this too may not be sufficient. Establishing a corporate presence, whether in the form of a limited liability company, limited partnership or a corporation, is important in order to create a liability shield that will help insulate the business owners’ individual assets. There are various ways of piercing this veil and creditors may nevertheless be able to try to access those individual assets.

One way of doing this is for a creditor to argue that the corporation is really a sham, and not operating as a true organization. Rather, the argument would be that the individual owner of the company is really acting in his individual capacity, rather than through a separate legal entity. One of the ways in which this attack is made would be by showing that the requisite corporate formalities were not attended to.

In this regard, simply forming the company with the state and obtaining a tax identification number may be insufficient. Instead, a business owner should do everything possible to bolster the corporate shield and to prove that the corporation has an operation and existence that is separate and apart from the individual owner(s). This is particularly important for small businesses and entrepreneurs.

The best way to start this is to have all of the appropriate corporate documents put in place. If the company is a limited liability company, it should have, at a minimum, a signed operating agreement, meeting minutes, organizational resolutions and a ledger of its members. Similarly, a corporation should have, at a minimum, bylaws, a shareholder’s agreement, meeting minutes, organizational resolutions, issued stock certificates and maintain a ledger of those distributions. All of these documents need to be signed and issued, and not just exist in blank form.

In addition, both types of organizations should have annual and special meetings and should have those meetings memorialized in the corporate form. This may sound silly if the business is owned by just one person, but that is precisely the situation in which it is even more important to attend to these formalities. This is because where there is just one or two owners, the argument can be more easily made that they are really acting in their individual capacities. Thus, even a sole-owner should ensure that he is, from a legal perspective, operating the business in accordance with corporate formalities to help enhance the valuable corporate shield.

Comments/Questions: ljm@gdnlaw.com

© 2009 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com

New Jersey Legislature Establishes the InvestNJ Business Program to Encourage Capital Investments in that State

Business Law: Recognizing the current economic condition of the Country generally, and the State of New Jersey in particular, the New Jersey Legislature passed, and the Governor signed into law, in December, legislation aimed at encouraging people and companies to invest in New Jersey businesses. The InvestNJ Business Grant Program Act (the “Act”) provides a grant to eligible businesses that make capital investments in the State. The grant is calculated as seven percent (7%) of the capital investment made, but may not exceed $1 million to any one grantee. Moreover, the sum of all of the capital investment grants given by the state are not to exceed $70 million.

For purposes of the Act, a capital investment is an expense of at least $5,000 incurred for “the direct use and operation of a business for (1) the site preparation and construction, renovation, improvement, equipping of, or obtaining and installing fixtures and machinery, apparatus or equipment in, a newly constructed, renovated or improved building, structure, facility, or improvement to real property; and (2) obtaining and installing fixtures and machinery, apparatus or equipment in a building, structure or facility.” To be eligible to receive the InvestNJ grant, the grantee must be a business that (a) operated for at least two years before the grant application was submitted; and (b) employed at least five full-time employees. Moreover, the grant needs to have been made between the effective date of the Act, December 9, 2008 and January 1, 2011.

To receive the grant, the business must submit an application, in the form provided by the CEO of the New Jersey Economic Development Authority before January 1, 2011. Another feature of the Act provides incentives to New Jersey businesses to add employment opportunities within the State. Specifically, the Act provides for the provision of a grant to businesses that (a) operate continuously in New Jersey for at least two years prior to filing the application; (b) employ at least five full-time employees; (c) add a position created in New Jersey after December 1, 2008 and before January 1, 2011 for a period of at least one year; and (d) had a “net increase” in employment of eligible positions within that time period. For purposes of this provision, an “eligible position” is defined by the Act as a full time position where the individual’s payment is subject to New Jersey tax withholding, and for which the business provides employee health benefits under its group plan. The law specifically excludes positions for consultants or independent contractors. Again, a business looking to receive a grant for its new hiring, in accordance with this Act, needs to submit an application by January 1, 2011. The grant to be provided is $3,000.00 for each eligible position, but one business may not receive more than $500,000.00 in grants for creating new eligible positions. Moreover, the total amount of grants issued for the creation of new positions is not to exceed $50 million.

Business owners, entities looking to establish businesses in New Jersey, and potential buyers and sellers of New Jersey businesses should all be aware of the financial incentives being offered by the State for investing in New Jersey businesses.

Comments/Questions: ljm@gdnlaw.com

© 2009 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com

Utilizing State Claims To Obtain Relief Where You Lack Standing Pursuant to Federal Anti-Trust Laws

Federal antitrust laws seek to protect those entities that purchase goods directly from parties engaged in unlawful trade restraints, monopolies and other acts that violate antitrust laws. However, in a situation involving an antitrust violation, it is evident that certain other entities or individuals may also be indirectly injured as a result of these improper acts. For instance, take the situation where a manufacturer and its distributors agree that a certain product will only be sold at an inflated price. Suppliers who purchase products from those distributors must now pay excessive amounts for the product. The supplier will then sell the product at an inflated priced to its customers in order to recoup the inflated price charged by the distributor.

In such a situation, the supplier may have a claim pursuant to federal antitrust laws since it directly purchased products from an entity that may have engaged in unlawful restraints on trade. However, under federal law, the end users of the product would be precluded from bringing a claim, despite the fact that they may have been harmed by having to pay such high prices for the product. Could the end user circumvent the standing requirement of federal antitrust laws by bringing a claim under state law?

This question was recently examined in Stepan Co. v. Callahan Co., a decision issued by the District Court for the State of New Jersey. In that case, the Court determined that federal antitrust laws preempted a plaintiff customer’s state claim for unjust enrichment. There, the defendant supplier had received settlement proceeds in a separate action from a distributor who had charged inflated prices for a chemical product in violation of federal antitrust laws. The plaintiff had purchased the chemical product from the defendant supplier for an amount that was based on the distributor’s inflated price. Accordingly, it argued that by retaining the settlement proceeds, the defendant supplier had been unjustly enriched as it passed on the inflated price to the plaintiff customer.

Nonetheless, the Court dismissed the plaintiff’s state claim, finding that allowing such a claim would run afoul of the standing requirements imposed by federal antitrust laws. As mentioned above, only direct purchasers of a product (and not indirect end users) may pursue claims against sellers that engage in federal antitrust violations. The Stepan Co. Court reasoned that if it permitted the plaintiff customer to bring a claim under state law, it could open the door for a vast array of indirect purchasers to bring suits where a direct purchaser recovered monies in connection with an antitrust violation.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com

Simply Registering a Company Name is Insufficient to Avail Business Owners of the Protections of the Corporate Shield

Business Law: It is an oft-asked question: I created a name for our business, isn’t that enough? Simply operating under a business name is generally not enough to protect the individual business owners’ rights, nor to comply with state laws regarding the operation of a business. Even if operating as a sole proprietorship (and not forming an entity with the state), a business still generally still needs to register the name of its business with the State. States generally require all businesses operating within them to register. Registration is essentially a way for the government to keep track of the different businesses and entities providing goods and services within the state and to ensure that taxes are paid.

Moreover, there are important benefits associated with operating a business through a corporate entity. One of the biggest reasons to form a company is to help protect the individual owner’s personal assets. A properly formed corporate entity is an independent, legal entity that is generally considered to be separate and distinct from its individual owners. If properly formed, and if the critical corporate formalities are adhered to, owners can take advantage of the corporate liability shield, often called a “corporate veil,” that generally shields the liabilities and debts of the company from becoming those of the shareholders. While there are exceptions to this protection, it is an important safety measure to seek when operating a business.

Comments/Questions: ljm@gdnlaw.com
© 2008 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com

In New Jersey, LLC Members May Be Removed from the Company Without Cause

Business Law: Under the New Jersey Limited Liability Company Act, N.J.S.A. 42:2B-1 et seq., the involuntary dismissal of a member of an LLC is permitted where “the member engaged in conduct relating to the limited liability company business which makes it not reasonably practical to carry on the business with the member as a member of the limited liability company.” N.J.S.A. 42:2B-24b(3)(c). Notably, this provision is separate and apart from the provision providing for involuntary removal of a member where he engages in illegal, fraudulent or otherwise wrongful conduct which negatively impacts the company’s business. Accordingly, it would appear that under New Jersey law, a member may be forced out of an LLC by the other members for engaging in conduct that is not unlawful or even wrongful. A plain reading of the statute suggests that the members of an LLC may remove one of its members for committing any act which, in their view, makes it “not reasonably practical” to carry on the business.

In practice, this could pose a serious threat to the members of any LLC having multiple members. Arguably, and depending on the subjective interpretation of this provision, a member could be removed from the company against his will for even a basic difference in opinion as to how the company should be run. On the other hand, where the members of an LLC are concerned about not having an adequate remedy for potential personal or business-related conflicts among them, this provision of the LLC Act could prove extremely useful. Essentially, those members sharing the majority opinion in how the business should be run could utilize this provision to ensure that a dissenting member will not stand in the way of their common objectives, even if ultimately the majority’s approach proves to have been wrong.

So, how should the members of an LLC deal with this issue? As in all things relating to LLC’s, this highlights the need for strong and well-negotiated operating agreements. That is because the statute’s rules governing involuntary dismissal of a member of an LLC would only apply where either (a) there is no operating agreement or (b) there is an operating agreement, but it is silent on that point. Accordingly, in forming and establishing the ownership structure of an LLC, the members should carefully negotiate and execute an operating agreement that specifically defines the terms governing involuntary dismissal. By doing so, the members may effectively protect their respective interests in the LLC and avoid future confusion or disagreement as to when it becomes “not reasonably practical” to carry on the business. Or, even if the members do agree to such a provision, they can do so understanding its implications.

Comments/Questions: ljm@gdnlaw.com
© 2008 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com

Southern District of New York Reaffirms that Company Executives Can Be Personally Liable for FTC Violations

Business Law:  The Southern District of New York recently decided Federal Trade Commission v. Medical Billers Network, Inc., et. al., in which it reaffirmed the holding that an individual company executive can be held liable for the company’s acts under the Federal Trade Commission Act.  The Medical Billers case revolved around a “work at home” marketing program, where the defendant offered individuals the opportunity to purchase systems and then process medical billing claims from their homes in exchange with the promise of making “an average of $400-600 per week.”  The Federal Trade Commission (FTC) was involved when purchases of these packages requested refunds that were either refused by Medical Billers, or to which Medical Billers simply did not respond.   

The Federal Trade Commission Act (the “Act”) prohibits unfair and deceptive sales and marketing practices.  15 U.S.C. §5(a)(1).  Three elements generally need to be demonstrated: “(1) a representation, omission, or practice, that (2) is likely to mislead consumers acting reasonably under the circumstances, and (3) [that] the representation, omission, or practice is material.” 

The aspect of this case that is critical is that the FTC did not just pursue legal remedies against the corporate defendant.  Rather, it also sued the individual owners. And notably, this pursuit was successful.  In other words, the corporate shield was ineffective to protect the individual owners and officers of the company from FTC Act liability.  In reaching this decision, the Court, citing its previous holdings, articulated the following:

Individual defendants may be liable for corporate acts or practices if they (1) participated in the acts or had authority to control the corporate defendant and (2) knew of the acts or practices. . . . ‘Authority to control the company can be evidenced by active involvement in business affairs and the making of corporate policy, including assuming the duties of a corporate officer.’ (citations omitted).

The case therefore reiterates the importance of ensuring that business practices and promotional materials do not, even inadvertently, fall under the classification of false or deceptive.

We therefore recommend the following:

• Ensure that all advertising and promotional materials have been cleared by legal counsel prior to their publication and distribution.
• Implement employee training to advance sales methods that are effective, but not violative of the Federal Trade Commission Act.
• Implement management controls to verify that the recommendations and training protocols are being internally adhered to.

Comments/Questions:
ljm@gdnlaw.com

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com