Contracts: The Basics

Understanding contracts is essential for a small business. Contracts are the basic building block of our economy and the legal principles of contract formation and enforcement go back centuries but are still in effect today.

Contracts require a “meeting of the minds” between the contracting parties and are enforceable in our courts. Contracts need to be clear and unambiguous and should be in writing and signed by the parties. In certain cases, oral contracts are enforceable but without a writing the terms are very hard to prove. For this reason, business contracts should always be in writing. The basic principle of contract interpretation by the courts is to determine what is the intention of the parties as determined by the four corners of the written document. Deals may be sealed with a handshake but fade away without a written document.

Contracts also require consideration to be enforceable. Consideration means that the parties exchange mutual promises or that one party agrees to provide a benefit to the other party or agrees to accept a detriment in consideration for the contract. A promise to make a gift is not enforceable because the receiving party has made no promise, payment or other consideration to the gifting party.

Under the Uniform Electronic Transactions Act (UETA), contracts can be signed electronically by using systems such as DocuSign as long as the parties intend to sign and do business electronically and keep a record that can be stored and reproduced as a copy. All states have adopted the UETA, including Missouri (codified at Section 432.200 RS MO 2003). Electronic contracts are just as enforceable as traditional signed contracts. Thus, it is important to note that the same basic principles of contract formation, interpretation and rules of enforcement apply to contracts in electronic or digital form. Continue reading »

Your Business Needs an Estate Plan, Too

Yes, small businesses need estate plans. Business estate plans determine what happens if the owner can no longer operate the business due to death or disability. A plan must be in place to address either potentially devastating situation.

Businesses with multiple owners commonly use Buy/Sell Agreements for such a plan. These provisions can be inserted into the Operating Agreement if the business is a limited liability Company (LLC) or can be provided in a separate agreement if the business is a corporation or partnership. There are two general forms used:

• Buy/Sell Provisions: Remaining owners (whether shareholders, members, or partners) buy the deceased owner’s interest from the estate. A life insurance policy can provide funds for the purchase.
• Redemption Agreement: The company buys the deceased owner’s interests from the estate. The remaining owners own the company. Proceeds from the sale go to the estate. This arrangement can also be funded by a life insurance policy.

Because of the tax and legal considerations involved, it is critical that these plans be thought out and planned in advance with the advice and input of the business’ attorney, accountant, and insurance professional.

If no agreement exists, the remaining owners must deal with the deceased owner’s estate, possibly controlled by the spouse, children, or other persons not involved in the business. This can be very disruptive. The business may have to be sold or liquidated to the detriment to all concerned. The value of the business is not passed on to the estate. The remaining owners must deal with a hostile party and potential litigation which could destroy the business.

The loss of an owner can also cause a vacuum in the management of the company. Continue reading »

Essential Points to Follow When Entering Into or Renewing Your Lease

In spite of the uncertainties caused by the pandemic, your lease remains critical to your business. Commercial leases are complex transactions and should be undertaken with great care.

Following these basic points will make the lease renewal or new lease go smoothly. Continue reading »

Mergers and Acquisition Activity: A Post Pandemic Surge?

Many post-pandemic signals indicate that Merger and Acquisition (M&A) activity has increased and is expected to continue to increase. Listings for sales of existing businesses surged in 2021, according to Rob Schmitt, a business broker at the St. Louis Group. Reasons for this increase include:  (1) post-pandemic stability; (2) low interest rates; (3) low capital gain rates; (4) access to government benefits like the PPP program; (4), retiring baby boomers; (5) robust stock values; and (6) the presence of capital on the sidelines waiting to be put to use.

Conditions are favorable for willing sellers and buyers in the M&A arena. Some businesses, including retail and hospitality, have not yet recovered from the pandemic. While some may not consider these to be good subjects for M&A activity, their valuations are low and may present attractive opportunities. There are also sellers who have experienced both the 2008-2009 financial crisis and COVID-19 and have decided that they will not wait any longer to exit. On the other hand, many companies look to expand operations in this favorable environment.

The process typically begins by contacting a M&A specialist, investment banker, business broker or similar advisor to determine how to position your business for sale, or, if you are a buyer, what acquisition candidates exist. After the initial match, Continue reading »

Recent Illinois and Missouri Supreme Court Decisions Reduce Litigation Risks of Companies Operating in Multiple States

On September 21, 2017, the Illinois Supreme Court handed down its decision in Aspen American Insurance Company v. Interstate Warehousing, Inc, greatly limiting the ability of plaintiffs to sue foreign corporations in Illinois simply because the corporation is registered to do business in and may have minimal contacts with Illinois. As described below, the decision joins Illinois with a nationwide trend disfavoring forum-shopping – a practice in which plaintiffs bring suit against defendants in plaintiff-friendly venues unrelated to the defendant’s contacts and the injury giving rise to the action.

The Aspen case concerned a claim filed in Illinois by a plaintiff who had been injured in a fire which occurred in Indiana. The defendant corporation was incorporated in and maintained its principal place of business in Indiana, although it did maintain a warehouse in Illinois and was also registered to do business in Illinois. The defendant corporation moved to dismiss the lawsuit for lack of proper jurisdiction as a result of these facts and the Circuit Court agreed. On appeal, the plaintiff argued that maintenance of a warehouse in Illinois and being registered as a foreign corporation in Illinois was sufficient to impart general jurisdiction over the corporation. Continue reading »

Insurance Considerations

Part 9 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

As a caveat to this discussion on insurance, we recommend that you consult with an independent insurance agent/broker to ensure that you obtain the most appropriate type and extent of insurance coverage that your specific business will need.

Having said that, there are some general insurance issues every residential or commercial leasing business should consider.

First, foremost, and fundamentally – don’t skip over insurance and do not assume your personal policies will cover your company’s property or operations.  Most personal policies do not cover businesses. Continue reading »

Your Entity’s Governing Documents

Part 4 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Simply put, every company should have an agreed-upon, written set of rules identifying how the company is to be run and by whom. The names for these sets of rules vary depending upon the type of entity you have, e.g. operating agreements, partnership agreements, and shareholder agreements, but they are generally known as the company’s governing documents.

Common issues described and controlled by these governing documents include:

• Ownership structure of the company including the source and amount of owner contributions)
• Capital contributions and division of profits and losses
• Roles and restrictions of the owners in managing the company
• Decision-making process for the company including notice and voting procedures
• How and where the company’s books and records will be kept
• Policy regarding transfer of owner interests
• Dispute resolution
• Wind up and dissolution of the company

Additionally, if certain owners make special agreements with the company, including arrangements for the company to use an owner’s vehicles, tools, or other personal property, the nature and scope of those arrangements should be stated in a written, signed agreement. This helps avoid confusion as to the extent of company assets and observance of corporate formalities. Continue reading »

Four Points to Follow When Your Lease Term is Ending

Your lease may be the most important asset of your business. Commercial leases are complex transactions and should not be taken lightly.

Following these basic points will make the lease renewal or new lease go smoothly.

1. Know your dates. I have seen many cases where tenants allow their lease renewal deadline to pass or, even worse, have their lease automatically renewed by failing to follow these important deadlines. You should check your lease to see exactly what options you have to renew and the deadline specified in the lease to notify the landlord of your intention to renew. These deadlines are usually strictly enforced by the courts.
2. Start early. You should start your decision process well before the deadline in the lease. The earlier you start, the more time you have to test the market, review potential alternative sites, and make your decision. Many renewal provisions have a market rent adjustment, so you will need to find out what your landlord proposes as “market rent” well in advance of the deadline to give you time to negotiate or to consider alternatives.
3. Consult the experts. You should consult a commercial real estate broker familiar with your type of property to assist you in determining the options available in the market including rent and other terms landlords are providing. They know the market, the players and concessions generally available. Brokers generally work on a commission basis and your landlord will most probably be consulting with his broker so you need to even the playing field. At the same time, you should consult with a real estate attorney so that your attorney will be on board when the lease proposal is made and when you are presented with a lease or renewal document.
4. Carefully review the lease documents. Depending on the type of property, whether construction is contemplated and many other factors, leases are lengthy and complex. Much legalese is involved and terms have meaning and importance that are not apparent to someone not experienced in reviewing and negotiating leases. The lease or renewal document should be carefully reviewed by your attorney and revised to include provisions necessary to protect your interests. Most landlords have lease formats that are not favorable to tenants but landlords are willing to negotiate lease terms especially now when it is still a tenant-oriented market.

If you follow these steps you should be able to navigate the lease renewal minefield. If not, you risk a blow up!

Posted by Attorney Michael J. McKitrick. With over 30 years of hands-on commercial litigation and transactional law experience, McKitrick’s practice encompasses business and transactional advice, commercial real estate matters, and regulatory and practice management guidance for health care professionals. Most of his clients are in the medical, financial services, and manufacturing sectors.