Periods are cheap; use them.

by Rick Colosimo on May 11, 2016

One of the easiest ways to improve the readability of your contracts is to use shorter sentences. I don’t even mean that you have to trim each sentence. If all you do is turn compound sentences into two sentences, you will help the reader. In addition, by eliminating coordinating conjunctions, you clarify the meaning of sentences by reducing the chances of someone misinterpreting what the “and” is supposed to mean (whether that mistake is accidental or on purpose).

I read this section the other day in an agreement drafted by a typical large NYC law firm:

This Agreement (i) shall be binding as to the executors, administrators, estates, heirs and legal successors of the Partners, and (ii) may be executed in several counterparts with the same effect as if the parties executing the several counterparts had all executed one counterpart.

I can see why, 38 pages in, they didn’t want to waste two whole sections on an incomprehensible successors and assigns provision and an unnecessary in the first place counterparts provision. But look at this: the drafter added (i) and (ii) for relatively short and completely unrelated clauses, which then required an additional comma before the conjunction “and” when the clauses wouldn’t have needed one without the (i) screwing things up.

Why not just use shorter sentences?

This Agreement (i) shall will be binding as to the executors, administrators, estates, heirs and legal successors of the Partners, and .
This Agreement(ii) may be executed in several counterparts with the same effect as if the parties executing the several counterparts had all executed one counterpart.

Or, make the second better by removing the passive voice:

The parties~~, and (ii)~~ may be execute this Agreement in several counterparts with the same effect as if the parties executing the several counterparts had all executed one counterpart.

In this case, however, the best course of action would be to strike the entire section. It adds nothing of value.

But, it’s all good: in this agreement, you can give notice by telecopier. As an aside, I now regularly strike fax as a notice provision because fax machines are like black holes for some companies – I make this a company-specific option when a company knows that it does lots of business by fax and expects that it would be hard for them to lose a fax.

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Why are there social enterprises?

by Rick Colosimo on May 9, 2016

Why are there social enterprises?

Some time ago, I wrote a Five-minute General Counsel post on how to approach the question of whether a social enterprise fits a founder’s needs. In that post, I focused on the issue of whether the concept of fiduciary duties and the prudent investor standard were as anathema to “social” goals as some people think.

John “Monty” Montgomery is a lawyer I worked for at Brobeck in Palo Alto. I’ve referred clients to him, had him to work for my clients, and maybe even had him and his team do work for me when I was outside the practice. Monty’s a good guy and has spent a lot of time thinking about how social enterprises work and why, precisely, we need them. In turn, that explains in which situations it’s the right choice for a founder and board.

For example, in a post on Laureate Education, Monty pulls out the one useful rationale that I see: clarifying in the charter that the corporation can have these other objectives and balance them, via the liability safe harbor. I’ve always maintained that the business judgment rule gives directors the protection they’re seeking, but I acknowledge that eliminating liability in this way is almost certainly preferable to winning the lawsuit if it comes. If that’s the balancing you seek – a bit more certainty by putting a permanent thumb on the scale, then it’s a good choice for your company.

For example, sometimes, people can expect to much, turning a “should”or “can” into a “will.” This post describes the failings of VW’s governance structures in allowing – or even encouraging – the EPA emissions test fraud to take place. The problem isn’t that VW lacked authority to follow the law. It isn’t that VW needed authority to make some kind of moral decision that committing securities fraud and breaching fiduciary duties would be a bad idea as a strategy for increasing shareholder value. No one needs a separate authority to make choices to follow the law or break the law. No director’s going to get sued for saying “I voted to comply with the law.”

And so these statutes that allow for alternative structures are best, in my mind, by providing a safe harbor for directors so that they don’t have to potentially justify why polluting less than the law allows is a good thing. Think of it this way: it would be really hard to challenge a sports or event sponsorship, or an earth day sponsorship as advertising. If a “green” image is justifiable, is it really conceivable that being green wouldn’t be?

So what’s next? Companies are signing up for these different entities – B corps, L3Cs, and others. These structures impose different kinds of costs, both explicit and implicit, on a business. If there’s enough interest, we’ll do a wrap-up of the current options. Are you thinking of a social enterprise? What do you think it will add to your company? Please share your ideas in the comments.

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Another reason you need a board

April 12, 2016

The HBR recently shared the results of a study showing that an increase in the amount of flattery received by a CEO disproportionately increased the likelihood of the CEO being fired. “You look mahvelous” Flattering the CEO increases chance of getting [him] fired http://t.co/2odFtkwBW3 — rickcolosimo (@rickcolosimo) November 5, 2013 That link is dead: look […]

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Compensating LLC founders

March 29, 2016

One side effect of the growing use of LLCs in startup companies is the general unfamiliarity of most first-time founders with the quirky side-effects of partnership taxation of LLCs. The most annoying of these for companies is usually that members, no matter how small their equity stake, can not be employees of the LLC. This […]

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How do I create a board?

March 4, 2016

You’ve read my post on the benefits of having a board in your closely held company, and you’re convinced. You’re ready to move forward but stuck at step 2. How do you go about putting a board together? For most companies, major investors push for governance rights and the structure of the board becomes an […]

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