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Monthly Archives: May 2016

Be Careful About Contractual Damage Waivers

auto attorney

HSP attorney Oren Tasini works with automotive dealerships regarding legal compliance, regulatory and franchise matters, and in the purchase and sale of automotive franchises. He also is a Past President of the National Association of Dealer Counsel and wrote this piece for NADC’s April newsletter.

Contracts, including asset purchase agreements, commonly seek the waiver by a party of a right to obtain certain kinds of damages, usually, consequential, indirect, special or punitive damages. The waiver of consequential damages particularly should cause a contracting party to pause. A careful analysis of the law of contracts and the parties’ rights upon breach reveals that a waiver of consequential damages, in essence waives a party’s right to receive the standard measure of damages for a contract breach – all damages that are the natural, probable and reasonable foreseeable consequences of the breach.

Although it may be reasonable to seek a waiver of punitive damages, the concept of consequential damage is fundamental to a party’s right to collect damages to which he is normally and rightfully entitled. For example, the standard and typical indemnification provision in an asset purchase agreement provides for the selling party to defend and indemnify the purchasing party from any breach of the seller’s representations and warranties. What is the effect of a waiver of consequential damage where a seller misstates its financial statements? Absent the waiver, one could easily argue it would be equal to the multiple, times the overstated earnings. This is a natural foreseeable consequence of the breach. Another measure might be the lost profits the seller expected to earn, but will not receive due to the misstatement. A waiver of the right to receive consequential damages may preclude such claims. Consequently, consequential damages and the right to pursue them, go to the essence of the contractual benefit of the bargain and should never be waived in any contractual agreement.

 

 

Myths about starting a Nonprofit or Charity (Part 2)

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Starting a Nonprofit Organization

Myth No. 2—“As a founder of my nonprofit, I can control it like I control my own company.”

So many nonprofits start from the ground-up with one or a handful of well-meaning volunteers doing all they can to make a difference for a cause close to their heart. Whether it’s creating care packages for soldiers, collecting pennies for a disease close to their heart, or advocating for funding for medical research, these heartfelt volunteers sometimes work for years until something clicks and they realize by default they’ve created a charity – but one without the organizational bones to go with the many hours of purpose-driven work. So, now they’re ready to formalize their efforts, create an entity, apply for nonprofit status or locate a fiscal sponsor.

It’s time to take their small, ‘mom and pop’ nonprofit and grow into a full-fledged organization that can qualify for government or foundation grants, and take that next step in the nonprofit lifecycle. For many nonprofit start-ups, the biggest challenge is the need for the founder(s) to relinquish some level of control to a board of directors. For many, it’s a hard lesson to learn.

Nonprofit Law

Practically speaking, the founder will need to create a board of directors of at least the required three individuals, and more is typically recommended. The board – not the founder – has ultimate responsibility to oversee the governance of the charity including doing all of those things required under state and federal law to properly manage its business and maintain its tax exempt status, once granted. While a volunteer organization is often closely held in the sense that it may start with a small board of volunteers, the reality is for the organization to grow and prosper, it needs to grow its board to include a group of diverse individuals each bringing a unique skill set and value to the board and the organization. This is often psychologically difficult for the founder(s) who started off with bake sales and dinner parties to raise funds and are now operating an organization requiring more sophisticated management and development techniques. It’s hard to give up control when you’ve done what you wanted, and how you wanted to do it, and have been told by so many how well you’ve done. And, you probably have, but it’s hard to accept that the best thing for the organization is to trust others to do the right thing – and recognize that one sure sign of success is when the small start-up you created to do some specific good, is now melding into a new organization ready for its next phase of development.

Founders must learn to trust that if they put the proper organization in place, created a well-rounded board of directors with a vested interest in the organizational purpose; it will be in good hands. One of the biggest mistakes I see repeatedly from founders is to populate a new board with only good friends or family members who have no real interest in the charitable mission. Often, they do not become fully engaged, and, worse, may be easily manipulated by a rogue board member out for their own personal interest. Best case may be that the board has constant turnover as all of its members are only there to do their friend, the founder, a favor by serving for a few months or a year without genuine interest.

One of the greatest ways to protect your organization at this critical early stage is to spend the time to vet your initial board members to find people who understand the organizational values created by its volunteer founder(s), the mission going forward and the responsibilities that come with joining a nonprofit board. Nonprofit founders have to realize that sometimes the best way to ensure their organization’s long-term success is to have faith that they can relinquish ultimate control by strategically constructing a board of directors who are philosophically in sync, mission-driven and ready to be engaged to accomplish great things in the spirit of the founder. This way, you give up ultimate control, before you risk outgrowing your own organization, and both the founder and the organization are typically better off for it.

Myths about Starting a Nonprofit or Charity (Part 1)

family paper cut out

Nonprofit Law

There is a certain joy in making a difference in this world, helping others in our community, or, simply, doing a good deed. That leads many of us to the idea that it would be great to start a nonprofit organization. So, let’s explore nonprofit law and some of the myths of starting a charitable organization that may help you to think through this crazy (or not so) idea before spending a considerable amount of time, money and effort.

Myth No. 1—“I just file a nonprofit corporation with the state or an on-line fast legal filing company, and I am good to go!”

Wrong. Actually, there are so many reasons why this myth is wrong. First, you shouldn’t be forming an entity of any kind without a business plan and a strategic path forward; however, let’s put that aside for a moment and just focus on the practical considerations.

Starting a Nonprofit Organization

There are two key components or steps when forming a charitable organization – 1) the actual entity type and where and how it is organized, and 2) the organization’s ability to be tax exempt under the Internal Revenue Code. The first is a state law matter and the second is a federal law matter. Typically, nonprofits are set up as not-for-profit corporations under state law (there are other possibilities, but we’ll put those aside for now since the majority of operational nonprofits are corporations under state law). This process typically means filing Articles of Incorporation with the state. While it’s true you can go to www.sunbiz.org in Florida and file not-for-profit Articles of Incorporation using a state provided form, the big reason you don’t want to waste your time and money doing this is that you’ll wind up butting heads with the IRS and have to amend and restate your articles later (that’s a legal term for throw it away and start-over). Same is true for when you create the Bylaws for your new organization which is destined to save the world. While state law formation process and federal IRS process are separate and distinct, they are actually linked because the IRS requires certain “magic language” to reside in both your Articles and your Bylaws. If you skip this requirement when you create these documents, it will slow down the entire process of creating your nonprofit – and result in a greater cost. So, best to do it right the first time rather than pay to have it fixed later.

Once you have the state nonprofit corporation formed, with the correctly worded Articles of Incorporation, Bylaws, a written organizational consent providing for the initial directors (in Florida you’re required to have a minimum of three directors) and officers, then you can go ahead to the second step in the creation process, determining what kind of tax-exempt status to apply for with the IRS, and to begin that process.

Nonprofit Lawyer

Unfortunately, clients come to me all the time to help them with the application to the IRS and the first thing I tell them is, let’s throw away everything you did to get ready for this point and start again, because your organizational documents will be rejected by the IRS as drafted.

Not to worry, you can still save the world with your new nonprofit – just get some good advice before you proceed.

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