Looking at the opportunities ahead and strategic planning for 2019, I strongly encourage you to include a legal checkup as part of its first quarter 2019 ‘housekeeping.’
Think of the legal checkup as being similar to one that you would have with your personal physician. Our view is that with a legal check-up, you are essentially taking stock of where your business’s legal and strategic matters are currently and identifying areas for improvement/updates. Once those areas for improvement have been identified, you can address them deliberately at your own pace before they turn into potentially expensive time-consuming problems (the classic ‘ounce of prevention’).
For instance, as we wrap up 2018, it’s a good time to make sure that you and your accounting team have a handle on how the Tax Cuts and Jobs Act of 2017 (the “TCJA”) impacted your business’s tax liability. The TCJA represents the most sweeping tax legislation in 30 years. Among other changes, the TCJA established a single flat tax rate of 21% for regular “C” corporations as opposed to a range from 15-35% applicable under the prior law. However, this flat tax rate does not apply to businesses that are not organized as “C” corporations, such as partnerships, LLCs or “S” corporations. Instead, there is a new deduction for individuals who earn income through these “pass-through” entities, which may allow them to deduct up to 20% of their net business income. Be aware, though, different rules apply to certain service business owners. We strongly encourage you to confirm with your financial advisors on where your company stands and how these and other parts of the TCJA affect you.
While reviewing the impact of the TCJA on your business may be specific to 2018, other legal checkups should be done annually. With a regular legal checkup, you’re conducting a top-level review of your business’s legal records. Examples of matters that may need to be addressed include: i) updating internal agreements such as shareholder agreements if one or more key shareholders have sold their interests in the prior year; ii) preparing for anticipated M&A activity; and iii) updating/modifying existing customer agreements to reflect most current terms of service (or frequently negotiated provisions). The remainder of this legal checkup blog will explore steps you can take streamline and optimize the frequently negotiated provisions in your standard contracts.
Companies that enter into the same kinds of transactions repeatedly typically have form contracts to govern the resulting relationships. It’s certainly much more efficient and economical not to reinvent the wheel with every deal; however, one size doesn’t necessarily fit all. In fact, you may find yourself negotiating the same provisions over and over again. If you find these discussions give you more heartburn than they seem to merit, it may be time to refine your forms and either make those provisions less contentious or develop standard fallback provisions that you can “go to” in the course of your negotiations to keep things moving.
Some frequently negotiated provisions that may be ripe for reassessment and examples of how such provisions might be revised are:
- Expanding the number of days to inspect/reject services or deliverables;
- Modifying the term of service and renewal provisions. Be willing to move from an auto renew to a manual renewal process.
- Modifying the number of days when payment is due. Be willing to move from 30 days from date of invoice to 45 days.
- Modifying the limitations on liability and consider increasing the cap on limitation, for instance from 6 months’ fees to 12 months’
- Changing governing law/venue. Opt for a ‘neutral’ state (e.g. Delaware or New York) rather than the company’s home state and venue.
If, in the course of your business dealings, you find yourself making the same concessions every time, then simply putting the more favorable provision in your template contract may make sense. In the alternative, having back up positions that have been vetted and approved from both a business and legal perspective provides another route to streamlining the process of dealing with frequently negotiated positions.
Ready to get your ‘legal house’ in order for 2019? Please call us and let’s discuss how we can help you do so. The ‘ounce of prevention’ approach will save your business time and money.
LAWYERLY DISCLAIMER: none of the foregoing items from the list should be deemed exhaustive, nor should this post be construed as legal advice.