Both our own practices and external developments illustrate new opportunities for our clients. You need to be aware of developments such as the following and their significance for day-to-day business and financing operations:
The increasing need for business insurance beyond traditional fire & auto coverage;
Why you need to talk to us first before lending money to customers or suppliers;
Why equipment leasing still often makes sense even if accounting practice changes; and,
Why social media marketing is still subject to ‘old media’ standards of truthfulness.
Need for Non-Traditional Types of Business Insurance
Corporate managers are well aware of the need for their companies to procure basic business insurance to protect against the risks of fire, flood, customers slipping on the floor and the like. However, in today’s economy, this is rarely enough. Most businesses face many threats going well beyond the ‘traditional’ physical casualties which are the subject of property and casualty insurance. Increasingly, large, sophisticated customers and clients will hesitate to deal with vendors, particularly smaller vendors, absent evidence of maintenance of pertinent coverages. (The accounting changes may also apply to leasing of real estate, so it is appropriate for those who may be parties to such leases to follow the topic.)
We strongly encourage clients to consult with insurance advisors having experience in areas going beyond mainstream areas to discuss their need for and availability of coverages such as (but not limited to) the following, none of which are included with regular CGL policies:
‘cyber’ or data breach insurance to cover many of the consequences of hacking episodes such as notice to customers, customer credit monitoring services and defense of litigation; in our experience, this item is often required in contracts with companies which entrust sensitive customer or other information to vendors;
Officer-director liability insurance (for both public and private companies) to cover third party claims against individuals; while most company bylaws contain indemnification for such claims, the insurance covers amounts due under such provisions and protects individuals in the event that the company is not able to satisfy its obligations;
Error and omission (‘malpractice’) insurance to cover claims that the companies in the service sector breached an obligation in connection with the delivery of their services; this is pertinent to most companies delivering services and not simply to those customarily thought of as ‘professional firms;
Employment practices liability coverage to deal with suits by supposedly aggrieved employees and investigations by governmental bodies such as the EEOC; and,
Business interruption insurance pertaining to lost profits from a shutdown of your own or a supplier’s business from a natural disaster or similar occurrence, this takes on greater significance as supply chains become longer and more complicated. [http://ww2.cfo.com/supply-chain/2014/05/chain-breaks/]
Even if a business feels that its practices are such that it does not have major exposure to third party claims, insurance is often available to protect against the considerable expense of defending against even a meritless claim.
While our firm is not in the insurance business and can not write any coverage, our corporate, technology and litigation partners will usually be able to point you in the right direction regarding consultation with insurance advisors.
Why You Need to Emulate Banks when Lending Money
A number of recent cases that our partners have recently addressed underscore the need for early consultation when those not customarily engaged in the finance industry lend money to suppliers, customers or someone else. Failure to include in such documentation many clauses that are found in institutional loan documentation is often a prescription for disputes, protracted litigation or arbitration and possible adverse outcomes.
It is impossible to enumerate here all of the provisions which should be considered in this situation. However, at a minimum, it is essential to indicate that the lender reserves full discretion as to advances of funds beyond the initial advance, so that if it believes that the borrower’s credit no longer justifies the risk of a further advance, it is not obligated to do so. Similarly, there must be language indicating that any disputes that the borrower wishes to pursue must be pursued separately from an action for collection of the debt, to minimize the risk of trumped up disputes being introduced when collection is required.
While no documentation can eliminate the risk of non-payment or substitute for proper due diligence, our corporate and litigation partners can work with you at transaction inception to eliminate unnecessary risks associated with non-standard documentation. We cannot stress enough that verbiage which often appears to be innocuous boilerplate, may make the difference between winning and losing a collection action and/or counterclaim.
Equipment Leasing Still Works for Many … Despite Accounting Changes
Many companies enter into leases for various items of equipment used in their operations. In recent years, there has been a good deal of discussion in the business press as to the tightening of accounting standards so that lease transactions are not used to hide financial obligations from actual or prospective creditors or investors [http://ww2.cfo.com/gaap-ifrs/2014/03/lease-accounting-standard-inches-forward/]. Today, it appears inevitable that such changes will occur, such that it is ill-advised for anyone to enter into a lease transaction because of purportedly favorable accounting consequences.
However, this does not mean that leasing itself is ill advised. Even assuming what is likely to be the case, namely that lease obligations will have to be reflected on corporate balance sheets along with corresponding assets, there are still good reasons to consider leasing. Among other considerations are matters as fundamental as differences in underwriting standards; a leasing company may be willing to provide financing in situations where a bank will not. Leasing may also be helpful where you do not anticipate retaining the asset for its full functional life, but envision upgrading to newer technology. Leasing companies will often write a lease for less than the original equipment cost and for a term less than the functional life, thereby ‘assuming the residual risk’ and allowing you to pay less than you would pay if you simply bought it outright. The leasing company counts on its ability to remarket the used item to someone else at lease expiration.
In cases where you do not have sufficient taxable income to fully utilize depreciation or other tax benefits associated with an asset, a leasing company may be able to help by acquiring the asset and taking the tax benefits into account when calculating the monthly rent.
While leasing often serves an important economic or operational purpose, irrespective of its accounting treatment, it is not for everyone or for all situations. For example, it is not appropriate if you intend to run the asset into the ground or anticipate problems returning it, such as it being embedded into walls or in very poor condition. Please consult with one of our corporate partners to discuss a proposed lease transaction.
FTC ’Uses its Feet’ to Tell us that Social Media Marketing Isn’t a Free Pass
Those emphasizing social media marketing should take heed of a very recent FTC letter involving Cole Haan shoes. In it, the FTC made clear that, the use of social media and technical devices such as hashtags, does not absolve marketers from the need to avoid misstatements and misleading omissions such as the personal stake of a product endorser. Briefly, Cole Haan ran a contest for which participants were directed to post on Pinterest various pictures of Cole Haan products using a specified hashtag.
The FTC, while it did not take action in this specific case, made clear that in future promotions, marketers must ensure that the direction of the party in the position of Cole Haan must be expressly indicated on forums such as Pinterest. It made clear that the use of a hashtag or similar device instead of an express acknowledgment would not suffice.
Our technology partners are well equipped to address the proper manner in which to adapt existing law to ‘new age’ marketing efforts.
Contributors:
Marty Robins, Esq.
Direct: (847) 277-2580
mrobins@fisherbroyles.com
James M. Fisher II, Esq.
Direct: (214) 774-4765
jfisher@fisherbroyles.com
Kevin E. Broyles, Esq.
Direct: (770) 448-6283
kbroyles@fisherbroyles.com
Download the Corporate Law May 2014 [pdf]
Founded in 2002, FisherBroyles, LLP is a full-service, cloud-based national law firm with attorneys across the country. Conceived as the “Next Generation Law Firm™”, FisherBroyles eliminates unnecessary overhead that does not add value to clients and instead offers a more cost-effective solution to clients across all industries. Visit our website at www.fisherbroyles.com to learn more about our firm’s unique approach and how we can best meet your needs.
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