Link To Guest Website: https://www.hklaw.com/en
Title: “Business Governance Issues & Pitfalls”
Guest: Courtney Worcester – Holland Knight
Interviewers: Marc Zwetchkenbaum – Marc Z Legal Staffing & Mark Furman – Tarlow Breed Hart & Rodgers
Click here to read the transcript
Welcome back Radio Entrepreneurs, listeners and fans, I’m producer Nathan Gobes filling in for Jeffrey Davis this morning. I want to welcome you all to another special segment. We have both Marc Z of Marc Z Legal Staffing and Mark Furman of Tarlow Breed, Hart, and Rogers. This morning. Welcome to you both marks.
Thank you, Nathan. You ready to be here and Great to be co-hosting with mark.
Thank you guys. We’re excited to have you both on, on it’s been many years since we had both of you sitting as, as hosts on the show. I want to introduce our next guest Courtney Worcester partner at Holland Knight. Welcome Courtney.
Happy to be here.
So I’ll hand it over to, to both marks to host the interview, Marc Z, if you want to kick things off.
Sure. Thank you, Nathan. So Courtney, first of all, welcome to the show and thank you for coming on to discuss some really relevant subjects with our listeners. One of the, one of the subjects that are important to, to our listeners who are a lot of them are private businesses and have some immediate concerns in terms of leadership. And, and in, in terms of small number of shareholders, there are a lot of situations that have come up in terms of running their businesses, particularly during COVID. And we think it’s important for you to share your thoughts in terms of what you’re seeing with our listeners.
Courtney (1m 34s):
Sure. I’m happy to be here. I thank you both for having me on and I agree. I think it’s an important topic to help those in sort of the startup community and also privately held businesses. You know, I think we’ve really seen a change over the years. Initially, most folks when forming a company wanted to form a corporation, and that came with a statutory scheme that in particular in Delaware, where lots of companies are formed was very detailed. It pretty much provided for every circumstance you could think of. So you had a lot of predictability and you sort of knew what you were supposed to do in every circumstance. Over the years, people have become very enamored with limited liability companies or limited partnerships, which have a lot of the same characteristics as corporations.
Courtney (2m 25s):
But the real difference is instead of a statutory scheme, it’s a contractual scheme, which means the parties, the founders can pretty much craft whatever sort of corporate governance scheme, indemnifications scheme, preferred stockholder scheme that they would like. But as with many things in life with a broad amount of freedom can come some unintended consequences and some risks that folks don’t really necessarily think about when they first start out.
Marc (3m 1s):
What, what are maybe the primary focal issues that when, when the, the founders of the company or, or the, the group that are getting things set up should be, should be really looking at because to avoid?
Courtney (3m 18s):
I think one thing is to have the right mindset. I often tell my clients, you know, your operating agreement is always drafted in the dating scheme. You’re in love with the other person. You two are going to have a long, fabulous company. You’re going to be the next Facebook. You’re going to be the next Uber. It’s going to be great. No one wants to talk about the divorce while they’re still on the honeymoon phase. And that’s really what you have to get founders to understand that while we all hope everything goes well forever. Not to say that lawyers are cynical human beings, but we probably see the bad versions of companies.
Courtney (3m 60s):
And so when you’re looking at an operating agreement, you really do need to think about what happens when this all goes wrong and going wrong can be a very broad topic. You know, probably the easiest one is that the company fails and that case a lot of times, there’s nothing to fight over, right? There’s not a left money. No one wants to spend fees on lawyers, sort of digging a bigger hole. So if the company simply fails, that’s usually not something you have to kind of worry about. It’s weird. The more successful the company is, the more you need to worry about the divorce. You know, a lot of times operating agreements, no one wants to spend money on them, right?
Courtney (4m 41s):
They’re a boring document. Folks like to recycle agreements that they’ve had from other companies they’ve been involved in the advents of copy and paste is probably not the best invention for lawyers because we have a tendency to cut and paste contractual terms, put them in a document and then maybe not spend as much time understanding how all the provisions we have put in may contradict each other, or may have terms that aren’t even defined. You know, I’ve seen operating agreements that have set up a board of directors that has two people. It has no provision for what happens when the two people are at a deadlock.
Courtney (5m 22s):
It says absolutely nothing. So now you have a situation where you may have a very successful company. One director wants to take it in one direction or one director simply wants to spend more money, maybe lease a new building, maybe hire someone. And the other director says no, and now the company is at a standstill. And a lot of times you have people who have that situation and, and they do resort to self-help, which is always scary for lawyers. We get very nervous when people do self-help because you have the person who wants to make the change saying things like we got to run the company, we have to make decision. And I think, you know, some companies frankly saw this during COVID right?
Courtney (6m 2s):
You have all these decisions that have to be made. You’re making them under tremendous pressure, both economic pressure, and just the pressure of what was going on in the world at the time. And you turn around and you know, your, you know, your co-founder your fellow board member either. Doesn’t see the world the same way, or doesn’t want to take those steps. And you sort of go out on a limb, take them yourselves, and now you’ve subjected yourself, you know, to potential liability. So the first thing I always tell founders is figure out what’s going to happen when you two don’t agree. You need a third board member, you need some sort of provision where one can buy the other one out, something needs to happen, and it needs to be as clear as possible.
Courtney (6m 47s):
Otherwise, you’re going to spend a lot of time and money litigating over what you thought the clause meant, and that’s risky for everyone.
Marc (6m 55s):
They usually usually sit in with the, the initial founders when you’re setting up the company to go, or whether it’s now by zoom or in person. So at least on the go, everybody’s got the same is heard it from you and is on the same page.
Courtney (7m 15s):
I don’t sit in as much as I think I should. You know, for clients that I’ve had, who are sort of serial entrepreneurs and have formed a couple of companies and have ended up in bad situations, you know, they’re the converted they understand before signing the operating agreement. It helps for me to take an hour to just look at a couple of provisions, look at the agreement and say, do you understand what this means? Because if X happens, this is the consequence. You know, a lot of people, I think still, unfortunately there’s this divide between transactional attorneys and litigation attorneys. And I think a lot of times business people hear that a litigation attorney is going to come in and look at something and they get nervous because their immediate assumption is, well, what do you mean?
Courtney (8m 2s):
Are we going to be sued? Like what happened? What’s going on here? And so I think it really is incumbent upon us to sort of help educate both clients and transactional attorneys that, you know, involving a litigator early on to sort of help do what I would describe as risk management work. That’s short dollars in the end, you know, an hour of my time, early on to point out some issues or to help someone structure a transaction in a way that is, you know, more defensible, should it be challenged or points out potential roadblocks that’s cheap money as opposed to four years of litigation over the same issue later on
Marc (8m 44s):
It’s it’s interesting. Like I know like with mark, like it was, it was a very well-respected litigator, one of his strengths. So the same thing is being like a counselor because you know how we could end up if it gets to worst case scenario. So you can sort of walk it back, right. Mark, in terms of that’s that’s been, yeah.
Mark (9m 5s):
And these are, these are complicated situations. Not all folks who become co-owners have the same interest actually, but they all have the same interest in being able to resolve disputes. In other words, make decisions. There’s gotta be a way to pray, pray the deadlock, but you know, lawyers have to be careful too, that you know, that they’re there representing the, the entity. I think they’re acting more as Scribner’s writing the agreement that the, that the individual owners have have come to it’s it can be tricky for lawyers to represent for people who were starting a business that may have different interests.
Mark (9m 59s):
But I think with Courtney was saying about clarity of what happened, you know, I’m sure Courtney said the experience I certainly have where you read some agreement or clause and you just scratch your head and say, what the heck does this mean? And who wrote, you know, as litigators, we just get to critique things that other people wrote. We don’t actually have to write as much briefs and settlement agreements, but, and then you have some serial entrepreneurs who, you know, they’ll throw seven figures in wood company based upon what’s written on the back of a nap.
Mark (10m 51s):
It’s incredible. We’ll die. We’ll document it later. And I’m looking at this napkin, okay. Why is there nothing on this napkin about what happens if we fall out of love? We say it’s not there because I think entrepreneurs are an optimistic life and they’re not subject to the same focus on the downside that Courtney and I are trained to focus on.
Courtney (11m 30s):
No, I think that’s true. I mean, I think in order to be, you know, an investor certainly on the venture capital side or the angel investor, you know, you have to be incredibly positive, right? Because you invest in so many companies that, you know, the reality is so many fail or don’t become huge successes. Not everyone gets bought out for hundreds of millions or billions of not everybody goes public. So to keep putting money into companies, when there’s a better than average chance, that things aren’t going to turn out the same way you do have to have, I think, a more optimistic personality than most litigators have, which is good.
Courtney (12m 10s):
We need those people, the economy needs those people, but sometimes, you know, to Mark’s point, it’s hard to be the one sort of raining on the parade and pointing out all the bad things that might happen one day.
Marc (12m 24s):
Right? No, no, the that’s I think you have the balance. You have the entrepreneur, who’s going to go into the venture, but make sure that everything’s as buttoned up as possible. Should the, the fitted lead down to a divorce business divorce. So that sounds, it sounds like you you’re achieving that balance and especially during these times.
Nathan (12m 49s):
Yeah. Thanks. Thank you. Thank you, Courtney. I want to thank you for joining the show. It’s a very relevant topic for, for far too many business owners. Unfortunately,
Courtney (12m 60s):
Thank you so much for having me on guys. I really appreciate it.
Nathan (13m 3s):
Courtney. If people are interested in reaching out our listeners or viewers, business owners tuning in, what’s the best way for them to reach you
Courtney (13m 11s):
Best way is right through my firm’s website. That’s Holland Knight dot com. I think I’m the only Worcester there. So it’s not hard to track me down from that site.
Nathan (13m 23s):
Great. Thank you. Once again. That’s Courtney Worcester partner at Holland and Knight, Marc Z of Marc Z Legal Staffing. How can people reach you
Marc (13m 32s):
Nathan? First of all, they can Google Marc Z M a R C and the letter Z or M a R C Z legal.com or 6 1 7 3 3 8 1 300.
Nathan (13m 43s):
Great. And of course Mark Furman, Tarlow Breed Hart rockers.
Mark (13m 48s):
I can be reached to them from an F U R M a email@example.com or it’s 6 1 7 2 1 8 2 0 2 5.
Nathan (14m 1s):
Thank you both to, to both the marks, of course you can find them on and Radio Entrepreneurs giving regular segments on our show and we’re on Radio Entrepreneurs dot com as well as YouTube, Spotify, LinkedIn, and a host of other sites. I want to thank our listeners and fans for tuning in. We’ll be back with another segment after this.
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