Legal Aide

Key Legal Considerations And Strategies Businesses Should Consider In An Economic Downturn

Virtually all Arizona businesses, but disproportionately small and medium-sized enterprises, have been significantly impacted by the recession. The current financial climate has and will undoubtedly continue to have countless business ramifications. Often overlooked, however, are the legal considerations that should be proactively evaluated by companies in a challenging economic environment. Legal strategies should be employed not only to manage present challenges, but also to take advantage of opportunities that present themselves in this ever-evolving business landscape. It is important to carefully consider the key legal variables in play.

Here are a few:

1. Renegotiate contracts
Unfortunately, parties oftentimes neglect to consider the details of their contractual relationships until such time as they are presented with challenges. It is therefore a good practice to closely scrutinize and reevaluate one’s contracts in advance of problems arising, and with an eye toward possibly negotiating more favorable terms. It is essential that businesses look to all of their contractual relationships and incorporate contractual provisions that allow for flexibility during fluctuating economic times and properly allocate business risks, including the protection of payment streams, dealings with vendors and clients, termination provisions, and dispute-resolution mechanisms.

2. Employment policies and procedures
Perhaps the area that presents the greatest challenge for small and medium-sized businesses concerns the legal aspects of employment. Particularly in economically challenging times, companies need to be aware of the potential for employment litigation. Companies should regularly ensure that employment policies are updated and consistent with their operations and the regulatory environment, and should be attuned to the potential impact of their employment-related decisions.

3. Corporate documentation
Reviewing and maintaining the proper business entity and structure for your business is vital to securing proper limited-liability protections, mitigating exposure associated with business and employment disputes, and ensuring the most advantageous tax treatment. Many factors influence the choice of a particular entity, including the number of owners, the source of capitalization, employee and immigration needs, management structure, the size of the organization, taxes, and personal asset protection. Limited-liability protection is particularly important in economically challenging times, when the number of disputes rises dramatically. Businesses should be extraordinarily prudent and diligent in the management and oversight of their corporate formalities to preserve the benefits of their entity status.

4. Intellectual property protection
Patents, trademarks, trade secrets and copyrights are species of intellectual property that can and should be protected under state, federal and international law, as applicable. The use and effectiveness of covenants not-to-compete and confidentiality agreements should also be evaluated. It is critical to assess intellectual property regulations and enforcement mechanisms on a regular basis before engaging in any activity that may jeopardize your business’ intellectual property rights.

5. Pursuing litigation
The prospect of business litigation should be approached with the goal of creating optimum value for the business. Businesses should be cognizant of the significant expense associated with litigation, the time horizon associated with the pursuit of claims through the judicial system, and the prospects, if any, of ultimately collecting on a favorable settlement or judgment. Litigants and their counsel should be acutely aware of the costs and benefits associated with pursuing and defending civil claims. The question should be asked: What is the value proposition in each alternative approach to resolving a dispute?

6. Consider bankruptcy alternatives
Bankruptcy can sometimes provide relief for a struggling enterprise. There are various strategies that can provide a “fresh start” for a business that has been impacted by this economy. A bankruptcy expert can assist in evaluating the utilization of bankruptcy to determine the best course of action. Alternatives to bankruptcy do exist, i.e. “work-outs” with lenders, and these options should also be fully explored in advance of filing for bankruptcy protection.

7. Dispute resolution
It is imperative to plan in advance to manage disputes that may arise in the course of business. Absent a contractual designation by the parties of a governing set of laws, forum or dispute resolution process, there may be uncertainty as to how, when and where disputes will be resolved. This uncertainty can translate into resources being unnecessarily expended. Parties should, at the very least, make efforts to agree in advance to a choice of law and forum to manage disputes, including the use of arbitration and/or mediation to provide for resolution. Businesses should be cautioned not to rush to agree to arbitration, however. In many instances, litigation in the judicial system may be a better option.

8. Identify a lawyer
It is important to seek the assistance of legal counsel who has a keen understanding of how to best structure your business or to help you in confronting your business’ challenges. The lawyer should have the ability to call upon a network of advisors who can provide particularized knowledge of the issues that confront your business, whether the goal is strategic planning or dispute resolution.

Recessionary economic conditions provide for challenges, as well as opportunities. The costs to those businesses that fail to adequately consider the legal ramifications of their actions in this environment can be substantial. These legal issues are best navigated and managed through proper planning, which will in turn maximize your business’ ability to capitalize on available opportunities.

Olivier A. Beabeau, a senior associate at Galbut & Galbut, contributed to this report. He can be reached at obeabeau@galbutlaw.com.