Smart businessowners understand managing legal risk increases a company’s bottom line and, therefore, its value. More than ever, attorneys are the generals leading defense preparation and implementation to protect the company’s assets from attacks coming from every direction.
It is well understood business risks are frequently unintended or unforeseen. When this happens, the company faces litigation, fines, or the loss of key employees. And months of legal invoices.
Without being overdramatic or suggesting businessowners can never win, the article groups primary areas of risk with thoughts about risk mitigation tactics.
Corporate risks arise from issues stemming from governance, business structure, and business practices. Each of these three concerns should be reviewed on a reasonable periodic basis. Corporate governance and structural issues often result from key persons not fulfilling their duties. Are directors and officers fulfilling their assigned responsibilities under the law and the company’s organic documents? Do directors or officers have competing interests through service (1) to other companies, (2) to trusts as trustees, (3) their families who are benefitting from corporate expenditures unrelated to business operations, or (4) that enables this person to take advantage of certain tax benefits?
Ironically, risks stemming from business practices often arise from the failure to develop business practices or to endure business practices are followed after they are developed. For if the business is not maintaining the confidentiality of its proprietary information, then how secret is any purported trade secret? Likewise operating internationally, is the company exposed to Foreign Corrupt Practices Act violations? A nimble business will constantly ask questions like these and act decisively to minimize legal risk by implementing new policies and procedures.
Assets – A business must protect its tangible and intangible property, as well as its own human capital. A failure to do so imparts risk and devalues the business. Are the tangible assets properly insured or sheltered from legal liability? Are the intangible assets titled in the name of the company and properly registered? Are key employees properly incented and locked in for the future of the business? Loss of tangible and intangible assets and human capital diminish the value of any company.
Litigation Disputes – No business can completely insulate itself from litigation. Contract disputes, employee misconduct, product liability claims and disputes over the use of intellectual property can all result in a drain on time and resources, even if the claim does not result in litigation. Litigation can frequently be avoided by taking proactive steps and working closely with counsel to assess risk and taking the time to insulate the company from liability.
Contracts – Contracts govern the company’s relationships with third parties, as well as its ability to generate revenue and manage expense. The systematic under-management of contracts creates expense leakage and missed revenue opportunities. Each of these types of contracts should be reviewed regularly to assess the company’s risk exposure.
Regulatory – Many businesses must comply with regulatory laws to remain viable. For, example, a food and beverage company must comply with relevant portions of the Food Safety Modernization Act. Likewise, businesses that collect and process personal data must assess and comply with data privacy (and security) regulations – increasingly in multiple jurisdictions. Proactive regulatory risk management requires the implementation of policies, procedures, and protocols to ensure proper compliance.
Competition is fierce these days. Business owners and executives should not be responsible for the dual role of making business decisions and legal decisions. Working with experienced counsel to identify areas of legal risk and to propose reasonable solutions should help businesses avoid significant pitfalls, which would undoubtedly impact the company’s overall value.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, real estate, and other issues. He can be reached at email@example.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.