BUSINESS FORMATION & SALES BLOG
If one sells a corporation, the shares of stock are what is being sold. If one sells a limited liability company, the membership interest is what is being sold. However, when one sells a sole proprietorship – a business which is not an entity– what exactly is being sold?
Generally speaking, the answer is that the assets are what is being sold. Some of these assets are easy to spot. For example, if the business has inventory; if it has vehicles or real estate, those can be the principal asset being transferred. Other times, especially in regard to a personal services sole proprietorship business (such as a doctor or lawyer’s practice), what is being sold is general intangibles. This can be everything from a copyright or a trademark to a right to collect money. These general intangibles are essentially the beginning and end of the value that of personal services sole proprietorships.
One of the more interesting dillemas is how to set a value on such general intangibles. Normally, this will be the central issue in determining the price for a sole proprietorship that does not have tangible assets.
© 2014 Nissenbaum Law Group, LLC
If the Seller of a Business Does Not Comply with Legal Requirements for the Sale, May They Use That Fact to Void the Sale Altogether?
May a Seller seek to void a contract for sale of his business by taking the position that the sale contract was violated and therefore unenforceable, when the seller itself is the one that did not comply? That issue was raised in Meadowbrook Industries, LLC v. Walker Management Systems, Superior Court of New Jersey, Appellate Division, Docket No. A-3568-11T4 (March 5, 2013).
In that case, the seller violated a contract for sale of a waste disposal business by failing to obtain the approval of the New Jersey Department of Environmental Protection before entering the agreement. NJSA 48:3-7(c). As it turned out, the seller was the one who wanted to scuttle the deal. It tried to argue that because the requirement had not been complied with, the contract was unenforceable.
The Appellate Division of the Superior Court of New Jersey rejected that argument. It held that the seller’s legal theory was barred by the doctrine of unclean hands. What this meant was that the party asserting the breach could not have caused that breach. The law protects those who did not cause their own harm.
© 2014 Nissenbaum Law Group, LLC
A recent Texas class action raised a novel issue of law. In that case, the Court was asked to determine whether Denton County Electric Cooperative, Inc. (“CoServ”) would be subject to the Texas Non-Profit Statute. The reason this came up was because the Non-Profit Statute had many more protections in it than the enabling statute for Texas cooperatives.
In Denton County Electric Cooperative, Inc. d/b/a CoServ Electric v. Nicole Hackett, Individually and on behalf of others similarly situated, Court of Appeals of Texas, Fort Worth, No. 02–09–00425–CV (May 10, 2012), the Court determined that the Texas “legislature did not intend to provide Electric Cooperative members with the same rights set out in the [Texas Non-Profit statute].” The sole exception would be if the cooperative enabling statute specifically incorporated the Non-Profit law.
On June 28, 2013, Governor Chris Christie signed a law (Bill S-2151) which requires judges in New Jersey to evaluate prenuptial agreements as of the date of their signing and not as of the date of their enforcement. This was a major change in the law.
It is of particular concern to business owners considering marriage. Typically, an owner will want to protect the business from being mandatorily sold in the event of a divorce. This law strengthens the enforceability of prenuptial agreements; therefore, it makes the protection afforded business owners that much more predictable.
The import of the law is that it prevents judges from considering the changes in circumstances between the time of signature and the time they are to be enforced. Prior to its enactment, N.J.S.A. 37:2-32 required judges to interpret premarital contracts as of the date of their enforcement. Therefore, if a contract was fair when it was signed, but when it was enforced would leave one spouse without financial support, it would be subject to attack.
What do for-profit businesses need to do if they are seeking to perform the socially conscious work of a non-profit, as well?
In light of the fact that some for-profit companies are looking for ways to do charitable work while avoiding the limitations imposed by the potential of shareholder derivative lawsuits for failing to maximize profits, new hybrid forms of corporations have been established. Two examples of the new forms of hybrid entities are “benefit corporation” and “L3C” entities.
Benefit corporations, which are recognized in New Jersey, New York, Maryland, California, Hawaii, Vermont and Virginia, must have a dual purpose to perform a public benefit and create value for their stakeholders. L3Cs (low-profit limited liability companies) have the same liability protection and tax treatment as an LLC but must have social benefit as their primary purpose and profit as the secondary purpose.
It remains to be seen whether this new development in the law will take the business community in a more socially conscious direction.
Is a Contract Provision That Limits the Scope of Damages in a Franchise Distribution Agreement Enforceable?
Will a provision of a distribution agreement between a franchisor and franchisee that prevents a party from recovering “lost profits” be enforceable? That issue was considered in Strassle v. Bimbo Foods Bakeries Distribution, Inc., United States District Court for the District of NJ. Civil 12-3313. (RBK/AMD) (March 13, 2013).
In that case, the franchisor, of a bakery franchise signed a distribution agreement with the franchisee which stated in part “DAMAGES: notwithstanding anything to the contrary contained in this Agreement, in no event shall either party be liable to the other for any consequential, incidental, indirect, or special damages, including loss profits and punitive damages.” The issue was whether the bar for certain types of damages was enforceable.
The Court found that it was. It held that “to the extent plaintiffs seek recovery of profits which they planned to make (but for Defendants alleged breach) on the sale of individual…breads and role products to retail clients within their distribution territory the court holds that such recovery is barred under 11.12 of the parties’ distribution agreement.”
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