Death of Common Sense

I blogged (fairly) recently about the death of good ‘ol common sense, but a recent transaction I was involved in reinforced my (sometimes) jaundiced view of humans’ ability to interact with one another using plain common sense.

We had a willing buyer and willing seller.  We had a price.  We identified who was buying what and how payment was to be made.  So the parties had it all pretty much figured out.

Six weeks later, the parties walked away from the deal in abject frustration, considerably poorer as a result.  What happened? 

The buyer wanted to use a standard purchase form that covered a multitude of risks and scenarios that in often simply bore no relation to the business that was being acquired.  This left the seller in the position of trying to convince the buyer that the standard form was inapplicable in many cases, which in turn prompted further investigative questions by the buyer to parse out the seller’s objections.  Rather than working with a document that was tailored specifically to the agreed terms, the standard form approach left the seller frustrated, often mystified, and put to the cost of needlessly trying to convince the buyer that one of the remote risks identified in the standard form was simply not applicable. This led to the buyer becoming increasingly suspicious, trust rapidly eroded and the deal died.

The real tragedy was that it didn’t have to be that way.  This was a classic case in my view of trying to commoditize a transaction; and it highlights the pitfalls of the one-size-fits-all approach.  Had the parties brought some plain common sense to bear, I believe this outcome could have been avoided.

Playing God?

Since I first starting practicing law in the US, I was struck by the fact that clients’ moral compasses often appeared to be guided purely by rules of law rather than a common-sense approach of what is right or wrong.  Take the following example:

Client:  “I want to sue my brother for breach of contract.”

Simon:  “I wouldn’t recommend that; first, this is your family.  Second, your brother has a family that would suffer the consequences of your unresolved fraternal conflicts.  Third, it just doesn’t seem right to me”.

Client.  But the law says I can do it, right? 

Simon.  Yes it does, but that doesn’t mean that it’s an appropriate way to deal with something.  Have you tried calling your brother to discuss this?

Client.  You think that might help?

This conversation is entirely fictitious, but the substantive content is a thread that permeates a significant number of my attorney-client interactions, and underscores the point that there is a difference between what is lawful and what is right.

I’m going out on a limb here, but is this perhaps the logical by-product of our constitutional democracy?  That is to say, the result of the fact that the glue that binds the nation is essentially a collection of laws – necessarily generic, rigid and of universal application – rather than a shared set of normative values derived from collective history with rules in place merely to regulate extreme transgressions of those values.  The United Kingdom for example does not have (nor seems to need) a written constitution and much of the way their society behaves is determined by generally accepted and long-established custom.  Granted, not all of those customs are necessarily palatable and perhaps require rule-based modification, but as a general matter, I believe that recourse to a set of generic rules as a template for a personal code of conduct breeds rigidity, lack of personal responsibility, a reluctance to think, and often fairly extremist views.  I also believe this has profound implications for the way we interact as citizens, and the way our nation interacts with other nation states. 

It may also explain the general antipathy toward the legal profession; perhaps we have become regarded as demi-gods, with tremendous power to influence personal choice?  I don’t know, but for myself, I would prefer clients to act out of an innate sense of decency and what’s plainly right, rather than the alternative.

Buy-Sell Agreements

Key Drafting Tip

I believe lawyers (and in the future, computers/whatever) should be able to write clear, simple agreements that have a cohesive thread running through them rather than simply reproducing antiquated, legalese-ridden forms that laypersons don’t understand. 

There is a secret to this which has served me well over the years, and which I’m about to impart – it’s all in the “Introduction”!

I can almost guarantee you that wherever a legal document contains an introductory paragraph that succinctly and cogently summarizes the agreement’s subject matter in five or six bullet points, you will hold in your hands a great agreement.  I have written a great many legal documents over the years, but the most effective, readable ones were absolutely those to which I devoted a great deal of effort in first identifying the key issues or transaction, and then summarizing and presenting them in a logical sequence at the beginning of the document.  Sometimes, that process would take me about a third of the entire drafting time, but it always proved invaluable, particularly in the case of unusual or complex transactions.  If you can’t summarize the issues, the reader is unlikely to understand them.

Go ahead; try it.  You won’t be disappointed.

A Day in the Life of the Business Lawyer

Ever wondered what that high-priced lawyer actually does in the office?  Well here’s your chance to find out (of course, I am making the bold assumption that there may be someone out there who has such an interest, and it definitely doesn’t include my kids, whose eyes glaze over after a few seconds of explanation).  There’s not much glamour in it, that’s for sure, despite the high price tag. 

It all starts with sitting in the same chair, in front of the same monitor.  Delicately, my fingers brush the keyboard entering the same password I’ve had since I can remember to access the network.  My fingers delicately caress the keyboard again to open, in precisely this order each day, the following software: Word, Outlook, PC Law, and Safari.  This is the stuff of lawyering! (and of every other conceivable office job).  The first cup of coffee follows, before delving into Outlook (always the first port of call).

I review my tasks and calendar.  Then I retrieve emails, my lifeblood.  Now for the fun part; I start entering time into PC Law, which involves clicking the same scroll-down menu I’ve clicked a gazillion times to find the correct client, and then clicking the stopwatch button while I read the incoming email associated with that client.  Then I respond to the email, again recording time.  I do this pretty much all day, every day, punctuated only by preparing agreements when asked to, or spending time on the telephone, all requiring the mandatory clicking of the stopwatch button.

Excited yet?

Well, maybe the document preparation might pique your curiosity.  How do lawyers prepare their documents?  Well, we start by remembering when we last did a document that was pretty similar.  If one exists, we copy it and use it as a template to work from.  Since most of the work has already been done, the client usually benefits since we generally charge by time and the work won’t take long (I’ve discussed this ad nauseam on this blog).  If we can’t find a form, we either start from scratch (rarely), or try to find a close approximation in our own data bank that we can customize (typical).  In these cases, the prep time goes up and clients tend to pay too much.  Big firms will delegate this task to young lawyers or paralegals, and simply check the end-product.  In smaller firms, the partners may do the job themselves – I do, because trying to create simple, practical documents has always been something I’ve enjoyed, and I think clients deserve this.

Oops, time to log out (of course, using the same delicate keyboard caress, with the same exit code).  Until tomorrow.

Legalease, and Why Lawyers Do It

For as long as I can remember, people have complained that they cannot understand legal documents.  And I can’t blame them, because so often it’s absolutely true.  For example, take the following fairly typical wording:

      “The parties hereby agree and confirm with one another that immediately subsequent to the incorporation of the Corporation, all assets owned by them shall be transferred to the Corporation by Bill of Sale or Assignment, as the case may be, free of all liens, mortgages, security interests or other encumbrances, in consideration for which the parties shall caused the Corporation to issue to the parties shares of its Common Stock in the proportion that their respective contributions of assets bears to all assets contributed”.

Aside from the fact that it’s not clear who must transfer assets and the needless capitalization of common nouns, there is nothing much wrong, technically, with this wording.  But you could also say:

            “Immediately after the company is formed, the parties must transfer all their assets to it, free of any liens, in return for a proportionate number of company shares.”

So why do lawyers write this way?  For a combination of reasons: first, that’s the way it’s been done for a long time, and if you write differently, you separate yourself from the herd, which is scary for most lawyers; second, many lawyers are lazy – it’s easier for them to find a “standard form” than to think through the issues for themselves; third, many lawyers have simply never been trained to write simply or translate legal concepts into plain English; fourth, I think lawyers often gratify their own egos by using legalese; and lastly, lawyers tend to believe that if they simplify language, they must be leaving something out which exposes them to the threat of litigation (ironically, it’s the agreements that say too much with language that no-one understands that are often the most contentious and litigated).

When I started practicing, I was fortunate enough to be assigned to a very senior, eminent lawyer who reviewed each and every document and letter that I wrote during a two year apprenticeship.  He literally used to interrogate me about my choice of phrases and use of words, strike through most of my language with a red pen and instruct me to try again.  He drummed into me that one should use short paragraphs and short sentences.  Replace technical words with simple ones that non-lawyers understand.  Use the active voice wherever possible so that the reader knows who has to do what.  Describe carefully who has to do something, when it must be done, how it must be done and where it must be done.  Never use words you don’t understand.

It’s the hallmark of a competent lawyer to be able to distill the very essence of any transaction or task to its essentials, and then write these down so that his or her client understands them.  After all, isn’t that the very essence of lawyering?

Incorporating a Small Business

Why should a new business incorporate, and what sort of legal entities are available?  This is a question I hear all the time in my business law practice. 

In most cases, using a legal entity to carry on a business makes good sense.  It helps protect the personal assets of the individual business owners from creditors of the business, and helps provide a mechanism to raise capital to fund the business. 

The two legal entities that most people choose from here in Washington are the corporation and the limited liability company (or LLC).  The choice always boils down to many factors, not the least of which is tax.  Small business owners generally want to minimize taxes, which points to using either a corporation that qualifies for “S-corporation” status, or an LLC; both of these entities essentially tax the business operations just once, in the hands of the individual business owners.  Individuals can own corporations and LLC’s, and operate their businesses through them as single owners.  The LLC is generally considered to be the best entity to use to own real property.

Forming legal entities in Washington is generally pretty straightforward, although where you have a corporation, you have some choices that you should think about during the set-up phase which can have important consequences, such as how you vote for directors, lowering the voting threshold for big decisions, and so on (the standard, downloadable forms typically ignore these). 

Once the entity is formed, additional steps must be taken to confirm that the business owner is also the shareholder or member of the chosen entity and that any existing business assets (or real property) are properly transferred to the entity – this is something that business owners who do their own incorporating often overlook.  The new entity must also be registered for federal, state and local tax purposes. 

Probably the most important document that is often overlooked or not well though through is the buy-sell agreement, as it is commonly known.  This document should always be used where you have more than one business owner.  It describes how the entity will be managed, who will provide funding for it, and what happens if an owner wants to sell out (or dies, gets divorced, files bankruptcy and so on). 

There are many incorporation forms available to consumers.  This can be a cost-effective way to set up a new entity, but I would always recommend having a trusted professional review “standard” forms to make sure they work in a specific case.

Raising Capital

Many clients that come to see me have great ideas, but they need money to get started.  Typically, they are young and entrepreneurial, don’t have personal financial resources and banks won’t touch them.  Can they go out and ask people to give them money to develop their ideas?

Yes they can, provided they follow the federal and state securities laws and regulations.  These can be quite complicated, and this is obviously not the right place to analyze them in detail.  In simple terms though, the securities laws and regulations are designed to protect an unsuspecting public from the reach of unscrupulous promoters who go out and try to raise capital through public solicitations.  The law forbids this, and requires any public offering to be “registered” with federal and state regulators, which is extremely expensive and beyond the reach of fledgling businesses. 

However, the law does allow investments to be made in a private context without formal registration (private offerings) where the parties know one another and the investors have a thorough knowledge of the business in which they propose to invest.  The trick is to make sure that private offerings stay private, and that the investors are given all the information they need to make an informed investment decision. 

There are a number of different formats that may be used when it comes to putting together the investment structure.  For example, preferred shares are popular with sophisticated investors, whilst investments made by close friends or family members often involve loans, common shares or some combination.  Simple is always better!

Anyone looking to raise money privately should consult with someone who works in this practice area to make sure they remain on the right side of the law.  If they don’t, investors may have the right to get their money back if the business doesn’t do as well as they may have liked, with fairly dire consequences for the entrepreneur and the business.

What Do I Do?

You would be amazed at the number of people who ask me what my practice area is, and immediately after I tell them, they ask me a legal question (about say divorce) that has absolutely nothing to do with my area of expertise (business).  I thought I’d write a short piece that might help explain what I do.

I practice business and corporate law (which also means I don’t do divorces or litigation).  I consult with business owners and help them set up new businesses, buy new ones, sell existing ones, and guide them through their various business activities. 

I help clients, particularly start-ups, raise money to fund their business operations, through borrowing or raising private capital through issuing shares to investors.  I evaluate leases and business plans, and provide a sounding-board to business clients about strategic decisions they may be considering.  I frequently troubleshoot crises.

Clients often need advice on whether they should incorporate, and if so, what sort of legal entity they should use.  That usually drives a discussion on whether they should have a buy-sell agreement where there are multiple owners (they should), and the different circumstances that come into play where a business owner wants to leave the business, becomes divorced, passes away and so on.  That in turn very often morphs into a discussion of how business owners can retire, through transitioning businesses to family members, sale, retirement or some combination of these.

Since I have practiced overseas as well as in the US, I have a background in cross-border transactions where clients want to establish business in the US, or a US business wishes to establish an overseas presence.  Being close to Canada, this is particularly useful.

Working as a business lawyer typically involves looking at a client’s business as a whole, and making sure legal solutions fit within the client’s overall business goals.  The term “counselor” is probably an appropriate title in many areas of business and corporate practice.

I hope this helps explain what I do in a little more detail.

Billable Hour Hangs On

In my quest to eliminate the billable hour (which has been fairly vigorous I can tell you), I have been polling quite a few of my business clients to see if they have any interest in being billed in some other way, such as value-based billing using fixed fees, retainers and so on.  Well the results really were pretty interesting.  In just about every case, the clients were surprised that I thought they might be disgruntled with the present system (they weren’t, which is good I suppose).  They said they trusted me, and were concerned that if I quoted a fixed fee, it might compromise the integrity of my work (the quicker I work, the more I make, which is the exact opposite of the hourly dilemma; the slower I work the more I make).  

The lesson for me is that I shouldn’t be imposing my value judgments on others quite so easily.  By all means suggest alternatives, but don’t force clients to accept them.  Educate clients on alternatives wherever possible, but accept that as human beings, we are all unique, have unique approaches and unique ideas.  It seems like the billable hour isn’t quite dead for me yet?