CONTRACTS 101... THE ANATOMY OF A VALID (K)

I recently was confronted with a question where an individual that I was working with had explained that they entered into a contract with a vendor and the very next day, the vendor told them that the sales rep had priced the contract lower than what they could deliver the actual services for and as such, they were canceling the agreement arguing that it was not a valid contract.

This got me to thinking…While it may be self-evident, the formation of a contract is quite complex and there are many nuances as to what constitutes an actual valid contract. So… I'm going to dedicate this blog post to a class entitled “Contracts 101… The anatomy of a valid (K).”

In this class session we are going to discuss what makes a valid offer.

So let's talk about the anatomy of a contract. For a contract to be valid 4 factors must be met. There must be a proper offer, a proper acceptance, consideration must be present and there must be no defenses to the enforcement of the contract.

Seems simple enough right?...Oh boy, just wait till you hear what I have to say on the subject.

WHAT LAW DOES THE COURT APPLY?

Let's first understand the difference between the sale of goods and the sale of services.

The sale of goods (where the court considers goods to be movable tangible personal property) falls under article 2 of the Uniform Commercial Code. The Sale of Services Including the Sale of Real Property, the Sale of Intangible Personal Property and Other Types of Services Generally Are Governed under the Common Law. Why Is This Important? Because the Law Treats Certain Aspects of the Contract Differently Depending on Whether You're Selling Goods or Whether You Are Selling Services.

Now you may be asking… Hey Brian, I sell both goods and services together so how will the law treat me? I'm glad you asked. Generally, the courts will use two types of tests to determine what law (UCC or the common law) to apply in your situation.

1) The Graveman Test - this test is generally applied where there is a complaint against you for your product or service and the court looks at the portion of the transaction under which the complaint is based to determine whether this issue involves goods or services. 

2) The Predominant Factor Test- under this test, the court looks at the entire transaction is a whole to determine whether it's predominant purpose was the sale of goods or the provision of services and will make a decision as to which law applies depending on which was more important.

WAS AN OFFER MADE?

Now that we understand what law we need to be concerned with, we now must consider whether an offer was actually made. The actual legal definition for an offer is:

 "1) manifestation of present contractual intent, 2) containing definite and certain terms, 3) communicated to an identified offeree.”

1.      Manifestation of Present Contractual Intent  - Under the law, there is what's known as "the objective theory of contract formation." This theory relies on whether an objective reasonable person or would believe that an offeror has intended to be bound by the contract if the offer was accepted by the offeree. In other words, did the person making the offer actually intend to make the offer? Or was there some underlying reason that would not make the offer valid?

It is important to keep in mind that generally, when you quote a price to someone this is not considered an offer but merely an invitation to receive an offer. In addition, a newspaper advertisement is generally not considered an offer unless (and this is important) the newspaper ad contains enough material terms about the offer to make the offer appear to meet an objective theory of contract formation and the newspaper advertisement identified the offeree.

2.      Containing Definite and Certain Terms - At common law, an offer required all the essential terms to be valid this included: the quantity, time for performance, identity of the parties, price and the subject matter. Article 2 of the Uniform Commercial Code dealing in the sale of goods has softened this issue so that only the identity of the parties and quantity of goods need to be stated for a valid offer. However, it is always recommended whenever you make an offer to include as many material terms as possible.

What happens if a material term is missing? Well, the court will look at either the course of performance (the previous performance between the parties under this particular contract), the course of dealing (how these particular parties performed under a different contract), or trade usage (where there are no prior dealings between the parties but, there is some custom in the industry that the court can follow).

3.      Communicated to an Identified Offeree - This of course is the simplest of the issues and the bottom line here is make certain that when you make an offer you communicated to a specific identified party and not just the world in general.

IS YOUR OFFER STILL OPEN?

In many situations an offer can actually terminate. An offer can terminate on its own terms however, an offer can also terminate due to a lapse of time, the death of the one who made the offer, destruction of the subject matter (if it goes to the heart of the deal) and even illegality.

A rejection by the offeree can terminate an offer and remember once an offer is terminated it is no longer valid so, an offeree cannot reject your offer and then run back to you and say "I've changed my mind!" Once your offer has been terminated it is dead. And remember, you can also revoke your offer either directly or through an indirect revocation as long as the offer is revocable and this brings us to our next issue.

IS YOUR OFFER REVOCABLE?

Generally, the offer is freely revocable. However, there are certain situations where your offer may not be revoked.

1) An Option Contract - A promise by an offeror to hold an offer open for a particular period of time that is supported by consideration (will get into consideration later) will be irrevocable for the agreed period of time. However, if an offeree has an option contract with you and rejects the offer and you as the offeror detrimentally rely on this rejection than the option contract will be revocable.

It is important to note, that even if there is no exchange of consideration for an option, the mere recital of consideration will make the option contract enforceable and non-revocable.

2) Merchants Firm Offer (UCC 2-215) - If your business that sells goods, beware of this provision under the Uniform Commercial Code. Under this provision, a writing signed by a merchant that gives assurances that the offer will be held open will make the offer irrevocable during the time stated. If there is no time stated, then the offer will be held open for a reasonable time not to exceed 90 days.

3) Equitable Option / Promissory Estoppel - If an offeree detrimentally relies on your offer, and the offer is reasonable, foreseeable and substantial, than the offer will be considered irrevocable for a reasonable period of time.

4) Unilateral Contract  - Where you make an offer where acceptance of the offer is based on performance rather than an actual agreement to accept the offer, your offer will be irrevocable once the performance has begun. You as the offeror must give the offeree a reasonable amount of time to complete the performance was their performance has started. Keep in mind, there is a minority rule in the law where the offer under a unilateral contract may be revocable at any time until the performance has been completed but again this is a minority rule and you should not rely on it.

So there you have it, this is your first class in a series of going through the anatomy of the contract. I hope you'll find some of this information extraordinarily helpful and I think you'll really appreciate the next class which will talk about an acceptance of your offer.

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BUILD A STRONG FOUNDATION TO INCREASE SALES

By, BRIAN KEITH FELDERSTEIN, ESQ.

Build a strong foundation and increase your company's bottom line...

I know, It sounds cliché and I'm certain you've heard it before through a Tony Robbins seminar. However, this blog post isn't going to be a discussion of how you can strengthen your inner self, nurture your positive alter ego, or even get all your employees to say "WOW, our boss is the best leader any worker bee could ever have!"

No boys and girls, I'm talkin about building an actual 501(c)(3) nonprofit, tax-exempt foundation and using this foundation not only for the greater good, but also to build contacts, develop relationships and as a consequence create sales for your company. 

A 501(c)(3) status is an IRS classification. The RS defines a 501(c) (3) as follows:

"To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170."

The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

Thus, under this classification, one can form a foundation that can relate to their business but the basis of the foundation must have a charitable purpose.

For example, I'm an attorney that practices business law. However, I am planning on forming a foundation that will help wounded soldiers coming home from Iraq and Afghanistan with starting their own high-tech entrepreneurial venture.

This foundation would have both a charitable and educational purpose and would meet the requirements of a 501 (c)(3). The foundation would certainly be able to receive tax-deductible contributions and it would be able to provide not only legal services to these veterans to start their own business but also provide professional business services as well.

More importantly, many entrepreneurs who currently own start-up technology companies would likely have an interest in serving on the board of this foundation or to serve in an advisory capacity because of the altruistic and honorable nature of the foundation's mission.

By working with this group of board members and advisers over time I will develop a relationship and understanding of their own business needs and concerns. This of course has the potential to create new business for me down the road and as we all know, sales is all about who you know and who knows you.

Forming a 501(c)(3) foundation is a lot like forming any new business organization. The foundation can be a Corporation, LLC, Trust, Unincorporated Association, or Corporation Sole (not worth going there).

However, the organization must be carefully formed and the proper IRS documents must be paid attention to because receiving a tax exempt status can be a bit difficult and will likely take up to 27 months. Also, like any for-profit corporation, one must observe the fiduciary duties owed to the other board members, advisers, and outside individuals and entities.

Finally, if you are going to move forward on creating a nonprofit foundation you MUST get with an attorney and a tax advisor to make certain you maintain IRS compliance right out of the gate. For example, a pivotal form that must be filled out properly during the formation of your nonprofit and each and every year thereafter is IRS form 990. IRS form 990 used to only focus on financial issues. However, starting this year, IRS form 990 has materially changed and the iris is now focusing on areas like: conflict of interest, foreign activities, governing structure, exactly with the organization is doing and how it is doing it. 

Here is a brief video that gives you a better understanding of the compliance issues as it pertains to starting a foundation. 

So there you have it, build the foundation and the world will beat a path to your door... Just make sure you build your foundation with a strong foundation to support your foundation....( or something like that)...

WHAT IS CROWDFUNDING AND WHY SHOULD I CARE?

By: BRIAN KEITH FELDERSTEIN, ESQ.

OK… Let's say you just finished your business plan for the next killer app or you’re humming along in your business and have an idea for a new product that you want to bring to market but you don't want to risk personnel, resources, or money to accomplish this new venture. Venture capital is out because your idea is too niche and friends or family are out because your ideas too big.

Enter the world of “Crowdfunding.” Crowdfunding is an alternative method of raising finance for a business project or an idea using an Internet portal like Kickstarter (if you haven't been to this site yet I highly recommend it). Unlike Angel investment where a single individual takes a larger stake in a small business, with Crowdfunding an entrepreneur can attract large numbers of people from all over through a web-based portal site (that has been designated by the SEC and the State as a "Broker-Dealer") each of whom takes a small stake in your business idea by contributing towards an online funding target.

Here is a quick explanation for those who like to watch rather than read:

PlantoStart.com lists the top 10 Crowdfunding web sites available to entrepreneurs and small businesses. These sites are worth a peak at although, other than kickstarter, I  would not recommend jumping on board with them just yet.

Through Kickstarter and these other Crowdfunding sites, you can present videos and documentation of your new idea and ask people to make pledges or provide cash for equity in order to support of your new venture.

Crowdfunding falls under the new Jumpstart Our Business StartUps (JOBS) Act, H.R. 3606. The act makes major changes to the federal securities laws that govern capital raising activities by smaller companies. The idea is to improve access to the public capital markets for emerging growth companies and thereby promote economic growth and job creation in the United States. You can read the full text of the Act here. this Act loosens certain restrictions on private securities offerings by smaller companies as well as regulatory compliance burdens on companies going public.

Among other things, the "JOBS" Act will:

• Create a new category of issuer called "an emerging growth company" (defined as a company with less than 1 billion in annual revenues), that will be entitled to limited relief from financial reporting and disclosure rules in connection with, and for five years after, an initial public offering.
• Remove the prohibitions on general solicitation and general advertising for offerings to accredited investors under rule 506 of regulation D.
• Permit Crowdfunding (and this is important), by allowing issuers to raise up to $1 million from a large number of small investors, subject to some limitations on investor income levels and other restrictions intended to help prevent fraud.
• Increase the dollar limitations on offerings under regulation A from $5 million-$50 million and enables a state blue sky exemption for regulation A offerings under certain conditions.
• Raise the threshold number of shareholders for mandatory registration under the Securities Exchange Act of 1934 from 500 to 2000 (or 500 non-accredited investors), excluding shareholders in employee compensation plans and "Crowdfunded" shareholders.

Be warned however, this Act is not ready for prime time just yet and not only do you have to comply with broker-dealer laws (California is especially concerned in this area), but there are a multitude of legal issues and business operational matters that you need to get your hands around before you begin this Crowdfunding adventure.

Yoichiro ("Yokum") Taku provides a mindnumbingly detailed and technical discussion of the how the "JOBS" Act treats Crowdfunding and what all the gobbledygook in the "JOBS" Act actually means. You can read Taku's analysis on this subject in his post "is crowd funding legal?" 

Although I don't recommend reading Taku's article if you are manic depressive or prone to suicidal thoughts, the take away from his article however is as follows:

1. Companies should not try to utilize Crowdfunding until the SEC finalizes their rule making under the Act... There is too much ambiguous language as certain clauses could have multiple interpretations. When it's you versus the government guess who will win...Therefore,be patient, let the dust settle and wait for my posts letting you know that the JOBS Act train is ready for boarding, at which time you should get in touch with a lawyer (most likely me), and work through all the nuances as it relates to the program.
2. Crowdfunding will have the ability to expand options available to small businesses seeking finance.
3. Kids don't try this at home...If you're going to use Crowdfunding to raise capital, you'll need an attorney to ensure your corporate housekeeping is in order. You'll need to be certain that the appropriate number and type of shares is authorized and you need to review provisions relating to voting rights, board composition, and other matters could be affected when you're number of stockholders increases.
4. Be prepared to file with the SEC...although these filings will be less burdensome than the filings required by public companies, you're still going to have a lot of homework.
5. Choose your Crowdfunding website with the utmost care...The transaction fees charged by some of these sites still have not been determined and there are risks that the fees may be excessive or that unscrupulous persons will masquerade as registered Crowdfunders.

So to sum things up, if you have an ongoing business and you're looking to launch a new product or service but you don't want to risk the cash then Crowdfunding (when it's ready for primetime) may be just the ticket to get your new idea off the ground.

Alternatively, if you're small and your business idea is still sitting on your desk underneath an old cup of coffee, Crowdfunding may be the best way to give your current boss the bird and start out on your own...Just make sure you have your T's crossed and I's dotted first.