Like it or not, the future of the practice of law is in the cloud.

640px Word processors at NIHE 1

I was recently asked about law firm technology by a colleague who is leaving our firm, and instead of just answering her I thought I’d write a blog post about it. What follows is a brief overview of what I was using with my firm before and a few thoughts about what I’d do if I were starting a firm today.

Infrastructure. As a long-time Apple user and privacy wonk it pains me to say this, but especially for smaller firms you just can’t beat the value of G-Suite. For $6 per user per month you get most of your IT infrastructure – e-mail (with a custom domain), calendaring, video chat, storage, groups (which you can use to address mail to multiple people at the same time or as a bulletin-board for open issues), a notes application (where I “write down” my time), and all sort of other goodies – on a completely portable platform. That’s powerful.

Oh, and there’s Google docs as well, which I don’t really use unless a client asks, but which offers a lot of functionality. It even looks to me like Sites might be sufficient for many small-firm websites, in lieu of a third-party provider.

Even better, for an additional $10 ($20 if you want to get fancy) you can add telephone numbers with Google Voice, and replace those $50 per month landlines. We actually switched to a Comcast VoIP a while back, and I don’t dislike it, but the ease of use and one-stop shopping with Google is a significant benefit for a lawyer who is also the firm’s IT person. That’s not to say G-Suite can’t be tricky to configure, but it’s easier than dealing with systems and hardware from multiple vendors.

Yes, there are privacy (and other) issues, but to be honest many of the issues which plague Google are present in other systems as well. There are definitely documents you shouldn’t maintain online, and you also need to make local backups of critical docs. As with all cloud services, it’s important to make good choices about when not to use the cloud.

Document Creation and Editing. In the interest of full disclosure, as a transactional lawyer I often have to exchange complex documents with lawyers who are wedded to MS Word, so while I think it is an overly-complicated piece of bloatware with a reprehensible UI, I have no choice but to use it. If you need the Microsoft apps, then use them, by all means.

That being said, when I don’t have to use Word, I prefer Apple Pages, since it’s relatively light-weight and has all of the features I need. The same applies to Excel and PowerPoint, although I’m not much of a presentation kind of guy. Google docs is an option, certainly, but I’m a bit old school in that I like to know that my documents and apps reside somewhere I can actually use them when the internet connection is gone.

Billing. Ok, this one I struggle with. We started with RocketMatter back in 2010, and were fairly early adopters for the then-fledgling case management system. The good? RocketMatter made time entry, billing, and trust account management much, much more efficient than it had ever been and, before G-Suite, the calendar function was very useful. The not so good? At $65 per user, it’s expensive, and most of the other functionality has never been terribly useful for us. The to-dos are essentially useless, I hate timers, and the other “collaborative” tools aren’t really collaborative.

The add-on features I might have been interested in – intake forms, for example – are only available at an additional cost, and it’s hard to even get concrete information about those features without signing up for a free trial. I understand you sometimes have to learn by doing, but I’m not building a bunch of forms just to find out if the service will work for me.

Again, I don’t think you can go wrong with RocketMatter, but if I were to do it again I’d see if QuickBooks online offered adequate time entry functionality and kill two birds with one stone.

Accounting. We currently use QuickBooks desktop versions, in large part because our accountant understands it. I’d probably switch to QuickBooks online if I were doing it again, although I’m sure there are some much better alternatives around than there were when I last looked into it. Ultimately, if you’re going to use an accountant (which I strongly recommend) make sure you use something they are comfortable with.

Collaboration. This is last on the list not because I think it’s not important – in fact, I think it’s the most important item on here, because it brings a whole new dimension to a lawyer’s practice. It’s last because it takes some commitment to use properly, and part of that involves getting your clients onboard. I love Basecamp for a lot of reasons, but the most important are:

  • correspondence is threaded and tied to a specific task;
  • files are exchanged securely;
  • tech-wary clients don’t have to use the interface, a simple e-mail will suffice;
  • you can add as many different companies (clients) and contacts as you’d like, and limit each project to the intended contacts; and
  • it’s easy to back up the whole environment in HTML format, so you can access all of the old project threads (but not files!) offline.

Basecamp is particularly useful on mobile devices, since pulling together relevant e-mails in a mail client can be a chore, but on Basecamp everything is right where you need it, in a single thread. I could go on … if you’d like me to, let me know in the comments and I’d be happy to oblige.

Disclaimer: This is largely what we used at our old firm, and to be honest on some level I miss that. That being said, some of the complicated systems the new firm has, and which I don’t enjoy, are in place for a good reason (I’m talking to you, iManage). Others are simply the standard choice for corporate IT across the country and have been for ages (I don’t understand how Microsoft has prevailed with such god-awful user interfaces across the years). Still, I think a further move towards the cloud is inevitable, especially for small firms, and if I were on my own I’d be all about it.

Photo via WikiCommons by UL Digital LibraryNo restrictions

Time to talk about officers

Black and White photo of managers

When it comes to the day to day work of a stock corporation in the US, neither the board nor the shareholders are typically involved – they don’t sign agreements, give orders, or do much of anything all. Instead, they appoint officers, who are responsible for the day to day operations of the corporation, and who typically operate with relatively little oversight outside of annual or semi-annual meetings.

Most jurisdictions require three officers: President, Secretary, Treasurer, although those officers may also hold additional titles such as CEO, CFO, or similar. Additional officers are not uncommon, particularly in larger companies, and may include Vice Presidents, Assistant Secretary, and an Assistant Treasurer. Other titles, such as CEO, CFO, and Manager are permitted, and can be used in conjunction with the above officer positions, but in most cases the company must still appoint all three legally required officer positions. Even where those specific positions are not mandated by law, it’s typically better to use those titles (in addition to other titles if desired), since many forms will ask for the signature of one or more of those officers.

In the typical closely held corporation, the president is the highest ranking official, vested with the broadest possible powers. The president is generally held to have implied actual authority, by virtue of his office, to engage in ordinary business transactions, such as hiring and firing non-officer level employees and entering into contracts in the normal course of business. The president does not usually have the authority to bind the corporation to contracts which are not in the ordinary course of business, such as contracts for the sale of real estate or the sale of all of the corporation’s assets. Where the president who is also responsible for the long-term strategic direction of a corporation (and may also be a board member), the title Chief Executive Officer was traditionally added. Of course, CEO sounds pretty cool, so that historical practice has been replaced by a plethora of random CxO titles ranging from Chief Vision Officer and Chief Knowledge Officer to Chief Heart Officer.

The Secretary is responsible for maintaining the corporate records, and typically handles legal matters as well. The authorities and duties of the secretary should be clearly defined in the bylaws. As a result, the secretary is often an attorney, whether general counsel or outside counsel. In firms with an in-house legal team, outside counsel may act as assistant secretary, and in some cases third-party service providers provide secretarial services for a fee. The Secretary has authority to certify the records of the corporation, including resolutions of the board of directors. That’s often important for US subsidiaries of German companies, since a secretary’s certification can be used in place of documents which don’t otherwise exist under the US legal system. The appointment or election of a secretary is a statutory requirement in many states.

The treasurer has usually the ultimate responsibility for the management of the corporate funds, and will be the primary interface between the corporation and its accountants, bookkeepers, and banks. The treasurer is responsible for overseeing the corporation’s funds, as well as the preparation of financial reports and budgets and the filing of tax returns. The treasurer may also be CFO.

Any officer can typically hold one or more officer positions. We typically don’t recommend that a single person hold all three positions, since the unavailability of that individual makes it very difficult to enter into contracts or perform other corporate actions.

Image courtesy of Wikimedia Commons, 1964, Unknown photographer

That social media account is valuable, until you try to transfer it.

Wikimedia The Scream by Edvard Munch 1893 Nasjonalgalleriet

The internet is is a social-media driven marketing platform, driven by technologies which seek to move consumers to specific branded content and humans who try to corral that technology as best they can. Billions of dollars are spent in the chase to build an online brand, and those brands are feverishly protected. What happens, then, when the time comes to cash in? The problem is that most of the drivers behind online brands aren’t really under the control of the brand owner, and for all of the money invested in those online brands there’s a surprising lack of clarity as to how (and if) those brands can be transferred. In some sense, social media accounts are like a piece of stolen artwork – incredibly valuable, but difficult to cash in on.

While lawyers here in the US often refer to social media accounts as “property,” that property right is limited by the provider’s right to limit your use of or control over that account. In many cases, the provider’s terms of service do not permit the transfer (or “assignment” in legal-speak) of those accounts without their consent (or, in some cases, at all).

So, for example, if your company has an instagram account which is key to the product’s marketing, your company’s rights to that account are limited to the rights granted in their terms of service. That’s where things get interesting – according to the terms of service with Facebook (owner of instagram) you “cannot transfer your rights or obligations under this agreement without our consent.” If you make that transfer anyway, by simply passing on the password and user id, instagram could suspend or terminate the account, leaving you with a whole lot of nothing.

There are often other terms which are disadvantageous to business transfers, including terms prohibiting the commercial use of the account (as is the case for Tik Tok, for example). Most if not all of those clauses allow for immediate termination, meaning any valuation in a transfer is pretty much a house of cards that could be destroyed at any time.

There aren’t really many workarounds, either, and none are foolproof. You could, for example, have the original owner keep the account, but sign an agreement which allows you to control of the account (so it would basically be that owner’s account in name only). That’s probably not a great option for either party, though, since the original owner has clearly decided to exit the business and doesn’t necessarily want to be saddled with obligations going forward, and you probably don’t want to be dependent on them for an eternity. That may also run afoul of some provider’s terms, which often prohibit sharing passwords and ids. Another alternative would be for the old owner to terminate the account and for you to register it, but even assuming you succeeded in obtaining the new account, you’d have to start from scratch in terms of followers which destroys the value of the transfer.

If the entire business is to be transferred, you have another option. Instead of purchasing the assets of the business, which would require a transfer of the contract with the provider, you can purchase the shares in the target business. You can then continue to run the account under the original business, even if you clear out all of the assets after the sale. That, however, may give rise to other unpleasant risks going forward, since a purchase of the shares brings any open liabilities with it as well.

The problem is that under regular property law principles you can own the account, but on the internet that ownership right is subject to the whim of the provider. As a result, the value of that ownership right is limited and unpredictable, since all of the above options could result in termination under the terms of most social media providers. That said, for many it seems to be a risk worth taking.

Shareholder and Board of Directors

As part of our short series on forming a US corporation, it’s important to understand the management structure, since there are significant differences between those structures in Germany (and many other countries) and the US. First, we’ll start with the shareholders and board of directors.

Shareholders
The Shareholders are the owners of the company (Aktionäre) and, in a C Corporation, hold shares much like they might in a German Aktiengesellschaft. There can be as many shareholders as there are shares, or shares can all be held by a single person or entity. The shareholders exercise power over the corporation by appointing the Board of Directors, which in turn appoint officers to handle the daily activities of the corporation. Thus, the exercise of power by the shareholders over the corporation is indirect, and unless the shareholder is also an officer the shareholder cannot sign contracts or direct the daily operations of the company. Of course, by threatening to remove the board of directors the shareholders can influence the actions of the board and the officer they appoint, but that influence is exerted indirectly rather than directly.

A word of caution – a lot of startups in the US are quick to give equity, and some Germans, in an effort to accommodate US partners, may decide to do the same. While this is certainly permissible, giving up even minority ownership in your US subsidiary should be done cautiously, if at all, and should be linked to mutual goals which ensure that the partnership is a lasting one.

Board of Directors
The board of directors (Aufsichtsrat also does not directly manage the company – rather, they appoint officers and provide the officers with an overall strategic direction for the company. German clients in particular often get confused about this, because the “director” or “managing director” in a German GmbH is usually authorized to act directly on behalf of the company, whereas the director in a US stock corporation is not. If one of the board members is also expected to act on behalf of the company then he or she should also be appointed to an appropriate officer position.

Although most states allow as few as one board member, a board of at least three members will ensure that the corporation can act if one of the board members becomes unavailable or incapacitated. It is always better to have an odd number of board members to prevent ties, even within closely held corporations.

Many companies have a chairman of the board, who presides over board meetings. Generally the board is required to have at least one meeting annually, although additional meetings may be called to address specific issues between annual meetings.

Obtaining your company’s US tax number

Excerpt, IRS Form SS-4

One of the most important steps in the formation of a new company is the application for an Employment Information Number (EIN, or also FEIN). The EIN is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to business entities operating in the United States. Originally, the EIN was limited to reporting employment-related taxes, but it has since become a more generalized identification number for US corporations. Changes in the law since 2001 have made it impossible to get a bank account without one, and have also made much more difficult to obtain without a US Social Security Number (SSN, the US equivalent of an individual tax identification number).

For the average US citizen or holder of a US SSN or other US tax identification number, the EIN is simple to get. The application can be completed online and the EIN is provided immediately. Since you can’t save your online application session, it’s typically best to download and fill out the IRS Form SS-4 (pdf) so you can be certain you have all of the necessary information available.

Without a US tax number, however, the process becomes more complicated. Applications without an SSN can be filed by mail, fax, or telephone, but processing takes significantly longer. The IRS website claims response times as low as four days for faxed EIN applications or four weeks for mail. That used to be true, but in our experience processing time over the past few years can and sometimes does take far longer than that. Unfortunately, addressing those delays can be extremely difficult, since IRS agents typically can’t provide any additional information about applications once submitted.

Unfortunately, due to these delays, sometimes companies are tempted to call on a business partner or even friend to submit the EIN application on the company’s behalf. The IRS frowns on the use of these “nominees,” as they are called, stating that the responsible party on Form SS-4 must be a person who “controls, manages, or directs the applicant entity and the disposition of its funds and assets.” If you’ve already filed for an EIN using a nominee, you can (and probably should) update the company’s information by filing Form 8822-B

.
Part of an occasional series of posts on starting your business in the US.

Incorporating in the United States

Mabbett Railway Chair Manufacturing Company share certificate 1867

A while ago, I wrote an article on choosing the state of incorporation for your US company. Now that you’ve decided where your company will be located (probably Delaware), the next step, of course, is to incorporate:

  1. First, you file a brief document (the Articles of Incorporation or, in Delaware, Certificate of Incorporation) outlining the basic structure of the company (typically name, initial corporation address, number of shares authorized, and often some sort of provisions for indemnification of officers and directors. Once the Articles are stamped by the state the corporation is in existence.
  2. The person who filed the Articles (called the incorporator) appoints the first board of directors and enacts the first bylaws (basically, the rules of operation of the company) in a written “Consent of the Incorporator.” The incorporator is a bit of an odd concept, since he or she has all power or responsibility for the company once formed, but is often a third party service provider not in any way related to the company. The position is really a temporary vehicle to effect the incorporation and the appointment of the board of directors, and the incorporator will typically resign right after formation.
  3. While not technically a corporate document, the incorporator will also typically file for a federal tax ID (commonly referred to as an Employer Identification Number or EIN). This can be a royal pain for non-US companies, but I’ll get to that in a later post.
  4. At this point the corporation has the beginnings of a structure but no owner or officers. The board of directors (similar to the German Aufsichtsrat) meets or signs a written consent appointing officers for the corporation, issuing stock to the shareholders, and if no bylaws have been put in place, enacting bylaws. The Board will typically also pass resolutions directing the officers to carry out some of the tasks necessary to make the company fully operational, such as opening bank accounts, signing a lease for an office, appointing counsel and an accountant, and signing other necessary documents or agreements.
  5. The Shareholder(s) may, but need not, sign a consent confirming the appointment of the board and ratifying any of the actions taken by the board.

The company is now fully functional, and can operate under the direction of the officers without further documentation. Note that the officers fulfill a role similar to the German Vorstand, but with significant differences. The signed documents are placed in a corporate minute book, which should be maintained for the life of the corporation.

After the initial incorporation, most jurisdictions require that the shareholder and board hold at least one meeting per year and maintain written minutes of that meeting in the corporate minute book. The board should also consider a meeting or written consent approving any transactions which impose a significant cost on the corporation, obligate the corporation for a long period of time, or which fundamentally change some aspect of the corporation’s operation or structure. More on that in a future post.

Part of an occasional series of posts on starting your business in the US.

US Citizens renouncing citizenship in record numbers

516px US passport high resolution
Here in the US, folks tend to assume that the United States is the proverbial “city upon a hill,” a place to which everyone does (or at least should) aspire. Many of my colleagues overseas have had some serious doubts about that premise for some time, but increasingly, even US citizens are having their doubts. According to a report in Newsweek, an increasing number are putting their money where their mouth is, with over 5,000 US citizens giving up their citizenship in the first half of 2020, more than twice the number for all of 2019.

A significant number of those giving up their citizenship are likely individuals who were born in the United States or to United States parents, but who no longer reside here and who have few or no ties to the United States. Many of those folks (like former London mayor and now Prime Minister of the United Kingdom Boris Johnson) have become increasingly disenchanted with the long arm of American tax law. Wealthy citizens should be aware, however, that giving up citizenship can be very expensive given the United State’s expatriation tax.

In any event, neither the process nor the cost has changed, so pundits speculate that the increase is due an increasingly divided electorate (and society) as well as economic and societal turmoil resulting from the COVID-19 pandemic. Some may have just realized that the dwindling reach of a US passport isn’t worth the headache, especially now.

By United States Department of State – Scan made by Ovinus Real, Public Domain, Link

Business visas to the US about to get more expensive

USCIS Filing Fee Table

As if coronavirus hasn’t already made business travel complicated enough, the cost of many of the most common non-immigrant business visas to the US is about to increase significantly. The USCIS recently announced an increase in the filing fees for certain immigrant and non-immigrant visas which allow foreign citizens to live and work in the United States. A chart of the fee changes for some of the most important visas for businesses is above, but overall it appears that the agency has chosen to spare immigrant visa applications the bulk of the costs, since those forms actually decreased as much as 21%. Those reductions were made at the expense of non-immigrant visa petitioners. The I-129 L increased a whopping 75% to $805 per petition.

The fee increases become effective October 2, 2020, and are intended to cover the costs of the agency’s activities, since the USCIS is supposed to be self-funding.

Overall, this seems consistent with the current administration’s general trend towards discouraging temporary business assignments to the US in favor of longer-term stays (or simply not coming to the US at all). Whether this is good for foreign direct investment remains to be seen.

Where in the World is our Case to be Litigated

Supreme Court of the United Kingdom

A little while back I wrote about choosing the law which applies to your transaction in an international setting. While often the party which initiates the transaction (and provides the first draft of the contract) will dictate the law and venue, that’s not always the best option. Indeed, in some cases it’s wildly impractical, particularly where far-flung parties want to compromise on a central location for litigation but want to keep their own law. It’s going to be hard to find a New York arbitrator who can effectively apply Estonian law to a contract between an Estonian and a Thai company. Even larger countries like Germany or France can’t always count on reliable interpretation of their laws in faraway locations.

One alternative is to choose a “neutral” forum, often one physically located between the parties, to reduce the burden of travel and allow the application of one set of laws which are readily understandable by both parties. There are many different options for neutral venues, but a few examples include:

  • United Kingdom. The UK, particularly London, has long marketed itself as a reliable and convenient venue for the resolution of legal disputes, and has the advantage of the English language and ready access from much of the world. UK law also reduces the burden of discovery which would otherwise be available in the US, and remains the most popular “neutral” law for international transactions.
  • New York. As a global center of international business, readily accessible from much of the world, New York has long been seen as a good neutral forum for international disputes, particularly for finance transactions. And yes, in the US you have to choose the law of a particular state.
  • Delaware. Long the choice of corporations in the US, Delaware is also a viable choice for resolution of international disputes which otherwise have no connection to the state, as long as there is some reasonable link to the state or if the value of the contract is above $100,000. Delaware’s dedicated business court (the Court of Chancery) is also seen as a plus, streamlining litigation in comparison to other US jurisdictions.
  • Switzerland. Switzerland has historically been considered a viable neutral venue for international disputes, in large part because of a general sense of reliability and neutrality, although the complexity of some Swiss laws and the need to litigate in a language other than English may well be an obstacle for some.
  • Singapore. Singapore is an increasingly popular venue for international dispute resolution, particularly in Asia, gaining in popularity over neighboring Hong Kong. Again, efficiency and ready use of the English language are pluses, as well as ready access from international markets.

Whatever venue or law you choose, arbitration can limit some of the risk of choosing a venue which is not otherwise related to the transaction at hand, and the adoption of international definitions (like INCOTERMS) and international legal frameworks (like CISG) can help ensure consistent resolution of disputes which may arise.

A lot goes into the choice of law, much more than can be covered in a single blog post. Whatever choice you make, be sure that the chosen venue will be amenable to hearing your case if and when the time comes.

Image courtesy of Diliff / CC BY-SA (https://creativecommons.org/licenses/by-sa/3.0)(cropped)

Dealing with the Risks of Remote Service

Lufthansa Boeing 747 430

The German business newspaper Handelsblatt ran an article (in German) last week discussing the issues facing German companies with US subsidiaries during the coronavirus. While a lot of business can be done remotely, much of Germany’s export economy is based on industrial goods, and those goods often require in-person service or installation. Given that most Germans cannot travel to the United States right now, in-person service is impossible. Since travel in the other direction is largely forbidden, US workers can’t be trained in Germany to do the work themselves either. That makes the inability to travel a massive thorn in the side of German business.

This thorn has a legal aspect as well – many sales and service contracts require in-person service, and mid-sized German manufacturers may not have enough (or any) technicians located in the US to provide the necessary services. They are used to sending technicians over as needed, but that’s obviously not possible now. Similar problems may arise where warranty service is needed on site, but cannot be provided due to the travel restrictions. In either case, companies are looking at both a customer service issue and a legal issue, and the resolution of one may in fact complicate the other.

Of course, contracts usually try to address these eventualities. For example, in some instances, force majeure clauses may allow for delays in service or termination of the contract in the event of certain disasters, but it’s not always clear if and when this particular disaster is covering, since the language in those clauses varies widely. On the customer service side, delaying service or terminating the agreement doesn’t help the end customer who may be sitting in the US with non-functioning equipment. It also doesn’t necessarily help the German vendor, since a customer which has experience this type of business interruption might favor a local (or larger) supplier in the future.

As a result, many mid-sized companies are getting creative with remote services. Unfortunately, sometimes those efforts also backfire. What happens if the instructions given over Zoom or Google Meet are unintelligible, or if the customer’s employee makes an error which damages or destroys the product which is being serviced? Some unwitting customers may find that they’ve voided their own warranty by accepting an offer to do the work themselves, even with the vendor’s assistance, and others just enter a gray area where the risk and liability issues are muddied, with no clear resolution when things go wrong.

Especially in high risk industries, manufacturers who agree to this type of service (and their customers) may want to consider a brief agreement or amendment to their sales and service contract which allocates those risks during the pandemic. That ensures that both parties can move ahead secure in the knowledge that the business relationship on which both parties rely survives the pandemic as well. If the risks are too great to reach agreement, maybe that’s a sign that you need to consider your options for termination after all, even if it does sour the business relationship.

Unfortunately, the travel limitations seem likely to stay for a while, given German skepticism of the United States’ handling of the coronavirus, so it looks like we might be dealing with these kinds of risks for a while as well. We might as well deal with them.

Photo courtesy of Kiefer. from Frankfurt, Germany / CC BY-SA (https://creativecommons.org/licenses/by-sa/2.0)