The Business Counselor Blog™

Major Categories of Legal Needs for Technology Companies

In today’s business world, all companies, regardless of the technology-related aspects of their business model and activities, are required to understand and comply with a plethora of laws and regulations, including:

• Common law legal relationships with employees, creditors, and landlords;

• Various licensing requirements imposed by federal, state, and local governments;

• Federal and state securities laws;

• Intellectual property rights;

• Employment laws;

• Federal and state tax laws and regulations, including the reporting obligations imposed under such laws;

• Domestic and foreign laws regulating technology transfers and the form and content of many common commercial relationships;

• Federal and state statutes relating to antitrust and unfair competition;

• Corporate governance rules and regulations;

• Federal and state laws relating to privacy and data security; and

• Federal and state statutes relating to consumer protection and other matters.

These requirements apply regardless of whether the business is operated as a proprietorship, a partnership, a limited liability company, or a corporation.  Moreover, each form of entity has its own set of operational rules that must be followed in order to gain the legal benefits from the use of the entity.  For example, in order for the shareholders of a corporation to take advantage of the limited liability offered through the use of the corporate form, they must observe certain governance procedures and operational formalities.

 

Based on what I have been seeing a list of the major categories of legal needs for technology companies should include the following:

• Management of existing intellectual property assets and establishment of strategies and procedures for creating and protecting new assets;

• Compliance with environmental, product testing, health, and safety regulations, including new “green” initiatives;

• Employment-related issues including compliance with applicable federal and state employment laws;

• Federal securities laws including Sarbanes-Oxley;

• International operations including compliance with export/import law requirements;

• Privacy and data security laws and industry guidelines;

• Accounting and financial reporting requirements;

• E-Commerce; and

• Litigation and e-discovery.

In the last two years increased emphasis has been placed on international operations, as more companies are pushed into global business activities, and e-discovery.  Concerns about Sarbanes-Oxley principles have also expanded to include many private companies.  E-discovery and privacy and data security laws are generally quite a mystery and surprise to executives, and each expansion into new foreign markets typically leads to unforeseen challenges that are not always planned for in advance.  For example, the lack of speed and expected costs associated with obtaining business licenses in new foreign markets often upsets even the best strategic plan for launching new activities in those markets.  Another problem is attempting to enforce legal rights in foreign courts.  The scope, complexity, and costs of litigation continue to rise even as the economy remains flat, and litigation generally takes up a much larger percentage of the resources allocated to the legal needs of technology companies.

 

Changes in the legal needs of technology companies tend to follow changes in the risk profile associated with their business activities.  In addition to the legal audit and compliance programs discussed later in this chapter, technology companies and their counsel must establish and continuously maintain risk assessment programs that facilitate identification and management of the material business risks faced by such companies.  Any such assessment must address all threats to management achieving its objectives, including those in the areas of operations, financial reporting, and compliance with laws and regulations.  The process of risk assessment includes identifying the risks, estimating the significance of the risks, and then selecting methods to manage them.  Auditors and others have identified a number of factors that they consider strong indications of increased financial risk.  Therefore, management should be aware of their existence and increase its control mechanisms when the following factors exist:

• Changes in the organization’s regulatory or operating environment;

• Changes in personnel;

• New or revamped information systems;

• Rapid growth of the organization;

• Changes in technology affecting production processes or information systems;

• New business models, products, or activities;

• Corporate restructurings;

• Expansion or acquisition of foreign operations; and

• Adoption of new accounting principles or changing accounting principles.

The content in this report has been adapted from material that appears in Alan Gutterman’s publication entitled “Business Transactions Solutions” and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.  Alan Gutterman is the Founder/Principal of Gutterman Law & Business (www.alangutterman.com), which publishes the Emerging Companies Blog and the Business Counselor Blog, and a Partner of The General Counsel LLC (www.thegeneralcounsel.net).

 

Checklist of Characteristics of Emerging Companies

This is checklist of commonly-noted characteristics of firms that would fit within the definition of an emerging company.  In general, whether or not a particular firm qualifies as an emerging company depends on several factors including the type of business activities; the role of technology in the firm’s business model; the level of innovation associated with the firm’s products, services and/or business processes; the size and anticipated growth of the firm’s target markets; the rate of turnover and earnings growth; the experience and entrepreneurial spirit of the management team; the firm’s ability to develop and sustain distinctive competencies that are related to value creation for the target customers; and participating in strategic alliances with credible industry partners.  The checklist can be a useful tool in preparing for presentations to potential investors, such as venture capitalists, that are focused on companies that have the potential for high returns on investment over a relatively finite holding period.

• Is the firm engaged in business activities that have combined innovation with extraordinary growth in turnover and employment?
• Is firm involved in the development and commercialization of new and innovative (i.e., emerging) technologies that promise to create entirely new markets or effect a substantial change in the competitive conditions that apply in specific existing markets?
• Does the firm have a distinctive competence in one or more areas that are essential to competitive success in its particular market (e.g., proprietary design technology (e.g., patents and trade secrets), manufacturing know-how, a unique brand, or extraordinary services)?
• Does the firm have core competencies based on human capital and other non-alienable assets such as knowledge and/or business processes?
• Does the firm engage in activities in a market that is expected to grow and expand rapidly in the future?
• Does the firm have a sensible and believable strategy for distributing its products and services within the target market?
• Is the firm involved in the development of relationships or contracts with recognized companies in the industry (i.e., “strategic alliances”) that provide validation of the company’s business model in the marketplace?
• Does the firm have innovative and unique products, processes, or services that can dominate a niche market segment?
• Does the firm have an internal growth strategy that focuses on continuous production of new or upgraded products during the early years of growth and evolution?
• Does the firm have a portfolio of proprietary intellectual property rights, such as patents, and physical assets?
• Are the actual or potential gross margins and/or cash flow generated by the company large enough to permit financing of growth over an extended period of time and produce a favorable return on invested capital?
• Does the firm have a full team of qualified, experienced and credible senior managers?
• Does each member of the management team have experience in the target industrial and an entrepreneurial spirit?

The content in this post has been adapted from material that will appear in Business Transactions Solutions (Fall 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Policies for Selection of Vendors and Purchase of Goods and Services

A business often contracts with outside parties for services and projects that the business' own personnel cannot perform cost-effectively; or call for skills beyond the business' resources. Although varied, these services commonly include professional, such as legal and accounting services; research and development; manufacturing, sales, and maintenance of products sold to customers; data and records services; computer services; security services; and maintenance of the business' equipment.  A business may also contract with consultants and independent contractors under special circumstances, such as during vacations of regular employees, or for servicing products sold by the business to customers in locations that the business' own personnel cannot economically service.

As a business grows the volume and complexity of agreements for services and maintenance increases and it is important to develop and enforce formal rules and procedures for selection of vendors and negotiation and completion of procurement transactions.  In many cases the responsibility for procurement of services, as well as tangible goods, will be vested in a purchasing department that will assume the leadership role for purchasing goods and services on behalf of the company.  In order to achieve its goals and objectives the purchasing department should prepare and disseminate a policy that covers purchasing authority, including the signatures and other approvals required for certain types of contracts and expenditure amounts; evaluation and selection of vendors, including bidding procedures and prohibitions on conflicts-of-interest; delivery and inspection procedures; invoicing and payment procedures; and contract review and approval procedures.

Each requisitioning department (i.e., the department that is actually requesting the particular product or service) should be expect to contribute to the process through preparation of purchase requisitions with sufficient lead time to allow the purchasing department to complete bidding requirements and/or process orders, provide accurate specifications when requested, verifying that funds are available and securing the appropriate budget manager's signature, and verifying delivered orders for accuracy.  Additional rules may apply to the purchase of specific products and services such as computer equipment, construction services, consulting and professional services and maintenance agreements and it is important to have the departments with the most expertise involved in the procurement process (e.g., the legal department should not be ordering software without input from the information technology department).

As with any other policy, plans should be made for reviewing the effectiveness of the purchasing procedures on a regular basis and the review should be conducted against very specific performance metrics outlined in the policy itself such as incurring the lowest cost in the fulfillment of specified needs with appropriate levels of quality and service; developing and implementing a strategic procurement plan that ensures that goods and services will be acquired after consideration of needs, alternatives, timing, and availability of funds; identifying and satisfying all relevant legal and ethical obligations (including vetting of potential conflicts of interests) in the acquisition of goods and services by purchase or lease; and establishing a core competency in purchasing techniques by recruiting and training skilled professionals on negotiating, contractual terms and conditions, cost reduction techniques, and cooperative buying processes.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (Fall 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.