Business Law Essentials for Accountants

You've read the Wall Street Journal. Another company lost a product liability case or settled an employment practices suit. How did the company get there? What didn't they do? What misperceptions led to a break in customer, supplier or employee relations? Using actual court cases, this course contructs a practical set of dos and don'ts to avoid costly litigation.

• Understand what causes litigation
• Identify business and industry practices that lose court cases
• Minimize risk violation of recent laws
• Implement changes necessary to comply with new legislation

Prerequisite: Undergraduate business law course or equivalent practical experience

Accepted for CFP^® credit.

Chapter 1

Course Overview

When considering the subject of Business Law, the scope of topics becomes endless. The depth of each topic can be a single course in itself. The purpose of this course is to provide an overview and update of the topics that affect most businesses. While your practice or company might have issues that could be covered by this course, time does not allow for coverage of every possible topic. Further, time does not allow for a complete discussion of each topic. The intent of this course is to address the current status of the law in the selected areas and provide an understanding of how the law might impact your company or client. While the course does not attempt to make legal scholars out of the participants, issue recognition is vital if a client is to avoid the pitfalls of ignorance. The accountant can perform a great service for his/her client by identifying those issues that might result in litigation and then prompting the client to take action to protect the business.

Most accountants need to have an understanding of the laws that shape and influence businesses' decisions. CPAs must pass a Business Law section of the CPA examination. Except for taxes, most CPAs do not keep abreast of the changes in Business Law. With the variety of issues accountants face, not knowing the nuances impacting Business Law is to be expected. A periodic review of these areas can keep the professional aware of the changes in each area and how these changes might alter or influence the activities of a business.

This is not a tax course, so the tax ramifications of the topics covered are not discussed. While taxes often influence many business decisions, this course attempts to look at issues from a different perspective. Taxes are just one part of any decision and cannot be the primary factor determining the final solution in every situation.

Except for Louisiana, the laws of the United States and the remaining forty-nine states are based on common law from England. While the laws of other countries, like France and Spain, have influenced our laws, American jurisprudence is primarily English based. When discussing the different topics, only Federal and common law will be considered. Congress has made a variety of laws that have an impact on almost every decision made by a business. When combined with the courts' interpretation of how these laws work, a business must be attuned to how these laws affect their activities. Attempting to cover how the fifty states have dealt with these issues would be an impossible exercise in an eight hour course. By knowing the current status within the Federal and common law, an accountant can have some degree of assurance that she is on the right track. Since every business needs competent legal council, once the issue has been identified, the firm's local lawyer should be called on to give the particular state's position on the issue.

In addition to the difference between Federal and state law, an accountant must know the difference between substantive and procedural law. Once a situation has progressed to where procedural law is needed, the local lawyer should be involved. Procedural law addresses how the courthouse works and the process of protecting the rights given under the law. Statute of limitations, filings, evidence and related issues are part of the procedural law. Normally, accountants need not be concerned with procedural law, since they cannot represent the business in court. Substantive law considers what a business can and cannot do. Substantive law notes what rights are created and why those rights exist. Businesses make their decisions based on the substantive law, so the course covers substantive law only with limited reference to procedural law, when needed for the purpose of clarity.

The most challenging aspect in developing this course has been determining which topics to cover and which ones to exclude. Knowing that the final decision will ultimately disappoint some participants, please understand that the final decision was not made lightly. Most businesses want to know what they can do to prevent being sued. Second, they want to know what to do if they get sued. Finally, business owners want to know how to protect their personal assets if they get sued and lose. The single largest source of potential liability in today's environment is employees; therefore, a major portion of the course covers employment related issues. As more accountants serve on civic boards, understanding the rules concerning proper corporate governance can enable the practitioner to safeguard personal assets while helping the community. Obtaining financing for business acquisition or expansion is always an issue facing businesses, so knowing the various securities laws can facilitate in acquiring needed capital. Given the unstable state of the economy, accountants need to be familiar with bankruptcy rules. Entity selection and other techniques are available for the accountant to help an owner protect his personal assets in the event of a losing law suit. While avoiding a lawsuit is not always possible, various alternative dispute resolution methods exist to minimize the potential costs associated with the suit. Finally, protecting the firm's intellectual property has become an increasing concern over the past few years; therefore, a review of the various intellectual property laws is provided. Although these topics fail to cover issues your business or clients might be facing, these topics should address most of the issues plaguing your firms currently.

Chapter 2

Corporate Management

Learning Objectives

• To explain how authority is shared in a corporation
• To define and explain a director's duty of care
• To explain a director's duty of loyalty to the corporation
• To acquaint the participants with the corporation's duties to minority shareholders

Case

Susan and Nancy are equal owners of Numbers, Inc., a corporation that operates a keno parlor under an agreement with a city. Both are officers and directors of Numbers. The keno parlor has been very successful. While Susan spends a considerable amount of time at Numbers, Nancy has started spending less time in Numbers' operations. The agreement with the city is scheduled to expire later this year. Susan is contemplating forming a new corporation and bidding on the keno contract individually, since she does all the work. What do you tell her?

Corporate Management

Once created, a corporation must be managed by people, whose functions, rights, and duties are determined by constitutions, statutes, administrative rules and regulations, and a variety of sources such as the articles of incorporation, bylaws, and contracts. Corporate management powers are divided among the shareholders, the board of directors, and corporate officers. The shareholders periodically elect the board of directors, who have the ultimate responsibility to manage the corporation. The board of directors appoints corporate officers and delegates to them the authority to operate the corporation consistent with management policy determined by the board. The officers often appoint additional executive officers and employees to manage day-to-day business activities. Collectively, the officers and directors are known as its management. In closely-held corporations the same persons are often simultaneously all three parties.

Shareholders

Although the shareholders are the owners of the corporation, their participation in management is generally limited to voting on the election of directors and on extraordinary corporate matters such as amendments to the articles of incorporation, dissolution, merger, or consolidation or sale of corporate assets outside the ordinary course of business. In addition, the power to amend, adopt, or repeal bylaws may be reserved to the shareholders in the articles of incorporation, and shareholders may generally repeal or change bylaws adopted by the directors.

Directors

All corporate powers are exercised by, or under the authority of, the board of directors. Normally, directors are elected by a plurality of the votes cast. In 2006, Delaware changed its statute allowing shareholders to amend the bylaws to require directors be elected by a majority of the votes cast. If the shareholders vote to amend the bylaws, the Board cannot amend or repeal the shareholders' decision. While more than 150 companies in the &P 500 elect directors by majority vote, the change to majority vote was made by the Board, which could change its mind later. A shareholder change will be permanent unless changed later by the shareholders. The business and affairs of the corporation are managed under the direction of the board. As part of its management function, the board S

• Makes basic policy decisions.
• Selects, supervises, and removes corporate officers and other executive personnel and delegates authority to them.
• Determines executive compensation.
• Determines if, when, and in what form or amount dividends will be paid.
• Determines financing and capital changes.
• Adopts, amends, and repeals bylaws, subject to shareholder approval.
• Participates with shareholders in effecting major corporate changes.
• Supervises the overall operation of the corporation.

Directors may be insiders, who are persons who are officers or employees of the corporation, also. The board may include "outside" directors, who are persons not affiliated with management. Corporate management authority is vested in the board of directors as a body, not in individual directors. Directors must act in properly constituted meetings, affording opportunity for discussion, deliberation, and collective judgment. The timing and other aspects of board meetings are governed by bylaw provisions and corporate policy. Meetings are either regular or special and directors are entitled to advance notice of special, but not regular, meetings. Unless the articles or bylaws provide otherwise, a majority of the number of directors fixed in the bylaws or articles constitute a quorum for the transaction of business.

The articles or bylaws can require either a greater or smaller number to constitute a quorum. If a quorum is present, a majority vote of the directors present is the act of the board, unless the articles, bylaws, or policies require a greater number. Each director is entitled to one vote and generally may not vote by proxy. A director who objects to an action of the board must either request that a dissent be entered in the minutes of the meeting or give written notice of dissent. Either method eliminates the dissenting director's potential personal liability for the action taken.

Typically, the board of directors of large/medium corporations delegates much of its management authority to corporate officers and to executive and other committees of the board. Committees are usually focused on one aspect of board responsibility. These committees do all the legwork in putting together reports and proposals. These reports are then given to the board as a whole for consideration. Each director is responsible for evaluating the committees' proposals. To prevent excessive delegation of board authority to committees, their powers are limited by statute. As a director, an individual may be required to sit on one or more committees. The executive committee is the most common committee and performs board functions between meetings of the full board.

Officers

Corporate officers are appointed and removed by the board of directors and conduct the day-today affairs of the corporation. Officers are agents of the corporation to whom the board delegates authority to execute and administer board policy decisions. Although corporate management is legally under the direction of the board, the officers effectively manage the corporation. State statute requires or authorizes a corporation to have certain officers.

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