New York & New Jersey Business Lawyer Blog

Simon Cunningham [CC BY 2.0 (], via FlickrCorporate directors and officers owe the corporation certain fiduciary duties, meaning they are legally obligated to act solely in the corporation’s interest. The duty of loyalty requires officers and directors to act on behalf of the corporation without economic conflict. A breach of the duty of loyalty might consist of a transaction that benefits an individual employee over the corporation, or a corporate opportunity that the employee withholds for their own benefit. Remedies for a breach of the duty of loyalty may include economic damages and an equitable remedy known as disgorgement, by which the employee must give up any personal gains obtained from their breach. The New Jersey Supreme Court recently considered whether a court could award disgorgement to a corporation that did not suffer economic loss. Kaye v. Rosefielde, No. A-93 Sept. Term 2013, 073353, slip op. (N.J., Sep. 22, 2015).

The plaintiff in Kaye hired the defendant in 2002 as Chief Operating Officer (COO) of several companies. Under a formal employment agreement, the defendant received an annual salary of $500,000, paid in equal parts by a corporation and a limited liability company (LLC) controlled by the defendant. The defendant served as COO and General Counsel of both companies, which managed and sold timeshares in properties owned by those two companies and several others.

According to the court’s ruling, the plaintiff alleged multiple acts by the defendant that breached the duty of loyalty to the companies that employed him. In one case, the defendant created a separate LLC in 2003 to manage certain timeshare interests, but he did not follow the plaintiff’s instructions regarding the allocation of ownership interests. The defendant drafted the new LLC’s operating agreement in a way that increased his own ownership interest and that of a corporation he owned and controlled. In 2005, the plaintiff learned of some of the defendant’s acts and terminated his employment.

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By Smiley.toerist (Own work) [CC BY-SA 4.0 (], via Wikimedia CommonsThe taxation of American businesses operating overseas is a controversial topic. The officers of a corporation, or the managers of a limited liability company (LLC), have a fiduciary duty to the owners of the business to maximize profits. With small businesses, the managers and owners are often the same people, but the duty remains. Minimizing a company’s tax burden is one way to do this. Some companies have developed a variety of schemes for keeping money offshore to avoid U.S. taxes. To the extent that these schemes do not violate U.S. tax laws, it is often because of loopholes in existing laws. A recent ruling from the European Commission (EC), the executive body of the European Union (EU), could have a significant impact on how American companies do business—and pay taxes—overseas.

According to some estimates, large U.S. corporations are holding over $2.1 trillion in profits in other countries, allegedly to avoid paying roughly $620 billion in income tax in the U.S. Unlike most countries, the U.S. requires both its citizens and its businesses to pay federal income tax on income derived outside U.S. territory. Why does the U.S. do this? One possible answer, albeit a rather cynical one, is that the U.S. projects its power and influence around the world, and both citizens living overseas and businesses operating abroad expect the protection of the U.S. government—and occasionally its armed forces—should they need it.

The EC is responsible for monitoring the compliance of EU member nations with EU laws and treaties. In the summer of 2014, the EC announced investigations into three companies either based in or closely tied to the United States, and their business practices in three European countries:  Apple in Ireland, Starbucks in the Netherlands, and Fiat Chrysler Automobiles in Luxembourg. In October 2014, it also announced an investigation of Luxembourg’s tax treatment of Amazon. The investigations are targeted more towards the countries than the companies, but the EC’s rulings will substantially affect the companies. The EC announced rulings in the investigations of Starbucks and Fiat in October 2015.

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By US Army Corps of Engineers from USA (Patrol Boat Hocking in Newark Bay) [CC BY 2.0 (], via Wikimedia CommonsThe Third Circuit Court of Appeals recently ruled against a private marine terminal operator at the Port Authority of New York and New Jersey (PANYNJ), which had challenged its lease at the port facility in Elizabeth, New Jersey. Maher Terminals v. Port Authority of N.Y. and N.J., et al., No. 14-3626, slip op. (3rd Cir., Oct. 1, 2015). The plaintiff claimed that the rent provisions of the lease violate the Tonnage Clause of the U.S. Constitution, U.S. Const. art. I, § 10, cl. 3, as well as several federal statutes related to maritime law. The court disagreed, although it noted that the claim “is not a typical landlord-tenant dispute.” Maher, slip op. at 3. It held that, as a land-based business, the plaintiff is not “within the class of plaintiffs that the Tonnage Clause or its related federal statutes were intended to protect.” Id. Most New York and New Jersey businesses will not have to deal with lease terms like this, but the case certainly illustrates the importance of understanding potential objections to a lease contract.

The plaintiff operates a business at the PANYNJ’s primary port facility under a lease agreement that took effect in 2000. Its business activities, according to the court, primarily consist of stevedoring, or loading and unloading cargo from ships. The lease charges two types of rent:  “Basic Rental” charges consisting of a fixed fee per acre, and “Container Throughput Rental” (CTR) charges based on the volume of cargo handled by the plaintiff. Id. at 4. The plaintiff could unload up to 356,000 containers during a calendar year without incurring CTR charges. The per-container charge for containers 356,001 through 980,000 is is $19.00, and it is $14.25 after that.

The lease also establishes minimum amounts of cargo the plaintiff must unload annually in order to keep the lease in effect. When the plaintiff first filed its complaint, the minimum number was 420,000 containers. This would effectively guarantee annual payment of CTR charges for 64,000 containers, but the lease sets an even higher minimum amount of guaranteed CTR payments, according to the court, which is equivalent to a total annual volume of 775,000 containers.

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Tax Credits [CC BY 2.0 (], via FlickrPrivate equity, the process by which companies can raise funding from investors, comes with numerous rules and regulations enforced by the Securities and Exchange Commission (SEC). One of the most important rules that small businesses must understand is Regulation D, or “Reg D,” 17 C.F.R. § 230.500 et seq., which sets forth the procedures for offering securities for sale without going through the full process of registering with the SEC under the Securities Act of 1933, 15 U.S.C. § 77a et seq. Reg D prohibits advertising any sale of securities to the general public, and it states that a business may only issue securities to “accredited investors.” In August 2015, the SEC approved a venture capital firm’s plan to use an online platform to match investors with businesses, finding that it does not conflict with Reg D’s ban on public advertising. This could be good news for other businesses hoping to leverage the internet and social media to raise private equity funds.

Under Reg D, securities may only be issued to “accredited investors,” defined to include banks, nonprofit business trusts, directors, or officers of the issuing company, and individuals with a net worth of more than $1 million or annual income in excess of $200,000. 17 C.F.R. § 230.501(a). With some exceptions, an issuer under Reg D cannot advertise the sale of securities or solicit purchasers from the general public. 17 C.F.R. § 230.502(c). Issuers must file Form D with the SEC to indicate compliance with Reg D.

Rule 506 of Reg D, codified at 17 C.F.R. § 230.506, establishes procedures for communicating with potential investors. Most Reg D offerings follow Rule 506(b), which provides that issuers can approach potential investors if they have a pre-existing relationship, but they cannot advertise or solicit investors from the general public. Offerings under Rule 506(b) may also include up to 35 non-accredited, sophisticated investors who are “capable of evaluating the merits and risks of the prospective investment.” Id. at § 230.506(b)(2)(ii).

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geralt [Public domain, CC0 1.0 (], via PixabayCybersecurity is a critically important part of nearly every business operating today. Data breaches that compromise customers’ personal information, such as names, addresses, and credit card numbers, can result in huge losses due to identity theft and other types of fraud. If the Federal Trade Commission (FTC) concludes that a business failed to take adequate measures to protect its data, it can bring an enforcement action for “unfair or deceptive acts or practices in or affecting commerce” under Section 5 of the FTC Act, 15 U.S.C. § 45. The Third Circuit Court of Appeals recently ruled in the FTC’s favor in a case involving the theft of more than 619,000 customers’ credit card information by hackers. FTC v. Wyndham Worldwide Corp., No. 14-3514, slip op. (3rd Cir., Aug. 24, 2015). The court did not rule on the merits of the FTC’s claim. It merely found that the FTC has authority to pursue the claim under Section 5.

According to the court’s ruling, the FTC began enforcing Section 5 “against companies with allegedly deficient cybersecurity that failed to protect consumer data against hackers” in 2005. Id. at 6. The defendant, which manages hotels directly and franchises its brand to independent hotels, experienced three cybersecurity breaches in 2008 and 2009. The theft of customer financial data resulted in fraudulent credit card charges exceeding $10.6 million. The defendant uses a “property management system” to process customer information, including names, addresses, and credit card information. Id. at 7. It requires franchisees to use the same system, configured to certain specifications.

The FTC’s lawsuit alleged numerous deficiencies in the defendant’s cybersecurity measures, including inadequate supervision of franchisees’ use of the property management system; use of “easily guessed passwords [by franchisees] to access the property management systems,” id. at 8; lack of firewalls and other common cybersecurity tools; failure to restrict access to its network by third-party vendors; the ability of franchisees to connect their networks to its central network without security; and failure to monitor its networks for intrusions, even after the first and second breaches. These acts and omissions, the FTC claimed, constituted “unfair” practices under the FTC Act. 15 U.S.C. § 45(a)(1).

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By Ken Lund [CC BY-SA 2.0 (], via Wikimedia CommonsManaging employment-related matters can be one of the trickiest, most difficult aspects of owning and running a business. A vast array of laws at the local, state, and federal levels affect the employer-employee relationship, including wages, hours of work, workplace safety, family and medical leave, non-discrimination, and reasonable accommodations for certain needs and conditions. While the vast majority of employment statutes and regulations have the best of intentions, maintaining full compliance with all applicable laws can be difficult for businesses with entire staffs devoted to the task. Small businesses may inadvertently run afoul of an employment law and face substantial penalties as a result. Recent news from the U.S. Department of Labor (DOL) illustrates the magnitude of the issue for New Jersey businesses. The DOL is holding more than $7 million collected from New Jersey employers in wage and hour claims, which remains unclaimed by employees.

The DOL’s Wage and Hour Division (WHD) enforces certain provisions of the federal Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq., the statute that sets the nationwide minimum wage. Since 2010, the federal minimum wage has been $7.25 per hour. 29 U.S.C. § 206(a)(1)(C). The FLSA also establishes overtime pay of time-and-a-half for employees working over 40 hours in a week, with some exceptions. 29 U.S.C. § 207(a). The WHD can take legal action against employers for alleged violations of FLSA wage and hour provisions. The DOL maintains a website entitled “Workers Owed Wages,” or “WOW,” where people may search to see if their employer is listed, and then if they are included in any recovery of back wages.

New Jersey’s equivalent statute is the New Jersey Wage and Hour Law, N.J. Rev. Stat. § 34:11-56a et seq. It has similar provisions for overtime but sets a higher statewide minimum wage. As of January 1, 2015, New Jersey’s minimum wage is $8.38 per hour. N.J.A.C. § 12:56-3.1(a). The New Jersey Department of Labor and Workforce Development enforces state wage and hour laws.

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By Kevin Hutchinson (Flickr) [CC BY 2.0 (], via Wikimedia CommonsRaising capital is a critical step in the early stages of starting a business, but federal and state laws set several important limits on this process. Ownership in a business, when given in exchange for a monetary contribution, is generally considered a “security” for the purpose of federal financial law. Federal law requires companies that are offering stock for sale to the public to register the offer with the Securities and Exchange Commission (SEC). An exception to this rule, known as “Regulation D” or “Reg D,” allows companies to offer stock to certain investors without the lengthy and expensive SEC registration process. This allows small businesses and startups to approach angel investors, venture capital firms, and others.

Public vs. Private Offerings

The process of raising capital for a small business or startup is commonly known as “private equity,” since funding comes from a limited pool of potential investors. A company that registers with the SEC and meets all of the requirements of the Securities Act of 1933, 15 U.S.C. § 77a et seq., can offer their stock for sale to the general public on exchanges like the New York Stock Exchange. It then becomes known as a “publicly-traded” company.

When a company offers its stock for sale to the public for the first time, it is known as an initial public offering (IPO). Obtaining SEC approval for an IPO is complicated, expensive, and out of reach for startups and many small businesses. These businesses need to raise capital, but they must do so in a way that does not inadvertently become an unauthorized public offering of securities.

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PublicDomainPictures [Public domain, CC0 1.0 (], via PixabayThe word “license” comes up quite often in discussions of starting, owning, and running a small business, but it can be easy to get confused about what a business owner or entrepreneur must do to remain in compliance with the law. In a very general sense, “license” means the freedom to act. More specifically, it means official permission to engage in a particular activity, such as driving a car. In a business context, a license confers the right to engage in certain types of business or professional activities. A license may be held by an individual, as in the case of a professional or occupational license, or by a business organization. Operating without a required license can have serious consequences, ranging from substantial fines to criminal penalties. New Jersey and New York business owners should be aware of the various types of licenses in order to determine what they need for their own businesses.

Licensing Authorities

Most licenses needed to do business in New Jersey are issued and managed by local or state agencies. State agencies typically handle occupational and professional licenses based on qualifications and criteria that apply statewide. Licenses and permits that pertain to a specific location, such as construction or use permits, are often the responsibility of officials at the city or county level, who might have greater knowledge and understanding of local circumstances and issues. Businesses in certain industries might need licenses from one or more federal agencies.

Professional and Occupational Licenses

Licenses are reportedly required for more than 200 occupations in New Jersey, which is slightly below the national average. About 20 percent of New Jersey’s workforce need a license for their job.

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By Urbanrenewal (Own work) [Public domain], via Wikimedia CommonsSmall business owners and entrepreneurs in New Jersey and New York have a wide range of options for financing their businesses. Venture capital (VC) financing is a rather well-known method of financing a startup business. While it accounts for only a small percentage of total business financing, venture capital has gained prominence in recent years because of its role in the technology sector in California’s Silicon Valley region and other areas of the country. Even if your company is not able to catch the interest of any VC firms, the VC process still offers useful ideas for business financing in general.

What is venture capital?

The term “venture capital” generally refers to private equity invested in startup businesses that demonstrate a high potential for growth and a return on investment. A VC firm manages a VC fund, which provides the capital to invest in promising business ventures.

Stage 1: Seed Financing

All businesses, to some extent, begin as an idea. In some cases, an individual or new business venture may be able to convince an angel investor or VC firm that their idea, which could involve a product or service, has a high potential for growth and is a worthwhile investment. Since an investment at such an early stage carries a high degree of risk, VC firms often require a “feasibility study” showing that the idea is both technologically and economically feasible.

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By Peosoldier photographer [Public domain], via Wikimedia CommonsEvery business may begin with an idea, but without money, a business cannot operate and grow. Most aspiring business owners fund their businesses from their own savings, or from credit cards or bank loans. A wide range of investment sources are available for businesses that can demonstrate a solid product or service, and the potential for growth and scalability, and profitability.

Stages of Business Financing

New businesses often follow several stages in obtaining financing:

– Seed stage:  The business solely consists of an idea or a product.
– Startup financing:  The business is ready to launch its product or service. In venture capital financing, this is sometimes known as the “Series A” financing round.
– Second-stage financing:  The business has demonstrated its viability and needs additional capital. This is sometimes called “Series B” financing.
– Line of credit, additional financing:  The business is nearing profitability and secures a line of credit from a commercial bank for “working capital.” It may also seek additional rounds of financing, beginning with “Series C” and continuing through the alphabet.
– Acquisition or IPO:  The business is acquired by another business or makes an initial public offering (IPO), which makes its shares available for purchase and sale on one or more stock exchanges.

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