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New legislation, plus the recent financial meltdown, has prompted many business owners to seek legal advice. Patricia Moore examines the lawyer-business owner relationship.
It’s usually pretty obvious when a business has outgrown its premises and needs to relocate, but as a fledgling company finds its wings, there’s often more involved than just floor space.
“As businesses grow, some owners realise too late they’ve also outgrown their original lawyer,” says Les Allen, partner at Gaze Burt, who leads the firm’s commercial law team. “By then they may have a real problem on their hands. The family lawyer or accountant, who may have seen the business through its early stages, sometimes can’t see the wood for the trees.”
And the results can be more than a little unfortunate – like the formation of a family trust for a wealthy businessman when the beneficiaries included his ex-wife – despite the fact that they were involved in a bitter court battle over assets at the time.
“Lawyers need to practise constantly in business law to be aware of the options available to clients.” They’ll also be more aware of trends, says Allen. “At one stage trading trusts were all the rage, then it was LAQCs – and now limited partnerships are becoming more common. Each structure has its own use and own limitations.”
Like so much else in life, the law today is increasingly complex, says Tony Southall, a partner at Gibson Sheat in Wellington. That’s probably not news to anyone who’s tried to fathom their way through contracts involving employment or terms of trade. But there are a lot of lawyers out there, many of whom can justifiably claim expertise in the field of commercial or business law. So who do you call? And does size matter? As the owner of a small enterprise will you feel most comfortable, and get the attention you may need, from a mega, mid-size or mini legal firm?
Essential attributes
The essential attributes for a business lawyer are well documented but start the process by talking to your existing advisers and your business network. And while experience is a key, it needs to be the right sort. Southall says if possible the lawyer handling your business affairs should be one who understands your particular business sector (manufacturing, exporting, franchising etc).
“Each sector has its unique context and legal issues and many lawyers have deep sector expertise that enables them to provide highly targeted and relevant advice. Businesses definitely get more bang for their buck by using sector specialist lawyers.”
However, it’s important to check there are not potential areas of conflict. “You may not want your lawyer acting for your main competitor.”
Trust and confidence in the person you’re dealing with are essential, says David Lowe, employment services manager with the Employers’ and Manufacturers’ Association (EMA). “You need to be confident that the people you’re relying on are not just across the issues but that the advice you’re being given is appropriate for the current environment. Running a business isn’t easy at the moment.”
But there are other issues to consider. Your lawyer must be responsive, says Les Allen. “There’s no point in having a supposedly capable lawyer who is completely bogged down in property settlements for example, when you need urgent advice.” And, he says, look for someone who’s not too academic. “No-one should cut corners but a lawyer with a street-wise, practical approach will generally cut through the issues much faster than someone with a highly academic approach.”
So what about the size of the firm? Specialisation within the legal profession has increased and many of the big corporate law firms no longer position themselves to act for privately owned businesses, says Southall. “Mid-size firms tend to structure their approach so that business owners get accessibility to a partner who will have an enduring relationship with the business. They don’t constantly delegate your work to a range of junior lawyers who often come and go, requiring you to spend time bringing them up to speed.”
And having a sole practitioner can be a problem. Who looks after you if they’re away asks Les Allen?
“Recently we dealt with a sole practitioner who disappeared overseas for ten days leaving a raft of files for his receptionist and legal executive. There were so many problems and unhappy clients he had to come back to the country early.”
Given the somewhat patchy recovery from the great financial meltdown, it will come as no surprise to read there’s a big demand from business owners for legal strategies to enhance cash collection. Or, as Les Allen puts it, “one of the greatest needs at the moment is for a lawyer to fight a rear-guard action against the banks. We have a case where a client with a $30 million turnover two years ago has gone into receivership and is battling four banks at the one time. In other cases we’re having to help clients try to avoid mortgagee sales.”
And in Wellington Tony Southall says they’re seeing a lot of businesses reviewing their terms of trade and bolstering them to ensure a higher probability of getting paid. “Registering their title retention arrangements and security interests is a priority. Obtaining personal guarantees from customers is another trend. Undoubtedly there is a lot of debt and security recovery work. Financial downturns tend to throw up more litigation so we are definitely seeing an increase in businesses suing or being sued!”
Terms of trade
Difficult trading conditions mean people tend to look more closely at the arrangements they’ve got and you need to make sure the terms of trade are solid, says Lowe. “With increasing international trade this is even more important. If you’re dealing internationally and there’s a dispute, whose law would apply? It’s important your terms of trade are put together in a way that protects you across international lines, not just New Zealand. That sort of stuff’s very basic for a commercial lawyer but if you’re not a specialist in the area you may not think about it.”
There’s also been an increase in employment related advice as businesses reduce staff to make themselves leaner, says Southall. “They’re undertaking health checks, doing due-diligence on themselves, not only to legally de-risk the business, but also to position themselves better should they wish to sell the business and/or make it a merger target.”
One of the impacts of the economy is that people are being more careful about transactions and generally seeking legal advice earlier, says Thomas Gibbons, who recently presented a seminar entitled ‘Company Law – Challenges for SMEs and their advisers’ to lawyers throughout the country. Gibbons, a partner at Hamilton law firm McCaw Lewis Chapman, says previously a lease or business acquisition agreement might have been signed without advice, because of the perception that the lawyer would slow things down. “Now people see the need to take a measured approach to transactions with large financial implications.”
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New legislation
The past 12 months have seen little new legislation that will particularly affect smaller enterprises. However the increase in GST and planned changes in the Holidays Act and Employment Relations Act will both impact on most SMEs.
And ‘evolutionary’ changes are happening, says the EMA’s Lowe, but these don’t always make headlines. “The style of this government is to make lots of small changes. It’s the responsibility of the business owner to satisfy themselves that the person they’re relying on is actually across all these changes themselves.”
Lowe says the current review of consumer law, including the Consumer Guarantees Act and the Fair Trading Act, is a case in point.“Nothing has been changed yet but the review is underway and it will be significant for a lot of businesses which operate under those laws.”
And Gibbons points to a range of case law on matters like security agreements, sale of shares, director obligations and business purchase warranties. “These can effectively ‘change the law’ in key areas for SME transactions.”
The 2010 ANZ Privately Owned Business Barometer Survey showed a marked increase in how highly business owners rated the benefits of external advice and mentoring (up from between 50 and 75 percent in 2009, to more than 90 percent of respondents). Increasingly they’re turning to their legal advisers for general business and strategic advice, says Southall. “Lawyers who specialise in representing business clients often have a wealth of knowledge and contacts they can apply for the benefit of clients.”
But smaller businesses are less likely to involve their lawyers early enough, says Allen, leading to a situation that’s “not so much ambulance at the bottom of the cliff as a morgue attendant trying to carry out CPR on a corpse.” He says larger businesses are very aware that using a commercial lawyer is the best form of risk management. “Many of them have learned this the hard way, through bitter experience.”
Business owners need to remember you get what you pay for, says Gibbons. “There is more of a role for a pragmatic, value-added lawyer in a difficult economy. A good lawyer will give practical advice as well as legal advice based on experience and judgement.”
To do that they need to be kept up-to-date with your business plans. An invitation to meet at your place of business and get to really understand what’s going on is a great way to build the lawyer-business owner relationship.
Patricia Moore is an Auckland-based freelance writer. Email [email protected]
Websites to visit:
www.gazeburt.co.nz
www.ema.co.nz
www.gibsonsheat.com
www.mlc.co.nz
Sidebox 1:
The danger of self-diagnosis
Medical professionals expected to treat patients who’ve already diagnosed their problem via the Internet, are not the only ones finding more people trying to come up with their own solutions. Self-diagnosis is also a problem for lawyers. Les Allen reports that while preparing a registered prospectus he had a call from the client every day for a week, explaining he had found another legal structure in the Reader’s Digest Law Book and would it work? “Much to his disgust none of them would.”
Clients often don’t realise their legal knowledge can be out-of-date or very specific to their last situation, he says. “An example is the case of a builder who verbally agreed to build a house for $250,000, for a close friend, but did not sign the sale agreement. On completing the property the builder asked for $450,000, believing that as he hadn’t signed the sale agreement he was not bound by it, as had always been the case in his previous experience.
“We had to tell him that in this case he was bound by the agreement although he hadn’t signed it. He had not consulted us at the very beginning because he wanted to save legal costs. That decision cost him $200,000.”
Sidebox 2:
Sour notes
Relationships crash and burn, and those between client and lawyer are no exception. If there is a lack of confidence this should be raised initially with the lawyer involved, says Thomas Gibbons. “Proper communication is often key to getting an issue resolved.”
Lawyers and law firms are required to have a complaints process in place, and Gibbons says asking to discuss the matter with a partner in the firm can be helpful.
“However, if there are serious concerns, raising the matter with the Law Society is a proactive way of ensuring the matter will be dealt with according to established process.”
The Law Society website (www.lawsociety.org.nz) details the steps to take if you wish to make a complaint.
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