Legal Considerations When Buying a Business: Summary of the M&A Process

Thinking of buying a business? For any arms’ length transaction, it is critical that buyers take certain steps during the purchase process (also referred to as the M&A process) to protect their legal and financial interests. Assuming the buyer has already identified a viable target company to purchase, we summarize here the essential next steps in this M&A process.

Hiring a Valuation Expert and Business Attorney

While each situation varies, often a good first step in buying a business involves hiring professionals to assist the buyer through the purchase process. A valuation expert will typically aid the buyer in assessing whether the target company is a sound investment and determining a reasonable purchase price to begin negotiations with the owner of the target company.

Similarly, a knowledgeable business attorney can work together with the buyer and valuation expert to determine the best approach for opening negotiations with the target company in order to maximize chances to obtain favorable terms for the buyer and, ultimately, a successful outcome. A business attorney will also advise the buyer on legal issues as they may arise during the M&A process and prevent the buyer from falling prey to common pitfalls.

Executing a Non-Disclosure Agreement

Prior to the initiation of negotiations with the target company, it is often wise for the buyer to require execution of a Non-Disclosure Agreement with the seller. The NDA typically prevents either party from using sensitive information about the other, which may be disclosed during the M&A process, to its advantage. This step is especially important if the buyer is a company or individual which owns or possesses confidential information that could harm it if disclosed publically and which may be disclosed during the course of the transaction.

An NDA should clearly describe what type of information is covered by the NDA, how the parties may share and utilize that information through the course of their negotiations, as well as the extent to which their information might be shared with third parties such as valuation experts, accountants, law firms and others who may be involved in the M&A process and beyond.

Should the parties reach a final agreement and execute a purchase or sales agreement, that document will usually include non-disclosure provisions which supersede this initial agreement. However, if negotiations break down and the parties never execute a purchase or sales agreement, the buyer’s confidential information will remain protected by the NDA and provide recourse to the buyer should the seller violate its material terms.

Signing the Term Sheet or Letter of Intent

A term sheet or letter of intent are two types of documents which serve the same central function: they summarize the primary terms of the proposed deal. Depending on a variety of factors, these documents may be quite brief or provide extensive detail concerning the parties’ intentions; they may also be binding or non-binding in nature, or a combination of both. The content of these documents will also vary depending on the type of purchase involved—whether the transaction involves a purchase of the entire company, including its liabilities, or simply its assets.

Learn more about letters of intent from our previous articles: “Letter of Intent: Is it Enforceable?” and “Using a Letter of Intent When Purchasing a Business”.

Performing Due Diligence

The importance of performing appropriate due diligence during the M&A process cannot be overstated—it is the buyers best opportunity to uncover any information that may have an impact on the value of the target company before taking ownership of the company or its assets. During this phase of the deal, the buyer and its accountants are provided access to the seller’s financial statements, employment and corporate records, as well as other information or documentation which may affect the value or viability of the target company. The buyer may also involve their business attorney to engage in independent due diligence tasks, such as performing a UCC search, reviewing company records held by the appropriate secretary of state’s office, securities filings, court records and other available documentation which relates to the target company.

During the due diligence process, the buyer’s business attorney will review records for the purpose of advising the buyer on a variety of legal issues, including an assessment of the potential risk of litigation. At the same time, the valuation expert will typically review the results of the financial record review for the purpose of advising the buyer regarding the continuing viability of the company from a financial perspective as well as fine-tuning the purchase price and other terms of the sale. These professionals will provide the buyer with an opinion, if requested, as to whether it makes sense to proceed with the M&A process from a legal and financial perspective, respectively.

Drafting and Executing the Purchase Agreement

Assuming the buyer has committed to proceed with the M&A process, the parties will negotiate the final terms of the purchase, which will be consummated in a purchase or sales agreement. In addition to a complete description of the assets and liabilities being purchased, the purchase or sales agreement will generally include extensive and concise detail regarding the parties’ rights and responsibilities in relation to the transaction, any warranties by the parties, conditions to closing, the consideration being given for the company or its assets, as well as non-disclosure and non-compete provisions.

Closing

The closing represents a successful conclusion to the entire M&A process. It is the date and time on which the terms set out in the purchase or sales agreement are finalized and ownership of the company/assets passes to the buyer. In some cases, all of the relevant documents will have been executed prior to closing and the consideration promised by the buyer is released to the seller.  Traditionally, however, the closing of a business purchase is very similar to the purchase of real estate in that the parties will meet, along with their respective advisors, and execute the final documents as required by the purchase agreement. Upon execution, certain interests may be perfected through recordation with an appropriate government entity or agency, but the transaction will have concluded and ownership passed to the buyer.

© 2017 Gehres Law Group, P.C. This article is for general information only. The information presented should not be construed to constitute formal legal advice nor the formation of a lawyer/client relationship.

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CONSIDERATIONS IN CHOOSING A TRADEMARK

The process of developing a successful brand for your business can be difficult and overwhelming.  One must consider a variety of factors, including the products or services that will be associated with a specific mark and decide how to effectively market them with a strong, unique brand, such that consumers will develop trust and goodwill in the business. It is usually beneficial tostart by developing a list of potential candidate trademarks, then consider the strength of the marks and the likelihood of registration. In determining registerability, it is helpful to know that trademarks are categorized based on their strength or distinctiveness. In this article, we discussthe various categories of marks available and whether they are registerable. Generally, a strong or distinctive mark is easier to register and to protect from infringers than a descriptive, weaker mark. Descriptive marks are also often more challenging to enforce should someone infringe on the mark.

COINED TRADEMARKS

The strongest trademark is a “coined” or “made-up” word that has no meaning other than as a trademark. For example, VERIZON and KODAK are well-known examples of such marks. While they may be more difficult for consumers to remember at first, since they do not carry any inherent meaning, a trademark owner has a great opportunity to create a positive association between the mark and a product, service, or business. Once this goodwill is established, coined trademarks generally are afforded the broadest scope of protection against infringers.

ARBITRARY TRADEMARKS

Arbitrary marks are comprised of words that have a common meaning but are applied to a product or service that is unrelated to that meaning. For example, APPLE for computers, SHELL for gasoline, and BLACKBERRY for cell phones. Like coined marks, established arbitrary marks are afforded a broad scope of protection against infringers.

SUGGESTIVE TRADEMARKS

Suggestive marks indicate some quality or characteristic of the products or services with which they are associated, but they do not directly describe the product or service. Rather, they require some imagination, thought, or perception for the consumer to reach a conclusion as to the exact nature of the products or services. Examples of suggestive marks are AIRBUS for airplanes, KITCHENAID for kitchen appliances, and SWEETARTS for candy.

DESCRIPTIVE TRADEMARKS

In contrast to the above-described marks, descriptive marks directly identify the nature of the products or services without imagination, thought, or perception. However, it is typically difficult to register and prevent others from using merely descriptive marks because of the competitive need to describe products and services accurately. For example, COLD AND CREAMY as a trademark for ice cream, or merely laudatory terms such as “best” or “quality,” describes attributes of the product and are likely not registerable. However, if consumers learn to identify the mark as being associated with a single source of origin for that product or service as a result of years of exclusive use, that mark acquires secondary meaning, and it may be registered and protected.

GENERIC MARKS

Finally, a generic term is a word or phrase that is the common term associated with a particular category of products or services, and thus cannot function as an indicator of origin. Escalator and cellophane are classic examples of terms that once functioned as trademarks but that, through lack of protection, became generic and now are used as the common names for the products, regardless of their source. Like some descriptive marks, generic terms are not registrable or protectable.

Conclusion

As is highlighted by this article, spending some time and money in choosing and registering the right type of mark for your business can mean the difference between success and failure of a brand.If you have a potential trademark you would like to register, please contact the experienced attorneys at Gehres Law Group to discuss the likelihood of success for registration, or for assistance in choosing a new trademark. We offer a free initial evaluation to new clients.

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Importance of Annual Meetings for California Corporations

Did you know that failing to address your company’s corporate and legal compliance issues can lead to costly and avoidable consequences such as:

-Legal claims by employees, shareholders, vendors or customers

-Personal liability of owners/managers for company obligations

-The potential for a dissolution of your company

-Limited access to new capital or loans

-A negative company image

-Increased costs of doing business

The good news is this:Many legal issues can be addressed at a relatively low cost compared to the expense of facing one or more of these consequences. For example, ensuring your corporation’s annual minutes have been timely prepared and executed typically takes only a few hours of time and goes a long way in avoiding the potential personal liability being asserted against the company’s shareholders in a lawsuit. In other words, being proactive rather than reactive can save a company and its owners big bucks!

For corporations and LLC’s which have formed a board of directors, the burden of complying with the California Corporation’s Code can be minimized through use of written consents. California law permits actions to be taken both by shareholders and directors without a meeting if all appropriate persons consent in writing. A provision allowing for written consents is usually included in the company’s bylaws, as is the date, time and place of annual meetings.

One of the greatest problems owners often have is knowing when action by the shareholders or board of directors is necessary. While a corporation’s bylaws, along with the Corporation’s Code, will define the extent of authority granted to shareholders and board members, generally, any action which is not what lawyers call “in the ordinary course of business” typically requires specific approval by the board of directors. Some actions, such as selling any substantial part of the corporation’s assets, a merger, or an amendment to the articles of incorporation or bylaws usually require the consent of shareholders as well.

“What Constitutes “Not in the Ordinary Course of Business”?

Actions which are generally considered not to be in the ordinary course of business, and therefore require board action, include:

-The purchase by the corporation of expensive items of equipment or of land (unless it is for sale as inventory);

-The issuance of additional shares (which may require registration as well);

-The granting of options to employees to purchase shares (which may also require registration);

-The signing of contacts which will commit the corporation to substantial tasks, which will bind the corporation for a long period of time or which involve high dollar amounts or unusual risks;

-The signing of employment contacts with corporate officers;

-Almost any transaction between the corporation and its shareholders or executive officers; and,

-The borrowing of money by the corporation or the loaning of money by the corporation.

We Can Help!

With more than 80 years of collective experience, the award-winning and AV-rated attorneys at Gehres Law Group, P.C. focus on preventing and solving legal problems before they spiral out of control, saving our clients a great deal of time, distress, and money. We offer clients an extensive and diverse set of skills, with one-on-one attention for each client, as well as collaboration among our attorneys and staff as client needs require.

As a client-focused, full-service firm, each business and estate planning client receives a prompt and thorough examination of their legal needs from our experienced attorneys. Each of our lawyers have been licensed to practice law for more than 10 years, and most have been licensed for 19 years or more. These years of hard-earned experience and results, along with our conservative billing practices, lead to concrete and cost-effective legal advice and strategies, without the waste caused by missteps and misjudgments often made by less experienced lawyers.

Whether you need business and corporate law services, contract drafting, business or commercial litigation services, intellectual property representation, employment law advice, estate and succession planning, or other business and commercial legal services, our diversity makes us unique in seeking to achieve the best results possible for each client. We know our success is your success and live by this credo every day of every year, working to meet and exceed your expectations.

Call or write us today to obtain the peace of mind that comes with knowing your business is covered.

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WAIVER OF UNKNOWN CLAIMS UNDER CALIFORNIA CODE §1542

Introduction

In settlement agreements, one or more parties may waive their right to pursue recourse against other parties to the agreement in return for some form of consideration, such as a payment of money. However, what if a party is unaware of certain claims they may have against the party they are releasing–could they then accept the described consideration and still turn around and pursue legal action against the released party once they become aware of the grounds for their claim? Is a waiver of “unknown” claims enforceable in California? We explore the answers to these questions in this article.

California Civil Code §1542

A good place to begin our analysis is by reviewing the language of Section 1542, which reads:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” 

In short, this section of the Code creates rights—the right of a releasing party’snon-waiver of unknown claims. In other words, a releasing party is presumed NOT to have waived claims which are not known. Therefore, California courts will interpret a general waiver of claims as not waiving unknown claimsof the releasing party.

Enforceable Waivers of Unknown Claims

However, it is well established that a general release that explicitly covers unknown claims and specifically waives the provisions of California Civil Code §1542 is “completely enforceable and act[s] as a complete bar to all claims (known or unknown at the time of the release) despite protestations by one of the parties that he [or she] did not intend to release certain types of claims.” San Diego Hospice v. County of San Diego (1995) 31 Cal.App.4th 1048, 1053.

At the same time, waivers of unknown claims are not absolute, but are subject to attack like many other contractual provision. Some of the more common grounds for challenging the enforceability of such waivers includes, fraud in the inducement, duress, and mistake. The scope of the release must also be fairly definite to ensure enforceability. As the Court noted in Kaufman & Broad-S. Bay v. Unisys Corp., 822 F. Supp. 1468, 1474 (N.D. Cal. 1993):

“California Civil Code section 1542 provides that a general release does not extend to unknown or unsuspected claims. The parties to a release may be bound by a waiver of the section’s protection if they understand and consciously agree to the waiver. However, if the parties have not dealt at arms’ length and the releasor has relied on fraudulent statements or misrepresentations by the releasee, then the release is binding only to the extent actually intended by the releasor. In order to void the release, the releasor must show that its entry into the release was induced by fraud, undue influence, mistake or deceit.”[Emphasis Added].

Conclusion

While specific and express waivers of unknown claims are generally enforceable in California, since they may be subject to legal challenges by a releasing party, it is wise to consult with a business or civil litigation attorney to ensure any specific release, taken together with the contract as a whole, is likely to be enforced. Your attorney will apply contract principles when drafting your contract that many laypersons are simply unaware exist, and which can help ensure your intentions are clearly and expressly enunciated and enforced if they become the subject of a dispute.

The business litigation lawyers at Gehres Law Group, P.C. have decades of experience representing clients in business-related disputes and work diligently to protect the interests of clients above all else. Contact us today for a free evaluation of your business-related matter.

NOTE: Articles on this website are provided as a convenience to users as general legal information only and do not constitute legal advice or a substitute for legal advice.  Do not rely on this information.  Contact a California litigation attorney to discuss your case.

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Considerations in Settling a California Dispute

In a prior Blog Article published here Dec. 8, 2015 (“Filing a Lawsuit to Secure a Prompt & Enforceable Settlement”), we discussed the advantages of filing a lawsuit, even where you know from the outset that the other party will likely agree to settle, so you can use a “Stipulated Judgment”, under CA Code of Civ. Procedure § 664.6 to aid in collection efforts if the settlement is not timely paid.  Section 664.6 authorizes a Court to enter Judgment based on the stipulation of the parties, i.e. in accordance with their settlement.

Since most settling parties prefer to avoid having a judgment on record, it is not uncommon for parties to sign, but not file, a Stipulated Judgment, while providing in their settlement agreement that, upon any failure of payment, the Stipulated Judgment can be filed and enforced forthwith.  One important note of caution regarding this technique of “securing” a settlement with an unfiled Stipulated Judgment:  The Court must agree to retain jurisdiction following the settlement and keep the case open pending payment of the settlement.  If the case is dismissed following the settlement, but before the settlement is paid or the Stipulated Judgment is filed, it cannot be enforced unless the Court is persuaded to reopen the case.  Viejo Bancorp, Inc. v. Wood, 217 Cal. App. 3d 200, 265 Cal. Rptr. 620, 1989 Cal. App. LEXIS 1360 (Cal. App. 4th Dist. 1989)

Having a Stipulated Judgment won’t solve all the problems of collecting an unsecured debt, but it WILL give you important enforcement powers such as 1) the right to conduct a debtor’s examination under oath to seek information that might help locate the debtor’s assets; 2) place judgment liens on properties of the debtor; 3) garnish debtor’s wages; and, 4) file orders of attachment against debtor’s bank accounts.

Planning to Contest Defendant’s Bankruptcy Filing

One of the most intractable problems in trying to collect money from a financially stressed or insolvent party is the possibility they will file for bankruptcy.  Unfortunately, most legal claims for money are presumptively dischargeable in bankruptcy. In addition, settlement agreements where the defendant “waives” the right to seek bankruptcy are often found to be unenforceable in California. If you anticipate a bankruptcy filing, be flexible and negotiate to get paid quickly, or insist on security or guarantors when possible.

In appropriate cases where the factual basis for the claims against defendant would, if proved, bring the matter within an exception to the rule of presumptive dischargeability, you might try to include a detailed stipulation as to the agreed and undisputed FACTS supporting defendant’s liability. In such cases, the Settlement Agreement and/or the Stipulated Judgment should include a detailed recitation of defendant’s wrongdoing, essentially an admission of facts which would support the non-dischargeable liability of defendant.

Most settlement agreements, however, contain language to the effect that “the parties to this settlement deny all wrongdoing and are not hereby admitting any liability.”   You can anticipate great resistance in getting a defendant to formally admit wrongdoing, even when Stipulating to Judgment. If you have sufficient leverage and the defendants are appropriately motivated to settle, they may agree to such language.

CONCLUSION

As the old saying goes, “you can’t get blood from a turnip”.  In any settlement try to include solvent parties, with assets to secure the settlement. If you are settling with an entity, try to insist that the settlement be guaranteed by the individuals who control that entity.  And again, generally speaking, if you are settling with an insolvent and untrustworthy party, for any significant amount of money, you are better off filing a lawsuit and settling by means of a Stipulated Judgment.

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Video Recording on Private Property in California

Over the years, clients have inquired about the legality of installing video cameras on their privately owned commercial real estate or business premises. The short answer is that such recordings are legal in California. However, a more complete answer requires that legal counsel for the client determine whether such recordings violate (or may foreseeably violate) a person’s constitutional right or reasonable expectation of privacy in the recorded area.

Volumes of legal authority have been written about whether a reasonable expectation of privacy exists in various situations. Therefore, one should not undertake to install video recording equipment until a knowledgeable business attorney has been consulted and given the green light. However, in California, we can also look to Penal Code § 647 for guidance. The relevant section of that statute provides:

• 647. Except as provided in subdivision (l), every person whocommits any of the following acts is guilty of disorderly conduct, amisdemeanor:

“…(j) (1) Any person who looks through a hole or opening, into, or

otherwise views, by means of any instrumentality, including, but not

limited to, a periscope, telescope, binoculars, camera, motion

picture camera, camcorder, or mobile phone, the interior of a

bedroom, bathroom, changing room, fitting room, dressing room, or

tanning booth, or the interior of any other area in which the

occupant has a reasonable expectation of privacy, with the intent to

invade the privacy of a person or persons inside. This subdivision

shall not apply to those areas of a private business used to count

currency or other negotiable instruments.[emphasis added]

(2) Any person who uses a concealed camcorder, motion picture

camera, or photographic camera of any type, to secretly videotape,

film, photograph, or record by electronic means, another,

identifiable person under or through the clothing being worn by that

other person, for the purpose of viewing the body of, or the

undergarments worn by, that other person, without the consent or

knowledge of that other person, with the intent to arouse, appeal to,

or gratify the lust, passions, or sexual desires of that person and

invade the privacy of that other person, under circumstances in which

the other person has a reasonable expectation of privacy.

(3) (A) Any person who uses a concealed camcorder, motion picture

camera, or photographic camera of any type, to secretly videotape,

film, photograph, or record by electronic means, another,

identifiable person who may be in a state of full or partial undress,

for the purpose of viewing the body of, or the undergarments worn

by, that other person, without the consent or knowledge of that other

person, in the interior of a bedroom, bathroom, changing room,

fitting room, dressing room, or tanning booth, or the interior of any

other area in which that other person has a reasonable expectation

of privacy, with the intent to invade the privacy of that other

person.”

Interestingly, while the right to privacy was clearly of paramount concern to the drafters of this legislation, it explicitly exempts areas in which currency is counted. However, this language should not be read to grant the unfettered right to record employees, customers, or others in an area where currency may be counted IF individuals in that area otherwise have a reasonable expectation of privacy, since it does not usurp a person’s federal or state constitutional rights.

Be aware, too, that there may be other local or municipal statutes which apply depending on your location. And if your video equipment also records sound, then there is a separate analysis for determining the legality of the audio recordings. For the sake of brevity, suffice it so say that California does not typically permit audio recordings unless all parties being recorded provide their consent.

Consent for various types of recording may be obtained contractually, such as in areas where employees are located, or guests of a vacation rental property. However, if it is foreseeable that other individuals may be recorded, it is imperative that notice of the recording be provided in a conspicuous location AND that the area being recorded does not involve a place, such as a bedroom, bathroom, locker room or other location where one may have a reasonable expectation of privacy.

If you have questions concerning the legality of placing recording equipment in your privately owned business location, contact the knowledgeable business attorneys at Gehres Law Group, P.C. We’re happy to assist our business community and your initial evaluation is always free.

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Arbitration Agreements Including Emergency Relief Provisions

There are many sorts of business disputes where “emergency relief” may be called for.  One common example is where trade secrets are stolen, often by employees or former employees.  In view of that possibility, it is common for employment agreements to not only require the employees agree not to divulge company trade secrets, but likewise authorize the employer to seek emergency, “injunctive relief” to stop the use of stolen trade secrets.

Injunctive Relief – What is it?

Injunctive relief is where a party is ordered to do, or not to do, something.  This is opposed to monetary relief, for example, where a party is ordered to pay money, or declaratory relief, where the ongoing rights and obligations of a party are confirmed by a decision of a judge or arbitrator.

Continuing with our trade secret example, if a former employee is using company trade secrets, the employer will typically want both monetary relief, to compensate for lost profits, and injunctive relief, i.e. an order directing the employee to STOP using company trade secrets.  If, however, the parties need to go through a long legal process, either in Court or arbitration, before the former employee is finally ordered to stop using company trade secrets, the damage to the company may be beyond remedy. It is for such situations that emergency injunctive relief, usually in the form of a “Temporary Restraining Order”, or “TRO”, may be sought.

In California, the authorizing statute is Code of Civil Procedure §527.  Under that section a party can file a complaint and go to Court immediately, even before the other party has been served, and on a proper showing of proof, including declarations under oath and other evidence, that emergency relief is necessary to prevent “irreparable injury”, the Court may issue a TRO.  The TRO is, by definition, “temporary”, usually just long enough to give the opposing party an opportunity to come forward in a hearing for “Preliminary Injunction”, with any opposition papers and evidence to dispute the requested relief. If the TRO is confirmed and a Preliminary Injunction is granted, the injunctive relief may remain in effect until the case is resolved, and may become part of a final judgment.

Injunctive Relief in Arbitration

There are various organizations which provide arbitration services. The biggest and most well-known is probably the American Arbitration Association (“AAA”), but there are many others.  Some industries, such as the securities industry, for example, require their members resolve disputes using the services of the Financial Industry Regulatory Authority “FINRA”. The various arbitration organizations have different rules which apply, and sometimes various sets of rules which parties can select from, but almost all of them include injunctive relief among the available remedies in arbitration.

Traditionally, however, emergency injunctive relief, of the sort one can obtain by filing a lawsuit and immediately appearing before a Court to ask for a TRO, was unavailable or ineffective through arbitration. The process of initiating arbitration usually involves the parties selecting and agreeing on a neutral arbitrator, or panel of arbitrators, and there was no process for one party to immediately file an arbitration claim and seek an immediate TRO.  Accordingly, it was not uncommon for a party to an arbitration contract to file a regular lawsuit in State or Federal Court, simply to obtain a TRO and preliminary injunction, and then to file a claim in arbitration.  While it may be a cumbersome multiplicity of effort, it was the only option for preventing irremediable harm from occurring while a claim was arbitrated.

Today this has changed.  Now most of the major arbitration organizations are offering procedures for seeking immediate TROs. This makes arbitration an option that should be considered by every business owner, both in employment contracts with its employees, and in its various commercial contracts with customers and suppliers, in an effort to avoid the expense and delays common in court proceedings.

Advantages to Including Emergency Relief In Arbitration Provisions

While we used the example of “trade secrets” in this brief article, emergency relief can become necessary or desirable in a wide variety of business disputes. We recommend mandatory arbitration clauses in most (not all) business and employment contracts, because the costs of actual Court litigation are so prohibitive. Additionally, Court litigation is also much more public than private arbitration. We likewise typically recommend that the arbitration clause specifically identify the arbitration organization that will be used, and that emergency injunctive relief will be authorized. This need NOT be exclusive, depending on how the contract is drafted. In other words, an injured party may have the option of seeking a court ordered TRO and preliminary injunction or seeking such injunctive relief through arbitration, whichever is determined to be most advantageous.

Business Owners Should Have Their Arbitration Provisions Reviewed

The business law attorneys at Gehres Law Group understand how arbitration clauses can and should be drafted to benefit the unique interests businesses. An ounce of prevention is worth a pound of cure. If you have not had your business and employment contracts recently reviewed by competent business attorneys, contact us to discuss your legal needs. There is no cost or obligation to do so.

By Stephen Lux, Of Counsel Litigation Attorney to Gehres Law Group, P.C.

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