DEI for Legal Teams

What legal responsibilities do business owners have to implement Diversity, Equity, and Inclusion into the workplace and how can a well-executed DEI strategy positively impact valuation? It is important for organizations to not only have strategies for implementing DEI and anti-harassment policies but also to implement them through effective training. Keeping employees safe and creating an inclusive workspace is not only smart from a culture and engagement perspective, it is always wise to reduce the risk of an employment lawsuit.

Training is not only for simply meeting compliance requirements, it can highlight different perspectives on the company culture and open the dialogue to create opportunities for team bonding, changes in HR policies, and increase productivity in the workplace by increasing the sense of ownership and agency employees have.

Training is no longer the sole purview of Human Resources, rather it is now a joint effort of leadership, HR, and the legal department of any mid-sized and larger organization.

DEI Training

When considering the costs of both diversity, equity and inclusion training and harassment prevention training, especially in a hybrid or remote world of work it can be easy to overlook the hidden risk-cost of not engaging in effective training.

Consider remote sessions with small teams as a way to keep the company running while creating “pods” of team members who are bonded through their experience and also able to disseminate their learning to other teams in the organization. (this is not a replacement for each person receiving training, of course).

Spending more money on an effective, motivating training program may, in fact, save money on time spent by employees, leadership and legal doing endless sessions to no positive impact. Starting with leadership and working your way down to those in middle management ensures that the message is consistent, that everyone is on board, and that the message doesn’t disappear after the training is over.

An Ounce of Prevention

From a risk management perspective, the cost of prevention is easily offset by not only the risk of harassment or discrimination action but also by the compliance requirements of each state.

Employment lawsuit damages and penalties can be significant if you lose, and legal fees in the hundreds of thousands even if you win. By adopting a comprehensive anti-harassment policy and providing effective training, employers can show that they have taken active steps to create a positive, inclusive and safe workspace.

Losing employees because of poor company culture, an unsafe workplace, or lack of diversity has costs to the employee in their pain and suffering and also costs to the organization in lower morale and therefore lower productivity, increased resignation rates, damage to brand reputation, and brand loyalty and increased insurance costs.

Weigh the cost of high-quality training against those of failing to promote a safe and inclusive workplace and company culture to truly understand the cost of DEI and harassment training.

How to Select a DEI Training Company

High-quality content, engaging activities, real-world experience, and well-presented experiences are essential to employee engagement. A “cheesy” or out-of-touch free-online course is likely to backfire causing employees to out the efforts on social media as ineffective and creating a hostile workplace environment to try another type of training program in the future.

By giving employees and management a high-quality experience the message is that leadership is invested in the DEI initiative, that tolerance for harassment or exclusion is very low and that the employees must take the program seriously.

Programs that include real-world experiences and immersive training in emotional intelligence and leadership strategies can change behaviors, not only of potential harassers but of bystanders and the company as a whole.

A well-executed DEI training program can create lasting and positive change. And that is priceless.

Disclaimer: The foregoing blog post does not constitute legal advice, but instead only addresses the general topic of DEI Training. Anyone seeking legal advice should consult with an attorney regarding its specific circumstances and needs.

A letter of intent for the purchase of a business sets forth the major deal points for that transaction, including the purchase price, the structure of the deal (asset purchase, stock purchase, etc.), whether an earnout will be utilized, and so forth. The letter of intent is almost always non-binding, meaning that deal points may be modified as the parties mutually agree during the course of due diligence and drafting final documents.

The fact that the letter of intent is non-binding and chiefly addresses business points of the deal sometimes lulls business owners into a sense of complacency on the legal aspects of the deal, with the mindset being that the lawyers can hash out the legal terms later. This mindset can be bolstered by the boilerplate language used in letters of intent on legal items such as indemnification, where the letter of intent may just generally state that the parties will indemnify one another pursuant to standard indemnity terms.

Why Boiler-Plate Shouldn’t Be Ignored

Business owners would be well served, however, by taking the time and using counsel to put some concrete terms around the important legal aspects of the deal. Although the letter of intent will be non-binding, having these terms addressed will set the expectations for both sides of the deal, and without a major issue arising during due diligence, it will be difficult for a buyer to justify making significant changes on these legal items. On the contrary, if important items are not addressed, a seller is left to try to negotiate mid-deal, where the buyer has an exclusive period of 90 days or so where the seller is unable to sell to anyone else (generally one of the only binding terms in a letter of intent), and seller is incurring significant costs like attorney and other adviser fees. This circumstance gives a seller less leverage to negotiate important legal terms.

So what are these important legal points a business owner will want to address in that letter of intent? Indemnification is one major item. Rather than say indemnity will be provided pursuant to “standard terms”, the letter of intent should address several things, including: (1) an indemnity basket or cap for the seller, as well as the survival period for indemnity claims; (2) the exceptions to the basket, cap, or standard survival period; and (3) the use of any escrow or setoff for indemnity purposes.

The Indemnity Basket

An indemnity basket functions like a deductible, where generally the business owner is not liable to indemnify buyer until losses exceed a set threshold amount. Then, once that amount is met, the seller is liable for indemnification for the entire amount of any loss. An indemnity cap is a limitation on the amount seller will owe for indemnity, generally an amount in the range of 10-20% of the purchase price. One can see that having an indemnity cap limiting the amount of the indemnity obligation would be crucial for a seller. Lastly, it is important to address the survival period for representations and warranties, which governs for how long a buyer may make an indemnity claim for breach of representation and warranty. Generally speaking, this survival period is between 12 and 18 months.

The most common exception to the application of the basket or cap, or to the survival period, is for fraud perpetrated by the seller. For example, if a seller has willfully concealed a problem with the business resulting in a loss, it is fair and reasonable to say that loss should not be excused or capped, and that if the loss arises after say a one-year survival period, the defrauding seller should not be able to avoid liability for the loss.

Escrow Equal to Cap on Indemnity

Finally, buyers generally like to set up an escrow where a portion of the purchase price will sit for the survival period to ensure payment of any indemnity obligation that may arise. Typically, the escrow amount will equal the cap on indemnity. If an earnout is contemplated, buyers may also demand the ability to “set off” any amounts owing on an indemnity claim against any earnout payments owing to a seller. Say, for instance, that seller claims $200,000 in damages for an indemnifiable claim and has an upcoming $500,000 earnout payment to a seller. The buyer in this case would unilaterally deduct the $200,000 from the payment owing and remit only $300,000 to the seller.

With all the possible permutations in the indemnity provision, one can see that it’s helpful at the outset to nail down items like the amount of the indemnity cap, the use of an escrow, etc. Doing so will also reveal whether the buyer is contemplating inserting exceptions to the cap or survival period that are outside commercial norms. Finding this out sooner, and addressing it before a buyer is in the thick of the deal process, will provide a better negotiating position.

What About Earnout

Another important item to flesh out in the letter of intent is how the earnout will be treated. Generally speaking, an earnout will be tied to EBITDA or some other measure of financial performance, i.e., the seller will receive X amount of money based on company performance. Defining clearly in the letter of intent how that benchmark is measured is crucial. Will certain revenues be excluded, how is the time period for such benchmark calculated and will any adjustment be made for deals booked prior to the cutoff where revenues have not been collected yet? Each particular scenario will raise its own questions, but much better to address those specific questions upfront.

Lastly, on the earnout, a seller has the ability to categorize a portion of any earnout as deferred purchase price rather than income, which results in preferred capital gains tax treatment on that portion of earnout as opposed to an ordinary income tax rate. The resulting difference in proceeds can be substantial, so it is well worth putting in the letter of intent what the amount of fair compensation for services provided will be, with any earnout monies over that amount to be treated as deferred purchase price.

Selling a business is a complex and time-consuming process in the best of circumstances. Given that, it makes good sense to address the important issues at the initial stage in detail to provide a clear forward path. Whoever said an ounce of prevention is worth a pound of cure may not have worked in the M&A space, but they were right on the money when they said it.

San Diego-based investment adviser Raymond Lucia’s request that the court consider his challenge to the constitutionality of the SEC’s use of in-house courts was recently rejected by a panel of the U.S. Court of Appeals for the District of Columbia Circuit.

Misleading Claims

Lucia, a well-known investment adviser with a long career, was charged by the SEC with conducting misleading investment seminars that promoted a “buckets of money” investing strategy that was purportedly supported by empirical testing, when no such reliable testing had been done. The SEC proceeding resulted in what Lucia’s own attorneys described as a “career-ending lifetime industry bar”.

Lucia petitioned the Circuit Court for rehearing, contending the SEC’s selection of administrative law judges violated the Appointments Clause of the Constitution, and that the Circuit panel erred in finding that the Appointments Clause did not apply because SEC ALJ’s are not “inferior officers” under the Constitution. The SEC has now responded to the petition.

Decision of the SEC Stands

In its response, the SEC stressed that the panel correctly found that ALJ’s are not inferior officers because those ALJ’s cannot exercise final decision-making authority under the pertinent regulatory scheme. Specifically, the SEC addressed Lucia’s reliance on Freytag v. Commissioner, 501 U.S. 868 (1991), with the SEC arguing that Lucia misconstrues the import of that decision. The SEC asserted that, because the tax court judge in the Freytag case had final decision-making authority, the commentary by the Supreme Court in the case Lucia’s counsel relied on in the petition was immaterial; the decisive point of difference is that the tax court judge was an inferior officer due to its final decision-making authority, and an ALJ, without any such authority, is not.

We will update this matter when the D.C. Circuit Court rules.

Jeff Petersen is an attorney licensed in California and Illinois representing clients in a wide variety of SEC investigations and SEC enforcement matters. He can be reached in California at 858.792.3666 and in Illinois at 312.583.7488.