SLIDE 1 B U S I N E S S O P E N E S S O P E R A T I O N S B I O N S B A S I C S : C S : M I T M I T I G A G A T I N G R I S K N G R I S K S A N D L I A B I S A N D L I A B I L I T Y R O R O B E R T R T E E . H H A U B E R G E R G , J J R . B A K B A K E R D O N E L R D O N E L S O N O N J U L J U L Y 2 0 , 2 0 2 0 , 2 0 1 7 M A D I S O M A D I S O N , N , M S M S
SLIDE 2 ASSESSING RISK
What is y What is your busi ur business endgame? ness endgame?
Build up the compan any and sell and sell it it
Continue t to o
n and manage com company f for the long t r the long term rm Think strat ink strategically – gically – not just f
r this year ar
If overly aggres erly aggressive, will there be , will there be collat collatera ral conseq l consequences, pressure t uences, pressure to t tolerat lerate risk risk
If selling the compan any, ho how will acq w will acquirer’s irer’s due diligen due diligence and its o e and its own t n toleran lerance f e for r risk risk af affect the lik ct the likelihood or t lihood or terms rms of a
deal
Lack of compliance creat liance creates added risk added risk 2
SLIDE 3 CAPITAL AND OPERATING INCENTIVES AND RISKS
As o As owner, ho how will w will R&D and daily operation R&D and daily operations be be funded? funded? Are there st Are there stockholder
- ckholders or o
- r other par
her partner ners? ? Ho How transparent will w transparent will finances and operations be? nances and operations be? What rights will What rights will minority shareholder minority shareholders ha have?
inspect the books and recor records
be treated f d fairly in valuing irly in valuing the co the comp mpany, e especially w when c comp mpany i is s sold
course t se to direct litigation f direct litigation for f r faulty ulty valuation valuation / lack of / lack of business judgment business judgment / /
- ppression or
- ppression or “unf
“unfair prejudice” air prejudice”
Use of derivativ
- f derivative litigation t
litigation to reco recover f r for the com r the compan any f y for negligence, breach r negligence, breach of duty
, breach breach of trust b
director
Avoid “ “robbing Pe Pete ter to to p pay P Paul”
Beware re falsifying re lsifying revenue nue or
penses to sho show a a bett better er bo bott ttom line
Hire good accountant accountant
3
SLIDE 4 TAX ISSUES IN OPERATIONS
Beware obligati re obligations t
pay em y emplo ployee benefits and tax ee benefits and taxes – es – healthcare, ealthcare, social social security deducti security deductions ns
Incentive ma e may be t y be to postpone pa postpone paying ying, in , invest no st now in R&D or w in R&D or expansion, pansion, and hope t and hope to mak make it up it up by end of th end of the tax y e tax year so ar so pa payment yment can f can final nally be y be made made
- Risk becomes one of tax e
Risk becomes one of tax evasion and IRS penalties asion and IRS penalties
4
SLIDE 5
SETTING INTERNAL POLICIES AND COMPLIANCE
Int Internal Structure rnal Structure 1. HR Policy and reporting mechanism 2. Compliance Plan a. Tone at the top b. Training 1) In person 2) Electronically c. Conformance to regulatory standards/audits if in a regulated industry d. One size does not fit all e. Benefits outweigh costs 1) Reputational damage 2) Sentencing Guidelines reduction in corporate fines 5
SLIDE 6
SETTING INTERNAL POLICIES AND COMPLIANCE (CONT.)
3. Reporting to Compliance Officer/Inside Counsel/Board Committee/Supervisor a. Hot-line/anonymity b. Non-retaliation c. Information flow to avoid whistleblower going public d. Investigatory / disclosure process 6
SLIDE 7 CONTRACTING WITH THE GOVERNMENT
Risk Risk in Obtai in Obtaining Cont Contract ct 1. 1. Stat State Pr e Procur
ement Pr Process
a. Avoid pay for play b. Bids versus sole source contracts c. 2017 change in procurement process in Mississippi 2. 2. Federal Pr deral Procurement Pr
a. Federal Acquisition Regulations (FAR) b. Military (DFARS), Civil (GSA), Healthcare (CMS) c. Truth in Negotiations Act 1) Skill required 2) Labor costs and other expenses 3) Defective pricing 7
SLIDE 8 CONTRACTING WITH THE GOVERNMENT (CONT.)
a. Procurement Integrity Act 1) No sharing by government of bid information 2) No collusion among bidders b. SBA minority §8 contractor and SBIR awards c. Fed Biz Opps notice 3. 3. Operat Operational risk ional risk a. Pricing b. Allocating costs to correct project, line items c. Failure to provide service, compliant goods 4. 4. Risk Risk of Cancella
- f Cancellation
- n of Cont
- f Contract (t
(termi erminati tion f
r conveni enience/cau e/cause), e), recoup recoupmen ment b by go governm rnment nt, litigati , litigation under f
deral False Claims Act lse Claims Act 8
SLIDE 9
EXAMPLES OF RISK IN OPERATIONS
EMPL EMPLOYEE EE SELF- SELF-DEALING EALING 1. Combating embezzlement/theft of equipment a. Double person check approval b. Alternate vacation times for authorizers c. Warehouse surveillance 2. Avoiding employee kickbacks – frequency of bids 3. Keeping receipts for all expenses – avoid cash only transactions for tax audits 9
SLIDE 10 EXAMPLES OF RISK IN OPERATIONS
VENDO VENDOR/ R/SUPPLIE PPLIER RELA R RELATI TION ONS 1. Collus Collusion
among v vendors ndors a. Identity of bids b. Alternating/rotating bids c. Territorial restrictions on service/delivery 2. 2. Self-dealing b Self-dealing by em emplo ployees ees a. Pay to play required of vendors b. Uncharged service/supplies for employees personally c. Refunds to employees off-book 10
SLIDE 11 VENDOR/SUPPLIER RELATIONS (CONT.)
3. C Cheating eating by supp supplier liers a. Mislabeling b. Shorting c. Substitution of untested or defective equipment/parts 4.
Mischarging a. Booking sales before delivery to enhance quarterly/annual revenues b. Allocating to wrong department/budget item 11
SLIDE 12 EXAMPLES OF RISK IN OPERATIONS
THE THEFT OF TRADE OF TRADE SECRE SECRETS TS/INTELLECTU NTELLECTUAL PR L PROPERT OPERTY 1. 1. Pr Prot
ect inno innovations with p tions with patents an nts and trademarks d trademarks 2. 2. Keep confiden eep confidential so al so la label bel restr restricti ction as such n as such 3. 3. Set limi Set limit on what
departing em emplo ployees ees can tak can take with them with them 4. 4. Pr Prom
ptly assert rights rights if com if compromi mised 5. 5. No Notice una ce unapproved/ ed/unlicensed use d user t to cease and desi cease and desist 6. 6. Threat Threaten litigation en litigation 12
SLIDE 13
EXAMPLES OF RISK IN OPERATIONS
WORKPL PLACE SAF E SAFET ETY/ENVIR Y/ENVIRONMENT ONMENT 1. 1. Key En y Envir vironment nmental R l Regulation gulations A s Affecting B cting Business O siness Owners a. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA): 1) Hazardous substances released into the environment 2) Liability of purchaser, existing owner 3) Phase I conducted to earn defenses and limit liability b. Clean Water Act: 1) Storm water runoff from construction projects 2) Disturbance of wetlands in property development c. Resource Conservation and Recovery Act (RCRA): 1) Solid waste and underground storage tanks 13
SLIDE 14
EXAMPLES OF RISK IN OPERATIONS WORKPLACE SAFETY/ENVIRONMENT (CONT.)
2. 2. Agencies encies which ins which inspec ect/i t/invest stigat ate a. OSHA – construction/workplace accidents, equipment safety b. EPA/MDEQ – underground storage tanks, leaking chemicals, discharges into waterways, medical and other hazardous waste c. NTSB/MDOT – delivery vehicle accidents, 18 wheelers to railroad cars 14
SLIDE 15 DEALING WITH ENFORCERS AND WHISTLEBLOWERS
1.
Inspections/
udits a. Licensing agencies b. Loan/grant programs c. Safety/environmental checks 2.
Search W ch Warran rrants/subpoen
a. Have protocol/training in place in advance b. Cooperate, do not obstruct or destroy documents c. Issue freeze memo, explanation of rights/obligations to employees 3. 3. Whist Whistleblo eblowers a. Resist firing, reassign laterally instead, avoid obvious retaliation b. Learn what details are from whistleblower c. Prepare internal investigation report if enforcers have been informed d. Sometimes voluntary disclosure to enforcer will mitigate e. Incentives to whistleblowers – False Claims Act, IRS, SEC 15
