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Archive for August, 2009

In an interesting case of first impression the Delaware Court of Chancery recently held that a company and its directors do not have a disclosure obligation, and do not owe other fiduciary duties, to a shareholder when exercising a right of first refusal.  A right of first refusal grants the holder the right to match any offer received by the seller.  In Latesco, L.P. v. Wayport, Inc., the company had a right of first refusal over some of the shares owned by one of its shareholders (a former insider).  The shareholder sought to sell some shares and got an offer from a third party.  The company exercised its right of first refusal and bought the shares, without disclosing confidential, inside information, that would have indicated the shares might be, or soon would be, worth more than the purchase price.

The Delaware court held that in these circumstances, the company and its directors do not owe a duty to the selling shareholder to disclose confidential information.  When exercising a right of first refusal, the company does not solicit the purchase or sale of shares, as they would do so if they were issuing new stock.  Instead, the shareholder gets an offer of purchase from a third party, notifies the company of the offer, and the company decides whether it wants to match the offer and purchase the shares.  No fiduciary duty is owed to the selling shareholder.

If the company solicits the purchase of shares from its shareholder, it would owe the same duties of disclosure as any selling or buying shareholder, and, in fact, in this case there is more to the story.  When the shareholder contacted the company with his notice of sale, the company asked if he would sell more shares to the company, shares that were not covered by the right of first refusal.  The  company did not disclose facts indicating that those shares might be worth more than the seller knew.  The court held that, for those extra shares not covered by the right of first refusal, “insiders should expect to observe the normal obligations of fiduciaries not to engage in transactions with stockholders while in the possession of material information” not known to the sellers.  The insiders could be liable for fraud and breach of fiduciary duties.

For a more detailed discussion of Latesco v Wayport, see this discussion by Francis G.X. Pileggi at the Delaware Corporate and Commercial Litigation Law blog.

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Gov. Ritter recently signed into law the Misclassification of Employees as Independent Contractors Act (MEICA), creating a complaint process for independent contractors to “turn-in” their bosses if they think they should be employees, and providing substantial fines if the state decides that the contractors should have been classified as employees.

According to rumors on the legal grapevine, as the Colorado economy deteriorated over the last year, the Colorado Department of Revenue has been aggressive in efforts to audit and collect sales and income taxes, and auditors have been paying particular attention to whether independent contractors should have been classified, and taxed, as employees.   Now comes H.B. 1310, which provides a whistle-blower and investigative process, and fines of $5,000 for a first offense, and up to $25,000 per employee for subsequent offenses.   MEICA amends the Colorado Employment Security Act (CESA), providing that:

  • An independent contractor who believes he should be an employee may file a complaint with the Colorado Division of Employment and Training
  • The Division has 30 days to decide whether to investigate, and if an investigation is conducted, employers must cooperate and provide information
  • If the Division determines that a contractor should have been classified as an employee, the employer will be liable for back taxes and interest
  • If the Division finds that the employer wilfully disregarded the law, the fine is $5,000 per misclassified employee for the first offense, and up to $25,000 per misclassified employee for subsequent offenses
  • For subsequent offenses, the employer may be barred from contracting with or receiving funds from the State of Colorado for 2 years
  • Employers may now seek Advisory Opinions from the Colorado Dept. of Labor on whether their contractors are properly classified

Unfortunately, there is not one statute or rule that provides the test for whether a worker is an employee or an independent contractor – multiple laws may impact the determination, depending upon who is asking and for what purpose.  CESA provides 9 factors to consider in deciding whether a worker is an employee or an independent contractor, the Colorado Wage Act provides a test, the IRS provides guidelines, as does the Colorado Workers’ Compensation Act.  Ultimately, the test of whether a worker is an employee or an independent contractor comes down to a question of “control”.  If the employer controls the workers’ activities and methods of providing the work product, the worker is an employee.  If the employer controls and directs only the work product to be delivered, but the worker is free to determine how he provides that result, the worker is probably an independent contractor.  Factors to be considered in making that determination include:

  • Is there a written contract specifying an independent contractor relationship?
  • Does the employer specify the time and place for performance?
  • Is the worker paid personally, or is payment to a business entity?
  • Is the work provided exclusively to the employer?
  • Is payment on a salary or hourly basis, or is it lump-sum for the job or per deliverable?
  • How closely does the employer supervise and direct the work?
  • Are the business operations and activities of the employer and worker combined, or separate?

Employers who maintain a substantial independent contractor workforce may be at significant risk under this new law, and should conduct a legal audit for compliance with worker classification requirements.  Counsel should review all independent contractor agreements, and may recommend amendments and changes in procedure to ensure proper classification.  New independent contractor agreements should be prepared by knowledgeable counsel, and procedures should be implemented to decrease the risk of worker misclassification.

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