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Texas Supreme Court Upholds Contractual Waiver Of Punitive Damages.

 
The Texas Supreme Court rendered a decision on the issue of a contractual waiver of punitive damages in a case alleging fraud.

This case was based on a transaction involving the purchase of a new airplane that actually contained repaired engines. The plaintiffs in the underlying case were successful in the trial court on a fraud claim and received an award of punitive damages. 

However, there were limitations of punitive damages contained in two applicable agreements. The purchase agreement provided that Bombardier will not be liable for punitive damages arising out of “services rendered or delivered under this Purchase Agreement.” The second agreement, a management agreement, stated “Neither party hereto may be held liable to the other party for any indirect, special or consequential damages and/or punitive damages for any reason.”

In upholding the validity of the waiver of punitive damages case, and reducing the judgment, the Texas Supreme Court explained:

"As the plaintiffs point out, we have held that 'fraud vitiates whatever it touches.' . . . We have never held, however, that fraud vitiates a limitation-of-liability clause. We must respect and enforce terms of a contract that parties have freely and voluntarily entered."
The Court continued, "And the plaintiffs 'cannot both have [the] contract and defeat it too.' . . . Rather than seeking rescission of the agreements based on Bombardier’s fraudulent conduct, the plaintiffs have tried to enforce the agreements, seeking an award of actual damages, while at the same time seeking to strike the limitation-of-liability clauses to receive an exemplary damages award."

The Court reasoned, "In balancing the competing interests between protecting parties from 'unintentionally waiving a claim for fraud' and 'the ability of parties to fully and finally resolve disputes between them,' we believe parties can bargain to limit exemplary damages. We note that the purchasing parties did not waive a claim for fraud; they only waived the ability to recover punitive damages for any fraud. As such, the valid limitation-of-liability clauses must stand."

The case is Bombardier Aerospace Corporation v. SPEP Aircraft Holdings, LLC,

 
The Texas Supreme Court's Opinion can be found here.
 
Full Article At:
 
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Adopting Pay-For-Performance Compensation Plans At Family Offices To Recruit And Retain Talent

 

Most public companies have developed long-term compensation programs that measure performance metrics over time (often over three years), and that typically reward senior executives for meeting clearly identified benchmarks.

 

These plans seek to align the interests of employees with those of owners (i.e., shareholders in the public markets).  Alignment, along with the retentive value of long-term incentives, has proven to be a successful way to ensure “pay-for-performance” and continuity within an organization.

 
But what about the compensation plans within private companies, including family offices? Whether led by a family member or another governance structure, a comprehensive compensation program that aligns stakeholder interests is critical to a successful organization. Following the public company model, rewarding key executives for value enhancement is the cornerstone of a pay-for-performance approach to compensation planning. Pay-for-performance clearly incents internal stakeholders and aligns the interests of the family office in providing the capital for those who are directing its investments (and upon whose performance the compensation depends). Further, pay-for-performance has become an integral tool for family offices to attract and retain top talent.
 
Most compensation programs have a three-pronged goal to incent, motivate and retain. Prudent investment, coupled with a properly structured compensation program, enables organizations to satisfy those three prongs because the ability to tie compensation directly to profitability incents and motivates and is often an expectation of top talent. The long-term nature of many family office investments fosters retention.
 
Here are some key considerations and best practices for the development of compensation plans that enable family offices to engage and retain top level talent.
 
Compensation factors
 
  • A well-thought-out compensation structure for executives comprises three elements: base salary, annual bonus, and long-term incentive plans (LTIPs):
  • Base salary. Seemingly obvious, but meaningful base compensation rewards a professional’s time and efforts since, without guaranteed success of every initiative/transaction, compensation cannot be solely tied to successful outcomes. Otherwise, most professionals will seek to limit risk.
  • Annual bonus. Although annual bonuses tend to be discretionary (see chart below), annual bonuses are useful if there are certain specific objectives that leadership would like to see achieved.  For example, specific HR or operational objectives are common.
  • Long-Term Incentive Plans (LTIPs). These plans intend to incent and retain talent by enabling them to create wealth alongside the family through metrics that align professionals with owners.  More recently, family offices have begun to allow (or even require) their senior-most executives to co-invest (with their own funds or funds lent by the family office), which cultivates a sense of ownership and further aligns the interests of all parties.
  • Vesting. Due to the long-term nature of successful initiatives/transactions, family offices often require several years of vesting even after value has been created.
 
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Director Access to Corporate Books and Records

 

The Court of Chancery recently affirmed the long-standing principle that directors of Delaware corporations are vested with “virtually unfettered rights to inspect books and records” of the company they serve. Schnatter v. Papa John’s Int’l., Inc. C.A. No. 2018-0542-AGB (Jan. 15, 2019). The Chancellor went on to reiterate that a director of a Delaware corporation that makes a demand to inspect the books and records of the corporation pursuant to Sec. 220 of the Delaware General Corporation Law should generally have “access at least equal to that of the remainder of the board.”

Directors of a company make a prima facie case for a statutory inspection of books and records where they show that: (a) they are a director, (b) they have demanded an inspection, and (c) the demanded inspection has been refused. Upon that showing, the company will then bear the burden of proving that the director making the demand for inspection was for an improper purpose–that is, the director’s “motives are improper, or that they are in derogation of the interest of the corporation. . . .”

 

Full story at link

 

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Startups And Founders NOTE: Now besides making a Section 83(b) election most also get a Section 83(i) election

 
For private corporations and their employees, IRS provides initial guidance on new tax benefit for stock options and restricted stock units

 


The Internal Revenue Service issued Notice 2018-97 offering guidance on a recent tax law change that allows qualified employees of privately-held corporations to defer paying income tax, for up to five years, on the value of qualified stock options and restricted stock units (RSUs) granted to them by their employers.
 

The tax law change was included in the 2017 Tax Cuts and Jobs Act (TCJA). In general, executives, highly-compensated officers and those owning one percent or more of the corporation’s stock cannot make the deferral election. Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax payable on the value of qualified stock may not be deferred.

Notice 2018-97, posted today on IRS.gov, offers initial guidance taxpayers can rely on until proposed regulations are issued and requests public comment on additional issues that should be addressed in those regulations.
 

Updates on this and other TCJA provisions can be found on the Tax Reform page of IRS.gov.

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Gary L. Britt, CPA, J.D.
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