In the past week, there’s been wild speculation on the technology news and blog sites about the claims made in a bombshell lawsuit filed against Facebook.

According to published reports, a New York man filed a lawsuit claiming that he owns a majority ownership interest in the $25 Billion company by virtue of a contract that he signed in 2003 with Facebook founder and CEO Mark Zuckerberg. An email from Facebook has asserted that “the claims are absurd and we strongly suspect that the contract is forged.”

The Facebook lawsuit raises five critical points that every company and entrepreneur should consider when formalizing its business relationship with a written contract.

FORMALITY COUNTS

In the Facebook case, the company has asserted that the contract is a forgery. There’s no doubt this issue will be addressed at the initial phase of the litigation. If the contract is in fact a forgery, the case will be summarily dismissed. If the contract is legitimate, the litigation will proceed on the merits to determine the rights and obligations of the parties to the contract.

Do you formalize each important business relationship with a written contract? If so, do you have a filing system for maintaining these important documents in a safe and secure place?

The appropriate degree of formality for a specific contract is dependent on the gravity of the business relationship. A relatively minor contract (i.e., a gentlemen’s wager on a sporting event with $1 is at stake) can be written on the back of a napkin or an envelope and signed by the parties. By contrast, a integrated written contract is needed when there’s a company-to-company relationship involving substantial performance obligations, the use of complex intellectual property rights, and substantial money is at stake.

If the parties to a deal ever had any reason to believe that the subject matter of their deal would someday be worth $25 Billion, then they probably would have insisted on a much more formalized written contract.

CLARITY IS CRUCIAL

The second lesson of the Facebook case is the compelling need for parties to a deal to strive for clarity in stating the rights and obligations of the contract. The rights and obligations of the parties constitute the bulk of the contractual terms.

In the context of the Facebook case, the parties should have addressed relevant rights and obligations including:

· The ownership rights related to the intellectual property, name of the venture/entity, interest in ancillary ventures/entities, and stock/shares of the venture/entity.

· Performance obligations such as who is obligated to do what, the payment of compensation, vesting of ownership rights, breach of contract, and termination of the contract.

· How to handle a dispute including alternate dispute resolution (mediation and arbitration), choice of law, choice of forum, attorney’s fees, and costs.

EXECUTION IS IMPORTANT

What are the appropriate formalities for execution of the contract? This question turns on who has authority to bind each party to the contract. If an individual will be signing the contract, then the individual has the authority to bind themselves to the contract (assuming that he/she has the requisite legal capacity).

If a party to the contract is a legal entity (i.e., a corporation, limited liability company, partnership, etc.), then the appropriate individual with authority to bind the legal entity should be executing the contract on behalf of the corporation. In short, you would want the President of a Fortune 500 company to execute an important contract, not a janitor who works at a remote branch of the corporation.

In order to make it easier to authenticate the contract in court at a later date, you should also consider whether to have multiple persons execute the contract (i.e., President and Secretary, whether there’s a need for witnesses to the execute of the contract, and whether the execution should be notarized.

ENFORCEMENT SHOULDN’T BE AN AFTERTHOUGHT

During the deal-making process, you should always contemplate what action should be taken in the event that the contract is breached. Depending upon the business relationship at issue, the parties should consider inclusion of:

· A non-compete provision that defines whether and how the parties can compete against each other in the event the relationship is terminated.

· A confidentiality provision that protects either or both parties against the unauthorized disclosure of business secrets.

· A liquidated damages provision that requires the party who violates the contract to pay a pre-established sum of money (liquidated damages).

· A provision that provides for injunctive relief so that the non-breaching party can effectively seek a court order that compels the breaching party to immediately stop violating the contract.

GET PREVENTATIVE LEGAL ADVICE

Based on the news reports of the Facebook case, it doesn’t appear that the parties to the alleged deal sought legal advice prior to striking their deal. I think its obvious that if the parties had obtained sound legal advice when the deal was allegedly negotiated, they could have avoided several glaring problems in this case:

· The degree of formality of the contract would have been commensurate with the scope of the deal.

· Whether the contract was legitimate or a forgery would likely not be at issue.

· There would be much more clarity about the rights and obligations of the parties.

· The appropriate means for enforcing the contract would be apparent.

Ultimately, the Facebook case will be resolved. Unfortunately, many of the issues raised at the initial phase of litigation could have been avoided altogether and without the necessity of time-consuming, expensive litigation. Don’t make the same mistakes in your business.

ABOUT THE AUTHOR

Fred Reilly became an attorney in 1986 and is a Member of the California Bar Association, District of Columbia Bar Association, and Florida Bar Association. Mr. Reilly is also a Solicitor and Member of The Law Society of the United Kingdom.

He is admitted to practice before the United States Supreme Court and United States Court of International Trade.

Mr. Reilly graduated from The London School of Economics and Political Science (Master’s degree in International Business Law), The Cumberland School of Law at Samford University (J.D.) and The Krannert School of Management at Purdue University (B.S. Management).

He practices international business and eCommerce law. Mr. Reilly frequently travels to Florida, California, London, and Moscow.

IMPORTANT NOTICE
This purpose of this blog is to inform and not to advise. The statements are general and individual facts in any given situation may alter their application or involve other laws not referred to here. You should always seek advice from a competent professional if any questions arise.

INTERVIEW – WAYNE KLINE, INTERNATIONAL TRADE EXPERT

Wayne Kline has been involved in international business throughout his career. He’s captained trade missions to Europe, Asia, South America, Central America, the Caribbean Island, Canada and Mexico. Starting in 2005, Wayne has been a Licensed Real Estate Agent in Florida working on commercial and residential real estate projects including the coordination of trade events in London, United Kingdom and Moscow, Russia.

From 1992 until 2005, Wayne was the Vice President of International Trade and Investment for the Central Florida Development Council in Polk County Florida. He provided Central Florida companies with the opportunity to market and sell their products overseas and in turn assisted foreign investors in establishing a presents in Florida through direct investment, expansion or relocation.

For twenty-three years prior to the Central Florida Development Council, Wayne had a career in aviation marketing with the airline industry and the Greater Orlando Aviation Authority with an emphasis on building international clientele and leasing facilities at the Orlando International Airport.

Wayne has taught international marketing at the University and College level.

Wayne’s Educational and Professional credentials are:
Bachelors Degree in Business Administration, Jones College, Jacksonville, FL.
Certified International Trade Specialist, Thunderbird, American Graduate School of International  Management, Glendale, AZ.
Certified Xerox Sales & Marketing School, Marina Del Ray, CA.
Licensed Florida Real Estate Agent

Q: You’ve spent your entire career in international business. How has the international business arena changed during your career?

A: In 1969 when I began my career in the international arena until the early 80’s, it was more a novelty and a fun pursuit for small and medium size companies to be engaged international activities. The real serious players then were the large national companies that could afford the expense of time and money to become successful of shore.

From the mid 80’s forward, it became easier for companies of any size to take part in international business thru the advent of state and federal assistance programs and the internet. More companies today have the attitude that a customer is a customer regardless of where they are located.

Q: Is the global marketplace a positive thing?

A: In my opinion yes because the more diverse a company’s client base is the less susceptible they are to the wows of economic change in a single market and the larger the customer base the better the opportunity for more sales. And as the overall economy of the world grows and people have disposable income, more goods and services can be purchased from the United States.

Q: Are there any specific policies that you’d like the U.S. government to implement to promote international business?

A: I believe a strong review of our trade policies, agreements and sanctions are in order. There are way too many loop holes that favor special interest and political interest groups and they give an unfair competitive edge to some countries and some U.S. companies.

Q: You’ve worked in Florida for the past 38 years. Are there any specific policies that you’d like the State of Florida to implement to promote international business?

A: From time to time Florida has been a strong supporter of international trade, mainly depending on the party and particularly the Governor in office. We would be much better served if policies were put in place and left there regardless of who is in power, similar to those of tourism with dedicated funding so programs could be on going. Florida’s trade dollars now rival those of tourism yet tens of millions of dollars are spent on promoting tourism while at times international trade has been hard pressed to receive a million dollars for promotion.

Q: What do you see as the biggest challenges facing an international company in today’s marketplace?

A: Several things come to mind. One is the ever increasing security demands on both goods and travel. It is understandable that since 9/11 most of these precautions are necessary; however, better implementation needs to happen. The process is flawed and the cost in time and money is too high for the results received. As I mentioned earlier, policies, agreements and sanctions need to be revised to all parties involved. Another constant problem will always be protecting yourself against patent infringements.

Q: What are the biggest opportunities?

A: Opportunities change as the rest of the world catches up. Like it or not we are not the best at everything. As a country’s technology develops and exceeds ours, we can embrace that technology and develop new technology around it. We are still the world leaders in most areas and produce quality products. The best U.S. opportunities will be in technology including specific product areas such as electronics, medical equipment, agriculture and food processing.

Q: Is there a specific trait or mentality that is crucial for success in international business?

A: I think a sense of adventure and a lack of fear of the unknown come into play and those that do not have a “business as usual” attitude. I have seen more type “A” personalities in international trade.

Q: How should a company best position itself for success in the global marketplace?

A: First, have a successful business model in the domestic market. Second, set up a separate profit center for international. Third, put together an international team including legal, accounting, shipping (freight forwarding, customs house broker) and sales and marketing. Fourth, research, research and research.

Q: How would you counsel a British company that was contemplating an expansion into the U.S. market?

A: To engage the services of U.S. professionals, in particular legal and accounting. Although we speak the same language and have the same basis for law, there are differences and a proper business structure and tax implications can be quite different. By all means – research, research, research. I would recommend to start with sales, graduate to distribution and on to manufacturing. In other words, establish yourself and your client base in a positive progression.

Q: By contrast, how would you counsel an American company that was contemplating an expansion into a foreign market?

A: The same as above and make sure the professionals you hire have expertise in international law, accounting etc. or have an affiliation with a firm in the country you are entering.

Q: During your tenure as International Trade Director for the Central Florida Development Council, what were the most common types of legal problems encountered by international companies?

A: The most common two problems involved contracts to provide goods and/or services and employment contracts. And in most cases, the problem was the result of not having the proper or no legal representation before the fact.

Q: What basic recommendations would you give to an international company or individual seeking advice about a legal problem?

A: Do not try and resolve the problem by yourself; you may only make the problem worse. I would then recommend seeking counsul from an international attorney with expertise in the law of the country where your problem exist or has an affiliation with a firm in that country and next time call your attorney first.

Q: In your opinion, what’s the biggest mistake an international company or individual can make when a legal problem arises?

A: Trying to resolve an issue without legal advice with the knowledge that the other party has representation or contacting their real estate or divorce attorney to seek advice for an international law problem.

Q: Do you have any predictions about the future of international business?

A: I have an opinion more than a prediction and that is I believe there is great opportunity to be had and that every company should take a serious look at developing international partnerships whether it be to buy or sell. It is truly a world marketplace and becoming a world economy and each of us are touched by international trade. We cannot be separatist and must be aware of the possibilities of doing business overseas when the opportunity arises. On the other hand, I think we should proceed with caution when dealing with China. It is certainly a market with good potential, but with serious pitfalls. It is a market that needs close attention by our government to insure that level playing field that I mentioned earlier.

WHY SHOULD INTERNATIONAL INVESTORS CONSIDER UNITED STATES PROPERTY INVESTMENTS?*

By Fred Reilly, American Attorney and English Solicitor

* This article was originally published in International Residence Magazine (Spring 2006), the official publication of the Moscow International Property Show.

International investors consistently rank the United States real property market as the most stable and secure in the world. In a recent survey by the Association of Foreign Investors in Real Estate members, nearly forty percent of respondents ranked the United States as the country having the best opportunity for capital appreciation. This article highlights two critical factors that every international  investor should understand, five reasons why U.S. real property represents an attractive investment opportunity and three specific recommendations for getting started.

Critical Factors You Should Understand

Residency and Citizenship. The possibility of becoming a U.S. citizen or gaining permanent legal resident status is attractive to many international investors, especially those seeking to establish an investment that will serve as the basis for family relocation. For example, the L visa classification enables a foreign company to temporarily relocate a manager or executive (and family) in the United States. Later, the manager or executive can apply for permanent residence or “green card” status. In the alternate, the EB5 visa classification enables an international investor (and family) to invest $1 Million in a new commercial enterprise that creates employment for a least ten U.S. citizens.

Mortgages. In the United States, investors traditionally use mortgages to finance the purchase of real property. The mortgage concept is relatively unknown to many international investors. When a bank provides a mortgage to finance a real estate purchase, the investor normally makes a down payment of 20% to 30% of the purchase price and the bank provides the balance of the money needed to complete the purchase in the form of a mortgage loan. Then, the investor repays the loan with interest by making monthly payments over a 15 to 30 year period. By financing the purchase of a property with a mortgage, the investor can purchase a more expensive property than he is able to buy in an all-cash transaction.

Reasons Why The United States Is Attractive

There are five reasons why the U.S. property is attractive to international investors.

Currency Exchange. Favorable currency exchange rates enable investors in U.S. real property and business ventures to obtain more value for their investment when compared to comparable investments available in other countries.

Sound Returns. The United States real estate and business venture market offers favorable risk- adjusted returns and the prospect of capital appreciation which international investors simply cannot achieve in other countries.

Investment Security. International investors place tremendous emphasis on the safety and security of their investments. Many countries suffer from political instability, capital market volatility, currency fluctuations, shifting legal regimes and other uncertainties. The United States provides international investors with a safe haven.

Owner’s Rights. Ownership restrictions and limitations are almost nonexistent in the Untied
States. In other countries, non-citizens face numerous restrictions and outright prohibitions against real property and business ownership.

Diversification. The acquisition of U.S. real property and business ventures contribute to an international investor’s diversification strategy. The active and dynamic U.S. market is extremely attractive when investors consider the need for potential exit strategies.

Getting Started

Before expending time and money, I recommend that a prospective international investor consider three additional points.

Establish specific criteria for your target investment. There are a wide variety of property investment options ranging from single-family homes, condominiums or other personal-use residences to office buildings, apartment buildings and raw land. Identify your most important investment factors including the type (commercial or residential), purpose (immigration, annual return, capital appreciation, diversification, etc.), location, price range and rate of return.

As a first step into the U.S. market, consider a joint venture or partnership relationship. For example, American property developers frequently require international investment capital. By engaging in a business relationship with an established developer, it is often easier for an international investor to enter the market with an experienced partner while also decreasing the risks.

Identify an American real estate professional who can present appropriate investment opportunities and is qualified to address the issues that arise in an international transaction.

DISCLAIMER: This article and its content are intended to provide general information on legal topics and shall not serve as a solicitation for services in any jurisdiction where prohibited by law. This article is not, nor is it intended to be used as a substitute for legal advice. You should consult an attorney for individual advice concerning your own situation. Sending an email to the owner of this website, and receiving any response thereto, does not, in and of itself, create an attorney-client relationship.

© Copyright 2007 by Fred Reilly. All rights reserved.