For most small businesses, a limited liabilty company (LLC) is the chosen form of business entity. LLC’s are overwhelmingly popular, and for good reason. They are simple to set up and run. They protect their members from personal liability for the debts of the LLC (assuming the members don’t assume the debts via, e.g., personal guarantees) while avoiding the dreaded double taxation of “C Corporations.” All well and good. But to say there are good reasons for choosing the LLC as the corporate form of a small business is only the very beginning of the critical conversation that must follow. What exactly is the deal between the partners (called “members” in the case of an LLC)? How will profits be divided and distributed? Who will have managerial control over the LLC? Who will have what vote in the management of its affairs? How do members get in and out? What happens if a member wants to sell his stake? When can members be required to add money? What can cause the LLC to dissolve and stop its business? Are the members going to be free to compete with the LLC? What will happen if the LLC wants to go into a new lines of business? How will the LLC be capitalized and how will its profits be distributed? When the LLC is dissolved, what is the order in which the assets will be distributed when it is? What are the tax consequences of the way the LLC is set up? The list goes on and on.

In the case of an LLC, these questions should be answered by the governing agreement of the entity, which is called the “operating agreement.” Georgia law does not require that an operating agreement be in writing, but it is usually a very bad idea to operate on a verbal, un-written agreement. The absence of a written document can make it impossible for the LLC to, e.g., borrow money and can create uncertainty about the members’ agreement as time passes and memories fade. Disputes happen, most often centering on managerial control of the entity and matters of money (e.g., division of profits). As the grand ambitions that accompanied the start of the venture crumble into bad debts, unfunded payrolls, and lease defaults, tempers flare and accusations fly. Only then do many memberss realize that they have not adequately protected their interests by negotiating and signing an operating agreement that fully and accurately states the deal between them and makes adequate provisions for what happens when things don’t go according to plan.

If you are going into a business venture that will be set up as an LLC, make sure that you have your own attorney – one experienced and competent in these matters – and that you insist on a written operating agreement that anticipates and answers the questions listed above. Realize that an attorney representing the LLC has an ethical duty not to show favoritism to one member over another. In other words, he cannot necessarily promote and protect your interests where they are contrary to those of your fellow members. That’s why, in negotiating the deal, you need your own attorney watching out for your interests, and yours only. Think of hiring good counsel as an investment in the success of the business no different than the purchase of quality computer equipment. Make sure you have a written operating agreement. Be certain that you know what it says before you sign it, and that it accurately reflects the deal that you intended to enter. Anticipate questions like those listed above, and answer them on the front end. Don’t leave important details hanging and don’t assume that verbal promises will be enforceable later. A small investment in a good attorney when the agreement is drafted can save you from a much much larger investment in the same attorney down the road when things go wrong and nobody seems to know the deal!

I.         Settlement negotiations dictate the terms of the settlement agreement. When drafting a settlement agreement, the threshold question is what has been agreed to. The first question that you should ask yourself is this:  What are the essential terms that were bargained for? If you are drafting the agreement, the essential terms must find their way into your document. If you are reviewing a document drafted by someone else, you cannot let the final agreement include material terms unfavorable to your client that were not bargained for. (Practice Note: It is extremely important that you include all arguably material terms in your offer or they may risk falling out in the drafting of the final agreement.) Do not assume that you can insert substantive terms after a settlement has been reached.  Having specifically discussed all the terms during negotiations will avoid many an argument in drafting the settlement documents and will allow you to enforce a settlement if necessary.

Examples of issues to consider:

• Who are the Releasees and Releasors? Who is being released and who is releasing claims? Be on guard for parties that find their way into the settlement agreement whose release was not negotiated for during negotiations.
•  What is being released? Is the release a general release of all claims or are specific claims being released (e.g., property damage claims v/s bodily injury claims in a lawsuit)? Are there specific claims that need to be excluded from the release?
• Indemnification. Indemnification is a substantive component of a settlement and should be bargained for. The precise terms of the indemnification language are highly important. Lawyers tend to gloss over this.
• Medical Bills, Liens and Insurance Reimbursement.  Is the Releasor being asked to indemnify the Releasee from paying medical bills incurred by Releasor?  O.C.G.A. §33-24-56.1 requires that the Releasor notify all benefits providers at least ten (10) days before consummating settlement.  Be on the lookout for trust agreements.  Some insurers may try to get you to agree to act as a trustee for them.
• Taxes.  In settlement agreements where the monies paid are taxable, one party ay ask the other party to indemnify the other party for taxes owed or penalties for failure to appropriately pay taxes.  I typically see this when employment claims are settled. For example, in Fair Labor Standards Act cases, remedies include lost wages, liquidated damages and attorneys’ fees.  In Title VII discrimination cases, remedies include lost wages, mental anguish damages and attorneys’ fees.  Payment for lost wages is subject to withholding and FICA.  Payment for mental anguish damages or liquidated damages is income that must be reported to the IRS, but is not earned income subject to withholding and FICA.  Thus, the employee and the employer pay less in taxes on the mental anguish and liquidated damages payments.  It is therefore important to specify in settlement negotiations not only the lump sum of the offer, but also the amount of the lump sum that will be attributed to lost wages, liquidated damages and attorneys’ fees.  The employer will often ask that the employee indemnify the employer in the event the IRS determines that the allocation of the payments is incorrect.  If the employee is willing to indemnify the employer in order to persuade the employer to agree to the allocation demanded by the employee, tailor the indemnification agreement so that it does not cover situations where the employer simply fails to make the payments that the agreement necessitates.
• Confidentiality.  This is frequently something that a party will try to interject after the fact. Confidentiality is a substantive limitation on the free speech rights of the parties.Again, it must be bargained for.  And, if confidentiality is sought in a case in which the settlement monies paid are not taxable, it is important to specify the amount of money being paid for the confidentiality clause. For example, damages received for “personal physical injuries or physical sickness” are not included in a person’s gross income.  26 U.S.C. §104(a)(2), i.e., income tax is generally not paid on personal injury settlements.  However, in 2003, the U.S. Tax Court held that monies paid for confidentiality clauses in personal injury settlements are not excluded from gross income and are subject to taxation.  See Amos v. Commissioner, T.C. Memo. 2003-329.  While the parties may specify the amount of the settlement attributed to confidentiality, the IRS may challenge that amount. Some settlement agreements provide for liquidated damages in the event a confidentiality agreement is breached.  If the amount is low, such a provision may actually provide some certainty for the parties.  I have received a number of first draft settlement agreements that provided for repayment of all settlement funds in the event of a breach of confidentiality.  I do not recall ever agreeing to such a clause. Defense attorneys often draft confidentiality clauses that only bind the plaintiff.  I negotiate for bilateral provisions when possible.  Corporate defendants often argue that they cannot be bound by confidentiality because they cannot control everyone in their organization.  In those cases, it is often worthwhile to identify the persons/positions in the corporation who will have access to the information and who will be bound by confidentiality.  If all else fails, consider a clause that releases the plaintiff from the confidentiality provision if someone from the corporation negatively comments on the plaintiff or his or her claims.

 II.      Timing of release.  Some releases purport to release claims that do not even exist and have not accrued at the time the release is executed. For example, I have seen releases in employment severance packages that would purport to release a claim if one of the employer’s agents ran a red light in a car and hit the employee two weeks after the release was signed. While there is support for the proposition that one cannot release claims that have not yet occurred, why risk it?  Specifically note that the release pertains to all claims arising up until the date the release is signed.

III.      A release may not require that an employee release the right to file a charge of discrimination with the EEOC.  An employee can release the right to file a lawsuit based on claims giving rise to the release.  However, the employee is still entitled to file a charge of discrimination with the EEOC.  See EEOC v. Cosmair, Inc, 821 F.2d 1085 (5^th Cir. 1987).

IV.      Older Worker Benefit Protection Act.  If the employee signing the release is over the age of 40 and if the release is for discrimination claims, it is important to comply with the terms of the Older Worker Benefits Protection Act, which Act provides, among other things, that that employee has a certain amount of time to consider the release, is notified of his or her right to counsel, and is given a period of time to revoke the release once signed.  See 29 U.S.C. §626 and 29 C.F.R. §1625.22.

V.        Non-disparagement Clauses.  As with confidentiality clauses, it may be beneficial for the plaintiff to negotiate for bilateral non-disparagement clauses. Also, in cases involving resolution of employment disputes, such a clause is an appropriate place to detail the type of information the corporate entity will provide concerning the plaintiff.  Specifying what the former employer will say if contacted by potential employers can provide both parties with security.

VI.      Attorney Signature.  Releases sometimes include a signature line for the Plaintiff’s attorney. While the attorney may refuse to sign the document unless her signature was bargained for, if the attorney is inclined to sign, I suggest having all attorneys sign and also including “Approved as to Form” above the signature line. This will make it clear that the attorneys are not agreeing to the substantive provisions of the agreement, e.g., indemnification.

VII.    Court Approval of Settlement Required. Some types of claims require court approval of any settlement agreement. A non-exclusive list is as follows:

• Bankruptcy
• Fair Labor Standards Act Claims
• Minors Claims in Excess of $15,000 – O.C.G.A. §29-3-3

VIII.   Mediated Settlements.  If the parties reach a settlement at mediation, it is best to negotiate the specific terms and to sign the Agreement and Release at the mediation.  Doing so will save all parties many hours of time.  At a minimum, a detailed memorandum of settlement should be signed that lays out each essential term of the settlement and signed by all parties and their attorneys. If such documentation is not signed at mediation, it is common for disputes over the precise terms of the settlement to continue for weeks following the mediation.  If the specific language cannot be negotiated at mediation, entering into an agreement specifying a date by which the settlement will be consummated will help hasten the process following mediation.

IX.      Enforcing the settlement.  To prevail on a motion to enforce a settlement agreement “a party must show the court that the documents, affidavits, depositions and other evidence in the record reveal that there is no evidence sufficient to create a jury issue.”  Superglass Windshield Repair, Inc. v. Mitchell, 233 Ga. App. 200, 504 S.E.2d 38, 39 (1998).  The analysis turns on “basic principles of contract formation and enforcement.”  Thompson v. Pulte Home Corp., 209 Ga. App. 558, 434 S.E.2d 89, 90 (1993).  A “contract exists [when] allessential terms have been agreed to.” Id. (emphasis added).

‘Under OCGA § 13-3-1, the plaintiff in a breach of contract action has the burden of proving three elements: subject matter of the contract, consideration, and mutual assent by all parties to all contract terms.’² Because a settlement agreement is a contract, it must meet the same requirements of formation and enforceability as other contracts.³‘Only when a meeting of the minds exists will an agreement be formed. But the law also favors compromise, and when parties have entered into a definite, certain, and unambiguous agreement to settle, it should be enforced.’⁴ If an alleged settlement agreement is disputed by the parties, it must be in writing to be enforceable.⁵ ‘Ideally, a writing satisfying this requirement consists of a formal written agreement signed by both parties. But letters prepared by the parties’ attorneys may suffice if they memorialize the terms of the agreement.’

Oldham v. Self, 279 Ga. App. 703, 707, 632 S.E.2d 446, 449 (2006) (footnotes omitted)

“The requirement of certainty extends not only to the subject matter and purpose of the contract, but also to the parties, consideration, and even the time and place of performance where time and place are essential.”  Zurich Am. Ins. Co. v. Gen. Car & Truck Leasing Sys., Inc., 258 Ga. App. 733, 734, 574 S.E.2d 914, 916 (2002). If a settlement is reached prior to litigation, a lawsuit alleging breach of settlement agreement is appropriate.

Nussbaum is a partner at Wachtell, Lipton, Rosen & Katz, which he joined in 1966 one year after the firm was formed. He focuses on corporate and securities litigation. Throughout his career, Nussbaum has actively practiced in both the public and private sector. During the Clinton administration, he was Counsel to the President of the United States, and in 1974, he was a senior member of the staff of the House Judiciary Committee, which conducted the 1974 Watergate Impeachment Inquiry. In 2004, Nussbaum helped client Larry Silverstein, who managed the Twin Towers, win a $2.2 billion settlement from insurance companies over the World Trade Center attacks of September 11, 2001.

For a more information on the Orr Lecture Series and Bernie Nussbaum, click here.

The People’s Law School (Athens, Georgia) is a series of informative sessions designed to increase community awareness and education of basic legal issues, including topics in criminal law, family law, wills and estates, tort law, and contract law. Dustin works out of the firm’s Jefferson, Athens, and Gainesville, Georgia offices.