Shaking Hands with Citizens United

 In General, Startup Corner

Shaking Hands with Citizens United

Most people I know disagree idea with the idea that corporations should be accorded the same protections as living breathing people under the U.S. constitution. Although considered a “legal person” under the law, there is a sense that entities are fundamentally different. How can one, for example, trust a corporation when one cannot look into the eyes of the corporation or shake its hand?

At the same time, I find that many people are inclined to trust the agents of corporate entities. On the basis of such trust, they decide that certain understandings do not need to be memorialized in written contracts or that it’s a waste of time and money to consider and document what should happen if the relationship sours. What is often not considered – especially for those newer to the business and investment worlds – is whether this trust is misplaced. It is easy to overlook that the fact that the deal is actually being struck with the entity that employs the trusted person, rather than the trusted person herself.

So what are the implications of entering into a deal with an entity rather than a person? Consider the example of an investment transaction with an early stage business. These are relationships that could last 5, 10 years, maybe even longer. A LOT can happen during a period of time like that. Even if the original entity representatives stick around for that entire period, unwritten agreements and assumptions can have a way of becoming less clear over time. I find this to be especially true when things aren’t going well with the business.

In some number of cases, the entity representatives who inked the deal won’t in fact be around for the entire length of the relationship. I find this to be particularly true with junior investment professionals in the impact space. Interestingly enough, according to a recent report by the Bureau of Labor Statistics, the median tenure with a single employer in the finance industry in the U.S. over the past decade has been less than five years. Or, the entity representative may stick around, but the entire investment may be transferred to a different corporate entity with different representatives.

One also has to consider whether the person on the other side of the negotiation has the authority to dictate the policy, values and practices of the organization that he or she represents. In most cases ultimate authority of the organization will reside in a board of directors or similar group. Even a partner in a venture capital firm is ultimately subject to an agreement with his or her partners, which will require ultimate organizational (rather than individual) control over decision-making. Just the other day, I learned that a client relied on an oral understanding with an entity representative, only to learn later that the entity’s board of directors refused to honor the deal. The result was a radically different economic outcome for the client.

Finally, as a matter of law, unwritten understandings will likely be unenforceable. Most contracts will contain a clause that specifically states that the written contract is the exclusive understanding of the parties. With such a clause, there are very limited circumstances under which a court will consider evidence that an agreement existed separately from the written contract.

It is impossible to address every contingency in a contract. One should, however, make sure that all of the material business understandings and assumptions are documented clearly in the written contract. In addition, even though it may feel counter to the positive energy and momentum of entering into a deal, it is important to understand what happens in possible worst-case scenarios. This is not fun for anyone, even (or maybe especially) for the lawyers who have a professional responsibility to do it. But, would you trust Citizens United to always do the right thing?

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