Executive summary 1
Statement of problem 2
Controlling Authorities 5
Possible Solutions 6
Solution 1 6
Diversity in Expertise 7
Professionalism and Ethics 7
Increased Goodwill 7
Big Costs 7
Option two - hiring an in-house counsel. 8
Minimal costs 8
Accessibility to the documents 8
Shared Ethics and Value 8
Lack of Professionalism in Specific Areas 8
Continual training inadequacy 8
The legal model for XTRA Technologies 9
Conclusion 9
Works Cited 10
Executive summary
The majority of business analysts agree on the idea that legal compliance is one of the most important spectrums of the company business activities. Failure to abide by the provisions of the law may not only attract severe financial penalties from the regulatory agencies, but it can paralyze enterprise operations, not to mention that a huge impact on the firm's reputation may be inflicted. Furthermore, the technological revolution has discovered a number of fundamentally new legal concerns, which should be taken into consideration by the contemporary business community like privacy protection, increase standards of confidential information and fair competition practices. This problem is especially relevant in the informational technology industry, which involves the use of outsourced labor in the developing countries (Mejia, Balkin & Cardy, 2008, 43-44).
The purpose of this report is multifold. Firstly, it identifies the main legal barriers and problems encountered by a typical company in this field. Secondly, it evaluates two possible scenarios for dealing with this issue in the United States ((a) hiring and in-house or (b) negotiating an agreement with a law firm). Finally, this report evaluates advantages and disadvantages of the both alternatives and concludes with the most effective model of satisfying company legal needs for the corporate needs under current macroeconomic conditions.
Company description
XTRA Technologies is a middle-size New York-based IT company, specializing in outsourcing software development to the developing countries. Legally, the firm is established as a limited liability company. Realizing the fact that the firm develops aggressively, its future transformation into the public company is highly possible within the following five years. It is important to emphasize that in the event this transformation takes place, the variety of legal problems faced by the enterprise will increase, and it will be important to develop and implement new approaches. Furthermore, the transformation itself is a very complicated procedure, which involves the participation of multiple private and public stakeholders. However, assuming that becoming a public company is not a short-term priority (it will not happen within the next three years), the principles applicable for legal compliance of a medium-sized corporation will be used in this report.
Before the paper is advanced further, depicting the company structure is essential. The head office of sales departments, top management, and marketing research unit is located in the USA while research and development centers are in the countries of Eastern Europe. Nowadays, it has 37 permanent staff members. In accordance with the definitions of the World Bank and WTO, such an enterprise fits the criteria of a medium-sized organization (Wise, 2009, 43).
The market of outsourcing software development services is booming in the USA. Today, the main customers of the firm are medical research institutions, hospitals, and the United States department of health and human services. At the same time, the companies are actively developing its cyber security and 'Internet of things' research units, intending to enter this market in a year. Current capitalization of the company is $1.2 million, and in the light of the high demand for software development services in the United States the company is expected to increase it by 300% within the next three years. Therefore, the legal matters of the company activity should be especially scrutinized to avoid disputes with the private and the public consumers.
The company has the following structure in the USA.
As it is evident from this structure, the firm has a common structure. Fundamental strategic management decisions are taken collectively by the Chief Executive Officer, Chief Research & Development officer and Chief Financial Officer. Operational decisions are taken by the heads of the departments without prior approval of the chief executive officer, although she has the right of veto to any corporate decision. Furthermore, under the company Articles of Association, the chief executive officer may give any command to his subordinates.
In general, this structure is followed by many United States companies operating in this field because it provides relative flexibility in terms of governing its overseas departments, which is an extreme priority in outsourcing business.
Statement of problem
The United States of America has one of the most diversified and complex legal systems in the world (Shavell, 2009, 489), although another popular analytical opinion is that this system is one of the most effective simultaneously (LoPucki, Lynn & Wyrauch, 2000, 74). Indeed, in accordance with ease of doing business index, the USA occupies the seventh position worldwide, which is an exceptional achievement in the light of federal structure and large size of this country (the countries outranked by Norway, Republic of Korea, and Denmark, Hong Kong, New Zealand and Singapore; the closest big competitor is Canada, #16th) (Wise, 2009, 51). Therefore, the amount of compliance procedures and the varieties of possible legal actions are among the highest worldwide. Provided that the company diligently observes all corporate legal requirements, no significant problems will hinder its strategic and operational activities (Kiechel, 2010, 32).
However, if the company violates federal of the state legislation (especially in terms of taxation and labor), the regulatory authorities may easily suspend the firm's operations, which result in losses, distrust from the partners and suppliers and other negative resultant impacts. To generalize, the following legal problems are the most common:
Different corporate conflicts (between the managers; between the managers and employees; between the employees.) Statistically, each third partnership and each second limited liability company experiences some form of disagreements between the stakeholders (Hopt, 2000, 56). In fact, the partners, or the directors are not expected to reach absolute harmony in every business situation. Furthermore, if the investors are involved, they may have different opinions regarding the effectiveness of the marketing strategy with the firm board of directors. Furthermore, the practice demonstrates that when the first period of enthusiasm among the stakeholders wanes, the chances that the relations will deteriorate in time increase. When the problems cannot be resolved in the appropriate manner, company profitability and other important aspects are likely to be affected. Management disputes arise from the company daily operational dealings and strategic governance steps. The most popular areas include engagements, contracts, quality assurance control, human resources management and premises control (Cairncross, 2002, 44-45). Another especially vulnerable area is company takeovers and possible mergers and acquisitions. The statistics demonstrate that in 67% of cases the board of directors experience extreme hardships in discussing and concluding on the possibility of merging with another company (Ostas, 2009,489-490). Some firms hire an independent mediator or advisor to assist in these dealings, but the practice illustrates that in 42% of cases their efforts are fruitless (ibid.). In the event, the money is at stake (as in our case), the possibility of litigation or arbitration becomes high.
Personal disputes typically arise from the matters relating to the employees and managers of the company, which may potentially affect corporate strategic and tactical operations (LoPucki, Weyrauch, 2000, 18). The most popular forms of conflicting interests under this scenario involve ownership rights among the founders (especially when inheritance is concerned).
Nowadays, the company jointly owned by three founders each holding 33.3% of shares. They formed statutory capital in equal portion. However, the constitutional documents of the enterprise provide that the share of Mr. Zimmerman may increase, in the event he demonstrates the exceptional professional performance of the company chief executive officer. The criteria of 'exceptional performance' is not regulated, giving substantial leeway to further deliberations and discussions after the first accounting period is finalized. Furthermore, it is not clear how the matter will be resolved if Mr. Zimmerman is removed from his position. Moreover, other founders consider that Mr. Zimmerman regularly discusses corporate affairs with his wife, which may potentially result in disclosure of the classified information, and influence on his managerial decisions. Another founder, Mr. Aloyce, who occupies the position of chief research and development officer, is known for his socially unacceptable behavior in the bars. His medical record includes 'propensity to binge drinking and marijuana abuse'. Although nowadays his professional performance is impeachable, in the event the company goes public, it is likely to attract the attention of the media. Possibly, this type of personal demeanor may tarnish the reputation of the enterprise before the suppliers, customers, and other important stakeholders. Firing him on these grounds in future may be problematic. Other company chief executives regular discuss these matters in private with their friends and relatives, and although nowadays they have no influence on the company operations, in future this issue may become an important concern.
3) Management misconduct. This type of corporate conflict occurs when the company executives, managers or advisors engage in some forms of professional or social misbehavior (Mejia, Balkin & Cardy, 2008, 66; Kiechel, 2010, 51). The most popular examples include personal loans to the directors (used for private gain), unauthorized diversionary tactics regarding corporate financial resources and assets, unauthorized transactions with the suppliers and customers, sexual and personal harassment of the employees and contracted parties. Furthermore, some evidence suggests that recently corporate hatred towards religious, sexual and ethnic minorities significantly intensified (Ostas, 2009, 510). The managers become selective in terms of hiring overseas labor, judging not only by professional criteria, but by social traits and personal characteristics as well. Therefore, the conflicts between the managers and the workforce in the company research departments have high degree of possibility, not to mention that in dealings with the USA-based staff the managers may engage in improper methods of corporate governance and establish unacceptable criteria for decision-making. 'Gender cap' in career promotion is one of the most notorious issues on the USA corporate agenda today (Ostas 2009, 511.
Both, federal and state legislation contain provisions designed to regulate this aspect, but this legislation is far from mature nowadays. The scholars argue that the regulation of human resources affairs in the corporate context is at the dawn of its evolution nowadays (Mejia, Balkin & Cardy, 2008). Therefore, XTRA Technologies should be prepared to deal with all forms of internal litigation, arbitration, and mediation in future. Furthermore, the practice suggests that, however, perfect a code of conduct or other disciplinary instruments may be drafted, the possibility of conflict in the USA is significantly higher than in other countries. Even Apple Incorporated, Microsoft, Cisco and other leaders of the technological world spend billions of dollars annually to resolve this matters. Therefore, professional legal assistance for prevention and 'extinguishing' these issues should become a priority.
Dissatisfied customers. This area is one of the most problematic in the light of the fact that consumer protection laws of the USA are one of the most highly developed. Nowadays, they are promoted and supported by the Federal Trade Commission, by the Better Business Bureau's and other executive and nonexecutive agencies. In legislative parlance, the USA Congress regulates corporate dealings with the customers by Fair Debt Collection Practices Act, the Fair Credit-Reporting Act, Fair Credit Billing Act, and other applicable legislation. They activity of consumer financial protection Bureau and the USA Department of Justice is focused on ensuring that the interests of private and corporate customers are diligently respected by the service providers and manufacturers. Currently, 7% of all service-focused and 9% of product-related transactions in the country lead some form of disputes, which in 2% and 3.5% cases respectively end up in a courtroom (Kiechel, 2010, 82). XTRA Technologies specializes in the both product development (developing software products for the customers) and services (provided technological consulting to the corporate clients and individuals). Therefore, the fact that some of the consumers may find the results unsatisfactory is potentially possible.
Controlling Authorities
In all its dealings with the third parties and the customers, the company will interact with a significant number of governmentally and stately based authorities. Furthermore, in the light of the fact that the firm operates in informational technology industry the provisions of the Digital Millennium Copyright Act and other applicable treaties all the world intellectual property organization should be carefully scrutinized. The penalties include serious financial fines (up to $300,000 and up to five years of incarceration) (LoPucki & Weyrauch, 2010, 32) The USA legislation criminalizes some forms of production and disseminating technologies designed to give control and access to the copyrighted works. Many software algorithms and technologies are copyrighted by the USA Patent Bureau. Hence, before anything is released for use, the firm should carry out thorough legal analysis in this regard.
The practice shows that the firm will interact with the following regulatory agencies of federal level:
Consumer Product Safety Commission,
Equal Employment Opportunity Commission,
Environmental Protection Agency,
Federal Communications Commission,
Federal Trade Commission,
Interstate Commercial Commission,
Occupational Safety and Health Administration.
However, the roles of federal Securities and Exchange Commission and the Internal Revenue Service should be especially highlighted in the context of this report. The first one is responsible for administering federal laws concerning the buying and selling of securities. It may be especially important if the company decides to go public in future, and if one of the founders decides to transfer its ownership rights to the third parties. The second one is responsible for collecting taxes and administering different executive actions in this regard as prescribed by the provisions of the Internal Revenue Code. Contemporary business scholars suggest that relationships with the Internal Revenue Service should be always friendly, because nowadays this agency has the highest degree of influence over any corporate transaction in the USA. In the event its officers identify any violation of the tax law, they may initiate criminal proceedings against the management of the enterprise, suspend business operations or otherwise paralyze corporate activities (Ostas, 2009, 501).
Possible Solutions
Considering the importance of the above-mentioned issues, it becomes clear that the company should seek professional legal assistance in three dimensions. Firstly, it needs aid to facilitate in its intercourse with the regulatory authorities to ensure compliance with labor, antitrust, fair competition and ethical standards. Secondly, engagement of professional lawyers is required to help in resolving the disputes between the management and employees, internal managerial disputes, conflicts with the customers and with the government. Finally, professional advice is necessary to assist the accountants of the firm in taxation and other responsibilities before IRS and FSE.
Two popular alternatives are available to meet these needs. A) The company may create an in-house legal departments and B) the firm may contract a corporate business oriented law firm. In other to understand which solution is better, the management should consider two criteria - professional efficiency and effectiveness and the costs.
Solution 1
The first scenario revolves around hiring a law firm. The main advantage of this option is that the law firm has abundant resources in all necessary areas of business. For instance, managing partner of Baker and McKenzie, one of the leading international law firms specializing in corporate dealings, argued that nowadays the typical company providing legal support of an enterprise has the following practice areas with relevant specialists (Hopt, 2000, 143).
Banking & finance - specialists from this segment may help the company to resolve its conflict in situations with banks and other financial institutions. Furthermore, they can provide valuable guidance in terms of financial planning, capitalization, loans and other important issues.
Competition law department of a law firm may be essential to assist in anti-trust legislation and fair competition strategy formulation.
Furthermore, a law firm is usually competent and in mergers and acquisition. This aspect will be important in the company expense further. Other essential practices of the typical corporate law firm are:
Employment And Migration (which may be useful if the company decides to relocate its overseas workforce to the USA; this practice is common for the most gifted and talented software engineers from the developing countries),
Intellectual Property Protection (the company will definitely patent its effective software solutions so that they may not be imitated by the competitors), real estate and construction (the company may decide to expand its physical premises), securities capital markets.
However, most importantly a law firm has huge resources in terms of Tax and Customs. The expertise of the company accountants and in-house tax advisors is not always sufficient to handle complex tax problems as the absence of double taxation agreement with the countries, where R&D centers are located.
Diversity in Expertise
The main advantage of a law firm is clear - it has different specialists with the different expertise to meet any legal needs of any enterprise. If XTRA Technologies suddenly decides to pursue other areas of IT business (developing its own product or providing IT training), it will not need to realign its own resources and hire a new workforce (Ostas, 2009, 34). Sometimes, the law firm may provide valuable assistance advising the company about the right time for expansion and growth.
Professionalism and Ethics
The second important advantage of a law firm is that it has proven professionalism in ethical and practical dimensions. In other words, attorneys and legal counsels of a law firm have years of continual experience in interacting with the state authorities and with a court. In-house counsels may be exceptional legal professionals, but they may lack practical experience in some aspects whereas the principle of rotation between the different departments of a law firm is useful for the lawyers to have grasp in all spheres of law. Moreover, workforce of a law firm is especially concerned about ethics, and its relationship with the customer is bound by the client-attorney privilege (Shavell,1982, 55). In contrast, if a company hires an in-house counsel, it is a typical employee-employer relationship. The standards of confidentiality and privacy protection in the first case a higher.
Increased Goodwill
Thirdly, when a law firm is hired it increases company goodwill and makes it more respectable before the customers, competitors and employers. To be more specific, simply putting a logo "protected by DLA Piper/CMS Cameron McKenna/ Baker & McKenzie" will be a sufficient warning for those, who are willing to use the law in an abusive way.
Many lawyers and company with a questionable ethical reputation seek all opportunities to start litigation and to claim damages for existent and nonexistent violations (the practice known as "legal hunting"). Corporate in-house lawyers are not always professional in a courtroom to deal with such vultures. A law firm can easily repel any such unmotivated assault. Moreover, the contract with a law firm will exercise positive effect in terms of disciplining the employees, who will realize, that taking action against the company is reasonable only under exceptional circumstances.
At the same time, this scenario is fraught with several important disadvantages.
Big Costs
Firstly, hiring a law firm is extremely costly. Although the annual/monthly fees are dependent on the amount of work done, expertise of the specialists involved, type of work, reputation and a rank of the law firm and many other issues, typically hiring a company mentioned in 100 Best Law Firms will cost no less than $500,000 per year (Half, 2015, Web.). In the light of the current needs of the firm, and especially because of the transnational character of its transactions, annual costs of services are likely to account for $1 million. In contrast, an average in-house lawyer with the 5+ years of experience salary is $ 98, 000 per year.
Secondly, a law firm may not be sufficiently informed about daily operational decisions of the company. In-house counsel had the opportunity to oversee company operations continually, accessing the contracts, communicating with different departments and partners. In any scenario, his better informed about financial and other environments of them company. Therefore, taking a particular legal action by the in-house counsel requires fewer time resources. This aspect has special importance if litigation is involved. In particular, the scholars argue that evidence collection contributes to 80% of a winning courtroom strategy.
Option two - hiring an in-house counsel.
Minimal costs
Firstly, several market studies demonstrate that the salaries of the house counsels are significantly lower than the costs of maintaining a law firm (Half, 2015, Web.). Even if the enterprise decides to establish a legal department with 3-4 professionals each specializing in a specific area of law, the costs will be lower. The following table illustrates hypothetical annual legal expenditures of a legal unit.
Furthermore, the company may allocate 'freed' financial resources for motivating its legal staff. In the event the company experiences financial hardships, the lawyers may work for reduced salaries because of their loyalty.
Accessibility to the documents
The second important advantage is familiarity with the company daily operations and strategic vision. In contrast to the advisors of law firm, corporate counsels may attend all corporate meetings; they can easily speak with CEO and chiefs of the departments, not to mention that they have an opportunity to monitor all internal documents (Ostas, 2009, 503).
Shared Ethics and Value
Finally, in-house legal professionals share corporate culture and ethics. They are personally acquainted with the workforce, which is essential for mediating internal corporate conflicts, and they are aware about the general direction of the company strategic development.
At the same time, several disadvantages shall be taken into consideration as well.
Lack of Professionalism in Specific Areas
As it has been mentioned in the previous sections of this report, in-house counsels are not professional in all areas of legal practice. In the most complex cases they will need to seek external advisory. Otherwise the outcome of legal action may be jeopardized.
Continual training inadequacy
Secondly, the in-house legal department is not armed with the most advanced legal research tools. A law firm always monitors all current legal trends (sometimes, the largest legal companies set them) and developments (Shavell, 1982, 55), whereas an in-house counsels usually track only the most important ones.
The legal model for XTRA Technologies
Based on the findings mentioned above, it may be concluded that hiring a law firm is unavoidably expensive for the firm at this stage. At the same time, the legal risks, associated with its business operations are enormous. Therefore, a mixed solution is the most suitable in this regard. This pattern is followed by many successful IT enterprises including CISCO, Avast antivirus laboratory and Samsung Electronics. In order to achieve excellence in its legal operations, the duties should be distributed between the hired law firm and the in-house legal department
Conclusion
Works Cited
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