Most business challenges include a legal component; one piece of the puzzle that if identified and fitted in properly produces a finished product, but if ignored, leaves an unfinished, incomplete game with no reward or satisfaction for its creator. The Year 2000 “puzzle” is no different and can, in fact, be approached in the very same way as companies locate all the relevant pieces and begin to fit them together within a Year 2000 Compliance Program.
The bottom line is that, for a number of internal and external reasons, companies must address the legal issues related to Year 2000. They must do so carefully and methodically, with their focus always on the goal of a completed puzzle.
Beyond Cash Donations: How New Forms of Giving Are Transforming Not-for-Profit Accounting
Evolving Funding Landscape for Not-for-Profits Not-for-profit organizations are being asked to do more with less,…
Learn More
But what is the puzzle companies need to complete? According to the media, pundits and Congress, the Year 2000 legal puzzle is primarily one of liability. Whom can you sue? When can you sue? How much can you collect? And, of course, who can sue you?
The real legal puzzle, however, is how to protect your business, your shareholders, and yourself from those who would rather sue than work together to solve problems.
Most entrepreneurs incorporate their businesses at an early stage for one very major reason: to protect themselves and their investors from personal liability for business risks. The protections offered through incorporation, along with insurance and due diligence, can help protect you and your business from Year 2000 liabilities.
Depending upon the state in which you have incorporated and presently conduct your business, there are variations of the so-called “business judgment rule.” This rule states that company officers and directors who exercise “good faith and prudence” in the carrying out of their business fiduciary duties may be protected from personal monetary liability for business decisions.
A director or officer of a corporation shall perform his or her duties in good faith and in a manner he or she reasonably believes to be in the best interests of the company and such as an ordinarily prudent person in a like position would use under similar circumstances.
While these themes were extracted from Massachusetts General Laws (Chapter 156B, Section 65), most states have similar provisions.
Many state business incorporation laws also allow entrepreneurs to protect officers and directors from personal monetary liability resulting from breaches of fiduciary duties by allowing the company to adopt an indemnification policy.
Since many companies cannot afford officer and director liability insurance, adopting these statutory protections remains a prudent business decision.
Beyond indemnification, insurance may not provide sufficient protection. Even with pending federal legislation, most business insurance policies do not cover Year 2000-related damages and liabilities. In many cases, your business already may have received a notice or an amendment to policies clarifying the boundaries of your coverage. Take time to read your policies carefully and consult with your company’s insurance adviser to determine what, if any, coverage might be available.
Regardless of your insurance coverage, the best way to show you have acted in “good faith and prudence” is to document your progress through your Year 2000 Compliance Program.
Beyond regular due diligence, existing contracts and agreements also may pose Year 2000 legal risks. Since the Year 2000 problem affects many aspects of most businesses, business relationships can be altered if misunderstandings exist about each party’s obligations and responsibilities.
As part of your Year 2000 Program due diligence, conduct a legal audit: a comprehensive review of any agreements and materials that may create Year 2000-related liabilities for your business. Existing agreements may contain clauses that determine how you need to address Year 2000 issues along with potential liabilities should you fail to prepare adequately.
While the legal audit will differ for each company, some common elements exist. If your business sells or services computer hardware, software, or any product with embedded computerized control or programming, you can determine your Year 2000 liability by reviewing the following documents as they relate to your company.
Maintenance and Support Agreements: Whether you provide maintenance and support directly to your customers or rely on third party vendors, these agreements may stipulate that Year 2000 corrections should be provided under the agreement.
Distribution Agreements: Agreements with distributors and resellers often carry commitments to provide product upgrades and enhancements.
License Agreements: Warranties and stipulations within product license agreements may create liabilities if Year 2000 problems exist.
Manuals and Documentation: Materials that describe how a product works may create functionality expectations that require action on your part.
Advertising and Promotional Materials: Any public statement of a product’s or service’s benefits may directly or indirectly include statements that cover Year 2000-related issues.
Any company that uses computer hardware, software, or any product with embedded computerized control or programming needs to determine its Year 2000 exposure resulting from these products. In addition, the business should understand its liability should a system or equipment failure interrupt its flow of goods or services.
Purchase Agreements: In some cases, purchase documents for hardware, software, and equipment include warranties or other statements that create vendor responsibility for fixing problems, including Year 2000-related issues.
License Agreements: While software license agreements generally are written to minimize the manufacturer’s liabilities, these agreements may include clauses that require the vendor to provide corrections or upgrades at no cost.
Maintenance and Support Agreements: Most maintenance and support agreements cover corrections, updates, and upgrades. A careful review of these agreements will indicate if Year 2000-related updates and upgrades are included.
The final step of the legal audit is a careful review of insurance policies and contracts. Since even the best prepared businesses can still experience interruptions, understanding what disruptions will and will not be covered by current insurance policies is vital to gauge your company’s status.
The purpose of the Year 2000 legal audit is twofold. First, it identifies your company’s Year 2000 liability exposure to customers. Second, it identifies the possibility of business interruption or, even worse, cessation due to non-compliant internal or external systems. Completing a legal audit helps guide your preparations and gives you the knowledge to work more effectively with vendors and suppliers.
Once all these legal pieces “fit,” your business’ protection from Year 2000 legal risks is much more complete.
Allen Falcon, president, of Boston-based Horizon Information Group and Marijo McCarthy, Esquire of Widett and McCarthy, P.C., are co-authors of “The Smaller Business Year 2000 Guide.” The guide is sponsored by The Smaller Business Association of New England, and is available at Amazon.com, Borders.com, Barnes-AndNoble.com, and directly from the publisher, Horizon Information Group, at www.HIGweb.com/sby2k.
