Frequently Asked Questions -

Answered by Harry B. Ray
 

Preventive Measures
Forming a Buying Group
The Risk of Serving on the Board of Directors of a Buying Group
The Most Common Antitrust Concerns  
Your Question
 
 

Preventive Measures

Question: What steps can a buying group take to stay within the antitrust laws?

Answer: The starting point is to have a written antitrust compliance program prepared for the group. It will contain procedures for conducting membership meetings, keeping minutes, admitting and expelling members and for structuring and relationships with vendors. Having such a written antitrust compliance program only gets half the job done, however. The group must actually comply with such procedures. An important aspect of any antitrust compliance program is the selection and involvement of competent legal counsel.
 

Question: We are in the process of forming a buying group. Would it be more advantageous to be a C corporation, an S corporation, a limited liability company or a partnership?

Answer: The answer depends upon a variety of factors. The only form of doing business which can reasonably be ruled out is that of a general partnership. The other types of business entities provide limited liability to the owners. The question then becomes whether the owners wish to have the business pay its own taxes or whether it desires to have the taxable income and losses flow through to them individually and be included in their own tax returns. If the former is the case, then the group should be formed as a C corporation. If the latter is the case, it would make more sense to form the business as either a limited liability company or an S corporation.
  

Question:  I have been offered a position on the Board of Directors of a buying and marketing group.  What advice do you have?

Answer:  At a bare minimum you should make sure that the corporation has indemnification provisions in its bylaws pertaining to officer and director liability.  Specifically, these provisions obligate the corporation to indemnify and hold their directors harmless for any mistakes they make in good faith, even though such mistakes may amount to negligence.  Ideally, the corporation should have a directors and officers insurance policy to fund this obligation.

You should also check to see if the corporate charter of the organization contains a limited liability provision for directors.  Most states typically allow such provisions to be included in the corporate charter.  If the corporation does not already have such a provision in its charter, it could probably be amended at little cost and expense in order to do so.

The primary source of liability to directors is a derivative lawsuit being brought on behalf of the corporation by one of the shareholders.  There is a greater likelihood of this happening if there are a number of shareholders than if there is only one or two shareholders.  If this particular group is structured with every store owning a share of the corporation, you would have greater exposure than if there were only a few shareholders.  This would be particularly true if the shareholders control the decisions of the board.  For instance, if there were only two shareholders and they served in two of the three positions on the board, with you being the third member, the likelihood of a derivative action being brought against you would be reduced.

One final piece of advice.  If the board ever approves an action with which you disagree, make sure that your dissenting vote is recorded in the minutes.