Source: https://www.wisconsinbusinesslawblog.com/
Timestamp: 2019-04-18 20:18:51+00:00

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Jim Phillips, Iowa 1979, is a shareholder in the Milwaukee office of Godfrey & Kahn, S.C., where he practices tax and corporate law.
An owner of C corporation stock may be able to exclude up to 100 percent of the gain on sale of stock held more than five years, if such stock meets the definition of “qualified small business stock” (QSBS) under Section 1202 of the Internal Revenue Code of 1986, as amended.
The gain might also be excludable from Wisconsin tax if the corporation is a qualified Wisconsin business and the requirements of Wis. Stat. section 71.05(25)(b) are met.
Given the significantly lower federal income tax rate on C corporation income (21 percent) compared to the federal income tax rate on flow-through income of S corporations and LLCs (37 percent or 29.6 percent, depending on whether the 20 percent deduction of Section 199A applies), the availability of the Section 1202 exclusion can, in some cases, tip the scales toward C corporation status when evaluating the proper choice of entity.
Here is a summary of the requirements and traps of Section 1202.
Section 1202 exempts from tax a specified percentage of a taxpayer’s gains from the sale of QSBS provided the taxpayer held the QSBS for more than five years (among other requirements discussed below).
The applicable exemption percentage for stock acquired on or after Sept. 27, 2010, is 100 percent. For stock acquired earlier, the exemption may be 50 percent or 75 percent, depending on the taxpayer’s stock acquisition date.
Congress has repeatedly changed the amount of the Section 1202 exemption with varying effective dates. For stock for which the 100 percent exclusion applies, the excluded gain is not a preference under the alternative minimum tax (AMT).
For other exclusion percentages, a portion of the excluded amount is an AMT preference.
The table below summarizes the interaction of Section 1202, AMT, and other code provisions.
For example, assume that individual X acquired $1 million of Y corporation stock in 2019, and Y stock is a capital asset in X’s hands. If the Y stock is not QSBS and X sells it in 2026 for $6 million, then X realizes a gain of $5 million. In that case, X could potentially owe federal income taxes of $1.19 million ($5 million gain x 23.8 percent capital gains rate).
However, if the Y stock were QSBS in X’s hands, then X’s entire Section 1202 gain on the sale would be excluded and X would owe no federal income taxes attributable to the sale. Thus, X would have tax savings of $1.19 million. This would be in addition to the lower C corporate income tax rate over the 6-year period. However, choice of entity is usually not just a current or future tax rate issue. A number of factors need to be considered: expected dividend distributions, the flexibility of structuring a potential future sale as an asset sale, estate planning considerations, etc.
Five year holding period – the taxpayer must have held the stock for at least five years.
Shareholder other than a corporation – the taxpayer claiming the Section 1202 exclusion must not be a corporation.
Acquisition at original issuance for cash or services – the taxpayer must have acquired the stock at its original issuance either (i) in exchange for money or other property (not including stock) or (ii) as compensation for services provided to the corporation. However, this requirement is waived in certain cases. For instance, if QSBS is transferred by gift or at death, the donee or heir, respectively, steps into the donor or decedent’s shoes for purposes of the Section1202 original issuance requirement and five year holding period.
Domestic C Corporation – the stock must be a corporation created or organized in the U.S. or any State that is taxed under subchapter C of the Code.
Gross Asset Test – The aggregate gross assets of the corporation prior to and immediately after the taxpayer acquires the stock must not exceed $50 million. For this purpose, aggregate gross assets includes the amount of cash and the combined adjusted bases of other property held by the corporation. However, the adjusted basis of any property contributed to the corporation is determined as if the basis of such contributed property were equal to its fair market value at the time of contribution.
Additionally, the corporation must be an “eligible corporation,” which primarily excludes a regulated investment company, REIT, REMIC or cooperative.
80 percent of assets by value used in a qualified active business – At least 80 percent of the corporation’s assets must have been used in the active conduct of one or more qualified trades or businesses during “substantially all” of the taxpayer’s holding period for the shares.
Given that the Section 1202 exclusion is designed to incentivize new business investment, the code has two provisions designed to prevent the exclusion from applying when newly issued stock is simply a replacement of a prior investment.
Stock is not QSBS if at any time during the four-year period beginning two years before the stock was issued, the issuing corporation purchases more than a de minimis amount of its stock from the taxpayer or a person related to the taxpayer. Redeemed stock exceeds a “de minimis amount” only if (i) the amount paid for it is more than $10,000 and (ii) more than 2 percent of the stock held by the taxpayer and related persons is acquired.
Under the second provision, stock is not QSBS, if during the two-year period beginning one year before the stock was issued, the corporation repurchased stock in one or more transactions (i) each of which involves a repurchase of more than $10,000 of stock where more than 2 percent of all outstanding stock by value is repurchased and (ii) the sum of all repurchases during the two-year period have a value, at the time of redemption, in excess of 5 percent of the aggregate value of all the corporation’s stock at the beginning of the two-year period.
The qualified active business test requires that during “substantially all of the taxpayer’s holding period” at least 80 percent (by value) of the corporation’s assets must be used in active conduct of a one or more qualified trades or businesses. Subject to certain allowances for working capital and financing research and experimentation, this means that if more than 20 percent of a corporation’s assets become cash or other non-qualified assets immediately after a venture capital round of financing or at any other time, such corporation may fail this “substantially all” test.
Additionally, in order for stock to qualify as QSBS, the aggregate gross assets of the corporation cannot exceed $50 million at either (i) any time prior to the taxpayer’s stock acquisition date and (ii) immediately after the taxpayer’s stock acquisition date.
For purposes of the requirement that a qualified small business have aggregate gross assets of $50 million or less, aggregate asset value is generally measured as cash plus the adjusted basis of the other assets. However, the basis of any property contributed to the corporation is deemed to be equal to its fair market value (FMV) for purposes of this gross asset test.
The contribution rule also affects a shareholder’s basis in his QSBS and the calculation of gain on later sale. When a shareholder has contributed property to a qualified small business, the shareholder’s basis in her QSBS is also deemed to be the FMV of the contributed property at the time of contribution, even though for all other tax purposes, the shareholder has carryover basis in her stock equal to her adjusted basis in the contributed property. Only future appreciation is eligible for the Section 1202 exclusion.
Generally, a shareholder must acquire stock at original issuance in exchange for cash or other property or as compensation for the stock to qualify as QSBS. A purchase from an existing shareholder will not qualify for the exclusion.
This strict rule is relaxed a bit, however, in the realm of corporate reorganizations. When a shareholder exchanges QSBS for other stock in a tax-free reorganization, such as a merger or stock for stock acquisition, the new stock received by such shareholder can qualify as QSBS with the holding period tacking. However, the exception only applies to the built-in gain in the stock at the time of the tax-free reorganization. Future gains in the stock received do not qualify for the Section 1202 exclusion, unless the new corporation is also a qualified small business.
Small business owners looking to sell their business in the near future need to be prepared for the complexities that will arise during the exit process. One complexity is the tangled web that comes with the Buyer of the business obtaining a loan backed by the Small Business Administration 7(a) program. Buyers of businesses are using the SBA 7(a) program in business acquisitions more and more frequently. The terms of the SBA financing package are favorable to Buyers compared to conventional financing, and due to a change in the SBA’s rules in early 2018, more Buyers are eligible for SBA financing because the down payment requirement minimum is now only 10% of the loan cost. Because the SBA is a federal government program backed by federal dollars, there are necessarily many rules and regulations that affect a Buyer’s eligibility for SBA backing as well as each individual lender’s underwriting process.
These complexities not only affect Buyers, but also affect Sellers, often impacting the flexibility of the terms of the transaction that would otherwise be available to the parties in a cash deal or even purely Seller financed transaction. The reality of the market also makes SBA financing a common component of most small business sales.
While a cash transaction is ideal for a Seller looking to liquidate his or her equity in the business and carry no risk of reliance upon the success or failure of the business post-closing, cash buyers are scarce, and finding a cash Buyer may be difficult, especially if the Seller has legacy interests in transitioning to the next generation of the family or a top level employee that doesn’t have the financial wherewithal to pay cash.
On the other hand, a Seller financed deal is a substantial risk to the Seller because it involves the Seller continuing to bear the risk of success or failure of the business post-closing to get paid, but without giving the Seller any direct control over the business operations.
The SBA 7(a) financed transaction may be an ideal middle ground for the Seller who wants to maximize the amount of cash received at closing, wishes to avoid the risk of Seller financing, but who doesn’t have a Buyer with the cash or that can qualify for conventional financing.
When negotiating a letter of intent or even the final purchase contract with a Buyer using the SBA 7(a) program, the Seller should know how the SBA 7(a) program may affect his or her goals and preferred terms of the transaction before even entertaining a deal involving such financing. Contemplating these issues before signing a letter of intent or a purchase contract is critical for the Seller because it allows the Seller to pre-emptively deal with the issues at a time where the Seller still has significant leverage in the negotiations.
The SBA 7(a) program requires the Buyer to come to the table with 10% of his or her own money to pay toward the total loan cost (which includes the entire purchase price of the business and some SBA and lender fees and costs). For example, in a $2M transaction, this means that the Buyer will need over $200,000.00 from his or her own pocket to be able to close the deal. As a Seller, determining whether the Buyer has sufficient assets to meet the 10% down payment requirement is important to know before the Seller expends significant costs proceeding with a transaction.
Even if the Buyer doesn’t have the 10% in cash, the SBA will allow the Buyer to use a Seller financed promissory note for up to 5% of the down payment requirement. So, on a $2M transaction, if the Buyer only has $100,000.00 to put down, if agreeable to the Seller, the Buyer could execute a promissory note of $100,000.00 to the Seller to meet the 10% down payment requirement.
But, there’s a catch! No payment can be made by the Buyer on that $100,000.00 note during the entire term that the note to the bank is outstanding (typically 10 years). Not only that, but the bank providing the Buyer the financing will surely require that that note to the Seller (and any liens on collateral securing that loan) be subordinated to all of the bank’s notes and liens for the purchase, putting the Seller second in line to collect from the Buyer in the event of default. In transactions with much of the purchase value being in goodwill, this puts the Seller at a significant of risk of not receiving the 5% of the purchase price to be paid on that note if the Buyer were to default.
In light of this, when negotiating the letter of intent or contract, it is advisable for the Seller to obtain and analyze the Buyer’s financials to determine the likelihood of the Buyer being able to meet the equity requirements to go through with the transaction, as well as to determine the likelihood of the Seller being able to collect on any Seller financing that is involved in the transaction in the event of default.
As a Seller, the SBA 7(a) program prohibits you from staying on as an officer, director, stockholder or key employee of the business after the Closing (though allows the Seller to be paid as a consultant for up to 12 months after closing for management transition purposes only). This is especially important for business owners who are not yet eligible for Medicare, yet need to have health insurance to bridge the gap until they are Medicare eligible. In a non-SBA financed transaction, the seller may stay on as an employee eligible to obtain benefits given to all other full-time employees, one of which is the group health insurance plan. An SBA rule prevents that arrangement.
The alternatives are to obtain such insurance out of pocket on the open market via an individual plan, or, if the Seller has a spouse that is employed and is offered health insurance, obtaining insurance through the spouse’s plan. Since having health insurance is so critical, finding a cost-effective way to bridge the gap from the date of a sale of the business to the date of Medicare eligibility is a major concern for many business Sellers.
Where a post-closing employment arrangement which includes health care can be structured into the deal in non-SBA transactions, it’s paramount for a Seller to be aware of this restriction on post-closing employment from the beginning of the negotiations of an SBA transaction, especially in negotiations of price or interest rate on an allowable Seller note. This additional out-of-pocket cost for health insurance should be accounted for by the Seller in these negotiations. In the very least, the Seller needs to have a plan in place for health insurance after the sale.
The SBA requires that where the parties are related (either by family or a close relationship such as a key employee, or co-owner), that an independent appraisal be conducted to justify the loan amount and/or purchase price. The SBA also requires this in transactions where the initial appraisal or purchase price allocation shows that the purchase price less fixed assets equals $250,000.00 or more. For many businesses, this latter scenario is common, as much of its value is in goodwill (typical in-service oriented businesses or where the price is based heavily on sales numbers, not the value of fixed assets). Often in the initial stages of negotiations, the Buyer may forego the cost of an appraisal and merely justify the purchase price based upon a review of the Sellers’ financials.
If the appraisal report determines the value of the business is a lower price than the agreed upon purchase price, in order for the transaction to occur, the bank may require that the Buyer infuse additional equity (either with cash or via a Seller standby note for the difference), or possibly allow an additional, non-standby Seller note to cover the difference between the appraised price and the agreed upon purchase price.
Often, when the independent appraisal is required by the bank, the parties are already under contract, with the Buyer obtaining a financing commitment being a contingency to closing. Where the contract has already been signed or a letter of intent heavily negotiated, there are costs that have been incurred by the parties in getting to that point. These sunk costs may make it a hard decision for the Seller to determine whether he or she is willing to walk away from the deal, and gives the Buyer leverage by threatening to walk. This may force the Seller to begrudgingly accept a lower price or unfavorable terms to accommodate the appraisal. The seller may not have been willing to accept these terms if they were contemplated before signing the letter of intent or purchase contract.
Taking pre-emptive steps to avoid getting into this position before signing the letter of intent or purchase contract can help avoid these outcomes. One good way to do so is for the Seller to obtain an independent valuation themselves prior to entering into a contract or letter of intent. Often Sellers have a rough idea of how much they believe their business is worth. It’s possible that that price is accurate, but sometimes the Seller’s idea may be completely unrealistic.
Getting a reality check on price via an independent valuation may save everyone’s time and money before signing a letter of intent or purchase contract. Or, if the Seller has a particular price in mind for his or her retirement that doesn’t match the valuation, if the Seller can afford to do so, knowing the realistic price ahead of time will give Seller the knowledge of how to get that desired price. The Seller may elect to hold onto the business for a period of time to earn enough income to bridge the gap between the valuation and the desired price, or take the time to look for a non-SBA Buyer willing to pay that price. If the conditions for an SBA required independent appraisal are present, having a realistic idea of price before signing a letter of intent or purchase contract will allow a Seller to avoid those outcomes or at least plan accordingly.
It’s also important for the Seller that the Buyer choose a lender that is reputable and experienced with the SBA 7(a) process. Some banks are deemed “preferred” lenders, which essentially means that the lender can make all of its own underwriting decisions without the requirement of the SBA going through an additional and independent underwriting process (which takes more time). A Seller looking to avoid a long, drawn out financing contingency period and get a deal closed quickly is advised to insist upon the Buyer using a preferred SBA lender from the start of the negotiation process and in the letter of intent or purchase contract if the deal is to be SBA financed.
The business attorneys at Schober Schober & Mitchell, S.C. are experienced in all types of privately held Wisconsin business purchase and sale transactions, including transactions involving SBA financing. Though the focus of this blog post is on Sellers, the business attorneys with Schober Schober & Mitchell, S.C. represent both Buyers and Sellers in such transactions. When considering buying or selling a business, it’s important to have an experienced attorney advising you at the beginning stages of the negotiations all the way through closing. Whether you’re a Buyer or Seller, the business attorneys at Schober Schober & Mitchell, S.C. will be happy to assist with your transaction. Contact me at jmk@schoberlaw.com or call me at 262-569-8300 to talk to me about how we can help you navigate through your deal.
Benjamin Streckert, Minnesota 2017, is an attorney with Ruder Ware in Wausau, where he concentrates his practice on various business transactional matters.
Did you know that the “full and equal enjoyment” requirement of the Americans with Disabilities Act also applies to websites maintained by places of public accommodation? Benjamin Streckert discusses the issue and provides tips for websites to become more accessible to those with disabilities.
Did you know that the Americans with Disabilities Act (ADA) applies to the websites as well as the physical facilities of places of public accommodation​?
A review of court dockets around the country shows that plaintiffs are filing an increasing number of lawsuits against companies alleging that their websites are not “accessible” to individuals with disabilities as required by the ADA.
In 2017, plaintiffs filed 814 website accessibility lawsuits in federal court alone, according to the ADA Title III website. This trend is not only a national one – these types of lawsuits are being threatened in Wisconsin as well. Businesses would be well advised to get out ahead of the potential threat.
According to the ADA, a disability includes “a physical or mental impairment that substantially limits one or more major life activities.” Title III of the ADA prohibits discrimination by a “place of public accommodation” against individuals with disabilities.
Although business owners and managers may want to consult with an attorney to determine if their business qualifies, hotels, restaurants, theaters, grocery stores, pharmacies, offices of health care providers, museums, golf courses, banks, and many other areas open to the community generally qualify as places of public accommodation. These places are required to provide “full and equal enjoyment of [their] goods, services, privileges, advantages or accommodations” to people with disabilities.
The ADA mandates that brick and mortar locations have certain ramps, counter heights, and other accommodations, so as to ensure that individuals with disabilities have access to full and equal enjoyment of the facilities and the services offered inside of them.
However, many people are not aware that the “full and equal enjoyment” requirement also applies to websites maintained by places of public accommodation. An individual with a disability must be able to equally access a website or mobile application with the aid of a commonly used assistive technology.
A good example of this is that a visually impaired person must be able to navigate a website using a screen reader. Screen readers are software programs that allow users to read the text displayed on a computer screen with a speech synthesizer or braille display. Not all websites are conducive to, or compatible with, screen readers, however.
In fact, websites must have very specific characteristics in order to be compatible with screen readers and other tools used by those with various disabilities.
Currently, there is no definitive standard for accessibility. But the World Wide Web Consortium’s Web Content Accessibility Guidelines Version 2.0 with AA (intermediate) success criteria (WCAG 2.0 AA) has become the presumptive standard.
If a place of public accommodation’s website does not conform to the above standards, both the United States Department of Justice and private citizens can bring suit.
The Department of Justice can obtain monetary damages, attorneys’ fees and costs, monetary penalties, and a court order requiring an institution to bring its website into compliance. An individual may not obtain money damages, but he or she can obtain a court order requiring the institution to bring its website into compliance and recover attorneys’ fees and costs. The costs to a noncompliant organization can be significant.
Proactively taking the above action steps can help mitigate the risk of an ADA suit.
MaiVue K. Xiong, U.W. 2010, is a partner with Weld Riley, S.C. in Eau Claire, where she practices in business, real estate, copyright/trademark, and banking law.
Absent a prenuptial or martial property agreement, “what’s yours is mine and what’s mine is yours” holds true for all marital assets and marital debt in Wisconsin. This is the case even when a spouse has not signed to obtain the debt, so long as the lender extending the credit obligations provides certain notifications to the non-applicant spouse.
The notification requirements are even more vigorous when the Wisconsin Consumer Act governs the credit obligations, which includes “consumer credit transactions” or consumer loans, credit cards, and credit sales under $25,000 that are subject to a finance charge and payable in installments.
This article focuses on the rules lenders must follow to successfully grant consumer loans to ensure compliance with state and federal laws, and also addresses legal ramifications married individuals, especially non-applicant spouses, should be aware of when living in a community property state.
Since a non-applicant spouse is liable for his/her spouse’s marital loans, a lender may also pull the non-applicant’s consumer report information (credit report) in assessing the spouse’s creditworthiness.
The Equal Credit Opportunity Act (ECOA) was enacted in 1974 to ensure lenders do not discriminate granting credit and loans on the basis of protective classes, including a consumer’s marital status. However, section 1002.5(c)(2) of the ECOA, Regulation B, specifically allows a lender to request “for any information concerning an applicant’s spouse … that may be requested about the applicant” if the spouse will be contractually liable on the account or if the applicant resides in a community property state.
This means that, in Wisconsin, a non-applicant’s spouse’s credit report may be pulled and used as a risk evaluation tool in assessing the spouse’s creditworthiness without violating the ECOA, even though the non-applicant spouse may have no knowledge yet that his/her spouse had originated a loan.
If a lender is asked by a credit reporting agency about a particular borrower, and the lender chooses to respond to the request, the lender can only provide information in the name of the spouse about whom the information was requested, and not in the name of the non-applicant spouse.10 This is to ensure that the credit report of both spouses are complete with all relevant information while at the same time limiting access to information relating to the non-applicant spouse.
This last subsection of section 1002.10 of the ECOA attempts to build in some protection for the non-applicant spouse, but by and large, non-applicant spouses in Wisconsin and other community property states are equally liable on debt incurred by their spouses.
As long as lenders have fulfilled their obligations and given proper notices, married individuals in Wisconsin without pre-nuptial or marital agreements should always keep in the back of their minds that “what’s yours is mine and what’s mine is yours” to avoid any surprises the next time they pull a credit report.
3 Wis. Stat § 766.56(2)(b). This requirement does not apply to open-end plans such as credit cards where the consumer may pay down and obtain new credit without further application.
Thomas J. Nichols, Marquette 1979, is a shareholder with Meissner Tierney Fisher & Nichols S.C., Milwaukee, where he focuses his practice on business law and tax law.
James W. DeCleene,Marquette 2015, is an attorney with Meissner Tierney Fisher & Nichols S.C., Milwaukee, where he practices in business law, estate planning, health care law, and intellectual property law.
Investing in a qualified Wisconsin business may provide certain tax benefits to individuals. Thomas Nichols and James DeCleene discuss these benefits and some potential pitfalls.
Wisconsin law currently provides tax-favored status to certain investments made in qualified Wisconsin businesses.
Since each filing only covers one calendar year, businesses desiring continuous qualified status should file every year.6 These filing requirements create hard and fast deadlines. There are no procedures for retroactive filings.
The business must have had 2 or more full-time employees.
50 percent or more of the business’s payroll must have been paid in Wisconsin.
With respect to the year in which a business first starts doing business in Wisconsin, these requirements are deemed satisfied if the business registered for the following year.
Lists of the businesses that have requested to be classified as qualified Wisconsin businesses for calendar years 2011-18 can be found on the Department of Revenue website.
Since a business’s registration for its first year is determined by reference to the following year, a business must request to be added to the list for the first year in which it does business in Wisconsin. This request is made by sending an email to DORISETechnicalServices@wisconsin.gov and providing the business’s legal name as well as the confirmation number for its registration for the following calendar year.
Be aware that these lists do not signal the department’s acknowledgement that a business is in fact a qualified Wisconsin business for a given year. Rather, it merely identifies those businesses that have self-identified as meeting the above requirements.
Accordingly, obtain representations, covenants, or other assurances as to a business’s qualified status when helping clients identify a qualified Wisconsin business in which to make an investment.
To qualify for this exclusion, the business must be a qualified Wisconsin business “for the year of investment” and “at least two of the four subsequent” calendar years, provided that the investment was made after 2010 and held for at least five uninterrupted years.11 To claim this exclusion, an individual must file a Schedule QI with his or her Wisconsin tax return.
While the statute requires an “amount [to be] paid” for such stock or ownership interest, we confirmed in a phone call with the Wisconsin Department of Revenue that this definition is broad enough to cover transactions involving noncash consideration. We also confirmed that the statute should also apply to cross-purchases where the ownership interest is being acquired from an owner of the entity, rather than from the entity itself. In order for an investment in a single member LLC to qualify, the LLC must have elected to be treated as an S or C corporation for Wisconsin purposes. 2017 Form I-177.
Because of this, the business could not be qualified during the year of the investment, and no exclusion would apply on the eventual sale of the investment, even if the business registered as a qualified Wisconsin business for each calendar year in which it did business in Wisconsin.15 Thus, it’s good to advise clients whether to wait to invest in a business until the calendar year in which the entity starts doing business in Wisconsin.
Note that gain passed through to an individual from a partnership, limited liability company, limited liability partnership, tax-option corporation, trust or estate can qualify for the exclusion.16 As an example, an individual investing in a limited partnership that made an investment in an LLC would be able to exclude the gain passed through from the limited partnership’s sale of its interest in the LLC, provided that the limited partnership held the interest for five years and all other requirements are satisfied.
On top of these overlapping issues, when advising a client with respect to the deferral provision, be careful to ensure that your client “invests all of the gain [from the sale] in a qualified Wisconsin business.”23 No partial deferral is allowed.
Also, given that this investment must be made within 180 days of the sale, apprise clients before the sale closing of this potential deferral opportunity and the relatively short deadline associated with it, in order to give clients time to make arrangements to acquire an interest in a qualified Wisconsin business.
Note, however, that if the investment in the qualified Wisconsin business is held in a manner sufficient to qualify for the exclusion above, the gain on the eventual sale of the investment could qualify for exclusion to the extent it exceeds the gain previously deferred.
Investing in a qualified Wisconsin business provides clear benefits to individual taxpayers. If the investment is held long enough and all other requirements are met, the gain could be wholly excluded in determining the individual’s Wisconsin taxable income.
Additionally, if the investment closely follows the sale of a capital asset, the gain from that sale could be wholly deferred.
In either event, it’s good to bear these considerations in mind when navigating these provisions.
1 Wis. Stat. § 71.05(25)(b).
2 Wis. Stat. § 71.05(26)(bm)(1).
3 Wis. Stat. §§ 71.05(25)(a)(1s), 73.03(69)(a).
7 Wis. Stat. § 73.03(69)(b)(1)-(2).
8 Wis. Stat. § 73.03(69)(b)(1); Tax § 2.986(3).
9 Wis. Stat. § 73.03(69)(d).
10 Wis. Stat. § 71.05(25)(b).
11 Wis. Stat. § 71.05(25)(a)(2).
12 Wis. Stat. § 71.05(25)(a)(2).
13 Wis. Stat. § 71.05(25)(a)(1m).
14 Tax § 2.986(2), (4)(b); see Wis. Stat. § 71.22(1r) (defining “[d]oing business in this state” for this purpose).
15 Wis. Stat. § 71.05(25)(a)(2).
16 Wis. Stat. § 71.05(25)(a)(1); see 2017 Form I-177 (listing trusts and estates as well).
17 Wis. Stat. § 71.05(26)(bm)(1).
18 Wis. Stat. § 71.05(26)(bm)(2).
19 Wis. Stat. § 71.05(26)(bm).
20 Compare Wis. Stat. § 71.05(26)(a)(2m), with Wis. Stat. § 71.05(25)(a)(1m).
21 Wis. Stat. § 71.05(26)(a)(1).
22 Compare Wis. Stat. § 71.05(26)(a)(1), with Wis. Stat. § 71.05(25)(a)(1); see 2017 Form I-177.
23 Wis. Stat. § 71.05(26)(bm)(1) (emphasis added).
24 Wis. Stat. § 71.05(26)(c).
This post was originally posted on the “State Bar of Wisconsin Business Law Section Blog” and was written by Attorney Randal J. Brotherhood ,Washington University 1981, who is a shareholder in the Milwaukee law firm of Meissner Tierney Fisher & Nichols S.C., where he practices primarily in the areas of corporate law, representing both for-profit and tax-exempt entities, intellectual property, and securities law.
For more information on the GDPR, see Keith Byron Daniels’s article, New European Privacy Law: Its Effect on Wisconsin Lawyers, in the July/August 2018 issue of Wisconsin Lawyer magazine.
How does a business stop a former employee from poaching the business’ employees after the employee has left employment of the business? Generally, to achieve this goal, employers have entered into a contract with the employee that includes a restriction called a “non-solicitation provision”. In a recent case, The Manitowoc Company, Inc., v. Lanning, the Wisconsin Supreme Court made a landmark decision which imposes significant limitations on employers with respect to non-solicitation provisions in employment contracts pursuant to Wisconsin Statute section 103.465.
Lanning was an experienced, well-connected engineer for The Manitowoc Company, Inc. (“Manitowoc”) a company that manufacturers construction cranes and food service equipment. After working for Manitowoc in its construction crane division for over 25 years, Lanning left to work for a competitor. During his time with Manitowoc, he and Manitowoc had executed an agreement by which Lanning agreed that he would not “solicit, induce or encourage any employee(s) to terminate their employment with Manitowoc or to accept employment with any competitor, supplier or customer of Manitowoc.” (emphasis added) for a period of two years after the termination of his employment with Manitowoc.
Within the restricted two-year period after Lanning’s departure, Manitowoc alleged that Lanning breached this covenant by engaging in competitive activities such as actively recruiting (or poaching) some of Manitowoc employees to work for his new company. Manitowoc then sued Lanning for violation of the above quoted provision in the agreement. Lanning argued that the provision was unreasonable and violated Wisconsin Statute section 103.465, (the statute governing restrictive covenants in employment agreements) which would thereby make the whole provision unenforceable.
The Circuit Court ruled that the provision did not violate the statute, but Lanning appealed, and, as explained in my previous post, the Court of Appeals reversed, stating that the non-solicitation provision was unreasonably overbroad and violated section 103.465.
The Wisconsin Supreme Court agreed with the Court of Appeals, holding that because the clause in the Agreement restricted Lanning from soliciting, inducing, or encouraging any employee of Manitowoc to leave their employment, it was overbroad, and an unreasonable restriction on Lanning that violated Wis. Stat. section 103.465. The Court supported this holding by asserting that common law states that no business has a legally protectable interest in preventing the poaching of ALL of its employees from a stranger, and therefore, the provision attempting to do that is illegal under the statute. The Court went on to state that an employer only has a legally protectable interest in preventing the poaching of some of its employees, and those employees are limited to certain classes. The Court set forth some examples of these classes of employees that might warrant protection, such as top-level employees, employees with special skills or special knowledge important to the employer’s business, or employees with skills that might be difficult to replace. The Court did not elaborate any further beyond those general examples or apply them to Manitowoc, specifically.
What does this mean for Wisconsin employers?
The Court for the first time expressly acknowledged what most in the legal community had already predicted—that non-solicitation clauses in employment contracts are subject to the notoriously restrictive Wisconsin statute section 103.465. If there was any question about it, the question is now answered.
The most obvious takeaway is that employers can no longer prohibit a departed employee’s solicitation of “all” employees in non-solicitation clauses. As such, all current agreements with employees containing restrictive covenants should be reviewed. If the agreements contain language prohibiting solicitation of anything other than specific groups of employees, the agreement should be amended, and additional consideration for the amendment must be provided to the employee in exchange for the amendment. Any language prohibiting solicitation of “all” employees should be removed, and all future agreements should be drafted without this broad prohibition to avoid having the agreement ruled unenforceable.
The other major takeaway is that non-solicitation clauses in employment related agreements must now identify specific employees or classes of employees that an employee is prohibited from soliciting after the employment relationship ends. These specific employees or classes of employees must be those in which the employer has a “protectable interest.” Determining what employees fall within these classes may be challenging given that the Court did not provide much guidance on the permissible scope of these classes of employees that warrant protection. This will be fact intensive for each business, and will warrant an in-depth discussion with clients regarding the nature of its employment base. This is likely to be a controversial area of law in the future, probably to be tested soon in the courts given the lack of guidance on this point by the Supreme Court in Lanning.
I think this decision creates potentially unintended consequences for small businesses in Wisconsin. A majority of businesses in Wisconsin, and most of our firm’s clients, are small to medium sized businesses. A large business with 13,000 employees like the Manitowoc Company may not actually suffer significant detriment from losing entry level employees, and a restriction preventing solicitation of ALL of those employees probably is broader than necessary to protect its competitive interests. However, the loss of any employee for a small business may be significant. As such, it is possible that a restriction to prevent solicitation of all of a small business’ workforce might be reasonable in certain circumstances, but the Court’s holding now deters them from attempting to assure themselves that reasonable protection in non-solicitation agreements with employees. I am hopeful that the Court has the opportunity soon to clarify this holding as applied to small businesses to avoid these consequences.
There are many open questions still outstanding in this area, and it is inevitable that we’ll get the answers to these questions as they work their way through the courts. In the meantime, businesses will want to ensure they are protecting themselves against potential poaching of their employees to the maximum extent legally permissible. The business attorneys at Schober Schober & Mitchell, S.C. are experienced in drafting employee restrictive covenant agreements and pay close attention to the often-changing landscape of employment restrictive covenant law.
If you or your business need a review of your current employee restrictive covenant agreements or are looking into establishing these agreements in your business, we would be happy to help. Contact me at jmk@schoberlaw.com or visit our website at www.schoberlaw.com if you have any questions.

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