Sidney Turner Blog » Limited Liability Company

Newsletter Winter 2012

admin — Thu, 05 Jan 2012 20:09:59 +0000

A Buy-Sell Provision.

A Buy-Sell Agreement is a partnership among the owners of a business in which each shareholder agrees that upon the occurrence of a specified event (death, disability, termination of employment, etc.), their shares (interest) will be sold to the surviving owners at a specific price. Additionally, each owner commits to buy the shares of their departing co-owner upon the occurrence of said specified event.

Buy-Sell Agreements can be funded (usually with life insurance) or unfunded (usually with promises to pay). Funding a Buy-Sell Agreement with life insurance is usually the most practical method – the heirs get cash and walk away, and the surviving owner gets the deceased owner’s shares immediately. Unfunded Buy-Sell Agreements are usually better than no agreement, but raise the spector of the odds of the heirs not getting paid. Quite often the earnings are not sufficient to pay off the heirs.

There are generally three different types of buy-sell agreements:

Cross-Purchase Agreement: A cross-purchase agreement allows the remaining co-owners to purchase the interest of a departing owner. Each co-owner must have sufficient capital to make the purchase. For the death of an owner, each shareholder generally acquires a life insurance policy on the lives of the other partners, and the death benefits received are required to be used to purchase the deceased owner’s interest.
Entity (or Redemption) Purchase Agreement: An entity purchase agreement requires the business to purchase the interest of a departing owner. After the purchase, the remaining partners would be the only owners of the entity. It is also common to fund the purchase with a life insurance policy purchased by the business.
Hybrid Agreement: A hybrid agreement provides that the remaining owners and the business itself purchase the interest of a departing partner. With a hybrid agreement, it is possible to give the individual owners the right to acquire the interest, but not the obligation. If the shareholders decline, the business would be obligated to acquire the interest of the departing owner. Alternatively, the agreement may allow for both the remaining owners and the company to purchase the departing partner’s interest. Therefore the hybrid agreement is the most flexible form of buy-sell agreement, having characteristics of both the cross-purchase and the entity-redemption agreement.

The valuation section of a buy-sell agreement is very important because it defines how the division of the owner’s interest will be valued when there is a change in ownership. Changes will inevitably occur as partners or shareholders of closely-held companies will eventually decide to part voluntarily or an event such as the death of a partner triggers the buy-sell agreement. If this section of the agreement is skipped, it will lead to increased costs and a prolonged period of negotiation to determine the value of the interest at the time of the change.

Insights into navigating negotiations to sell your business.

Tips and techniques to help you get the deal done

Once you’ve decided to sell your company and have found the right buyer, you’ll quickly begin negotiating the terms of your deal and price. In developing your negotiation strategy, you’ll start thinking about the current economic environment, asking questions like “Is it a buyer’s market or a seller’s market?” Alternatively, you may be wondering, “How far can I push to get the terms most beneficial to me in today’s environment?”

There are some tips and techniques that can help you when it comes time to sit down and get a deal done, no matter what side of the table you’re on.

Price isn’t everything. So often deals involving small and mid-sized companies focus on price but don’t ignore terms, they matter. The terms of the deal can have a critical impact on how you are paid, or how you pay, for a business. Terms affect the real price of the business, so they must be examined beyond just the nominal price that has been agreed upon.

Know your “walk-away” number. This may sound elementary, but you need to have an understanding of what’s reasonable when it comes to the price of an asset. Know your minimum. Know your max. And know these in advance. Put in the time and effort early on to research and fully understand your walk-away so that you will stay disciplined at the table.

Making the first offer can be an advantage. Conventional wisdom says that laying out the first offer is detrimental. But as we see proven time and time again in behavioral psychology, tipping your hand can anchor the conversations and can significantly influence subsequent terms in the discussion. However, employ this tactic with caution: only do so when you know you have an information advantage.

Know who’s on the other side of the table. Not just by name, but really know them and know what they really want. Understand your counterpart’s motivation. Would this deal be a big feather in their cap? Is it their first deal? What does their compensation structure look like? What about their past experience? What industries have they worked in? What are they passionate about? Often, the answers to each of these questions are different, but understanding the motivations of your negotiation counterpart from all viewpoints can help you organize your approach and increase your bargaining power.

Concede small victories – and let them be known. When you’re at the negotiating table, have a predetermined list of pieces of the deal you’re willing to bend or concede on. Doing so will create small victories for your counterpart – so long as you make it known. What’s the value of conceding on something if the other side of the table doesn’t recognize it? To make strategic concessions, follow these four steps:

1. When you give something up, make it known.

2. Decide how the other side can reciprocate and demand that they do so.

3. If mutual trust hasn’t been established, offer a contingent concession: we’ll do this if you do that.

4. Concede in installments. Essentially, this means that people like receiving positives over time. So when you have your list of elements you’re willing to concede, don’t unload them all at once; instead, spread them out over the course of the discussions.

Sincerely,

Sidney Turner

Sidney Turner, LLC

Legal Insight, Business Strategy

4800 N. Federal Highway, Suite 307B

Boca Raton, FL 33431

Voice: (561)-208-6383

E-mail: sturner@sidneyturnerllc.com

Interim Injunction Restraining Directors

admin — Thu, 29 Sep 2011 13:55:56 +0000

A Manhattan Supreme Court granted an interim injunction restraining directors of a Delaware corporation from committing acts that constitute grounds for dissolution. The unusual preliminary injunction in a dispute between two shareholders of a New York based Delaware Corporation, requiring that the directors “not commit acts that constitute grounds for dissolution under NY law, and that corporate records are made available. The question is how does a director comply with an injunction against “oppression” of a minority shareholder?

Sidney Turner

www.SidneyTurnerllc.com

Tax dischargeable in bankruptcy.

admin — Thu, 22 Sep 2011 15:30:55 +0000

Did you know it is not uncommon for taxpayers seeking bankruptcy advice about tax liabilities to be told that taxes are not dischargeable? However, while generally they are non dischargeable such statements are incorrect. While there are a number of complex rules that need to be satisfied, taxpayers should know that Federal Income Taxes may be dischargeable if the tax liability satisfies the Bankruptcy code requirements.
Generally, taxpayers may discharge federal income taxes, depending on the age of the debt. Thus, they may be dischargeable in a Chapter 7 if ALL of the following criteria are met.

1. The tax is paid toward a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition.
2. A tax return was filed more than two years prior to the filing of the bankruptcy petition.
3. The tax was assessed more than 240 days prior to the filing of the bankruptcy petition.
4. In addition, the tax must not be due to a fraudulent tax return and the taxpayer has not attempted to evade or defeat the tax.

The taxpayer who contemplates bankruptcy should consult with a professional who understands the nuances of the dischargeability of taxes as provided under the bankruptcy code. Because there are so many timing rules that have to be complied with, the timing of filing the bankruptcy petition is crucial in order to obtain the desired fresh start through the bankruptcy process.

Sidney Turner

www.SidneyTurnerllc.com

An SPE is a legally distinct entity with a limited life

admin — Fri, 16 Sep 2011 13:00:44 +0000

An SPE is a legally distinct entity with a limited life, usually an LLC, created to carry out a narrow pre-defined activity or series of transactions for a “sponsor” company. SPEs can serve legitimate business purposes by raising capital for their sponsors and by isolating and homogenizing cash flows and business risks of a specific asset class. SPEs are also used frequently for tax purposes, especially for cross-jurisdictional tax planning and for optimally allocating tax benefits among investor classes.

General Growth Properties, Inc., which filed the largest real-estate Chapter 11 case in U.S. history. In connection with approving the debtor-in-possession financing facility, Judge Gropper permitted affiliated debtors to use excess cash collateral from bankruptcy-remote special purpose entities which, to the surprise of many market participants, were included in the Chapter 11 proceedings.

In connection with seeking approval of the Company’s proposed debtor-in-possession facility (the “DIP Facility”), the Company also sought use of cash collateral from separately organized subsidiary bankruptcy-remote special purpose entities (“SPEs”). The property owned by each of these SPEs was intended to secure only the obligations of the pre-petition lenders to the SPE owning the property (the “SPE Lenders”). Arguing that the value of the collateral in certain of the SPEs is sufficient to protect the interests of the SPE Lenders, the Company proposed that excess cash collateral from rents be made available to support the DIP Facility.

Several pre-petition agents for the SPE Lenders (the “Pre-Petition SPE Agents”) filed objections to the Company’s proposed DIP Facility on behalf of the SPE Lenders. The Commercial Mortgage Securities Association and the Mortgage Bankers Association also filed an amici curia brief with the court addressing the implications of the proposed use of cash collateral on commercial real estate finance.

Sidney Turner

www.SidneyTurnerllc.com

Little known Fact in Valuation

admin — Wed, 03 Aug 2011 17:00:10 +0000

How is the valuation of a business interest effected by the fact of lack of marketability in a closely held business, or Discount Lack Of Marketability (DLOM )?

A DLOM’s basic premise is that shares of a closely held corporation cannot be readily sold on a public market and therefore should be discounted to reflect the additional risk factors associated with the time and difficulty of finding buyers for non-publicly traded shares.

Sidney Turner

www.SidneyTurnerllc.com

Number SIX of the Six Major Points Series

admin — Mon, 18 Jul 2011 14:53:27 +0000

Here is Number SIX of the Six Major Points Series

I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Sixth of the Six Major Points Series

Number SIX of the Six Major Points Series

It Means Knowing the Purposes and Limitations of Litigation. When I give presentations on business workouts and reorganizations, I tell the audience that the vast majority of cases involving a viable business ultimately leads to a buyout settlement, and that it’s only a question of how much time, distraction and legal expense the parties are willing to bear before they realize that the legal system is not an efficient or even wise way to decide the fate of a living, breathing company. However, for many different reasons litigation can be an unavoidable and necessary tactic in reaching the strategic goal of separating business partners who no longer can co-exist as owners and managers. Sometimes there’s just no other way to grab the attention of the other side. The litigation will take its normal, unpredictable course. The parties’ expectations of a quick resolution are undermined by many delays and procedural and discovery skirmishes attendant to all litigation. As the case drags on and the legal costs mount, the clients begin to reassess the costs and benefits of a buyout settlement.

The business lawyer must be willing to take the lead in re-evaluating and advising the client of litigation and settlement prospects at every stage of the engagement.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

Number FIVE of the Six Major Points Series

admin — Fri, 15 Jul 2011 14:00:15 +0000

Here is Number FIVE of the Six Major Points Series

It Means understanding business and the relationships that make it work.

This is the Fifth of the Six Major Points Series:

Number FIVE of the Six Major Points Series

It Means Understanding Valuation Basics. In many instances, by the time lawyers are brought into the picture the relationship between the business owners has deteriorated past the point of no return. If it’s a viable business, one or the other is going to have to be bought out. The single biggest impediment to amicable resolution becomes the disparate views of the company’s value as seen through the very different lenses being worn by the potential purchaser and the potential seller. The business lawyer is not a business appraiser, but he or she must be able to elevate the client’s understanding of basic appraisal approaches and methodology, along with any applicable legal concepts such as the case-law-driven rules surrounding minority and marketability discounts in “fair value” buyout proceedings. The lawyer’s grasp of appraisal doctrine becomes even more critical when collaborating with a professional business appraiser who has been engaged to prepare a valuation report and to testify as an expert at a valuation hearing. The business lawyer must be able to speak the language of appraisal and understand its doctrinal basis to put on a persuasive valuation case.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

Number FOUR of the Six Major Points Series

admin — Thu, 14 Jul 2011 14:00:43 +0000

Here is Number FOUR of the Six Major Points Series

It Means understanding business and the relationships that make it work.

This is the Forth of the SIX Major Points Series

Number FOUR of the Six Major Points Series

It Means Understanding Finance and Accounting Basics. Almost every business divorce case involves some degree of dispute over company finances and accounting. Many small companies involved in business litigation do not prepare any financial statements; much less do they have an outside CPA who prepares audited financial statements. The company’s tax returns may present a distorted picture of the company’s income, compensation to principals, and other expenses. A business lawyer must have a basic understanding of financial and tax accounting, including the ability to comprehend financial statements, internal reports such as QuickBooks, and (last but not least) tax returns, in order to converse intelligently with the client and the client’s accountant about financial issues that likely will take center stage in the litigation.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

Number THREE of the Six Major Points Series

admin — Wed, 13 Jul 2011 14:00:45 +0000

Here is Number Three of the Six Major Points Series

It Means understanding business and the relationships that make it work.

This is the Third of the SIX Major Points Series

Number THREE of the Six Major Points Series

It Means Knowing the Law. Each form of business entity, be it partnership, corporation or limited liability company, is governed by a separate statutory scheme with rules that, in many key instances, are significantly different as is the case law that has developed around each form. The standing requirements to bring a dissolution proceeding vary among the entities, and even within the same type of entity depending on the statute invoked. The availability of a buyout remedy depends on the type of entity and the alleged statutory basis for dissolution. Under still-evolving case law the filing of a dissolution petition may inadvertently trigger a right of first refusal under a shareholders’ agreement. Particularly with corporations, there are numerous, mandatory, statutory provisions that come into play at the board level. The availability of a court-appointed receiver can differ depending on the entity type. The list goes on and on. The business lawyer must have a thorough understanding of the legal framework within which closely held businesses operate and whose rules govern forced judicial dissolution, derivative actions and other varieties of owner vs. owner litigation.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

Number TWO of the Six Major Points Series

admin — Tue, 12 Jul 2011 14:00:11 +0000

Here is Number Two of the Six Major Points Series

It Means understanding business and the relationships that make it work.

This is the Second of the SIX Six Major Points Series

Number TWO of the Six Major Points Series

It Means Knowing Your Client’s Business. Every closely held business is different. Some operate on a partnership model with diffuse authority and little or no formality in regard to decision making. Written agreement among the owners may be non-existent. Others may have detailed written agreement calling for hierarchical management, and still act like a cadre of co-equals, others may have a hierarchical management structure that is rigorously followed. The business lawyer also must discern who holds what leverage in the company’s business. For example, one owner may control relations with the company’s key customers, which may have significant implications in terms of who’s in a position to buy out whom. One owner may have personal financial resources the other lacks, or may personally own the real estate housing the company’s business. The point is, as a business lawyer you need to understand how the business at hand operates, not just on paper but in practice, and you need to understand how the business operation affects your client’s ability to prosecute or defend claims of shareholder oppression, deadlock or financial impropriety, and how it influences the range of possible outcomes.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com