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Newsletter Winter 2012

January 2012

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

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Shareholder of Corp A Cannot Seek Dissolution of Corp B

October 2011

Court rules that shareholder of Corporation A cannot utilize de facto merger doctrine to seek dissolution of Corporation B.

The petitioner in this case sought to dissolve a corporation of which, he was not a shareholder on the theory that it had entered into a de facto merger with another corporation in which he held a 25% stock interest. A New York Supreme Court dismissed the petition, noting that the petitioner cited “no authority that would allow a court to utilize the doctrine of de facto merger to shift his shareholder interest in one corporation to another corporation for the purpose of forced dissolution of the new corporation.”

Sidney Turner

www.SidneyTurnerllc.com

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Condo community turns to bankruptcy to remain solvent

September 2011

This is a great article by Daniel Vasquez a Sun Sentinel Columnist about a subject close to my heart. I have been talking about this for years. This shows how you can get an out of control situation back under control through the power of bankruptcy court. I will send more later. Enjoy Daniel’s article

Sidney Turner

www.SidneyTurnerLLC.com

Daniel Vasquez

A Palm Beach County condo community is turning to an unusual solution to deal with foreclosure-related problems that are sapping its finances: Bankruptcy court. The approach, experts say, could point the way for other condo and homeowner communities struggling with financial problems because owners can’t pay monthly assessments.

In 2010, The Spa at Sunset Isles — with 232 units in Royal Palm Beach — was facing several common problems confronting South Florida communities. It had a large number of homeowners falling into foreclosure and unable to make mortgage or maintenance payments. Banks were reluctant to take title to “underwater” properties worth less than the mortgages owed. Last year nearly half of the owners — 104 — were in foreclosure and 160 had stopped paying maintenance fees.

Last summer the community had a bank balance of about $25,000 and was $126,000 in debt to vendors and creditors. It had to raise monthly assessments from an average of about $358 per month to $400 per month — depending on size of each home — and required owners to pay special assessments.
So to get out of financial trouble, the Spa’s board decided to file for Chapter 11 bankruptcy in August 2010 in the United States Bankruptcy Court in the Southern District of Florida West Palm Beach Division, said John T. Kinsey, the association’s attorney.

Fast forward to today: The community has emerged from Chapter 11 and now has more than $490,000 in its bank accounts and the board hopes to drop monthly assessments from a current average of $400 to $251 in 2012. John Bazos, president of the condominium association, said the board also plans to make capital improvements to the property, including repairing roads and fixing a broken water fountain at the entrance.

“The community had a complete turnaround from being destitute to being prosperous,” Bazos said. “The result is increasing the real estate value because the financial strength we were able to gain via the legal avenues of Chapter 11.”

The community still faces financial difficulties because of the downturn in the market and the region’s pressing foreclosure problems. Five years ago, a two-bedroom, two bath home in the community sold for about $280,000. Today a similar home sells for around $45,000, say board members. But Kinsey said the bankruptcy filing saved the community from financial disaster.

Kinsey said the Spa’s board had to pay about $1,000 in court fees to file for bankruptcy and accrued about $50,000 in legal fees in the process.

By filing for bankruptcy protection in federal court, the community obtained court orders requiring banks to begin paying monthly assessments to the association and take title of homes in foreclosure, Kinsey said. Once the banks take title to units, they are required by Florida law to pay the monthly assessments for those units. And while most people think of financial reorganization under Chapter 11 as being only for major corporations, such as automobile companies and major airlines, condo and homeowners communities are also entitled to file for bankruptcy.

Some of the Spa’s homes had been locked in foreclosure proceedings for as long as 36 months, which meant that the association was unable to collect assessments from previous owners that had defaulted on mortgages or from the banks that hold the mortgage notes.

Florida laws could not achieve the same results, Kinsey said, because the statutes do not require banks to pay assessments before they take title nor require them to foreclose on a particular deadline. But in bankruptcy court, Chief Judge Paul G. Hyman had the authority to make the banks involved start paying the association their share of monthly assessments.

That’s because bankruptcy laws allow any entity that pays to maintain a bank’s collateral to recover its costs. In this case, the board was paying to maintain the common areas of the homeowners community, which are tied contractually to home loans in a shared community and considered part of the bank’s collateral. The next step was Hyman’s order, handed down in February, which enabled the association to force the banks to take title to units independent of their mortgage foreclosure actions.

“The association had to file Chapter 11 in order to accomplish any and of this,” Kinsey said. So far one bank has complied with Hyman’s orders and the association has begun filing lien foreclosure suits against the rest, Kinsey said.

Bazos said the community’s budget and morale are in the best shape in years.

“Our owners are very happy because their properties are standing on financially sound ground and the properties are easier to sell because you don’t have an association that is in default and you have an association that is able to make improvements to the property.”

dvasquez@tribune.com or 954-356-4219 or 561-243-6686. Daniel Vasquez‘ condo column runs Wednesdays in Your Money and at SunSentinel.com/condos. Check out Daniel’s Condos & HOAs blog for news, information and tips related to life in community associations at SunSentinel.com/condoblog. You can also read his consumer column Mondays in Your Money and at sunsentinel.com/vasquez.

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Did you know Phantom Income in Shareholder Buy-Out Agreement

September 2011

Phantom Income in Shareholder Buy-Out Agreement

If you have recently been bought out and received a Schedule K-1 tax form from your old company for last year that allocates to a substantial net income sum that you never received. Isn’t it outrageous, that former business partners are shifting taxes on earnings that stayed with the company for their benefit?

If as the selling shareholder, member or partner did not foresee the possibility of a positive net income allocation for that portion of the tax year preceding the buy-out’s effective date, and did not negotiate a tax payment distribution in the buy-out agreement to the extent of any non-distributed allocation of net income, you are likely to be writing a bigger check to Uncle Sam.

For example a firm of four brothers organized as a corporation which, as is typically done, elected for pass-through partnership tax treatment as a subchapter “S” corporation. The plaintiff was a 25% shareholder of the corporation. The majority shareholders filed a dissolution proceeding which was resolved by a stipulation and order of settlement. Under the stipulation, plaintiff received $150,000 in exchange for surrendering his interests in the corporation.

A follow-up lawsuit was triggered by plaintiff’s receipt the next year of an allegedly “untruthful” K-1 from his former firm allocating $75,000 net income to the plaintiff, which plaintiff denied receiving. Plaintiff sued his former firm and his three brothers individually, alleging that the $75,000 was allocated to him to lower their own personal tax liabilities; that prior to plaintiff’s departure in 2007, the firm routinely made distributions to cover the partners’ personal taxes; and that the defendants were liable for the $25,000 in additional taxes owed by plaintiff on his reported K-1 income.

The plaintiff moved for partial summary judgment against the firm defendants, for a determination that they are obligated to reimburse plaintiff for the personal taxes due on the $75,000 he never received, based on a provision in the 2007 stipulation of settlement in the dissolution case:

“Upon surrender by [plaintiff] of his shares of stock in the respondent [firm] . . . the respondent will hold plaintiff harmless for any liability for the payment of taxes or other debts of the respondent which exist December 31, 2007.

The court rejects plaintiff’s reliance on the provision and denies his motion. The hold-harmless provision, the court writes,

“does not support plaintiff’s interpretation that the defendants agreed to pay his personal income taxes. The settlement agreement was made within the context of a corporate dissolution proceeding and the “taxes” clearly refer to corporate, not personal, taxes.”

Sidney Turner

www.SidneyTurnerllc.com

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Did you know about issues involving business entity ownership interests?

September 2011

1) Inadequate and defective documentation of ownership interest in a business is an all too common feature of closely held businesses and, after a dispute arise, litigation over an assert claim by adversely effected business partner’s standing (right) to sue is challenged.

The reasons for this state of affairs are many and diverse, e.g.: The owners lack a sophisticated understanding of the legal formalities involved in an ownership interest in the chosen form of business entity. The owners are unable or unwilling to spend the money for necessary legal and accounting services. The owners are family members or long-time friends who trust one another and believe they don’t need any written agreement or certification of ownership interests.

The usual issue is whether the complaining party ever became a shareholder or, if the case involves a limited liability company, ever held a membership interest. This type of dispute has been the subject of many disputes. However many variations arise.

2) 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?

3) Court rules that shareholder of Corporation A cannot utilize de facto merger doctrine to seek dissolution of Corporation B. The petitioner in this case sought to dissolve a corporation of which, he was not a shareholder on the theory that it had entered into a de facto merger with another corporation in which he held a 25% stock interest. A New York Supreme Court dismissed the petition, noting that the petitioner cited “no authority that would allow a court to utilize the doctrine of de facto merger to shift his shareholder interest in one corporation to another corporation for the purpose of forced dissolution of the new corporation.”

Sidney Turner

www.SidneyTurnerllc.com

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Little known Fact in Valuation

August 2011

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

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Did you know you might not really have an ownership interest?

July 2011

Inadequate and defective documentation of ownership interest in a business is an all too common feature of closely held businesses and, after a dispute arise, litigation over an assert claim by adversely effected business partner’s standing (right) to sue is challenged.

The reasons for this state of affairs are many and diverse, e.g.:

The owners lack a sophisticated understanding of the legal formalities involved in an ownership interest in the chosen form of business entity.
The owners are unable or unwilling to spend the money for necessary legal and accounting services.
The owners are family members or long-time friends who trust one another and believe they don’t need any written agreement or certification of ownership interests.

These circumstances should not deter you from investing in the required documentation. Make sure you get the proper documentation and protect your interest.

Sidney Turner

www.SidneyTurnerllc.com

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Number FIVE of the Six Major Points Series

July 2011

Here is Number FIVE 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 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

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Number FOUR of the Six Major Points Series

July 2011

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

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Number THREE of the Six Major Points Series

July 2011

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

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Posts Tagged ‘Palm Beach County Attorney’

Shareholder of Corp A Cannot Seek Dissolution of Corp B

Condo community turns to bankruptcy to remain solvent

Did you know Phantom Income in Shareholder Buy-Out Agreement

Did you know about issues involving business entity ownership interests?

Little known Fact in Valuation

Did you know you might not really have an ownership interest?

Number FIVE of the Six Major Points Series

Number FOUR of the Six Major Points Series

Number THREE of the Six Major Points Series

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