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DRAFTING BUY/SELL AGREEMENTS FOR CLOSELY HELD COMPANIES, PART 1
& PART 2
First Run Broadcast: June 11 & 12, 2019
Live Replay: September 9 & 10, 2019
1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes each day)
There is rarely a liquid market for the sale or exchange of ownership interests in closely-held
companies. Buy/sell agreements fix that problem by creating a market among the owners of a
company, providing a mechanism for owners to liquidate their interests in a reliable manner. The
owners may agree to buy and sell interests among themselves on the occurrence of certain events
and using certain valuation metrics, or they may agree that the company itself will redeem an
owner’s interest. Without these agreements, there is often no alternative for an owner to cash out,
short of liquidating the company. This program will provide you with a practical guide to the
different types of buy/sell agreements, drafting the essential provisions of each, and common
negotiating and drafting tips.
Day 1 – September 9, 2019:
• Types of buy/sell agreements – cross-purchase among owners, entity redemption, and
hybrid approaches
• Identifying most highly negotiated provisions of buy/sell agreements
• Drafting triggering events – voluntary sale, retirement, death, bankruptcy of shareholder
or member
• Valuation of interests – independent appraisals, formula clauses, industry comps, and
dispute resolution
• Rights of first offer v. rights of first refusal, and sales to third parties
Day 2 – September 10, 2019:
• Funding buy/sell arrangements – payouts/earnouts over time, commercial borrowing,
key-man insurance, other funding sources
• Special issues involving S Corps and unincorporated entities
• Drag-along and tag-along rights in buy/sell agreements
• Major tax issues in buy/sell agreements for buyer, seller and the entity
Speakers:
Peter Bloom is the founder of The Bloom Group, where he is an experienced business lawyer,
and acts as general counsel to emerging, mid-stage and family businesses, providing strategic
advice as well as guidance regarding corporate law, contracts, tax, intellectual property
protection, financing, succession planning and labor and employment law. He is also a highly
skilled transactional lawyer, having handled mergers and acquisitions, stock and asset purchases,
technology transfers, recapitalizations and other corporate reorganizations, and venture capital
investments. Mr. Bloom earned his A.B., magna cum laude, from Duke University, his J.D.
from the University of Connecticut School of Law, and his LL.M. from Georgetown University
Law Center.
Norman Lencz is a partner in the Baltimore, Maryland office of Venable, LLP, where his
practice focuses on a broad range of federal, state, local and international tax matters. He
advises clients on tax issues relating to corporations, partnerships, LLCs, joint ventures and real
estate transactions. He also has extensive experience with compensation planning in closely held
businesses. Mr. Lencz earned his B.S. from the University of Maryland and his J.D. from
Columbia University School of Law.
VT Bar Association Continuing Legal Education Registration Form
Please complete all requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________
Firm/Organization _____________________________________________________________________
Address ______________________________________________________________________________
City _________________________________ State ____________ ZIP Code ______________________
Phone # ____________________________Fax # ______________________
E-Mail Address ________________________________________________________________________
Drafting Buy/Sell Agreements for Closely Held Companies, Part 1 Teleseminar
September 9, 2019 1:00PM – 2:00PM
1.0 MCLE GENERAL CREDITS
PAYMENT METHOD:
Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________
VBA Members $75 Non-VBA Members $115
NO REFUNDS AFTER September 2, 2019
VT Bar Association Continuing Legal Education Registration Form
Please complete all requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________
Firm/Organization _____________________________________________________________________
Address ______________________________________________________________________________
City _________________________________ State ____________ ZIP Code ______________________
Phone # ____________________________Fax # ______________________
E-Mail Address ________________________________________________________________________
Drafting Buy/Sell Agreements for Closely Held Companies, Part 2 Teleseminar
September 10, 2019 1:00PM – 2:00PM
1.0 MCLE GENERAL CREDITS
PAYMENT METHOD:
Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________
VBA Members $75 Non-VBA Members $115
NO REFUNDS AFTER September 3, 2019
Vermont Bar Association
CERTIFICATE OF ATTENDANCE
Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: September 9, 2019 Seminar Title: Drafting Buy/Sell Agreements for Closely Held Companies, Part 1 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
Vermont Bar Association
CERTIFICATE OF ATTENDANCE
Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: September 10, 2019 Seminar Title: Drafting Buy/Sell Agreements for Closely Held Companies, Part 2 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
BUY-SELL AGREEMENTS IN CLOSELY-HELD
COMPANIES
PETER M. BLOOM
The Bloom Group LLC
5335 Wisconsin Avenue, Suite 440
Washington DC 20015
WWW.THEBLOOMGROUPLLC.COM
TYPES OF BUY/SELL AGREEMENTS
Cross-purchase among owners
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Entity redemption
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
TYPES OF BUY/SELL AGREEMENTS
Types of Buy/Sell Agreements
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
• Hybrid approaches
• Non-compensatory
• Compensatory • Section 83 issues • Vesting • Coordination of entity type with insurance
funding mechanism
Most Highly Negotiated Provisions of Buy/Sell Agreements
• Most highly negotiated provisions of buy/sell agreements
• Permitted transfers
• Additional capital contributions
• Governance and voting
• Hiring and firing
• Borrowings
• Distributions in excess of tax distributions
• Annual budgets/finances
• Major events/transactions
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Most Highly Negotiated Provisions of Buy/Sell Agreements
• Restrictions on other activities of stockholders/members
• Terms of any cross purchases, redemptions
• Distributions
• Entity economics – e.g., preferred returns, allocations
• Permitted activities of entity
• Vesting for partner/employees
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Triggering events Voluntary sale
Retirement
Death
Bankruptcy of shareholder or member
Divorce
Termination of employment (distinguish cause and w/o cause)
Disability/incapacity
Russian roulette
Passage of time Other events?
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Rights Of First Offer v. Rights Of First Refusal
• Rights of first offer • Time restrictions
• Price restrictions
• Rights of first refusal • Activates upon bona fide offer made • by third party • Option to acquire on same terms • (or more favorable) for set period of time
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Valuation of Interests
Independent appraisals
Appointment issues
Single appraiser? Panel of appraisers?
Costs Appraiser(s) still need(s) directions regarding assumptions:
All-cash sale?
Application of federal or state securities laws restricting transfers
Life insurance benefits considered?
Minority discounts applied?
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Valuation of Interests
• Formula clauses
• Difficulties in reaching formula that capture value
• Common approach: multiple of EBITDA, normalized over
period of years
• Time limitations
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Valuation of Interests
• Industry comps
• Problems in defining “industry” and what a comparable is
• Who will decide what industry means and what is comparable?
• Other applicable assumptions
(e.g., are minority discounts applicable?)
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Valuation of Interests
• Dispute resolution
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Funding Buy/Sell Arrangements
• Entity financing
• Earn outs
• Commercial borrowing (e.g., SBA 7(a))
• Insurance
• Other funding sources
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
Drag-along and Tag-along Rights in Buy/Sell Agreements
• Drag-along
• Tag-along
• Calculating payments
• Minority discounts
• Exclusion of other consideration, such as consulting agreements, employment agreements, restrictive covenants
THE BLOOM GROUP, LLC WWW.THEBLOOMGROUPLLC.COM
1
© 2008 Venable LLP
BUY-SELL AGREEMENTS - TAX ISSUES
Norman Lencz, Partner
NLencz@Venable.com
t 410.244.7842
f 410.244.7742
2
Buy-Sell Agreements – Tax Issues
© 2015 Venable LLP
Will the buy-out be accomplished in a taxable or
tax-free manner?
Will life insurance proceeds be available to fund
the buy-out?
Will the buy-out be accomplished through a
redemption or a cross-purchase?
Will a basis “step-up” be available?
Will post-closing consultation or compensation
arrangements be used to maximize tax
efficiencies?
Will an installment note and/or an “earnout” be part
of the consideration?
Tax Considerations in a Buyout
3
Buy-Sell Agreements – Tax Issues
© 2015 Venable LLP
For C Corp – capital gain vs. dividend treatment
for redeemed stockholder is the biggest issue
Currently, 20% tax rate for capital gains and
“qualified” dividends
Special Issues for S Corps, LLCs and Partnerships
4
Buy-Sell Agreements – Tax Issues
Capital gain vs. dividend issue is generally less
important than in the C Corp context
Buy-Sell Agreement at time of formation is
absolutely crucial to ensure compliance with S
Corp rules
Buy-Sell Agreement should prohibit transfers to
ineligible S Corp shareholders such as
1. certain types of trusts
2. corporations
3. multi-member LLCs
4. nonresident aliens
© 2015 Venable LLP
Special Issues for S Corps
5
Buy-Sell Agreements – Tax Issues
Special allocations, disproportionate distributions
and multiple classes of stock are prohibited,
which limits flexibility in the buy-out context
Distributions of appreciated property are
generally taxable, unless a tax-free spin-off is
feasible
No “look-through” to ordinary income assets on
transfer or redemption of S Corp stock
© 2015 Venable LLP
Special Issues for S Corps (cont’d)
6
Buy-Sell Agreements – Tax Issues
Special allocations, disproportionate distributions
and multiple classes of interests may be used to
effect a “separation”
Appreciated property can generally be distributed
tax-free
Basis step-up inside the LLC/partnership (Section
754 election)
© 2015 Venable LLP
Special Issues for LLCs and Partnerships
7
Buy-Sell Agreements – Tax Issues
Because of flow-through tax treatment, tax
distributions should be mandatory
Election to “close the books” upon transfer or
redemption of stock/interests is generally
available
Cross-purchase vs. redemption issues should be
considered
Cash can generally be distributed tax-free to the
extent of tax basis in stock/interest
© 2015 Venable LLP
Issues Common to S Corps, LLCs and Partnerships
8
Buy-Sell Agreements – Tax Issues
© 2015 Venable LLP
C Corp NOL preservation is most crucial issue
Must avoid an “ownership change” (i.e., change
of 50 “percentage points” of ownership over any
3-year period)
In corporate, LLC and partnership “spin-offs”,
must allocate tax attributes among the surviving
entities
Preservation of Valuable Tax Attributes