Fall 2023 Webinar – Closely Held Business Entity

Business Law Symposium for the Closely Held Business Entity

Dear Client an Friend:

Pozzuolo Rodden are pleased to invite you to the first of 3 Fall 2023 Business/Estate Law seminars titled “Business Law Symposium for the Closely Held Business Entity”; to be held Wednesday, September 27, 2023 from 3 to 5 pm via Zoom.

Here’s the Zoom session info:

Link: https://zoom.us/j/96741362729?pwd=N29YZ3ZnSj1jREE3bTVYZGk#VHNXdz09

Meeting ID: 967 4136 2729

Passcode: 574435

If you plan to attend, please click this link and complete the email: Chrissy@pozzuolo.com

Or, complete the form below and email it to: Chrissy@pozzuolo.com

If you have a particular question or business item of interest, kindly include the issue with specificity on the form and it will be addressed. If the seminar extends beyond 2 hours the firm will complete this seminar in two sessions to be scheduled appropriately. Lastly, attached please find an outline for the seminar which I hope you find useful and informative.

We look forward to working with you next week.

Name: ___________________________________________________________________

Firm Name: _______________________________________________________________

Email Address: _____________________________________________________________

Phone: _________________________________

Question/Interest: ___________________________________________________________

________________________________________________________________________

BUSINESS PLANNING,

COMMERCIAL FINANCING DOCUMENTS PLANNING,

AND ESTATE PLANNING

FOR THE CLOSELY HELD BUSINESS PERSON

TO FOLLOW IN THE TWENTY FIRST CENTURY

By: Pozzuolo Rodden, P.C.

Joseph R. Pozzuolo, Esquire

COURSE DESCRIPTION AND LEARNER OBJECTIVES:

In advising clients on privately held businesses it is necessary to understand the important intertwining of the legal and business concepts involved. This course provides a comprehensive and practical overview of the most important legal concepts business persons must know in this area. This course will bring you through from the initial formation of the business to the final winding up of business. More specifically this course will discuss important documents, provisions and considerations for; 1) business formation such as choice of entity, buy-sell agreements, shotgun clauses, LLC operating agreements, partnership agreements, restrictive covenants, and stock option agreements; 2) managing and running the business including employment agreements, shareholder agreements, and changing the choice of entity; and, 3) the winding down, selling, or business succession plan. This seminar will focus on the day to day, wheeling and dealing of the privately held business world.

SELECTION OF A BUSINESS ENTITY.
1. INITIAL MEETING WITH CLIENT
  1. Role of Attorney
  2. Role of CPA
2. FACTORS BEARING UPON CHOICE OF ENTITY
  1. Level of control desired
  2. Personal vulnerability to lawsuits
  3. Tax implications
  4. Regulation/business formalities
  5. Cost
  6. Rendering professional services
  7. Number of employees
  8. Type of business
3. BASIC CLOSELY-HELD ENTITIES
  1. Sole proprietor
  2. General partnership
  3. Limited partnership
  4. “C” corporation
  5. “S” corporation
  6. Limited Liability Company
  7. Professional corporation
4. EQUITY ALLOCATION
  1. Sweat equity/”know how”
  2. Passive investment
  3. Idea person
  4. Growth investors
INCORPORATION.
1. NAME
2. FICTITIOUS NAMES
3. ARTICLES OF INCORPORATION
  1. (a)Publication
4. BY-LAWS
  1. Organizational meeting/ Adoption
  2. Shareholders
  3. Directors
  4. Officers
5. “S” ELECTION
  1. Default is “C”
  2. Must qualify under section 1361 of IRC
  3. Must timely file Fed. Form 2553 and PA Form REV-1640
LLC & LLP FORMATION.
1. NAME
2. FICTITIOUS NAMES
3. CERTIFICATE OF FORMATION/ LIMITED PARTNERSHIP
  1. Business purpose
4. OPERATING AGREEMENT/ PARTNERSHIP AGREEMENT
  1. Capital contributions
  2. Members/Partners
  3. Management
  4. Profit and Loss allocations
  5. Distributions
  6. Admission of new members/partners
  7. Absence of opening agreement or partnership agreement
5. PARTNERSHIP TAXATION DEFAULT FOR LLCs
  1. Corporate election
  2. Single member LLCs
SUCCESSION PLANNING.
1. OPERATING/ SHAREHOLDERS’ AGREEMENT
  1. Triggering events
    1. death
    2. disability
    3. lifetime
      - attempting to sell interest to third party
      - pledging interest as security
      - judicial declaration of incompetence/bankruptcy
      - receipt of bona fide offer for interest
    4. put & call options
    5. shotgun estrangement
    6. permitted transferee(s)
  2. Form of buyout
    1. optional or mandatory
    2. redemption
    3. cross-purchase
    4. wait-and-see
  3. Valuation
    1. stale valuation
  4. Funding/ Method of payment
    1. cash
    2. insurance proceeds
    3. promissory note/ installment sale
BUYING & SELLING A BUSINESS.
1. INITIAL NEGOTIATIONS
2. LETTERS OF INTENT
  1. Agreement in principle
  2. Exclusivity
  3. Dates for execution of definitive agreements and closing
  4. Non-binding but for certain terms
3. FORM OF TRANSACTION
  1. Asset purchase
    1. Buyer prefers
    2. Seller remains subject to liabilities not expressly assumed by buyer
      - product liability, environmental liability, and labor law liability are a potential pitfall for buyer in an asset purchase
    3. Requires preparation of additional documentation such as deeds, bill of sale, lease/contract assignments, etc, not required in stock purchase
  2. Stock purchase
    1. Seller prefers
    2. Buyer is subject to all seller liability, including unforeseen liabilities
4. DEFINITIVE AGREEMENT
  1. Price
  2. Method of payment
    1. Buyer may “reserve” an amount for indemnification purposes through escrow of portion of purchase funds, payment in installments, or requesting a letter of credit.
  3. Representations and warranties
    1. Seller wants to limit to “material items” and to the “best of seller’s knowledge”
    2. Buyer wants absolute representations and warranties
    3. Resolving contentious items
    4. Basket vs. Floor/Ceiling
  4. Indemnification
  5. Preconditions of closing
  6. Restrictive covenant & confidentiality
  7. Identification/exclusion of assets (asset purchase)
  8. Exclusion/ assumption of liabilities (asset purchase)
  9. Price allocations (asset purchase)
    - Buyer cannot write off amount paid for stock, but can amortize amounts paid for restrictive covenants
  10. Receivable collection
  11. Inventory Valuation
  12. Pennsylvania laws relating to sales in bulk
  13. Termination
5. DUE DILIGENCE
  1. Verification of corporate compliance
    1. providing legal opinion letters
  2. Financial review
  3. Environmental testing
  4. Employment contracts & ERISA
  5. Validity of customer lists & contracts
  6. Contracts affecting assets
  7. Intellectual property rights
  8. Product warranties
  9. Many other ancillaries
6. DISSENTERS’ RIGHTS: 15 Pa. C.S. §1930 for SHAREHOLDERS
  1. No statutory dissenter’s rights for LLC members, but may be provided for by contract
FINANCING.
1. FUNDING SOURCES
  1. Equity
  2. Debt
  3. Cash reserves
2. BANKS MUST MAKE LOANS
  1. Do not be apprehensive
  2. Without loans, banks would not stay in business
  3. Footwork, attention to fine print and a working knowledge of legal issues in loan documents will make a business stronger and build a positive working relationship with banks
3. RESEARCH LENDERS
  1. Zero in on appropriate targets
  2. Some banks lend on a conventional basis (without government support) while some banks participate in government programs
  3. Look for bank familiar with your loan type, industry, and geographic locale and has done business with clients like you or businesses like yours
  4. Seek out banks that give loans of the size and type you want
  5. Network and introduce your clients to competing banks, lawyers, accountants, local business owners for referrals or simply contact a commercial loan manager
  6. Ask competitors and other local relayed businesses for referrals
4. NEGOTIATION OF COMMITMENT LETTERS
  1. How to shop a commercial/real estate loan
  2. Who should shop the loan on behalf of the client
  3. Documentation required to shop loan:
    1. Keep it real- broad unsubstantiated statements should be avoided.
    2. Prepare for meeting:
      1. ask for detailed description of all the materials the lender wants to review
      2. complete loan application
      3. business and personal tax returns
      4. financial statements
      5. projections
      6. executive summary that details what you will use the money for and how you will pay it back
      7. promotional materials about your business such as brochures, ads, articles, press releases, etc.
      8. anticipate questions
5. IF AT FIRST YOU DO NOT SUCEEED
  1. Keep trying one lender after another until you get your loan
  2. Most businesses have to have another bank to get better terms
  3. Once you are approved, take the same loan package to a competing bank and negotiate terms
6. ALTERNATIVES TO BANK FIANCING
  1. Insurance companies
  2. Private placement/Equity investors
  3. Finance companies
  4. Non-bank lenders
  5. Factoring
  6. Leasing
  7. Options/Warrants for equity investors, insurance companies and non-bank lenders with Put/Call Options
7. NEGOTIATING FACTORS WHICH CAN HAVE AN IMPACT ON CLIENT’S FINANCIAL PERFORMANCE
  1. Better interest rates
  2. Lower loan fees
  3. Higher lending ratio on inventory
  4. Higher lending ratio on receivables
  5. Lower attorney fees
  6. Cap on Attorney fees
  7. Audit fees
  8. Longer amortization periods
  9. Longer loan terms
  10. No prepayment penalties
  11. Limitations on collateral, underlying security and loan coverage
  12. Notice of right to cure defaults
  13. No “confession of judgment” default remedy- nuclear bomb remedies
  14. No unlimited guarranty
    1. sales are growing steadily-fast
    2. debt to equity ratio continues to trend downward
    3. customers pay on time
    4. three or more years of substantial profitability
  15. Reduce loan coverage
  16. All loans as package
  17. Better representations and warranties
  18. No security interest on “hereafter acquired equipment”- could affect business ability to finance equipment in the future
  19. Letters of credit including foreign letters of credit
8. COMMERCIAL/REAL ESTATE LOAN AGREEMENTS
  1. Construction loans v. mortgage/post-construction
  2. Term loan agreement
  3. Accounts receivable lending agreement
  4. Inventory loan agreement
  5. Mortgage agreement
  6. Participation agreement
  7. Suretyship/Guarantee Agreement
  8. Promissory Note
  9. Security Agreement
  10. Assignment of Leases and Rents
  11. Control Agreement
9. LEGAL OPINION LETTER
EMPLOYMENT CONTRACTS
1. Who should negotiate?
2. How to choose an attorney to negotiate for you?
3. Terms to negotiate
  1. Duties
  2. Location of duties
  3. Service as an officer and director
  4. Check signing privileges
  5. Term of Contract
  6. Compensation
  7. Business Expenses
  8. Vacation, sick leave and leave of absence
  9. Disability
  10. Medical and financial records
  11. Billings and fees
  12. Insurance
    1. Health Insurance
    2. Life Insurance
    3. Malpractice Insurance- claims made and Tail Coverage
  13. Death Benefits
  14. Fringe Benefits
    1. Qualified Corporate Retirement Plans
      1. Money Purchase Pension
      2. Profit Sharing Plan
      3. Deferred Benefit Pension
    2. Non-Qualified Deferred Compensation Plan
    3. Medical Reimbursement
  15. Restrictive Covenants
  16. Termination
  17. Arbitration of Disputes
  18. Interpretation of Contract
  19. Separation Agreement
4. Discrimination Considerations
PROTECTING PROPRIETARY INFORMATION
1. Confidentiality Agreements
  1. Absence of confidentiality agreement/ state law protections
2. Restrictive Covenants
  1. Reasonable covenant must serve a legitimate protectable interest and:
    - Be reasonable in: 1) scope, 2) duration, and 3) geographic area
    - Should not be so broad as to create a monopoly or interfere with the public interest
  2. Sale of business vs. employment contract
  3. Modification
  4. Assignment
  5. The New Jersey Supreme Court factors:
    1. Bargained for
    2. Clearly expressed meaning
    3. In writing and recorded
    4. Reasonable as to geographic, scope, and duration
    5. Does not impose an unreasonable restraint on trade or secure monopoly for the covenant or
    6. Does not interfere with the public interest
    7. Intention of the parties when the covenant was executed
    8. Changed circumstances
  6. Blue Pencil Rule
INCENTIVE AGREEMENTS
1. Restrictive equity awards
  1. 83(b) election provides for immediate vesting / income inclusion
    - if expecting an increase in value
    - risk that value may decline below 83(b) price
  2. Will not become worthless unless value drops to zero
  3. Awards forfeited if not vested
ETHICAL ISSUES
1. REPRESENTATION OF THE BUSINESS ENTITY
  1. Conflicts
    1. Shareholders
    2. Directors and officers
    3. Employees