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COVID-19 Tip: Action Items for Businesses after a Stay-at-home order
Following a stay-at-home order, businesses should:
(1) determine whether any portion of operations is “essential”;
(2) get clarification and/or exemptions from government officials for unclear cases;
(3) document any such determination and communicate it to employees; and
(4) optimize on-site operations to reflect the determination.
If you have questions about the foregoing or need assistance with any of these action items, please contact us.
Tips for Negotiating Commercial Agreements during the COVID-19 Pandemic
The global impact of the coronavirus has caused some U.S. companies to end their traditional commercial activity and consider new lines of business or other activities to support the global fight against the coronavirus pandemic. Companies that are considering novel engagements in light of the coronavirus pandemic will likely need to enter into commercial agreements to accomplish these goals with investors, unions, co-development partners, suppliers and other third parties.
Under traditional circumstances, these commercial agreements would take weeks or months to negotiate before implementation. However, in the current environment where speed can save lives, such commercial agreements need to be structured to permit negotiating parties to move swiftly to execution and implementation of projects, while protecting their interests. Described below are a few ways in which commercial agreements can be structured to accomplish these goals:
1) Play the Short Game. Structure commercial agreements with short terms, termination for convenience provisions and flexible renewal provisions that permit the contracting parties to engage swiftly, but exit easily when necessary or, if the working relationship proves to be positive, renew and extend future terms for longer periods.
2) Kick the Can. When time is short and parties are aligned, less may be more. Consider structuring high-level agreements with provisions that permit the parties to subsequently modify certain less time-critical items in a separate document. The high-level agreement should provide that upon execution of the separate document, the separate document will be deemed to be incorporated in the high-level agreement without further action by the parties. The resultant agreement should give comfort to the parties that key terms have been agreed, while punting less critical items to be negotiated at a later time.
3) Play Nice with IP in the Short Term. For potentially contentious issues like ownership of jointly developed intellectual property, allow each party equal ownership of such intellectual property developed within a limited window of time and state that the parties will agree as to the appropriate ownership of such property at a later time. This provision should be coupled with a covenant of each party to take all necessary action to assign ownership of intellectual property as necessary to comply with the subsequent agreement.
4) Dodge the Tax Fight. If parties are unable to come to speedy agreement on the appropriate tax treatment of various activities, provide that each party may pursue its own preferred tax treatment and thereby bear the risk associated with disapproval of such tax treatment by tax authorities in the near term. Couple this provision with language that permits the parties to come to alignment on tax treatment following execution of the agreement.
5) Delegate, delegate, delegate. Save time in near-term negotiation by including provisions that require teams to be established that are tasked with working together to determine processes and procedures for non-immediate activities. Such teams can be charged with idea generation and negotiation of such procedures, subject to final approval of management members of the contracting parties.
If you would like assistance in drafting any of the foregoing provisions, or if you would like more ideas on ways that you can structure commercial agreements, please contact us.
OEMs Look to Strategic Alliances to Acquire EV Assets and Technologies
On May 8, 2019, Akio Toyoda, President of Toyota Motor Corporation (TMC), announced that TMC would seek strategic alliances to obtain technology for electric vehicles, “develop[ing] together with those who share the same aspirations.”[i]
Toyoda’s promise reflects a recent trend for automotive original equipment manufacturers (OEM). Increasingly, OEMs are eschewing traditional mergers in favor of joint ventures and co-development alliances with other industry players to obtain necessary technology and infrastructure to support the development of electric vehicles.
For example, in July of 2019, Volkswagen AG and Argo AI agreed to establish a $2.6 billion venture to create electric vehicles for the European market by 2023.[ii] Similarly, in July of 2019, Toyota established a $600 million venture with a Chinese ride-sharing service to develop battery operated vehicles for the Chinese market.[iii]
Not surprisingly, the trend toward strategic alliances for electric vehicle development has contributed to a near-term decline in traditional merger and acquisition activity for OEMs. According to the Q1 2019 edition of Deloitte’s Automotive M&A review, total M&A deal value in the first quarter of 2019 for the global automotive sector was $12.4 billion, down from $29.4 billion for the previous quarter.[iv] Deloitte reported that the majority of OEM acquisitive activity in the quarter related to strategic arrangements to access technology.
If strategic alliances remain in vogue, OEMs seeking to acquire technologies and capabilities through such alliances should bear the following principles in mind: (1) clear delineation of management roles between partners of such alliances is critical, (2) global protection for contributed and co-developed intellectual property is paramount, and (3) exclusivity, termination and exit provisions in alliance documents must be tailored to permit flexibility and optionality.
One thing is clear, strategic alliances are the near future for the development of electric vehicles.
[i] Toyoda, Akio. “Financial Results Press Conference” Toyota Motor Corporation. 18 May 2019 https://global.toyota/en/newsroom/corporate/27803157.html
[ii] Colias, Mike; Germano, Sara. “VW Ups Its Investment in Ford’s Self-Driving Car Unit.” Wall Street Journal, 12 July 2019, https://www.wsj.com/articles/volkswagen-to-invest-in-fords-self-driving-car-unit-11562890815?mod=searchresults&page=2&pos=8.
[iii] Aquino, Alyssa. “Toyota Racing Ahead With $600M Hail-Service Co. Venture” Law 360, 25 July 2019, https://www.law360.com/articles/1181952/print?section=energy.
[iv] Deloitte Financial Advisory. “Automotive M&A Review Q1 2019.” Deloitte LLP, March 2019. https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/manufacturing/deloitte-uk-automotive-ma-review-q1-2019.pdf.
Highlights of the Initial Treasury Report on U.S. Financial Regulatory Reform
In February of 2017, President Donald Trump issued an executive order (the “Executive Order”) identifying “core principles for regulating the U.S. financial system” and directing the U.S. Department of the Treasury (the “Treasury”) to study and recommend potential regulatory reforms to align United States (“U.S.”) financial system regulation with the core principles.
On June 12, 2017, the Treasury published an initial report (the “Treasury Report”), that identified several areas for reform of the regulatory framework for the U.S. banking system. The Treasury Report contained recommendations for, among other things, reducing regulatory overlap and duplication by banking sector regulators through the consolidation of regulatory agencies, revamping regulatory agency mandates, increasing oversight by the President, expanding the authority of the Financial Stability Oversight Council (“FSOC”) to permit the FSOC to coordinate regulatory policy making and restructuring the Office of Financial Research to place it under the control and direction of the Treasury.
The Treasury Report recommended that financial regulatory agencies engage in a cost-benefit analysis for all “economically significant” proposed regulations and submit the analysis for public comment and also provided recommendations for increasing foreign investment in the U.S. banking system. The Treasury Report also contained recommendations for an increase in the threshold requirements for bank stress testing and living wills, and indicated the Treasury’s support for the Financial CHOICE Act of 2017’s (“FCA”) “off ramp” from regulatory oversight for highly capitalized banks.
In addition, the Treasury advocated for restructuring the Consumer Financial Protection Bureau, recommended alterations to leverage ratio rules to increase market liquidity, and suggested changes to narrow the applicability of the Volcker Rule, but did not recommend its repeal. The Treasury Report also included recommendations for easing the regulatory burden on community banks and credit unions, including modifications to the U.S. Basel III risk-based capital regime and streamlining regulatory reporting requirements.
Many of the recommendations in the Treasury Report will require repeal, modification or replacement of certain statutes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act. If the FCA is any indication, proposed legislation to repeal, modify or replace such statutes will likely pass the House of Representatives along party lines, with Democrats uniformly opposed to such measures. However, such legislation will also require 60 votes in the U.S. Senate, which means that Republicans must obtain the approval of eight Democrats. Republicans also have the option of seeking changes that can be tied to the federal budget through budget reconciliation measures, which will only require 51 votes in the Senate. Given the limited progress of Congress on approving other items on President Trump’s legislative agenda, it remains to be seen how many of the Treasury’s proposed reforms will be enacted in the near term.
Financial Choice Act: Implications for Institutional Investors
On June 8, 2017 the United States House of Representatives passed H.R. 10, the Financial Choice Act (the “FCA”), along party lines. The nearly 600-page bill includes numerous measures to repeal or roll back regulations impacting the United States financial system, but primarily targets the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The bill contains provisions that have the potential to greatly impact the interests of institutional investors. The FCA faces long odds to pass in the Senate in its current form due to the Democratic filibuster, but there is a chance that the bill or a modified version of the bill may pass.
FCA Implications for Market Risk
The FCA removes many of the regulatory safeguards that were imposed under Dodd-Frank in an effort to monitor and reduce perceived risks to the United States financial system. Among other things, the FCA eliminates Dodd-Frank’s mechanisms for supporting or winding down failing financial institutions in favor of a federal bankruptcy regime, repeals the Volcker Rule’s prohibition on speculative investments by financial institutions, exempts certain institutions from Dodd-Frank era regulations and stress tests, and eliminates the Financial Stability Oversight Council’s authority to designate certain entities as systematically important. The FCA also restricts the rulemaking and enforcement power of federal agencies, including the Securities and Exchange Commission (the “SEC”), and would require such agencies to engage in rigorous cost-benefit analyses before proposing or issuing new regulations. In many cases, the FCA would require Congressional approval for new regulations of any significance. These changes to the Dodd-Frank era regulatory scheme have the potential to greatly decrease the costs associated with regulatory compliance by institutional investors’ portfolio companies and could have the effect of increasing such investors’ return on investment.
FCA Implications for Investor Influence on Corporate Governance and Management
The FCA limits institutional investors’ ability to make shareholder proposals that can influence the governance and management of their portfolio companies. Under current rules, any holder of at least $2000 or 1% of a company’s stock for at least a year can make shareholder proposals. In contrast, Section 844 of the FCA would require shareholders to hold at least 1% of the subject company’s registered securities for a minimum of three years to be able to make a proposal. Moreover, Section 844 of the FCA would also increase the existing thresholds for resubmission of shareholder proposals, and eliminate the ability for a shareholder proposal to be submitted by proxy, representatives, agents or other persons acting on behalf of a shareholder. Section 844 of the FCA could reduce costs of defense against frivolous or ill-advised shareholder proposals which may be beneficial for institutional investors’ investment returns.
FCA Implications for Director Elections
The FCA would repeal Section 971 of Dodd-Frank, eliminating the SEC’s ability to issue rules on proxy access. However, ever since the SEC’s original proxy access rules were vacated on administrative grounds in July 2011, more than 350 public companies, including more than half of the companies in the Standard & Poor’s 500 index implemented a proxy access bylaw in response to shareholder proposals.[i] Due to such private ordering, the FCA’s repeal of Section 971 of Dodd-Frank may have limited impact.
Institutional investors may feel the impact of Section 845 of the FCA, which prohibits the SEC from mandating that issuers use universal ballots that would permit investors to choose to support both management and dissident director nominees. Accordingly, Section 845 of the FCA would gut the SEC’s proposed Rule 14a-19 that would require issuers to use such universal ballots. If the FCA is enacted, institutional investors seeking a universal ballot would need to use private ordering to obtain such ballots for elections of the directors of their portfolio companies.
Section 972 of Dodd-Frank is also slated for repeal under Section 857 of the FCA. Section 972 of Dodd-Frank requires annual disclosure of why issuers have chosen to have one person serve as both chairman of the board and chief executive officer or why two different people serve in such roles. However, this disclosure is quite similar to the disclosure required by Item 407(h) of Regulation S-K, and, accordingly, repeal of Section 972 of Dodd-Frank should not have a significant impact on the ability of institutional investors to obtain this information about management.
Implications for Proxy Advisory
Section 482 of the FCA requires proxy advisory firms to register with the SEC to be able to provide proxy voting research, analysis or recommendations. Section 482 of the FCA would require proxy firms to permit companies that receive proxy advisory firm recommendations to have access to and opportunities to comment on drafts of the recommendations, and would also require proxy advisory firms to employ an ombudsman to address complaints from such companies pertaining to accuracy of voting information. Section 482 of the FCA also directs the SEC to establish rules and procedures that would prohibit unfair and coercive practices by proxy advisory firms, including conditioning or modifying a vote recommendation based on whether an issuer purchases services or products. Certain investors have publicly decried Section 482 of the FCA, arguing that, among other things, its registration requirements and regulations would increase the cost of proxy advice, would inhibit the objective nature of proxy advice, would hamper the ability of institutional investors to make informed voting decisions during the hectic proxy season, and would ultimately be inequitable to dissident shareholders in the context of contested elections.[ii]
FCA Implications for Institutional Investor Influence Over Compensation
The FCA would also eliminate the statutory authority under Dodd-Frank for certain compensation disclosure rules that may be of interest to institutional investors. For example, Section 857 of the FCA would repeal the statutory basis for the SEC’s pay ratio disclosure rule under Section 953(b) of Dodd-Frank. Compliance with this rule is required for most reporting entities beginning in 2018; however, in February of 2017, the Acting Chairman of the SEC directed staff to reconsider implementation of the rule and established a 45 day comment period. Repeal of Section 953(b) of Dodd-Frank would eliminate future compliance costs for companies, which would remove the potential for negative pressure on investor returns. However, certain investors have voiced support for the rule.[iii]
Section 857 of the FCA would repeal Section 956 of Dodd-Frank, which requires federal regulators to issue rules that would restrict certain incentive compensation arrangements that could encourage inappropriate risk-taking by employees of certain financial institutions, and repeal Section 955 of Dodd-Frank, which is the basis for the SEC’s proposed rule which requires issuers to disclose whether employees and directors may hedge fluctuations in the issuer’s securities. Repeal of these Dodd-Frank provisions may impact investors’ ability to evaluate risks associated with employee and compensation policies and monitor risk-taking by management.
Additionally, Section 843 of the FCA would modify the say-on-pay rules under Section 951 of Dodd-Frank. Dodd-Frank currently requires shareholders to vote on executive compensation packages at least once every three years and to determine the frequency of such votes at least once every six years. The FCA would amend the rule to require say-on-pay votes only when there are material changes to executive compensation and would eliminate the vote on say-on-pay frequency entirely. More than 90% of S&P 500 companies have adopted annual say-on-pay votes and proxy advisory firms like ISS and Glass-Lewis support proposals for annual say-on-pay votes.[iv] Accordingly, the modification of these rules would have little practical effect for many public companies, given that most public companies are likely to retain annual voting.
Section 849 of the FCA also targets for modification Section 954 of Dodd-Frank which would require national exchanges to cause issuers to claw back incentive-based pay from executives in the event of an accounting restatement that would have delivered lower incentive-based compensation. Section 849 of the FCA would narrow this claw back requirement to apply only to the executive officers with control or authority over the financial reporting that resulted in the accounting restatement. The SEC has not yet finalized its proposed claw back rule; accordingly, institutional investors may not feel the impact of the FCA’s modification of Section 954 of Dodd-Frank.
Implications for Specialized Disclosures
Section 862 of the FCA would repeal requirements codified in Sections 1502, 1503 and 1504 of Dodd-Frank that address required investigation and disclosure related to conflict minerals, disclosures on mine safety health issues, and disclosures pertaining to payments made to governments by issuers in resource extraction industries. Institutional investors may obtain higher returns on investment if issuers are not burdened by costs of compliance with these provisions.
Outlook for Institutional Investors and the FCA
It is highly unlikely that the FCA will be enacted in its current form. The bill lacks bipartisan support, and given that at least eight Democratic votes will be required to overcome any filibuster, the FCA may well be dead on arrival in the Senate. However, it is possible that portions of the bill could be passed in the Senate by Republicans through appropriations measures which will only require 51 votes. Additionally, Republicans may be able to pass portions of the FCA that have some bipartisan appeal. In any case, investors should expect Republicans to continue efforts to roll back the reach of Dodd-Frank and other statutes with regulatory requirements that impact the United States financial system. If those efforts are successful, institutional investors will stand to benefit from any boost to investment returns associated with portfolio companies’ reduced regulatory burden, but will have to rely on private ordering to protect other interests associated with managing risk and influencing corporate governance and management of their portfolio companies.
[i] See, “Proxy Access by Private Ordering.” Council of Institutional Investors, (February 2017). Retrieved from http://cii.membershipsoftware.org/files/publications/misc/02_02_17_proxy_access_private_ordering_final.pdf.
[ii] See Letter from Jeff Mahoney, General Council, Council of Institutional Investors, to The Honorable Jeb Hensarling, Chairman, Committee on Financial Services, United States House of Representatives et al. (Apr. 29, 2017), available at http://www.cii.org/files/issues_and_advocacy/correspondence/2017/04_29_17_letter_cmte_fin_serv.pdf.
[iii] California Public Employees’ Retirement System. (2017). CalPERS Joins Other Investors in Continued Support of “Pay Ratio” Disclosure Requirement [Press release]. Retrieved from https://www.calpers.ca.gov/page/newsroom/calpers-news/2017/calpers-joins-other-investors
[iv] See, Compensation Advisory Partners. (2017). Say on Pay Vote Results (S&P 500). Retrieved from https://www.capartners.com/wp-content/uploads/2017/05/2017-SoP_Update_5-15-2017.pdf
Key Provisions To Include In Your Confidentiality Agreement
Many companies require employees, agents and third parties to sign form confidentiality agreements to protect such companies’ proprietary information and trade secrets. This week, the Securities and Exchange Commission (SEC) signaled that such seemingly innocuous agreements could land such companies in hot water for violation of federal law.
On April 1, 2015, the SEC announced enforcement action against KBR, Inc. for requiring employees to sign a form confidentiality agreement as a routine part of internal investigations. The SEC found that language in KBR, Inc.’s form confidentiality agreement could potentially discourage employees from communicating with the SEC about possible securities law violations in contravention of the whistleblower protections of Rule 21F-17 of the Dodd-Frank Act. Rule 21F-7 provides in relevant part:
“No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”
The relevant language in KBR, Inc.’s form confidentiality agreement seemed innocent enough:
“I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.”
The SEC found that KBR, Inc. had never taken action to enforce the confidentiality agreement and no employee had ever been prevented from communicating with the SEC about securities law violations. Nevertheless, the SEC determined that the language in KBR. Inc.’s confidentiality agreement was restrictive enough to discourage employees from reporting to the SEC. The SEC required KBR, Inc. to pay a fine, revise its form agreement and contact all employees that had signed the agreement since 2011 to advise them (1) that they are not prohibited from reporting violations of federal law or regulations and (2) that prior notification or authorization from KBR, Inc. to make such reports is unnecessary.
Rule 21F-7 is broad and applies to the restriction of any “individual” that may seek to make whistleblower reports. Accordingly, it applies to confidentiality agreements used not only for employees, but ANY person that may sign a form confidentiality agreement with a company subject to the Dodd Frank Act in ANY context. In light of the SEC’s enforcement action in KBR, Inc.’s case, managers of public companies (and private companies that engage in securities offerings or other activity subject to the Dodd Frank Act) should take the following actions to ensure compliance with Rule 21F-7:
1) Review all form confidentiality agreements to ascertain whether they contain (1) language that could restrict a signatory from reporting possible violations of federal laws or regulations, or (2) language that requires prior authorization or notification before an individual may report possible violations of federal laws or regulations.
2) Revise all form confidentiality agreements to include explicit language explaining that the signatory has the unrestricted right to report possible violations of federal laws or regulations or make other protected disclosures. Explicit language should also be included to indicate that no prior authorization or notification is required to make such reports or disclosures.
3) Contact previous signatories of form confidentiality agreements that remain in effect to inform such signatories of their rights under Rule 21F-7. Maintain written documentation of such contact in case of any future investigation by regulators.
If you have questions about Rule 21F-7 or if you would like assistance in reviewing or updating your confidentiality agreements, feel free to contact us for assistance.
Buying an Existing Franchise Unit
Purchasing a franchise unit can be a great way for an entrepreneur to benefit from an established business model and the guidance and brand recognition of a franchisor. However, entrepreneurs may be able to avoid the time and cost of establishing a franchise unit from the ground up by purchasing an existing franchise unit from an existing franchisee. Existing franchisees may have a variety of motivations to sell their units: to pursue other occupations, retire or perhaps because the business is distressed. In any case, you should take certain steps to protect yourself as you consider and execute the purchase of an existing unit:
Business Due Diligence: Begin by evaluating the purchase opportunity as you would any other franchise unit or business purchase. Review the franchisor’s disclosure documents, talk to existing franchisees, and consider whether the franchise represents a business that is right for you. In addition to this basic diligence, you should make efforts to learn about the health of the existing unit. Ask the seller probing questions about the nature of the business and its relationships with employees. Review the unit’s historical financial statements to determine trends in business revenues, key expenses and financial risks. Try to determine what investments may be necessary to maintain or improve operations and attempt to discover whether there may be future market trends that could impact the health of the business. Additionally, try to determine if the seller has operated the unit in accordance with the franchise model. If not, this may present an opportunity for you to improve the business quickly or it may be an indication of other problems with the business itself or the franchise as a whole.
Investigate the Franchisor’s Requirements: Often franchisors will require any purchaser of an existing unit to meet the minimum net worth and liquidity requirements applicable to typical franchisees. Franchisors may also require purchasers to engage in training and be approved by the franchisor before a purchase can occur. Additionally, the franchisor may require certain upgrades or investments at or near the time of purchase. Discuss these details with the franchisor and the seller and review the franchisor’s disclosure documents and the existing franchise agreement to plan appropriately for these issues.
Negotiate the Purchase Agreement: Most franchisors will require payment of a transfer fee to the franchisor in the event of a sale of an existing franchise unit. Be sure that you negotiate how this fee will be shared or how the purchase price will be adjusted to account for this fee. Additionally, the purchase agreement should stipulate how the franchise agreement will be transferred. Often parties will determine that the purchaser will assume the remaining term of the agreement and sign a new agreement with the franchisor at the end of the term. Be sure that your method of transfer conforms to the franchisor’s requirements as stipulated in the franchisor’s disclosure documents for transfers of franchise agreements. You should also make sure that the purchase agreement contains representations and warranties regarding the business and that the seller is held responsible for making all material disclosures about the business to you.
Use good legal counsel. Engage legal counsel that will protect your interests in negotiations with the seller and assist you in identifying issues and risks in relation to your purchase. If you are considering buying a franchise unit, feel free to contact us for assistance.
Stock Purchase, Asset Purchase or Merger?
There are a variety of ways to structure the sale or acquisition of a business or enterprise. The most common methods are stock purchases, asset purchases and mergers. Determining which structure to use is often a matter of negotiation and is impacted by the various considerations of the parties to the transaction.
Stock purchases. In a typical stock purchase transaction, a buyer pays to acquire the stock of the business target. Through such purchase, the buyer assumes the assets and liabilities of the business and can step into the shoes of the former owners with regard to existing agreements as well as title to assets and ownership of liabilities with limited documentation required. In the case of a business with a large number of stockholders, like many publicly traded companies, the buyer will often take precautionary measures to ensure that all stockholders, or at least the vast majority, will agree to sell their stock. Buyers will also seek to negotiate protective provisions in the sale agreement like indemnity provisions and representations and warranties from the owners to protect against unforeseen liabilities or undisclosed issues with the business.
Asset purchases. In an asset purchase scenario, a buyer pays for specific assets and specific liabilities of the target company. In this scenario, the parties must work together to identify the appropriate assets and liabilities for transfer and take all necessary steps, including obtaining third party consents, executing transfers of deeds, bills of sale, assignment and assumption agreements and other documents to transfer title or ownership of the each purchased asset and liability from the seller to the buyer. This can be a time-intensive process, but is often preferable when a buyer is not interested in acquiring the entire business or where the buyer wants to be certain about the assets and liabilities it will acquire. Parties to an asset purchase transaction must also negotiate the allocation of the purchase price to the purchased assets for federal taxation purposes.
Mergers. In a merger transaction, two business entities are combined into a single entity, typically when a subsidiary of the buyer entity purchases the stock of the target business. Like a stock purchase scenario, the buyer entity assumes the assets and liabilities of the target business with limited documentation. Mergers are often preferable to a traditional stock purchase transaction in cases where there are a large number of stockholders, some of whom may not be willing to sell their shares. In that case, a merger can typically occur as long as a majority of the stockholders agree to sell their shares.
A merger or acquisition of a company can take many different forms. Ultimately, the parties to the transaction must consider their goals from a financial and future operating perspective to determine which transaction structure is appropriate. If you need assistance in determining the transaction structure that is appropriate for you, feel free to contact us for assistance.
Selling Your Business
Selling a business can be a time-consuming, emotional and stressful process. We’ve compiled the following tips to help you prepare:
1) Get organized. Compile your key documents and maintain them in a fashion that is easily accessible. Key documents include: financial statements and tax returns for the previous three years, contracts and agreements with vendors and customers, board resolutions, copies of leases, licenses, and insurance policies, lists of tangible assets and lists of intellectual property. We recommend maintaining copies of these key documents on a secure electronic platform that enables you to grant your advisers and potential buyers access to the key documents as they perform due diligence.
2) Protect Your Information. During the sale process, you will reveal sensitive information about your business to advisers and to potential buyers, some of whom could be your competitors. Make certain that each of your advisers and each potential buyer is bound by a confidentiality agreement and non-disclosure agreement. If you need assistance in preparing a customized confidentiality and/or non-disclosure agreement, contact us. Although a confidentiality agreement will not guarantee that sensitive information about your business is never exploited, it will send a message to your advisers and potential purchasers that you value your business information and that you are serious about protecting it. You can also take precautions to limit disclosure of sensitive information by requiring potential buyers to make good faith deposit and offer before releasing your most sensitive information.
3) Don’t ignore taxes. Tax planning is a crucial part of structuring an effective business sale strategy. Talk with your accountant or tax adviser about the recognition of gains from the sale to determine the optimal timing for sale proceeds. For example, you may determine that it is optimal for your tax planning needs to accept a promissory note instead of cash for a portion of the purchase price to minimize the immediate tax impact of the sale. In the context of an asset sale, you will also need to consider the tax effect of the allocation of the purchase price to the purchased assets.
4) Be flexible. Determining an appropriate purchase price and negotiating payment terms with a potential buyer is an art, not a science. You can often generate more value for yourself over the long-term by being flexible in negotiations than a more rigid approach. Rely on your legal and financial advisers to assist you in evaluating appropriate sale structures and maximizing realized value for your business.
5) Use good legal counsel. You’ve spent a lot of time developing and growing your business. You should engage legal counsel that will protect your interests and help you realize the full value of your business as a going concern. Feel free to contact us for assistance as you prepare for the sale of your business.
Obtaining EB-5 Financing for Your Business or Project
Since 1990, EB-5 financing has become an increasingly popular way to fund commercial enterprises and real estate projects at competitive rates. If you are interested in seeking EB-5 financing for your commercial enterprise or project, here are a few things you should know:
What is EB-5 financing? The term “EB-5” refers to the fifth employment-based visa preference category under the Immigration and Nationality Act of 1990 (“INA”). Under this provision of law, foreign nationals may obtain a green card by investing $1,000,000 in a new commercial enterprise in the United States or $500,000 in a new commercial enterprise located in a rural area or an area of high unemployment in the United States. The investment must create at least 10 full-time jobs for qualified United States workers.
Regional Centers: EB-5 investment funds may be pooled together by public or private entities that receive approval by U.S. Citizenship and Immigration Services (USCIS) to invest in industry-specific projects that promote economic growth in specific geographic areas. Such entities are called “regional centers”. Regional centers market the E-B5 visa program to foreign investors, assist the foreign investors with E-B5 visa applications and invest the foreign investors’ pooled funds in appropriate projects. Foreign investors that invest through such regional centers are subject to relaxed job creation requirements for their investment (i.e. indirectly created and induced jobs may be counted within the 10 job requirement).
Obtaining Financing from a Regional Center: If you wish to obtain financing from a regional center, you must find a regional center that operates in your project’s geographic area that is (1) designated to fund projects in your industry or (2) willing to seek an amendment to its industry designation to fund your project. You should endeavor to work with a regional center that is experienced in doing the marketing and sales activities required to solicit EB-5 investors and that is able to maintain compliance with USCIS reporting requirements. You can also establish your own regional center to fund your project; however, you should be aware that this is a time consuming and expensive process.
Regional Center Funding Process: To fund your project, a regional center will typically create a new limited liability partnership and will solicit foreign nationals to purchase partnership interests through a sponsorship offering. The limited liability partnership will then use the proceeds from the offering to fund your project, typically through a loan or preferred equity.
EB-5 Financing Terms: Loans from regional centers typically carry interest rates of 4-7% and terms of 5-7 years. Typically, the regional center will commit to provide you with an agreed upon amount of funding, contingent on the receipt of the E-B5 visas from USCIS. Once the EB-5 visas have been granted, the lender will provide the funds to you and require collateral to guarantee repayment.
Uses of EB-5 funds: The full amount of the E-B5 funds must be used in a job creating enterprise and should not be held in in your business or project reserves. E-B5 funds can be used to repay a bridge loan if it’s clear in the loan documentation that the bridge loan was made in contemplation of the EB-5 financing.
If you are considering E-B5 financing for your business or project, feel free to contact us for assistance.
D5 Creation