drafting buy/sell agreements for closely held …• identifying most highly negotiated provisions...

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


TYPES OF BUY/SELL AGREEMENTS

Types of Buy/Sell Agreements


• 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


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


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?


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


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?



• Formula clauses

• Difficulties in reaching formula that capture value

• Common approach: multiple of EBITDA, normalized over

period of years

• Time limitations



• 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?)



• Dispute resolution


Funding Buy/Sell Arrangements

• Entity financing

• Earn outs

• Commercial borrowing (e.g., SBA 7(a))

• Insurance

• Other funding sources


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


1

© 2008 Venable LLP

BUY-SELL AGREEMENTS - TAX ISSUES

Norman Lencz, Partner

[email protected]

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


© 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


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


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


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


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


© 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

drafting buy/sell agreements for closely held …• identifying most highly negotiated provisions...

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