BUY-SELL AGREEMENTS, PART 1 & PART

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1 BUY-SELL AGREEMENTS, PART 1 & PART 2 First Run Broadcast: June 21 & 22, :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 even successful closely-held companies. Buy/sell agreements, however, create a market among the owners of a company, providing a mechanism for a shareholder or member to liquidate his or her 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 buy out a shareholder or member s interest over time. Without these agreements, there is often no alternative for a shareholder or member 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 June 21, 2016: Types of buy/sell agreements cross-purchase among owners, entity redemption, and hybrid approaches Most highly negotiated provisions of buy/sell agreements 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 June 22, 2016: 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.

2 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.

3 VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT Fax: (802) PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name Middle Initial Last Name Firm/Organization Address City State ZIP Code Phone # Fax # Address Buy-Sell Agreements, Part 1 Teleseminar June 21, :00PM 2:00PM 1.0 MCLE GENERAL CREDITS VBA Members $75 Non-VBA Members $115 NO REFUNDS AFTER June 14, 2016 PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association) Amount: Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # Exp. Date Cardholder:

4 VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT Fax: (802) PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name Middle Initial Last Name Firm/Organization Address City State ZIP Code Phone # Fax # Address Buy-Sell Agreements, Part 2 Teleseminar June 22, :00PM 2:00PM 1.0 MCLE GENERAL CREDITS VBA Members $75 Non-VBA Members $115 NO REFUNDS AFTER June 15, 2016 PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association) Amount: Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # Exp. Date Cardholder:

5 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: June 21, 2016 Seminar Title: Buy-Sell Agreements, Part 1 Location: Credits: Program Minutes: Teleseminar - LIVE 1.0 MCLE General Credit 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.

6 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: June 22, 2016 Seminar Title: Buy-Sell Agreements, Part 2 Location: Credits: Program Minutes: Teleseminar - LIVE 1.0 MCLE General Credit 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.

7 BUY-SELL AGREEMENTS IN CLOSELY-HELD COMPANIES PETER M. BLOOM The Bloom Group LLC 5335 Wisconsin Avenue, Suite 440 Washington DC

8 TYPES OF BUY/SELL AGREEMENTS Cross-purchase among owners THE BLOOM GROUP, LLC

9 TYPES OF BUY/SELL AGREEMENTS Entity redemption THE BLOOM GROUP, LLC

10 Types of Buy/Sell Agreements Hybrid approaches Non-compensatory Compensatory Section 83 issues Vesting Coordination of entity type with insurance funding mechanism THE BLOOM GROUP, LLC

11 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

12 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

13 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

14 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

15 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

16 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

17 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

18 Valuation of Interests Dispute resolution THE BLOOM GROUP, LLC

19 Funding Buy/Sell Arrangements Entity financing Earn outs Commercial borrowing (e.g., SBA 7(a)) Insurance Other funding sources THE BLOOM GROUP, LLC

20 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

21 BUY-SELL AGREEMENTS TAX ISSUES Norman Lencz, Partner t f Venable LLP 1

22 Buy-Sell Agreements Tax Issues Tax Considerations in a Buyout 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? Venable LLP

23 Buy-Sell Agreements Tax Issues (Global) Special Issues for S Corps, LLCs and Partnerships 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 Venable LLP

24 Buy-Sell Agreements Tax Issues Special Issues for S Corps 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 Venable LLP

25 Buy-Sell Agreements Tax Issues Special Issues for S Corps (cont d) 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 Venable LLP

26 Buy-Sell Agreements Tax Issues Special Issues for LLCs and Partnerships 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) Venable LLP

27 Buy-Sell Agreements Tax Issues Issues Common to S Corps, LLCs and Partnerships 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 Venable LLP

28 Buy-Sell Agreements Tax Issues Preservation of Valuable Tax Attributes 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 Venable LLP

29 Contact Information Norman Lencz, Partner t f Venable LLP