Subject: Memo regarding acquisition of an entity within and outside of Georgia, by a LLC formed in Georgia

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Solomon Alexander
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ONE STOP DESTINATION FOR WORLD CLASS LEGAL SUPPORT SERVICES SKJ Juris Services (P) Ltd. 2 nd Floor, Kundan Chambers, Thube Park, Shivajinagar, Pune 411 005, MH, India.

1 ONE STOP DESTINATION FOR WORLD CLASS LEGAL SUPPORT SERVICES SKJ Juris Services (P) Ltd. 2 nd Floor, Kundan Chambers, Thube Park, Shivajinagar, Pune , MH, India. Tel: , Fax: E. Mail: info@skjjuris.com Web site: To: Mr. From: SKJ Juris Services (P) Ltd. Date: December 21, 2011 Subject: Memo regarding acquisition of an entity within and outside of Georgia, by a LLC formed in Georgia Issue: 1. What is the procedure for acquisition of a business entity? 2. What are the implications / aspects that need to be considered by the acquiring business entity? 3. Whether a Georgia based business entity will face any challenges in acquiring a business entity formed within and outside of Georgia. Analysis: We have carried out our research of the State laws and procedures relevant to acquisition of business entities/ companies, (including corporations, LLCs, and Partnerships). 1 And our memo is as follows: For the purpose of this memo, the parent company is the acquiring company and the target company is the acquired company. A. Methods in which a legal acquisition can be done Merger and Consolidation 3 The parent company can form a U.S. subsidiary and merge or consolidate it with the target company. 1 A Legal Guide to Acquisitions and Doing Business in the United States, Baker & McKenzie; January 1, The acquisition of an existing American company or an ownership interest therein, Aaron N. Wise (last accessed December 20, 2011). 3 As per Official Code of Georgia Annotated (O.C.G.A), there are specific provisions related to merger. The merger procedure laid down in this memo is similar to the said specific provisions of O.C.G.A. So far as acquisition through other modes is concerned, the procedure laid down in this memo is generally followed by the entities irrespective of its formation in any given State within the United States. This study has been derived out of the legal guide to acquisitions and doing business in the United States, See Supra Note 1. 1

2 i. Two entities are joined under which all assets and liabilities become the property of the surviving entity. (Surviving entity is the entity that would be in existence after merger or consolidation). ii. For a merger or consolidation, a certificate of merger or consolidation (or any other document so required for the purposes of merger for that particular State), or any other document in addition as required by the laws of that State, must be filed with the Secretary of the State, where an entity is acquired. iii. For an effective merger, all the shareholders / members of an entity must consent to the merger. 4 iv. A merger with a listed public company will require the approval of the target company s stockholders / shareholders and therefore will be subject to securities regulations under the Securities Act, Securities Exchange Act, Trust Indenture Act, Investment Company Act, Investment Advisors Act. 2. Asset Acquisition The parent company can form a U.S. subsidiary company, that will acquire all or a part of the assets of the target company. i. It can be difficult to transfer assets, licenses, permits and franchises in the name of new business entity, since consent of the issuing government agencies have to be obtained. ii. The advantage of this method is that the buyer does not normally assume the obligations and debts / liabilities of the target company, unless specified by contract. iii. The target company or its owners may be subject to tax on the gain from an assets sale, and hence buyers prefer a share acquisition (explained below) for saving taxes. 3. Stock / Share Acquisition The parent company may purchase all or part of the shares / stock or ownership interests of the target company, directly or through a U.S. subsidiary. i. This is the simplest form of acquisition, especially for privately owned companies. When all the stockholders / shareholders are ready to sell, this method is the most appropriate. ii. The advantage of this method is that all assets remain in the target company and few transfer documents are required. 5 Also transfer taxes are limited or avoided. iii. The target company retains its assets, licenses, permits and franchises, taxes and liabilities. 6 If there are any undisclosed liabilities, then pursuant to the indemnity clause, the target company shall be responsible for discharging the undisclosed liabilities. 4 A Legal Guide to Acquisitions and Doing Business in the United States, Baker & McKenzie; January 1, A Legal Guide to Acquisitions and Doing Business in the United States, Baker & McKenzie; January 1, A Legal Guide to Acquisitions and Doing Business in the United States, Baker & McKenzie; January 1,

3 iv. A share / stock acquisition for cash is a taxable transaction for the selling stockholders / shareholders. 7 B. Process of Acquisition: Pre-acquisition & Acquisition Process Documentation: 1. Letter of Intent ( LoI ): The parties may decide to execute a LoI which will contain an outline of the transaction, broadly covering the following aspects. The list below is not exhaustive. A letter of intent is not binding on the parties, 8 and may be altered from time to time. Besides, with or without a letter of intent an acquisition agreement can be prepared for negotiation. (a) Determination of acquisition price. (b) Consideration for acquisition. (c) Manner of payment of consideration. (d) Time frame for acquisition, merger. (e) Details of law firms responsible for creating the agreements. (f) Scope of initial due diligence, which records will be made available for completing due diligence? (g) How much time will the Target Company allow for negotiations? (h) How much compensation (referred to as bust up fees) will the acquiring company be entitled to in the event the target company is acquired by another company? (Once news of the proposed merger leaks out, the Target Company is "in play" and other companies may make a bid to acquire the Target Company). (i) Will there be any operating restrictions imposed on either company during negotiations? For example, the two companies may want to postpone hiring new personnel, investing in new facilities, issuing new stock, etc. until the merger has been finalized. (j) Will there be any adjustment to the final purchase price due to anticipated losses or events prior to the closing of the merger? (k) Limitations imposed, etc. Initial Due Diligence: It is an investigation of the target company s business operations and financial statements. Before such investigation, a confidentiality agreement is entered into with the target company relating to access and confidential treatment of the information obtained from the target company The acquisition of an existing American company or an ownership interest therein, Aaron N. Wise (last accessed December 20, 2011). 8 A Legal Guide to Acquisitions and Doing Business in the United States, Baker & Mckenzie; January 1,

4 Regulatory considerations: The following regulations need to be followed wherever / if necessary and also to check whether the target company has followed all regulations as in existence. (a) Foreign Investment approvals CFIUS (Committee on Foreign Investment in the United States) investigation. (b) Bulk Transfers: Notice to creditors and other formalities. (c) Other limitations and notices: The Hart-Scott-Rodino ( HSR ) premerger notice The HSR Act established the federal premerger notification program, which provides the Federal Trade Commission (FTC) and the Department of Justice (DoJ) with information about large mergers and acquisitions before they occur. Securities Law Considerations. 2. Acquisition Agreement: This is the final purchase agreement that will complete the acquisition. (a) Description of transaction: Transfer of assets, shares or merger, price and terms of payment, price adjustment. (b) Liabilities assumed in asset acquisitions. (c) Representatives and Warranties: These are the one of the biggest concerns for both parties. It is formulated to provide disclosure of information about the target company (d) Covenants: Clauses detailing the conduct of business in the ordinary course between contract and closing, confidentiality, consents to assignments and non-assignable contracts, future employment of employees. (e) Conditions precedent to Closing: Acceptance that the representations are true and covenants are performed, no adverse changes in business, related agreements executed, legal opinions, no litigation affecting transactions, government approvals where necessary has be obtained, transfer or issuance of permits, other consents and approvals. (f) Closing: Transfer documents: Stocks, deeds, bills of sale, assignment of agreements and intangible assets. Payment: Wire transfers, escrow, promissory note. Corporate formalities: Shareholders approvals. Other matters: Obtaining non-compete agreements, employment agreements, leases and licenses, service and escrow agreements, obtain legal opinion, update articles of organization, ensure acquisition agreements are true and correct on closing, obtain resignations of managers, etc. (g) Indemnification: Coverage, threshold or deductible amount, Survival of obligations (time limits), Source of funds (escrow, holdback). 4

5 (h) Dispute resolution and governing law: Arbitration / mediation / conciliation, choice of forum. (i) Other agreements: Noncompetition agreement, Employment agreements, Lease and licenses, Service agreements, Parent or other guarantees, Ongoing supply and distribution agreements, Escrow agreements, Intellectual property agreements. Other formalities during acquisition: (a) Reserve name in relevant states, file certificate of articles. (b) Capital: Prepare entity interest certificates. (c) Management: Operating Agreement, manager managed / member managed. (d) Other organizational Matters: Obtain taxpayer identification number if applicable, qualification to do business. Post-acquisition Process: Post acquisition, the surviving entity / company or the acquired entity / company can perform its business activities subject to the LLC or corporation laws of the State where the entity / company would operate its business. State laws must be complied with, for management and other requirements, if necessary. C. Implications during acquisitions: The major aspects to consider while acquiring a company is to take into consideration the following: 1. Taxes involved. The tax implications are an overall issue and not related specifically to any State. Keeping a check on the i. Tax attributes, (Section 108 (b) (2) of the Internal Revenue Code) taxpayers must reduce 7 specified tax attributes. Net operating losses. General business credits. Minimum tax credits. Capital loss carryovers. Basis of property. Passive activity loss and credit carryovers. Foreign tax credit carryovers. ii. In an asset acquisition, the buyer may not be directly liable for income and other taxes. iii. Sales and other transfer taxes: Transfer taxes wherever applicable. 5

6 iv. Liabilities and contingent expenses, etc: 9 Assumed liabilities to be taken care off. v. Financing structure: How would the transaction be financed? vi. Purchase price allocation (if applicable) vii. Post-transaction filing requirement / elections. viii. Transaction costs. 2. Anti-trust laws under the United States Code Title 15 (The United States antitrust law is a body of laws that prohibits anti-competitive behavior / monopoly and unfair business practices). If the buyer is a big company holding an ability to control the market prices, then acquiring another company is subject to the antitrust laws and hence must notify the federal government of the acquisition. 10 The anti-competitive factor is decided by the federal agencies taking into consideration the market size, type of commerce, competing companies in the market, financial condition of the company, etc. 11 The Federal Trade Commission (FTC) and the United States Department of Justice (DOJ) become involved with a merger and acquisition through a Form 16 page form, if applicable. 3. Legal issues: Information regarding law suits and other claims pending against the target company, what other legal issues can be expected due to an acquisition. Security laws should also be kept in mind, where companies are registered with the Security and Exchange Commission (SEC). Conclusion: Our research shows that the State laws and procedures for acquisition of a business entity/ company, either by merger, asset or share acquisition as applicable in the United States. 12 There may exist State levied fees and taxes which differ in each State. Besides, documentation may vary state-wise. ************************************************************************************************* Top 10 Merger and Acquisition Tax Issues, Blake Christian, May 8, 2008 (last accessed December 20, 2011) ( last accessed December 20, 2011) 11 Mergers and Acquisitions (Part 1), Matt H. Evans, March See Supra Note 1. 6

NUVERRA ENVIRONMENTAL SOLUTIONS, INC.

NUVERRA ENVIRONMENTAL SOLUTIONS, INC. FORM 8-K (Current report filing) Filed 09/04/12 for the Period Ending 09/03/12 Address 14624 N. SCOTTSDALE RD. SUITE 300 SCOTTSDALE, AZ, 85254 Telephone 602-903-7802