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Corporate Matters: F.I.R.R.M.A. Proposed Regulations Expand C.F.I.U.S. Oversite on Foreign Investment

Corporate Matters: F.I.R.R.M.A. Proposed Regulations Expand C.F.I.U.S. Oversite on Foreign Investment

C.F.I.U.S. is an interagency committee authorized to review certain transactions involving foreign investment in the U.S. Its mandate is to determine the effect of such transactions on the national security of the U.S. and, where appropriate, to deny approval to the transaction. F.I.R.R.M.A. was enacted in 2018 to expand the scope of transactions that are subject to C.F.I.U.S. review. Recently, the Treasury Department proposed regulations to implement the changes under F.I.R.R.M.A. Simon H. Prisk discusses the way in which the jurisdiction of C.F.I.U.S. has been expanded.

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Corporate Matters: Delaware Law Allows L.L.C. Divisions

Corporate Matters: Delaware Law Allows L.L.C. Divisions

Delaware recently amended its company law to enable a limited liability company (“L.L.C.”) to be divided into two or more newly-formed L.L.C.’s, with the original company either continuing or terminating its existence.  The amendment provides L.L.C. members with significant flexibility in separating from each other so that assets, liabilities, rights, and duties of the company can be allocated among the resulting companies.  Simon Prisk explains the change in company law.

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Corporate Matters: Profits Interest Basics

Corporate Matters: Profits Interest Basics

In the latest in his series of articles on the relative flexibility of limited liability companies and their desirability for use in many instances, including joint ventures, Simon H. Prisk looks at grants of profits interests as a means of compensating service providers and employees.  If done properly, these incentives can be optimized by favorable tax treatment, achieving the same or better tax results than incentive stock options available to C-corporations and S-corporations.  If done without proper thought and planning, the results may be suboptimal.  

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Corporate Matters: Partner Representative and the New Partnership Audit Regime

Corporate Matters: Partner Representative and the New Partnership Audit Regime

Commencing in January 2018, the I.R.S. began a new centralized audit regime with respect to partnerships.  It replaces the concept of a “Tax Matters Partner” with a “Partnership Representative.”  This is more than a change in name.  Unless the partnership is able to elect out of the new rules and actually does so, the I.R.S. will only deal with the Partnership Representative, and the individual partners have no right to separately appeal any tax assessment.  Additionally, the I.R.S. may now collect tax at the partnership level as a result of a tax audit.  Simon Prisk examines these and other changes – including the opt-out provisions – that will affect partnerships, partners in the current taxable year, and partners at the time that year is examined by the I.R.S.

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Corporate Matters: Joint Venture Considerations

The term “joint venture” is more a term of art than a legal concept.  Joint ventures have been described by the courts as an association of two or more persons, in the nature of a partnership, to carry on a business enterprise for profit.  Simon H. Prisk examines the decision points faced when drafting a joint venture agreement. 

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Corporate Matters: Should a Liquidated Damages Clause be Included in a Contract?

Corporate Matters: Should a Liquidated Damages Clause be Included in a Contract?

A liquidated damage clause in a contract is an attempt by the parties to estimate damages in the event of non-performance or breach of the contract.  It represents a way to compensate the aggrieved party for an act of the other party to the agreement.  To be enforceable, the amount of the liquidated damages must not be a penalty.  Simon H. Prisk explains when these clauses should be used, whether a clause may have a problem regarding its enforcement, and what standards are used for making that determination.

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Corporate Matters: Domestication of Non-U.S. Entities

Although not allowed under New York law, a non-U.S. entity may transfer its corporate charter from a foreign jurisdiction to the state of Delaware and many other states.  The process allows a non-U.S. entity to become subject to all of the provisions of state corporate law, and the existence of the corporation is deemed to have commenced on the date the non-U.S. entity was first formed.  When the process is completed, the corporation is legally formed under U.S. state law.  Simon Prisk explains.

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Corporate Matters: Initial Steps in Selling a Privately Held Corporation

Disclosure of information is a problem often encountered when representing the owners of a privately held business that is for sale.  What should be disclosed?  What should remain confidential?  How is confidential information protected?  These and other matters will arise in connection with the sale of a business.  Owners often hate disclosure, while prospective purchasers demand as much as possible, and delegate the task to officious lawyers and accountants.

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$3.1 Billion Scam – Hijacked E-Mail Accounts Invite Wire Transfer Fraud

In a public service announcement, the F.B.I. has publicized a new internet risk for business that goes beyond Russian hacking of political parties.  It is a sophisticated scam targeting businesses that work with foreign suppliers and that regularly perform wire transfer payments.  E-mail accounts are hacked, hijacked, and used by criminals to authorize bogus business payments.  The scam has been reported by victims in all 50 states and in 100 countries.  Fraudulent transfers have been sent to 79 countries, with the majority going to Asian banks in China and Hong Kong.  Simon H. Prisk examines how the scam works and advises caveat solventis.

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Corporate Matters: Earnouts

What is an earnout?  When is it used?  How long a term should be considered when computing an earnout?  Simon H. Prisk explores the ins and outs of this useful corporate acquisition tactic that makes a portion of the purchase price contingent on a target company achieving certain milestones.

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Corporate Matters: Anatomy of a Limited Liability Company Agreement – Part I

Simon H. Prisk and Nina Krauthamer begin a series on the reasons why a carefully crafted L.L.C. agreement is important in a joint venture.  Commonly referred to as an operating agreement, this governance tool addresses the purpose, management, and overall operation of an L.L.C. and the obligations of members to make capital contributions.

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Corporate Matters: If I Can Make it There, I Can Make It...

We have recently been receiving instructions from a variety of European clients looking to open either an office or retail location in New York. These clients are looking for advice across a range of topics: from location and leases to signage and insurance. In this month’s “Corporate Matters,” Simon H. Prisk addresses typical start-up legal needs of foreign clients expanding retail business to the U.S.

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Corporate Matters: Directors and Officers Insurance

Many of our clients instruct us from outside the United States to establish companies through which an acquisition or some other transaction will be conducted. After completing our “know your client” obligations for a matter involving a new client, the home country advisors instruct us to form the entity and open a bank account. This month, Simon Prisk looks at directors and officers insurance policies designed to protect incumbents from liability claims based on a failure to supervise the actions of a company. He cautions management to be wary of coverage gaps when comparing policies and costs.

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Corporate Matters: Are You Doing Business in New York?

Clients with entities formed in a state other than New York often ask if they should seek authority to transact business in New York. Typically, the client is concerned that operations in New York exist and a fear that often inhibits a company from pursuing registration is the expectation that registration brings with it New York State and New York City tax obligations. Simon H. Prisk reflects: The answer to these questions is not as clear cut as one might think.

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Corporate Matters: Buy/Sell Arrangements

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In our May issue, we discussed the implications and importance of drafting governance documents to cover the death of a business partner. We thought an appropriate follow-up would be a brief examination of buy/sell provisions.

Buy/Sell provisions deal with the transfer of ownership interests, typically within a business enterprise, when one of the partners wants out, or, potentially, wants another partner out. In either circumstance, it is not uncommon for each partner to want to carry on with the business – just as long as the other partner is excluded.

Corporate Matters: One Clause that Should Be in Every Partnership Agreement

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Our practice involves the drafting of many different types of partnership agreements and other agreements governing the relationship among individuals involved in a common enterprise. These agreements include general and limited partnership agreements, operating agreements or limited liability company agreements, and shareholder agreements for corporations. In this article, all these types of entities are referred to as “joint ventures.”

During the initial client discussions with respect to these agreements we highlight and discuss the usual laundry list of matters that co-investors should consider at the time of formation. One matter that we believe should be addressed in every joint venture agreement is what happens upon the death of a member of the joint venture. For obvious reasons, many do not want to focus on this point. However, the procedure to be followed when surviving spouses and heirs inherit an ownership interest is best handled at the beginning of the joint venture. While it may appear that all joint venture members have similar interests, relationships can change very quickly, and the bottom line is that while one may be very interested in being in partnership with a certain individual, the same interest may not attach to that person’s spouse.

Corporate Matters: Help – My Delaware Entity Has Been Cancelled!

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We have received inquiries recently concerning Delaware entities that have been cancelled by the State. This situation is not as bad as it sounds, and after a few simple steps (and a couple of checks), the entity can be reinstated.

How Does it Happen?

In Delaware, a corporation becomes “void” for failure to file its annual report. The entity becomes “forfeited” if its registered agent resigns and is not replaced. Registered agents typically resign if their annual fee is not paid in a timely manner. The registered agent is required to give 30 days’ notice of its intention to resign and will have forwarded to the address of record delinquency notices from the State with respect to unfiled reports.

The certificate of formation of a Delaware limited liability company will be cancelled if the entity fails to pay its annual franchise tax for three consecutive years, or if it fails to replace its registered agent within 30 days.

Before a Delaware corporation becomes void or forfeited or a limited liability company has its certificate of formation cancelled, such entity first ceases to be in “good standing.” This occurs as soon as an entity fails to pay certain fees or to file annual reports. While in this status, an entity cannot make any filings with the State or sue in the courts of Delaware. It is also difficult to close any transaction where a good standing certificate is required. This situation may be cured by filing the outstanding reports and paying all outstanding franchise taxes.

Corporate Matters: Partnerships

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In previous issues, we discussed limited liability companies and the various benefits of using such entities, including pass-through taxation, asset protection, ease of formation and flexibility. There are partnerships that can be used to achieve the same results that may be of particular interest to individuals from jurisdictions where the limited liability company is not recognized to the same extent as it is in the United States. These are “Limited Partnerships,” “Limited Liability Partnerships” and “Limited Liability Limited Partnerships.” We thought it may be helpful to outline the differences between these three types of partnerships. Research should be conducted on a state-by-state basis depending on the jurisdiction one is interested in – the following discussion focusses on Delaware.

LIMITED PARTNERSHIP

A Limited Partnership is a partnership where one or more of the owners are general partners and one or more of the owners are limited partners. The general partners have unlimited liability and are liable for all of the partnership’s debts and obligations. The limited partners have limited liability – limited to the amount of capital they have invested in the partnership. General partners control the partnership and are responsible for its operation. Limited partners have no say in the operation of the partnership and are subject to losing liability protection if they are found to be participating in the management of the partnership. The Delaware Revised Uniform Limited Partnership Act (“DRLPA”) provides that “a limited partner is not liable for the obligations of a limited partnership unless he or she is also a general partner or, in addition to the exercise of the rights and power of a limited partner, he or she participates in the control of the business.”

LIMITED LIABILITY PARTNERSHIP

A Limited Liability Partnership is a general partnership for which an election has been made to obtain limited liability for all of the general partners. Unlike a Limited Partnership, in a Limited Liability Partnership there are no limited partners and all partners can participate in the management of the partnership. As a general rule, the partners of a Delaware general partnership are liable for all of the obligations of the partnership.

Corporate Matters: Limited Liability Company Agreements

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In a previous issue, we discussed shareholder agreements and set out items that one should look for in such an agreement. A related topic, but one with subtle differences – particularly on the tax side – concerns the agreements used to govern the management and operation of limited liability companies. In the Delaware Limited Liability Company Act, these agreements are referred to as “limited liability company agreements,” and in the New York Limited Liability Company Law, they are referred to as “operating agreements.” In practice, however, the terms are used interchangeably. For purposes of this article, we will use limited liability company agreement (“L.L.C. Agreement”), as Delaware is the state most frequently used for limited liability company formation.

STATE REQUIREMENTS

Although many states do not require a limited liability company to have an executed L.L.C. Agreement, it is prudent to outline the internal governance procedures of the entity in a legal document. There really is no reason why the members of a limited liability company should not have a functioning governing document. An L.L.C. Agreement does not necessarily have to be a long or complicated document; it will allow you to effectively structure your financial and working relationship with your co-owners in a way that is suited to the type of business you are engaged in. Furthermore, having an agreement will help protect your limited liability status, particularly for single-member limited liability companies, as well as prevent management disagreements and ensure that the business is governed by rules of your making, rather than as stipulated by a particular state statute.

Care should be taken in drafting the agreement, however, as although many statutes provide a lot of discretion for members of a limited liability company to define the terms of their relationship – state statutes contain fundamental governing provisions that members of a limited liability company can contract out of – courts have relied on the plain language contained in the contracts and have resisted creating ambiguities based on extrinsic evidence.

Corporate Matters: Series Limited Liability Companies

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Clients frequently tell us they have heard of series limited liability companies but are unsure what they are and when they should be used. In this issue we will briefly explain the series limited liability company (“Series L.L.C.”) and outline some of the pros and cons, with respect to its formation and use.

SERIES L.L.C. ESSENTIALS

Delaware and a handful of other states have allowed the formation of Series L.L.C.’s since the mid-1990’s. A Series L.L.C. is a limited liability company (“L.L.C.”) composed of an individual series of membership interests where the L.L.C. is essentially subdivided into many separate series, each series holds distinct assets, and obligations with respect to the assets designated as being in a series. The creation of the series must be included in the Certificate of Formation and the management and operation of each series must be set forth in the Series L.L.C. agreement. The Delaware statute provides that “a limited liability company agreement may establish or provide for the establishment of one or more designated series of members, managers, limited liability company interests orassets” and that each series may have a separate business purpose or investment objective. This allows, in theory, for each series to have its own management structure and distinct business purpose.

The feature that most piques the interest of our clients is the ability of the assets of each separate series to be protected from the creditors of another. An owner of an L.L.C. that holds real estate assets, for example, that comprises both ownership and management could hold each business in a separate series of the same L.L.C., and a suit against the ownership series could not attack the assets of the management series.