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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: Ichabod Crane Visits His Executive Employment Attorney

Corporate Matters: Ichabod Crane Visits His Executive Employment Attorney

Washington Irving’s “The Legend of Sleepy Hollow” tells the story of poor Ichabod Crane, a school teacher attacked by a headless horseman. It is a tale fitting for Halloween by a 19th Century American author famous for his stories about rural New York State, somewhere near the Tappan Zee Bridge. In this latest retelling, George Birnbaum, a New York State attorney whose practice focuses on labor law, brings a new twist to the story. Here, it comes to light that Ichabod made poor decisions regarding his employment contract, and those decisions exacerbated work-related problems flowing from the attack.

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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: 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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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: 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.

Corporate Matters: Professional Limited Liability Companies and Professional Corporations

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In our March issue we discussed incorporation basics and entity selection. We focused on limited liability companies and corporations, as they are the most common entities used. We thought it might be helpful to follow up on that article with a brief discussion on professional limited liability companies and professional corporations.

PROFESSIONAL LIABILITY COMPANY

A professional limited liability company (“P.L.L.C.”) is organized for the sole purpose of providing professional services by licensed professionals. Generally, states don’t allow L.L.C.’s for businesses where a license is required. Licensed professionals who want the benefits of an L.L.C. must form a P.L.L.C. instead. A P.L.L.C. must be organized solely for the purpose of engaging in either a single licensed profession, or in two or more that can be lawfully practiced together. The name of the business must include the words “professional limited liability company,” or the abbreviation “P.L.L.C.” Generally, any person who is licensed to practice in a state under a designated profession may organize a P.L.L.C. A professional is a person licensed in a field such as health, law, engineering, architecture, accounting, actuarial science, or another similar field. However, licensing requirements may vary state by state. Therefore, one must thoroughly review the applicable statute for the state in which the P.L.L.C. will conduct business.

A professional or group of professionals considering incorporation would consider a P.L.L.C. for the favorable pass-through tax treatment and limited liability – a member of a P.L.L.C. is not liable for acts of another member or the entity’s debts. Note, however, that members remain personally liable for their own professional misconduct or malpractice. So, even if you practice a profession through a P.L.L.C., it is a good idea to carry malpractice insurance.

Corporate Matters: Breaking Up Shouldn't Be So Hard to Do

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We have found that clients typically have to be persuaded to think about what will happen if a commercial relationship does not work out. In this issue we will discuss break up provisions and what you should look for when entering a business relationship or other form of contractual obligation.

The problem of what happens if a relationship does not work out as planned can arise in many different legal contexts: (i) Landlord/Tenant – in some instances matters concerning lease renewal are not determined when the lease is signed, but rather, they are negotiated at the expiration of the term; (ii) Joint Venture/Partnerships – many joint ventures or partnership are set up in ways that make deadlock a distinct possibility; (iii) General Contracts – either party to a contract can breach the terms and conditions; (iv) Marriage Contracts – apparently 50% of these are breached by one of the parties (the cleanest resolution of these breaches one governed by a pre-nuptial agreement). When everyone is in a good mood the assets are divided, even when the last thing on anyone’s mind is the division of assets.

Corporate Matters: Shareholder Agreements

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In the first issue of our publication, we discussed the need and relative ease of preparing and entering into an agreement between partners and the consequences of not doing so. We used the recent case of Gelman v. Buehler 2013 NY Slip OP 01991 (March 26, 2013) to illustrate the sometimes expensive consequences of not documenting the initial agreements between partners. Following up on that, we thought it might be helpful to outline in broad terms what one should look for in a shareholders agreement.

While we have stated that it is relatively simple to prepare a shareholders agreement. Careful consideration still must be given to the contents of such an agreement, and it should be tailored to meet the needs of the parties involved. No two shareholders agreements are alike, and one size definitely does not fit all.

When one thinks of a shareholders agreement it is typically in the context of a corporation. Many of the same issues arise between partners when drafting a partnership agreement and members in a limited liability company operating agreement.

SHAREHOLDERS

All of the shareholders should be correctly named and their percentage ownership in the entity set forth. All shareholders that are entities should be in good standing, and individuals should have their complete address inserted.