Hard Times Business Acquistions

"Theodore B. Polk is managing Director at Citigroup Capital Strategies, and he was kind enough to share his thoughts [with PLI's In Brief] in Acquiring or Selling the Privately Held Company — 2009. The article is a great retrospective on where we were prior to the slowdown and how deals are moving forward. Though written in February, things haven't progressed so much that the value isn't still as good as then, particularly in its generalized description of how markets change when an economy slows. Whereas in flush time, sellers care primarily about the price they will receive for their businesses, when times are tough, they look at price combined with whether the purchaser can actually follow through with the deal. Thus deals that have been getting done do so "because the buyers took advantage of their superior access to capital and welcomed the opportunity to buy well-run operations at a time when others were struggling to do so." Anyway, Polk offers some pointers on the kinds of businesses that look to sell in the current environment and how to get these deals done, regardless of the market conditions. He also looks at what factors will drive a market turnaround. (Hint, higher future tax rates make doing deals now more attractive.) And turnaround will come."

Using ESOPs to Transfer a Business to Employees

"An employee stock ownership plan (ESOP) is a tool business owners use to achieve three common exit objectives: 1. Leave the business soon 2. Leave the business with cash adequate enough for financial security 3. Leave the business to employees

"An ESOP is touted as allowing business owners to cash out at fair market value from their businesses, pay no taxes on the sale and transfer their companies to their employees in the process. To separate truth from fiction - or reality from hype - advisors need to address the following questions when they meet with business owners who want to transfer their business to key employees.

"What is an ESOP?

"How does an ESOP buyout work?

"What company characteristics are needed to make an ESOP work well?

"What are the disadvantages to an owner in selling to an ESOP?

"What are the advantages to an owner of selling to an ESOP?

"This article explores each question and provides the information that business owner advisors need to answer their clients' questions about ESOPs. "

Lessons on Retaining Key Target Employees

"Common issues confronting acquirors involve retaining the target company’s key employees and protecting against the loss of business to defecting employees. A recent Delaware Court of Chancery decision addressed issues faced by an acquiror, where a group of the target company’s employees plotted to leave the target company and launch a competing business prior to the acquisition’s close. The court’s decision in Ivize of Milwaukee, LLC v. Compex Litigation Support, LLC will likely cause acquirors to more aggressively seek and obtain employment and/or non-competition agreements from key target employees, particularly where the success of the acquisition depends upon a relatively small number of key employees."

Read more in this Harvard Law School Forum article.

Copyright Licensing in a Nutshell

Copyrights arise automatically when an original work is fixed in a tangible medium of expression. These rights include the exclusive right to copy the work, to distribute the work, to prepare derivative works based on the pre-existing work, and, for certain types of works, to perform and display the work. Each of these rights can be separately transferred or licensed. Moreover, each of the rights can also be subdivided and licensed to more than one licensee.

The large number of ways in which copyright rights can be divided and subdivided increases the complexity of copyright licensing. Copyright owners can license any one or a combination of the rights and a license can be limited in scope, for example to specific media, territory, or uses.

To make the situation even more complicated, there are many different types of works that can be protected by copyrights. These include literary works, musical works, dramatic works, pantomimes and choreography, pictorial, graphic, and sculptural works, motion pictures and other audiovisual works, sound recordings, and architectural works. Each type of work presents its own complex issues.

For example, music licenses have many unique issues that need to be addressed, both factual and legal. The same is true with respect to licenses for fine arts, sculptural works, and theatrical works. Similarly, software licenses involve an array of legal and technical issues that must be understood when preparing a written license. Technology licenses, including biotechnology licenses, are similarly specialized. Copyright licenses can be used in connection with advertising, marketing materials, web site designs, manuals, and computer software.

Each type of license has its own quirks. To understand the basics, see this outline from Pillsbury Winthrop from PLI.

Checklist for a Technology Transfer Agreement

Partially adapted from the "Training Manual on Technology Transfer", by United Nations Industrial Development Organization (UNIDO)

Preliminary Statements

Identification of the parties

The opening paragraph should identify the parties to the agreement with their official names, addresses and, when applicable, the location of their governing law of incorporation. Corporations should be identified as patent and subsidiary, patent, or subsidiary alone, and their legal capacity or authority should be given.

Care in specifying the parties to an agreement ensures precise identification of licensing and licensed parties. For the licensor, this precludes the possibility of extending the licence beyond the intended entity or of not including all of the include entity. For the licensing party extend to the entire intended entity.

Purpose

The purpose of an agreement should be stated in a brief paragraph that captures the essence of why the licence agreement is being executed. It can be as simple as “ This agreement is to permit company A to make, use and sell product X in the territory, as defined in the agreement, with the help of the technical assistance and the know-how licensed under this agreement, by company B and under the licensed patents as defined in this agreement. ‘ A statement can also be made, either in this section or in the whereas clauses, on the economic aim of the contract, i.e. to produce the licensed goods economically and competitively.

Effective date of the agreement

The data when the agreement comes into full force and effect is often stated in a separate paragraphs. It can come before or after the date the agreement is signed. The effective date is sometimes defined in the definitions section of the agreement when conditions prevent showing just the date itself.

Some countries require government approval after the parties to an agreement have agreed to all of its provisions and have executed ( signed ) the document. In those cases the date of the government approval usually becomes effective date.

Whereas clauses (recitals, preamble)

The whereas clauses give the background and rationale for the agreement . They should be worded carefully to clarify the terms and conditions for people from either party who were not involved in making the agreement but who are asked later to settle conflicts between the parties. Clarity is also important in the event legal action is taken by one party against the other. In a court of law the judge may look to the whereas clauses to improve his understanding of clauses that may be difficult to interpret. Whereas clauses contain such things as licensor and licensee representation and background of the agreement.

Licensor representations

For the rest of this checklist which is a reproduction of a page from www.tannedfeet.com see this post.

How M&A Works in China

For M&A, the basic policy is as follows:

Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.

Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.

Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.

Foreigners are not permitted to purchase a majority interest in a large and financially successful Chinese company. Even smaller companies are off the table if they are financially sound and work in a core technology field or have created a strong or historically important brand.

China is remarkably receptive to direct foreign investment that creates new business activity in China. The policy towards the purchase of existing businesses and assets is the opposite. Such purchases are strongly disfavored, since they are seen as providing no net benefit to China. Under this policy regime, venture capital and troubled company buy-out businesses have plenty of room to operate. Strategic alliances in core industries also work well.

On the other hand, traditional private equity that focuses on the outright purchase of strong and successful companies simply does not work under this system. Central government regulators will consistently step in and exercise their veto powers to prevent the foreign acquisition of a majority interest in any existing, strong Chinese company. This is not likely to change anytime soon.

Read more in this article from China International Business

Negotiating a Real Estate Broker Agreement

This article discusses some of the common issues that a Company may want to explore before the Company signs and delivers a real estate broker's standard form of retention agreement.

Reverse Merger Financial Statement Requirements

This memorandum discusses the steps that a former shell company must take to comply with the SEC Staff’s position with respect to reporting financial statements in connection with mergers that cause a public shell company to cease being a shell company.

Joint Venture Agreements

Great collection of joint venture agreements at this OneCLE webpage

ESOPs in a Nutshell

"ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars. In almost every case, ESOPs are a contribution to the employee, not an employee purchase.

"An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits.

"Shares in the trust are allocated to individual employee accounts...

"Owners of privately held companies can use an ESOP to create a ready market for their shares. Under this approach, the company can make tax-deductible cash contributions to the ESOP to buy out an owner's shares, or it can have the ESOP borrow money to buy the shares (see below). In C corporations, once the ESOP owns 30% of all the shares in the company, the seller can reinvest the proceeds of the sale in other securities and defer any tax on the gain...

"ESOPs are unique among benefit plans in their ability to borrow money. The ESOP borrows cash, which it uses to buy company shares or shares of existing owners. The company then makes tax-deductible contributions to the ESOP to repay the loan, meaning both principal and interest are deductible...

"As attractive as these tax benefits are, however, there are limits and drawbacks... Private companies must repurchase shares of departing employees, and this can become a major expense. The cost of setting up an ESOP is also substantial -- perhaps $30,000 for the simplest of plans in small companies and on up from there. Any time new shares are issued, the stock of existing owners is diluted. That dilution must be weighed against the tax and motivation benefits an ESOP can provide. Finally, ESOPs will improve corporate performance only if combined with opportunities for employees to participate in decisions affecting their work."

From this NCEO webpage.

Troubled Tech Company Due Diligence Tips

"The considerations and observations listed below are by no means exhaustive, but may provide some guidance (or at least food for thought) if you are looking at acquiring a tech company, particularly a distressed tech company.

"1. Test the target’s accounts payable, accrued expenses and liabilities...
When considering the acquisition of truly distressed companies, the acquirer should also confirm that all 401(k) withholdings of employees have been properly deposited, and that all tax withholdings have been accounted for and forwarded to the appropriate federal or state agency.

2. Quantify the “Transaction Cost” of a successful transaction...
Buying companies is expensive, and when an acquirer is buying a distressed company Although this list is not exhaustive, the “one off” transaction costs include:

(a) Target’s attorney’s fees (for which payment at closing will be expected).
(b) Target’s investment bank or business broker’s success fees, if one was engaged.
(c) Cost of target’s fairness opinion, if one was obtained.
(d) Acquirer’s attorney’s fees (probably due in the ordinary course, not at closing).
(e) Possible costs associated with any consents required from target’s accountants.

3. Quantify the “Business Cost” of a successful transaction.
Similar to transaction costs, there are a number of “one off” business costs associated with an acquisition that should be quantified during the due diligence process. These include:

(a) Payments due under change of control agreements or severance agreements post acquisition.
(b) The cost of buying out leases or other costs associated with discontinuing certain operations of the target or consolidating the operations of acquirer and target.

4. Review customer contracts or licenses for out of market terms...
Terms to be aware of include:

(a) “Fixed price” contracts that require completion of a project and all warranty work at a single price.
(b) Unlimited liability of the target for work performed or intellectual property licensed to a customer.
(c) Non-competition clauses which limit the target’s ability to provide services or products to other clients in the same line of business as the customer.
(d) License terms which authorize the customer to re-license or resell target products or intellectual products built for the customer by target.
(e) Terms which permit or do not prohibit customers from hiring target’s employees.
(f) Terms which allow customers to cancel agreements or obtain other relief from target in the event of a change in control of target.

5. Confirm that intellectual property and human capital are in place...

6. Test and confirm the sales pipeline...

7. Review (and renegotiate) severance arrangements with target management...

8. Identify third-party agreements to be restructured...

9. Test the proposed acquisition structure...
At a minimum, one of the factors considered in pricing the offer should be the analysis of the market stigma facing the target’s business.

10. Do Not be afraid to abandon the transaction..."

Read more in this article by Jude Sullivan from which the foregoing is quoted.

The Perils of Using Form Agreements

Set forth here is a form of consulting agreement available from the collection of OneCle.com Business Contracts from SEC filings. OneCle provides a useful reservoir of publicly available contracts.

The problem, however, with using these or any other contracts as a model for your agreement is that your situation may differ in significant ways from the circumstances surrounding the publicly available contract (the "PAC"). For instance, the PAC may or may not have been subject to negotiation. Thus, the PAC may be stronger or weaker from your point of view than your agreement could be.

For example, the below agreement, although not completely unfair to the Consultant, could be substantially improved from the Consultant's perspective. For instance, the indemnity provision is overly broad. At the very least, a mutual indemnity obligation on the part of the Company could be negotiated.

Also, it is commercially reasonable for the Consultant to make more limited Warranties and Representations than are present below. In addition, standard UCC disclaimer language is usually appropriate in such an agreement. So too would be provisions limiting the Company's remedies for breach of contract, limiting the Consultant's liability for incidental and consequential damages and limiting the total dollar amount of the Consultant's exposure to liability.