About Richard W. Jones Mr. Jones is an attorney with the Atlanta, Georgia law firm of Jones & Haley, P.C. Mr. Jones concentrates his practice on corporate law and the purchase and sale of businesses through mergers and acquisitions. For further information go to www.corplaw.net
|
From the seller’s standpoint, the sale of a business is one of the most consequential events in the life of the business. Many times the seller has spent years building the business and, quite understandably, has a strong emotional attachment to his or her creation. On the other hand, a purchaser of a business generally either views the transaction as a way to enter into a new industry or a way to build an ongoing business.
There are many ways that a sale of a business may be structured, but they are all variations on three (3) general themes:
- The sale of stock
- The sale of assets
- A merger transaction.
Sale of Stock.
Sellers generally prefer to structure a transaction as a sale of stock, because in that structure, the purchaser is buying the company itself and will be acquiring all of its assets as well as all of its liabilities. In addition, the seller will receive capital gains treatment for the sale of stock, which could reduce the Seller’s tax liability.
On the other hand, from a buyer’s perspective, when he purchases the business through a stock purchase, the purchaser acquires all the liabilities of the corporation, even those that may be unknown at the time. This adds a lot of uncertainty to the transaction. On the positive side, the purchaser acquires all of the assets of the seller, including unassignable contracts, permits and licenses, without having to obtain the consent of the other party to the contract. This can be a significant benefit to the purchaser in certain circumstances where these types of contracts are central to the business and they are unassignable. For example, in a stock purchase, the purchaser obtains all intellectual property such as patents and trademarks without having those assets specifically transferred, and the purchaser receives contracts such as leases without the consent of the other party, in most cases.
Asset Sale.
Asset sales are generally favored by purchasers, because the purchaser is getting specific assets of the company, and the purchaser only assumes specific liabilities of the company which the purchaser chooses to assume. Thus, the purchaser is able to “cherry pick” the assets it desires, and it is able to avoid liabilities, which may or may not be known.
From a seller’s standpoint, the sale of assets is more complicated, because each asset has to be re-titled in the name of the buyer. This is not required in a stock purchase. In addition, the seller has to negotiate over each asset and liability being transferred. Also, the seller may be left with certain assets for which it has no use. In that case, the seller would be in a position of having to sell off those assets to another party. This case be difficult and it adds uncertainty to the transaction.
Merger
The third basic alternative for structuring the sale of business is through the mechanism of a merger. A merger is fundamentally different from the sale of a business through an asset sale or stock sale, because generally the seller receives the stock of the purchaser, and in many cases the seller is asked to stay on and run the business. Thus, the seller continues to be tied to the business either as an operator or as owner going forward. There are variations on this theme, and the seller is not always asked to remain with the business, but in any event the seller will continue to be tied to the success of the business as compared to a sale of assets or a sale of stock, which effectively terminates the seller’s connection with the business going forward.
In a typical merger transaction, the stock of the purchaser is exchanged for the stock of the seller, so after the transaction, the selling corporation can become a subsidiary of the purchaser or it can be completely absorbed by the purchaser. In any event, the shareholders of the seller now become shareholders of the purchaser.
One of the benefits of a merger is that it can be completely tax free or it can be partially tax free or entirely taxable to the seller depending on the structure of the transaction. As a result, mergers are driven by the tax implications of the transaction more so than a sale of stock or assets. In a merger, there are many other strategic implications such as the vision of the purchaser going forward on a post-merger basis. The seller may or may not agree with this vision and therefore, it is important that strategic objectives be balanced against the tax consequences in order to have a successful merger.
In addition to the three (3) options discussed above, there are other strategic alternatives that may be available in structuring the sale of a business, for example, the development of a partnership or a joint venture. However, the three (3) alternatives discussed above, generally provide the basis for the sale of most businesses, although there are an infinite number of variations used to accomplish the goals of the buying and selling parties. For this reason, it is crucial for the buyer and seller to have experienced legal counsel to advise them on the best structure to meet their particular goals and to minimize the tax implications and the risks of the transaction.
This article is not intended to be an in-depth discussion of the issues presented, but is only an overview of the structural options available to a seller or buyer of a business. For this reason, it is limited in its scope. However, I intend to provide subsequent articles that will discuss each of these options and their advantages and disadvantages in more detail. So stay tuned.
Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta, Georgia law firm of Jones & Haley, P.C. He has over 30 years experience representing clients in securities and corporate matters. Please see our website at http://www.corplaw.net/.
When Jones & Haley incorporates a business for a client, we always inform them of the importance of having annual shareholder’s meetings. Some clients are conscientious and make sure they have shareholders’ meetings every year, while others ignore the requirement. Why is it important for the corporation to have an annual meeting after all?
Every state requires that a corporation formed under the laws of the state to conduct annual meetings. In Georgia, that requirement can be found in O.C.G.A.14-2-701(a), which states that: “A corporation shall hold a meeting of shareholders annually at a time stated or fixed in accordance with the bylaws.” The state has no enforcement mechanism to require annual meetings, and there are no state penalties that may be imposed for failure to conduct annual meetings. However, the Georgia Code and the corporate codes of most states provide an enforcement mechanism through the shareholders of the corporation. Under those code sections a shareholder of the corporation may apply to the courts to order an annual meeting if one is not held within certain time frames. Obviously, an annual meeting forced in a manner such as this could wreak havoc on the relationships of the shareholders.
One of the most important advantages of operating a business in a corporate structure is to provide limited liability to the shareholders. That is, the shareholders’ exposure to liabilities for the debts and acts of the corporation is limited to the amount of money they invested in the corporation. This protects the shareholders’ other assets from exposure in the face of potential massive liability. Thus, the importance of limited liability to the corporate structure cannot be over emphasized.
If a corporation does not meet certain requirements, it can lose its limited liability protection. One of the requirements of maintaining limited liability is that the corporation must carefully observe certain corporate formalities. These corporate formalities generally involve dealing with the corporation as a separate legal entity. This is accomplished by the corporation maintaining separate books, maintaining a separate checking account and brokerage account, by signing contracts and other documents in the name of the corporation, and by conducting a regular annual meeting of shareholders. Accordingly, when a corporation fails to hold its annual meeting, it runs the risk of losing its limited liability or at least it endangers its limited liability status.
In addition to the foregoing, and as a more practical matter, a corporation that fails to maintain its annual meetings can jeopardize its ability to engage in certain transactions that may be to its benefit in the future. For example, we have represented many business owners who have bought and sold their corporations. I can tell you of many situations where my clients were preparing to purchase a corporation and when we asked for a copy of their annual minutes, they did not have them. In these situations, the deal was not always destroyed for this reason alone, but the failure to conduct annual meetings, is seen as a red flag and consequently there was a fear that there may be other problems with the deal. This, in turn, causes the due diligence team to dig deeper to see if there are other problems with the corporation. Likewise, we have represented sellers of corporations who do not maintain their annual minutes, and one of the first things we did in order to make sure the transaction is not endangered was to examine their annual shareholder meetings to make sure to document those meetings that had not previously been documented.
Accordingly, for state law purposes and as a matter of good corporate practice, it is important for the corporation to carefully observe the requirement of an annual meeting of shareholders. It is also important that that meeting be documented and a written record of the meeting retained. In that meeting, the shareholders should take action to elect the directors of the corporation on an annual basis. The Board should also approve any fundamental corporate acts that have occurred that year, such as the establishment of an employment benefit plan, execution of major contracts, execution of employment agreements, and other fundamental corporate actions.
Conducting these meetings will aid the corporation in complying with its legal requirements, and will improve the position of the corporation later on when it seeks to engage in major corporate transactions. For these reasons, it is very important that all corporations, no matter their size, make sure that they conduct shareholders’ meetings on a regular basis, and at least annually.
Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta, Georgia law firm of Jones & Haley, P.C. He has over 30 years experience representing clients in securities and corporate matters. For more information please see our website at http://www.corplaw.net/.
In September, 2011 the Georgia Supreme Court ruled that the common practice of having garnishments processed and answered by clerical staff was impermissible. They ruled that in the future such answers would be considered the practice of law, and therefore garnishments could only be answered by a licensed attorney in the State of Georgia. This caused severe hardships for many companies who process garnishments on a routine basis through the use of clerical staff. As a result, a general outcry was heard from the business community. The State Legislature heard this outcry, and they have now wisely passed a law to overturn the decision of the Georgia Supreme Court. The new law takes effect immediately.
Under the new law which has passed both Houses and which has been signed by the Governor, businesses in Georgia may now process and answer garnishments as before without the use of an attorney. However, there are 2 aspects of the new law of which businessmen should be mindful. The first is that the new law risks being struck down by the Georgia Supreme Court, because there is a question of whether the Georgia Legislature can overturn a decision of the Georgia Supreme Court. This issue arises because the Georgia Supreme Court has the power to regulate the practice of law in Georgia. As a result, the Legislature may not have the power to overrule the Georgia Supreme Court on this issue. Second, the exemption only covers answers to the garnishment, so an attorney must still be hired if a claim is to be filed in response to the garnishment.
For the time being, the Legislature’s actions have returned us to the status quo in this area, but businessmen should keep their eye on this matter, because further changes could be made in the future.
Richard W. Jones is business lawyer and corporate attorney with the Atlanta, Georgia law firm of Jones & Haley, P.C. and he has over 30 years experience representing clients in corporate, and mergers and acquisition matters. See our website at http://www.corplaw.net/.
Welcome to Corporate Law and Mergers and Acquisitions. The purpose of this blog is to provide useful information to the business community and the public in general about business law and corporate legal matters. I hope to provide information that is useful to start-ups, to entrepreneurs, and to those who are operating successful businesses that are affected by developments in the corporate law area. I will discuss matters involving corporations, limited liability companies, limited partnerships, and general partnerships. These discussions will involve the formation of these legal entities, practical operational issues, and important current developments.
In addition to business and corporate law, I will also discuss topics involving the sale of businesses through stock sales, mergers, sale of assets, and other legal structures that are appropriate and strategic for the transfer of ownership of a business. This is a topic that faces many successful businessmen and women and it can be one of the most important transactions a business owner faces in the life of his/her business. With over 30 years of experience in these types of transactions, I hope to provide answers that the common business owner can use if he is planning a business sale or purchase transaction or if he/she is approached by a potential buyer who proposes to buy his business. After all this can be the opportunity to cash in on all the hard work it took to build the business.
I have handled hundreds of transactions of this nature over the past 30 years, and I am hopeful I can use that experience to provide practical and helpful information to business owners and those who are contemplating starting a business. I also hope that my blog posts prompt lively discussions and that these issues are debated and examined.
I look forward to the challenge, and I look forward to hearing from you. If you have input please leave a comment or if you would like to contact me directly you may do so by email by using the email widget located on the left-hand side bar.
Richard W. Jones is an attorney with the Atlanta, Georgia law firm of Jones & Haley, P.C. and he has over 30 years experience representing clients in corporate business matters as well as in mergers and acquisitions and the sale and purchase of businesses. See our web site at www.corplaw.net.
|
|