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PACE 2010 - Minimizing risk
 

PACE 2010 - Minimizing risk

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    PACE 2010 - Minimizing risk PACE 2010 - Minimizing risk Presentation Transcript

    • Minimizing Risk Through Company Restructuring Garth D. Stevens, Snell & Wilmer L.L.P. Joshua P. Hayes, Eide Bailly LLP
    • Objectives of Reorganization
      • Protect specific classes of assets (e.g., real estate, IP)
      • Create firewalls between different businesses
      • Insulate higher risk business from lower risk business
    • Limited Liability and Piercing the Corporate Veil
    • Limited Liability
      • A fundamental tenet of corporation and LLC formation:
      • Ordinarily , a company’s shareholders will not be liable for the company’s debts or other liabilities beyond the shareholders’ equity investment in the company.
    • Piercing the Corporate Veil
      • Potential triggers:
        • Fraud
        • Deliberate efforts to hinder creditors
        • Recklessly undercapitalizing / underinsuring the company.
        • Failing to observe legal formalities that give the company independent legal status.
      • — High risk operations
      • — Low risk operations
      • — IP assets
      • — Owned real estate
      Simple Company Structure Shareholders Company
    • Common Firewall Structure Shareholders HoldCo OpCo. #1 OpCo. #2 IPCo. Real Estate Co.
    • Three-Step Process
      • First – Factual analysis and planning; preliminary steps.
      • Second – Complete the Reorganization (one time event).
      • Third – Observe corporate & business formalities (ongoing).
    • Factual Analysis & Planning; Preliminary Steps
      • Determine appropriate tax structure.
      • Identify contractual restrictions (e.g., bank loan documents; shareholder agreements).
      • Identify permit and licensing issues, including transferability.
      • Identify notices/registrations that will need to be made (e.g., IP transfers; notices to customers).
      • Obtain applicable shareholder/director approvals.
    • Tax Analysis and Considerations
      • Tax considerations – e.g., preservation of NOLs and tax credits.
      • Valid business purpose.
      • Shareholders receive stock in exchange for stock.
      • Investment position is equivalent after transaction is complete.
    • How Do We Get There?
      • Form new HoldCo.
      • Shareholders of current OpCo assign their shares of OpCo to new HoldCo (Code § 351)
      • In exchange, HoldCo issues shares to OpCo shareholders
      • The result – Shareholders now hold the same % ownership of HoldCo and HoldCo owns OpCo
      Step One – Formation of New Parent Holding Company Shareholders HoldCo OpCo.
    • How Do We Get There?
      • HoldCo forms new OpCo subsidiaries.
      • Each OpCo subsidiary issues shares to HoldCo
      • S-election for new HoldCo; Q-Sub elections for subsidiaries (watch timing)
      Step Two – Formation of New Subsidiaries Shareholders HoldCo. OpCo. OpCo. IPCo. Real Estate Co.
    • How Do We Get There?
      • Original OpCo. makes a dividend/distribution of assets to HoldCo. (Code § 368)
      • HoldCo then contributes the assets to another OpCo subsidiary.
      • OpCo’s then enter into cross agreements on arm’s length terms.
      Step Three – Transfer of Assets Shareholders HoldCo. OpCo. OpCo. IPCo. Real Estate Co. ASSETS
    • The End Result Building Lease IP Licenses Admin Services Agreements Shareholders HoldCo OpCo. #1 OpCo. #2 IPCo. Real Estate Co.
    • Subsidiaries vs. Sister Companies Parent Co. OpCo. IPCo. Real Estate Co. HoldCo OpCo. IPCo. Real Estate Co.
    • Subsidiaries vs. Sister Companies
      • Consolidated tax election?
      • Combined filing?
      Tax Filing Considerations:
    • Preserving Limited Liability
      • TWO KEYS:
      • Maintenance of independent existence and operation.
      • REASONABLE capitalization and/or insurance for each company.
    • Independent Existence
      • Think of (and treat) each company as if it was truly independent of each other company.
      • If you don’t treat each company as a separate legal entity, there is a good chance that a court won’t either.
    • Maintaining The Firewalls
      • Avoid co-mingling funds; each company with its own bank account.
      • Document inter-company transactions should be documented with written agreements on arm’s length terms.
      • Intercompany loans should be under written, interest-bearing notes or loan agreements (not just GL entry).
      • Each company should follow proper corporate formalities.
      • Where appropriate, each company should have its own employees.
      • If possible, avoid cross guaranties and cross-default terms in contracts.
      • If possible, physical segregation of businesses.
    • Capitalization and Insurance
      • The best way to avoid a creditor’s attempt to “pierce the veil” is to give the creditor no need to do so.
      • Take a REASONABLE approach to capitalizing and/or insuring each company.
    • Thank You Garth Stevens Snell & Wilmer 602-382-6313 gstevens@swlaw.com Joshua P. Hayes Eide Bailly 602.264.8663 [email_address]