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PACE 2010 - Minimizing risk
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PACE 2010 - Minimizing risk


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  • 1. Minimizing Risk Through Company Restructuring Garth D. Stevens, Snell & Wilmer L.L.P. Joshua P. Hayes, Eide Bailly LLP
  • 2. 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
  • 3. Limited Liability and Piercing the Corporate Veil
  • 4. 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.
  • 5. 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.
  • 6.
    • — High risk operations
    • — Low risk operations
    • — IP assets
    • — Owned real estate
    Simple Company Structure Shareholders Company
  • 7. Common Firewall Structure Shareholders HoldCo OpCo. #1 OpCo. #2 IPCo. Real Estate Co.
  • 8. Three-Step Process
    • First – Factual analysis and planning; preliminary steps.
    • Second – Complete the Reorganization (one time event).
    • Third – Observe corporate & business formalities (ongoing).
  • 9. 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.
  • 10. 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.
  • 11. 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.
  • 12. 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.
  • 13. 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
  • 14. The End Result Building Lease IP Licenses Admin Services Agreements Shareholders HoldCo OpCo. #1 OpCo. #2 IPCo. Real Estate Co.
  • 15. Subsidiaries vs. Sister Companies Parent Co. OpCo. IPCo. Real Estate Co. HoldCo OpCo. IPCo. Real Estate Co.
  • 16. Subsidiaries vs. Sister Companies
    • Consolidated tax election?
    • Combined filing?
    Tax Filing Considerations:
  • 17. Preserving Limited Liability
    • TWO KEYS:
    • Maintenance of independent existence and operation.
    • REASONABLE capitalization and/or insurance for each company.
  • 18. 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.
  • 19. 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.
  • 20. 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.
  • 21. Thank You Garth Stevens Snell & Wilmer 602-382-6313 Joshua P. Hayes Eide Bailly 602.264.8663 [email_address]