PACE 2010 - Minimizing risk


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PACE 2010 - Minimizing risk

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