![Thank You Garth Stevens Snell & Wilmer 602-382-6313 gstevens@swlaw.com Joshua P. Hayes Eide Bailly 602.264.8663 [email_address]](https://image.slidesharecdn.com/minimizingrisk-101012104337-phpapp01/85/PACE-2010-Minimizing-risk-21-320.jpg)
PACE 2010 - Minimizing risk
- 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 gstevens@swlaw.com Joshua P. Hayes Eide Bailly 602.264.8663 [email_address]