In general, an M&A deal refers to one of three types of transactions:  asset acquisition, stock purchase or merger.  In M&A deals, one of the first and most important decisions facing the buyer and its counsel is to identify and select the most appropriate form of the transaction.  The buyer often has a choice of effecting the acquisition by either (1) purchasing all or a portion of the assets of the selling corporation, and usually assuming all or some portion of the liabilities associated with those assets; (2) purchasing all or a portion of the seller’s stock; or (3) merging the buyer and seller, after which only one company survives.

From a legal perspective, some of the most important issues to consider when contemplating an M&A transaction are (1) the required corporate approvals, including dissenters’ rights, to complete the transaction, (2) tax free reorganizations versus taxable transactions, (3) the seller’s liabilities and obligations assumed by the buyer, (4) the assignability of contracts, leases, and other legal rights, (5) the resulting minority interests that flow from the deal, (6) California sales tax, (7) the possibility of unwanted assets in a tax-free reorganization, and (8) how federal and California corporate and securities laws apply to the deal.

From a business perspective, some of the most important issues to consider include (1) confirming ownership of the seller’s assets, (2) reviewing the financial statements for accuracy and confirming sales figures, (3) determining leadership roles in the new organization and eliminating duplication sooner rather than later, and (4) confirming a cultural match and deciding how to reduce and hopefully eliminate cultural conflicts that almost always arise.

Finkel Law Group, with offices in San Francisco and Walnut Creek, has a thriving M&A practice that continues to grow as both buyers and sellers gain confidence in the direction the economy is heading, the impact of this growth on their particular market segments, and the increasing availability of capital to finance transactions of all sizes.

In coming weeks, we will be discussing a range of M&A issues as part of our “insights” series to help you better understand the key issues and potential pitfalls that arise in many M&A transactions.  If you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with an M&A transaction, contact us at (415) 252-9600, (925) 274-9600 or info@finkellawgroup.com to speak with one of our attorneys about your deal.

The post Merger & Acquisitions Best Practices appeared first on Finkel Law Group.

Trial lawyers best understand the process of resolving a business dispute, whether that resolution is to be made shortly after the dispute arises, after a lawsuit has been filed, or in deciding whether litigation should be undertaken.

Trial lawyers know that time spent in the early stages of a business dispute or lawsuit is needed to obtain and/or review relevant documents, interview witnesses, and develop a strategy that makes both economic as well as strategic sense.  Without trial experience, a business person will not have available to him or her the knowledge and experience necessary to give that person the advantage, position, and knowledge to make the right choice in resolving a company dispute.

The Finkel Law Group provides clients with the transactional and trial experience needed to handle decisions at the beginning of a business relationship, during that relationship, and also when disputes arise within a company, partnership, or corporation. You can reach us at (415) 252-9600, (925) 274-9600 or info@finkellawgroup.com.

The post How a Litigator Can Assist In Business Disputes appeared first on Finkel Law Group.

Our client asked for assistance negotiating the terms of the consulting and training agreement with the software company.  Upon reviewing the proposed agreement, we were amazed to discover the software company was trying to use a form contract to license the software to our client rather than entering into a consulting agreement under which our client would provide technical assistance and training services to the software company’s customers who licensed the software.  In particular, the proposed agreement required our client to indemnify the software company for acts of infringement committed by the software company’s customers, a party over which our client had absolutely no control.

We managed to negotiate a change to the indemnification provision that completely eliminated any indemnification obligations by our client for any parties or third persons.  In fact, we secured indemnification rights for our client in the event the software company’s licensees infringed on any parties’ or third person’s intellectual property rights, and our client someone got named in a subsequent law suit.  Moreover, the indemnification obligation survives expiration and termination of the consulting agreement, which is important to our client because infringement suits may not rear their ugly heads for years after the contract had expired.  Our client was quite pleased with the results.

So remember at least two things from this blog:  (1) Always read the contract in its entirety before you sign anything to make sure it’s appropriate for the transaction you’re thinking of entering into, and (2) always contact Finkel Law Group, P.C. for assistance with your technology licensing needs, whether its software or some other cool technology.

You can reach us at (415) 252-9600, (925) 274-9600 or info@finkellawgroup.com.

The post Recent Licensing Contract Victory appeared first on Finkel Law Group.

Regardless of what type of bankruptcy was filed, you must immediately cease any and all collection efforts upon getting notice of the filing. Once any bankruptcy case is filed, the Automatic Stay as described in Section 362 of the Bankruptcy Code takes effect, and virtually all actions against the Debtor or property of the estate must cease.

Watch Out for Penalties for Continuing to Collect

There are severe penalties for creditors who “knowingly and willingly” violate the automatic stay, and in addition to having to pay your own lawyer to defend you, you may get stuck paying the Debtor money damages and his attorney’s fees and expenses.

Punitive Damages Are Possible

Section 362(k)(1) of the Bankruptcy Code provides that “…an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

Some courts have interpreted the language of Section 362(k)(1) to limit the section to individual debtors (not corporations or other entities), but even in non-individual cases, most courts have allowed the recovery of damages for a willful violation of the stay through use of the Court’s general equity powers of Section 105 of the Bankruptcy Code. The Courts take these violations seriously, and even the IRS and State Officials are not immune from sanctions for willful violations of either the automatic stay or the discharge injunction.

Because there is often some delay between the time of the filing of the case and the creditor’s receipt of notice, the Courts require that the violation be “willful”, which means that the creditor must have knowledge of the filing. Once the creditor does have knowledge, however, the creditor should remedy any actions taken in unknowing violation of the stay (such as dismissing a lawsuit if it was filed after the bankruptcy case was commenced). Failure to do so promptly may also result in the imposition of sanctions by the bankruptcy court.

If the Debtor gives telephonic notice, that is sufficient to require that the creditor reasonably investigate whether the filing actually happened, and to take no further action until the creditor has done so. Bankruptcy Court records are available for a nominal charge through PACER (Public Access to Court Electronic Records), www.pacer.gov. PACER requires that you register before you can search the records, but there is no fee to register. Most attorneys who practice in the Federal Courts have accounts and can obtain the information for you.

If you want more information about bankruptcy or restructuring issues, please contact us at Finkel Law Group. You can reach us at (925) 274-9600, (415) 252-9600 or info@finkellawgroup.com.

The post Creditors: Stopping Collection appeared first on Finkel Law Group.

Software companies make money licensing their software to their customers and clients around the world.  More and more that licensing is done via the Internet.  There are many different provisions in a software license to be aware of, but the most important ones are usually the grant clause, indemnification provision and assignment clause.  These provisions are particularly important in software transactions between enterprises where the licensee process huge amounts of data, rely on the software for all day-to-day business activities, and are potential takeover targets for larger companies.

Indemnification Provisions in Software Licensing Agreements

This post discusses some important points to keep in mind when reviewing the indemnification provision in a software license.  If you represent the licensor, and the parties agree that the license should contain an indemnification provision, make sure of the following:

1. The provision should be drafted to ensure that the licensor maintains complete control of the defense and receives from the licensee the assistance necessary to mount a successful defense or settle the case.
2. Exclude from the provision’s coverage all instances where the licensor’s software is not responsible for the event that gives rise to the claim.
3. Impose a financial cap on the licensor’s duty to indemnify the licensee.  This cap should be established at an amount equal to no more than the license fees and royalties, if any, that the licensor has received from the licensee under the license.
4. Limit the licensee’s remedies to (1) modifying the software so that it no longer infringes, (2) replacing the software with non-infringing software, or (3) returning the license fees to the licensee.

From the licensee’s perspective, since its being indemnified by the licensor the indemnification provision must survive expiration or termination of the license because an infringement claim may very well be filed after the license has long ago terminated or expired.  In coming weeks I will share a real life example recently handled by the Finkel Law Group.

If you want more information about how to negotiate licensing agreements, please contact us at Finkel Law Group.  You can reach us at (925) 274-9600, (415) 252-9600 or info@finkellawgroup.com.

The post Software Licensing Agreements appeared first on Finkel Law Group.

A business owner inquired whether he had to file bankruptcy for his corporation to avoid personal liability for the company’s debt, or whether there were other options to closing out the company.  The company had few assets remaining, with a value of $20,000, and a tax debt for payroll taxes of $25,000, contributions due to the employees’ retirement accounts of $5,000 and significant trade debt, including corporate credit card debt and vendors.  The Corporation’s owner had received payments from the company designated as repayments of loans rather than salary for the two years prior to the business closing in order to reduce his personal income tax liability.

Bankruptcy Option

Since the company had already ceased operating, a Chapter 7 liquidation case would be the most likely bankruptcy option.  In a Chapter 7 case, a Trustee is appointed to liquidate assets and pay creditors according to a priority scheme set forth in Section 507 of the Bankruptcy Code.  The first priority is to administrative expenses of the Chapter 7 case which includes trustee fees and any fees for the trustee’s attorney and accountant approved by the Court.  The Trustee fees are 25% of the first $5,000;10% of the next $45,000.  Before the case were even filed, the Company would have to pay an attorney to file the case.  The fees for a business case would probably be a minimum of $5,000.  Therefore, the total left for creditors for this company would be no more than $12,385.

The Trustee could also seek to recover from the individual owner the payments he received during the year prior to bankruptcy as “preferential payments” under Section 547 of the Bankruptcy Code.  Had the owner received actual payroll compensation instead of the loan repayments, the money would not be recovered, but because the payments were in made on account of a prior-existing debt (the loans), and the owner was an “insider” the Trustee could, and most likely would, seek to recover those payments.  For that reason alone, bankruptcy might not be the best option for the corporation.

The corporate bankruptcy would also not absolve the owner of personal liability for all debts.  Some tax debts and other obligations would survive the bankruptcy filing (see future post in coming weeks).

If you need bankruptcy law assistance, please contact us at Finkel Law Group to discuss the options.  You can reach us at (925) 274-9600, (415) 252-9600 or info@finkellawgroup.com.

The post Bankruptcy Your Only Option? appeared first on Finkel Law Group.

The primary considerations in choosing a business entity is (1) the degree to which the entrepreneurs’ personal assets are protected from the business’ liabilities, (2) the availability of favorable tax strategies (like maximizing the tax benefits of start-up losses, avoiding multiple layers of taxation, and converting ordinary income to long term capital gains), (3) the company’s attractiveness to potential investors and lenders, (4) the availability of attractive equity incentives for employees and consultants, and (5) the costs of starting-up and operating the enterprise.

A limited liability company (“LLC”) combines the pass through federal tax treatment of a partnership with the liability protections of a corporation.  The owners of an LLC have no personal liability for the obligations of the LCC.  For all practical purposes, an LLC operates as a limited partnership without the legal requirement of having a general partner who bears ultimate liability for the obligations of the partnership.  An LLC is not limited to 100 members or members that have particular attributes like subchapter s-corporations.  An LLC is not the best form of business entity to offer equity incentive programs to employees and consultants because the tax code does not allow LLCs to offer incentive stock options (“ISO”) to employees, and the value and appreciation of a membership interest in an LLC are not easily explained to employees. LLC’s can provide a good form of business entity for real estate investments, motion picture or other entertainment focused enterprises.

With respect to taxes, in California an LLC must pay the minimum tax of $800 per year.  Unlike corporations, in addition to the statutory minimum tax, an LLC must pay an annual fee based on gross revenues derived from or attributable to California ranging from $900 for gross revenues of $250,000 or more to $11,790 for gross revenues of $5 million or more.  The LLC is not taxed on contributions to capital.  Members may contribute property or cash to the LLC tax-free.  An LLC is not a form of business entity that can take advantage of tax code provisions that provide favorable treatment for certain losses or gains for qualified small business stock.

A member of an LLC who contributes services to the company in exchange for a profit interest in the company, is not subject to tax.  A member who seeks a capital interest (i.e. equity) in the company is subject to tax, but that tax may be deferred.  An LLC can use the cash method of accounting.  An LLC is typically not subject to double taxation upon liquidation.

An LLC may not be suitable for businesses financed by VC funds because frequently there are tax restrictions on investments that can be made by the funds’ tax-exempt partners.  An LLC may be very attractive for businesses financed by corporate investors, and to some extent by wealthy individuals.

An LLC is a good entity for a start-up entity seeking flow through losses to its investors because (1) unlike a limited partnership it offers protection against personal liability for its members, (2) it can have corporations and partnerships as members and is not subject to any other limitations that apply to S corporations, (3) losses can be specially allocated entirely to cash investors (in an S corporation losses are allocated to all owners based on share ownership); and (4) an LLC can be incorporated tax free at any time.

Before you decide on the form of business entity you select for your new business venture, contact us at Finkel Law Group to discuss the options.  You can reach us at (925) 274-9600, (415) 252-9600 or www.finkellawgroup.com.

The post What about an LLC? appeared first on Finkel Law Group.

Your business is faced with a number of different types of taxes and government fees (which certainly feel like taxes). Some of the types that could apply to your business are personal property taxes on your equipment and inventory, real property taxes, sales taxes on items you sell, use tax on items you purchase, federal and state income taxes withheld from your employees paychecks, social security taxes – both the employer paid tax and the amounts withheld from employees paychecks, income taxes on the business, fees to the State of California (minimum $800 per year) depending on the form of your business (corporation, LLC, limited partnership) and county and/or city fees for business licenses. I am sure you can think of others as well.

So what should you do when you can not pay them all, in full and on time.  First, pay the income taxes and social security contribution withheld from employee paychecks and the employer’s unemployment, social security and other contributions to the California Employment Development Department (EDD) and the Internal Revenue Service.

For more information on how Finkel Law Group can help you properly structure your new or existing business enterprise to take maximum advantage of state and federal tax laws, call us for a consultation at (925) 274-9600 or (415) 252-9600 or visit us as www.finkellawgroup.com.  We look forward to talking with you.

The post What Taxes to Pay First appeared first on Finkel Law Group.

Consider a Tax Flow Through Entity

If the business intends to distribute current earnings, a tax flow through entity, like a partnership, LLC or S-Corp, is likely the best choice because the earnings can be distributed without incurring a second level of tax.  If the company, however, is a C-Corp, earnings can be distributed without incurring a second level of tax only if they are paid as salary or other reasonable compensation to shareholders who work for the business.  This compensation is deductible by the corporation against its taxable income.  Other distributions of earnings by a corporation to its shareholders, other than compensation, will be taxed as dividend income to the shareholders.  It is not deductible by the corporation.  Most small companies that distribute the business’ current earnings, and don’t have owners who work for the company have a strong incentive to use a tax flow through entity like an S-Corp, partnership or LLC.

Income Tax Incentive for Building Value in Your Business

Federal income tax law provides an additional incentive to organize as a C-Corp for businesses that seek to build long term value rather than distribute current earnings.  With a C-Corp (but not any other business entity) that qualifies as a small business corporation, stock issued after August 1993 that is held for at least five years is generally eligible under IRC section 1202 for a reduction of at least 50 percent in the capital gains tax payable upon sale, reducing the effective rate to approximately 14 percent.  Recent revisions to the tax code provide a reduction of somewhere between 75 and 100 percent in the capital gain tax rate upon sale through 2012.  The tax code is always changing so make sure you contact us about recent changes and how they may affect your business planning.

Section 1045 Can Benefit Non-Corporate Investor

Under IRC section 1045, a non-corporate investor who sells qualified small business stock in a C-Corp can defer any gain recognition on the sale by reinvesting (rolling over) the sale proceeds into a new qualifying small business stock within 60 days of the sale.  Under IRC section 1244, an initial investor whose investment complies with the conditions of the statute, and who later realizes a loss on his qualifying small business stock, may treat the loss as ordinary loss rather than a capital loss, taking the potentially greater tax benefits.

For more information on how Finkel Law Group can help you properly structure your new or existing business enterprise to take maximum advantage of state and federal tax laws, call us for a consultation at (925) 274-9600 or (415) 252-9600 or visit us as www.finkellawgroup.com.  We look forward to talking with you.

The post How Will The Business Return Profits to Owners? appeared first on Finkel Law Group.

To many a business owner there is nothing more frustrating than opening the morning’s mail to find that one of your best long time customers has filed bankruptcy, owing you a lot of money.  Is there no hope for getting paid?  Not necessarily.  In this series of postings, we will look at various options for the creditor in a bankruptcy case.  These are just designed to let you know what remedies might be available to you.  Whether you want to pursue them or not will depend on the facts of your individual situation, how much time and money you want to spend, and whether there is money in the estate to pay you.

Look at the Notice and determine what type of bankruptcy was filed.  Not all bankruptcies are alike. The filing could be:

• Chapter 7 – a straight liquidation.  A trustee is appointed to liquidate any assets and pay creditors according to the priority scheme set forth in the Bankruptcy Code;
• Chapter 11 – a reorganization.  The Debtor retains control of assets and generally continues to operate its business while the Debtor puts together a plan of how the Debtor will repay creditors.  Chapter 11 debtors can be individuals or they can be major corporations.
• Chapter 12 – a repayment plan for family farmers.  Similar to a Chapter 13 case in that a Plan is filed early in the case; limited to family farmers.  These aren’t seen much in the Northern District of California and won’t be discussed much in this article;
• Chapter 13 – an individual repayment plan.  The Debtor files a plan at or near the time the case is filed outlining what payments the Debtor will make over the next three to five years (not available to corporate debtors).

In an upcoming post, I will address the need to stop collections.

The post Customer File for Bankruptcy? appeared first on Finkel Law Group.