Archives for category: Business

Many individuals form business organizations for various reasons. Some of the most common reasons are to address tax matters, limit liability, provide a specific or perpetual duration, and address ownership transferability issues. The Texas Business Organizations Code (“TBOC”) authorizes individuals to form three general type of entities: partnerships, corporations, and limited liability companies (“LLC”). While there are other forms of entities which may be used for particular professions or other specific uses (such asnon-profit or limited liability entities), these three forms comprise tcorpKithe most commonly used entities. The partnership form is further divided between general partnerships and limited partnerships.

Why is it important to address transferability issues in a business organization? For one, the success of a business, particularly a small business, typically hinges upon the abilities of the owners who are usually also the managers. It is important that each owner know with whom he or she is conducting business. Furthermore, the owners at some point may wish to sell their interests in the entity. Since there is no ready market for investors of small businesses interests, transfer restrictions in the form of buy-sell agreements can be used to create a market and set a reasonable price. In other instances, transfer restrictions can assist with compliance of state and federal laws. Certain corporations may be exempt from securities registration under federal and state law where transfer restrictions are used.

In most instances, the owners of a business organization may set up their own transfer rules in a written agreement. For corporations, those rules may be set forth in the Bylaws, but are typically found in a separate document referred to as a shareholder agreement. For partnerships, transfer restrictions are set forth in a partnership agreement. For LLCs, the company agreement contains the transfer restrictions.

If the owners fail to provide their own transfer rules, the TBOC will regulate such transactions. Leaving aside the corporate form, the rules set forth in the TBOC for partnerships and LLCs are similar. Before becoming an assignee partner or member, consent of all of the partners or members must first be obtained. In those instances where consent has not been obtained, a transfer of an ownership interest will not result in the assignee achieving partner or member status.

However, the mere assignment without consent (absent an express written agreement to the contrary) will not void the transfer of the interest to the assignee. Unless restricted or prohibited by the partnership or company agreement (or other document), a partner or member may freely assign his or her interest to another party. The preceding rule also applies to the transfer of corporate shares. However, without the consent of all owners, the assignee will not be entitled to exercise the rights or powers of a partner or member in the entity. Nor will the assignee become liable as a partner or member solely because of the transfer. Instead, the assignee is entitled to be allocated any income, gain, loss, deduction, credit, or similar items, and to receive distributions to which the assignor was entitled, to the extent such are part of the assigned interest.

For corporations, the owner’s (or shareholder’s) interests in the company are generally freely assignable unless otherwise agreed to in writing between the owners or disallowed under the TBOC. For small business corporations, the implementation of a shareholder’s agreement is of particular importance. The shareholder’s agreement allows the owners to predetermine the manner in which their relationship will operate and is akin to a partnership or company agreement. Without a shareholder’s agreement, minority shareholders may have little or no recourse to control how disputes are resolved. They may be unable to remove themselves from the corporate ownership structure without a significant financial loss. Majority shareholders may try to squeeze or freeze out the minority shareholders and force them to sell their interests for less than they are worth.

Shareholder agreements will usually contain one or two types of transfer restrictions: mandatory buy-sell and first option buy-sell agreements. A mandatory buy-sell is triggered by a specified event, such as the death, disability or divorce of a shareholder. When the event occurs, either the corporation or the other shareholders are required to purchase the shareholder’s interest pursuant to specified pricing and payment terms contained in the agreement. A first option buy-sell reserves the right of all shareholders or the corporation to purchase shares in preference to third-parties. As opposed to the mandatory buy-sell, the first-option buy-sell does not require that the other shareholders or corporation purchase the selling shareholder’s interest, but instead allows them to do so if they so choose. If the option is not fully exercised, then the shareholder is allowed to consummate a sale to a third-party.

Restrictions on transfer are important aspects of doing business as a Texas business organization. Failure to obtain and use them can result in unintended consequences to the business and its owners.

Scott Alagood is board certified by the Texas Board of Legal Specialization in Commercial and Residential real estate law. He can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.

MediationIn 1987, Texas passed the Alternative Dispute Resolution Act which is now found in Chapter 154 of the Texas Civil Practices and Remedies Code. This Act introduced formal mediation to the State of Texas. Since that date, mediation has been used to resolve countless disputes between citizens, businesses, and governmental subdivisions of the State of Texas.

What is mediation? Mediation is a forum and process in which an impartial person, called the mediator, encourages and assists parties to a dispute to reach a settlement or resolution of that dispute between themselves. The mediation may be ordered by the court or through voluntarily participation by the parties to the dispute. Where the parties have retained attorneys to assist with the dispute, the attorneys participate in the mediation with their respective clients.

The mediation process in Texas is strictly confidential. Unless the parties agree, the statements of the parties, their conduct, demeanor, and their legal and factual positions may not be disclosed to anyone by the mediator. This rule encourages the parties to be entirely forthcoming with the mediator during the course of the mediation.

The mediator is not there to impose a decision on the parties. Even if the mediator is a licensed attorney, the mediator should not provide the parties with any legal advice or make ultimate judgments on the potential outcome of the dispute if it were to go to trial or arbitration.

Mediations are usually held in private and without any public fanfare. Most court cases are public record, and typically hearings or trials will be open to the public. Mediation allows the parties to settle their disputes quietly.

Mediation allows the parties, instead of a judge, jury or arbitrator, to reach a resolution of their dispute on terms that are acceptable to them. Note the term, “acceptable”, as many mediations actually result in outcomes in which one or more of the parties reach settlement terms that are not necessarily a “win”, or what they would want if the case had to be litigated. Mediation involves the parties negotiating to reach an acceptable outcome rather than fighting one another in an expensive and time-consuming forum to potentially achieve a win-lose or sometimes lose-lose outcome.

The mediator tries to use specific methods and techniques to assist the parties in reaching a settlement. For example in resolving a business dispute, it may seem necessary for one partner to end up with the business while the other ends up with the monetary value of his interest in the partnership. Looking at the dispute in that fashion is an example of an evaluative method of resolving disputes. “Horse-trading” is another example of an evaluative method of resolving disputes, and focuses on reaching an outcome in the most direct manner. Much of the time this technique works well to resolve simple disputes where the sum of the whole is equal to its parts, and those parts must be divided up to settle the case.

However, if the mediator delves deeper into the backgrounds of the parties, the origin of the disputes, and the motivations of each party to become involved in the dispute, many times it becomes clear that the mediator has more to deal with than simply dividing up ownership and money. A facilitative method can be best described as an attempt to find a resolution which has mutual benefits for all parties. Under the facilitative method the mediator looks for subtle undertones of the dispute. Those subtleties usually require the mediator to delve into areas that on the surface may not seem to have any direct relevance to the dispute.

In our example, the mediator may find out that one of the partners is a really good business person, while the other may be really good with the manufacturing of the good or the generation of the service which makes up the business. The mediator may find out that the two partners were once best friends, who but for the dispute (which may or may not have anything to do with the business), no longer can operate all parts of the business together. Under the facilitative approach, the mediator will attempt to repair the relationship, and try to find a resolution which may allow the parties to stop fighting each other and go back to work in their respective areas of strength for the benefit of the business and themselves as its owners.

Clearly, these are extremely simple examples. But a good mediator will always look at several methods and techniques of dispute resolution in order to determine which methods or combinations will achieve a positive result.

Since its inception, mediation has been a positive process for litigants in Texas. It has helped reduce the case load of our courts and saved millions of dollars for the participants involved. Just about any type of dispute can be mediated. From disputes between countries, NFL quarterbacks and commissioners, divorces, collection suits, and just about any other type of disagreement, mediation can be a tool to save money, time, and public scrutiny.

Scott Alagood is board certified by the Texas Board of Legal Specialization in Commercial and Residential Real Estate Law. Scott may be reached at alagood@dentonlaw.com or www.dentonlaw.com.

Receiverships PicturesA receivership is an equitable and legal remedy that may be used to acquire possession of property by a court appointed party known as a receiver. A receiver’s powers are derived directly from the appointing court. The receiver is a disinterested party who represents and protects the interests of all other persons for the receivership property.

A court appointed receiver is an extremely harsh remedy. The remedy allows the State to take possession and control of private property and place it in the hands of a third party. A court will appoint a receiver only if there are no other less harsh remedies available.

Basis for Receivership.

A receivership in Texas may be installed under rules of equity (“fairness”) or pursuant to a specific statute. Under equity, a receivership must be “ancillary” to an otherwise apparently valid claim or remedy and to protect or preserve property during the pendency of a lawsuit. Where the receivership arises out of a statute, it doesn’t matter if ancillary claims exist.

Types of Receiverships.

Equitable Receiverships. A court may appoint a receiver in any case in which a receiver may be appointed under the rules of equity.

General Receivership Statute. Chapter 64 of the Texas Civil Practice & Remedies Code allows a court to appoint a receiver under any of the following circumstances:

  • Action by vendor to vacate a fraudulent purchase of property;
  • Action by creditor to subject any property or fund to his claim;
  • Action between partners or other jointly owning or interested in any property or fund;
  • Action by a mortgagee for foreclosure and sale of mortgaged property; or
  • Corporation that is insolvent, or is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights.

Family Law Receiverships. In conjunction with a divorce proceeding, a court may appoint a receiver as a temporary order for the preservation and protection of spousal property.

Post Judgment Receiverships. Judgment creditors may seek the appointment of a receiver to assist in the satisfaction of a judgment in certain circumstances.

Business Entity Receiverships. A receiver may be appointed for a corporation that is insolvent, is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights. The Texas Business Organizations Code deals with the appointment or a receiver for any domestic entity (including corporations, partnerships, limited liability companies, and associations) or its property.

Mineral Receiverships. A receiver may be appointed where a mineral interest or mineral leasehold interest is owned by a nonresident or absent defendant, and upon the application of a person who has a vested, contingent, or possible interest in land or an estate subject to a contingent future interest in order to lease the land for development pending the vesting of the contingent interest.

Congregational Receiverships. A receiver may be appointed for a religious congregation which had maintained regular forms of work and worship in a community at regular intervals, but ceased to function in such capacities for at least one year.

Receiver Qualifications.

To qualify as a receiver a candidate must be a citizen and qualified voter of Texas at the time of the appointment. A candidate must not be a party, attorney, or other person interested in the action in which the receiver is sought.

Appointment Procedures.

Absent the appointment of a receiver upon the court’s own motion, a party seeking such appointment must file an application with a court having proper jurisdiction over the subject matter of the suit. Except in certain extreme circumstances, notice and opportunity to be heard must be provided to all adverse parties prior to the appointment. An ex parte appointment should rarely be sought, and very well may constitute an unlawful taking of property the Texas and U.S. Constitution.

The receiver must take an oath to faithfully perform all duties of the receivership and execute a good and sufficient bond.  The applicant must file a bond approved by the clerk payable to the defendant in an amount determined by the court. A court may dispense with the issuance of the applicant’s bond in a divorce.

Receivership Powers and Duties.

A receiver may take charge and keep possession of receivership property, receive rents, collect and compromise demands, make transfers, and perform other acts as authorized by the court. The act of the receiver does not bind the receivership property unless first authorized and subsequently approved by the court.

Following the appointment, a receiver must take an inventory of the property received and report it to the court. Where a party or other person subject to the receivership fails to release possession of receivership property, the receiver may bring an action to obtain possession.

A receiver may only sell the interest that it has in the receivership property at the time the receiver was appointed. Any receiver sale is a judicial sale and must be authorized and confirmed by the court before title will transfer.

Once all property has been disposed of and all proceeds distributed, then the receiver should be discharged. The final discharge order should include the final accounting of the receivership, a determination of the receiver’s fees, the restoration of any remaining property to the rightful owners, and a final discharge the receiver.

Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Legal Specialization and can be reached at alagood@dentonlaw.com and http://www.dentonlaw.com.

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It is very likely at some point everyone will require the services of an attorney.   Choosing an attorney can be a complicated and stressful event. Here are a few tips that may assist you in choosing the right attorney.

 

  1. State Bar of Texas. The State Bar of Texas website provides a search for attorneys by name and law firm, geographical area, practice area, specialty certification, specialty services provided, and law school attended. www.TexasBar.com. You can also call toll free at (800) 204-2222. The State Bar operates a statewide referral service. For general information, the State Bar can be extremely helpful.
  2. Martindale-Hubble®. Martindale-Hubble® publishes specific information about attorneys who choose to advertise with their service. www.martindale.com. Each listed attorney has the opportunity to be rated by their peers. Martindale’s Peer Review Ratings™ provides an indicator of a lawyer’s high ethical standards and professional ability as determined by other members of the bar and judiciary.   The rating is based on a scale of 1 being the lowest and 5 being the highest. A rating of AV Preeminent® (4.5-5.0) means that peers have ranked the attorney at the highest level of professional excellence and ethical standards. BV Distinguished® (3.0-4.4) is an excellent rating for a lawyer with some experience.   Rated® (1.0-2.9) evidences that the lawyer has met a very high criteria of general ethical standards. Not all attorneys are rated, and that simple fact shouldn’t be used to necessarily pass on choosing an unrated attorney. There are well qualified attorneys who simply choose not to advertise with this service. With that said, the Peer Review Rating® system provides a good indication of an attorney’s qualifications and ethical standards.
  3. Texas Board of Legal Specialization. While there are over 70,000 attorneys licensed to practice in Texas, only about 7,000 have been recognized as Board Certified® specialists in at least one of twenty-21 areas of the law. www.tbls.org. Board Certified® attorneys are the only attorneys in Texas allowed to represent themselves as a specialist in a select area of the law. The process to become Board Certified® is voluntary and can only occur after an attorney has been licensed for at least five years and has a minimum of three years experience in a particular specialty area. Before an attorney can become Board Certified®, that attorney must have established qualifications reviewed by colleagues and judges familiar with the attorney and the area of specialty, and must have passed all testing required by the Texas Board of Legal Specialization in the specialty area. Board Certified® attorneys must reapply for certification every five years. To maintain certification, an attorney must attend additional continuing legal education beyond that required by the State Bar of Texas for licensing. Again, not all attorneys are certified. The sole fact that an attorney is not certified does not mean that such attorney does not possess the requisite experience, skill, and ethical standards to handle a particular matter. However, certification does mean that the attorney has been vetted by other attorneys and judges and is deemed to be an expert in his or her particular field of law.
  4. Personal or Business Referrals. Many times, the best information you can achieve in searching for an attorney is through individuals or businesses familiar with a particular attorney or law firm. While referrals are an easy and quick way to find an attorney, care should be taken to make your own evaluation of the referred attorney through each of the three services set forth above, reviewing the attorney’s or firm’s website, and looking at other sources of information on the attorney or firm through a general internet search. Additional on-line information may be found at LinkedIn®, Avvo, Lawyers.com™, FindLaw®, Texas Super Lawyers®, and local bar association websites.
  5. Find the Attorney Right for You. Attorneys are as diverse as the people and organizations that they represent. Choose an attorney that fits your budget as well as need. Financial terms should be discussed and completely understood. Be wary of unwritten terms of representation. Ask detailed questions about the attorney’s experience, qualifications, and disciplinary history. Practical implications should be discussed along with legal options. Potential conflicts should be discussed.   Ensure that your choice has the time to handle your matter. Find out how they will correspond with you. Ask how soon they will return phone calls or e-mails. No question is dumb. Attorneys are people who bring their own experiences and personalities into any representation. Hire one that fits you and your legal needs.

 

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Specialization and can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.
 

Alagood & Cartwright Shake Hands

Whether looking to sell or buy a business, certain issues should be taken into consideration.  First, it is important to determine what type of business organization is involved.  These include sole proprietorships, partnerships (general and limited), corporations, and limited liability companies.

A qualified tax advisor (CPA or tax attorney) should be consulted to determine the tax consequences resulting from the transaction.  The tax advisor may assist in determining how to structure the sale.  The seller needs to consider (1) how much, if any, gain or loss will be recognized by the seller; and (2) the character of the gain or loss as ordinary or capital.  For the buyer, it is important that the purchase price be properly allocated among the assets or ownership interest purchased.  An allocation will establish the purchaser’s cost basis in the asset or ownership interest used for future taxable events such as determining gain or loss and depreciation deductions and recaptures.

The type of sales transaction must be evaluated in order to determine the tax consequences and structure of the sale.  Sales of sole proprietorships involve the transfer of assets and the allocation of existing and future liabilities of the business.  With business organizations, the transaction may be structured as an asset purchase (similar to the sole proprietorship) or a sale of the ownership interest in the business entity (such as stock, membership interests, and partnership interests).  When a sale involves an ownership interest, careful consideration should be paid to the governing documents and public filings to ensure that the sale is allowed and does not trigger other agreements or restrictions which may interfere with the intended sale, such as superior rights of purchase by the entity or other owners of the entity.

For sales involving entities, the governing documents should be reviewed to determine who has the authority to approve the sale.  Financial records should be analyzed to determine what, if any, liabilities of the business that the purchaser will assume as well as valuing the business’ assets or intrinsic value.  A purchaser should carefully consider how an entity adheres (or fails to adhere) to the formalities associated with operating as a business organization.  In some instances, failure to adhere to these formalities may be used by a court to disregard the entity to place liability directly with the owner.

The purchaser may want a covenant by the seller not to compete in the same type of business being sold for a stated time and area following the sale.  There are strict limitations on the enforcement of “covenants not to compete”.  Parties are well advised to retain a qualified attorney to document the agreement.  If the purchaser wants to retain any of the seller’s employees following the sale, then employment agreements and retirement plans must also be addressed, particularly for key employees.  It may be important to negotiate covenants not to compete with key employees as well.  For certain businesses, intangible property rights may be a significant reason that the business is being acquired.  These include copyrights, trademarks, service marks, and trade names.

The parties may use contractual indemnification provisions to allocate liabilities of the business.  However, without assurance that there is any funding underlying the contractual promises, such provisions may not provide the parties with any meaningful remedy.  A percentage of the purchase price may be withheld or additional sums placed in escrow for a specified period of time following closing to provide security for the parties’ indemnification promises.

Governmental regulations, private restrictions, and real estate issues must be considered.  Securities and antitrust laws may have to be addressed.  Franchise laws may apply to businesses which are subject to franchise agreements.  Businesses such as bars and restaurants must deal with licensing and permitting issues with the Texas Alcoholic Beverage Commission and local health departments.  Unemployment compensation, insurance, and workman’s compensation may also need to be addressed.  Additional regulations or requirements associated with the purchase of a professional business to legally operate the business will have to be considered.

In short, there are numerous and sometimes complicated issues which may arise with the sale of a business.  Both sellers and purchasers should ensure that well qualified consultants are used to assist them with the transaction.

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Specialization and can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.

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