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Slide 1: Minimizing Risk Through Company Restructuring Garth D. Stevens, Snell & Wilmer L.L.P. Joshua P. Hayes, Eide Bailly LLP 1
Slide 2: Objectives of Reorganization 1. 2. 3. Protect specific classes of assets (e.g., real estate, IP) Create firewalls between different businesses Insulate higher risk business from lower risk business ©2010 Snell & Wilmer L.L.P. 2
Slide 3: Limited Liability and Piercing the Corporate Veil 3
Slide 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. ©2010 Snell & Wilmer L.L.P. 4
Slide 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. ©2010 Snell & Wilmer L.L.P. 5
Slide 6: Simple Company Structure Shareholders Company —High risk operations —Low risk operations —IP assets —Owned real estate ©2010 Snell & Wilmer L.L.P. 6
Slide 7: Common Firewall Structure Shareholders HoldCo OpCo. #1 OpCo. #2 IPCo. Real Estate Co. ©2010 Snell & Wilmer L.L.P. 7
Slide 8: Three-Step Process • • • First – Factual analysis and planning; preliminary steps. Second – Complete the Reorganization (one time event). Third – Observe corporate & business formalities (ongoing). ©2010 Snell & Wilmer L.L.P. 8
Slide 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. ©2010 Snell & Wilmer L.L.P. 9
Slide 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. ©2010 Snell & Wilmer L.L.P. 10
Slide 11: How Do We Get There? Step One – Formation of New Parent Holding Company 1. 2. 3. 4. 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 Shareholders HoldCo OpCo. ©2010 Snell & Wilmer L.L.P. 11
Slide 12: How Do We Get There? Step Two – Formation of New Subsidiaries Shareholders 1. 2. 3. HoldCo forms new OpCo subsidiaries. Each OpCo subsidiary issues shares to HoldCo S-election for new HoldCo; Q-Sub elections for subsidiaries (watch timing) HoldCo. OpCo. OpCo. IPCo. Real Estate Co. ©2010 Snell & Wilmer L.L.P. 12
Slide 13: How Do We Get There? Step Three – Transfer of Assets 1. 2. 3. 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. Shareholders HoldCo. ASSETS OpCo. OpCo. IPCo. Real Estate Co. ©2010 Snell & Wilmer L.L.P. 13
Slide 14: The End Result Shareholders Admin Services Agreements HoldCo OpCo. #1 OpCo. #2 IPCo. Real Estate Co. IP Licenses Building Lease ©2010 Snell & Wilmer L.L.P. 14
Slide 15: Subsidiaries vs. Sister Companies Parent Co. HoldCo OpCo. IPCo. Real Estate Co. OpCo. IPCo. Real Estate Co. ©2010 Snell & Wilmer L.L.P. 15
Slide 16: Subsidiaries vs. Sister Companies Tax Filing Considerations: • • Consolidated tax election? Combined filing? ©2010 Snell & Wilmer L.L.P. 16
Slide 17: Preserving Limited Liability TWO KEYS: 1. Maintenance of independent existence and operation. 2. REASONABLE capitalization and/or insurance for each company. ©2010 Snell & Wilmer L.L.P. 17
Slide 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. ©2010 Snell & Wilmer L.L.P. 18
Slide 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. ©2010 Snell & Wilmer L.L.P. 19
Slide 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. ©2010 Snell & Wilmer L.L.P. 20
Slide 21: Thank You Garth Stevens Snell & Wilmer 602-382-6313 gstevens@swlaw.com Joshua P. Hayes Eide Bailly 602.264.8663 jhayes@eidebailly.com 21