common issues and strategies in business break-ups

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COMMON ISSUES AND STRATEGIES IN BUSINESS BREAKUPS

COMPLEX FINANCIAL LITIGATION 2016 SERIESPremier date: February 17, 2016

COMPLEX FINANCIAL LITIGATION 2016 SERIES

COMMON ISSUES AND STRATEGIES IN BUSINESS BREAKUPS

Premier Date: February 17, 2016

2© 2016 DailyDAC, LLC d/b/a/ Financial Poise®

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS

3© 2016 DailyDAC, LLC d/b/a/ Financial Poise®

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meet the facultyPANELISTS

George Apostolides Arnstein & Lehr LLPKatherine Puffer VH ValuationsAdam Russ Frantz Ward LLP

MODERATOR Jack Barber

Crowe Horwath LLP

© 2016 DailyDAC, LLC d/b/a/ Financial Poise®

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Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.


http://www.financialpoise.com/

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about this webinarWhen times are good, business owners and advisors usually do not plan for what will happen if the business eventually breaks up. Sometimes this oversight arises from an unwillingness to plan for difficult times, but more often it happens because owners and advisors are focused on starting up the business and do not carefully consider how to handle a breakup if things do not go as planned. This webinar explains common issues that arise when a business is not working anymore and the owners decide to break up. The expert panel will discuss issues that should be considered at the time you start your business, terms to include information documents that anticipate break ups, and ways to resolve break up disputes through negotiation or litigation. © 2016 DailyDAC, LLC d/b/a/ Financial Poise®

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about this seriesBusiness owners and executives, and the attorneys and other professional who advise them, need to be prepared for the possibility that ordinary business activities will lead to litigation. Internal disputes sometimes arise among the owners, shareholders, and investors who participate in a business. Businesses themselves often face disputes with their business partners, vendors, suppliers, and creditors. Financial Poise’s Complex Financial Litigation series will familiarize you with the common types of business litigation and will help you understand the common issues that arise in these disputes.

Join leading experts in this field as they walk you through discussions of these complex topics in plain English so that you are prepared when the next dispute arises.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs. © 2016 DailyDAC, LLC d/b/a/ Financial Poise®

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episodes in this series

EPISODE #1 Common Issues and Strategies in Business Breakups

2/17/2016

EPISODE #2 Nuts & Bolts of Lost Profit Cases

3/16/2016

EPISODE #3 Resolving Shareholder Disputes 4/20/2016

EPISODE #4 Defending Against Bankruptcy Avoidance Actions

5/18/2016


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Why do business partners split up?

• Soured personal relationships• Personal financial strains• Business is bad• Perception that other partner is not pulling fair share• Greed• Dishonesty• Illness• Death


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Business structures can lead to disputes

• Opportunism, Oppression, and Governance Disputes• Few shareholders/members

–Often single controlling shareholder– control group

• Limited marketability for stock• Identity of management and ownership• Often formed among family or others personally tied


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Closely-held corporation or llc• Ripe for oppression and opportunism• Concentrated control

• Majority rule the norm • Limits to minority power

• Limited exit rights• Illiquidity

» Seldom publicly traded and no well-developed market for member interests, stock in closely-held enterprises

» contractual restrictions» Limited withdrawal and dissolution rights

• Significant discount for lack of control and liquidity• Dissolution rights lacking


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Advance planning often lacking• Potential for ex ante contractual safeguards – Corporate statutes relax traditional principles of corporate

governance» Board that oversees management» Shareholder decisions by majority rule

– Modern statutes often: » Provide for dividend, employment and dissolution options» Permit parties to deviate from standard corporate

governance structure» Shareholders may contract provide for their employment as

officers and directors


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Owners seldom plan ahead


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Majority control

– Can lead to claims of

– Oppression

– Self-Dealing

– Risks of conventional corporate law norms

– Centralized control in board

– Majority rule in voting directors

– May take actions detrimental to minority


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Forms of oppression


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Legal protections for minority owners– Judicial and legislative protections have emerged– Judicial protections• Shareholder doctrine

» Judicial recognition of fiduciary duties» Beginning in 1970s, many courts hold that majority

shareholder’s fiduciary duties in close corporation run directly to individual owners

» Enhanced, partnership-like fiduciary duties among shareholders

» Direct cause of action for breach of fiduciary duty» Significant change in rights and obligations of close

corporation shareholders


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Shareholder doctrine• Greater judicial scrutiny of majority decisions• At odds with business judgment rule and deference

to majority• Variations among states– Delaware “minority rule”– Apply general corporate principles to all corporations– Only D’s, O’s and controlling SH’ owe fiduciary duties

– Primarily to corporation– Business judgment rule and entire fairness test – Best interest of corporation


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Statutory protections• Oppression / Dissolution Statutes– Exceptions (AK, CA, DE, FL, IN, KS, KY, LA, MA OH, OK,

NE)– “Oppression” by controlling SH grounds for dissolution

– Formerly required extreme conduct (illegality, fraud, misapplication of assets or waste)

– Deadlock sometimes suffices

– Judicial definitions of “oppression”– Conduct that frustrates reasonable expectations of shareholder– Broad and subjective standard– Recurring breaches of fiduciary duties– Abusive conduct


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alternative remedies• Compel buy-out• Appoint provisional directors• Appoint custodian• Other equitable remedies• Not a panacea– Courts sometimes reluctant to find conduct meets

standard– Some interpret oppression narrowly

• Dissolution rare


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Litigation alternatives• Mediation– May promote restoration, preservation, of family

harmony– May promote understanding in the face of blame

and anger– May preserve family wealth

• Arbitration• Business counselors


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Contracts can anticipate future disputes• Shareholder, operating agreements • Buy/sell agreements may provide exit rights and liquidity

– Buy-out rights in by-laws or shareholder agreement?– Or upon death of shareholder

• Decentralized corporate management available in some states• Provisions to forestall squeeze-outs

– SHA that commits board to specific course of action– Supermajority provisions– Dividend triggers– Employment contracts– Right to compel dissolution

• Arbitration provision


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Resolution: negotiation or litigation• Negotiations can lead to several results• Division of business• Departure of one owner

• Consider using a neutral to mediate• Litigation is necessary when negotiation

and/or mediation fail• Lawsuit in state or federal court• Arbitration


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Litigation outcomes difficult to predict• Litigation drawbacks• Expensive• Time-consuming• Difficult to predict

• Factors to consider• Form of business• State law that applies• Governing agreements

• Litigation outcomes• Can result in an all or nothing outcome


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Valuation matters• Whether a business dispute is resolved by

negotiation or litigation, valuation of the business interests is critical

• Owners must understand value to reach reasonable negotiated results

• Judge / jury / arbitrator must understand value to reach an outcome


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Valuation: Three common approaches• Income-based method• Asset-based method• Market-based method


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Valuation: Income-based method• Determine fair market value (FMV)–Multiply revenue stream x discount or

capitalization rate– The discount of capitalization rate converts the

revenue stream into present value– Discount rate or capitalization rate = yield

necessary to attract investors, given risks– Several different methods of determining the

appropriate discount rate


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Valuation: asset-based method• Concept = Business is equal to the sum of its parts• Based on principle of substitution: no rational investor will pay more for business assets than

cost of procuring assets of similar economic utility• In contrast to income-based approaches, which require the valuation professional to make

subjective judgments about capitalization or discount rates, the adjusted net book value method is relatively objective (the net value method is relatively objective, but not always relevant).– Pursuant to accounting convention, most assets are reported on books at acquisition value, net of

depreciation where applicable. These values must be adjusted to fair market value wherever possible• Value of a company’s intangible assets, such as goodwill, is generally impossible to determine

apart from the company’s overall enterprise value. – Thus, Asset-Based approach is not the most probative method of determining value of going business

concerns. • Most relevant where liquidation is imminent or ongoing; where a company earnings or cash

flow are nominal, negative or worth less than its assets; or where net book value is standard in the industry in which the company operates.

• May also be used as a "sanity check" when compared to other methods of valuation, such as the income and market approaches...


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Valuation: market-based method• Based on economic principle of competition: in

a free market supply and demand forces will drive price of business assets to a certain equilibrium; buys would not pay more for business, and the sellers will not accept less, than the price of a comparable business enterprise

• Similar in many respects to the “comparable sales” method that is commonly used in real estate appraisal


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Valuation: market-based method• Key factor = what to use as comparable?– It may be difficult to identify public and/or non-

public companies that are sufficiently comparable to the subject company


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Valuation: use of experts• Types of experts• Business / forensic accountants• Lawyers• Appraisers / valuation professionals• Bankers and other financial advisors

• Use a qualified Business Valuation Expert• Must be credible• Must apply and defend the use of judgment and estimates• Methodology must be sound and fit the facts of the case or be

subject to Daubert• Must have effective oral and written communication skills


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Valuation: use of experts• Use your expert to facilitate proper discovery and

disclosure• Adhere to the rules of evidence and procedures applicable to

the case• All work product may be discoverable if client hires expert

• Use the expert to educate the Court• Expert is expected to be impartial and independent• Testimony offered in the spirit of personal integrity, good

faith and sincerity• Use your expert to rebut the other side


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More About The Faculty: D

JACK [email protected]

Jack Barber is an attorney and registered CPA. He serves as Assistant General Counsel for the accounting, consulting, and technology firm Crowe Horwath LLP. He was previously a partner in a Chicago law firm, where his practice included counseling businesses and business owners, representing individuals and entities in civil and criminal investigations and regulatory matters, and litigating complex commercial and financial disputes. His litigation experience includes shareholder, member, partnership, and joint venture disputes; securities disputes; insurance coverage claims; banking and broker-dealer disputes; tax controversies; and professional liability claims against accountants, appraisers, attorneys, and others.

Jack also has extensive experience in the non-profit sector. He serves as a director of the Barber National Institute, which serves more than 4,200 children and adults with developmental disabilities and provides world-class education and training to industry professionals.


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GEORGE APOSTOLIDES

George Apostolides is a partner in the firm’s Chicago office and Chair of the Litigation Practice Group. His practice focuses on business and bankruptcy litigation, and he handles cases in federal and state courts both in Illinois and nationwide. He has practiced with the firm since his graduation from Northwestern University School of Law in 1995, and has years of experience managing business risk for his clients, litigating disputes, and, if necessary, taking cases to arbitration or trial.Mr. Apostolides’ clients range from Fortune 500 companies to small businesses and individuals. He provides a range of services for those clients, including litigation avoidance consulting, prosecuting claims for damages, and defending cases filed against the clients. His focus is always on his clients’ needs and interests in both the short and long term.If litigation is necessary, Mr. Apostolides has handled hundreds of cases in jurisdictions throughout the country and has first-chair trial experience both in courtrooms and before arbitration panels. He also has handled numerous appeals and has argued before the United States Court of Appeals for the Seventh Circuit.

In addition, he has handled tort cases from his earliest days as an attorney and has experience handling insurance and liability issues.

[email protected]


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KATHERINE [email protected]

Katherine Puffer, of VH Valuations, has over 30 years of business and financial experience. She served as a financial officer of a Fortune 100 company for over 10 years. Her valuation experience includes a wide variety of industries including financial services, electronics, manufacturing, franchises, fast food, printing, agriculture, information technology, personal services, amusement and recreation and health services. She has experience valuing family limited partnerships, intellectual and intangible property, and businesses involved in marital litigation, mergers and acquisitions and shareholder disputes. She has prepared appraisals related to employee compensation and financing and has provided litigation services to her clients. She is experienced in expert testimony.


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ADAM [email protected]

Adam is a partner in the Commercial Litigation group at Frantz Ward LLP, where his experience includes matters as varied as class action defense, construction litigation, creditors' rights, insurance coverage, trade secret defense, prosecution of restrictive covenants, director and officer liability, and real estate issues. He has obtained favorable resolution for clients in courts throughout Ohio and beyond. He has significant state court appellate experience, including first-chair oral arguments before several Ohio Courts of Appeal. As part of his practice, Adam advises individuals and businesses on “best practices” to avoid litigation. Adam has been named as an Ohio Super Lawyers® Rising Star in the area of Business Litigation in 2012, 2013, 2014, 2015, and 2016.

Adam is active in the local community, where he volunteers his time with the Legal Aid Society of Cleveland and the Cleveland Metropolitan Bar Association’s 3Rs – Rights ● Responsibilities ● Realities - Program. He is an executive committee member of the Associate Board of Shoes and Clothes for Kids, a local non-profit serving underprivileged children. He also serves as a member of the Ohio State Bar Association Council of Delegates and Young Lawyers Section Council, and previously participated in the Ohio State Bar Association’s 2011 Leadership Academy. He currently serves as the chairperson of the Notre Dame Club of Cleveland’s Universal Notre Dame Night celebration and is a member of the Cleveland Bridge Builders Class of 2015.

Adam graduated from the University of Notre Dame in 2002 with a B.B.A. in Finance and Business Economics, magna cum laude, and from Notre Dame Law School in 2005. You can reach Adam at +1- 216-515-1648 or by email at [email protected].


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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.
