COMMON ISSUES AND STRATEGIES IN BUSINESS BREAKUPS

COMPLEX FINANCIAL LITIGATION FOR THE NON-EXPERTPremiere Date: January 19, 2017

This webinar is sponsored by: EisnerAmper1

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MODERATOR

Erin Hollis Marshall & Stevens, Chicago

PANELISTS

Jud DeLoss Greensfelder Hemker & Gale, Chicago

Katherine Puffer VH Valuations, Chicago

Leland Chait Sugar Felsenthal Grais & Hammer, Chicago

MEET THE FACULTY

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SERIES SPONSOR

EisnerAmper

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ABOUT THIS WEBINAR

Breaking up is hard to do. Business partners don’t always get along or agree. In this webinar, we discuss

common issues and strategies regarding business breakups:

• Preventative breakup strategies

• Common breakup issues and strategies to cope with a breakup

• Issues that cause breakups

• What is breach of fiduciary duty

• Dealing with family members that can’t get along

• Shareholder oppression and dissention

• Majority rules and minority power

• Contractual restrictions, including valuation clauses in stockholder and partnership agreements

• Limited withdrawal and dissolution rights and resolutions

• Impact state statutes may have on valuation issues

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ABOUT THIS SERIESMany people do not understand the specialization that the legal industry has undergone in the past several

decades. Just as one would not go to a dermatologist for lung cancer, one would not ask a tax attorney to

defend a DUI. But the specialization goes even deeper: litigation over commercial disputes should be

handled by someone with deep experience with such disputes; the best criminal defense attorney or divorce

litigator is simply not the likely best choice because, among other reasons, issues tend to repeat themselves.

This is not to say that once an attorney has done one “xyz case” she is an expert at all “xyz cases,” but the

truth is that the expression “the practice of law” exists for good reason. This webinar series explores four

common litigation scenarios involving complex financial issues. Each episode is delivered in Plain English

understandable to business owners and executives without much background in these areas. Yet, each

episode is proven to be valuable to seasoned professionals. As with all Financial Poise Webinars, each

episode in the series brings you into engaging, sometimes humorous, conversations designed to entertain as

it teaches. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed

independently of the other episodes, so that participants will enhance their knowledge of this area whether

they attend one, some, or all of the episodes.

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EPISODES IN THIS SERIES

EPISODE #1 Common Issues and Strategies in Business Breakups 1/19/2017

EPISODE #2 Nuts & Bolts of Lost Profit Cases 2/23/2017

EPISODE #3 Resolving Shareholder Disputes 4/20/2017

EPISODE #4 Defending Against “Avoidance Actions” 5/11/2017

Dates shown are premiere dates; all webinars will be available on demand after premiere date

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Reasons for Business Breakups

• Emotional

Fraud

Perceived Inequity

• Financial

Retirement

Bankruptcy

Perceived benefits elsewhere

• Unforeseen

Death

Disability

Decline of Market

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Closely-Held Business Issues

• Not easily liquid, marketable

• Concentration of control (family-owned businesses)

• Loose adherence to corporate governance

• Lack of communication

• Minimal distinction between owner and business

• Voting limitations and power for minority shareholders

• Liquidity for exiting shareholders

• Withdrawal and dissolution rights

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Closely-Held Business Issues, Cont.

• Minimal, if any, board oversight

• Minimal formalities in place

• Lack of transparency or self-dealing

• Document maintenance

• Penetration of corporate veil

• Lack of continuity of business operations

• Key shareholder concerns

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Why Do Owners Fail to Plan?

• Lack of pragmatism and foresight

• Lack of third-party guidance (legal, insurance, operational,

valuation)

• Advisor costs

• ‘Handshake’ agreements, lack of formal documentation

• Operational distractions

• Relationships: Family, friends (“blood is thicker than water”)

• Optimism

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Majority Control

• Can lead to claims of: Oppression

Self-dealing, misappropriation

• Risks of conventional corporate law norms Centralized control in board

Majority control in voting directors

May take actions detrimental to minority

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Shareholder Oppression

• Autonomous control that directs the inequitable transfer of wealth

• Squeeze-out or freeze outs

Exclusion from profits

Lack of dividend policy or declaration

Lack of profitability due to excessive director fees, officer’s

compensation, bonuses

• Termination of employment

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Shareholder Oppression Cont’d

• Involuntary removal from director or officer position

Voting powers

Deny access to information or documents

• Formulaic or other terms of buyout at less than fair value

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Shareholder Oppression 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

• Greater judicial scrutiny of majority decisions

• Modifies business judgment rule and deference to majority

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Shareholder Oppression Doctrine, Cont.

• Varies by state:

Delaware “minority rule”

Apply general corporate principles to all corporations

Only Directors, Officers and controlling Shareholders 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

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Statutory Protections Cont’d

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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Alternative Remedies, Cont.

• Mediation

May promote restoration, preservation, of family harmony

May promote understanding in the face of blame and anger

May preserve family wealth

• Arbitration

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Preventive Corporate Planning

• Updated agreements (operating agreement)

Change in assets

Change in intentions

Change in tax law

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Preventive Corporate Planning Cont’d

• Buy-sell, shareholder, partnership agreements provisions:

Eight “D’s”

• Death, Divorce, Disability, Dissention, Dissolution, Departure

(retirement), Debt Overload (bankruptcy), and Decline of

Market

Sufficient funding vehicle

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Preventive Corporate Planning, Cont.

• Provisions to forestall squeeze-outs

Provision that commits board to specific course of action

Supermajority provisions (if applicable)

Dividend triggers, declarations

Employment contracts

Non-competes

Right to compel dissolution

• Arbitration provision

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Negotiation or Litigation?

• Consider cost/benefit

Financial

Operational

• Litigation outcome can be unpredictable

• Governing state law

• Governing agreements

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Why A Valuation Is Essential

• Objective, third-party opinion

• Based on recognized valuation theory and methodology

• Considers any applicable valuation discounts

• Serves as a basis for negotiations

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Valuation Approaches & Methods

• Income Approach (going concern)

Discounted Cash Flow (DCF) Method

Capitalization of Earnings Method

• Asset Approach (ex. holding company or unprofitable company)

Adjusted Book Value Method

Excess Earnings Method (hybrid income/asset approach)

• Market Approach (sometimes used as a sanity check)

Market Transaction Method (private transactions)

Guideline Publicly-Traded Company Method (public transactions)

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Valuation: Use of Experts

• Use a qualified Business Valuation Expert

• Must be:

1) objective;

2) experienced

3) Credentialed

• Must apply and defend the use of judgment and estimates

• Applied methodology must be appropriately applied and fit the

facts of the case or risk being subject to Daubert challenge

• Must have effective oral and written communication skills30

Valuation: Use of Experts, Cont’d

• Hire the correct type of expert

Accounting

Forensic Accountant

Tangible Asset Appraiser

Business Valuation

Lifestyle Analyst

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Valuation: Use of Experts, Cont.

• Use your expert to facilitate proper discovery and disclosure

Adhere to the rules of evidence and procedures applicable to the case

IMPORTANT: All work product may be discoverable if client hires expert

directly

• 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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ABOUT THE FACULTY

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ERIN HOLLISehollis@marshall-stevens.com

Ms. Hollis is a Financial Valuation and Consulting Director of Marshall & Stevens Incorporated in Chicago. Her valuation experience began in 2000, and includes litigation matters, transactional analyses, taxation matters and corporate planning. She also has special purpose appraisal experience with specific types of feasibility, including ESOP Valuations. Her other professional activities include authoring numerous articles on valuation in several publications, speeches, and being an active member of the American Society of Appraisers, where she participates as Secretary of the national Business Valuation Committee. She is also a member of the Valuation Advisory Committee of The ESOP Association and a member of the National Center for Employee Ownership (NCEO).

Prior to becoming a Director of Marshall & Stevens, she held the Director position of Tax & Valuation Services with Valuation Advisory Services and simultaneously with Strategic Tax Advisors for 13 years. In her position, Ms. Hollis oversaw all aspects of business development, production, administration, financial planning, quality control, revenue and client development. Ms. Hollis is a graduate of Michigan State University, a qualified expert witness, and an Accredited Senior Appraiser (ASA) in Business Valuation of the American Society of Appraisers. She is also Certified in Distress Business Valuation (CDBV) with the Association of Insolvency & Restructuring Advisors.

ABOUT THE FACULTY

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LELAND CHAITlchait@sfgh.com

Leland Chait is a Partner at Sugar Felsenthal Grais & Hammer in Chicago in the areas of Bankruptcy, Reorganization, and Creditors’ Rights.

As a problem solver, Lee successfully tries business disputes in state and federal courts throughout the United States, focusing on matters in the healthcare and insurance fields, and in resolving business divorces. He advises individuals and businesses with complex commercial disputes, including cases brought on a class action basis, in the employment, insurance, antitrust, regulatory compliance and healthcare fields.

ABOUT THE FACULTY

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JUD DELOSSgdeloss@greensfelder.com

Jud is an Officer at Greensfelder Law Firm in Chicago. With extensive experience in all aspects of health law including compliance, privacy and information technology, Gerald (Jud) DeLoss represents clients across the health care spectrum. He assists behavioral health care providers, health information technology vendors, federally qualified health centers, hospitals and research organizations, as well as industry trade and professional associations.

Jud has extensive knowledge of HIPAA, HITECH, meaningful use of electronic health records (EHRs) and telehealthrequirements and has testified as an expert witness on health information privacy. He is adept in handling matters related to state and federal regulations of behavioral health information privacy, particularly in the area of 42 CFR Part 2 federal regulations (governing the confidentiality of drug and alcohol abuse patient records) and mental health confidentiality.

Jud has represented clients before the Centers for Medicare and Medicaid Services (CMS) on meaningful use audits and appeals. He also assists clients in responding to HIPAA breach situations and prepares and negotiates software licenses and other agreements for EHR systems and other health information technology (HIT) solutions. He regularly counsels HIT vendors on compliance with state and federal laws and on addressing “Big Data” concerns.

ABOUT THE FACULTY

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KATHERINE PUFFERkpuffer@vhvaluations.com

Katherine Puffer has 35 years of business and financial experience. She is a CPA and is licensed in the State of Illinois. She is accredited in Business Valuation (ABV) by the American Institute of Certified Public Accountants. She is a Certified Property and Casualty Underwriter (CPCU) and a Certified Divorce Financial Analyst (CDFA). She served as a financial officer of a Fortune 100 company for over 10 years.

Katherine Puffer is experienced in preparing valuations needed for estate planning and taxes and for martial litigation. She has experience valuing business for mergers and acquisitions and for purposes of raising capital. Her firm is experienced in preparing valuations for startup firms. In addition, Katherine is experienced in calculating financial damages associated with contract disputes and shareholder disputes. She is experienced in expert testimony.Katherine Puffer’s formal education includes an MBA from the University of Chicago, the Graduate School of Banking from the University of Wisconsin as well as a BS in business from the Carlson School at the University of Minnesota.

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EisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

benefit plan audits, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-registered and provides services to more than 200 public companies and to thousands of entities spanning the hedge, private equity, brokerage and insurance

space in the financial services marketplace. As companies grow we help them reach their goals every step of the way.With offices in New York (NY), New Jersey (NJ), Pennsylvania (PA), California (CA), and the Cayman Islands, and as an independent member of Allinial

Global, EisnerAmper serves clients worldwide.

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