transactional/corporate law essentials · 2019-06-04 · • structured and negotiated...
TRANSCRIPT
presented by
The South Carolina Bar Continuing Legal Education Division
Transactional/Corporate Law Essentials
Friday, June 7, 2018
http://www.scbar.org/CLE
SC Supreme Court Commission on CLE Course No. 195292E
Table of Contents
Choice of Entity: Corporation or LLC ............................................................................................11 Robert Bethea, Jr., William Umbach Ethics Hypotheticals/Role Plays .......................................................................................................23 William Higgins LLC Formation ..................................................................................................................................31 Robert Bethea, Jr., William Umbach Buy-Sell Agreements ..........................................................................................................................54 Robert Bethea, Jr., William Umbach Corporate Formation ........................................................................................................................93 Thomas Brumgardt Securities ...........................................................................................................................................133 Joseph Clark Buying/Selling a Business: Asset and Stock Purchase Agreements ............................................154 Melissa Cassell Contract Review and Drafting ........................................................................................................162 Foster Girard Employment Agreements and Confidentiality Agreements .........................................................179 Christina Rogers
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Transactional / Corporate Law Essentials June 7, 2019
PROGRAM AGENDA This program qualifies for 6.5 MCLE; 1.0 LEPR
SC Supreme Commission on CLE Course # 195292E
8:30 a.m. Registration
8:50 a.m. Welcome and Overview Joseph D. Clark Haynsworth Sinkler Boyd, P.A.
9 a.m. Choice of Entity: Corporation or LLC Robert P. Bethea, Jr. Adams and Reese LLP William M. Umbach Adams & Reese, LLP
9:30 a.m. Ethics Hypotheticals / Role Plays William O. Higgins Graybill, Lansche & Vinzani, LLC
10 a.m. LLC Formation Robert P. Bethea, Jr. Adams and Reese LLP William M. Umbach Adams & Reese, LLP
10:30 a.m. Break
10:45 a.m. Ethics Hypotheticals / Role Plays William O. Higgins Graybill, Lansche & Vinzani
11:15 a.m. Buy-Sell Agreements Robert P. Bethea, Jr. Adams and Reese LLP William M. Umbach Adams & Reese, LLP
12:00 p.m. Lunch
1:00 p.m. Corporate Formation Thomas A. Brumgardt Nelson Mullins Riley & Scarborough LLP
1:30 p.m. Securities Joseph D. Clark Haynsworth Sinkler Boyd, P.A.
2:00 p.m. Buying/Selling a Business: Asset and Stock Purchase Agreements Melissa Cassell Morton & Gettys 3:00 p.m. Break
3:15 p.m. Contract Review and Drafting L. Foster Girard Haynsworth Sinkler Boyd, P.A.
4:15 p.m. Employment Agreements and Confidentiality Agreements Christina L. Rogers Michelin Corporation
5:00 p.m. Adjourn
Transactional/Corporate Essentials
SPEAKER BIOGRAPHIES (by order of presentation)
Joseph D. Clark
Haynsworth Sinkler Boyd, P.A. (course planner)
Joe Clark is a Shareholder in the Columbia office of Haynsworth Sinkler Boyd, P.A. and serves as the Columbia representative on the firm’s three-member Management Committee. His practice areas include Corporate & Business, Corporate Organization & Governance, Mergers & Acquisitions, Corporate Finance & Securities and Commercial Transactions. Mr. Clark received his B.A. in 1983 from the University of South Carolina, his M.B.A. in 1989 from the University of South Carolina and his J.D. (cum laude) in 1995 from the University of South Carolina School of Law. Prior to joining Haynsworth Sinkler Boyd, Mr. Clark worked for First Union National Bank (1989-1992) and First National Bank of South Carolina and South Carolina National Bank (1983-1989). Mr. Clark is a member of the South Carolina Bar (Corporations, Banking and Securities Law Section, Past Chairperson); American Bar Association (Business Law Section); Speaker, Business and Corporate Law, South Carolina Bar Bridge the Gap Program; Richland County Public Library, Friends of the Library Board Member; and is an Adjunct Professor, University of South Carolina School of Law. He is the Co-author of the South Carolina Limited Liability Companies and Limited Liability Partnerships (4th ed. 2012) and South Carolina Corporate Practice Manual (2nd ed. 2005). Mr. Clark has been recognized in The Best Lawyers in America® - Corporate Law; Securities / Capital Markets Law.
Robert P. Bethea, Jr. Adams & Reese, LLP
Rob Bethea joined Adams and Reese in 2013 as a Partner following the firm’s expansion into South Carolina by merger with Ellis, Lawhorne & Sims, P.A. Rob served as the Partner in Charge of the Adams and Reese Columbia office from 2013 to 2017 and now chairs the Middle Market Mergers and Acquisitions Team for the firm. Rob advises clients on business transactions in the southeastern United States and beyond. He provides counsel on startups, mergers, stock and asset acquisitions, recapitalizations, taxation, business contracts and agreements, succession planning, franchising, securities and finance. Rob advises clients in a range of industries including health care, professional services, manufacturing and distribution, marine products, and industrial services. With advanced training in tax law, he has extensive experience advising clients on the often-complex tax consequences of business decisions and options, and he brings extra value to clients when negotiating transactions. Rob also plans and structures transactions in close coordination with clients’ accountants, bankers,
and other advisors. He has represented clients in contractual and business disputes – including management and shareholder disagreements, shareholder oppression and fiduciary duty claims, and successor liability and indemnity claims – as well as in government and regulatory investigations and compliance matters. Rob also provides counsel on the protection of trade secrets and intellectual property, including non-compete, confidentiality, and non-solicitation agreements. Rob earned his LL.M. in Taxation from New York University School of Law in 1997; received his J.D. from the University of South Carolina School of Law in 1996; and received his B.A. from Wofford College in 1993.
William M. Umbach
Adams & Reese, LLP
William M. Umbach advises businesses on a full range of legal matters, including commercial transactions, mergers and acquisitions, entity formation, governance, restructuring, business planning, corporate divisions, recapitalizations, and divestitures. With advanced training in taxation, he is able to help his clients organize, manage and reorganize their businesses to adapt to the changing business climate and to structure transactions in a tax-advantageous manner. Will also advises on lending transactions, including setting up new entities and representing borrowers when financing and refinancing credit facilities. Will has advised clients in a variety of industries, including textiles, marine and other types of manufacturing, automobile and boat dealerships, and health care entities of various types, including large physician medical practices and hospital trust services companies. His clients range in size from individuals navigating local markets to Fortune 100 companies with more than $1 billion in annual revenue, and he currently serves as outside general counsel for a leading manufacturer with locations in four U.S. states, China and India, as well as other companies in the manufacturing, fitness amenities, and appraisal services industries. EXPERIENCE • Representation of oil and gas exploration and production company in $75 million acquisition of Uinta Basin assets and related debt and equity financing. • Structured and negotiated multimillion-dollar sales and acquisitions of stock and assets of ongoing businesses, including representing certain members of a business’ management team in a $20+ million dollar acquisition of the equity of the managed business. • Structured and negotiated mergers, split-ups, split-offs, and spin-offs that utilized various non-recognition provisions of the Internal Revenue Code, including representing a group of sellers in connection with a multi-step reorganization and sale of a portion of the equity of their existing business at a valuation in excess of $55 million. • Represented borrowers in the negotiation and closing of various secured credit facilities, including a $125 million credit facility financed by private equity and supported by tax incentives and $50 million credit facility to finance a dividend recapitalization of the borrower. • Represented executive to determine the excise tax consequences of severance payments made upon a change in control of employer and negotiated settlement of claims for severance payments based in part on the same.
• Representation of oil and gas exploration and production company in $65 million reserve- based lending facility and $20 million term loan. • Representation of oil and gas exploration and production company in $55 million sale of midstream assets. • Representation of private equity fund in acquisition, reorganization, and partial divestiture of brewery and related operating assets. • Representation of textile company in $15 million revolving credit facility and $4 million of term loans. PROFESSIONAL AFFILIATIONS Will is an active member of the Taxation sections for both the American Bar Association and South Carolina Bar and has previously served as a Council Member of the South Carolina Bar, Tax Law Section. COMMUNITY SERVICE Will is active in the community, performing pro bono work for a charitable entity that provides affordable housing for low-income families and another that runs a group residence for children.
William O. Higgins Graybill, Lansche & Vinzani, LLC
Bill Higgins practices law in the Columbia office of Graybill, Lansche & Vinzani, LLC in the areas of commercial real estate law, tax law, business acquisitions, professional responsibility, legal ethics, and lawyer misconduct. He received his B.S. degree from Presbyterian College, his J.D. degree from the University of South Carolina School of Law, and his LL.M. degree in taxation from New York University School of Law. Active in the South Carolina Bar, he is a former chairperson of the Professional Responsibility Committee, the Ethics 2000 subcommittee, the Ethics Advisory Committee, and the Real Estate Practice Section Council. He was a member of the Task Force on Multi-Disciplinary Practice and currently serves on the Professional Responsibility Committee and the Ethics Advisory Committee. He is listed in Best Lawyers® in both Real Estate Law and Ethics and Professional Responsibility Law.
Thomas A. Brumgardt
Nelson Mullins Riley & Scarborough LLP
Tom Brumgardt practices in the areas of corporate law, mergers and acquisitions, and insurance regulation. Experience
• Experience with mergers and acquisitions, corporate formation and governance issues, commercial contract issues and other corporate transactions
• Experience with insurance regulatory issues (including captive insurance and other alternative risk transfer mechanisms)
Recognitions
• Chambers and Partners, Up and Coming Practitioner in S.C. Corporate/Mergers and Acquisitions (2016-2019)
• The Best Lawyers in America® -- Corporate Law, Corporate Governance Law, Mergers and Acquisitions (2014-2019)
Professional Activities
• Corporate, Banking, and Securities Section, South Carolina Bar (former chairman) • Former delegate, S.C. Bar’s House of Delegates • American Bar Association • South Carolina Bar Association • D.C. Bar • Richland County Bar Association
Leadership
• President and Chairman, South Carolina Captive Insurance Association (2012) • Former Secretary/Treasurer and Chairman of Governmental Affairs Committee, South
Carolina Captive Insurance Association • Former Director and Secretary/Treasurer of CIPAC, a political action committee of the
South Carolina Captive Insurance Association • Former Chairman and Section Delegate to House of Delegates, Corporate, Banking and
Securities Law Section of the South Carolina Bar • Graduate of Leadership Columbia (2004) Education
Education
• University of South Carolina School of Law, JD (2001) • University of South Carolina, Honors College, BS, Finance (1998)
Admissions
• South Carolina • District of Columbia • Practice Areas • Captive Insurance • Corporate Governance • General Counsel Services • Mergers & Acquisitions
Articles & Speeches
• Events/Speaking Engagements • Annual Conference 2016, Insurance Managers Association of Cayman - Speaker (December
2016) • S.C. Captive Insurance Association Conference - Speaker (November 16, 2016) • Montana Captive Insurance Association Tenth Annual Conference - Speaker (July 19-21,
2016)
Melissa Cassell Morton & Gettys
Melissa focuses her practice on corporate, employment law and commercial real estate. She is licensed in North Carolina and South Carolina, allowing her to better serve clients whose business and legal matters cross state lines. She represents clients in acquiring real estate, assets, entities and key employees, from start up to growth to winding up. With clients in a variety of industries, she has drafted and negotiated a myriad of agreements, including purchase and leasing agreements, employment and severance agreements, service agreements, buy and sell agreements, and corporate governance agreements. In the healthcare realm, Melissa has represented practitioners including dentists, physicians and physical therapists. She has assisted both for profit and nonprofit providers reaching and executing acquisition, employment and partnership agreements, all while navigating the various local and national requirements on healthcare providers. In 2009, Melissa earned her B.S. degree, cum laude, in Business Administration from the University of South Carolina where she was a member of Alpha Delta Pi sorority. In 2013, she earned her Juris Doctor degree from the University of South Carolina, where she was an editing member of the Real Property, Trust and Estate Law Journal, a member of the Pro Bono board and research assistant for Alan S. Medlin. Melissa has served as an adjunct professor at the University of South Carolina School of Law, teaching a Small Business Organization Law Capstone class in which third-year students navigate legal matters that face a hypothetical company during the formation and capitalization stages. As part of her practice, she regularly assists small business owners with many of those same issues, including formation, capitalization, and reorganization of their companies. Melissa lives in Fort Mill with her husband, Andrew and son, Ben.
L. Foster Girard
Haynsworth Sinkler Boyd, P.A.
Foster Girard concentrates on corporate finance and commercial transactions at Haynsworth Sinkler Boyd. Foster’s practice is rooted in real estate matters, where he represents buyers, sellers and developers, and serves as lender’s counsel. He handles a variety of real estate purchases and sales, and is well-versed in easement and land dispute matters. He also advises on a number of financing documents and commercial contracts involving goods (including under Article Two of the Uniform Commercial Code), services and commercial real estate, and works to find practical legal solutions to achieve his client companies’ business objectives. These solutions include general corporate matters, including choice of entity, entity formation and governance documents. In the past, he assisted on private placement offerings and on bank acquisitions. EDUCATION University of South Carolina, J.D., 2009 The Citadel, B.S., 2006 ADMISSIONS South Carolina, 2009 HONORS AND AWARDS
South Carolina Super Lawyers® "Rising Stars" Business/Corporate 2019 and Business Litigation 2018 Columbia Business Monthly's "Best & Brightest 35 and Under" 2017 and "Legal Elite of the Midlands" Commercial Real Estate Law 2018 Order of the Coif Order of the Wig and Robe Recipient of The Citadel's Mark W. Clark Honor Committee Award PROFESSIONAL AND CIVIC ACTIVITIES South Carolina Bar, Young Lawyers Division Community Law Week Co-Chair (2010-2013) and Fifth Circuit Representative (2013-2016) Leadership Columbia, Class of 2014 PRESENTATIONS AND PUBLICATIONS "Contract Review and Drafting," SC Bar Transactional/Corporate Law Essentials, June 8, 2018 "Who Runs this Place Anyway? Considering Corporate Governance Documents," HSB 2015 Corporate Law for Accountants Seminar Series
Christina L. Rogers
Michelin Corporation
Christy Rogers is Senior Corporate Counsel for Michelin North America, Inc. where she provides counsel and advice on employment and benefits-related matters for all Michelin operations in the United States. She also serves as Michelin’s data privacy counsel. Prior to her move in-house, Christy was an attorney with Fisher & Phillips, LLP where she primarily focused her practice on employment litigation matters and employment counsel and advice. Christy received her undergraduate degree from Clemson University, cum laude, and received her J.D. from the University of South Carolina School of Law, cum laude. Upon graduation from law school, Christy served as a law clerk to the Honorable Joseph F. Anderson, Jr., Senior U.S. District Judge for the District of South Carolina. Before attending law school, Christy was a litigation paralegal for eight years. In that capacity she worked on a variety of cases in both state and federal court, assisting with many depositions, hearings, mediations, and trials. During law school, Christy was a member of the Mock Trial Bar and was selected as a member of the national competition team. As a result of her advocacy skills, she was awarded the Sherod H. Eadon Scholarship and also served as Chief Justice of the Mock Trial Bar. At graduation Christy was the recipient of the prestigious Compleat Lawyer Award. She is the former co-chair of the SC Bar YLD iCivis Committee and serves on the In-House Counsel Committee for the SC Bar. She is a member of the John Belton O’Neall Inn of Court, which fosters excellence in professionalism, ethics, civility, and legal skills. In 2019 Christy was the recipient of Clemson University psychology department’s inaugural Distinguished Alumni Early Career Award.
Choice of Entity: Corporation or LLC
Robert Bethea, Jr. William Umbach
Transactional/Corporate Law Essentials
Friday, June 7, 2019
5/29/2019
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Choice of Entity
South Carolina Bar Conference Center
June 7, 2019
Rob Bethea, Esquire and
Will Umbach, Esquire
Adams and Reese LLP
Choice of Entity
Pre “Check the Box”• Entities were granted
tax status based on the balance of certain “factors”.
• LLCs could be treated as corporations if they included too many “corporate” characteristics.
Post “Check the Box”• Entities have a default
classification that can be electively changed.
• Formerly relevant factors are now generally irrelevant.
• Maximum flexibility available to planners.
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Important Choice of Entity Considerations
• Limited Liability– Members are not personally liable for the debts
and obligations of the LLC or vicariously liable for actions of others. There are exceptions:
• Assumption of liabilities through guaranties of debt or other obligations.
• Contribution obligations or other direct debts to the LLC and other members.
• Activities of the members that justify the “piercing of the veil.”
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Factors Considered in Corporate Piercing Cases
• gross undercapitalization,
• failure to observe corporate formalities,
• non-payment of dividends,
• the insolvency of the debtor corporation at the time,
• siphoning of funds of the corporation by the dominant stockholder,
• non-functioning of other officers or directors,
• absence of corporate records, and
• the fact that the corporation is merely a facade for the operations of the dominant stockholder or stockholders.
Application to LLCs
Courts have generally held that no single factor, but a combination of several, coupled with “an element of injustice or fundamental unfairness” will justify the lowering of the veil.
Piercing analysis, particularly in the LLC context, is a result driven analysis. If it smells bad, strikes against respecting the liability shield will be accumulated until the desired result (i.e., piercing) can be achieved.
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Important Choice of Entity Considerations
• Ownership Flexibility– No limit on the number of owners (S Corp
limited to 100).
– Individual persons, other entities, and trusts can all be members (S Corp has limits).
– Citizenship or foreign status irrelevant (S Corp has limits).
– Multiple classes of interests are permitted. This allows the inclusion of preferences or other financial rights applicable to less than all of the members (Single class of stock only in S Corp).
Important Choice of Entity Considerations
• Taxation– No entity level tax on income. All tax items
pass through LLCs and S Corps and are reflected on the owners’ individual returns.
– No gain recognition upon contribution of appreciated property to the LLC and no § 351 “control group” requirement. IRC § 721.
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Important Choice of Entity Considerations
– Distributions from LLCs (even of appreciated property) are generally tax free. IRC § 721.
– Liquidations are generally tax free and result in a transferred basis to the members in the distributed assets without triggering gain recognition. Compare this to corporations (even S corporations) where the “deemed sale upon distribution” construct can create income.
Important Choice of Entity Considerations
– Addition of LLC debt to member’s basis. LLC debts increase the outside basis of the members under IRC § 752 based upon their sharing of profits (default rule).
– Again, compare to S corporations where shareholders only receive additional basis credit for loans made by them to the corporation. Direct corporate obligations do not pass through and effect basis (nor do personal guarantees by shareholders of company debt).
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Important Choice of Entity Considerations
• Availability of other Partnership Tax Attributes.– § 754 Election allows basis adjustments:
• When a member purchases an interest in the LLC, IRC §743(b)(1) allows an adjustment equal to the difference between the member’s outside basis and share of inside basis in LLC assets.
• Distributions of cash or assets to a member that exceed their outside basis allow an upward adjustment by the LLC of its basis in other, retained assets. IRC § 734(b)(1)(A) and (B).
• The estate of a deceased LLC member can obtain an adjustment equal to the difference between outside basis (after step-up) and share of inside basis in LLC assets.
Important Choice of Entity Considerations
• Tax Cuts and Jobs Act– Section 199A permits owners of sole
proprietorships, S corporations, or partnerships to deduct up to 20% of income earned by the business.
– Creates parity between these pass-thru entities with the significant corporate tax cuts in the Act (i.e, 35% down to 21%).
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Important Choice of Entity Considerations
• While the intentions of 199A are clear, the statute is not.– Deduction of 20% of “qualified business
income” earned in a “qualified trade or business”
• Deduction is limited to greater of (1) 50% of W-2 wages or (2) the sum of 25% of W-2 wages, plus 2.5% of unadjusted basis immediately after acquisition of all depreciable tangible property.
Important Choice of Entity Considerations
• “Qualified trades and businesses” include all trades and businesses except the trade or business of performing services as an employee and "specified service" trades or businesses.
– Section 1202(e)(3)(A) - Any trade or business involving services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of its employees.
– Section 199A then adjusts this definition to (a) exclude engineering and architecture, (b) add investing, investment management, trading, or dealing in securities, partnership interests, or commodities, and (c) look to the reputation and skill of “employees and owners”.
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Important Choice of Entity Considerations
– QBI is net amount of income, gain, deduction, and loss with respect to a qualified trade or business conducted in the US.
• QBI excludes certain investment-related income, reasonable comp. paid to the taxpayer for services to the trade or business, and guaranteed payments under 707(c).
• There are many unanswered questions: – Is rental property included?
– How do you net income and loss for taxpayers with multiple QTBs or tiered company structures?
– Is comp. paid to an S corporation shareholder included in W-2 wages for purposes of the W-2 limitation?
Important Choice of Entity Considerations
• Limitations on Creditors– Creditors of LLC members are generally unable
to participate in the management of an LLC owned by a debtor. Creditors of shareholders can generally vote foreclosed shares of stock.
– Creditors may obtain a charging order and receive distributions from the LLC that would otherwise be provided to the debtor member. SC Code Section 33-44-504.
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Advantages Retained by Other Forms
• Certainty– Liability shield issues and results are generally
considered more predictable and certain with other forms.
– State by state treatment of other forms is more consistent. For example, Texas, Florida, Tennessee, and others impose special “privilege” or franchise taxes on LLCs that effectively treat them as corporations for state tax purposes.
Advantages Retained by Other Forms
• Certainty, continued. . .– Employment Tax Issues.
• “Net Earnings from Self-Employment” include the distributions received by partners from any trade or business carried on by the partnership. IRC §1402(a).
• An exclusion is provided for distributions to limited partners that are inherently passive and removed from management of the partnership.
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Advantages Retained by Other Forms
• Certainty, continued …– Employment Tax Issues, continued…
• The general rules described above pre-date LLCs.
• Members of member-managed LLCs are generally considered “general partners” for purposes of self-employment tax.
• Members in manager-managed LLCs that are not actively engaged in management are generally considered “limited partners” for purposes of self-employment tax.
Advantages Retained by Other Forms
• S Corporation Employment Tax Opportunities– Distributions from an S Corp to its shareholders are
generally not included in Net Earnings from Self-Employment.
– S Corp shareholders and their accountants will frequently divide the available cash flow between compensation (subject to withholding of employment taxes) and distributions related to the shares of stock held by the shareholders.
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Advantages Retained by Other Forms
• S Corporation Employment Tax Opportunities– Pigs get fed. Hogs get slaughtered.
– Failing to treat an appropriate portion as compensation can result in all distributions being treated as compensation subject to withholding of employment taxes.
Advantages Retained by Other Forms
• Practical Issues– Growth oriented businesses that intend to retain
(rather than distribute) cash may enjoy lower initial tax rates in the C Corporation setting.
– Sophisticated equity investors and lenders will often require C Corp structures to accommodate customary preferred classes, options, warrants, and other financing or equity structures.
– Tax-exempt entities and foreign investors may require a “blocker structure” to avoid pass-thru income or nexus issues.
Ethics Hypotheticals/Role Plays
William Higgins
Transactional/Corporate Law Essentials
Friday, June 7, 2019
5/31/2019
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TRANSACTIONAL / CORPORATE LAWESSENTIALS
June 7, 2019
ETHICS HYPOTHETICALS / ROLE PLAYS“Competence • Conflicts • Clients”
WILLIAM O. HIGGINS, ESQUIREGRAYBILL, LANSCHE & VINZANI, LLC
I. COMPETENCE
Rule 1.1 of the Rules of Professional Conduct:
A lawyer shall provide competent representation toa client. Competent representation requires thelegal knowledge, skill, thoroughness andpreparation reasonably necessary for therepresentation.
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II. CONFLICTS OF INTEREST
See Rules 1.7, 1.8, 1.9, 1.10, 1.13, and 1.18 of the Rules of Professional Conduct.
III.CLIENTS
The Rules of Professional Conduct identify at least five (5) types of clients. Can you name them?
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(CLIENTS‐ANSWERS)
• Current Client• Former Client• Prospective Client• Organizational Client• Client with Diminished Capacity
IV. HYPOTHETICALS
For Question 1 under each hypothetical, choose the bestanswer from the options provided.
A. Three friends (X, Y, and Z), each a sophisticatedbusinessperson, decide to go into business together.In order to reduce costs, they agree that they shouldengage one lawyer to represent them in connectionwith the formation and governance documents fortheir new entity. They schedule a meeting withLawyer A to discuss choice of entity and entitygovernance. They are unsure as to how to handlethe management of the new entity and whetherthey each need written employment agreementswith the new entity. Additionally, they anticipatebeing equal owners of the new entity, but their initialcapital contributions may vary so they are unsure asto whether voting rights should be equal.
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1. May Lawyer A ethically undertake the jointrepresentation of X, Y, and Z?
a. Yes, if it is clear that he can resolve all of theoutstanding issues without conflict, and if X, Y,and Z give their informed consent confirmed inwriting.
b. No, because this scenario presents aconcurrent conflict of interest among X, Y, andZ which cannot be consented to.
c. Yes, if he reasonably believes he can providecompetent and diligent representation to X, Y,and Z, and if all three give their informedconsent confirmed in writing.
d. No, unless X, Y, and Z agree that the entitystructure will include equal management andcontrol rights, as well as equal compensationamong X, Y, and Z.
FURTHER ASSUMPTIONS AND VARIATIONS:2. Assume that X is an existing client of Lawyer A.
Does that matter?3. Assume that X and Y are husband and wife. Does
that matter?4. Assume that only Z will be actively involved in the
day‐to‐day operations of the new entity. Doesthat matter?
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5. Assume that X is 75 years old, Y is 55 years old,and Z is 35 years old. Does that matter?
6. Assume that the new entity will be limited to thepassive ownership of investment real estate thatis managed by an independent propertymanagement company. Does that matter?
7. Assume that the new entity will be developingsophisticated and specialized software for sale tothird parties and will need assistance in draftingagreements with those third parties for the same.Does that matter?
8. Assume that the new entity intends to make aprivate placement offering to attract investors.Does that matter?
B. Lawyer A handled the defense of a copyrightinfringement suit against her client, Corporation X.That lawsuit lasted for more than three (3) years andincluded voluminous discovery related toCorporation X’s financial status, internal governance,and regulatory compliance. The lawsuit was settledprior to trial. Since that settlement, Lawyer A hasdone no work for Corporation X, and Corporation Xhas been using Lawyer B for all of its outside counselneeds for more than three (3) years.
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Lawyer A is approached by Corporation Y torepresent Corporation Y in connection with theacquisition of a portion of the operating assets ofCorporation X used in a line of business thatCorporation X is looking to divest itself of.
1. May Lawyer A ethically undertake therepresentation of Corporation Y?a. Yes, Corporation X is a former client, and the
matter on behalf of Corporation Y is not thesame or substantially related to the copyrightinfringement suit that Lawyer A handled forCorporation X.
b. No, unless Corporation X gives its informedconsent confirmed in writing.
c. Yes, but only if Lawyer A agrees not to use ordisclose any information about Corporation Xlearned or obtained in the copyrightinfringement case.
d. No, the representation of Corporation Y byLawyer A would constitute a prohibitedconcurrent conflict of interest.
FURTHER ASSUMPTIONS AND VARIATIONS:2. Assume that the previous litigation settled
shortly after Lawyer A became involved such thatLawyer A was not exposed to information aboutCorporation X’s financial status, internalgovernance, and regulatory compliance. Doesthat matter?
3. Assume that the previous litigation settled six (6)months ago. Does that matter?
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Thank You!
GRAYBILL, LANSCHE & VINZANI, LLC
LLC Formation
Robert Bethea William Umbach
Transactional/Corporate Law Essentials
Friday, June 7, 2019
1
Transactional/Corporate Law Essentials
LLC Formation
South Carolina Bar Conference Center
June 7, 2019
Rob Bethea, Esquire and
Will Umbach, Esquire
Adams and Reese LLP
LLC Formation - Initial Questions
• What is the proposed name of the LLC?
• What are the general purposes of the LLC?
• Are there limitations on what it can or should do?
• Will the LLC exist for purposes of a single transaction or finite period of time?
• How many members will the LLC have?
• Who are the members (name, address, SSN or EIN)?
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Initial Questions, cont…
• Who will control the activities of the LLC?
• Will the LLC have non-member employees?
• Are there any special licenses or government approvals needed to conduct the LLC’s business?
• Where are the LLC’s offices located?
• Who will serve as the registered agent?
Organizational Basics
• Essential Documents– Articles of Organization
– Appropriate Federal Tax Forms
– Appropriate State Filings
– Operating Agreement
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Articles of Organization
• § 33-44-203(a) Articles must set forth:– Name (§ 33-44-105 governs naming of LLCs).
– Initial designated office address.
– Name and address of registered agent.
– Name and address of each organizer.
– If LLC is a “term company” and length of term.
– If a member is liable for any particular LLC debts.
Articles of Organization
• § 33-44-203(a) Articles may set forth:– Provisions permitted in an operating agreement.
– Other matters not inconsistent with law.
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Optional Provisions
• Any matters appropriate for the Operating Agreement can be included in the articles.
• Provisions indicating the specific purpose of the entity.
• Common limitations include restrictions on the authority of members or managers to transfer property. § 33-44-101(c).
• SPE or “Bankruptcy Remote” language.
Examples of Filed Articles
Basic Articles of Organization for a member-managed real estate
investment LLC.
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Examples of Filed Articles
Expanded Articles of Organization for a special purpose real estate
investment LLC.
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Basic Delaware “Articles”
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Additions and Amendments to Articles of Organization
§ 33-44-101(1) provides the definition.
"Articles of organization" means initial, amended,and restated articles of organization, and articles ofmerger. In the case of a foreign limited liabilitycompany, the term includes all records serving asimilar function required to be filed in the Office ofthe Secretary of State or other official havingcustody of company records in the State or countryunder whose law it is organized.
Matters Requiring Amendment
• Change in At Will or Term Status.
• Name Changes.
• Limitations on member or manager authority that are to be binding on third parties.
• Changes to Management Structure.
• Other matters that were formerly updated on an annual basis in the report required before January 1, 2004.
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Effect of matters not documented in Articles.
• No notice to third parties.
• Not automatically binding on parties dealing with the LLC.
• May be binding on members and mangers if part of the Operating Agreement or a duly approved amendment to the Operating Agreement.
Management Structures
• Basic choice is between member-managed and manager-managed.
• Variations on either option are endless.
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Member-Managed Variations
• 1 Member = 1 Vote is the default rule.– § 33-44-404. “In a member-managed company
each member has equal rights in themanagement and conduct of the company'sbusiness and except as otherwise provided insubsection (c), any matter relating to thebusiness of the company may be decided by amajority of the members.”
• Pro-rata voting is a common modification in many Operating Agreements.
Per Capita Voting
• Each member gets one vote.
• The size of the member’s interest in the LLC is irrelevant.
• In this example, Bob, Jim and Pete represent a majority.
Bob 10%
Jim 10%
Pete 10%
Sue 70%
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Pro Rata Voting
• Each member’s vote is based upon their respective interest in the LLC.
• In this example, Sue controls all majority-based decisions in the LLC. Bob, Jim and Pete are along for the ride.
Bob 10%
Jim 10%
Pete 10%
Sue 70%
Member-Managed Variations
Majority vote may control for all but certain designated matters where unanimity is the default rule. There are 12 identified circumstances that require approval by all members.
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Member-Managed Variations
• To further confuse matters, Members in a member-managed entity may delegate certain responsibilities to “managing-members” or other designated officers or agents. The authority of these “unofficial managers” is purely a matter of contract. In the absence of language in the Articles describing the management structure, each member will retain the apparent authority to conduct the LLC’s business.
Unanimity Required
33-44-404(c). The only matters of a member or manager-managed company's business requiring the consent of all ofthe members are:(1) the amendment of the operating agreement under Section33-44-103;(2) the authorization or ratification of acts or transactionsunder Section 33-44-103(b)(2)(ii) which would otherwiseviolate the duty of loyalty;(3) an amendment to the articles of organization underSection 33-44-204;(4) the compromise of an obligation to make a contributionunder Section 33- 44-402(b);
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Unanimity Required, cont…
(5) the compromise, as among members, of an obligation of a member to make a contribution or return money or other property paid or distributed in violation of this chapter;
(6) the making of interim distributions under Section 33-44-405(a), including the redemption of an interest;
(7) the admission of a new member;
(8) the use of the company's property to redeem an interest subject to a charging order;
Unanimity Required, cont…
(9) the consent to dissolve the company pursuant to Section 33-44-801(2);
(10) a waiver of the right to have the company's business wound up and the company terminated under Section 33-44-802(b);
(11) the consent of members to merge with another entity under Section 33- 44-904(c)(1); and
(12) the sale, lease, exchange, or other disposal of all, or substantially all, of the company's property with or without goodwill.
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Manner of Acting by Members
• Meetings of Members
• Without a meeting. §33-44-404(d).
• Through appointment of a proxy by execution of a written appointment.
Manager-Managed Variations
§ 33-44-404(b). In a manager-managed company:(1) each manager has equal rights in the management and conductof the company's business;(2) except as otherwise provided in subsection (c), any matterrelating to the business of the company may be exclusively decidedby the manager or, if there is more than one manager, by a majorityof the managers; and(3) a manager:
(i) must be designated, appointed, elected, removed, orreplaced by a vote, approval, or consent of a majority of themembers; and
(ii) holds office until a successor has been elected andqualified, unless the manager sooner resigns or is removed.
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Member Approval Rights
• Generally, members have no rights to participate in the management and conduct of the LLC’s business.
• The same 12 items contained in 33-44-404(c) apply to manager-managed LLCs and unanimous member consent is required unless these default rules are modified by agreement.
Manager Voting
• Each Manager is entitled to a single vote.
• Each Manager has the apparent authority to carry on the business of the LLC in the ordinary course.
• Filed Articles have the effect of placing third parties on notice that the LLC is manager-managed.
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Manner of Acting by Managers
• Meetings of Managers
• Without a meeting. §33-44-404(d).
• Through appointment of a proxy by execution of a written appointment.
§ 33-44-409 imposes two duties on Members and Managers
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Duty to be Careful
• § 33-44-409(c).• Applicable to members in a member-managed
LLC.• Applicable to managers in a manager-managed
LLC.• NOT applicable to members in a manager-
managed LLC.• Cannot be grossly negligent, reckless, engage in
intentional misconduct or knowing violation of law.
• Operating Agreements cannot “unreasonably reduce” duty of care. § 33-44-103(b)(3).
Duty to be Loyal
• § 33-44-409(b).• Applicable to members in a member-
managed LLC.• Applicable to managers in a manager-
managed LLC.• NOT applicable to members in a manager-
managed LLC.• Operating Agreements cannot eliminate the
duty of loyalty. § 33-44-103(b)(2).
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Duty of Loyalty, cont…
• Preserve Company Property. “To account to the company and to hold as trustee for it any property, profit, or benefit derived by the member in the conduct or winding up of the company's business or derived from a use by the member of the company's property, including the appropriation of a company's opportunity.”
• Adverse Conduct. “To refrain from dealing with the company in the conduct or winding up of the company's business as or on behalf of a party having an interest adverse to the company.”
• Non-Compete. “To refrain from competing with the company in the conduct of the company's business before the dissolution of the company.”
Good Faith and Fair Dealing
• While not a separate duty, the duties of care and loyalty must be discharged in accordance with these concepts.
• The duties of loyalty and care and obligations to act fairly and in good faith are not violated because a member’s conduct furthers his or her own interests.
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A Word About the SC Revised Uniform LLC Act
• Replacement for the existing 1996 Act.
• Based upon 2006 Uniform Act.
• The proposed legislation before the SC Legislature varies slightly from the form of the Uniform Act and contains numerous differences from the present SC Statute.
Primary Changes
• Section 110 – The Operating Agreement controls and the parties are free to contract on matters formerly restricted by our act (e.g., statutorily provided fiduciary duties). Modifications to fiduciary duties must be in writing.
• Article 3 – Authority of members and managers is clarified. – There is no presumed automatic agency authority of members and you must refer to the
Operating Agreement.
– Use of a filed and/or recorded Statement of Authority is authorized.
– Statements of Authority can be permissive or restrictive and can be filed with SC SOS as evidence of management authority (i.e., the Articles no longer specify member or manager managed) or recorded as notice to third parties if relating to real estate transfers by LLC.
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Primary Changes, cont.
• Article 4 – Clarifies the parties needed to form LLCs, preformation rights and duties of parties, and how parties become members of new LLCs.
– We elected to not allows for “shelf LLCs” due to SC SOS concerns.
– Clarifies what constitutes, and does not constitute, distributions to members.
– Continues “per capita” default rule for distributions.
– The operating agreement (not the Articles) specifies the LLC management structure.
– The duties in Section 33-44-409 are the exclusive duties and can be modified or eliminated by agreement (except for good faith and fair dealing).
• Article 5 - Clarifies the nature of an Assignee’s interest and the nature/process of foreclosing a charging order.
Primary Changes, cont.
• Article 6 – LLCs will all have perpetual duration unless the Operating Agreement establishes a specific term.
– Withdrawal before termination is “wrongful” unless permitted by the Operating Agreement.
– Prior law required a redemption of a member in an at will company and of a member in a term company at the end of the term. Old LLC agreements may need to be modified to deal with this change).
• Article 7 – Updates and expands on dissolution and winding up. A more practical method for dealing with LLCs with no active members is provided.
• Article 10 – More flexible and complete merger, conversion, and domestication provisions are now included. The concept of dissenters rights can by included in the Operating Agreement.
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SC Specific Changes
• No Shelf Registrations.
• Delaware model with respect to modification of fiduciary duties by Operating Agreement.
• No Annual Report required.
• Direct action by members for injury to LLC without resorting to derivative action (ABA Model Act).
• Our existing conversation statute of partnerships to LLCs and LLCs to partnerships, LP, and corps was retained.
Buy-Sell Agreements
Robert Bethea William Umbach
Transactional/Corporate Law Essentials
Friday, June 7, 2019
5/29/2019
1
Buy-Sell Agreements and
Succession Planning
South Carolina Bar Conference Center
June 7, 2019
Rob Bethea, Esquire and
Will Umbach, Esquire
Adams and Reese LLP
Drafting Considerations
and Exit Strategies
5/29/2019
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What are Buy-Sell Agreements?
• They are contracts in which the owners of business interests agree to impose restrictions on their own property for the mutual benefit of the group and the company.
• General principles of law favor free alienation. Buy-Sell agreements are enforceable, but can be scrutinized.
What are Buy-Sell Agreements?
• Can be separate written agreements or contracts with a limited purpose or embedded within other governing documents.
• Can be generally applicable to all interests and owners or drafted to deal with the circumstances of a particular owner or class of interest.
• Fewer than all owners can enter into a buy-sell, but the restrictions will not be applicable to individuals that are not parties to the agreement.
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What are Buy-Sell Agreements?
• “Buy-Sells” raise significant tax, legal and business issues.
• They frequently are designed to:– Provide for the orderly transfer of a business.
– Improve liquidity and value by creating a market for a relatively illiquid and unmarketable security.
– Prevent meddling from outsiders, competitors, or creditors of the business and its owners.
– Resolve or manage disputes between owners of the business in a timely fashion.
What are Buy-Sell Agreements?
– Restrict competitive activities of former owners.
– Limit who may exercise significant control over the business.
– Limit ownership to active or valuable participants in the venture.
– Protect the rights of minority owners.
– Establish a value for estate planning and administration purposes.
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“Default” LLC Buy-Sell Provisions
• Sections 33-44-501(b) and 33-44-502 provide that a member may only freely transfer their distributional interest in the LLC.
• The transferee of an LLC distributional interest does not succeed to the management rights inherent in the membership interest or automatically become a member in the LLC.
• The transferee is entitled to receive only the distributions to which the transferor member would have been entitled and may only become a member upon approval by other members.
“Default” LLC Buy-Sell Provisions, cont…
• Section 33-44-701(a)(1) requires LLCs to purchase a dissociated member’s distributional interest in an at-will company upon dissociation.– The value is equal to its fair value on the “date of
dissociation”.– An offer from the LLC is due 30 days after the
dissociation.– The offer must include a current balance sheet, income
statement, and explanation of how the value was calculated.
– Failure to reach agreement within 120 days provides the dissociated member with the right to seek enforcement of the purchase in court.
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“Default” LLC Buy-Sell Provisions, cont…
• Section 33-44-701(a)(2) requires LLCs to purchase a dissociated member’s distributional interest in a term company upon expiration of the LLC’s term.– The value is equal to its fair value on the date the term
of the LLC expires.– An offer from the LLC is due 30 days after the
expiration of the term.– The offer must include the same financial information.– Failure to reach agreement within 120 days provides
the dissociated member with the right to seek enforcement of the purchase in court.
“Default” LLC Buy-Sell Provisions, cont…
• In both cases, specific agreements between the members regarding valuation and payment terms will control (unless the LLC breaches the agreement).
• An action to enforce a purchase right provides the court with the ability to determine fair value and order the LLC to pay that value.
• The purchase price (whether agreed or judicially determined) must be offset by damages and other amounts owed to the LLC by the dissociated member.
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“Default” Corporate Buy-Sell Provisions
• Preemptive Rights, Section 33-6-300 - SC is an “opt-out” jurisdiction. A corporation cannot issue shares without first offering to present shareholders.
• Dissenters Rights, Section 33-13-101 - Provide certain shareholders with right to sell stock and withdraw investment when a corporation engages in transactions affecting shareholder rights, risk, or value.
• Statutory Close Corporations– Section 33-18-110 Share Transfer Prohibition
– Section 33-18-120 Share transfer after first refusal by corporation
– Section 33-18-130 Attempted transfer after breach of prohibition
– Section 33-18-140 Compulsory purchase after death
“Default” Buy-Sell Provisions, cont…
• These standard methods are often not practical methods of handling transfers of interests.
• They are all “waivable” and may be modified by agreement.
• In the presence of an operating agreement or shareholders agreement, the statutes merely serve as a failsafe or backup in the event of a breach, invalidity, defect, or other circumstance rendering the agreement ineffective.
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Buy-Sell Provisions in LLC Operating Agreements
• Members are not likely to find a market for their interests and should consider methods for terminating their investment in the entity at the inception of the LLC.
• The Operating Agreement is the appropriate place for these issues to be addressed, though separate buy-sell agreements and buy-sell clauses in other agreements between the LLC or its members are not uncommon.
Basic Formats of Buy-Sells
• Redemption Agreement. Contract between an owner and entity where the owner agrees to sell their interest to the entity itself under certain circumstances.– Usually require that sale or transfer to a party that is not already an
owner be preceded by an offer to the entity.– The death of an owner will usually trigger a sale by the owner’s
estate to the entity.
• Cross-Purchase Agreement. Contract among the owners where they each agree to offer their interests to each other under certain circumstances.
• Hybrid Agreements. Contract among the owners and the entity where each is granted certain rights to purchase the interests of a dissociating, withdrawing or departing owners.
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Form of Agreement Driven By:
• Tax issues– effect on taxable year of entity and owners– recognition of gain or loss by selling owner– character of gain recognized on a sale
• Business issues– Liquidity of the parties– Concerns over control
• Structural Concerns– What events should trigger the Buy-Sell?– Who are the likely buyers?– How will the purchase price be determined?
Tax Issues
• In the LLC and partnership setting, redemption and cross-purchase buy-sell provisions produce more equivalent results than in the corporate context.
• The character of this gain will vary depending on the structure of the agreement.
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Business Issues
• Liquidity– Redemption Agreement can often provide a
more liquid and solvent buyer.• Owners will frequently build assets inside the
company, rather than outside the company.
• If funding mechanisms are involved (e.g., life insurance on the owners) fewer policies will be required.
• The costs of funding the buy-sell are apportioned more equally among the owners.
Business Issues, cont…
• Concerns over Control– Cross purchase agreements provide owners the
opportunity to shift control of the entity through the direct acquisition of additional interests.
– Redemptions maintain the relative ownership of the owners in the company.
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Structural Concerns
• Common Triggering Events:• Voluntary Transfers
– Sales or Exchanges to outside parties.– Sales or Exchanges to existing owners.– Gifts or bequests.
• Consider allowing transfers to certain trusts to facilitate estate planning activities of members.
• Involuntary Transfers– Foreclosure.
• Notice to potential creditors and a restriction on the ability of a member to encumber an interest are important.
– Transfers incident to divorce.– Satisfaction of other judgment creditors.
Structural Concerns, Common Triggering Events, cont…
• Employment/Activity Related Restrictions– Termination of employment.
– Failure to participate in a defined manner or provide certain “sweat equity.”
• Note that restrictions rising to the level of a forfeiture are subject to additional scrutiny and may be unenforceable.
– Disability of a Member.
– Loss of licensure or other qualifications necessary to conduct of business.
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• Death of a member.– These are generally enforceable.
– The agreement should indicate that the parties desire for their estates, personal representatives and heirs to be subject to such restrictions.
– Can establish the value of the interest for estate tax purposes.
Structural Concerns, Common Triggering Events, cont…
Structural Concerns, Types of Transfer Restrictions
• Complete prohibition on transfers.– limiting and dramatically affects value.– An agreement that provides for transfers with the
consent of “all other parties” is, effectively, a complete prohibition.
– Used most often to prohibit encumbrances.
• Limit transfers to qualified buyers.– Common in professional settings.– Can also be drafted to require approval of less than all
members as an alternative to a complete prohibition.
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• Right of First Refusal– The existing members can “step into the shoes”
of a prospective purchaser.
– Does not overly restrict a member’s ability to sell, but does provide other members with the ability to protect the entity and its ownership.
– Draft carefully to avoid “set-up” offers designed to force a buy-out.
• Mandatory Sales and Purchases– Most common in the event of death.
– Do not provide a mandatory purchase obligation without a funding mechanism.
– Life insurance, disability income insurance, and disability buy-out insurance are the most common forms of funding for these provisions.
Structural Concerns, Types of Transfer Restrictions
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• Options– Common with termination of
employment/retirement triggers.
– The company may elect to not exercise option and allow an inactive or passive owner.
– Can also take the form of calls, puts, and tag-along clauses that may be negotiated between the parties.
Structural Concerns, Types of Transfer Restrictions
• Russian Roulette or Slice-of-the-Pie Clauses– Designed to separate two or more business
owners.
– One party sets the price, the other party decides to buy or sell.
– Really only useful where the parties are of relatively equal financial strength and have an equal chance at successfully running entity.
Structural Concerns, Types of Transfer Restrictions
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• Exclusions to Certain Transferees. Can be used to prevent transfers to: – competitors,
– factions or groups of owners,
– former owners, and
– terminated employees.
Structural Concerns, Types of Transfer Restrictions
Structural Concerns, Valuation Methods
• To be useful, a valuation method must be reasonable, certain, and unambiguous on the date the agreement is adopted.
• The selected method must yield a readily determinable and comparable price when applied to the company and its business.
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Structural Concerns, Valuation Methods
• The Buy-Sell Agreement will most often be executed at the inception of a venture when problems are not anticipated.
• The Buy-Sell Agreement will be scrutinized when there are problems.
• It is important that all involved agree on the propriety of the method chosen and are comfortable with the clarity and certainty of its components.
Structural Concerns, Valuation Methods
• Determinability means that the chosen method, when applied, will result in a value without additional components or steps being required of the parties.
• For estate tax purposes, only agreements that provide for a determinable agreement price will be successful in fixing estate tax values.
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Structural Concerns, Valuation Methods
• Again, for estate tax purposes, the price established by the agreement must be reasonable.
• A price is deemed reasonable on such date if it is represents fair market value of the interest at that time.
Structural Concerns, Valuation Methods
• Comparability requires that a taxpayer show that the valuation method is similar to that used in other arms’ length transactions.
• Treasury Regulations under IRC Section 2703 indicate that a buy-sell agreement term, such as a valuation method, will be found comparable if it is one that could have been obtained in a fair bargain between unrelated parties in the same business or industry dealing at arms’ length.
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Structural Concerns, Specific Valuation Approaches
• Fixed dollar agreements establish a value for an interest on the day that the agreement is executed.
• These are the most simple of agreements, but lack the ability to track changes in value without subsequent amendments.
• To solve this problem, the agreement may have an adjustment mechanism that will periodically change the fixed value to a more current amount.
Structural Concerns, Specific Valuation Approaches
• Formulaic Valuation Methods provide an endless range of choices.
• Most formulas consider one or more of the following:– Revenues/Earnings,– Distribution/Dividend history and probability,– Book value of assets, or – Minority and marketability discounts or control
premiums.
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Structural Concerns, Specific Valuation Approaches
• Revenue or Earnings based formulas are most useful where the company will be selling goods or services.
• Care must be taken to define what is meant by “earnings” or “revenues”.
• Appropriate adjustments must be made to generate a clear picture of the business and its profitability.
Structural Concerns, Specific Valuation Approaches
• A multiple of earnings or capitalization rate is then applied to determine the price.
• Very little industry data exists for closely held business and it is difficult to arrive at an appropriate multiple.
• The chosen multiple will usually be driven by the risk of the venture with issues such as stability, growth patterns, customer concentration, and obsolescence driving the multiple.
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Structural Concerns, Specific Valuation Approaches
• Distribution/dividend history is a variation on the earnings analysis that looks at the cash flow generated by a business to its passive owners.
• Typically useful where goods and services are not the means of producing income, but where income is derived from a fixed revenue stream (e.g., a lease).
Structural Concerns, Specific Valuation Approaches
• Book Value and Net Asset Value methods are most common in investment property and holding company scenarios where the incremental growth (or decline) in the value of the underlying asset is the most important factor.
• Book Value will reflect the FMV of an asset on the day it is acquired, but typically will not reflect FMV into the future.
• Book value will typically fail to capture zero basis intangibles such as goodwill, customer lists, etc…
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Structural Concerns, Specific Valuation Approaches
• Net Asset Value will typically refer to the adjusted book value of assets, less liabilities.
• Typical adjustments include revaluation of real property, securities and other investments, the retention of a residual value in depreciable property, and the addition of an intangibles component.
Structural Concerns, Specific Valuation Approaches
• Appraised Valuations are useful when the best method of valuation is unclear or the parties are unable to agree.
• A particular appraiser can be named in the agreement or a panel of appraisers can be selected by the parties.
• The qualifications of the appraisers should be established in the agreement and the parties should agree to follow/accept the recommendations of the appraisers.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 1
Transactional/Corporate Law Essentials
South Carolina Bar Conference Center
June 7, 2019
Rob Bethea, Esquire and Will Umbach, Esquire
Adams and Reese LLP
Sample Operating Agreement Buy-Sell Clauses
1. Termination of Employment Triggering a Redemption Option
2. Retirement Trigger
3. Withdrawal or Disability
4. General Restrictions on Transfers
5. Prohibition on Transfers
6. Qualifications/Licensure of Transferees
7. Voluntary Transfer Triggering a Cross Purchase Option
8. Involuntary Transfer Triggering a Cross Purchase Option
9. Transfer at Death Triggering a Mandatory Cross Purchase
10. Basic Right of First Refusal/Cross Purchase
11. Basic Right of First Refusal/Redemption
12. Russian Roulette/Slice of the Pie Clause
13. Fixed Agreement Price
14. Simple Third Party Offer/FMV Appraisal
15. Appraisal Panel Valuation
16. Life Insurance Funding
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 2
Termination of Employment Triggering a Redemption Option
8.5 Termination of Active Participation. The parties desire to limit the ownership of the
Membership Interests in the LLC to active participants in the LLC’s business, it being in the best interests
of the LLC and its Members. Therefore, it is agreed that any Member who, at any time, ceases to be a full-
time participant in the LLC’s business (i.e., in the nature of a full-time employee), for any reason, shall be
deemed to have offered to sell his Membership Interest at the Agreement Price and on the Agreement
Terms. Such offer shall be deemed made on the date on which such Member ceased to be an active
participant in the LLC’s business.
8.5.1. The LLC shall have thirty (30) days in which to elect to buy the Offered Interest.
The LLC may exercise this purchase option by giving the Offering Member written notice within
such option period.
8.5.2. If the LLC does not agree to buy all of the Offered Interest within such option period,
the Offering Member may retain the portion of the Offered Interest that the LLC did not elect to
buy; however, such Interest of the LLC shall remain subject to all provisions of this Agreement
except this Section 8.5.
8.5.3. Nothing in this Agreement imposes any obligation on the LLC to employ or retain
any Member. The right to compel the sale of a Member's Membership Interest under this Section
shall be in addition to any right to expel a Member under other provisions of this Agreement.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 3
Retirement Trigger
8.2. Purchase Upon Retiring Event. For purposes of this Agreement, "Retiring Event" means, with
respect to any Member, the first to occur of (a) the death of such Member, (b) the Disability of such Member,
(c) the bankruptcy of such Member, (d) the Normal Retirement of such Member, or (e) an Accepted
Transfer to another provider of professional dental services. The Member with respect to whom a Retiring
Event occurs is sometimes referred to herein as a "Retiring Member." Upon the occurrence of a Retiring
Event, the LLC shall continue without dissolution, and the Retiring Member shall cease to be a Member,
have no further right to participate in the LLC's business, profits, losses, or distributions and be deemed to
have offered to sell all of its Membership Interests to the LLC on the terms provided in this Section 8.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 4
Withdrawal or Disability
8.3. Withdrawal or Disability. Any Member who is expelled, withdraws, retires, becomes a
Disabled Member or otherwise ceases to provide services as an active Member of the LLC, shall be deemed to
have offered to sell all of his or her Membership Interest in the LLC to the LLC for the Purchase Price and on
the Purchase Terms set forth herein and the LLC shall accept such offer.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 5
General Restrictions on Transfers
Option 1
8.1. Restrictions on Transfers. The Members do not want any Membership Interests to be made
generally available to persons other than the present Members. Therefore, in addition to restrictions
provided under applicable state law, the Members agree that no Member will Encumber, Transfer, or permit
to be Encumbered or Transferred, all or any portion of his or her Membership Interest, whether now or
hereafter acquired, except in accordance with the terms of this Agreement. No attempted Encumbrance or
Transfer of any Membership Interest not in accordance with the terms of this Agreement shall be reflected
on the LLC's books.
Option 2
8.1. Restrictions on Transfers. No Member shall Transfer all or any portion of its Membership
Interest or any rights therein without the unanimous consent of the Members. Any Transfer or attempted
Transfer by any Member in violation of the preceding sentence shall be null and void and of no force or
effect whatever. Each Member hereby acknowledges the reasonableness of the restrictions on Transfer
imposed by this Agreement in view of the LLC purposes and the relationship of the Members. Accordingly,
the restrictions on Transfer contained herein shall be specifically enforceable. Each Member hereby further
agrees to hold the LLC and each Member (and each Member's successors and assigns) wholly and
completely harmless from any cost, liability, or damage (including, without limitation, liabilities for income
taxes and costs of enforcing this indemnity) incurred by any of such indemnified persons as a result of a
Transfer or an attempted Transfer in violation of this Agreement.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 6
Prohibition on Transfers
8.2. Encumbrance. No Member may Encumber any or all of his or her Membership Interest in
connection with any debt.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 7
Qualifications/Licensure of Transferee Members
Notwithstanding anything herein to the contrary, (a) no person, organization, or entity may be a Member
of this LLC unless such person, organization, or entity is a "Qualified Person" within the meaning of Section
33-19-103(1) of the South Carolina Code if the LLC was a South Carolina professional corporation; (b) the
LLC shall not have any power to engage in any activity or carry on any business that is not authorized by
the licensing authority of South Carolina applicable to the dental profession; and (c) the LLC may not render
any professional service or engage in any business other than the professional dental services and ancillary
activities authorized by this Agreement.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 8
Voluntary Transfer Triggering a Cross Purchase Option
8.3. Voluntary Lifetime Transfers. No Member may make any Voluntary Lifetime Transfer
except pursuant to this section. Any Member who wishes to make any Voluntary Lifetime Transfer must
promptly send a notice to each other Member and be deemed to have offered to sell his or her Membership
Interest otherwise to be Transferred to the other Members at the Agreement Price and on the Agreement
Terms. Such notice shall include a statement of the type of proposed Transfer, the name, address (both
home and office), and business or occupation of the person to whom such Membership Interest would be
Transferred, and any other facts that are or would reasonably be deemed material to the proposed Transfer.
8.3.1. Each other Member shall have sixty (60) days from such notice in which to elect
to buy all or any of the Offered Membership Interest. The other Members may elect to buy the
Offered Membership Interest in proportion to their respective membership Interests (excluding the
Offered Membership Interest), or in such other proportion as they shall agree upon.
8.3.2. If the other Members do not agree to buy in the aggregate all of the Offered
Membership Interest within such option period, such Lifetime Transfer may be completed. If a
Lifetime Transfer is not consummated within thirty (30) days after the expiration of such Member
option period, the provisions of this Agreement will again apply to such Offered Membership
Interest as if no such Lifetime Transfer had been contemplated and no notice had been given. A
Lifetime Transfer is consummated when the LLC has been given notice that legal title to the
Membership Interest has been Transferred, subject to recordation on its books.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
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Involuntary Transfer Triggering a Cross Purchase Option
8.4. Involuntary Lifetime Transfers. Any Member who has any information that would
reasonably lead him or her to expect that an Involuntary Lifetime Transfer is foreseeable must promptly
send a notice to each other Member and be deemed to have offered to sell his or her Membership Interest
otherwise to be Transferred to the other Members at the Agreement Price and on the Agreement Terms.
Such notice shall include a statement of the type of proposed Transfer, the name, address (both home and
office), and business or occupation of the person to whom such Membership Interest would be Transferred,
and any other facts that are or would reasonably be deemed material to the proposed Transfer.
8.4.1. Each other Member shall have sixty (60) days from such notice in which to elect
to buy all or any of the Offered Membership Interest. The other Members may elect to buy the
Offered Membership Interest in proportion to their respective Membership Interests (excluding the
Offered Membership Interest), or in such other proportion as they shall agree upon.
8.4.2. If the other Members do not agree to buy in the aggregate all of the Offered
Membership Interest within such option period, such Involuntary Lifetime Transfer may be
completed. If an Involuntary Lifetime Transfer is not consummated within thirty (30) days after
the expiration of such Member option period, the provisions of this Agreement will again apply to
such Offered Membership Interest as if no such Involuntary Lifetime Transfer had been
contemplated and no notice had been given. An Involuntary Lifetime Transfer is consummated
when the LLC has been given notice that legal title to the Membership Interest has been
Transferred, subject to recordation on its books.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 10
Transfer at Death Triggering a Mandatory Cross Purchase
8.5. Transfers at Death. On the death of any Member, his or her Personal Representative will
immediately be deemed to have offered to sell to the other Members all of the deceased Member's
Membership Interest at the Agreement Price and on the Agreement Terms, and such each other Member
shall accept such offer and agree to buy such shares of the Offered Membership Interest in proportion to
their Membership Interests (excluding the Offered Membership Interest), or in such other proportion as
they shall agree upon.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
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Basic Right of First Refusal/Cross Purchase
8.2. Right of First Refusal. A Member who wishes to Transfer any Membership Unit, or who has reason
to believe that an involuntary Transfer or a Transfer by operation of law is reasonably foreseeable (an
"Offering Member"), shall first give each other Member written notice of the intent to Transfer such
Membership Unit (the "Offered Units") or of the knowledge that an Involuntary Transfer or Transfer by
operation of law is reasonably foreseeable. This notice must contain a description of the number of
Membership Units to be Transferred, the consideration (if any) to be paid, the terms of Transfer and of the
payment of consideration (including but not limited to the relative percentages of cash and debt, and the
terms of any debt instruments), and the name, address (both home and office), and business or occupation
of the person to whom the Offered Units would be transferred, and any other facts which are or would
reasonably be deemed material to the proposed Transfer.
8.2.1. Upon the receipt of such notice, each other Member shall have a right to buy that
share of the Offered Units having the same proportion to all of the Offering Member's Membership
Units as the buying Member's Membership Units bears to the Membership Units held by all
Members (except the Offering Member).
8.2.2. Each Member may exercise this purchase option by giving the Offering Member
written notice within thirty (30) days after receipt of the latter's notice.
8.2.3. If the Members do not agree to buy all of the Offered Units, the Offering Member
may complete the intended Transfer. If this Transfer is not completed within thirty (30) days after
expiration of the option period, any attempted Transfer shall be deemed made under a new offer
and this Section shall again apply.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
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Basic Right of First Refusal/Redemption
8.2. Right of First Refusal. A Member who wishes to Transfer any Membership Interest, or who has reason
to believe that an involuntary Transfer or a Transfer by operation of law is reasonably foreseeable (an "Offering
Member"), shall first give the LLC written notice of the intent to Transfer such Membership Interest (the
"Offered Interest") or of the knowledge that an Involuntary Transfer or Transfer by operation of law is
reasonably foreseeable. This notice must contain a description of the portion of Membership Interest to be
Transferred, the consideration (if any) to be paid, the terms of Transfer and of the payment of consideration
(including but not limited to the relative percentages of cash and debt, and the terms of any debt instruments),
and the name, address (both home and office), and business or occupation of the person to whom the
Membership Interest would be transferred, and any other facts which are or would reasonably be deemed
material to the proposed Transfer.
8.2.1. Upon the receipt of such notice, the LLC shall have a right to buy that share of the
Offered Interest.
8.2.2. The LLC may exercise this purchase option by giving the Offering Member written
notice within thirty (30) days after receipt of the latter's notice.
8.2.3. If the LLC does not agree to buy all of the Offered Interest, the Offering Member may
complete the intended Transfer. If this Transfer is not completed within thirty (30) days after expiration
of the option period, any attempted Transfer shall be deemed made under a new offer and this section
shall again apply.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 13
Russian Roulette/Slice of the Pie Clause
8.6. Special Purchase. In order to prevent the injury that might occur to the LLC in case of a
prolonged deadlock, material difference of opinion, or non-negotiable dispute between the Members, in
addition to all other restrictions contained in this Agreement, either Member may at any time send to the
other Member a Special Purchase Notice or a Special Sale Notice.
8.6.1. A Special Purchase Notice is a written notice by which the Offering Member offers
to buy all of the other Member's Membership Interest for the price and on the terms described in
the Special Purchase Notice. A Special Purchase Notice is valid only if accompanied by the
Offering Member's deposit with an Escrow Agent of its good personal or company check for the
portion of the purchase price due at closing under the terms of the Special Purchase Notice.
8.6.1.1. The other Member shall have ninety (90) days from the Special Purchase Notice
either to accept the offer or, at its sole option, reject the offer and instead elect to buy all of
the Offering Member's Membership Interest for the price and on the terms provided in the
Special Purchase Notice. Failure to respond to the Special Purchase Notice within ninety
(90) days constitutes acceptance of the offer and the other Member's agreement to sell its
Membership Interest.
8.6.1.2. The other Member may accept the offer and agree to sell its Membership Interest
to the Offering Member by delivering to the Escrow Agent a notice indicating acceptance,
within ninety (90) days from the date of the Special Purchase Notice. Upon acceptance of
the offer by the other Member, the Escrow Agent shall do or cause to be done the following:
First, transfer the other Member's Membership Interest to the Offering Member;
Second, deliver to the other Member the Offering Member's check for the purchase
price due at closing;
Third, terminate the escrow, at which time the Escrow Agent shall be released from
all duties and responsibilities.
8.6.1.3. The other Member may reject the Special Purchase Offer and evidence its decision
to buy the Offering Member's Membership Interest by delivering to the Escrow Agent a
good personal check made payable to the Offering Member for the appropriate portion of
the purchase price within ninety (90) days from the date of the Special Purchase Notice.
Upon receipt of such check by the Escrow Agent, the Escrow Agent shall do or cause to
be done the following:
First, transfer the Offering Member's Membership Interest to the other Member;
Second, deliver to the Offering Member the other Member's check for the purchase
price due at closing;
Third, return to the Offering Member its check originally deposited with the
Escrow Agent; and
Fourth, terminate the escrow, at which time the Escrow Agent shall be released
from all duties and responsibilities.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
Supplemental Materials Page 14
8.6.2. A Special Sale Notice is a written notice by which the Offering Member offers to
sell all of its Membership Interest for the price and on the terms described in the Special Sale
Notice. A Special Sale Notice shall be valid only if accompanied by the Offering Member's good
personal or company check for the portion of the purchase price due at closing under the terms of
the Special Sale Notice.
8.6.2.1. The other Member shall have ninety (90) days from the Special Sale Notice either
to accept the offer or, at its sole option, reject it and elect to sell all of its own Membership
Interest to the Offering Member at the price and on the terms provided in the Special Sale
Notice. Failure to respond to the Special Sale Notice within ninety (90) days constitutes
rejection of the offer and the other Member's election to sell its own Membership Interest.
8.6.2.2. The other Member shall evidence acceptance of the Special Sale Notice by
delivering to the Escrow Agent a good check made payable to the Offering Member for
the appropriate portion of the purchase price within ninety (90) days from the date of the
Special Sale Notice. Upon receipt of such check by the Escrow Agent, the Escrow Agent
shall do or cause to be done the following:
First, transfer the Offering Member's Membership Interest to the other Member;
Second, deliver the other Member's check for the purchase price due at closing to
the Offering Member;
Third, return to the Offering Member its check originally deposited with the
Escrow Agent; and
Fourth, terminate the escrow, at which time the Escrow Agent shall be released
from all duties and responsibilities.
8.6.2.3. The other Member may reject the offer made in the Special Sale Notice and elect
to sell its Membership Interest to the Offering Member by delivering to the Escrow Agent a
notice of rejection within ninety (90) days from the date of the Special Sale Notice. Upon receipt
of such notice by the Escrow Agent, the Escrow Agent shall do or cause to be done the following:
First, transfer the other Member's Membership Interest to the Offering Member;
Second, deliver to the other Member the Offering Member's check for the purchase
price due at closing;
Third, terminate the escrow, at which time the Escrow Agent shall be released from
all duties and responsibilities.
8.6.3. All fees charged by the Escrow Agent shall be paid by the LLC, regardless of which
Member sells its Membership Interest.
8.6.4. This Section 8.6 shall be effective only so long as ownership of the LLC is vested in
two Members, each holding an equal Membership Interest in the LLC.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
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Fixed Agreement Price
8.5. Agreement Price. The purchase price that the Members must pay for the Offered Interest
under this Section 8, shall be the Lesser of (a) that of any proposed Transfer if the proposed Transfer for
which notice was given is to be made for any valuable consideration in money or money's worth of property,
or (b) an amount equal to the proportion that the Offered Interest bears to all outstanding Membership
Interests, multiplied by the fair market value of the LLC as determined and agreed by the unanimous consent
of the Members.
8.5.1. Annual Adjustment. Each year, the Members shall meet and shall review the
Agreement Price then in effect. If the Members unanimously so agree, they shall modify the
Agreement Price to reflect what they believe to be the then current fair market value of the LLC.
Such modification or retention of the existing value shall be reflected on Exhibit C. The initial
Agreement Price established by the Members is $_______________.
8.5.2. Automatic Adjustment. If the Members should for any reason fail to modify the
Agreement Price, the last determination of value shall control, except that, if the most recent value
stipulated on Exhibit C is more than one year prior to the date a buy-out right is triggered, then the
most recent value specified on Exhibit C shall be adjusted to reflect increases or decreases in the
value of the LLC from the date of such valuation until the last day of the month in which the buy-out
right is triggered. This adjustment shall be determined by the accountant who regularly prepares
the LLC’s financial statements based on the net increase or decrease in the book value of
Membership Interests in the LLC since the date of the most recent value specified on Exhibit C
determined in accordance with the accounting principles consistently applied in preparing the
LLC’s financial statements. The LLC and the Offering Member shall share the cost any fees
charged by the accountant for calculating this adjustment.
Transactional/Corporate Law Essentials Sample Buy-Sell Provisions
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Simple Third Party Offer/FMV Appraisal
8.6. Agreement Price. The purchase price that the Members must pay for the Offered Interest
under this Section 8 shall be the same as that of any proposed Transfer if the proposed Transfer for which
notice was given is to be made for any valuable consideration in money or money's worth of property.
Otherwise, the purchase price that the Members must pay for the Offered Interest under this Section shall
be the percentage interest that the Offered Interest bears to all outstanding Membership Interests multiplied
by the fair market value of the LLC’s assets, including goodwill and other intangible assets, reduced by any
liabilities of the LLC. The fair market value of the LLC’s assets shall be determined by an independent
appraisal performed by a professional appraiser selected by the unanimous consent of the Members. The
LLC and the selling member shall share the cost of the appraisal.
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Appraisal Panel Valuation
Option 1
Retiring Event Purchase Price. The "Purchase Price" of a Retiring Member's Membership Interest shall be
an amount equal to the fair market value of the general dentistry practice conducted by the LLC and its
Members, including all assets other than real property used in or useful to the LLC’s business that are
owned or titled in the name of its individual Members, multiplied by the percentage of Membership Interest
owned by the Retiring Member. The fair market value of the general dentistry practice conducted by the
LLC and its Members shall be determined by an independent appraisal performed by a professional
appraiser selected by agreement of the Retiring Member (or their representative) and the remaining
Member. The decision of the selected appraiser in this matter shall be conclusive and the cost of this
appraisal shall be divided equally between the parties. If the parties are unable to agree upon a single
appraiser, then they shall each, at their own expense, select separate appraisers. If the two appraisers so
selected are unable to agree upon the fair market value of the general dentistry practice conducted by the
LLC and its Members within thirty (30) days, then these two appraisers shall select a third appraiser to
make a final determination as to the fair market value of the general dentistry practice. The cost of this
third appraisal shall be divided equally between the parties.
Option 2
Agreement Price. The purchase price that the Members must pay for the Offered Interest under Section 8.2
shall be either (a) that of any proposed Transfer if the proposed Transfer for which notice was given is a
bona-fide, third-party transaction with consideration to be paid in cash, notes payable in cash, or any
combination thereof, or (b) an amount equal to the proportion that the Offered Interest bears to all
outstanding Membership Interests, multiplied by the fair market value of the LLC’s assets reduced by any
liabilities of the LLC if the proposed Transfer for which notice was given is not a bona-fide, third-party
transaction with consideration to be paid as described above. The fair market value of the LLC’s assets
shall be determined by an independent appraisal performed by a professional appraiser selected by the
unanimous consent of the Members. The LLC and the Offering Member shall share the cost of the
appraisal. If the Members are unable to agree upon a single professional appraiser, then the Offering
Member and the other Members (as a group) shall, at their own expense, each retain separate professional
appraisers within ten (10) days. If either party fails to timely appoint an appraiser, then the appraiser who
is appointed shall serve as the sole appraiser and their determination of value shall control. If the two
appraisers so chosen are unable to agree upon a single conclusion as to the fair market value of the LLC’s
assets within 30 days, then the two appraisers shall select a third professional appraiser and the opinion of
this third appraiser shall control. The Offering Member and the other Members as a group shall each be
responsible for one-half of the costs of this third appraisal.
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Supplemental Materials Page 18
Life Insurance Funding
8.10. Life Insurance.
8.10.1. Each Member will apply for, own, and be the beneficiary of life insurance policies
on the life of each other Member, in amounts listed on Schedule B [omitted]. Each Member will
take any actions required to maintain in force all of the insurance policies he or she is required to
maintain under this section, and will not cancel them or allow them to lapse without the prior written
consent of each other Member.
8.10.2. Each Member may acquire any additional policies of life insurance he or she deems
appropriate to carry out this Agreement, and each Member will cooperate fully in any such
acquisitions, including submitting to any physical examinations and providing any medical
information required by the insurer. All additional policies will be listed on Schedule C.
8.10.3. Each Member will pay every premium on any life insurance policies which he or
she is required to maintain under this section, and give each other Member proof of such payment
within fifteen (15) days of the date the premium was due. If any Member fails to supply such proof,
any other Member may pay the premium and be reimbursed for his or her payment by the Member
who failed to supply such proof of premium payment. All dividends on any such policies will be
applied to the payment of premiums.
Corporate Formation
Thomas Brumgardt
Transactional/Corporate Law Essentials
Friday, June 7, 2019
Form Revised by South Carolina Secretary of State, August 2016 F0001
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF INCORPORATION
1. The name of the proposed corporation is:
2. The initial registered office of the corporation is:
_____________________________________________________________________________________________ (Street Address)
_____________________________________________________________________________________________ (City, State, Zip Code)
And the initial registered agent at such address is: _____________________________________________________________________________________________ (Name)
I hereby consent to the appointment as registered agent of the corporation
_____________________________________________________________________________________________ (Agent’s Signature)
3. The corporation is authorized to issue shares of stock as follows. Complete “a” or “b”, whichever is applicable:
a. The corporation is authorized to issue a single class of shares, the total number of
shares authorized is _______________________________.
b. The corporation is authorized to issue more than one class of shares:
Class of Shares Authorized Number of Each Class
________________________________ ______________
________________________________ ______________
________________________________ ______________
The relative right, preference, and limitations of the shares of each class, and of each series within a class, are as follows:
4. The existence of the corporation shall begin as of the filing date with the Secretary of State unless a delayed date is
indicated (see Section 33-1-230(b) of the 1976 South Carolina Code of Laws, as amended) of its incorporation is
______________
Form Revised by South Carolina Secretary of State, August 2016 F0001
Name of Corporation
5. The optional provisions, which the corporation elects to include in the articles of incorporation, are as follows (See the
applicable provisions Sections 33-2-102, 35-2-105, and 35-2-221 of the 1976 South Carolina Code of Laws, as
amended).
6. The name, address and signature of each incorporator is as follows (only one incorporator is required):
a. _____________________________________________________________________________________________ (Name)
_____________________________________________________________________________________________ (Address)
_____________________________________________________________________________________________ (City, State, Zip Code)
_____________________________________________________________________________________________ (Signature)
b. _____________________________________________________________________________________________ (Name)
_____________________________________________________________________________________________ (Address)
_____________________________________________________________________________________________ (City, State, Zip Code)
_____________________________________________________________________________________________ (Signature)
c. _____________________________________________________________________________________________ (Name)
_____________________________________________________________________________________________ (Address)
_____________________________________________________________________________________________ (City, State, Zip Code)
_____________________________________________________________________________________________ (Signature)
Form Revised by South Carolina Secretary of State, August 2016 F0001
Name of Corporation
7. I, ___________________________________________________________ an attorney licensed to practice in the
state of South Carolina, certify that the corporation, to whose articles of incorporation this certificate is attached, has
complied with the requirements of Chapter 2, Title 33 of the 1976 South Carolina Code of Laws, as amended, related
to the articles of incorporation.
Date: ___________________
Name of Corporation:
_____________________________________________________________________________________________ Signature
_____________________________________________________________________________________________ Type or Print Name
_____________________________________________________________________________________________ (Street Address)
_____________________________________________________________________________________________ (City, State, Zip Code)
_____________________________________________________________________________________________ (Telephone Number)
Form Revised by South Carolina Secretary of State, August 2016 F0001
FILING INSTRUCTIONS
1. Two copies of this form, the original and either a duplicate original or a conformed copy, must be filed.
2. If the space in this form is insufficient, please attach additional sheets containing a reference to the appropriate paragraph in this form.
3. Enclose the fee of $135.00 payable to the Secretary of State. The $25 CL-1 fee is included in the $135 filing fee.
4. THIS FORM MUST BE ACCOMPANIED BY THE FIRST REPORT TO CORPORATIONS (SEE SECTION 12-20-20
OF THE 1976 SOUTH CAROLINA CODE OF LAWS, AS AMENDED). The $25 CL-1 fee is included in the $135 filing fee.
Return to: Secretary of State
1205 Pendleton Street, Suite 525 Columbia, SC 29201
SPECIAL NOTE THE FILING OF THIS DOCUMENT DOES NOT, IN AND OF ITSELF, PROVIDE AN EXCLUSIVE RIGHT TO USE THIS CORPORATE NAME ON OR IN CONNECTION WITH ANY PRODUCT OR SERVICE. USE OF A NAME AS A TRADEMARK OR SERVICE MARK WILL REQUIRE FURTHER CLEARANCE AND REGISTRATION AND BE AFFECTED BY PRIOR USE OF THE MARK. FOR MORE INFORMATION, CONTACT THE TRADEMARKS DIVISION OF THE SECRETARY OF STATE’S OFFICE.
Date " Application for Charter "filed with Secretary of State Date of "Request for authority to do business in this state "(Foreign Corp.) FEIN Business Code
1. State of incorporation: 2. Indicate month corporation closes its books: 3. Nature of principal business in SC: 4. Location of registered office of the corporation in the state of SC is in the city of Registered agent at such address is 5. Location of principal office in SC (street, city, zip and county): 6. Date business commenced in SC: Effective Date of Incorporation: 7. If a professional corporation, are all shareholders, one-half of the directors (or individuals functioning as directors) and all officers (other than the secretary and treasurer) qualified to practice the professional services engaged in by the corporation? 8. The names and business addresses of the directors (or individuals functioning as directors) and principal officers in the corporation are:
9. The total number of authorized shares of capital stock itemized by class and series, if any, within each class as follows: Number of Shares Class Series 10. The total number of issued and outstanding shares of capital stock itemized by class and series, if any, within each class is as follows: Number of Shares Class Series
1. Fee due with this report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Interest due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Penalty due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Total - Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See instructions for payment and mailing.
Month Year
MAILING ADDRESS FOR TAX CORRESPONDENCE
CITY AND STATE ZIP
(Office Use Only)
For Secretary of State Use Only
Name/Title Business Address and Office
SIGNATURE OF INCORPORATOR OR OFFICER AUTHORIZED TO SIGN
I, the undersigned incorporator or principal officer of the corporation for which this return is made, declare that this return, including accompanying statements and schedules, has been examined by me and is to the best of my knowledge and belief a true and complete return made in good faith.
TITLE
Office Use Only
NAME OF CORPORATION
PHYSICAL ADDRESS OF HEADQUARTERS (NUMBER AND STREET)
CITY AND STATE ZIP COUNTY
DATE
THIS RETURN PREPARED BY
File Number ENDING PERIOD SID Number
Check if subchapter Selection Email address
STATE OF SOUTH CAROLINA DEPARTMENT OF REVENUE
(Rev. 5/3/16) 3134
INITIAL ANNUAL REPORT OF CORPORATIONS
1. 2 . 3 . 4 .
25 00000000
( ) -Telephone #
Federal Employer Identification Number (FEIN or EIN) - If this number has not been obtained, write "applied for" or "to be applied for" in the space provided. The FEIN can be applied for and obtained via the internet, directly from the IRS Website www.irs.gov 24 hours a day, 7 days a week. Business owners or their tax professional representative can enter "EIN" as a keyword to begin the process. While the internet is the preferred method for applying for EIN's, business owners may still obtain EIN's by mailing or faxing Form SS-4, as provided in the form's instructions.
Line 2 - If year end date has not been established, write "not known" in the space provided. December will be selected by the SC Department of Revenue.
Line 5 - Registered agent must be a resident of South Carolina. Line 5 - If principal office is not in existence at the time of filing, write "not established" in the space provided. Line 6 - If business has not started at the time of filing, state expected date. Also include the effective date of incorporation with
the Secretary of State. Line 8 - If all of these positions have not been filled, please indicate and provide names and positions known at the time of filing. Line 10 - If no shares have been issued at the time of filing, please indicate.
Special Instructions for Limited Liability Companies, Professional Corporations, and Other Associations Taxed for Income Tax Purposes as Corporations.
LLCs: Do not complete CL-1 unless you are taxed as a corporation. You must submit a CL-1 and a $25 minimum license fee to the Secretary of State if you are a domestic corporation filing your initial Articles of Incorporation, or a foreign corporation filing an Application for Certificate of Authority to Transact Business in South Carolina. Make all payments payable to the Secretary of State. The Secretary of State cannot process a CL-1 that is not accompanied by Articles of Incorporation or an Application for Certificate of Authority to Transact Business. If you have not already submitted a CL-1 and a $25 minimum license fee to the Secretary of State and are taxed as a corporation and not exempt under SC Code Section 12-20-110, you must submit them to the SC Department of Revenue within 60 days after commencing business in South Carolina or using a portion of your capital in this State. Make the payment payable to the SC Department of Revenue and mail to: SC Department of Revenue, Registration, Columbia, SC 29214-0140.
The minimum fee of twenty-five($25.00) dollars must be paid at the time such report is filed. Interest is due at the prevailing federal interest rate if this return is not filed within 60 days after commencing business in this state. Late filing of this return will incur a delinquent penalty of 5% per month not to exceed 25%. Late payment of the license fee will incur a penalty of 1/2% per month not to exceed 25% . Address Definitions: The mailing address for tax correspondence will be used if information related to your taxes must be sent to you.
*Any entity taxed as a corporation and not exempt under SC Code Section 12-20-110 must submit a CL-1 and include a $25 payment. If your organization is a limited liability company or association and is taxed as a corporation: 1. "Corporation" should be interpreted to mean limited liability company or association; 2. "State of incorporation" should be read to mean state of organization; 3. "Shareholders" should be interpreted to mean members; 4. "Director" or "officer" should be interpreted to mean manager or managing member; and 5. "Incorporator" should be read to mean person forming the limited liability company or association. Sections requesting certain information such as number of shares of stock may not apply to your organization and should be so indicated.
ACTION TAKEN BY WRITTEN CONSENT
BY THE INCORPORATOR OF
_________ ___
Pursuant to Section 33-2-105(a)(2) & (b) of the South Carolina Business Corporation Act of
1988, as amended, the undersigned, being the sole Incorporator of ____________________, a South
Carolina corporation (the “Corporation”), by execution hereof does hereby (i) unanimously consent
to and adopt the following resolutions as of the date hereof, which resolutions shall have the same
force and effect as if adopted by unanimous affirmative vote at a meeting of the Incorporator of
the Corporation duly called and held, (ii) waive all requirements of notice, and (iii) direct that this
consent be filed with the minutes of the proceedings of the Corporation:
1. Resolution Affirming Articles of Incorporation
RESOLVED, that the Articles of Incorporation, as filed with the South Carolina
Secretary of State, a copy of which has been placed with the records of the
Corporation, are hereby affirmed as being the Articles of Incorporation of the
Corporation.
2. Resolution Adopting Bylaws
RESOLVED, that the Bylaws presented to the Incorporator, a copy of which is
attached to this consent and incorporated herein by reference, are hereby adopted and
approved as the Bylaws of the Corporation. Said Bylaws shall remain in full force
and effect until amended or repealed by action of the Board of Directors or the
shareholders.
3. Resolutions Electing Initial Directors
WHEREAS, the Corporation's Bylaws provide that the Corporation shall have not less than
one nor more than ten directors.
RESOLVED, that the number of directors of the Corporation shall initially be _____;
and
FURTHER RESOLVED, that each of the following ____ persons is hereby elected
as an initial director of the Corporation, to serve as such until the next election of
directors and until his successor has been duly elected and qualified, or until his earlier
death, resignation or removal:
IN WITNESS WHEREOF, the undersigned, being the sole Incorporator of the
Corporation, has hereunto set his hands as of the day and year first above written.
____________________
Incorporator
UNANIMOUS WRITTEN CONSENT
IN LIEU OF ORGANIZATIONAL MEETING OF
THE BOARD OF DIRECTORS OF
______________ ___, 20__
Pursuant to the South Carolina Business Corporation Act of 1988, as amended (the "Act"),
the undersigned, being all of the members of the Board of Directors of
, a South Carolina corporation (the "Corporation"), by execution hereof do hereby (i)
unanimously consent to and adopt the following resolutions as of the date hereof, which resolutions
shall have the same force and effect as if adopted by unanimous affirmative vote at a meeting of the
Board of Directors of the Corporation duly called and held, (ii) waive all requirements of notice, and
(iii) direct that this consent be filed with the minutes of the proceedings of the Corporation. The
Board of Directors, having been elected by the Incorporator as the first Board of Directors of the
Corporation, hereby takes the following actions to complete the organization of the Corporation:
1. Resolution Affirming Articles of Incorporation
RESOLVED, that the Articles of Incorporation of the Corporation, as filed with the
South Carolina Secretary of State by the Incorporator, a copy of which has been
presented to the Board of Directors and placed in the minute book adopted pursuant
to this consent, are hereby approved, adopted, ratified and confirmed as being the
Articles of Incorporation of the Corporation.
2. Resolution Approving Actions of Incorporator
RESOLVED, that the Board of Directors hereby approves, adopts, ratifies and
confirms in all respects any and all actions taken by the Incorporator on behalf of the
Corporation in connection with its formation, including but not limited to the filing of
the Articles of Incorporation with the South Carolina Secretary of State.
3. Resolution Adopting Minute Book
RESOLVED, that the minute book presented to the Board of Directors is hereby
adopted as the minute book for the Corporation. The Secretary, or other officer, is
hereby directed to place a copy of the Articles of Incorporation, the Bylaws, the stock
register and all minutes of the shareholders, the Board of Directors and each
committee thereof in the minute book and to maintain it as part of the official records
of the Corporation.
4. Resolution Adopting Bylaws
RESOLVED, that the Bylaws presented to the Board of Directors, which have been
adopted by the Incorporator, a copy of which has been placed in the minute book of
the Corporation, are hereby approved, adopted, ratified and confirmed as the Bylaws
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of the Corporation. Said Bylaws shall remain in full force and effect until amended
or repealed by action of the Board of Directors or the shareholders.
5. Resolution Adopting Form of Stock Certificate
RESOLVED, that the form of stock certificate for common stock, a copy of which
has been presented to the Board of Directors and placed in the minute book of the
Corporation, is hereby approved and adopted as the form of stock certificate to
represent shares of common stock of the Corporation.
6. Resolutions Approving Original Issuance of Stock
RESOLVED, that the Corporation hereby authorizes and approves the issuance of the
following number of shares of common stock of the Corporation to the following
subscribers, at a purchase price per share of $_____, for a total purchase price of
_________________, payable in cash, by hereby accepting subscriptions therefrom
to purchase such shares:
Name Number of Shares Total Price
FURTHER RESOLVED, that any officer of the Corporation be, and each hereby is,
authorized and directed, for and on behalf of the Corporation, to execute and deliver
one or more stock certificates to each subscriber set forth above for the number of
shares of common stock set forth opposite such subscriber’s name, upon receipt of the
purchase price in payment for such shares of stock as set forth opposite each
subscriber’s name above, which consideration the Board of Directors has determined
and hereby finds to be adequate therefor, and that upon such payment such shares of
common stock shall be deemed duly and validly authorized, issued and outstanding,
fully paid and nonassessable shares of common stock of the Corporation.
7. Resolutions Regarding Restriction of Share Transfers and Approving Legend for Stock
Certificates
WHEREAS, shares of stock of the Corporation are being offered for sale pursuant to
exemptions from registration under the Federal and State securities laws, and in this
connection, the Board of Directors deems it advisable and appropriate to restrict the
further transfer thereof.
RESOLVED, that no shares of the Corporation’s common stock may be transferred
unless such shares are registered under the Securities Act of 1933, as amended, and
any applicable state securities laws, or the Corporation has received an opinion, in
form and substance and from counsel satisfactory to the Corporation, or other
representation acceptable to the Corporation in its discretion, that an exemption from
such registration is available; and
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FURTHER RESOLVED, that all shares of common stock issued by the Corporation
shall have conspicuously noted on the front or back of the certificate substantially the
following statement:
The shares represented by this certificate were issued by the
Corporation pursuant to exemptions from registration under both the
Federal and State securities laws. Such exemptions may prohibit
certain transfers of these shares. Therefore, none of the shares (nor
any interest in such shares) may be transferred in any manner
whatsoever (either voluntarily or involuntarily, directly or
indirectly, by pledge, sale, gift, levy, or any other attempted method
of transfer) unless such shares are registered under the Securities Act
of 1933, as amended, and any applicable state securities laws, or the
Corporation has received an opinion, in form and substance and from
counsel satisfactory to the Corporation, or other representation
acceptable to the Corporation in its discretion, that an exemption from
such registration is available.
8. Resolution Appointing Officers
RESOLVED, that the following persons are hereby appointed to the offices set
opposite their respective names, to serve in such capacities in accordance with the
Bylaws of the Corporation until his or her successor has been duly appointed and
qualified, or until his earlier death, resignation or removal:
President
Vice President
____________ Secretary
____________ Treasurer
9. Resolution Adopting Fiscal Year
RESOLVED, that the Corporation's fiscal year shall be the calendar year.
10. Resolutions Regarding Opening of Bank Accounts
RESOLVED, that the appropriate officers of the Corporation be, and they hereby are,
and each of them hereby is, authorized to open and maintain bank accounts in the
name of, and on behalf of, the Corporation with such financial institutions as such
officers may determine, in their discretion; and
FURTHER RESOLVED, that any more specific resolutions of the Board of
Directors required to be adopted in connection with the immediately preceding
resolution be, and they hereby are, adopted as if set forth herein in full, and the
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Secretary of the Corporation is directed to attach a copy of any such resolutions to
this consent.
11. Resolution Authorizing Qualification in Other States
RESOLVED, that the officers of this Corporation be and they hereby are authorized
and directed to prepare and file any certificate, document or report as may be required
to be filed in any State, Territory, in the District of Columbia, in any foreign country,
or any other place in which the officers shall find it necessary to file the same to
authorize this Corporation to do business within such jurisdiction.
12. Resolutions Regarding Subchapter S Election
RESOLVED, that the Corporation hereby elects to be taxed as an S Corporation
pursuant to and in accordance with subchapter S of the Internal Revenue Code of
1986, as amended (the “I.R.C.”), with such election being made for the current
calendar year and for each succeeding year until such election is either properly
revoked or until the Corporation is no longer qualified to be taxed as an S
Corporation;
FURTHER RESOLVED, that the President, Treasurer, and Secretary of the
Corporation are each authorized to prepare, execute and file documents to
effectuate the election of the Corporation to be taxed pursuant to subchapter S of
the I.R.C. Any such officer, by way of illustration and not limitation, is authorized
to prepare, execute, and file on behalf of the Corporation Internal Revenue Form
2553 (and any attachments), Internal Revenue Tax Return Form 1120S, and any
other documents to elect or maintain the Corporation's status as an S Corporation.
Any such officer is authorized to obtain the necessary signatures or consents of all
the shareholders. Any such officer is authorized to appoint any attorney-at-law or
other agent of the Corporation to represent it in any matter with the Internal
Revenue Service, or with any other government agency, corporation, entity, or
person with regard to the election and maintenance of status as an S Corporation;
and
FURTHER RESOLVED, that the shares of common stock of the Corporation shall
contain an appropriate legend to reflect the election to receive the tax treatment
accorded by subchapter S.
13. Omnibus Resolutions
RESOLVED, that any of the officers of the Corporation be, and each of them
hereby is, authorized (i) to prepare, execute, deliver and perform, as the case may
be, such agreements, amendments, applications, approvals, certificates,
communications, consents, demands, directions, documents, further assurances,
instruments, notices, orders, requests, resolutions, supplements or undertakings,
(ii) to pay or cause to be paid on behalf of the Corporation any related costs and
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expenses and (iii) to take such other actions, in the name and on behalf of the
Corporation, as each such officer, in his discretion, shall deem necessary or
advisable to complete and effect the foregoing transactions or to carry out the intent
and purposes of the foregoing resolutions and the transactions contemplated
thereby, the preparation, execution, delivery and performance of any such
agreements, amendments, applications, approvals, certificates, communications,
consents, demands, directions, documents, further assurances, instruments, notices,
orders, requests, resolutions, supplements or undertakings, the payment of any such
costs or expenses and the performance of any such other acts shall be conclusive
evidence of the approval of this Board of Directors thereof and all matters relating
thereto; and
FURTHER RESOLVED, that all actions heretofore taken by the officers and
directors of the Corporation with respect to the foregoing transactions and all other
matters contemplated by the foregoing resolutions are hereby approved, adopted,
ratified and confirmed.
IN WITNESS WHEREOF, the undersigned, being all of the members of the Board of
Directors of the Corporation, have hereunto set their hands as of the day and year first above
written. This consent may be executed in two or more counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same instrument. Copies of
executed counterparts transmitted by facsimile or other electronic transmission service shall be
considered original executed counterparts.
____________________________________
_
BYLAWS
OF
__________________________________
ARTICLE 1: OFFICES
Section 1: Principal Office. The principal office of the Corporation shall initially be
at __________________.
Section 2: Other Offices. The Corporation may also have offices at such other places
within and without the State of South Carolina as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE 2: SHAREHOLDERS
Section 1: Place of Meetings. Meetings of shareholders shall be held at the time and
place, within or without the State of South Carolina, stated in the notice of the meeting or in a waiver
of notice.
Section 2: Annual Meetings. An annual meeting of the shareholders shall be held
each year within six months of the end of the Corporation's fiscal year on a date and at a time to be
set by the Board of Directors in accordance with all applicable notice requirements. At the meeting,
the shareholders shall elect directors and transact such other business as may properly be brought
before the meeting.
Section 3: Special Meetings.
(a) Special meetings of the shareholders, for any purpose or purposes, unless
otherwise required by the South Carolina Business Corporation Act of 1988,
as amended or any successor provisions thereof (the "Act"), the Articles of
Incorporation of the Corporation (the "Articles"), or these Bylaws, may be
called by the chairman of the Board of Directors or a majority of the Board of
Directors.
(b) In addition to a special meeting called in accordance with subsection 3(a) of
this Article 2, the Corporation shall, if and to the extent that it is required by
applicable law, hold a special meeting of shareholders if the holders of at least
ten percent of all the votes entitled to be cast on any issue proposed to be
considered at such special meeting sign, date and deliver to the secretary of
the Corporation one or more written demands for the meeting. Such written
demands shall be delivered to the secretary by certified mail, return receipt
requested. Such written demands sent to the secretary of the Corporation shall
set forth as to each matter the shareholder or shareholders propose to be
presented at the special meeting (i) a description of the purpose or purposes
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for which the meeting is to be held (including the specific proposal(s) to be
presented); (ii) the name and record address of the shareholder or shareholders
proposing such business; (iii) the class and number of shares of the
Corporation that are owned of record by the shareholder or shareholders as of
a date within ten days of the delivery of the demand; (iv) the class and number
of shares of the Corporation that are held beneficially, but not held of record,
by the shareholder or shareholders as of a date within ten days of the delivery
of the demand; and (v) any interest of the shareholder or shareholders in such
business. Any such special shareholders' meeting shall be held at a location
designated by the Board of Directors. The Board of Directors may set such
rules for any such meeting as it may deem appropriate, including when the
meeting will be held (subject to any requirements of the Act), the agenda for
the meeting (which may include any proposals made by the Board of
Directors), who may attend the meeting in addition to shareholders of record
and other such matters.
(c) Business transacted at any special meeting shall be confined to the specific
purpose or purposes stated in the notice of the meeting.
Section 4: Notice.
(a) Notice stating the place, day and hour of the meeting and, in the case of a
special meeting, the specific purpose or purposes for which the meeting is
called, shall be delivered by the Corporation not less than ten nor more than
sixty days before the date of the meeting to each shareholder of record entitled
to vote at such meeting. Except as may be expressly provided by law, no
failure or irregularity of notice of any regular meeting shall invalidate the same
or any proceeding thereto.
(b) The notice of each special shareholders meeting shall include a description of
the specific purpose or purposes for which the meeting is called. Except as
provided by law, the Articles or these Bylaws, the notice of an annual
shareholders meeting need not include a description of the purpose or
purposes for which the meeting is called.
(c) Except as otherwise provided by law, notice may be given by either personal
notice, telephone, facsimile, electronic communication, overnight courier or
United States mail. Notwithstanding the foregoing, notice must be in writing
unless oral notice is reasonable under the circumstances. Except as otherwise
provided by law, written notice, if in a comprehensible form, is effective at the
earliest of the following: (i) when received; (ii) five days after its deposit in
the United States mail, as evidenced by the postmark, if mailed postpaid and
correctly addressed; or (iii) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested, and the receipt is signed
by or on behalf of the addressee. Oral notice is effective when communicated
if communicated in a comprehensible manner.
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(d) A shareholder may waive any notice required by the Act, the Articles, or these
Bylaws before or after the date and time stated in the notice. The waiver must
be in writing, be signed by the shareholder entitled to the notice, and be
delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. A shareholder's attendance at a meeting: (i) waives
objection to lack of notice or defective notice of the meeting, unless the
shareholder at the beginning of the meeting, objects to holding the meeting or
transacting business at the meeting; and (ii) waives objection to consideration
of a particular matter at the meeting that is not within the purpose described in
the meeting notice, unless the shareholder objects to considering the matter
when it is presented.
Section 5: Quorum. The holders of a majority of the shares issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall
constitute a quorum at meetings of the shareholders for the transaction of business except as otherwise
provided by law, by the Articles or these Bylaws. If a quorum is not present or represented at a
meeting of the shareholders, the shareholders entitled to vote, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum is present or represented. At an adjourned meeting at
which a quorum is present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified. Once a share is represented for any purpose at a
meeting it is deemed present for quorum purposes.
Section 6: Majority Vote; Withdrawal of Quorum. Except in regards to the election
of directors, when a quorum is present at a meeting, action on a matter by a voting group is approved
if the votes cast within the voting group favoring the action exceed the votes cast opposing the action,
unless the action is one for which, by express provision of law, the Articles or these Bylaws, a higher
vote is required in which case the express provision shall govern. Directors shall be elected by a
plurality vote of the shareholders. The shareholders present at a duly constituted meeting may
continue to transact business until adjournment, despite the withdrawal of enough shareholders to
leave less than a quorum.
Section 7: Method of Voting; Proxies.
(a) Each outstanding share of common stock shall be entitled to one vote on each
matter submitted to a vote at a meeting of shareholders. Each outstanding
share of other classes of stock, if any, shall have such voting rights as may be
prescribed by the Board of Directors. Votes shall be taken by voice, by hand
or in writing, as directed by the chairman of the meeting. Voting for directors
shall be in accordance with Article 3, Section 3 of these Bylaws.
(b) A shareholder may vote his shares in person or by proxy. A shareholder may
appoint a proxy to vote or otherwise act for him, including giving waivers and
consents, by signing an appointment form, either personally or by his attorney-
in-fact. All proxies must have an effective date. If not dated by the person
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giving the proxy, the effective date of the proxy is the date on which it is
received by the person appointed to serve as proxy, which date must be noted
by the appointee on the appointment form. An appointment of a proxy is
effective when received by the secretary or other officer or agent authorized
to tabulate votes. Unless a time of expiration is otherwise specified, an
appointment is valid for eleven months. An appointment of a proxy is
revocable by the shareholder, except as provided by Section 33-7-220(d) of
the Act or any subsequent provision of like tenor and import. Proxies
delivered by facsimile to the Corporation, if otherwise in order, shall be valid.
Section 8: Record Date. For the purpose of determining shareholders entitled to
notice of or to vote at any meeting of shareholders, including any special meeting, or shareholders
entitled to receive payment of dividends, or in order to make a determination of shareholders for any
other purpose, the Board of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not less than ten nor more than seventy
days prior to the date on which the particular action, requiring such determination of shareholders, is
to be taken. Except as otherwise provided by law, if no record date is fixed for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders, or of shareholders entitled
to receive payment of dividends, the date on which notice of the meeting is mailed, or the date on
which the resolution of the Board of Directors declaring such dividend is adopted, as the case may
be, shall be the record date.
Section 9: Shareholders' List. After fixing a record date for a meeting, the
Corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to
notice of the shareholders' meeting. The list must be arranged by voting group (and within each voting
group by class or series of shares) and show the address of and number of shares held by each
shareholder. The shareholders' list shall be available for inspection by any shareholder, beginning on
the date on which notice of the meeting is given for which the list was prepared and continuing
through the meeting, at the Corporation's principal office or at a place identified in the meeting notice
in the city where the meeting is to be held. A shareholder, his agent, or attorney is entitled on written
demand to inspect and, subject to the requirements of Section 33-16-102(c) or any subsequent
provision of like tenor and import, to copy the list, during regular business hours and at his expense,
during the period it is available for inspection. The Corporation shall make the shareholders' list
available at the meeting, and any shareholder, his agent, or attorney is entitled to inspect the list at any
time during the meeting or any adjournment. Refusal or failure to prepare or make available the
shareholders' list does not affect the validity of action taken at the meeting.
ARTICLE 3: DIRECTORS
Section 1: Management. The business and affairs of the Corporation shall be
managed by the Board of Directors who may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by law, the Articles or these Bylaws directed or required to be
done or exercised by the shareholders.
Section 2: Number of Directors. The authorized number of directors shall be not less
than one nor more than ten, with the precise number thereof being fixed either by the Board or the
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shareholders from time to time. The members of the Board of Directors need not be shareholders nor
need they be residents of any particular state.
Section 3: Voting for Directors. Directors shall be elected by a plurality vote.
Section 4: Vacancies. Any vacancy occurring in the Board of Directors, whether by
increase in the number of directors or by death, resignation, removal or otherwise may be filled by an
affirmative vote of a majority of the remaining directors then in office for a term ending at the next
annual meeting of the shareholders of the Corporation.
Section 5: Place of Meetings. Meetings of the Board of Directors, regular or special,
may be held either within or without the State of South Carolina.
Section 6: Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such time and place as shall from time to time be determined by the Board.
Section 7: Special Meetings. Special meetings of the Board of Directors may be
called by the chairman of the board, president or any two directors, on not less than two business day
notice to all directors. Any such special meeting shall be held at such time and place as shall be stated
in the notice of the meeting. The notice does not need to describe the anticipated purpose or purposes
of the special meeting.
Section 8: Telephone and Similar Meetings. Directors may participate in and hold a
meeting by means of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Participation in such a meeting shall
constitute presence in person at the meeting, except where a person participates in the meeting for the
express purpose of objecting to the holding of the meeting or the transacting of any business at the
meeting on the ground that the meeting is not lawfully called or convened, and does not thereafter
vote for or assent to action taken at the meeting.
Section 9: Quorum; Majority Vote. At meetings of the Board of Directors a majority
of the number of directors then in office shall constitute a quorum for the transaction of business. The
act of a majority of the directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors, except as otherwise specifically provided by law, the Articles or these Bylaws.
If a quorum is not present at a meeting of the Board of Directors, the directors present may adjourn
the meeting from time to time, without notice other than announcement at the meeting, until a quorum
is present.
Section 10: Waiver of Notice. A director may waive any notice required by
the Act, the Articles, or these Bylaws before or after the date and time stated in the notice. Except as
provided in the following sentence, the waiver must be in writing, signed by the director entitled to
the notice, and filed with the minutes or corporate records. A director's attendance at or participation
in a meeting waives any required notice to him of the meeting unless the director at the beginning of
the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at
the meeting and does not thereafter vote for or assent to action taken at the meeting.
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Section 11: Compensation. Each director shall be entitled to receive such reasonable
compensation as may be determined by resolution of the Board of Directors. By resolution of the
Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of
Directors. No such payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of standing committees and special
committees may, by resolution of the Board of Directors, be allowed compensation for attending
committee meetings.
Section 12: Procedure. The Board of Directors shall keep regular minutes of its
proceedings. The minutes shall be placed in the minute book of the Corporation.
Section 13: Action Without Meeting. Any action required or permitted to be taken at
a meeting of the Board of Directors may be taken without a meeting by unanimous written consent
of all the directors. Such consent shall have the same force and effect as a meeting vote and may be
described as such in any document. Signatures on any such consent may be obtained by facsimile.
Section 14: Notice. Except as otherwise provided by law, notice may be given by
either personal notice, telephone, facsimile, electronic communication, overnight courier or United
States mail. Notwithstanding the foregoing, notice must be in writing unless oral notice is reasonable
under the circumstances. Except as otherwise provided by law, written notice, if in a comprehensible
form, is effective at the earliest of the following: (i) when received; (ii) five days after its deposit in
the United States mail, as evidenced by the postmark, if mailed postpaid and correctly addressed; or
(iii) on the date shown on the return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by or on behalf of the addressee. Oral notice is effective when
communicated if communicated in a comprehensible manner.
ARTICLE 4: COMMITTEES
Section 1: Executive Committee. The Board of Directors may designate two or more
directors to constitute an Executive Committee. When the Board of Directors is not in session, the
Executive Committee, to the extent permitted by applicable law, shall have and may exercise all of
the authority of the Board of Directors.
Section 2: Other Board Committees. The Board of Directors may appoint such other
Board committees as it deems appropriate, each consisting of two or more directors. Any director
may serve on any such committee. Any committee appointed under this Section 2 shall perform such
duties and assume such responsibility as may from time to time be placed upon it by the Board of
Directors.
Section 3: Other Committees. The Board of Directors may establish other
Committees from time to time consisting of directors and/or other individuals, as required or as it
deems appropriate. Any committee appointed under this Section 3 shall perform such duties and
assume such responsibility as may from time to time be placed upon it by the Board of Directors.
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Section 4: Meetings. Time, place and notice of committee meetings shall be as called
and specified by the committee chairman or any two members of each committee.
Section 5: Quorum; Majority Vote. At a meeting of a committee, a majority of the
members of the committee shall constitute a quorum for the transaction of business. The act of a
majority of the members present at any meeting at which a quorum is present shall be the act of the
committee, except as otherwise specifically provided by the Act, the Articles or these Bylaws. If a
quorum is not present at a meeting of a committee, the members present may adjourn the meeting
from time to time, without notice other than an announcement at the meeting, until a quorum is
present.
Section 6: Procedure. The committees shall keep regular minutes of their proceedings
and report the same to the Board of Directors at its next regular meeting. The minutes of the
proceedings of the committees shall be placed in the minute book of the Corporation.
Section 7: Action Without Meeting. Any action required or permitted to be taken at
a meeting of a committee may be taken without a meeting by unanimous written consent of all the
members of the respective committee. Such consent shall have the same force and effect as a meeting
vote and may be described as such in any document.
Section 8: Telephone and Similar Meetings. Committee members may participate in
and hold a meeting by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other. Participation in such a
meeting shall constitute presence in person at the meeting, except where a person participates in the
meeting for the express purpose of objecting to the holding of the meeting or the transacting of any
business at the meeting on the ground that the meeting is not lawfully called or convened, and does
not thereafter vote for or assent to action taken at the meeting.
Section 9: Removal from Committees. The Board of Directors may remove
and/or replace any member of any committee at any time.
Section 10: Chairman of Committees. The chairman of the board shall
appoint the chairman of each committee.
ARTICLE 5: OFFICERS
Section 1: Officers. The officers of the Corporation may consist of a chairman of the
board, a vice chairman of the board, a president, a chief executive officer, a secretary, a treasurer, one
or more vice presidents, an assistant secretary, and an assistant treasurer. The Board of Directors may
also create and establish other officer positions as it deems appropriate. The Board of Directors shall
have the authority to appoint, or may authorize the chief executive officer to appoint, the persons who
shall hold such offices specified herein and such other offices as may be established by the Board.
Any two or more offices may be held by the same person.
Section 2: Term. Each officer shall serve at the pleasure of the Board of Directors
(or, if appointed by the chief executive officer of the Corporation pursuant to this Article, at the
8
pleasure of the Board of Directors or the chief executive officer) until his or her death, resignation, or
removal, or until his or her replacement is elected or appointed in accordance with this Article.
Section 3: Vacancies. Any vacancy occurring in any office of the Corporation may
be filled by the Board of Directors. Any vacancy in an office that was filled by the chief executive
officer may also be filled by the chief executive officer.
Section 4: Compensation. The compensation of all officers who are employees of
the Corporation shall be fixed by the Board of Directors or by a committee of the Board of Directors.
Section 5: Removal. All officers (regardless of how elected or appointed) may be
removed, with or without cause, by the Board of Directors. Any officer appointed by the chief
executive officer may also be removed, with or without cause, by the chief executive officer.
Removal will be without prejudice to the contract rights, if any, of the person removed, but shall be
effective notwithstanding any damage claim that may result from infringement of such contract rights.
Section 6: Chairman of the Board. The office of the chairman of the board may be
filled by the Board at its pleasure by the election of one of its members to the office. The chairman
shall preside at all meetings of the Board, and shall perform such other duties as may be assigned to
him by the Board of Directors.
Section 7: Vice Chairman of the Board. The office of vice chairman of the board
may be filled by the Board at its pleasure by the election of one of its members to the office. In the
absence of the chairman of the board or in the event that that office is vacant either temporarily or
otherwise, during such period the vice chairman shall assume the duties of the office of the chairman
of the board.
Section 8: Chief Executive Officer. If the Board chooses to have a chief executive
officer other than the president, the position of chief executive officer may be filled by the Board at
its pleasure. The chief executive officer shall be responsible for the general and active management
of the business and affairs of the Corporation, and shall see that all orders and resolutions of the Board
are carried into effect. The chief executive officer shall preside at all meetings of the shareholders.
He shall perform such other duties and have such other authority and powers as the Board of Directors
may from time to time prescribe.
Section 9: President. In the event no other person is designated the chief executive
officer of the Corporation, or in the event that office is vacant either temporarily or otherwise, during
such period the president shall serve as chief executive officer and have the duties of that office. He
shall perform such other duties and have such other authority and powers as the Board of Directors
may from time to time prescribe.
Section 10: Vice Presidents. The vice presidents shall perform such duties and have
such authority and powers that may from time to time be prescribed by the Board of Directors or
delegated by the chief executive officer.
Section 11: Secretary.
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(a) The secretary or a board approved designee shall attend all meetings of the
Board of Directors and all meetings of the shareholders and record all votes,
actions and the minutes of all proceedings in a book to be kept for that purpose
and shall perform like duties for the executive and other committees when
required.
(b) The secretary shall give, or cause to be given, notice of all meetings of the
shareholders and special meetings of the Board of Directors.
(c) The secretary shall keep in safe custody the seal of the Corporation and, when
authorized by the Board of Directors or the Executive Committee, affix it to
any instrument requiring it. When so affixed, it shall be attested by his
signature or by the signature of the treasurer or the assistant secretary.
(d) The secretary shall be under the supervision of the Board of Directors. He
shall perform such other duties and have such other authority and powers as
may from time to time be prescribed by the Board of Directors.
Section 12: Assistant Secretary. The assistant secretary shall perform such duties and
have such powers as may from time to time be prescribed by the Board of Directors.
Section 13: Treasurer.
(a) The treasurer or a board approved designee shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements of the Corporation and shall deposit all moneys
and other valuables in the name and to the credit of the Corporation in
appropriate depositories.
(b) The treasurer or a board approved designee shall disburse the funds of the
Corporation ordered by the Board of Directors, and prepare financial
statements as they direct.
(c) The treasurer shall perform such other duties and have such other authority
and powers as may from time to time be prescribed by the Board of Directors.
(d) The treasurer's books and accounts shall be opened at any time during business
hours to the inspection of any directors of the Corporation.
Section 14: Assistant Treasurer. The assistant treasurer shall perform such duties and
have such powers as may from time to time be prescribed by the Board of Directors.
Section 15: Bonds. The Board of Directors may, by resolution, require any or all
officers, agents and employees of the Corporation to give bond to the Corporation, with sufficient
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security, for the faithful performance of the duties of their respective offices or positions, and to
comply with such other conditions as may from time to time be required by the Board of Directors.
ARTICLE 6: INDEMNIFICATION
Section 1: Indemnification of Directors.
(a) The Corporation shall indemnify and hold harmless, to the fullest extent
permitted by applicable law, any person (an "Indemnified Person") who was
or is a party or is threatened to be made a party to or is otherwise involved in
any threatened, pending or completed action, suit or other proceeding, whether
civil, criminal, administrative or investigative and whether formal or informal,
by reason of the fact that he, or a person for whom he is a legal representative
(or other similar representative), is or was a director of the Corporation,
against expenses (including attorneys' fees), judgments, fines, amounts paid in
settlement or other similar costs actually and reasonably incurred in
connection with such action, suit or proceeding. For purposes of this Article
6, all terms used herein that are defined in Section 33-8-500 of the Act or any
subsequent provision or provisions of like tenor and import shall have the
meanings so prescribed in such Section.
(b) Without limiting the provisions of Section 1(a) of this Article 6, the
Corporation shall indemnify a director who was wholly successful, on the
merits or otherwise, in the defense of any proceeding to which he was a party
because he is or was a director of the Corporation against reasonable expenses
incurred by him in connection with the proceeding. In addition, the
Corporation shall indemnify an individual made a party to a proceeding
because he is or was a director against liability incurred in the proceeding if:
(i) he conducted himself in good faith; (ii) he reasonably believed: (A) in the
case of conduct in his official capacity with the Corporation, that his conduct
was in its best interest; and (B) in all other cases, that his conduct was at least
not opposed to its best interest; and (iii) in the case of any criminal proceeding,
he had no reasonable cause to believe his conduct was unlawful. The
termination of a proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent is not, of itself, determinative
that the director did not meet the standard of conduct described in this
subsection (b). The determination of whether the director met the standard of
conduct described in this subsection (b) shall be made in accordance with
Section 33-8-550 of the Act or any subsequent provision or provision of like
tenor and import.
Section 2: Advancement of Expenses.
(a) With respect to any proceeding to which an Indemnified Person is a party
because he is or was a director of the Corporation, the Corporation shall, to
the fullest extent permitted by applicable law, pay for or reimburse the
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Indemnified Person's reasonable expenses (including, but not limited to,
attorneys' fees and disbursements, court costs, and expert witness fees)
incurred by the Indemnified Person in advance of final disposition of the
proceeding.
(b) Without limiting the provisions of Section 2(a) of this Article 6, the
Corporation shall, to the fullest extent permitted by applicable law, pay for or
reimburse the reasonable expenses (including, but not limited to, attorneys'
fees and disbursements, court costs and expert witness fees) incurred by a
director who is a party to a proceeding in advance of final disposition of the
proceeding if: (a) the director furnishes the Corporation a written affirmation
of his good faith belief that he has met the standard of conduct described in
Section 1(b) of this Article 6; (b) the director furnishes the Corporation a
written undertaking, executed personally or on his behalf, to repay the advance
if it is ultimately determined that he did not meet such standard of conduct;
and (c) a determination is made that the facts then known to those making the
determination would not preclude indemnification under this Article 6. The
Corporation shall expeditiously pay the amount of such expenses to the
director following the director's delivery to the Corporation of a written
request for an advance pursuant to this Section 2 together with a reasonable
accounting of such expenses. The undertaking required by this Section 2 shall
be an unlimited general obligation of the director but need not be secured and
may be accepted without reference to financial ability to make repayment.
Determinations and authorizations of payments under this Section 2 shall be
made in the manner specified in Section 33-8-550 of the Act or any subsequent
provision or provisions of like tenor and import.
Section 3: Indemnification of Officers and Employees. The Board of Directors shall
have the power to cause the Corporation to indemnify, hold harmless and advance expenses to any
officer or employee of the Corporation to the fullest extent permitted by public policy, by adopting a
resolution to that effect identifying such officer, or employee (by position and name) and specifying
the particular rights provided, which may be different for each of the persons identified. Any officer
or employee granted indemnification by the Board of Directors in accordance with the first sentence
of this Section 3 shall, to the extent specified herein or by the Board of Directors, be an "Indemnified
Person" for the purposes of the provisions of this Article 6.
Section 4: Insurance. The Corporation may purchase and maintain insurance on
behalf of an individual who is or was a director, officer or employee of the Corporation, or who, while
a director, officer or employee of the Corporation, is or was serving at the request of the Corporation
as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise, against liability asserted
against or incurred by him in that capacity or arising from his status as a director, officer or employee,
whether or not the Corporation would have the power to indemnify him against the same liability
under this Article 6.
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Section 5: Nonexclusivity of Rights; Agreements. The rights conferred on any person
by this Article 6 shall neither limit nor be exclusive of any other rights which such person may have
or hereafter acquire under any statute, agreement, provision of the Articles, these Bylaws, vote of
shareholders or otherwise. The provisions of this Article 6 shall be deemed to constitute an agreement
between the Corporation and each person entitled to indemnification hereunder. In addition to the
rights provided in this Article 6, the Corporation shall have the power, upon authorization by the
Board of Directors, to enter into an agreement or agreements providing to any person who is or was
a director, officer or employee of the Corporation certain indemnification rights. Any such agreement
between the Corporation and any such director, officer or employee of the Corporation concerning
indemnification shall be given full force and effect, to the fullest extent permitted by applicable law,
even if it provides rights to such director, officer or employee more favorable than, or in addition to,
those rights provided under this Article 6.
Section 6: Continuing Benefits; Successors. The indemnification and advancement
of expenses provided by or granted pursuant to this Article 6 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director, officer or employee
and shall inure to the benefit of the heirs, executors and administrators of such person. For purposes
of this Article 6, the term "Corporation" shall include any corporation, joint venture, trust, partnership
or unincorporated business association that is the successor to all or substantially all of the business
or assets of this Corporation, as a result of merger, consolidation, sale, liquidation or otherwise, and
any such successor shall be liable to the persons indemnified under this Article 6 on the same terms
and conditions and to the same extent as this Corporation.
Section 7: Interpretation; Construction. This Article 6 is intended to provide
indemnification and advancement of expenses to the directors of the Corporation to the fullest extent
permitted by applicable law as it may presently exist or may hereafter be amended and shall be
construed in order to accomplish this result. This Article 6 is also intended to permit, but not require,
indemnification and advancement of expenses to the officers and employees of the Corporation to the
fullest extent permitted by applicable law as it may presently exist or may hereafter be amended and
shall be construed in order to accomplish this result. To the extent that a provision herein prevents
the intended effects set forth in the first two sentences of this Section 7, such provision shall be of no
effect in such situation. If at any time the Act is amended so as to permit broader indemnification
rights to the directors, officers or employees of the Corporation, then these Bylaws shall be deemed
to automatically incorporate these broader provisions so that these Bylaws shall have the intended
effects set forth in the first two sentences of this Section 7.
Section 8: Amendment. Any amendment to this Article 6 that limits or otherwise
adversely affects the right of indemnification, advancement of expenses or other rights of any
Indemnified Person hereunder shall, as to such Indemnified Person, apply only to claims, actions,
suits or proceedings based on actions, events or omissions (collectively, "Post Amendment Events")
occurring after such amendment and after delivery of notice of such amendment to the Indemnified
Person so affected. Any Indemnified Person shall, as to any claim, action, suit or proceeding based
on actions, events or omissions occurring prior to the date of receipt of such notice, be entitled to the
right of indemnification, advancement of expenses and other rights under this Article 6 to the same
extent as if such provisions had continued as part of the Bylaws of the Corporation without such
amendment. This Section 8 cannot be altered, amended or repealed in a manner effective as to any
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Indemnified Person (except as to Post Amendment Events) without the prior written consent of such
Indemnified Person.
Section 9: Severability. Each of the Sections of this Article 6, and each of the clauses
set forth herein, shall be deemed separate and independent, and should any part of any such Section
or clause be declared invalid or unenforceable by any court of competent jurisdiction, such invalidity
or unenforceability shall in no way render invalid or unenforceable any other part thereof or any
separate Section or clause of this Article 6 that is not declared invalid or unenforceable.
ARTICLE 7: CERTIFICATES AND SHAREHOLDERS
Section 1: Certificates. Certificates in the form determined by the Board of Directors
shall be delivered representing all shares of which shareholders are entitled. Certificates shall be
consecutively numbered and shall be entered in the books of the Corporation as they are issued. At a
minimum, each share certificate must state on its face: (a) the name of the Corporation and that it is
organized under the laws of South Carolina; (b) the name of the person to whom issued; and (c) the
number and class of shares and the designation of the series, if any, the certificate represents. Each
share certificate (a) must be signed (either manually or in facsimile) by at least two officers, including
the president, a vice president or such other officer or officers as the Board of Directors shall
designate; and (b) may bear the corporate seal or its facsimile. If the person who signed (either
manually or in facsimile) a share certificate no longer holds office when the certificate is issued, the
certificate is nevertheless valid.
Section 2: Issuance of Shares. The Board of Directors may authorize shares to be
issued for consideration consisting of any tangible or intangible property or benefit to the Corporation,
including cash, promissory notes, services performed, written contracts for services to be performed
or other securities of the Corporation.
Section 3: Rights of Corporation with Respect to Registered Owners. Prior to due
presentation for transfer of registration of its shares, the Corporation may treat the registered owner
of the shares as the person exclusively entitled to vote the shares, to receive any dividend or other
distribution with respect to the shares, and for all other purposes; and the Corporation shall not be
bound to recognize any equitable or other claim to or interest in the shares on the part of any other
person, whether or not it has express or other notice of such a claim or interest, except as otherwise
provided by law.
Section 4: Transfers of Shares. Transfers of shares shall be made upon the books of
the Corporation kept by the Corporation or by the transfer agent designated to transfer the shares, only
upon direction of the person named in the certificate or by an attorney lawfully constituted in writing.
Before a new certificate is issued, the old certificate shall be surrendered for cancellation or, in the
case of a certificate alleged to have been lost, stolen or destroyed, the provisions of these Bylaws shall
have been complied with.
Section 5: Registration of Transfer. The Corporation shall register the transfer of a
certificate for shares presented to it for transfer if: (a) the certificate is properly endorsed by the
registered owner or by his duly authorized attorney; (b) the signature of such person has been
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guaranteed by a commercial bank or brokerage firm that is a member of the National Association of
Securities Dealers and reasonable assurance is given that such endorsements are effective; (c) the
Corporation has no notice of an adverse claim or has discharged any duty to inquire into such a claim;
(d) any applicable law relating to the collection of taxes has been complied with; and (e) the transfer
is in compliance with applicable provisions of any transfer restrictions of which the Corporation shall
have notice.
Section 6: Lost, Stolen or Destroyed Certificates. The Corporation shall issue a new
certificate in place of any certificate for shares previously issued if the registered owner of the
certificate: (a) makes proof in affidavit form that the certificate has been lost, destroyed or wrongfully
taken; (b) requests the issuance of a new certificate before the Corporation has notice that the
certificate has been acquired by a purchaser for value in good faith and without notice of an adverse
claim; (c) gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as
the Corporation may direct, to indemnify the Corporation (and its transfer agent and registrar, if any)
against any claim that may be made on account of the alleged loss, destruction or theft of the
certificate; and (d) satisfies any other reasonable requirements imposed by the Corporation. When a
certificate has been lost, apparently destroyed or wrongfully taken, and the holder of record fails to
notify the Corporation within a reasonable time after he has notice of it, and the Corporation registers
a transfer of the shares represented by the certificate before receiving such notification, the holder of
record is precluded from making any claim against the Corporation for the transfer or for a new
certificate.
Section 7: Restrictions on Shares. The Board of Directors, on behalf of the
Corporation, or the shareholders may impose restrictions on the transfer of shares (including any
security convertible into, or carrying a right to subscribe for or acquire shares) to the maximum extent
permitted by law. A restriction does not affect shares issued before the restriction was adopted unless
the holders of the shares are parties to the restriction agreement or voted in favor of the restriction. A
restriction on the transfer of shares is valid and enforceable against the holder or a transferee of the
holder if the restriction is authorized by this Section 7 and its existence is noted conspicuously on the
front or back of the certificate.
ARTICLE 8: GENERAL PROVISIONS
Section 1: Distributions. The Board of Directors may authorize, and the Corporation
may make, distributions (including dividends on its outstanding shares) in the manner and upon the
terms and conditions provided by applicable law and the Articles.
Section 2: Books and Records. The Corporation shall keep correct and complete
books and records of account and shall keep minutes of the proceedings of its shareholders and Board
of Directors.
Section 3: Fiscal Year. The fiscal year of the Corporation shall be the same as the
calendar year.
Section 4: Reports.
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(a) The Corporation shall furnish its shareholders annual financial statements,
which may be consolidated or combined statements of the Corporation and
one or more of its subsidiaries, as appropriate, that include a balance sheet as
of the end of the fiscal year, an income statement for that year, and a statement
of changes in shareholders' equity for the year unless that information appears
elsewhere in the financial statements. If financial statements are prepared for
the Corporation on the basis of generally accepted accounting principles, the
annual financial statements also must be prepared on that basis. If the annual
financial statements are reported upon by a public accountant, his report must
accompany them. If not, the statements must be accompanied by a statement
of the president or the person responsible for the Corporation's accounting
records: (i) stating his reasonable belief whether the statements were prepared
on the basis of generally accepted accounting principles and, if not, describing
the basis of preparation; and (ii) describing any respects in which the
statements were not prepared on a basis of accounting consistent with the
statements prepared for the preceding years. The Corporation shall mail the
annual financial statements to each shareholder within one hundred twenty
days after the close of each fiscal year. Thereafter, on written request from a
shareholder who was not mailed the statements, the Corporation shall mail
him the last financial statements.
(b) If a Corporation issues or authorizes the issuance of shares for promissory
notes or for promises to render services in the future, the Corporation shall
report in writing to the shareholders the number of shares authorized or issued,
and the consideration received by the Corporation, with or before the notice
of the next shareholders' meeting; provided, however, no such report is
required if the Corporation is subject to the registration requirements of
Section 12 of the Securities Exchange Act of 1934 and the shares are issued
or authorized pursuant to a plan that has been approved by the shareholders of
the Corporation.
Section 5: Seal. The Corporation's seal shall contain the name of the Corporation and
the name of the state of incorporation. The seal may be used by impressing it or reproducing a
facsimile of it or otherwise.
Section 6: Execution of Instruments, Contracts, etc.
(a) The President and any Executive Vice President shall have the power and
authority, except as otherwise required by law or directed by the Board of
Directors, to execute, on behalf of the Corporation, all contracts, agreements,
deeds, conveyances and other documents and instruments.
(b) In addition to the foregoing, the Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract, agreement, deed,
conveyance or other document or instrument, on behalf of the Corporation,
and such authority may be general or confined to specific instances. The
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Board of Directors may authorize the Corporation to enter into employment
contracts with any of its employees for any length of time and on any terms
and conditions it deems wise.
(c) All checks, drafts or other orders for the payment of money issued in the name
of the Corporation shall be signed by such officer or officers, agent or agents
of the Corporation and in such manner as from time to time shall be
determined by resolution of the Board of Directors.
(d) All funds of the Corporation not otherwise employed from time to time shall
be deposited to the credit of the Corporation in such depositories as the Board
of Directors or a committee thereof, shall direct.
Section 7: Resignation. A director may resign by delivering written notice to the
Board of Directors, the chairman or the Corporation. Such resignation of a director is effective when
the notice is delivered unless the notice specifies a later effective date. An officer may resign at any
time by delivering notice to the Corporation. Such resignation of an officer is effective when the
notice is delivered unless the notice specifies a later effective date. If a resignation of an officer is
made effective at a later date and the Corporation accepts the future effective date, the pending
vacancy may be filled before the effective date if it is provided that the successor does not take office
until the effective date.
Section 8: Computation of Days. In computing any period of days prescribed
hereunder the day of the act after which the designated period of days begins to run is not to be
included. The last day of the period so computed is to be included.
Section 9: Amendment of Bylaws.
(a) These Bylaws may be altered, amended or repealed or new Bylaws may be
adopted at any meeting of the Board of Directors at which a quorum is present,
by a two-thirds vote of the directors then in office, provided notice of the
proposed alteration, amendment or repeal is contained in the notice of the
meeting.
(b) These Bylaws may also be altered, amended or repealed or new Bylaws may
be adopted at any meeting of the shareholders at which a quorum is present or
represented by proxy, by the affirmative vote of the holders of sixty-six and
two-thirds percent of each class of shares entitled to vote thereon, provided
notice of the proposed alteration, amendment or repeal is contained in the
notice of the meeting.
(c) Upon adoption of any new bylaw by the shareholders, the shareholders may
provide expressly that the Board of Directors may not adopt, amend or repeal
that bylaw or any bylaw on that subject.
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Section 10: Construction. Whenever the context so requires, the masculine shall
include the feminine, and the singular shall include the plural, and conversely. If any portion of these
Bylaws shall be invalid or inoperative, then, so far as is reasonable and possible: (a) the remainder of
these Bylaws shall be considered valid and operative, and (b) effect shall be given to the intent
manifested by the portion held invalid or inoperative.
Section 11: Headings. The headings are for convenience of reference only and shall
not affect in any way the meaning or interpretation of these Bylaws.
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1
SC BarTransactional/Corporate Law Essentials
Corporate Formation
Thomas A. Brumgardt
Nelson Mullins Riley & Scarborough LLP
June 7, 2019
Choice of State of Incorporation
• Business friendly jurisdiction
• Investor preference
• Well developed corporate law / judicial expertise
• Forum for dispute resolution
• Limitation of director / officer liability
• Expense
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Governing Law
• South Carolina Business Corporation Act of 1988
• General Corporation Law of the State of Delaware
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Basic Documents
• Articles of Incorporation (or Certificate of Incorporation for DE)
• SC Initial Annual Report (Form CL‐1)
• Bylaws
• Consent of Incorporator
• Consent of Initial Board of Directors
• Subscription Agreement
• Shareholders Agreement
• EIN Application (Form SS‐4)
• Other state and federal tax filings (e.g., S corp election)
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Articles of Incorporation
• Existence begins upon filing of Articles of Incorporation (or Certificate of Incorporation, if in DE) unless delayed date is specified
• Joint and several liability if purport to act for corporation prior to incorporation
• Filing process in SC and DEoHard copy filings
o Electronic filings
• Forms:ohttp://www.scsos.com/
ohttps://corp.delaware.gov/
ohttps://nvca.org/
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Articles of Incorporation
• § 33‐2‐102: The Articles of Incorporation must set forth:
(1) a corporate name for the corporation that satisfies the requirements of § 33‐4‐101;
(2) the number of shares the corporation is authorized to issue, itemized by classes;
(3) the street address of the corporation's initial registered office and the name of its initial registered agent at that office;
(4) the name and address of each incorporator;
(5) the signature of each incorporator; and
(6) a certificate, signed by an attorney licensed to practice in this State, that all of the requirements of this section have been complied with.
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Articles of Incorporation
• § 33‐2‐102: The Articles of Incorporation may set forth:
(1) The names and addresses of the individuals who are to serve as the initial directors;
(2) Provisions not inconsistent with the law regarding:
(i) the purpose for which the corporation is organized;
(ii) managing the business and regulating the affairs of the corporation;
(iii) defining, limiting, and regulating the powers of the corporation, its board of directors, and shareholders;
(iv) a par value for authorized shares or classes of shares;
(v) the imposition of personal liability on shareholders for the debts of the corporation to a specified extent and upon specified conditions; and
(3) any provision that under Chapters 1 through 20 of Title 33 is required or permitted to be set forth in the bylaws.
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Articles of Incorporation
• Listing of optional provisions in comments to § 33‐2‐102
• Commonly included optional provisions:
oPreemptive Rights—opt out?
oCumulative Voting—opt out?
o Limitation on director liability (for public companies)—include?
o Statutory close corporation election
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Name of Corporation
• § 33‐4‐101
• Must include “corporation,” “incorporated,” “company,” etc.
• Must be distinguishable on the Secretary of State records
• Consider trademark or service mark
• Fictitious names
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Role of Incorporator
• Sign and deliver Articles/Certificate of Incorporation
• Appoint initial directors if not named in the Articles/Certificate
• Complete organization (or allow initial directors to do so)
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Completing the Organization
• Appoint initial directors
• Adopt bylaws
• Appoint officers
• Issue shares
• Other administrative and tax matters
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Bylaws
• Corporate administration
• Shareholders
• Directors
• Officers
• Reflect statutory scheme/modify default statutory provisions
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Hierarchy of Controlling Authority
• Statute
• Articles or Certificate
• Bylaws
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Agreements
• Stock purchase or subscription agreement
• Shareholders Agreement
o Transfer restrictions and buy out provisions
oVoting agreements (e.g., drag along rights, election of directors, etc.)
o Information rights
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Questions?
Thomas A. Brumgardt
Nelson Mullins Riley & Scarborough LLP
(803) 255‐9743
15
Securities
Joseph Clark
Transactional/Corporate Law Essentials
Friday, June 7, 2019
6/4/2019
1
SC BARTRANSACT IONAL/CORPORATE LAW ES SENT IA LS
SE L ECTED I S SUES UNDER THE S ECUR I T I ES LAWS
Joseph D. Clark
Haynsworth Sinkler Boyd, P.A.
June 7, 2019
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OVERVIEW
• Regulatory Framework
– Federal regulation
• Federal Securities Act of 1933 (Securities Act)
• Federal Securities Exchange Act of 1934 (Exchange Act)
• SEC Regulations
– South Carolina regulation
• South Carolina Uniform Securities Act of 2005
• SC Securities Regulations
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OVERVIEW
• Multiple Choice: A sale of stock by a South Carolina company to a North Carolina resident is subject to:
1. Federal securities laws
2. North Carolina securities laws
3. South Carolina securities laws
4. All of the above
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OVERVIEW
• Regulatory Framework
–Multi‐state transactions (blue sky laws)
– Any offer to sell securities, originating within the state, and any offer to buy, directed into the state, confers state jurisdiction over the transaction, regardless of whether either party is at the time present in the state. S.C. Securities Act §35‐1‐610
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OVERVIEW
• Questions:
–What is a security?
–What are the general requirements under the securities laws?
–Why are the securities laws important to your clients (and you)?
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WHAT IS A SECURITY?
• Is stock a security – yes (1) or no (2)?
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WHAT IS A SECURITY?
• Is all stock of a business a security – Yes (1) or No (2)?
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WHAT IS A SECURITY?
• Is a note a security – yes (1) or no (2)?
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WHAT IS A SECURITY?
• Is LLC membership a security – yes (1) or no (2)?
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WHAT IS A SECURITY?
• Is an orange grove a security – yes (1) or no (2)?
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WHAT IS A SECURITY?
• [A]ny note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit sharing agreement, collateral‐trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights . . . or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Securities Act Section 2(a)(1).
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WHAT IS A SECURITY?
• Howey “Investment Contract” Test
– SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
– S.C. Securities Act § 35‐1‐102(29)(D).
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WHAT IS A SECURITY?
• Howey “Investment Contract Test (continued)
– Investment of money
– In a common enterprise
–With an expectation of profit
– Solely (substantially) from the efforts of others
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WHAT IS A SECURITY?
• Rivanna Trawlers
– Rivanna Trawlers Unlimited v. Thompson Trawlers, Inc., 840 F.2d 236 (4th Cir. 1988).
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WHAT IS A SECURITY?
• Rivanna Trawlers (continued)– When a partnership agreement allocates to the partners "specific and unambiguous" powers giving them "ultimate control, as a majority" over the business of the partnership, then "the presumption that the general partnership is not a security can only be rebutted by evidence that it is not possible for the partners to exercise those powers."
– “[I]nvestigation of the partnership agreement and circumstances of a particular partnership may show that "the partners are so dependent on a particular manager that they cannot replace him or otherwise exercise ultimate control."
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WHAT IS A SECURITY?
• Application of Howey and Rivanna Trawlers to Partnerships
– Traditional general partnership interests are presumed not to be securities.
– Traditional limited partnership interests are presumed to be securities.
– Either presumption can be rebutted on the basis of right (and practical ability) to control.
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WHAT IS A SECURITY?
• Application of Howey and Rivanna Trawlers to LLCs
–Membership interests in member‐managed LLCs (that are like traditional general partnerships) are presumed not to be securities.
–Membership interests in manager‐managed LLCs (like traditional limited partnerships) are presumed to be securities.
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Underlying Principle: To Enable Informed Investment Decisions
– Transactions in securities must be registered or exempt (or preempted)
– Parties to transactions in securities must have access to accurate information
– Persons engaged in business of selling securities must be licensed
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Securities offerings must be registered or exempt
– Federal and state required (unless federal preemption)
– Generally involve restrictions on manner and/or size of offering
– Most commonly used are private offering exemptions
– No exemption for sale of entire business
– Exempt from registration but still subject to antifraud rules
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• True (1) or False (2)?
– An offering of stock to all employees of a company is exempt from registration as a private offering.
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Private Offerings: Securities Act §4(a)(2)– Transactions that do not involve “public offerings”
– No specific limits on number of offerees – large number suggests public offering
– Based on ability of investors to fend for themselves – access to information that registration would disclose and adequate sophistication to understand information
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Private Offerings: SEC Regulation D
– Rule 506
• Safe harbor under Securities Act §4(a)(2)
• No dollar limit
• State registration is pre‐empted – but notice filing required
• “Bad Actor” disqualification
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Private Offerings: SEC Regulation D– Rule 506(b) [Private Offering]
• No general solicitation or advertising
• No more than 35 non‐accredited investors (must be sophisticated)
• Unlimited accredited investors
• Specific information is required if sales to non‐accredited investors
– Rule 506(c) [Public Offering]• Accredited investors only
• Verification of accredited investor status
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Private Offerings: SEC Regulation D
– All Regulation D offering methods include:
• Safe harbor from integration – more than 6 months before or after
• Requirement for reasonable care to prevent purchases for resale
• Filing of Form D with SEC
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Intrastate Offerings – SEC Rule 147
– The issuer and all buyers must be in or residents of same state
– The issuer must have at least 80% of its revenue or assets or offering proceeds, or a majority of its employees in the state
– Strict conditions on resales
–Must register or be exempt under blue sky laws
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Offers to Employees ‐ SEC Rule 701– Must be under written employee stock compensation plans
– Available only to private companies
– Limits annual amount of securities that may be issued
– Includes information delivery requirements if sales exceed $10 million
– Not integrated with any other offering or sale
– Must register or be exempt under blue sky laws (SC Uniform Securities Act §35‐1‐202(21))
6/4/2019
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• SC Statutory Limited Offerings
– SC Uniform Securities Act §35‐1‐202(14)
– No dollar limit
– No more than 25 purchasers within SC
– No public solicitation or advertising
– Purchasers must buy for investment purposes
– Commissions only to licensed broker‐dealers
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Resales
– Antifraud and registration or exemption requirements apply equally to resales
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• True (1) or False (2)?
– Exempt offerings are not subject to securities fraud claims.
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Investors must have access to accurate information– Requirements to comply with registration or specific exemptions
– It is unlawful for a person in connection with the offer, sale, or purchase of a security, directly or indirectly . . .• to make an untrue statement of a material fact or• to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading . . . . S.C. Securities Act § 35‐1‐501.
– Seller has burden to prove did not know or could not have known with the exercise of reasonable care. S.C. Securities Act §35‐1‐509(b).
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
The Case of Farmer Jones
• A family dairy farm in owned by an LLC. Farmer Jones is the manager. There are other members.
• The USDA requires periodic testing for foot and mouth disease. Farmer Jones doesn’t test.
• Farmer Jones sells securities representing ownership of his dairy farm.
• After closing the buyer discovers that the cattle have foot and mouth disease.
• True (1) or False (2)?– Farmer Jones was obligated to disclose the foot and mouth disease.
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WHAT ARE THE GENERAL REQUIREMENTS UNDER THE SECURITIES LAWS?
• Persons engaged in business of selling securities must be licensed
– Beware of unlicensed brokers
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WHY ARE SECURITIES LAWS IMPORTANT TO YOUR CLIENTS?
The Case of Farmer Jones (continued)
• The buyer signs an acknowledgement at closing that the farm property is prone to flooding and uninsurable.
• The buyer incurs losses from foot and mouth disease but decides to tough it out and not sue.
• After initial struggles the business prospers.• Hurricane later floods farm and destroys uninsured cattle and
buildings• The buyer sues for rescission based on failure to disclose foot
and mouth disease. • True (1) or False (2)?
– The suit is dismissed for lack of causation.
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WHY ARE SECURITIES LAWS IMPORTANT TO YOUR CLIENTS?
• Minor infractions can have catastrophic consequences
– Failure to qualify for exemption or make required disclosure provides rescission remedy to all investors
– Remedies are relatively easy to attain
6/4/2019
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WHY ARE SECURITIES LAWS IMPORTANT TO YOUR CLIENTS?
• Your client can be personally liable or go to jail (and so can you).
– Control persons are jointly and severally liable
– Aider and abettor liability
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WHY ARE SECURITIES LAWS IMPORTANT TO YOUR CLIENTS?
The Case of Farmer Jones (continued)
• Farmer Jones sees you at lunch the day before the sale and tells you one of his cows doesn’t look so good. You tell him he should tell the buyer but he disagrees and you acquiesce.
• You close the sale for Farmer Jones.• The buyer sues you for aiding and abetting.
• True (1) or False (2)?– You are personally liable for the buyer’s losses.
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WHY ARE SECURITIES LAWS IMPORTANT TO YOUR CLIENTS?
• A person who, with actual knowledge that a person is committing acts sufficient to violate Sections 35‐1‐501 and 35‐1‐502, nonetheless intentionally furthers the violation with actual awareness that the person is rendering substantial assistance to the person committing the violation of Sections 35‐1‐501 and 35‐1‐502, thereby becomes an aider and abettor of the violation, and is therefore jointly and severally liable with and to the same extent as the assisted person who engaged in the fraudulent activity . . . S.C. Securities Act §35‐1‐509(g)(5).
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PRACTICE TIPS
• Avoid being identified in offering documents
• Try to avoid direct contact with investors
• Encourage involvement of a qualified accountant
• If in doubt, involve a specialist in securities laws
• Watch out for unlicensed securities brokers
• KNOW YOUR CLIENT!
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hsblawfirm.com
This document is for informational purposes only and should not be construed as legal advice. Any result the law firm and/or its attorneys may have achieved on behalf of clients in other matters does not necessarily indicate similar results can be obtained for other clients.© 2018 Haynsworth Sinkler Boyd, P.A.
JOSEPH D. CLARK
P 803.540.7847
Buying/Selling a Business: Asset and Stock Purchase Agreements
Melissa Cassell
Transactional/Corporate Law Essentials
Friday, June 7, 2019
5/29/2019
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BUYING AND SELLING A BUSINESS:asset & stock purchase agreementsPresented by: Melissa G. Cassell, Morton & Gettys, LLC
Melissa is an attorney with Morton & Gettys, LLC in Rock Hill,South Carolina, where she counsels businesses with respectto corporate acquisitions and sales, structuring andrestructuring, employment matters and commercial realestate acquisitions, sales and leases. Melissa is theimmediate past President of the York County BarAssociation and has practiced with Morton & Gettys sincegraduating from law school.
5/29/2019
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The Life of a Transaction
NEGOTIATIONS NDA/LOI CONTRACT DUE DILIGENCE CLOSING POST CLOSING
NEGOTIATIONS
Early stages, can be as simple asdetermining whether a party wants tobuy or sell
If listed, negotiations may involve oneor more business brokers*
Generally determining if there can bea meeting of the minds
No disclosures
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NDAnondisclosure
agreement
A MUST for seller: limits a buyer’s ability to use information learned through discussions with seller:• Only for determining whether business is
right for buyer• NOT for buyer’s pecuniary gain
Still important for buyers for same reasons
LOIletter of intent
Typically non-binding EXCEPT FOR:
Confidentiality/NDAExclusive offering
Good faith
Agree to ESSENTIAL business terms:
$$$Timeline
Scope of purchaseWho drafts contract
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CONTRACT:form
Asset Purchase:• Generally favored by buyers• Limit what is purchased/assumed• BUT not turnkey (need new entity, no P&L for
lending)• AND still potential for liabilities and liens that
follow the asset (SC Code 12-54-124 for taxes)
Stock Purchase:• Generally favored by sellers• Quick/turnkey• CAREFUL for liabilities if buyer• P&L/track record available for financing• Public perception of same company• Avoid double taxation if Seller is a C corp
CONTRACT:covenants/ conditions
• Run the business in the normal course• No new liens or liabilities that cannot terminate at
Closing• No terminating employees• Pay obligations as and when due
Covenants: usually pre-Closing obligations of seller
• New liens or liabilities that cannot be released at Closing
• Seller performed all of its covenants and reps/warranties remain true
• No governmental moratoria or similar injunction affecting business
• General compliance and approvals• Material Adverse Change• Financing (careful sellers)
Conditions: usually outs for buyer
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Contract:reps/warranties and indemnity
•Authority, validity and binding effect•No bankruptcy or receivership•Possession free of liens or liabilities or new contracts•No known violations/litigation and compliance•Good working order (assets)•Not delinquent on taxes and financials accurate•Confirm brokers
From seller:
•Authority, validity and binding effect•No violation of separate agreement•No bankruptcy or receivership•Confirm brokers
From buyer:
•Seller indemnify buyer for damage from misrepresentation, action or failure of seller PRE Closing
•Buyer indemnify seller for damage from misrepresentation, action or failure of buyer POST Closing
Indemnity:
CONTRACT:adjustments and survivability
Include prorations of taxes, leases and other third party costs
Determine how inventory, A/R and A/P will be handled
Credits for Buyer (benchmarks)
Seller consult post Closing
Earnouts/Clawbacks
Escrow agreements
Be sure to ADD survivability if buyer and LIMIT it if seller
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DUE DILIGENCE:inspections
Timeframe and termination rights determined at contract stage
Lien, judgment, pending litigation search on seller AND principals (state and county)
Tax compliance certificate from DOR
Title search if any real estate involved
Environmental reports (CERCLA)
Determine assignability of any assets/contracts
CLOSING AND POST-CLOSING
Determine what conveyance documents needed• Bill of sale for assets• Ownership share assignment and certificated shares for
stock • Careful of assets with documented titles
Written consent/resolutions from the parties
Document any ancillary obligations/ restrictions
• Non-compete, non-solicitation• Consulting, employment agreement• Assignments of contracts, leases
Certificate of reps and warranties and confirm what survives and for how long
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Trends in APAs
Non-competes: Palmetto Mortuary Transport, Inc. v. KnightSystems, Inc., 424 S.C. 444 (2019): complex sale betweensophisticated parties = “scrutinized at a more relaxed level thannon-competes executed in conjunction with employmentcontracts.” Also cites Reeves v. Sargeant, 200 S.C. 494 (1942)which found lifetime restraint on seller to compete with businesswas reasonable when buyer purchased the business, all assets,goodwill and exclusive name rights (which included Seller’sname).
Reps/Warranties and Indemnification: Johnson v. Little, 2019 WL1549158 (Ct of App 2019): Sale of assets for $30,000, “free of anyliens or encumbrances” and Seller will “defend, indemnify andhold purchaser harmless from any claims and or demandswhich arise or are asserted as arising form seller’s conduct priorto closing.” Convoluted facts (intertwined companies ownedby each), but ultimately seller held to have breached thecontract based on checks that bounced (for payment ofinvoices) when seller removed buyer as authorized signatoryprior to closing. Buyer’s knowledge did not affect outcome.Because seller signed individually, individual liability too.
Trends in SPAs
Adjustments: 7M Securities, LLC v. Digi International, Inc.,2019 WL 2057274 (US Dist. Ct. W.D. NC 2019): stockpurchase agreement had a calculation for the purchaseprice that included a deduction for “EstimatedTransaction Expenses”, later defined to include “anyliability of [seller] for payments to, or with respect to itsemployees… including bonus[es], deferredcompensation or similar compensation… and accruedpaid time off.” Dispute over $1,134, 242 (ofapproximately $9MM PP). Seller contended that moregeneral definition of the purchase price conflicted withthis provision and thus ambiguity. Court disagreed andconfirmed the credit was owed to buyer.
Contract Review and Drafting
L. Foster Girard
Transactional/Corporate Law Essentials
Friday, June 7, 2019
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT (this “Agreement”) is made as of the ____ day of
___________, 2019 (the “Effective Date”), by and between Big Manufacturing Company, Inc.,
with its principle office at ___________________, (“Manufacturer”) and Local Distributor,
LLC, with its principle office at _________________ (“Distributor”).
RECITALS
A. Manufacturer is in the business of developing, manufacturing and distributing
corrugated boxes (the “Products”)
B. Distributor is in the business of distributing and selling corrugated boxes; and
C. Manufacturer and Distributor desire to enter into a business arrangement whereby
Distributor purchases Products from Manufacturer for resale to customers in the Territory (as
hereinafter defined).
NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter
set forth, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Appointment of Distributor. Manufacturer hereby designates Distributor as a
distributor of Products in the Territory (as defined below) upon the terms and conditions
provided herein. The geographic territory within which Distributor may re-sell Products shall
consist of __________________ (the “Territory”).
2. Protected Accounts.
a. During the term of this Agreement, Manufacturer hereby agrees not to sell the
Products to any Protected Accounts in the Territory.
b. “Protected Accounts” shall mean (i) as of the Effective Date, those customer
locations listed on the attached Exhibit A for only the locations specified therein, and (ii) those
customer locations within the Territory for which Manufacturer accepts an order submitted by
Distributor; in either event unless and until any such customer location has ceased to be a
Protected Account pursuant to the terms contained in this Section 2. For any new customer
location for which Manufacturer accepts an order submitted by Distributor, the parties will
amend Exhibit A to add such customer location and agree on an annual target sales amount for
such customer location.
c. For a customer location to remain a Protected Account, (i) Distributor must
sell the Protected Account a minimum of eighty (80%) of the annual target sales set forth on
Exhibit A for such Protected Account, and (ii) sales to such Protected Account each month must
be no more than 140% of the previous month’s sales to such Protected Account and no less than
40% of the previous month’s sales to such Protected Account. If Distributor fails to satisfy either
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of these minimum sales requirements with respect to any Protected Account, that customer
location will immediately cease being a Protected Account. Any customer location that has
ceased being a Protected Account will not become a Protected Account again until Distributor
has complied with the foregoing requirements for twelve consecutive months.
d. Periodic business reviews shall be held between Manufacturer and Distributor
at a mutually agreed time and place in order to review the list of Protected Accounts. Distributor
will be responsible for arranging the time and place of the reviews with Manufacturer’s consent.
Such business reviews shall be held no less than twice per year. Prior to each business review,
Distributor will provide Manufacturer with a written status of each Protected Account.
3. Purchases and Sales of Products. Unless Manufacturer has agreed otherwise as to
an order or customer, Distributor shall submit orders to Manufacturer and will not allow its
customers to submit orders to Manufacturer, and such orders must be:
a. at the pricing set forth on the attached Exhibit B, or as such pricing is
adjusted from time to time as set forth in Section 5 below,
b. at payment terms of 1% 10 days, net 30 days,
c. for Products to be shipped directly to end-users within the Territory,
d. for delivery F.O.B. Manufacturer’s applicable facility with title and risk of
loss transferred to Distributor when Products are delivered by Manufacturer to a carrier for
transportation to Distributor’s customer, and
e. subject to the additional terms and conditions of sales set forth on Exhibit
B and any other additional terms and conditions of sales specified by Manufacturer from time to
time.
The terms of this Agreement will control over any inconsistent terms in any orders
submitted by Distributor, and any additional, non-customized (boilerplate) terms in any order
will be of no effect. Manufacturer may, in its sole and absolute discretion, accept or reject orders
submitted by Distributor. Distributor’s obligation to pay for Products is not subject to payment
to Distributor by purchasers from Distributor. Distributor will have all credit and collection risk
from resales of Products by Distributor.
4. Responsibilities of Distributor. Distributor shall, during the term of this
Agreement:
a. call upon and provide customer service for existing and potential accounts
within the Territory on a regular basis consistent with good business practice,
b. use commercially reasonable efforts to solicit and procure orders for
Products,
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c. evaluate potential customer’s needs for Products and relate these
requirements to Manufacturer,
d. cooperate with and assist Manufacturer in promotional and merchandising
campaigns for Products,
e. notify Manufacturer promptly of complaints or claims made or brought
against Distributor or against Manufacturer in regards to the Products, and
f. comply with all laws and governmental regulations applicable to its
performance hereunder.
5. Responsibilities of Manufacturer. Manufacturer shall, during the term of this
Agreement:
a. inform Distributor of all price changes for Products no less than 30 days
prior to implementation,
b. provide Distributor on request with reasonable quantities of sales and
technical information and samples,
c. provide support for proposals and technical assistance as may be
reasonably necessary to facilitate procuring orders for Products,
d. cooperate reasonably with Distributor if claims are brought by end-users
with respect to the Products, and
e. comply with all laws and governmental regulations applicable to its
performance hereunder.
6. Non-competition. Distributor agrees that during the term of this agreement, and
for the one-year period following the expiration or termination of this agreement, Distributor
shall not, on its own behalf or on behalf of any other person or entity, without Manufacturer’s
prior written approval, directly or indirectly sell, offer for sale, market, promote, receive or
solicit orders for products that are the same, or substantially similar to, or intended for the same,
or a substantially similar use as, any of the Products in the Territory.
7. Warranty. Manufacturer warrants that, at the time of delivery, the Products
supplied hereunder will conform to Manufacturer’s specifications. Manufacturer makes no other
warranties, expressed or implied, by operation of law or otherwise, including, specifically,
MANUFACTURER MAKES NO WARRANTY OF ANY KIND WITH RESPECT TO THE
MERCHANTABILITY OF SAID PRODUCTS OR WITH RESPECT TO THEIR FITNESS
FOR ANY PARTICULAR PURPOSE. Should any customer request warranties other than the
warranties Manufacturer agrees to give under this Section, Distributor shall promptly relay such
request to Manufacturer and Manufacturer agrees to consider such request in good faith.
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8. Limitation of Liability. Neither party will be liable under any circumstances in
connection with this Agreement for any special, consequential, incidental, indirect, or punitive
damages.
9. Indemnity. Manufacturer agrees to indemnify (including, without limitation,
reimbursement for reasonable attorneys’ fees and expenses of litigation) Distributor, its agents,
servants, representatives or employees, against any and all third party claims, to the extent
caused by any breach by Manufacturer of its warranty hereunder or any express warranty given
by Manufacturer. Distributor agrees to indemnify (including, without limitation, reimbursement
for reasonable attorneys’ fees and expenses of litigation) Manufacturer, its agents, servants,
representatives or employees, against any and all third party claims, to the extent caused by any
breach of warranty given by Distributor for the Products other than the warranty given by
Manufacturer hereunder.
10. Confidential Information.
a. In connection with this Agreement, each party may provide the other with
confidential or proprietary information, including, without limitation, customer lists,
descriptions, specifications, pricing information, drawings, manufacturing methods, marketing
information, formulae or compositions. Each party agrees to take precautions to protect such
information, not to use it except for purposes contemplated by this Agreement and not to
disclose, in whole or in part, any such information or information regarding this Agreement or
the relationship between the parties, without the prior written consent of the other, and to bind its
employees, officers and agents to this same obligation. This obligation shall not extend to
information that is generally published or lawfully available from other sources, that is
independently developed by a party without reference to confidential information disclosed
hereunder or that was known to a party prior to disclosure by the other.
b. Notwithstanding the foregoing subsection a., customer or prospective
customer information provided by Distributor to Manufacturer may be used by Manufacturer
during the Initial Term and any Renewal Term solely to pursue sales of products other than the
Products and for no other purpose, and after termination of this Agreement for any purpose.
11. Intellectual Property Rights.
a. Distributor acknowledges that title in and ownership of any and all
confidential or proprietary information, technology and know-how related to the Product (“IP
Rights”) are and at all times have been in Manufacturer, and that, by this Agreement, Distributor
is not acquiring any title, ownership or other interest in the IP Rights. Distributor agrees not to
contest or challenge the validity of, or Manufacturer’s title in, the IP Rights and to cooperate
reasonably with Manufacturer in protecting Manufacturer’s rights to the IP Rights. Any
improvements, variations or derivatives of the Products that are invented or developed by
Distributor during the term of this Agreement will be owned by Manufacturer. Distributor
agrees to promptly disclose any such improvements, variations or derivatives to Manufacturer
and to cooperate with Manufacturer in the execution of any and all proper instruments and to do
any and all lawful acts necessary to carry out the intent of this paragraph.
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12. Term and Termination.
a. The initial term of this Agreement shall expire on December 31, 2020 (the
“Initial Term”). Upon expiration of the Initial Term, this Agreement will automatically renew
for successive one-year periods (each, a “Renewal Term”) unless either party gives the other
written notice of non-renewal at least ninety (90) days prior to the expiration of the Initial Term
or the then current Renewal Term. Either party may terminate this Agreement immediately in
the event of any default by the other party that is not cured within thirty (30) days after written
notice from the terminating party describing the default. At termination, all invoices shall be
immediately due and payable.
b. If Manufacturer gives notice of non-renewal to Distributor and Distributor
performs all of its obligations hereunder through the date of termination, Manufacturer will pay
Distributor a 15% commission on any sales of Products made by Manufacturer, to any customer
locations that were Protected Accounts at the time of termination, for a period of ninety (90)
days after the date of termination of the Initial Term if the term is not renewed or, for a period of
one hundred eighty (180) days after the date of termination of any Renewal Term. Payment of
these commissions is intended to compensate Distributor for the loss of the benefits of this
Agreement if Distributor has fully performed its obligations hereunder and Distributor will not
be required to perform any additional services or duties to be entitled to these payments. Any
inventory not sold by Distributor will be repurchased by Manufacturer under the conditions set
forth on Exhibit B.
13. Amendments. This Agreement shall not be amended or modified except by a
written document duly signed by the parties.
14. Assignment. This Agreement may be assigned by either party, in whole or in part,
only with the prior written consent of the other party, which consent will not be withheld
unreasonably; provided, that either party may assign this Agreement, without the other’s consent,
to a subsidiary or affiliate, or to a successor entity or assignee as a result of a merger, acquisition,
consolidation, restructuring or sale of the assignor’s applicable line of business, provided that
such successor entity or assignee assumes in writing the assignor’s obligations hereunder.
15. Governing Law; Arbitration.
a. This Agreement shall be governed by and construed in accordance with
the laws of the State of South Carolina, without regard to the laws of such jurisdiction
concerning conflicts of law.
b. Any and all disputes arising out of or relating to the interpretation or
application of this Agreement or concerning each party’s relationship with the other or
termination thereof, shall be subject to arbitration in Greenville, South Carolina pursuant to the
Federal Arbitration Act. Arbitration shall be conducted under and governed by the Commercial
Arbitration Rules of the American Arbitration Association. All arbitrators must be licensed
attorneys with at least 10 years of substantial business transactional experience and must take an
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oath of neutrality with respect to both parties. Judgment upon the award rendered may be
entered in any court of competent jurisdiction. Nothing contained in this Section shall limit the
right of the parties to enforce by court injunction or other equitable relief, the other party’s
obligations under this Agreement.
16. Force Majeure. Neither party hereto shall be liable to the other for default or
delays in delivery or accepting goods or services hereunder if such default or delay is caused by
fire, strike, riot, war, act of God, governmental order or regulation, complete or partial shutdown
of plant by reason of inability to obtain sufficient raw materials or power, and/or any similar or
different contingencies beyond the reasonable control of the respective parties.
17. Costs of Enforcing Agreement. Should either party institute proceedings to
enforce the terms or conditions of this Agreement, the prevailing party shall be entitled to
recover all its reasonable expenses from the other party, including attorney’s fees, costs and other
expenses reasonably and necessarily incurred.
18. Waiver. Failure by either party to require strict performance hereunder will not be
deemed a waiver of that party’s right to subsequently require strict performance.
19. Independent Contractor. It is mutually understood and agreed that Distributor is,
at all times, acting and performing as an independent contractor and not as an agent of
Manufacturer. Nothing in this Agreement shall be construed to create the relationship of
employer and employee, master and servant, or principal and agent between Manufacturer and
Distributor. This Agreement shall not be construed to be a partnership or joint venture. No
employees or agents of any party shall be deemed to be employees or agents of any other party
for any reason whatsoever pursuant to this Agreement. Manufacturer shall not have or exercise
any control or direction of the prices for which the Products are resold or, except as expressly
stated herein, the methods by which Distributor markets or sells the Products or otherwise
conducts its business. Neither party has authority hereunder to bind the other party in dealings
with third parties.
20. Notices. All notices, demands and other communications provided for or
permitted hereunder shall be made in writing and shall be by registered or certified first class
mail, return receipt requested, overnight courier service or personal delivery, to the addresses set
forth in the preambles to this Agreement. Notices shall be deemed effective (x) upon receipt in
the case of personal delivery or via overnight courier, and (y) five business days after the date of
mailing in the case of certified or registered mail.
21. Severance. In the event any provision of this Agreement is declared void or
unenforceable, such provision shall be deemed severed from this Agreement, which shall
otherwise remain in full force and effect.
22. Entire Agreement. This Agreement constitutes the entire understanding between
parties. Declarations, representations, promises or conditions other than those set forth in this
Agreement shall not be construed in any way so as to contradict, modify or affect the provisions
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of this Agreement. The terms of this Agreement will not be varied or supplemented by any
conflicting or additional terms pre-printed on any form supplied by one party to the other party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and
year first above written, in multiple counterparts, each of which shall be considered an original.
MANUFACTURER:
Big Manufacturing Company, Inc.
By:
Name:
Title:
DISTRIBUTOR:
Local Distributor, LLC
By:
Name:
Title:
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EXHIBIT A
INITIAL PROTECTED ACCOUNTS
Customer Location Annual Target Sales
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EXHIBIT B
INITIAL PRICING AND ADDITIONAL TERMS AND CONDITIONS OF SALE
[INITIAL PRICING TO BE INSERTED]
Additional Terms and Conditions of Sales
• Minimum order quantities of __________________.
• Lead-times shall be __________________.
5/31/2019
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CONTRACT REVIEW AND DRAFT ING
Foster Girard
Transactional / Corporate Law Essentials| June 7, 2019
2
PRECISION IS KEY
• Be clear as to:
–Which party is obligated to act: “Bob shall file the report …,” not “the report shall be filed”
–When they are required to act
–Manner in which they must act (warranties, standard of care, etc.)
– Consequences
5/31/2019
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PRECISION IS KEY
• Be consistent:
– In use of defined terms
– In phrasing / wording (i.e. “indemnify, defend and hold harmless” in one provision and “indemnify and hold harmless” in another)
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PRECISION IS KEY
• Avoid ambiguity:
– Pronouns (he, she, they, etc.) cause confusion.
– Does a qualifier / limitation apply to part or whole?
– Does “hereunder” or “herein” mean just this section or this entire agreement?
COULD THE PROVISION REASONABLY BE INTERPRETED IN DIFFERENT WAYS.
5/31/2019
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SAMPLE CONTRACT
• Introduce parties, effective date, etc.
• Recitals (use of “witnesseth” and “whereas”)
• Main body (use a logical or customary order)
• Boilerplate
• Signatures
• Exhibits / Schedules
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SAMPLE CONTRACT
• Appointment of Distributor and Protected Accounts:
– Is the arrangement exclusive or non‐exclusive to each party (can Manufacturer have other distributors and can Distributor sell competing products)?
– Manufacturer wants to make sure it isn’t frozen out of major accounts if Distributor not actually selling as it should, Distributor wants to be sure Manufacturer doesn’t go around Distributor to sell direct to best accounts
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SAMPLE CONTRACT
• Primary issue in other types of agreements:
– Sale of goods: requirements obligation, minimum volume, output contract
– Provision of Services: monthly fees, service level agreement
– Software License: hosted / not hosted, support obligation, security
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SAMPLE CONTRACT
• Special Provisions:
– Non‐competition: enforceability concerns
– Non‐solicitation: hard to police in big companies
– Confidentiality: mutual or one‐way; exclusions
– Intellectual Property: infringement; ownership
– Equipment / Tooling: maintenance and replacement obligations
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SAMPLE CONTRACT
• Warranties:
–Warranty period
– Implied warranties for sale of goods
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SAMPLE CONTRACT
• Limitations of Liability:– Exclusive remedy of repair, replace, refund
– No (or dollar cap on) indirect, incidental, consequential, special, or punitive damages
– No (or dollar cap on) damages measured by lost profit
– Dollar cap on all damages
• May need to address how limitation of liability affects the indemnity
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INDEMNIFICATION
• Causation: “to the extent caused by” or “arising out of or resulting from”
• Standard of Care: “… negligence, willful misconduct, or breach of this agreement” or “… the products or supplier’s acts or omission”
• Obligation to defend / cover attorneys fees
• All losses or just third party claims
• Insurance / ability to make good
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SAMPLE CONTRACT
• Governing Law and Dispute Resolution:
– Familiarity with governing law
– Unlikely to sue a customer except in really egregious situations
– Cost of travel, hiring local counsel in a dispute
– Home court advantage
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Employment Agreements and Confidentiality Agreements
Christina Rogers
Transactional/Corporate Law Essentials
Friday, June 7, 2019
6/3/2019
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Presented by:Christy Rogers
Is this the real life? Is this just fantasy? Mike Dotson (Research and Development employee)
Leaves to work for a competitor (allegedly not in a materials position)
Gets to new job and shares proprietary Company information with competitor
What do you do?
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So, what’s the big deal?(Why we care) Technological advancements that have been good for industry have also made stealing confidential information easier for employees
The landscape of restrictive covenants is changing rapidly
Poorly drafted agreements result in unenforceable agreements
There’s lots of room for mistakes – currently agreements are governed by state law
Components of AgreementsLess Problematic More Problematic
Confidentiality/Non‐Disclosure Provisions
Return of Property
Non‐Solicitation of Employees
Non‐Solicitation of Clients
Non‐Compete Provisions
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But first . . .
Trade Secrets vs. Confidential Information
• Trade Secrets are statutorily defined
• If information won’t qualify as a trade secret, need contractual protection(confidentiality/non-disclosure agreement)
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What the Heck is a Trade Secret Anyway? • Information (formula, pattern,
program, device, method, product, technique, system, procedure, code . . .)
• That is valuable (“derives independent economic value”)
• Because it is not generally known (not know to the public or others who may obtain economic value from its disclosure) AND
• The owner has made efforts to keep it a secret (efforts must be reasonable under the circumstances)
What’s the Purpose?
Confidentiality/Non‐Disclosure Clause
Identifies expectations regarding the use and disclosure of the Company’s information (both during employment and after it ends)
Demonstrates the Company’s intention to keep information confidential (contract remedy)
Not all information is protectable (has the information been treated as confidential in the past?)
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What are the Pitfalls? Carefully craft definition of confidential information
not overly broad (“any and all information related to the Company”) preferably related to employee’s job duties
Do not prohibit disclosure indefinitely Do you really have a legitimate business interest to prohibit forever?
Courts in SC have held that an overly broad confidentiality/ non‐disclosure agreement amounted to a de facto non‐compete agreement (strict scrutiny)
If a confidentiality provision is so broad that it would effectively preclude an employee from working elsewhere in the industry, it may be treated like a non‐compete much more difficult to enforce
What’s the Purpose?
Return of Property
Umm. . . let’s you get your stuff back (phone, computers, credit cards, keys, etc.)
Also meant to ensure return of your documents and information
Further evidence that the Company is seeking to keep certain information confidential
You may need to take additional steps beyond the agreement itself (training, exit interview, letter to prospective emplpoyers, etc.)
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What are the Pitfalls
Be careful about requiring that the cost of any unreturned property be deducted from the employee’s final paycheck
The disclaimer may help (“unless otherwise prohibited by state law”), but can you ensure compliance?
Most states have specific restrictions about deductions from pay (violation of state wage payment laws)
Deductions cannot reduce an employee’s pay below minimum wage (violation of the FLSA)
Now things get sticky . . .
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Non‐Compete/Non‐Solicitation: (A/K/A The Bugaboos) NCAs traditionally disfavored by Courts – even more animosity now with current legislative changes (more tolerance for non‐solicitation)
States may impose different standards for enforceability (do your research!)
Movement from broad employee application more restrictive employee application
What’s the Purpose? Non‐solicitation• Of Employees: Restrict departing employees from recruiting or assisting future employer from hiring your employees (NOT a no‐poach agreement)
• Of Clients: Prevents former employees from contacting your clients/customers and indefinable prospects
Non‐Compete An agreement not to work for a competitor for a stated period of time
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The Basics . . .
A Writing
Defines protectable interests
Must be reasonable in terms of scope and time
Clearly states time, territory, prohibited activities (drafting issues)
Provides employee with consideration
Protectable Interests Training (money spent, necessary for job)
Customer relationships that result in repeat business (importance of relationship, employee interaction with customer)
Receipt of confidential information (need, know, access)
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Requirements ‐ Drafting IssuesTime
Territory
Scope of Prohibited Activities
Time 2‐3 years generally the outer limit for non‐competes/non‐solicits
Some states require “look back” limits for non‐solicitation restrictions
Consider “pay for no play” provisions
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Territory Some states require geographic limitations, described by city, parish, or county (Be Careful! It may look reasonable on paper, but not so reasonable in practice)
What about restrictions from working for a specific competitor? How do we do this in states that require specific geographic territories? (specific client/customer list)
Territory“Step Down” or “Tiered” Easily severable provisions
Team IA v. Lucas (Ct. App. 2011)“…the Parties to this agreement hereby agree that for the purposes of this Agreement, the “RESTRICTED TERRITORY” shall consist of the entire continental United States. In the alternative, and only if such territory is deemed by a court or other proceeding to be unreasonable or otherwise invalid or unenforceable, then such territory shall be defined as the states of South Carolina, North Carolina, Georgia, and Alabama.”
Court held that continental US restriction was unenforceable, but “alternative” territorial restriction may be enforceable if evidence supported that employee worked in all 4 states
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Scope of Prohibited Activity Describe what the Company
considers to be “competitive activity”
Do not prohibit employment with a competitor in “any capacity”
Generally, need to prohibit employment that would result in the employee performing the same duties he/she performed for the Company (specificity is key)
Consideration What are the Pitfalls?
Consideration must be “adequate”
Timing (offer of employment vs. continued employment)
Type (bonus, promotion, raise, “access to new information”)
What’s the Purpose?
Generally required to show that the agreement is enforceable
Requires that employee get something in exchange for post‐employment restrictions
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(Dead) Proposed Federal LegislationWorkforce Mobility Act
Would have prohibited the use of non‐compete agreements by employers (total ban)
Provided employees with a private right of action if they had been illegally forced to sign a non‐compete agreement
Would have still allowed employers to protect their trade secrets
End Employer Collusion Act
Would have prohibited employers from entering into no‐poaching agreements in which they promise not to recruit each other’s workers
Policy behind proposed bill was: no‐poach agreements drive down wages and prevent workers from moving to better job opportunities
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Pending Federal LegislationFreedom to Compete Act
Introduced January 2019 (more likely to gain bipartisan support)
Set limits on an employer’s ability to enter into non‐compete agreements with certain kinds of employees
Bill would render void existing non‐compete agreements and outlaw any new non‐compete agreement between employers and employees classified as non‐exempt under the FLSA
State Developments The New Hampshire, New York, and New Jersey legislatures have introduced “partial ban” bills that seek to prohibit the use of non‐compete agreements with regard to low‐wage employees (Illinois passed a similar bill in 2017)
Pennsylvania and Vermont have introduced sweeping proposals to restrict the use of all non‐compete agreements
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State DevelopmentsMassachusetts Non‐Competition Agreement Act
Limits non‐competition provisions in most employment contexts to one‐year
Requires employers wishing to enforce a one‐year period to pay their ex‐employees for the time that such employees are sidelined
Cannot enforce provisions against employees laid‐off or terminated without cause or against employees classified as non‐exempt
Applies to employee noncompetition agreements entered into on or after October 1, 2018
State’s Where Non‐Competes Have Been Banned California ‐ non‐compete agreements that preventemployees from future gainful employment are void;this ban applies to non‐competes that are or remaineffective after the termination of employment (and no“tricky lawyering” allowed)
North Dakota – also applies to non‐solicitationagreements; Court has stated forcing North Dakotaresidents to abide by laws in other states is a violationof the state’s labor laws
Oklahoma – can still prohibit the solicitation ofclients and other employees
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What’s the takeaway? All employees can sign a NDA – so, let’s do that!
Be sure that “confidential information” is clearly defined – be wary of being too expansive
If you decide NOT to use NCAs – be strategic about how to handle customer contacts
If you decide to use NCAs – understand your jurisdiction, use step down provisions, and carefully select employees who will sign (also: consider forfeiture clauses and liquidated damages provisions in lieu of blanket prohibition)
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Other Provisions Remedies injunctive relief (must act
quickly); legal fees (most courts will enforce)
“Blue‐pencil” provision in SC court cannot add in new language to make agreement enforceable
Severability in SC court can sever the unenforceable provisions and enforce the rest (if possible)
Choice of Law in SC court will honor choice of law provision, as long as it does not violate public policy
Other Provisions Survival and assignability clause
At‐will employment disclaimer (don’t create a contract of employment)
Confirm no restrictions from a previous employer (and agreement to disclose restrictions to future employers)
Ownership of work product (consider separate IP/Inventions Assignment Agreement, if needed)
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Final Questions?
Sample Provisions
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Confidentiality/Non‐Disclosure ClauseSample language:
During employment, Employee agrees not to directly or indirectly disclose oruse the Company’s confidential and/or proprietary information except asrequired for the performance of services in furtherance of the Company’sbusiness. Also, for a period of two years following his/her employment withthe Company, Employee agrees not to directly or indirectly disclose or usethe Company’s confidential and/or proprietary information. Confidentialand/or proprietary information means information which is treated by theCompany as confidential and which has not been made generally available tothe public or to competitors of the Company, and may include but is notlimited to customer lists, customer preferences, customer pricing data,customer payment history, marketing strategies, profit/loss data,information related to margins and vendor pricing, sales forecasts, productdevelopment data, and any other information marked or treated by theCompany as confidential. This promise is not intended to and does not limitin any way Employee's duties and obligations to the Company understatutory (e.g., a trade secrets statute) or case law not to disclose or makepersonal use of such information.
Employee Acknowledgement Re: Confidential Information and Trade SecretsSample language:
Employee agrees that Company is engaged in a highly competitive business and has expended, and continues to expend, significant money, skill and time to develop and maintain valuable Trade Secrets and Company gives Employee knowledge of many of Company’s Trade Secrets and Confidential Information, the disclosure or use of which would cause Company significant and irreparable harm. Employee further agrees that the covenants in this Agreement are reasonable and necessary to protect Company’s legitimate business interests in its Trade Secrets, Confidential Information, and other proprietary information.
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Non‐solicitation of EmployeesSample language:
Employee agrees that for a period of one year following the termination of Employee's employment for any reason, Employee shall not directly, or indirectly by assisting others, recruit or attempt to recruit any of the Company’s employees or contractors with whom Employee became familiar as a result of Employee's employment with the Company.
Non‐Solicitation of Clients Sample Language:
Employee agrees that: a) for a period of two years following the termination of Employee’s employment, b) Employee will not directly, or indirectly by assisting others, solicit or attempt to solicit any business from any of the Company’s clients, or actively sought prospective clients, with whom Employee had material contact during the last twelve (12) months of Employee’s employment with the Company, c) for the purpose of providing services or products that are the same, substantially similar, or competitive with those Employee provided on the Company’s behalf.
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Return of PropertySample language:
Employee agrees to return all Company property and all documents related to the Company upon termination of employment. Such property includes, but is not limited to, the original and any copy of all confidential information, as well as client lists and files, Company issued keys and credit cards, equipment, computer printouts or software, unpublished advertisements, brochures, plans, records, drawings, materials, papers and copies thereof. It is specifically agreed that any documents, card files, notebooks, calendars, rolodex's, etc. containing client information are the property of the Company regardless of by whom they were compiled.
Non‐ CompeteSample language:
Employee agrees that for a period of one year following the termination of Employee’s employment for any reason, Employee will not compete with the Company by performing work that is similar to or competitive with the work that Employee performed for the Company. This restriction shall only apply within the following counties: ___________________.
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Non‐ CompeteSample language:
“For a period of twelve (12) months following separation of employment for any reason, Employee shall not, directly or indirectly, on behalf of himself or any third party or entity, whether as an owner, employee, consultant, contractor, officer, agent, or in any other capacity, compete with Company in the commercial sale of [insert business field or kind of work] or activities that are the same as or similar to the products Employee sold on behalf of the Company in the geographic territory encompassing: _________.
Step Down or Tiered Provision Sample language:
“For purposes of this non‐compete covenant, ‘Restricted Territory’ is defined to include: (a) the United States; (b) South Carolina; (c) North Carolina; (d) any state where Employee performs Services in the twelve (12) month period preceding his termination; and (e) the geographic area within a five (5) mile radius of any company location.”
For purposes of this non‐solicitation covenant, ‘Customer’ is defined to include: (a) any customer of the Company; (b) any customer of the Company about which Employee was provided access to Confidential Information; (c) any customer who with which Employee had contact at any time in the twelve (12) month period preceding the separation of his employment with the Company.”
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Consideration – New HireSample language:
Employee acknowledges that this Agreement was explained to Employee prior to employment and Employee accepted employment at Company knowing this Agreement would be required. Employee agrees he/she is voluntarily and willingly entering into this Agreement in exchange for Company agreeing to hire Employee, for which Employee would not be eligible in the absence of this Agreement. Employee understands and agrees that Company would not provide Employment if Employee did not enter into this Agreement.
Consideration – PromotionSample language:
Employee acknowledges that this Agreement is supported by adequate consideration, as he/she is voluntarily and willingly entering into this Agreement in exchange for Company promoting the Employee to [insert position], for which Employee would not be eligible in the absence of this Agreement. Employee understands and agrees that Company would not provide this consideration if Employee did not enter into this Agreement.
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SeverabilitySample language:
Each paragraph, clause, subclause and provision of this Agreement shall be severable from each other and, if for any reason, any paragraph, clause, subclause or provision is invalid or unenforceable, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other paragraph, clause, subclause or provision of this Agreement. It is intended by Employee and Company that any paragraph, clause, subclause or provision which is invalid or unenforceable as written be valid and enforceable to the fullest extent possible. In the event that a court of competent jurisdiction would otherwise hold any paragraph, clause, subclause or provision hereof unenforceable for any reason, it is the express intention and desire of Company and Employee that the court modify and reform said paragraph, clause, subclause or provision so as to render it enforceable to the maximum extent deemed reasonable by the court. If a court of competent jurisdiction cannot modify an offending paragraph, clause, subclause or provision to be made valid or enforceable (or if the court is restricted by applicable law from performing such modification), then it shall sever the offending paragraph, clause, subclause or provision (or portion thereof) from this Agreement and all remaining paragraphs, clauses, subclauses and provisions shall remain enforceable.
Disclosure to Prospective EmployersSample language:
Employee will disclose the terms of this Agreement to any prospective employer prior to accepting such employment. Regardless of the terms of Employee’s separation, Employee hereby gives Company permission to contact and advise all of his/her prospective employers of the secrecy and non‐compete obligations Employee has to Company.
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Survival and Assignability Sample language:
This Agreement and the obligations and restrictions set forth herein shall survive the Termination Date, unless superseded by a new agreement. If Employee is subsequently hired by an affiliate of Company, then all the rights and duties under this Agreement shall succeed to the Company affiliate. Employee agrees and understands that this Agreement shall continue in full force and effect, with any successor and assign, if any, of Company, unless superseded by a new agreement. Employee also agrees and understands that all the rights and duties under this Agreement shall succeed to any Company successor or assign.
At‐will Employment DisclaimerSample language:
Employee acknowledges that the employment relationship between Company and Employee is one of employment at‐will, and no rights to employment for a definite period of time are created by this Agreement. Employee understands that both Employee and Company have the right to end Employee’s employment with Company for any or no reason and with or without prior notice.