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Business Breakups (Series: Common Commercial Conflicts)

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As any entrepreneur will attest, starting and operating a business comes with unique challenges. These challenges are a key reason that, by some estimates, half of the companies that are founded today will not exist four years from now. It can be argued that the effort and attention needed to find success precludes business owners from planning for failure. This webinar focuses on the realities of a failing business from the owners’ perspective. Join our panel of experts as they discuss the various considerations that should be given at the outset of start-up negotiations and through business breakup, including dispute negotiation and litigation.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/business-breakups-2019/

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Business Breakups (Series: Common Commercial Conflicts)

  1. 1. Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2
  2. 2. The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. DISCLAIMER 3
  3. 3. MEET THE FACULTY MODERATOR: Leland Chait Leland Chait, Esq. PANELISTS: John Levitske Ankura John Martin Sugar Felsenthal Grais & Helsinger Max Stein Boodell & Domanskis LLC 4
  4. 4. ABOUT THIS WEBINAR As any entrepreneur will attest, starting and operating a business comes with unique challenges. Despite these challenges, dynamic creators are focused on building and creating, often not thinking of steps to make difficulties, even failures, unwind smoothly. Yet failure is a constant reality. By some estimates, half of the companies that are founded today will not exist four years from now. This webinar focuses on the realities of a failing business from the owners’ perspective. Join our panel of experts as they discuss the various considerations that should be given at the outset of start-up negotiations and through business breakup, including dispute negotiation and litigation. This webinar is delivered in Plain English, understandable even if you do not have a background in the subject. It brings you into an engaging, even sometimes humorous, conversation designed to entertain as it teaches. And, it is specifically designed to be viewed as a stand-alone webinar, meaning that you do not have to view the other webinars in the series to get a lot out of it. 5
  5. 5. ABOUT THIS SERIES This webinar series focuses on the legal and financial realities that accompany unanticipated adverse events, soured business relationships, and failing and bankrupted organizations. Whether you are a general litigator, business owner, aspiring shareholder, or insurance claims analyst, this webinar series will help you to understand and prioritize key concepts associated with business breakups, shareholder disputes, claims for lost profits, and bankruptcy avoidance actions. As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business owners, and executives without much background in these areas, yet is also valuable to attorneys, accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 6
  6. 6. Dates shown are premiere dates; all episodes will be available on demand after their premiere date. EPISODES IN THIS SERIES EPISODE #1 Business Breakups 2/05/2019 EPISODE #2 Lost Profit Cases 2/26/2019 EPISODE #3 Resolving Shareholder Disputes 3/26/2019 EPISODE #4 Defending Against Bankruptcy Avoidance Actions 4/23/2019 7
  7. 7. Episode #1 Business Breakups © 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 8
  8. 8. REASONS FOR BUSINESS BREAKUPS • Emotional • Fraud • Perceived Inequity • Financial • Retirement • Bankruptcy • Perceived benefits elsewhere • Unforeseen • Death • Disability • Decline of Market 9© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  9. 9. CLOSELY-HELD BUSINESS ISSUES • Not easily liquid, marketable • Concentration of control (family-owned businesses) • Loose adherence to corporate governance • Lack of communication • Minimal distinction between owner and business • Voting limitations and power for minority shareholders • Liquidity for exiting shareholders • Withdrawal and dissolution rights 10© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  10. 10. CLOSELY-HELD BUSINESS ISSUES (CONT.) • Minimal, if any, board oversight • Minimal formalities in place • Lack of transparency or self-dealing • Document maintenance • Penetration of corporate veil • Lack of continuity of business operations • Key shareholder concerns 11© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  11. 11. WHY DO OWNERS FAIL TO PLAN? • Lack of pragmatism and foresight • Lack of third-party guidance (legal, insurance, operational, valuation) • Advisor costs • ‘Handshake’ agreements, lack of formal documentation • Operational distractions • Relationships: Family, friends (“blood is thicker than water”) • Unrealistic Optimism – Unrealistic projections/expectations 12© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  12. 12. COMMON ISSUES IN BUSINESS BREAKUPS • Accusations of shareholder oppression • Accusations of breach of fiduciary duty • Accusations of undue personal uses of company assets • In particular, use of company personnel • Accusations of self-dealing • Accusations of asset misappropriation/fraud • Proper valuation 13© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  13. 13. MAJORITY CONTROL • Can lead to claims of: • Oppression • Self-dealing, misappropriation • Risks of conventional corporate law norms • Centralized control in board • Majority control in voting directors • May take actions detrimental to minority 14© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  14. 14. SHAREHOLDER OPPRESSION • Autonomous control that directs the inequitable transfer of wealth • Squeeze-out or freeze outs • Exclusion from profits • Lack of dividend policy or declaration • Lack of profitability due to excessive director fees, officers’ compensation, bonuses 15© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  15. 15. SHAREHOLDER OPPRESSION (CONT.) • Involuntary removal from director or officer position • Voting powers • Deny access to information or documents • Formulaic or other terms of buyout at less than fair value • Running a “Taj Mahal” and wasting company assets 16© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  16. 16. PREVENTIVE CORPORATE PLANNING • Updated agreements (operating agreement) – When? • Change in assets • Change in intentions • Change in tax law 17© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  17. 17. PREVENTIVE CORPORATE PLANNING (CONT.) • Buy-sell, shareholder, partnership agreements provisions: • Eight “D’s” • Death, Divorce, Disability, Dissention, Dissolution, Departure (retirement), Debt Overload (bankruptcy), and Decline of Market • Sufficient funding vehicle 18© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  18. 18. PREVENTIVE CORPORATE PLANNING (CONT.) • Provisions to forestall squeeze-outs • Provision that commits board to specific course of action • Supermajority provisions (if applicable) • Dividend triggers, declarations • Employment contracts • Non-competes • Right to compel dissolution 19© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  19. 19. PREVENTIVE CORPORATE PLANNING (CONT.) • Arbitration provision • “Baseball” or “Texas” arbitration provisions • Parties involved submit proposals to arbitrator, and the arbitrator has to select one proposal without modification • Incentivizes parties to offer up more reasonable proposals 20© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  20. 20. PREVENTIVE CORPORATE PLANNING (CONT.) Generally: • Have business agreements in writing and up-to-date • Have a dispute resolution mechanism in place • Consider incentives in dispute resolution mechanisms, such as “Baseball” or “Texas” arbitration provisions 21© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  21. 21. ALTERNATIVE RESOLUTIONS • Can invite a third party to buy out part or entirety of business • Have a 3rd party discrete investor come in and negotiate a buyout • At the very least, can provide a “back of the envelope” valuation of the company from an outside investor’s perspective 22© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  22. 22. NEGOTIATION, MEDIATION AND/OR LITIGATION? • Consider cost/benefit of alternatives – financial, operationa • Litigation outcome can be unpredictable • Governing state law • Governing agreements • Mediation • Structured and assisted negotiation • Can be used in conjunction with litigation • “The Courts of this country should not be the places where resolution of disputes begins. They should be places where disputes end after alternative methods of resolving disputes have been considered and tried.” • Justice Sandra Day O’Connor 23© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  23. 23. WHY A VALUATION IS ESSENTIAL • Objective, third-party opinion • Based on recognized valuation theory and methodology • Considers any applicable valuation discounts • Serves as a basis for negotiations 24© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  24. 24. VALUATION APPROACHES & METHODS • Income Approach (ex. going concern) • Discounted Cash Flow (DCF) Method • Capitalization of Earnings Method • Asset Approach (ex. holding company or unprofitable company) • Adjusted Book Value Method • Excess Earnings Method (hybrid income/asset approach) • Market Approach (a relative valuation approach) • Market Transaction Method (private transactions) • Guideline Publicly-Traded Company Method (public transactions) 25© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  25. 25. VALUATION: USE OF EXPERTS • Use a qualified Business Valuation Expert • Must be: • Objective • Experienced • Credentialed • Must apply and defend the use of judgment and estimates • Applied methodology must be appropriately applied and fit the facts of the case or risk being subject to Daubert challenge • Relevant shareholder or other agreements, caselaw or statutes regarding valuation. 26© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  26. 26. VALUATION: USE OF EXPERTS (CONT.) Hire the correct type of expert: • Accounting • Forensic Accountant • Tangible Asset Appraiser • Business Valuation • Lifestyle Analyst 27© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  27. 27. VALUATION: USE OF EXPERTS (CONT.) • Use your expert to facilitate proper discovery and disclosure • Adhere to the rules of evidence and procedures applicable to the case • IMPORTANT: All work product may be discoverable if client hires expert directly • Use the expert to educate the Court • Expert is expected to be impartial and objective • Testimony offered in the spirit of personal integrity, good faith and sincerity • Use your expert to rebut the other side 28© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  28. 28. ABOUT THE FACULTY LELAND CHAIT LelandChait@gmail.com Lee is an experienced litigator and counselor who represents individuals, investors, families, and businesses ranging from partnerships and LLCs to medium-sized enterprises to the world’s largest financial services institutions. He has successfully handled disputes in state and federal courts and arbitrations throughout the United States alleging fraud and violations of duties owed to partners, shareholders, employees, customers, and the public; violation of employment and anti-discrimination laws; antitrust laws; industry regulations; and cyber insurance contracts. Lee is Vice-Chair of the Excess, Surplus Lines & Reinsurance Committee and the Corporate Counsel Committee of the American Bar Association’s Tort Trial and Insurance Practice Section. 29© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  29. 29. ABOUT THE FACULTY JOHN LEVITSKE John.Levitske@ankura.com John Levitske is a Senior Managing Director at Ankura, focused on business valuation and complex financial disputes. He has served as a senior advisor to companies, owners, executives, and legal counsel in business disputes, shareholder disputes, and M&A transactions regarding issues of valuation, finance, damages, and accounting. John is based in Chicago. With over 30 years of experience, including two decades of Big Four public accounting and international consulting experience, John is seasoned in business valuation, financial analysis, economic damage quantification, forensic accounting, retrospective solvency analysis, and post- merger and acquisition accounting calculations. He is experienced in the appraisal of healthy and distressed companies for buyouts of shareholders and creditors, transaction planning, estate and gift taxation, financial accounting, bankruptcy proceedings, and litigation disputes. His experience includes numerous valuation dispute cases in US litigation, arbitration, and medication, plus international arbitration. John has provided consulting and expert witness testimony services and has served as a neutral party in arbitration and mediation. He has testified as an expert witness in the US and Europe in depositions, hearings, bench and jury court trials, and domestic and international arbitration (ICC, SCC, AAA, JAMS, FINRA, and ad hoc arbitrations) and has served as a neutral arbitrator. In addition, he has rendered binding decisions on disputed matters. He is co-author of the “Managing Post-Merger & Acquisition Purchase Price Disputes” chapter in the American Bar Association’s 2016 Alternative Dispute Resolution Handbook for Business Lawyers. John has lectured on valuation, financial analysis, and forensic accounting topics to various professional groups, including the American Bar Association, the Chicago Bar Association, the Association of Insolvency & Reorganization Advisors, and DailyDAC-Financial Poise. In addition, he served as an accounting, finance, and auditing adjunct professor at both the University of Pittsburgh and Point Park University, and as a national exam question writer for both the Uniform CPA Exam and the American Institute of Certified Public Accountants’ Accredited in Business Valuation Exam. 30© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  30. 30. ABOUT THE FACULTY JOHN MARTIN jmartin@sfgh.com John’s clients range from individuals and small businesses to multinational corporations, and he represents both plaintiffs and defendants in a wide variety of commercial disputes, including corporate governance suits, trust litigation, and matters arising out of lending and other financial relationships. 31© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  31. 31. ABOUT THE FACULTY MAX STEIN MStein@boodlaw.com Max Stein, a member of Boodell & Domanskis, LLC, is a business litigator focused on meeting clients’ business objectives, helping them resolve disputes at the most opportune times. Max represents clients as both plaintiffs and defendants in a wide variety of forums. Additionally, Max notes that one advantage of practicing at a smaller firm, is that he is able to offer his clients high-quality, nimble representation at reasonable rates. To aid his clients in achieving their business objectives, Max approaches cases as though they will go to trial, utilizing his extensive trial experience. Max also counsels his clients, helping to identify and navigate legal risks to achieve their business goals and protect their competitive interests while managing and, where possible, avoiding the expense and uncertainty of litigation. 32© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  32. 32. The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. IMPORTANT NOTES 33© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  33. 33. If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar on demand, please don’t hesitate to email us at: info@financialpoise.com Please include the name of the webinar in your email, and we will provide a response to your question. QUESTIONS OR COMMENTS? 34© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  34. 34. To receive Financial Poise’s DACyak, our free weekly e-newsletter, just send an email to: info@financialpoise.com Please add the message, “Subscribe Please” to your email, or add yourself by going to: https://www.financialpoise.com/newsletter/ Subscribers are eligible to receive discounts and giveaways from time to time, and subscriber emails are never sold to or shared with third parties. 35
  35. 35. About Financial Poise™ www.financialpoise.com DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. 36

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