Corporate Transactions

by Chris Swiecicki

What is the “Representations and Warranties” Section of a Purchase Agreement for, and Why is it Important?

When buying or selling a business, an accurate representations and warranties section of a purchase agreement is critical for ensuring a smooth transition. Any size entity, whether a small family business or larger corporation, is bound to the facts stated in the agreement in order to close the transaction.

Because there are so many legal details that could result in indemnification (compensation for loss and harm) for either party if not accurate, it’s always best to have a trustworthy attorney by your side who can explain what everything means during all contract negotiations.

What Are Representations and Warranties?

Representations and warranties are contractually binding statements assuring both parties of a sale that the business is what the buyer believes it to be. They give both parties legal recourse if the transaction does not go through as expected. Both the buyer and seller make representations and warranties, but the majority of them are made by the seller. 

Representations

A representation is an assertion that everything in a contract is true as stated. Especially in M&A transactions, sellers must include information about the target company or business and the stock or assets and liabilities being transferred. 

Warranties

A warranty can result in indemnification, or compensation, if the assertion is false. The seller will warrant information given to the buyer during the diligence process, such as that:

• The business is in compliance with all relevant government regulations.
• All financial statements are true and accurate.
• All property—whether tangible or intangible—is free of any encumbrances.

The buyer will need to make warranties as well, such as that:

• They have enough money on hand to pay the purchase price.
• They are a duly formed corporation with the power to execute the contemplated transaction. 

Exceptions 

Representations and warranties are drafted as general statements in most M&A transactions. The seller must disclose exceptions to those statements in a disclosure schedule attached to the purchase agreement. As long as the exception is properly disclosed, the buyer has been given official notice of the fact. If a seller fails to make a disclosure, it may result in a claim of fraud against the seller.

For example: Except as set forth in Section 1.1 of the Disclosure Schedule, the Company has no current litigation. Disclosure: A claim for XXX was filed in the Superior Court for Perry County on March 3, 2020, under Case No. 1234.

Remedies and Enforcement

The indemnification obligations of the parties, provided in the purchase agreement, is what enforces the representations and warranties. Indemnification language typically states that for a limited time after closing, the parties can indemnify each other for breach of or inaccuracy in the representations and warranties provided by that party.

For example, if a deal closes and the buyer discovers that the seller’s financial statements are inaccurate, the buyer can seek indemnification for losses incurred.

Because of the repercussions that can happen if any inaccuracies occur, it’s extremely important to have a lawyer help craft the deal at an early stage. A simple mistake made here can actually have larger ramifications on if the deal goes through, or whether a seller can get paid if it doesn’t.

Representation and Warranties Insurance

Insurance to protect both parties of an M&A transaction has become fairly common, although it is more often requested by the seller as protection from post-closing indemnity claims. Because the policies pay out claims that arise from breaches in the representations and warranties, those covered by insurance tend to be less concerned about deal friction and closing issues. 

The insurance issuer is involved in due diligence and negotiation of the representations and warranties. Every policy has different exclusions and conditions under which the policy will not cover indemnification claims. Exclusions are determined based on the insurance company’s due diligence review, and usually include issues the parties knew of prior to closing and other extraordinary risk issues.

What Information is Included in Representations and Warranties?

In general, the seller and target of the M&A will include the following information in this section of the purchase agreement. 

Financial Information

Financial Statements

This ensures that financial statements delivered to the purchaser:

• Are true and complete.
• Were prepared from the financial records of the target.
• Were prepared with sound accounting principles.
• Reflect actual transactions and have been maintained in accordance with sound business practices.

No Liabilities

This states that there is no debt or liabilities other than:

• Those disclosed in or reserved against in the aforementioned financial statements.
• Those incurred in the ordinary course of business since a particular date.

Tax Matters

This clarifies all information about taxes, stating that:

• The target has filed all required tax returns. 
• All tax returns are true, complete and correct in all material respects.
• All taxes have been paid in full and there are no liens or contests.

Ownership Issues

Authority

This states that the target and each seller party has:

• The full legal right and authority to execute the purchase agreement.
• Authorizations, consents and approvals required by law.

Corporate Power

This states that the target and each seller party has the power and authority to:

• Own, lease, operate and use its assets and properties. 
• Perform all its obligations under its contracts.

Ownership of Target Company; No Subsidiaries

This states that the seller owns the issued equity interests of the target and that:

• They are free and clear of all liens, encumbrances and rights of third parties. 
• There are no subsidiaries of the target. 
• All issued equity securities of the target were issued in compliance with federal and state laws.

Title and Sufficiency of Purchased Assets

This states that each seller party owns the goods sold, and that:

• At closing, the seller will transfer and deliver to the buyer all purchased assets.
• All goods and assets will be free and clear of liens and rights of third parties.
• Purchased assets constitute all of the material assets, properties and rights necessary. 
• The tangible personal property is in good operating condition and repair, except for with the exception of normal wear and tear. 
• All items of tangible personal property are located at the target’s premises.

Laws

Legal and Authorized Transactions

The purchase agreement constitutes the legal, valid and binding obligation of the target and each seller party. 

Compliance with Laws 

There are no violations by the target of any law relating to the target, its equity, assets or the transaction.

Licenses and Permits

The target has all required licenses and permits.

Litigation

There are no claims, lawsuits, investigations or judgments relating to the target.

Organization

The target and each seller party is in good standing under the laws of its jurisdiction of organization. 

Full Disclosure 

This explains that the purchase agreement does not contain any untrue statement or omit any information that would make the statements false or misleading.

Contracts

This states that except what is included in the disclosure schedule, the target is not bound by any contract or other agreement. The contracts set forth on the applicable disclosure schedule:

• Are a legal, valid and binding obligation of the target and the other parties.
• In full force and effect in accordance with its terms.
• May be assigned to the purchaser and will continue after closing.

Other Information

The representations and warranties section may also include information regarding:

• Product Warranties to Customers.
• Customer Credits.
• Intellectual Property and Confidential Information.
• Employee and Labor Matters.
• Environmental, Health and Safety Matters.
• Inventory.
• Real Estate.
• Insurance Matters.

A Knowledgeable M&A Attorney Should Be Involved in All Parts of a Purchase Agreement

Regardless of why you are buying or selling a business, it is best to have an M&A lawyer at the earliest stages of the deal. They should be the ones obtaining a valuation and crafting the agreement, along with ensuring the representations and warranties are complete and accurate. Instead of waiting until a deal is on the table and contracts are already drafted, contact  Swiecicki & Muskett, LLC to help you navigate your merger or acquisition.

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by Chris Swiecicki

How Long Does the Average M&A Deal Take?

Mergers and Acquisitions (M&A) are complex business transactions that can significantly impact companies, industries, and even whole economies. They involve the combination of two or more companies, either through a merger (the coming together of equals) or an acquisition (one company purchasing another).

Business owners, even though they are aware of the complexity of such deals, are often still surprised at how long the M&A process takes. So how long does the average M&A deal take? While the average timeline is between six and twelve months, various factors influence the timeline of M&A transactions, so the average might not be as informative as knowing what the milestones are, and what to expect along the way.

What Can Affect M&A Timelines?

On average, Mergers and Acquisitions deals typically take several months to complete, ranging from six to twelve months or longer. Smaller transactions involving private companies may close more quickly, while larger deals with significant complexities and hurdles can take several years. Timelines depend on several factors:

Deal Complexity: Complex deals with numerous subsidiaries, international operations, or regulatory challenges tend to take longer to complete.

Due Diligence: The depth and breadth of due diligence (a process that allows the buyer to confirm pertinent information about the seller, such as contracts, finances, and customers) can significantly impact the timeline. Investigations into financials, legal matters, operations, and culture may turn into an extensive process.

Negotiations: The negotiation phase, including price, terms, and conditions, can vary in length. Contentious negotiations may extend the timeline.

Financing: Securing financing, whether through equity, debt, or a combination, can be a lengthy process that impacts deal closure.

Integration Planning: Planning the integration of two companies requires careful consideration of various factors, and this phase may begin before the deal closes. Extensive integration planning can add time to the process.

Cultural Alignment: Achieving alignment between the cultures of merging companies can be a time-consuming effort. Cultural differences may require additional attention and resources.

Unforeseen Challenges: Unexpected obstacles, such as legal disputes, unexpected financial issues, or changes in market conditions, can prolong the deal timeline.

Steps in the M&A Process 

The typical M&A deal flow consists of strategy, transaction, and implementation phases. Here is a more thorough breakdown of these phases:

Strategy Development/Planning

Define the strategic objectives and rationale for the deal. Essentially, the merger process commences when a company opts to acquire another. A company assesses the advantages of merging with another entity and identifies the potential benefits it stands to gain from the acquisition. This evaluation necessitates a thorough examination of its own operations as well.

Due Diligence

Upon acceptance of the offer, the due diligence phase begins. This comprehensive examination encompasses all financial facets, including balance sheets, ratios, personnel, clientele, supply chains, market presence, operational protocols, and beyond. This in-depth assessment of the target company is used to identify any prospective issues associated with the business.

Negotiation/Merger Agreement

Finalize the terms and conditions of the deal. After an acquiring company identifies its merger need, conducts searches for suitable target firms, selects a compatible candidate, and assesses its value, the formal merger process commences when one company extends an offer to another. Typically, this initiates confidential deliberations between both parties regarding the proposed merger. While initial agreements may arise from the first offer, negotiations typically entail multiple offers and prolonged discussions, often spanning several months.

Closing 

Sign the final agreements and complete the transaction. If the buyer remains interested in pursuing the acquisition, both parties typically outline the specifics of their transaction, including all terms and conditions. This may include discussions regarding the final purchase price, as well as the particulars of warranties, indemnities, and any restrictions. These negotiated terms are then incorporated into either a Share Purchase Agreement (SPA) or an Assets Purchase Agreement (APA), depending on whether the transaction involves the acquisition of shares or the entire business.

Integration 

Execute the integration plan to merge the two companies successfully. It is common for the Share Purchase Agreement (SPA) or Assets Purchase Agreement (APA) to incorporate clauses that become operative after the closing, including additional responsibilities to be fulfilled by both parties. These may include finalizing the transfer of extra assets, securing consents, or entering into supplementary contracts.

In addition to addressing these post-closing affairs, the parties may also consider a post-closing integration process. This exercise aims to merge the two companies or businesses successfully.

Ensure a Successful M&A Deal

The duration of an M&A deal can vary widely, depending on numerous factors. While the average timeline falls within the range of six to twelve months, it’s crucial to recognize that each transaction is unique. Successful M&A deals require careful planning, diligence, and a willingness to adapt to unforeseen challenges. Understanding the potential variables that can affect the timeline can be complicated. Contact Swiecicki & Muskett to help you navigate the complexities of M&A transactions with greater clarity and confidence.

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by Chris Swiecicki

Three Kinds of Conflicts Where a Corporate Lawyer is Essential

“Corporate law” is a broad category involving all legal issues of establishing, managing, and operating a corporate entity. But at the same time, it is a highly specialized area of practice. Out of the 1.3 million attorneys in the American Bar Association, less than 15,000 are classified as corporate lawyers. Within this group, there are specialties within the specialty. For example, an attorney might focus their practice on a niche such as mergers and acquisitions or intellectual property.

So what is corporate law, exactly? At its core, the discipline is about business relationships and the contracts that define them. What does a corporate lawyer do? While the job description can cover a lot of ground, in essence, they advise companies on their legal rights and responsibilities in regard to those contractual relationships.

What Is Corporate Law?

The basis of all corporate law lies in mandatory and default provisions that create a framework for how every corporation operates. Mandatory rules are non-negotiable and all corporations must conform. Default rules are exactly that: the practice that is followed unless the parties forming the company provide an alternative way of doing things. Default provisions can not, of course, violate federal, state, or local laws. 

For example, a commonly accepted practice is that a merger can be approved by a majority vote of all outstanding shares. A corporation can opt instead to require 60%, 75%, or some other amount. 

An example of a mandatory provision is the rule that all publicly traded companies must provide regular detailed financials in a prescribed format. It is not something a corporation can avoid.

These new rules are spelled out in a corporate charter, also known as articles of incorporation. Articles of incorporation are fundamentally a contract between the company, its shareholders, and the incorporating state.

What does a corporate lawyer do to help with these issues? They can assist with corporate governance, which is the system of rules, processes, and practices that guide a company. They iron out the details and spell out exactly how the business will be structured and operated. 

In creating this framework, corporate lawyers anticipate the conflicts that may arise among the various stakeholders. They can then ensure that the corporate charter is clear and fair to all parties involved.

The Three Relationships That Result in Corporate Conflict

While a corporate entity can be seen as having a single goal, the corporate structure includes stakeholders with conflicting interests in the business. For example, a company might have managers whose main focus is productivity and efficiency. Meanwhile, the company’s employees value good working conditions, fair pay, and generous benefits. Creditors want to be paid in full and on time. And shareholders hope for ever-increasing profits. 

All of these objectives can define a successful company. But few corporations can accomplish all of these things without a push and pull between stakeholders. It is the job of a corporate attorney to interpret corporate law and help the business resolve these conflicts when they arise. 

It’s worth noting that corporate lawyers are not on the side of the shareholders or the employees. Instead, they represent the corporate entity itself. They handle these three common conflicts with the best interests of the company in mind.

1. Managers vs. Shareholders

Shareholders of any company are by nature concerned with the return on their investment, and associated tax implications. This is sometimes at odds with corporate management who may be willing to sacrifice some short-term profits in favor of growing the business or maintaining its competitive edge. 

For example, the management team at a manufacturing company may be in favor of a large capital investment in new automated technology. The price tag is high and it could take two to three years before its full benefit is felt in the bottom line. The shareholders are not willing to see their dividends suffer and are against the purchase.

A corporate lawyer can help negotiate the dispute between the two groups and help them come to an agreement that will be in the best interests of the company.  

2. Controlling vs. Minority shareholders

Companies with majority shareholders and minority shareholders can be prone to conflict. Not only do minority shareholders have less control than those with controlling interest, nor do they have the protection of a contract like employees, vendors, or creditors do. 

In one notable case (Halpin v Riverstone National, Inc.) minority shareholders won a class action lawsuit against majority shareholders who voted to proceed with a merger without including the minorities in the vote.

The remedy for this would have been to include explicit provisions in a company’s articles of incorporation. Corporate law is generally written to add protections by either empowering minority parties or limiting the advantages given to majority shareholders. For example, minority shareholders might be given special voting powers, reserving a certain number of seats on the board for them, or assigning veto powers or key committee roles. 

When the rules are broken, or if there is no specific language addressing a situation, litigation may be necessary.

3. Shareholders vs. Non-Shareholders

There are several groups of stakeholders who are not shareholders. These parties include employees, vendors, creditors, and even the community where the corporation does business. The nature of these parties’ roles with the company can be a source of conflict with shareholders.

A good example of this is a case brought against IBM by its employees in the early 2000s. Lou Gerstner was credited with rescuing IBM with massive layoffs and overhauling its pension plan to help cut costs. Not only were shareholders thrilled, but Gerstner walked away from the job in 2002 with an annual salary of over $1.5 million and a pension of more than $1.1 million. 

When an executive’s compensation comes at the expense of its employees, it is a clear conflict of interest. The employees won the case and the company agreed to pay $320 million in a settlement to current and former employees. 

While this is an extreme case, corporate law deals with any conflict between a company’s stakeholders. The law lays out the rules for all to follow and corporate lawyers interpret the law so the parties can come to a consensus that benefits the wellbeing of the business as a whole.

A Corporate Lawyer is an Asset

Whether a company is big enough to employ in-house counsel or an entire legal department or is small and just needs occasional legal advice, finding an experienced attorney is a must.  

These legal professionals are indispensable when drawing up a corporate charter and deciding on issues of corporate governance. Once a company is established, they can advise on all contractual and legal matters involving the various stakeholders, and resolve conflicts as they arise.

The firm of Swiecicki & Muskett Attorneys at Law has extensive experience in corporate law, particularly in the areas of compliance and taxation. Contact Christopher Swiecicki to discuss your company’s needs.

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by Chris Swiecicki

What is Patent Infringement? And Can it Apply to Apps?

In today’s smart-phone driven world, mobile applications are part of everyday life. Apps are everywhere, enhancing our productivity, communication, and entertainment. For app developers coming up with the next big idea that will disrupt a particular industry, it’s understandable to be protective of their creation and its underlying technology. 

Everyone working in the tech world needs to understand the legal landscape around this type of intellectual property. Just like any invention, software and mobile apps can be patented. Patents safeguard intellectual property and give patent holders a definition of what is patent infringement for an app. On the other hand, anyone building apps needs to be careful not to infringe on someone else’s patent—and should be aware of the potential consequences of doing so.

But before getting into those details, I should note here: Handling a patent issue is something that should be done by someone admitted to the patent bar. If you are pursuing a patent case, make sure you have a patent attorney on board first.

While I am not a patent attorney myself, I have been co-counsel for a patent case for an app, and so I’ve seen firsthand the kinds of information that patent attorneys will commonly share with potential clients. What follows is a brief overview for those pursuing this route. (And if you are a patent attorney looking for co-counsel with business experience, I would be delighted to help with your case!)

The Basics of Patent Protection

Patents are issued by the U.S. government and are covered by intellectual property law. A patent grants an inventor—or in this case a software developer—the exclusive right to make or sell their invention for a set period of time. 

Copyrights and trademarks are also intellectual property, but are different from patents. Copyrights cover individual written works of authorship. Trademarks protect branding for goods and services. 

What is patent infringement? It is using someone else’s idea, either by accident or intentionally, to create your own product or app. A patent by itself does not prevent this from happening. It does, however, give the patent holder the right to make you stop. For a patent holder, this could be as easy as informing the offending party that what they are doing is patent infringement. Other cases may call for business litigation involving patent attorneys. 

Getting a Patent For an App

Obtaining a patent for an app follows the same guidelines as any other invention. Applicants must prove that their product is new and unique. Software and mobile apps must provide a novel technical solution to a technical problem. You can not patent abstract ideas or obvious solutions that anyone else in the industry might come up with.

While the methods and processes of app technology are patentable, the underlying code is not. Computer code can, however, be copyrighted. Depending on the nature and technology used to create an app, it might benefit a creator to get both a copyright and a patent.

But is a patent really necessary? That depends. The process of getting a patent is time-consuming and expensive. Developers must decide if the app has the potential to become popular enough to justify not only the cost of the patent but of marketing the product to the public. And it is important to note: The patent application process requires the developer to publish the details of the app. If the application is denied, or if the patent lapses (more on that later), the technology is fair game for a competitor.  

The return on investment, and the risk, might not be enough for an individual entrepreneur unless the app is truly unique and marketable. It is best to consult with a patent attorney who can advise on whether it makes sense to pursue a patent. 

What is Patent Infringement For an App?

Patent infringement for an app involves copying and profiting from its methods and processes without the patent holder’s permission.

Once they have a patent, the developer can sell the app (and its patent). Or they may grant permission to use it for a fee by licensing it. Meanwhile, it is the patent holder’s responsibility to determine if patent infringement has occurred. They can seek damages in such cases with the help of a patent attorney.

As mentioned above, the law firm of Swiecicki and Muskett is involved in one such case. The firm, along with another attorney, is representing Gil Bashani, owner of a company called Parking World Wide, in a lawsuit against the City of St. Louis. Bashani owns the patent on a system that determines if a parking space is occupied by someone who hasn’t paid. The app then sends an alert to a parking attendant or law enforcement. The suit alleges that the City’s mobile parking system called ParkLouie uses Bashani’s technology.

This case has yet to go to trial, but is a good example of what is patent infringement for an app. If it can be proven that ParkLouie is using and monetizing Parking World Wide’s processes, the City could be liable for damages.

Obtaining a Patent For an App

Again, any patent attorney will tell you that an app is only patentable if it solves a technical problem with a new and unique technical solution. But how does someone know what is new and what is a patent infringement of an existing idea?

Developers can start by using the Patent Public Search Tool on the U.S. Patent Office’s website (USPTO). This will find apps that are already patented with the same or substantially similar technology. A patent attorney can help with this, and the application process.

There are two types of patents protecting different aspects of an invention:

• Utility patents are granted for unique machines, chemicals, or processes and last for 20 years.
• Design patents protect an object’s unique appearance or design for 15 years.

Apps typically have utility patents, as they are concerned with the technological processes and methods of the software.

Assuming the app is unique, inventors can apply for either a provisional or non-provisional patent. We’ve all heard the phrase “patent pending,” which means there is a provisional patent. Provisional patents last for one year. During that time, developers can refine the details of their product and determine if there is a market for it. 

At the end of 12 months, they can either apply for a provisional patent or let the non-provisional patent lapse. Other companies and competitors could then file for their own patents using the same ideas. Remember, part of the patent application process is making the information available for public viewing. 

Protection From Patent Infringement—Is it Worth It?

The process of patenting an app takes anywhere from two to five years. Provisional patents cost between $2,000 and $5,000. Non-provisional patents range from $10,000 to $15,000. In addition, there are annual fees to maintain and keep the patent. Plus, it is up to the owner of the patent to discover instances of infringement. And if they uncover illegal use of their ideas, the business litigation fees to seek damages are their responsibility. 

That said, successfully suing for patent infringement for an app means collecting damages and forcing the infringement to stop. For an app that is truly innovative and likely to disrupt the industry, getting a patent is well worth the effort. 

If you are an app developer who is wondering whether your idea is unique, or if you have an app that you’re considering patenting, the best thing to do is consult with an attorney who has been admitted to the patent bar. They can advise from there.

In the meantime, if you yourself are a patent attorney trying to get your head around a case involving an app, we would love to help out, and perhaps even be co-counsel on the case. Swiecicki & Muskett has extensive experience with business litigation and business law which can be invaluable in such cases. Contact us today to see whether we would be a good fit.

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by Chris Swiecicki

What is “Lifting the Corporate Veil” in Company Law?

Founders set up LLCs and other corporations to protect themselves from personal legal liability. The personal assets of members of an LLC are separate from their business assets. However, courts sometimes end the limited liability protection for owners, directors, and shareholders, an action called the lifting the corporate veil or piercing the corporate veil. 

“Veil” refers to the protection from legal liability provided by LLCs and corporations.  When a court lifts the corporate veil, it removes the shareholders’ protection from legal liability. Their personal assets will be included in any orders to repay creditors and other litigants.

Owners, directors, and shareholders need to do all they can to protect themselves from a court piercing the corporate veil—and the personal consequences that follow.

When Do Courts Lift the Corporate Veil?

Courts use caution when considering lifting the corporate veil because the principle of limited liability is a key part of corporate law. However, in cases where there is straightforward evidence of an egregious act of misconduct, courts are willing to pierce the corporate veil and impose personal liability. The misconduct may include fraud, wrongdoing, or abuse of the corporate form. In Missouri and in most other states, three factors must be present for a judge to pierce the corporate veil:

1. The owner dominated finance, policy, and business practices around a transaction and the corporate entity did not have a “separate mind.”
2. The owner’s control was used to defraud, violate a statute or other legal duty, or commit a dishonest or unjust act that hurt the plaintiff.
3. The control is believed to have caused the injury or loss.

A Missouri appeals court reaffirmed the three requirements for lifting the corporate veil in a 2014 case, Hibbs v. Berger.

Can Minority Members Ask Courts to Pierce the Corporate Veil?

The Hibbs ruling is also known for the court’s decision on whether minority members may file claims against majority owners. Plaintiff Steve Hibbs claimed that Brian Berger, his former employer, owed him money. Hibbs owned 5% of one of Berger’s businesses. When the company started having money problems, Hibbs stopped getting paid.

The Missouri Court of Appeals ruled Hibbs, a minority member of an LLC, had a right to pierce the corporate veil. Then, the court considered whether the case met the three requirements for removing the protection offered by an LLC. The court decided there was not enough evidence to pierce the corporate veil.

Examples of Courts Piercing the Corporate Veil

Two high-profile examples of a court piercing the corporate veil took place in Florida:

• In Ocala Breeders’ Sales v. Hialeah, Inc., the court lifted the corporate veil to investigate reports of the corporate officers of Hialeah, Inc., unlawfully running a subsidiary. The look behind the corporate veil revealed the subsidiary was no more than an instrument of the parent company. Hialeah, Inc., did not have enough capital and thus could not meet its obligations.
• In Broward Marine, Inc. v. S/V Zeus, the court lifted the veil of a yacht company to reveal the dominant shareholder’s evasive moves to avoid paying the plaintiff the money he owed him. The court found the defendant transferred all the company’s assets to another business he owned and hid the transaction. A judge ruled the dominant shareholder and his other company both were liable for the debt.

Florida courts followed the same guidelines for piercing the corporate veil as Missouri courts do.

Bad Business Practices Leading to Lifting the Corporate Veil

Courts are more likely to strip protection from legal liability–pierce the corporate veil–of companies guilty of one or more of these bad business practices:

• Commingling funds. When members of an LLC do not keep their own money separate from their business funds, they risk losing protection from legal liability. In the view of the courts, a business owner who does not treat their business as a separate entity does not qualify for limited liability protection.
• Sharing assets. Owners of LLCs who own more than one business need to keep separate financial records and lists of assets for each business. For example, if they list an expensive piece of equipment as an asset for one business, they cannot list the same equipment on their other business’s Schedule C.
• Illegal activities. If a corporation is used as a vehicle to defraud creditors, shareholders, or other third parties, a court may disregard the corporate form and hold the individuals responsible for the corporation’s actions. This can occur when the corporation is used to conceal illegal activities or to evade legal obligations.
• Lack of corporate formalities or recordkeeping. Corporations must follow certain formalities such as holding regular meetings and tracking finances. They also must keep a clear separation between the corporation and its owners.
• Undercapitalization. The courts consider whether a business is undercapitalized when a creditor or other litigator asks for lifting of the corporate veil. The court wants to know whether the business has enough money to run. If the court decides the LLC or other business entity is undercapitalized, it is more likely to pierce the corporate veil.

How to Avoid Piercing of the Corporate Veil and Personal Legal Liability

If you ever face piercing the corporate veil, you will have a better chance of convincing a court you keep your business and personal assets separate by adhering to best practices:

• Follow formalities for your business structure. Corporations need to have annual meetings, file reports, and more. LLCs and LLPs need to file reports to the state, have operating agreements, and keep records of votes on big decisions.
• Save business documents for at least seven years. When you do this, you can prove you run your business following the law.
• Have separate business and personal accounts at the bank and for other accounts.
• Capitalize your business to the extent you can always pay your bills, employees, and contractors.
• Use your business name on everything including contracts, signage, business cards, and other official documents.

Corporate lawyers have advice specific for maintaining the veil for different industries and fields.  Whether you are starting a business or tweaking an existing corporate structure, a conversation with an experienced corporate attorney is a valuable use of your time. Swiecicki and Muskett, LLC, advises business owners and corporate leaders based on decades of legal experience. Contact us today if you have any questions about piercing the corporate veil!

 

by Chris Swiecicki

What is a “Poison Pill” in Corporate Law?

When a larger company tried to take over the company owning the St. Louis Post-Dispatch in 2022, corporate lawyers showed Lee Enterprises how to fight back. They crafted a poison pill defense, or shareholders rights plan, to kill the unsolicited offer from Alden Global Capital. The defense worked, and Lee still owns the Post-Dispatch and 22 other papers.

Corporate lawyers often recommend poison pills for defense against corporate raiders.  Sometimes the acquirer backs off. Other times, the targeted company and the acquirer reach a favorable agreement.

How Do Poison Pills, Shareholder Rights Plans, Work?

Poison pills reduce the appeal of a takeover by either making the deal too expensive for the bidder or by creating negative side-effects of a takeover.

As corporate raiders begin buying up shares, corporate lawyers work closely with the targeted company to determine the specifics of the poison pill and when to launch it. For example, a  board may stipulate that a shareholders rights plan take effect when the acquiring entity gains 20% of the company’s shares.

Most shareholders rights plans include a stipulation that they can be changed or negated by the board. Thus, the board is forcing the acquirer to negotiate directly with them, which will have a positive position for bargaining.

Corporate lawyers use a variety of ways to launch poison pills including:

1. Preferred stock plan: A company issues a dividend of preferred stock to shareholders. These shareholders may use special voting rights when a company tries to takeover by buying a large quantity of shares.
2. Flip-in: Many companies include a provision in their charter or bylaws establishing a threshold for buying stock. Before the acquiring entity nears the ceiling, usually between 20 and 50%, the targeted company starts selling stock at a discount to its existing shareholders. This dilution of the company’s stock may prevent the hostile takeover.
3. Flip-over: When a company employed a flip-in poison pill and was not able to avoid a hostile takeover, there is another defense mechanism to try: A flip-over poison pill.  The shareholders of the targeted company buy up stock at a discount. In doing so, they dilute the shares of the acquiring company’s existing shareholders. This is only possible if a section of the bylaws spells out the legality of the maneuver.
4. Back-end plan (also known as a note purchase rights plan): A back-end plan gives shareholders of the targeted company the opportunity to exchange their stock for either cash or other securities at a higher value if the acquiring company gains a majority of the company stock. This strategy may diminish the acquiring company’s interest in purchasing the existing shareholders’ stock.
5. Golden handcuffs: Corporate lawyers also may recommend a golden handcuffs poison pill. Many executives have lucrative deals rewarding them when they hit goals and/or stay with the company for a certain period. The “handcuffs” often include deferred compensation and employee stock options. A golden handcuffs poison pill defense removes the vesting and performance requirements. Then, the executives may cash out and leave the company. This often makes the target less desirable to the acquirer who need the executives to lead the company after they take over.

Pros and Cons of Poison Pill Defense Strategies

The ultimate success of a poison pill defense strategy reveals itself years down the road. Boards will consider whether the goals of both companies were met and whether they are still being met when analyzing the success of the shareholders rights plan.

For many companies, the poison pill is a negotiation tactic that succeeds in either 1) preventing a hostile takeover or 2) laying the foundation for a favorable merger. While developing the shareholder rights plan, or poison pill, the company finds a way to dictate the terms of the takeover. The poison pill’s benefits may include:

• The targeted company identifies potential acquisitions.
• Higher premiums for shareholders.
• Slowing the speed of a corporate raid.

In the short term, a poison pill can hurt the valuation of many shares. The decrease in value will affect the company’s constituencies in different ways:

• Shareholders may receive a financial loss when the value of their shares declines.
• Corporate executives who also own part of the company may or may not lose their position, power, or money during a takeover.
• Lower and mid-level employees may be laid off.

Corporate Lawyers Guide Companies Threatened by a Takeover

If another company is positioning itself to get majority ownership in your company, contact the Swiecicki-Muskett law firm. Managing partner Christopher Swiecicki will guide you in developing a poison pill, or another strategy, to lead your company through a hostile takeover proactively and cost-effectively.

Christopher developed his expertise in corporate law as both in-house and outside legal counsel. Today, he provides senior-level counsel to C-suite executives, in-house legal teams, and business owners. He is on the faculty of Washington University in St. Louis School of Law where he teaches business acquisitions (M&A) courses.

Contact the Swiecicki-Muskett law firm at 636-778-0209 or email [email protected].

  

by Chris Swiecicki

How to Find a Corporate Tax Lawyer

Creating a tax strategy takes teamwork among legal, finance, and accounting professionals. Many companies trust an independent corporate tax lawyer as an advisor to the tax strategy team. When you are ready to add a corporate tax lawyer to your team, how do you find one? The search starts the old-fashioned way and ends with a list of interview questions. 

Ask for a Referral to a Corporate Tax Lawyer

This is a case when “Googling it” is not a good first step. You will not see many listings for “corporate tax lawyer.” You probably will have better success by asking your professional network if they will refer you to a corporate tax lawyer. Inquire with your banker and accountant, and the lawyers you work with on other matters. Most of us trust recommendations from respected colleagues, which is why this is the best way to find a lawyer you will trust from day one. 

If you do not get a referral from someone you know, check with the bar associations in your area; for Missouri, those include the Federal Bar Association and the Eighth Circuit Bar Association, the bar for the St. Louis area. (You can also learn about our own Taxation Law capabilities here at Swiecicki & Muskett.) 

Check Their Credentials for Practicing Taxation Law

The practice of taxation law requires a minimum of a Juris Doctor degree, known as a J.D. The attorney also must be licensed by the state bar. Many corporate tax lawyers expand their expertise and earn a Master of Laws in Taxation degree, known as an L.L.M.. Some are certified public accountants and others have served in corporate finance positions.

Christopher Swiecicki, founder and managing attorney at Swiecicki & Muskett, L.L.C., practices taxation law with the insight of decades of experience in law, finance, and accounting. During his career he has:

 

• Earned a J.D. in 1990 and an L.L.M. in 2005, both from the Washington University School of Law, one of the top law schools in the nation.
• Taught a course in Business Acquisitions as an adjunct professor at the Washington University School of Law since 2011. 
• Worked as a tax accountant at one of the Big Four accounting firms.
• Served as inside tax counsel to a Fortune 500 Company.
• Worked as inside tax counsel to a regional financial institution.
• Served as a chief financial officer and general counsel for a $40 million private company. 
• Been recognized as an expert in the field by the Association of Corporate Counsel and the American Bar Association. 

Today, Christopher Swiecicki provides personalized service to business owners and executives at major corporations. He keeps his client roster small enough to respond quickly to every client. When he meets with clients, he has in-depth knowledge of their needs. (To begin a conversation, you can find his contact information here.)

Ask If the Corporate Tax Lawyer Has Applicable Experience

A corporate tax lawyer might have impressive credentials but lack experience related to your situation. Ask them about it before signing a contract with them. In some cases, you may need to meet with them to explain your situation. If you learn they are not experienced in the area you need help with, ask them for a referral to another corporate tax lawyer. 

Learn What the Corporate Tax Attorney Will Do for You

When hiring a corporate tax attorney, find out what they will do for you. Christopher Swiecicki has decades of experience advising companies on the federal tax-related aspects of acquisitions and dispositions, mergers and financial structures and products, and corporate governance. If you are seeking counsel in one of these areas, contact Swiecicki to discuss your situation and see if there is a good fit.

In other situations, consider asking the following questions, or variations of them, depending upon your business:

 

1. What is your experience with a business like ours?
2. How do you see our business interests intersecting with tax law?
3. How will you apply your knowledge of taxation law to help us manage our business functions more effectively?
4. Will you help us decide whether to set up a C-Corp or an LLC?
5. What skills and resources do you have to help our company manage tax exposure and risk?
6. How does your team stay current on IRS rulings and government programs affecting business taxes?
7. Will you advise us on the tax ramifications of current operational and business decisions?
8. Do you provide counsel related to e-commerce and cloud-based services?
9. Do you have experience litigating cases before the IRS?

 

At Swiecicki & Muskett, we serve businesses in many industries with varied structures and sizes. We are constantly gaining new insights, thanks to the diversity of our clientele.  

When you are ready to increase profits with a sophisticated tax strategy, contact us. We will serve you with the strength of our experience combined with constant attention to changes in taxation law. Contact Christopher Swiecicki at 636-778-0209 or email [email protected].

by Chris Swiecicki

Understanding Sandbagging in M&A Transactions

In the context of buying a business, a “sandbagging” Buyer is one who is (or becomes) aware that a specific representation or warranty made by the Seller is false—but instead of telling the Seller this fact, the Buyer completes the transaction. The Buyer then seeks post-closing damages against the Seller for the breach.

Sandbagging is a frequent occurrence in acquisitions. It happens so often that transactional planners have made a “sandbagging playbook” that tells people how to handle the issue, depending on which side of the deal they’re on and whether the state law governing the agreement is “pro-sandbagging” or “anti-sandbagging.” 

Competing Interests When it Comes to Sandbagging Clauses

More importantly, the Buyer and Seller in a deal have different competing interests, and so each has their ideas on handling the sandbagging clause.

So, while there are many different ways to prepare for sandbagging, most strategies boil down to three essential elements:

1. Including a clause in the acquisition agreement that says the Buyer can seek a claim even if the Buyer knew ahead of time that the Seller’s representations and warranties were false (i.e., sandbagging is permitted)..
2. Including a clause in the acquisition agreement that says the Buyer can’t seek compensation for a breach of the Seller’s representations and warranties if the Buyer knew the representations and warranties were false ahead of time (i.e., sandbagging is explicitly forbidden).
3. Saying nothing about the issue. In this case, the contract defaults to whatever state law says.

When the Buyer wants a sandbagging clause, and the Seller wants an anti-sanding clause, a typical compromise is to leave both clauses out of the purchase agreement. However, in certain states, if the agreement makes no mention of a sandbagging clause, sandbagging is permitted. So from the Seller’s perspective, mentioning the clause is only sometimes considered an equal compromise. 

As seen in Arwood v. AW Site Services, LLC In the Court of Chancery of Delaware, the state respects contracting parties’ right to enter into good and bad contracts. The Delaware Supreme Court has yet to decide if a party can win a settlement for a broken promise if both parties knew some of the promises weren’t true at the time of signing.

Sandbagging in the Context of Due Diligence

Due diligence is expensive, so parties to contracts in mergers and acquisitions often try to ensure a Buyer doesn’t have to check every detail of a Seller’s business. 

Pro-Sandbagging

A pro-sandbagging clause enables a buyer to pursue compensation for a violation of a representation or warranty even if the Buyer had previous knowledge that the statement was untrue. The right to a remedy, for instance, is not affected by any knowledge acquired (or capable of being acquired) before or after the execution and delivery of the agreement or the closing date with respect to the accuracy or inaccuracy of such representation [or] warranty. 

In the Buyer’s eyes, a pro-sandbagging clause helps assure that it will benefit from its bargain. Based on the Seller’s promises and warranties, the Buyer assumed that its target had a particular worth. Buyers claim that if the statements are untrue, they overpaid and should receive compensation. Additionally, buyers contend that pro-sandbagging agreements give the parties more assurance. They eliminate obstacles to recovery, for instance, a protracted and expensive argument over the Buyer’s prior knowledge during the indemnification process.

Anti-Sandbagging

An anti-sandbagging clause would prevent a buyer from pursuing reimbursement in cases where the Buyer knew (or, depending on the clause’s scope, had cause to know) that a representation was untrue before closing. The contract can provide, for instance, that the Seller is not responsible for “any Losses originating from or attributable to any inaccuracy in or warranty in this agreement if the party claiming indemnification for such Losses had Knowledge of such breach before Closing.” 

The parties may restrict the scope of the agreement to knowledge received by a particular group of people or to knowledge obtained before a particular date.

These days, anti-sandbagging clauses are rare. However, sellers contend that these clauses may encourage collaboration between the sale parties in specific situations. If, for instance, an executive or owner plans to stay with the acquiring company after the acquisition, the persistent danger that the Buyer may sandbag the Seller may result in conflict and distraction. Sellers might also contend that they should be allowed to fix any problems the Buyer learns about before closing.

Key Takeaways

By getting the Seller’s promises, the Buyer puts some risks on the Seller. As a practical matter of business, a Buyer doesn’t have to check and make a provision for every aspect of the company’s finances because it knows it can take legal action against the Seller if the claims turn out to be false. For example, false or misleading statements about the company’s financial health or expectations of future performance. 

A Seller can’t go back on the promises it made because the Buyer’s due diligence didn’t find out they were false. Since the Seller promised in the contract that the Buyer could depend on certain statements, the Seller can’t say that the Buyer was wrong to trust the Seller’s own binding words.

Two General Rules Governing Sandbagging

In general, courts have established two separate rules—the so-called “Modern Rule” and the “Traditional Rule”— In the absence of a sandbagging clause in the M&A agreement, parties to M&A transactions and their counsel should be aware of how various states handle a buyer’s indemnity rights.

The Modern Rule

The modern rule refers to a legal principle that guides the interpretation and application of law in contemporary society. It is based on the principle that laws should evolve and adapt to changing circumstances and new situations. In other words, the modern rule emphasizes the need for a flexible and dynamic approach to law rather than a strict and rigid interpretation of outdated legal principles.

According to “Modern Rule” courts, the Buyer had the right to rely on the representations and warranties because they were negotiated contractual duties. Delaware and, generally speaking, New York are two states that adhere to the Modern Rule (as well as Illinois, Florida, Connecticut, and Indiana). 

The Modern Rule is a “pro-sandbagging” rule and is thus in the best interest of the Buyer. Because purchasers are typically not required to demonstrate reliance in those jurisdictions to pursue an indemnity claim for a seller’s breach of a representation or warranty, buyers are likely to prefer the controlling law of an M&A agreement to be a state that adheres to the Modern Rule.

The Traditional Rule

According to the Traditional Rule, a buyer’s indemnification claim requires that it be proven that they relied on the representation or warranty in some way. 

Most states have adopted this approach, which calls on purchasers to demonstrate that they relied on the representation or warranty that the Seller broke. 

The Traditional Rule is seller-friendly since it prohibits “sandbagging.” Because a buyer would have to demonstrate that they relied on the Seller’s false representation or warranty to succeed in a claim for breach of representation or warranty against the Seller, a seller will likely prefer that a state that adheres to the Traditional Rule serve as the governing law of an M&A agreement. 

The Bottom Line

Some people who disagree with modern rules think sandbagging is bad economics because it makes bargaining more like a punishment. Others believe that sandbagging is unfair or questionable from an ethical point of view. Even though it might be unsettling to let a Buyer wait until after closing to bring a breach claim against the Seller that it knew about before closing, the risk of this kind of litigation can be managed just like any other risk in the deal that the parties make.

A rule that supports sandbagging backs up the idea that representations and warranties are an essential way to share risks. 

When the parties to a contract choose not to (or don’t) divide the risk of sandbagging, the Buyer can rest assured that, as part of the deal, the Seller has implicitly promised to be honest in what it says. This view of “reliance”—that is, it requires nothing more than relying on the express warranty as part of the deal between the parties—reflects the common belief that an action for breach of an express warranty is no longer based on tort but mainly on the contract. 

In other words, the fact that the Buyer questioned whether the Seller would honor their promises should not free the Seller from his obligations when it agrees to do what it said it would do. Reliance, whether a good idea or not, is not a part of breaking a contract.

Practice Pointer

During the due diligence, you should keep in mind the Seller’s promises and any facts you find that goes against the promises. It is best to seek legal advice before entering into any contract. 

Contact Swiecicki & Muskett, LLC for practical solutions to your business and legal issues.