Private Alternatives to the Public Markets How to Survive and Grow in a Capital Constrained Environment

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Private Alternatives to the Public MarketsHow
to Survive and Grow in a Capital Constrained
Environment

• A Private Conference on
• May 16, 2001
• William Mutryn
• Holland Knight LLP
• MAPrincipal Structural and Legal Issues

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Structural Legal Issues

• Prevalent Transaction Structures
• Use of Stock as Consideration
• Tax Elections
• Closing Balance Sheet
• Indemnity by Sellers
• Escrow
• Survival Period
• Cap
• Threshold
• Contingent Consideration

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Prevalent Transaction Structures

• Stock Purchase
• Needed for Seller capital gains
• Avoidance of novation
• Triangular Merger
• Stock as consideration
• Corporate record issues
• Insulation of Liabilities
• Avoidance of Novation
• Asset Purchase
• Novation not an issue
• Target is S Corp no double tax
• Target has unresolved liabilities
• Sale of portion of Target's business

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Tax Elections

• Section 338(h)(10) Treats Stock Sale as Asset
  Sale
• Used in Limited Circumstances
• Principal Effects on Seller
• May convert receivables to ordinary income
• Principal Effects on Buyer
• Permits purchase price to be expensed
• Increases basis of purchased businesses

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Use of Buyers Stock as Consideration

• Tax Deferral
• Risks to Seller
• Price collar
• Liquidity Rule 144
• Registration Rights
• Valuation

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Indemnity by Sellers

• Escrow Offset
• Survival Period of Reps and Warranties
• Caps
• Thresholds/Basket
• No Limits Breach of Covenants, Fraud, Willful
  Misconduct, Environmental
• Offsets Insurance, Tax, Mitigation

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Contingent Consideration

• Purpose
• Time Period 1 to 2 years
• Criteria Revenues, EBIT, Gross Profit
• Advantages
• Rewards performance
• Purchase price appears greater
• Win/Win
• Disadvantages
• Difficult to Write and Negotiate
• Subject to Disputes
• Need to Retain Separateness
• May Not Optimize Business Decisions