General Archives - Wetherington Hamilton, P.A.

The Corporate Transparency Act: Much Ado About Nothing

June 4, 2025/in General/by Ted Hamilton

A perennial problem for all national governments is preventing criminals from accessing money and the financial systems which grant them access to sources of funding. And while the United States already has numerous regulations designed to stop crooks from using the international banking system, malign actors continue to find ways around these regulations. That is why, as a part of the Anti-Money Laundering Act of 2020, Congress enacted the Corporate Transparency Act.

The Corporate Transparency Act (“CTA”) created a new reporting regime for nearly all corporations, limited liability companies, and similar entities which do business in the United States. In broad strokes the CTA requires that certain “Reporting Companies” submit information identifying all “Beneficial Owners” to the U.S. Treasury Department, thereby ensuring that no bad actors are benefiting from companies operating in the U.S. economy.

The CTA involves two key terms, which are defined as follows:

“Beneficial Owner” – An individual who (1) directly or indirectly exercises substantial control over the entity or (2) owns or controls 25% or more of the entity.
“Reporting Company” – A corporation, limited liability company, or other similar entity (1) that was created by filing a document with a secretary of state or (2) that was formed under the laws of a foreign country and is registered to do business in the United States. The CTA also contains a list of twenty-four exceptions to the definition of “Reporting Company”.

REPORTING COMPANIES

Pursuant to an Interim Final Rule published on March 21, 2025, Reporting Companies fall into two categories: Domestic Reporting Companies and Foreign Reporting Companies.

Domestic Reporting Companies can be defined as all corporate entities created in the United States. Pursuant to the Interim Final Rule, Domestic Reporting Companies are exempt from the reporting requirements of the CTA.

Foreign Reporting Companies can be defined as all corporate entities formed under the laws of a foreign country that have registered to do business in any U.S. State or Tribal jurisdiction. Pursuant to the Interim Final Rule, Foreign Reporting Companies are required to comply with the reporting requirements of the CTA.

All homeowners’ associations, condominium associations, and cooperative associations in the State of Florida are required to be organized as corporations registered with the State of Florida. Accordingly, all community associations are Domestic Reporting Companies and are exempt from the reporting requirements of the CTA.

BENEFICIAL OWNERS

Foreign Reporting Companies are required to report certain information about their Beneficial Owners to the federal government – but what exactly is a “Beneficial Owner”?

There is little disagreement that the directors and officers of a board are considered Beneficial Owners under the CTA. In every corporate entity these individuals are the people making important decisions about the company – in other words, they are “exercising substantial control over the entity”. Similarly, members of committees that make important decisions about how the company is run would be considered Beneficial Owners for purposes of the CTA.

Additionally, anyone that holds more than twenty-five percent (25%) of the total ownership interest of a Foreign Reporting Company is also considered a Beneficial Owner under the CTA.

But what about a high-level employees? Are they also Beneficial Owners because they exert control over the company? The CTA’s definition of “Beneficial Owner” specifically excludes “an individual acting solely as an employee [] and whose control over or economic benefits [are] derived solely from the employment status of the person”. In most circumstances, employees are not classified as Beneficial Owners under the CTA.

BENEFICIAL OWNERSHIP INFORMATION REPORTING

Foreign Reporting Companies must submit certain specified information for each individual determined to be under the “Beneficial Owner” umbrella. Foreign Reporting Companies that currently exist are required to submit their first report no later than April 20, 2025. Beneficial Ownership reporting includes each Beneficial Owner’s:

Full legal name;
Date of birth
Current residential or business address; and
A copy of identifying documentation (passport or state-issued driver’s license).

The actual information being reported is not particularly contentious, however, it is easy to imagine some Beneficial Owners will push back on producing the required identifying documentation. Unfortunately this is a requirement and Beneficial Owners will have no choice but to provide all information requested under the CTA or face enforcement by the federal government.

Of course, who constitutes a Beneficial Owner may change over time. Any Foreign Reporting Company that experiences changes to its Beneficial Owners is required to file an updated report within thirty (30) days of that change.

ENFORCEMENT

The Congress was serious about cutting down on money laundering and the funding of terrorist organizations and the penalties for violating the CTA reflect this seriousness.

Providing inaccurate information when reporting Beneficial Owner information or failing to provide Beneficial Owner information are both violations under the CTA. Additionally, failure to provide a timely update to changes in Beneficial Ownership is a violation of the CTA. Penalties for violating the CTA include fines up to $10,000.00 and up to two (2) years imprisonment.

CONCLUSION

For several years the business world expected the Corporate Transparency Act to be a major administrative burden, cumulatively costing corporations hundreds of millions of dollars. With the deadline looming, many trade groups and companies filed lawsuits against the U.S. Department of Treasury seeking to have the CTA ruled unconstitutional. These lawsuits and changes in federal guidance created a confusing regulatory landscape that resulted in confusion and conflicting expectations of how the law would be enforced.

At the last minute, with the publication of an Interim Final Rule on March 21, 2025, the U.S. Department of Treasury altered the CTA to make it inapplicable to the vast majority of business that operate in the United States. Whereas everyone from mom-and-pop restaurants to gigantic corporations were previously expected to be impacted by these regulations, now only Foreign Reporting Companies will be required to comply.

All of the anxiety that the CTA produced ended up being much ado about nothing.

That being said, the CTA still presents a regulatory burden for Foreign Reporting Companies. If you have questions about the current version of the CTA, or if you believe your company may be classified as a Foreign Reporting Company, it would be wise to contact competent legal counsel for advice.

Contract Conditions: How They Can Impact Your Case

March 29, 2018/in Articles, General/by Ted Hamilton

Conditions….life is full of conditions. I might tell my son that I’ll let him go to a party or a hockey game if he will clean up his room or take the trash out; these are conditions that he must fulfill in order to get what he wants. We have, in effect, created a verbal contract whereby each party must comply with certain contract conditions. My son may have to clean his room or take out the trash and in return, if he complies with his promise, I will have to allow him to attend a particular event. This is a simplified example, but the issue can be more complicated when parties are creating and enforcing contracts.

Contracts are full of conditions. A creditor may agree to loan money to a borrower with the condition that the borrower will make monthly payments for a specific amount which includes principal and interest; if payments are not timely made, late fees may be added. Sometimes contract conditions must occur prior to an event in order to create a contract, and sometimes conditions must occur in order for a creditor to sue for breach of contract if, for example, the borrower defaults on the loan by failing to pay as promised.

“A condition precedent is one which must happen or be performed before the estate to which it is annexed can vest or be enlarged; or it is one which is to be performed before some right dependent thereon accrues, or some act dependent thereon is performed.” Black’s Law Dictionary, Sixth Edition.

Some contracts conditions require notices of default be mailed to the borrower before a creditor is permitted to file suit. Debtors may raise failure to comply with conditions precedent as a defense, thereby attempting to prohibit a creditor from enforcing the terms of a contract. The attorneys at Wetherington Hamilton, P.A. can interpret contracts and ascertain whether conditions precedent have been complied with prior to filing suit in order to overcome the defense of failure to comply with conditions precedent. If you have a contract dispute, contact our office at (813) 676-9082 or JoanW@whhlaw.com.

Collections Attorney Tampa

Joan W. Wadler has been a member of the Florida Bar since 1991. Her practice concentrates on Collections and Commercial Litigation, Real Estate Litigation and Associations Law. She can be reached at (813) 676-9082 or JoanW@whhlaw.com

The Importance of Professional Courtesy in the Practice of Law

September 18, 2017/in Articles, General, Litigation/by Ted Hamilton

Have you heard why sharks won’t attack lawyers? Professional courtesy! (insert laugh here). We have all heard jokes about lawyers referencing their behavior as aggressive, unprofessional, offensive, shady, etc. This may come as a surprise to some, but as attorneys, we are bound by Rules of Professional Conduct. In order to become a member of the Florida Bar, in addition to passing the bar exam and an extensive background check, each new attorney takes an Oath of Admission. In 2011, as a result of concerns over increased lack of civility among those who are members of the legal profession in our state, the Florida Supreme Court added the following language to the Oath of Admission**:

“…To opposing parties and their counsel, I pledge fairness, integrity, and civility, not only in court, but also in all written and oral communications;…”

I was surprised to learn that this language was being included in the Oath of Admission of such a noble profession. I remember the day I learned that I had passed the Florida Bar as being one of the best days of my life; I was being admitted to a respected and noble profession! To me, common sense would dictate acting with fairness, integrity and civility. I try to live my personal and professional life this way, and enjoying professional relationships with other attorneys is one of the many reasons I enjoy the practice of law. Just this afternoon I had the pleasure of speaking with opposing counsel on a case that is set for trial next month. The conversation was pleasant and professional as it should have been, and we are attempting to resolve the case without the need for trial. This type of professional dialogue with other professionals is one of the many reasons that I enjoy the practice of law.

I have dealt with many personality types during my tenure as an attorney. Fortunately, most attorneys with whom I have dealt practice law with fairness, integrity and civility. Of course, there are those who do not, which is unfortunate. But this noble profession, like all others, has its good eggs and not so good ones. The attorneys at Wetherington Hamilton, P.A. practice law with the utmost professionalism, including fairness, integrity and civility…nothing less!

**Supreme Court of Florida, No. SC11-1702, In Re: Oath of Admission to the Florida Bar, September 12, 2011

Should I Pick My Lawyer from a Billboard? Practical Advice on How to Pick a Lawyer

August 29, 2017/in Articles, General, Litigation/by Ted Hamilton

We have all seen them, the giant billboard that says “Aggressive for You”; “Make your wallet fat with us”; “Over 150 million recovered for victims”; or “Just Because You Did It, Doesn’t Mean You’re Guilty”.

Now it may be hard to believe, but at least in Florida, the Bar Association approves each and every billboard you see for its truthfulness and accuracy. Thus, a billboard cannot misrepresent a lawyer’s experience or credentials. It can’t inflate the truth and it must be honest. Unfortunately, beyond these basic approval criteria, lawyer ads can say whatever gets you in the door. So how do you choose a lawyer?

First, determine the type of legal issue you are facing. Just as in medicine, there are general practitioners and then there are specialists. The lawyer you currently deal with may have different types of lawyers’ in the firm. As a result, they may have the ability to handle varied types of law. Our firm for example has an estate planning and probate lawyer as well as a real estate lawyers. Although these two types of law might cross at times, the laws governing these areas of law is definitely different. As a result, the lawyer you need needs to practice in the area you need help in.

Second, if you know a lawyer, trust them and like them, ask them if they handle your type of matter. For example, if you call our office with a family law problem, we will tell you we don’t handle family law but we can refer you to a family law attorney. However, if you call our office for an estate plan, we have an excellent estate planning attorney in our office and I will connect you to her. If you call about a litigation matter, I might handle it or I might have an associate handle it depending on the complexity of the issue. If you don’t know a lawyer, you can check the internet and review sources such as www.Lawyers.com and www.martindale.com . You can also check reviews on Google.

Third, determine your budget. The pricing of lawyers varies greatly depending on the type of matter and the complexity of the issue. Even today, most lawyers bill by the hour. Very specialized matters such as tax appeals, benefits law issues or securities law issues, require a specialized attorney who will likely charge more. In Tampa, the rates for these types of attorney’s at this time runs anywhere from $375 per hour to over $500 per hour. As a general matter, larger firm prices are more than smaller firms or solo attorneys. Finally, you might have heard the slogan “you pay nothing unless you recover”. This is basically what is called a contingent arrangement. You don’t pay the lawyer unless they collect. This type of fee arrangement works best in the personal injury area where there is insurance coverage. However, our firm also does collections on a contingency basis. Thus, if you have a judgment to collect, our firm will often handle the collection of a judgment or suit to collect based upon a percentage of the recovery.

Finally, ask questions. Check the internet. Check the Florida Bar or your local bar to see if any grievances have been filed against the lawyer. These types of checks can help narrow down your choices and ensure you make the best decision. Also, if your not happy with your lawyer, make a change. There are over 100,000 lawyers in Florida. If yours is not doing the job for any reason, you certainly have the right to chose someone else.

Wetherington Hamilton founding attorney, Theodore J. Hamilton, has over 20 years of experience in handling real estate transactions and litigation. Attorney Hamilton has particular experience in matters involving complex litigation and complicated real estate matters having represented title insurance companies and individuals throughout the state of Florida. He can be reached by phone at (813) 676-9082 or via email at TJH@whhlaw.com.

How and When Can Someone be Held Personally Liable?

July 28, 2017/in Articles, General/by Ted Hamilton

There are situations where you can be held personally liable even though it is not your intention be responsible. Two circumstances where this often arises in contract situations are when you are representing another as an agent or where you are signing a personal guaranty.

If you are an agent or the representative for someone, you can be held personally liable. The law generally holds that an agent is responsible under a contract if the principal is not disclosed. Therefore, if you enter a contract for someone else (the principal) make sure you fully disclose that you are entering into that contract in a representative capacity. You should make sure that the principal is fully disclosed (named). It may not be enough to just indicate that you are entering a contract as an agent or representative if the principal is not fully disclosed. Do not rely on the other party to be aware that there is a principal, even if you believe that they should be. To protect yourself, be sure to spell it out clearly that you are the agent and indicate the name of the principal. Also make sure that the principal is a real person or legal entity. If you represent a person or business that does not actually exist, you could be held personally liable.

Another situation where unexpected personal liability occurs is if you sign a personal guaranty. Where this most often occurs is if you sign on behalf of a corporation. Many times people will sign a guaranty and designate that they are signing as president or an officer of the corporation. The law is that if the corporation is already responsible, it is meaningless for it to guaranty its own debt. Therefore, an officer who guarantees the debt of the corporation becomes personally liable and adding a title does not relieve the personal obligations.

These can be tricky situations and may result in personal liability when there was no real intention to give it. Of course, if you have any doubt, call the experienced attorneys at Wetherington Hamilton who are familiar with these situations. You may save a big headache in the future.

Thomas K. Sciarrino, Jr., Esq. is a veteran collections attorney with 38 years of experience in handling Commercial Litigation, Collections, and Creditor’s Rights. He is the head of the collections department at Wetherington Hamilton, P.A. In addition to practicing law, he has also lectured on creditor’s right before various business and professional groups.

Why You Must Always Comply with Court Orders

June 26, 2017/in Articles, Debt Collection, General/by Ted Hamilton

Currently, my practice focuses primarily in the area of collections, which in Florida, can be broken down into two main steps- they are obtaining Judgment and execution or collecting sums due as a result of the Court having entered Final Judgment.

Once final judgment has been entered, there are various methods available for collection of that judgment. Often, the Final Judgment contains language requiring defendants to complete what is known as a Fact Information Sheet as provided in Florida Rule of Civil Procedure Form 1.977, or defendants may be subpoenaed to appear at deposition in aid of execution.

Parties to a case are all required to comply with court orders; when a party fails to do so, the Court has the authority to find an individual in contempt. The individual is given the opportunity to purge herself/himself of the contempt by complying with the Court Order. The court may order monetary or other sanctions for failure to comply with a Court Order. I regularly hear judges tell defendants that there is no longer debtor’s prison and that they do not send people to jail for not having money to pay their debts, but when people fail to provide a fact information sheet as ordered by the Court or fail to appear at deposition after having been served, they can be found in contempt of court and, after proper notice (personal service), arrested. This is never our goal, but it can happen.

Approximately ten years ago, I brought my then 9 year-old daughter to work on “bring your daughter to work” day. The day began as a normal day (and I had no court appearances scheduled that day), but soon after arriving at work, I was told that I had to go to court because a defendant had been “picked up” for not appearing at a deposition. So I brought my daughter to the court house with me. When we arrived, a woman, our defendant, dressed in an orange jump suit and in hand cuffs, was in the court room. After a hearing in front of the presiding Judge, I took her deposition while my daughter waited patiently nearby; the Judge then ordered the woman’s immediate release. As you might imagine, this made quite an impression on my young daughter.

So what is the bottom line? Parties cannot be arrested for not having money to pay their debts…but parties to a case are all required to comply with Court Orders.

Joan W. Wadler has been a member of the Florida Bar since 1991. Her practice concentrates on Collections and Commercial Litigation, Real Estate Litigation and Associations Law.

Who’s in Charge Here Anyway? Qualities of Leadership

February 13, 2017/in Articles, General/by Ted Hamilton

Are you a leader? How would you know?

Leadership is from the front of the room or the front of the line. And, leadership is from the rear, and from side-by-side interaction. Being a leader doesn’t necessarily mean you make all the plans, and assign all the roles, and set all the goals. Sometimes you are in charge, sometimes you have to take charge, and sometimes you have to empower others to charge. Leaders listen to what is said, and also hear what is not being said, to understand the actual dialogue and because it affects the process and the outcome.

Team: A team is not a group of people who work together. It is a group of people who trust each other.

Vision: Without a picture of where you are going, you will never get there. Part of leadership is sharing the vision and enrolling the team in that vision, then working with the team to refine and direct that vision. A leader is flexible, soliciting and accepting input from the rest of the group and crafting the vision to incorporate that input. A leader will partner with the group and all work together. Ultimately, soliciting input and allowing the group to contribute to the conversation results in a higher percentage of participation in the result, even if the result is not exactly what some individuals were hoping for. A leader communicates the vision to everyone else.

If the team is not actively engaged in the planning and realization of the vision, the end result is likely to be unsatisfactory, and will not be supported by the group as a whole.

Motivating Yourself and Others:

Lead by example. Assist and participate. If the team sees you are willing to pitch in and work with them, they are more likely to follow the plan. Do your homework. Anticipate questions or concerns and prepare your answers ahead of time.

Lead by expectation. Always expect people to do their best and be successful, and then if you create a culture in which your response to indifference or failure is disappointment, it can be more powerful than criticism or censure.

If someone takes credit for the success of your idea, remember it is better to be effective than to be right. A good idea is worth carrying out, and part of leadership is understanding that getting the job done is more important than who gets the credit for the idea.

Attitude is everything. Enthusiasm, positive energy and passion are contagious. So are doubt, negativity, and the conviction that it won’t work out. Choose positive. It will empower you and the others, and it creates strength (physical and mental). Also, it leads to out of the box thinking and new solutions.

Mentor and monitor. Stay involved during the process. Be accountable for the on-going work, and for the results. And, make others accountable for their parts, including if they are not doing their parts.

Empower others. Always work to give them the tools and the information they need to be successful. Solicit their input, create consensus when you can.

Celebrate everything and everyone. After the project is finished, revisit the process and review what worked, and what was changed and improved as it went along.

Focus on your strengths and the strengths of the others. A leader will balance the team so that each member brings a strength to bolster an area of weakness in another team member. Look for and recognize the strengths of the group, and you will have a much stronger team. When you have a grasp of the strengths of the individuals, you can encourage meaningful participation by all members of the team, and make the best use of your resources. Everyone has something to contribute.

Now when I ask you again “Are you a leader?” what will you say?

Ellen Hirsch de Haan, Esq.

The Consumer Financial Protection Bureau Found Unconstitutional

November 11, 2016/in Articles, Debt Collection, General/by Ted Hamilton

For anyone involved in the financial services industry over the last four years, the CFPB or Consumer Financial Protection Bureau has become a four letter word. This entity created by Congress as part of the Dodd Frank act passed after the financial collapse in 2008, was given broad jurisdiction to regulate all types of financial services, from banks to title companies to insurance agencies. However, in a ruling on October 11, 2016, the U.S. Court of Appeals for the District of Columbia Circuit found the structure of the CFPB unconstitutional because of the “concentration of enormous executive power in a single, unaccountable, unchecked Director who wields vast power over the U.S. economy.” The case (PHH Corporation, et.al. v. Consumer Financial Protection Bureau) can be found here. As it stands, the director of the CFPB is appointed by the President. This director can only be removed for cause, such as “inefficiency, neglect of duty or malfeasance.” This structure, with the President having no discretion for removal, was found unconstitutional in the PHH case.

The PHH case also vacated a $109 million penalty imposed by the CFPB finding the agency misinterpreted the applicable statute and then violated Federal Law. The issue in the PHH case was RESPA. This act protects consumers from undisclosed arrangements in real estate closings. The court found that RESPA was not violated by PHH mortgage and vacated the penalty. RESPA governs every residential real estate closing. For those who have purchased residential real estate, you may have noticed confusing changes to your closing statements. The CFPB has mandated these changes and others in its attempt to make closings more clear.

Further changes are in the wind as imposed by the CFPB that will cause many small businesses to close. The changes to RESPA have caused tremendous consolidation in the real estate industry and have made the barriers to entry extremely expensive. Similar changes in the banking industry caused by CFPB regulation have made community banks merge or close. These regulations can only lead to higher costs for all of us.

If you are involved in any financial service industry, feel free to call us about upcoming cases or regulations involving your industry. In addition, if you are facing a claim involving regulations adopted by the CFPB, let us know and if we can’t help we can point you in the right direction.

Theodore J. Hamilton, Esq.

Anatomy of a Business Sale: Part II of III

October 31, 2016/in Articles, General/by Ted Hamilton

INTRODUCTION

This 3-part series is intended to de-mystify the business sale process. In Part I, I discussed the process of identifying a buyer, the importance of a good non-disclosure agreement, and the development of a terms sheet or letter of intent. In this second installment, I will explain the 4 basic types of business sale transactions and will provide an overview of the due diligence process.

FORMS OF TRANSACTIONS

The letter of intent or terms sheet will often describe the form of the proposed transaction as either a “stock sale” or an “asset sale.” Alternatively, the transaction may be structured as a “merger” or possibly as a “redemption.” We will address each of these in turn.

Asset Sale

In an asset sale, the company sells its assets and operations to either an existing company or to a company formed by a buyer for this purpose. The selling company remains an empty shell after the sale, sometimes retaining only liabilities, other times retaining accounts receivable, which it will continue to collect from customers. The selling company is often required to change its name so that the buying company can register the name with the appropriate state authority.

The issue of the selling company’s liabilities is usually a subject of negotiation. The buying company may be willing to assume some of the seller’s liabilities, including contracts with certain customers or certain vendors. The seller and its legal counsel must screen existing contracts and agreements to determine whether those agreements can be transferred, or assigned, to the buyer. Most such agreements, and particularly bank loans, leases, and intellectual property licenses contain some form of restriction on transfer or an outright prohibition against assumption of by third parties without prior consent. For example, attempting to assign a bank loan without obtaining the lender’s approval is almost always an event of default, allowing the lender to “accelerate” or demand immediate payment of the note. For this reason bank debt is rarely assigned to or assumed by the buyer, and the buyer’s lawyer will ensure that such debts are paid, so that the acquired assets are not subject to the bank’s liens.

If the seller is organized as a corporation, an asset sale will require the approval of the directors and a majority of the voting shareholders of the selling company. If the seller is a limited liability company, unless the operating agreement provides otherwise, a majority vote of the members is sufficient to authorize the sale of the company’s assets.

Stock/Membership Interest Sale

In a stock sale, all of the assets and liabilities remain with the selling company and it is the stock or the membership interests themselves that are sold to the buyer. The new buyer or buyers purchase the stock or limited liability company interests from the owners of the selling company. Even though the assets are technically not transferred from the original company, many of the contracts that the selling company has with third parties may treat a “change of control” of the company as equivalent to a prohibited assignment of a contract or assumption of debt. If so, this requires consent by the contracting party before completing the transaction.

If the acquired company has more than one owner, the buyer(s) usually want all of the owners to participate in the sale. This is why many buy-sell agreements and LLC operating agreements contain so-called ‘drag-along’ provisions that require minority shareholders or LLC members to join in a sale of stock or LLC interests that has been endorsed by the majority owner(s).

Redemption

A redemption is a form of a stock sale whereby the company buys the shares of one of its owners. This form of transaction is often used when there are multiple owners and only one is selling. For example, the founder may own 90% of the company and the CFO may own 10%. The company can purchase the founder’s 90% stake over time and as each segment is purchased, the CFO’s percentage ownership increases until, eventually, the founder has zero and the CFO has 100%. Just as in a stock sale, many of the contracts that the company has with third parties may treat a “change of control” as equivalent to a prohibited assignment of a contract or assumption of debt. Therefore, a redemption also often requires review or consent by certain third parties prior to consummation.

Merger

A merger is a legal procedure whereby 2 or more companies are combined, with only one of them remaining in existence after the process is completed. The merged company ceases to exist and the surviving company automatically acquires all of the assets, liabilities and operations that were owned by all of the original companies before the merger. Under both the FL business corporation law and the FL limited liability company law, a majority of the voting shares or membership interests must approve a merger. Also, as with asset sales, stock sales and redemptions, many agreements and licenses will require approval from third persons before the merger is completed.

DUE DILIGENCE

The due diligence process usually begins immediately following execution of the letter of intent or the terms sheet. “Due Diligence” is an in-depth investigation of all the things the buyer thinks it needs to know before it makes an irrevocable commitment to the deal. The buyer will provide the seller with a due diligence checklist which is typically very detailed and should be (but isn’t always) customized to the seller’s business. The seller will provide the buyer with information responsive to the buyer’s checklist requests, either stating the item requested is not applicable, or providing materials that are responsive.

Typically, a due diligence checklist requests copies of all corporate records, significant contracts, leases, patents, trademarks, permits, and license agreements. In addition, the buyer will want to send contractors to conduct physical and environmental inspection of any real estate (owned or leased) and to inspect any important equipment. The buyer’s financial management team will request financial records and may request meetings with the seller’s accountants. The buyer’s operations team may request meetings with key employees, customers and suppliers of the seller.

Sellers sometimes want to wait to disclose certain matters until they are sure the deal will go through. These may include the identity of key customers, or price and terms for their work, trade secrets, or sources of supply and purchase terms. The seller’s lawyer can usually work out procedures to make the disclosures anonymous (for example, substituting the letter ‘X’ for the name of a key customer) or delaying disclosure until everything else is in order.

Ideally, the seller should work with its consultants and advisors on its business and legal due diligence materials far in advance of the actual sale. In Part I of this series we discussed the importance of using an investment banker or business broker. If they are included in the process early enough, these advisors, together with the company’s accountant and lawyer can “clean-up” any issues that could be problematic to a buyer. In addition, the company’s lawyer can provide the seller with a due diligence checklist of its own to help gather and organize the materials likely to be requested by a typical buyer. A business that is prepared for due diligence will find the entire process much more manageable. Prompt, thorough, and accurate responses by the seller will create a favorable impression on the buyer that the seller’s company is professionally organized and well-run. This creates goodwill on the part of the seller and raises the buyer’s confidence that this is a good deal.

If the seller is unprepared and cannot provide the buyer with prompt and accurate responses to the due diligence checklist, the buyer may attempt to renegotiate the exclusivity period deadline, arguing that it will need more time. If the delays continue, the buyer may grow concerned about the viability or trustworthiness of the overall transaction, which can lead to the buyer terminating the deal. Generally speaking, it is in the seller’s interest to disclose as much as possible to move the deal along and to avoid post-closing buyer surprises that may lead to indemnification claims and purchase price claw-backs.

More often than not, the seller provides its due diligence materials through an electronic “data room.” The seller can control and monitor who receives data room access. An electronic data room saves paper and reduces the amount of time the buyer’s management team needs to spend on-site at the seller’s facility. It also creates an organized electronic record of the materials that can be downloaded to a CD or flash drive for future use, such as another deal if this one fails or in the event of a post-closing buyer indemnification claim.

CONCLUSION

In Part I of “Anatomy of a Business Sale,” I discussed the importance of preparing a business for sale and the process of identifying a buyer, and the development of a terms sheet or letter of intent that serves as an outline for the formal purchase documents. In this Part II, I explained the different forms that a business sale can take – asset sale, stock sale, redemption and merger. Finally, I reviewed the importance of the buyer’s “due diligence” investigation and why it is important for the seller to be prepared and to respond promptly and accurately. In Part III, I will conclude this series with an explanation of the typical provisions contained in the agreements used in all four forms of transactions and an explanation of the closing process.

Matthew J. Lapointe, Esq.

The Anatomy of a Business Sale – Part 1

October 1, 2016/in Articles, General/by Ted Hamilton

Business Sale Selling a private company is much more than a business transaction. After all, the owners have invested time, treasure, and in some cases blood and tears into building their business. Many owners have the first dollar their company ever earned encased in glass. They have developed deep relationships with employees, customers, and suppliers. For many business owners, their very identity is tied up in their company. Selling the business is emotionally and psychologically draining.

The sale process can also seem unduly complicated and ritualized to business owners used to making their own decisions and implementing those decisions with little or no oversight. The sale process includes the preparation and review of unfamiliar documents, seemingly endless requests for documents and financial records (known as “due diligence”), and long discussions over legal points and contingencies. There may also be difficult tax issues to work through. For many clients, the sale process is mysterious and takes much longer than they think it should take.

In this three-part series, I intend to de-mystify the process and explain the different phases of the sale of a company. In this first installment, I will discuss the process of identifying a buyer for the company, the importance of a non-disclosure agreement, and the preparation of a terms sheet and a letter of intent outlining the business points of the deal. I will conclude this first part with a discussion of how and when the business owner should disclose the transaction to minority owners, employees and other stakeholders.

In Part II, I will discuss the basic forms a business sale may take – an asset sale, stock or LLC interest sale, redemption or merger. I will conclude Part II with a description of the “Due Diligence” process, which applies to all forms of transactions.

Part III will contain a detailed look at the main provisions of an Asset Purchase Agreement and a Stock/LLC Interest Purchase Agreement. I will include a clear (hopefully!) explanation of the warranties and representations commonly made by sellers, the indemnities commonly included in such agreements, common pre-closing and post-closing covenants and the closing process itself.

Without further preliminaries, here is Part I of Anatomy of a Business Sale.

Identifying a buyer

Business owners can identify buyers in a number of ways. A long-time employee, a competitor or a customer may express an interest in acquiring the company. Sometimes an investment banker or business broker may approach the business owner on behalf of a potential buyer.

Business owners who have concluded that now is the time to exit their company may reach out to their lawyer or accountant. These professionals may know people who would have an interest in the business. More likely, they will put the business owner in contact with an investment banker or a business broker. These professionals usually have wide networks of contacts and know how to get the maximum exposure and the highest price for the business. There are also business transition experts who specialize in planning and assisting the business owner with developing and executing a transition plan, using accountants and lawyers with whom they have established relationships.

The investment banker or business broker will usually spend time with the business owner, interviewing him or her and reviewing financial records and business policies and procedures. They will usually prepare a set of comprehensive materials describing the general nature of the company, its industry, and its approximate location, without divulging its precise identity. The broker or investment banker will compile a list of possible contacts, using his or her own database and perhaps soliciting suggestions from the business owner and the business’ lawyer and CPA. That list will then be approved by the business owner, who of course has the final say on who he or she will contact. The broker or investment banker will then contact the people on the list, inquiring whether they have any interest in a possible transaction.

In some cases, the business owner is not concerned about pre-sale publicity and the broker or investment banker will embark on a very public marketing campaign to sell the business.

THE Non-Disclosure agreement or “NDA”

If a prospect responds to the overtures of the broker or investment banker, the next step is to ask the prospective buyer to sign a non-disclosure agreement with the seller. This agreement requires the prospective buyer to keep confidential any information it may receive concerning the company, its finances or its business. In most cases it will also require the buyer not to disclose the very fact that the company is for sale or that any transaction is being discussed. The NDA should also contain provisions prohibiting the prospective buyer from trying to hire away the selling company’s employees, trying to contact the company’s customers or vendors or otherwise using any of the information they receive about the selling company in any way other than the consideration of the transaction.

The non-disclosure agreement should also require the prospective buyer to return any and all documents it receives if the deal does not proceed. Nowadays, most of this information is shared electronically, and if the deal does not proceed it is important to obtain a certification from the prospective buyer that it has permanently deleted all confidential material from its computer system.

In some cases, the prospective buyer may be providing information to the selling company as well. This would certainly be the case where the buyer wants to pay part of the price over time, or with shares of its stock. In these cases, the NDA works in both directions and the selling company will be required to respect the confidentiality of the information provided by the prospective buyer or merger partner. Likewise, if the deal does not progress, the selling company will be required to return or permanently delete any confidential information it received from the prospective buyer.

Most prospective buyers honor their commitments and it is rare to see litigation arise out of an NDA, but it happens. Consequently, it is important to have your lawyer draft the NDA or carefully review the NDA provided by the broker or investment banker.

THE “Agreement in principle,” the “Term Sheet” and the “Letter of Intent”

term-sheet

After the parties sign an NDA, the prospective buyer usually asks the selling company to disclose summary financial information and information about its facilities, product or service lines, customers and vendors. The buyer may also want to meet the owners and top executives and interview them about the business.

When the prospective buyer has a good picture of the company’s historical financial information and of the business in general, the owners will start to negotiate price, payment terms and other specific terms and conditions of the deal. These specifics may include the owner’s continued employment by the selling company after the closing (how long, what salary and benefits); the disposition of company-occupied real estate (is it part of the deal or will it be leased to the new owner); and whether the seller will retain any company assets. With advice from the lawyers and accountants, the owners should also determine the form of the deal: a sale of assets or a sale of the company’s stock or LLC interests. These business points will often be reduced to writing in a “Term Sheet,” a short (usually 1 or 2 pages) summary in bullet points that is signed by the seller and the buyer.

Sometimes the parties go straight from the Term Sheet to the actual transaction document — an Asset Purchase Agreement, a Stock/LLC Interest Purchase Agreement or a Merger Agreement. Depending upon the size and complexity of the deal, the parties often move from a Term Sheet to a Letter of Intent (“LOI”). The LOI sets out the agreed-on business terms but goes beyond the Term Sheet by including some or all of the following:

(1) the seller’s commitment to give the buyer access to the business for ‘due diligence’ purposes (we’ll address due diligence in detail in Part II).
(2) a “no-shop” provision, whereby the seller agrees not to discuss selling the company with anyone else for a fixed period of time.
(3) a provision that allows the buyer to terminate the LOI if at any time it concludes that the details of the business are unsatisfactory.
(4) a termination date or a date by which the deal must close.
(5) provisions for a deposit, to be held by the investment banker, broker or, more commonly, the seller’s attorney.
(6) any financing contingency or other contingencies.

The LOI usually not a comprehensive legal document, but it can be legally binding. Legal counsel should absolutely be involved in the preparation of the LOI to ensure that it is perfectly clear which parts are legally binding (e.g., the “no shop” clause and confidentiality provisions) and which are not.

INFORMING EMPLOYEES AND OTHER STAKEHOLDERS

If there are minority owners in the company, it is often a touchy issue determining precisely when to inform them of the possible transaction. In larger companies, the majority owner is often the only one actively involved in the business and family members or early investors have only minor equity interests. Of course, these minority owners are certain to become involved eventually in any transaction, either because their approval is legally required for the company to sell assets, or because most buyers of stock or LLC interests will want to acquire 100% of the company’s equity.

When and how to break the news to minority owners, top company executives and other stakeholders is mostly a business decision for the majority owner, who must balance the risk of premature disclosure against the risk of angering other stakeholders by a perception that they were not sufficiently trustworthy to be told of the deal earlier.

There are certain key employees who simply must be told fairly early in the process because their cooperation is essential to getting the deal done. The CFO, for example, will need to handle much of the response to due diligence inquiries about the company’s financial position. Likewise, the head of Human Resources may be tasked with compiling information about employees, the structure of benefit plans and pending litigation that will be disclosed to the prospective buyer. These and other key employees are often offered a “deal bonus” to ensure that they remain with the company through the transition and the consummation of the deal.

There is no easy answer to the question of how much information a business owner should share with employees and other stakeholders before a company sale. Every situation is different. The business owner should consult with legal counsel, the broker or investment banker and others to determine whom to tell how much and when.

COMING UP NEXT

In Part II, I will discuss the two basic forms a business sale may take – an asset sale or a stock/ownership interest sale (including a merger). I will also provide a discussion of the due diligence process and the importance of full disclosure.

Matthew J. Lapointe, Esq.