Mergers & Acquisitions

Introduction to Merger & Acquisition Earnouts

July 14, 2017 | Katya Mezek

An earnout is a type of pricing structure used in mergers and acquisitions that makes some of the purchase price contingent on the performance of the business after the acquisition has taken place. In this sense, the sellers must “earn” this part of the sale price. At its most basic, these provisions serve to reallocate post-sale risk to both the buyer and the seller. When considering a merger or acquisition, it is often best to get counsel from an experienced Silicon Valley merger & acquisition attorney to fully understand the terms and conditions of the agreement.

When Are Earnouts Employed?

Earnouts can be employed in a variety of situations to resolve points of contention in the negotiations of a merger or an acquisition. Commonly, they are used when the seller is more optimistic about the future value of the company than the buyer. The earnout clause will allow both parties to reach an agreement that they believe to be fair. They can also be used as a financing mechanism and for the sale of startups with little operational and financial history.

What is the Importance of Letters of Intent in an M&A Negotiation?

May 5, 2017 | Katya Mezek

Corporate merger and acquisitions are highly technical transactions with a lot at stake for all parties involved. It can take thousands of hours of dedicated work to finalize this type of deal and the last thing you want is to commit time, energy, and money to the process only to have one party back out at the last minute. For this reason, the early stages of any merger and acquisition should involve a carefully drafted and negotiated letter of intent (LOI) that is signed by all parties.

What is a Letter of Intent?

Before you begin the merger and acquisition process, both parties should be on the same page regarding the basic terms of the transaction. These terms are set out in a letter of intent that the parties can review and negotiate to ensure they are in general agreement regarding the basic terms of the final agreement before they commit resources to the transaction. Though you want the terms of a letter of intent to be attractive to the other party, you should also always be realistic. Disputes can arise later in the M&A process that can halt the process and you could even be accused of acting in bad faith.

Should I Invest In A Resale Franchise?

February 10, 2017 | Structure Law Group, LLP

Starting a business is a difficult endeavor. While many people want the opportunity to start their own business, the time and commitment required to establish, develop, and grow a successful business are not for every potential entrepreneur. Instead of starting their own business, some individuals may look to another alternative: resale franchise.

A resale franchise is an already-established franchise business that the current owner is looking to sell. The current franchise owner may be selling his or her franchise for reasons such as a divorce, a death in the family, or even for purpose of retirement. Whatever the reason, a resale franchise provides an opportunity to dive into a business without building it from the ground up.

Investing in a Resale Franchise: Pros

Post-Closing Disputes In Mergers and Acquisitions

January 6, 2017 | Mark Figueiredo

In the early stages of a merger and acquisition (M&A) transaction, owners may be willing to overlook certain differences in favor of focusing on the benefits of the deal. However, as the M&A transaction is completed, the rose-colored glasses may come off and sudden concerns may develop into serious legal disputes between owners. If these disputes are not handled correctly, it can result in long-term consequences, both financially and regarding the relations of the parties. The following are some information regarding common post-closing M&A disputes.

Deferred Payment of Purchase Price

Many M&A agreements are structured such that part of the purchase price is paid at closing and the rest is paid at some point in future. This is done with “earn-out” clauses and purchase price adjustment clauses, among others. An earn-out clause is where the amount of future money paid depends on selling company’s performance after the acquisition, i.e. the money has to be earned after the closing before it is paid out. These types of clauses are sometimes interpreted differently by buyers and sellers after the closing. For example, if the selling company’s product is upgraded after the closing, the buyer and seller may view the revenues from those sales differently under an earn-out clause. As another example, if the buyer and seller have different accounting practices that could certainly affect their interpretation of purchase price adjustment clauses. Resolving these disputes can involve complex accounting and negotiations by both parties.

Protecting Private Information In California

September 9, 2016 | Structure Law Group, LLP

The exchange of cash for payment for a goods or services is rare these days. We have certainly become a digital society. Business make advances daily to make transactions more efficient and convenient. However, businesses engaging in e-commerce must not compromise security for expediency. Additionally, businesses store infinite amounts of personal data about their customers. These businesses, such as health care providers and health insurance companies, not only must safeguard their electronic transactions but must also secure sensitive information and proactively combat data breaches. Failure to do so can lead to a huge economic loss for the customers and the company. The savvy business attorneys at Structure Law Group, LLP advise businesses on the best practices to prevent data breaches and counsel them on the necessary steps to take if such an unfortunate event occurs.

In California, people have a constitutional right to the safety and integrity of their personal information. California’s information security act defines personal information as any information that could identify or describe a person. Personal information is also an individual’s name, address, social security number, license number, medical information, and the like. A business in possession of such information must take reasonable steps to prevent disclosure of private information. California law obligates businesses to implement security measures reasonably designed to protect the integrity of the private information. Every business entity, from a sole proprietorship to a multi-national corporation is subject to the information security act.

California law broadly defines “data breach.” Data breach includes any “unauthorized acquisition of computerized data that compromises the security, confidentiality, or integrity of personal information maintained by the person or business.” The information may be used in good faith for the benefit of the person whose information is disclosed, provided that such disclosure is authorized.

What is a Fraudulent Conveyance?

September 2, 2016 | Ryan Penhallegon

A “fraudulent,” or more accurately “voidable” transfer, is a transfer by a party (the “debtor”) of some interest in property with the goal or effect of preventing a creditor or creditors from reaching the transferred interest to satisfy their claim or claims.

What Law Governs “Fraudulent” or “Voidable” Conveyances/Transfers?

Fraudulent conveyances are governed primarily by the Uniform Voidable Transactions Act (UVTA), which replaced the Uniform Fraudulent Transfer Act (UFTA) in California as of January 1, 2016. The UVTA applies to transfers made or obligations incurred after January 1, 2016. The UFTA will continue to apply to transfers made or obligations incurred prior to January 1, 2016. One of the most noticeable changes made in the UVTA is the removal of the word “fraudulent” from the title and body of the act. This change emphasizes that a transfer may be, and often is, voidable even in the absence of any sort of improper intent by the debtor or the transferees.

Trade Secrets In California

August 26, 2016 | Structure Law Group, LLP

Businesses must endeavor to guard their trade secrets jealously. Failure to do so can wreak havoc upon development and growth. It will also give competitors a leg-up in the marketplace. Knowing and understanding California’s trade secret law is therefore critically important. Implementing multiple safeguards to prevent trade secret disclosure is necessary. If a business fails to implement reasonable safeguards to prevent trade secret misappropriation, then the business may be without recourse in court. Working closely with experienced business attorneys to develop the appropriate security measures to prevent trade secret theft could prevent disaster from striking. The San Jose San Jose business attorneys at Structure Law Group, LLP (in San Jose and Oakland) have extensive experience counseling businesses on how to best protect their trade secrets and defending businesses against trade secret misappropriation in court.

California’s Uniform Trade Secrets Act (“UTSA”), which follows the Uniform Trade Secrets Act adopted in 48 states, defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (Ca. Civil Code §3426.1.)

In order to assert a claim for misappropriation of trade secret information, the owner of the trade secret information must identify its trade secret with sufficient specificity so that the information is separate from areas of general knowledge. For example, customer lists, marketing plans or pricing concessions are examples of broad categories of trade secret information. Or, the trade secret can be highly specific, such as a newly designed manufacturing process or the recipe for some sugary carbonated beverage, such as the recipe for Coca-Cola.

Restricted Stock vs. Stock Options: Deciding How to Compensate Your Employees

June 24, 2016 | Mark Figueiredo

Issuing equity in a company is a popular form of employee compensation. This trend is especially popular here in Silicon Valley, where startup companies often defer cash compensation to their employees in exchange for a share of future growth through the issuance of equity. If you own a non-public company, you may wish to compensate your employees partially by issuing them equity in the company. Equity aligns incentives between employers and employees while enabling employees to build up wealth over a longer term. Equity issuance can be done in different ways, including by issuing restricted stock grants or by issuing stock options. Each of these forms of compensation can have its own pros and cons and you want to make sure you carefully analyze the decision and decide which is best for your circumstances.

Restricted Stock

Restricted stock is a stock award that will not fully transfer to the employee until certain conditions have been met. These conditions can include a certain length of time working for your company, meeting certain performance or financial goals or milestones, and more. These restrictions can be helpful for owners to ensure that employees do not simply walk away from your venture and that they must wait for the award to vest before they receive the stock benefits. In addition, by making an 83(b) election with the IRS within a certain period of time after the restricted stock grant, employees can save significantly on the tax burden once the stock vests. If no election is made, however, employees may face hefty tax liability at the time of vesting depending on the value of the shares. Restricted stock is less risky and easier to manage in comparison to regular stock. However, restricted stock has less favorable tax treatment than options.

Avoiding Business Ownership Disputes

June 17, 2016 | Mark Figueiredo

Starting a business with a partner can be highly beneficial: collaborations offer many benefits and are particularly popular with startups and firms providing professional services. When you start a business with another person or people, the last thing you expect is to end up in a disagreement about business ownership. Unfortunately, these kinds of disputes arise on a regular basis and can have a significant impact on the success of your business as well as your personal bottom line.

Business disputes can arise in a variety of contexts – here are some of the most common situations:

A party may attempt to assert authority which he or she does not have

Selling Your Business: Tips for Success

May 27, 2016 | Structure Law Group, LLP

As an innovator or entrepreneur, you may launch a business for a variety of reasons. At first, a primary reason is to develop a profitable product or technology you believe will provide a nice return. But, creating the next popular app or useable technology could lead to a life-changing acquisition of your business at a premium valuation. At the same time, if your business is not performing as you had hoped, selling may be the best option for you. These are only a few reasons why you may want to sell your business.

It is important that businesses considering a sale of their company obtain the guidance of legal counsel. A Silicon Valley business attorney will be able to work with owners to identify and avoid potential legal issues that may arise with the potential sale of the business. These pitfalls could include, for example, issues with due diligence, fiduciary duty and duty of care, voting requirements, corporate compliance, shareholder approval, intellectual property, and lien holder negotiation. After all, once a decision is made to sell the business, the goal is not only to get a good offer but to be able to actually get the deal done.

Owners considering a sale of their business should consider the following four tips: