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A quick scan of the headlines shows come confusion about the deal between AT&T and DirecTV. Some media outlets are calling it an acquisition while others say the 48 billion dollar purchase is a merger. Mergers and acquisitions are similar with a few important distinctions. In this post we’ll address the key differences between these two kinds of transactions.

What is a Merger?

One component of mergers and acquisitions is relational. Mergers are seen as the more friendly way of doing business. When two firms merge, both shed their old companies to form a new one. A good example is the merger between Daimler-Benz and Chrysler. In this scenario, both companies ceased to exist. They issued new stock as Daimler-Chrysler. Mergers are a common occurrence between two companies of equal size and standing.

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Business is an ongoing back-and-forth between interested parties. Contract negotiations, whether they be with employees or a competing business, can be contentious. There’s a lot at stake and big feelings are involved. A successful contract negotiation is one where all parties feel they got something out of the deal. This isn’t wishful thinking. By following these four simple tips you can create an environment where everyone is heard and respected.

1. Multiple Meetings

The first tip is pretty straightforward. Break down the negotiation into multiple sessions. The longer you sit at a table arguing over the same points the less likely you’ll come to an agreement. Give the person time to digest the information. Clear eyes and a fresh head make for better judgment.

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Starting a business can feel overwhelming. Whether you’re opening a brick and mortar store or an online business, there are a lot of steps involved in turning your idea into reality. Creating a business plan and securing funding are a solid beginning; at this point you’ll also need to do a few things to make sure your business is legal.

Steps to Legally Starting a Business: It Takes More Than a Business Plan! 

Picking a name is a fun element of starting a business. A name not only tells potential customers what you sell but it also reveals something of your personality. Before you jump into the next activity on your business plan and start advertising your store front or online business, make sure someone else isn’t already using the name. Fortunately, most states offer a searchable database through the Secretary of State’s Office. Also, be sure to do a national trademark search to find out if another company owns the rights to the name.

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If you are an employer in San Jose, you are most likely aware that on January 1, 2014, the minimum wage increased to $10.15 per hour for your business; California’s minimum wage increase was to $9 per hour. In addition to new employment laws, there, there have been other new laws that affect businesses in 2014, such as the all new California limited liability company act. But one law actually applies to all business entities with an Employer Identification Number (“EIN”), including entities such as corporations, partnerships, limited liability companies, and even nonprofit organizations. As of January 1, 2014, any entity with an EIN must notify the IRS of a change of (1) a mailing address, (2) a business location or (3) the identity of a “responsible party.” A change in a company’s mailing address or business location is pretty clear, but the identity of a responsible party may not be so clear.

If you are not sure who the “responsible party” was initially, check the Form SS-4 application that was filed initially by the organization to obtain its EIN, and it will be the person or entity listed as responsible on that form. Then, look at the instructions to Form 8822-B to determine if your responsible party has changed. The instructions define a responsible party as “the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.” If the entity’s original responsible party at the time of filing the Form SS-4 is no longer affiliated with the organization or no longer fits that definition, then the entity must use Form 8822-B to let the IRS know.

Form 8822-B must be filed within 60 days of the change. If such a change occurred before January 1, 2014, and the entity has not previously notified the IRS in some other manner, Form 8822-B must be filed before March 1, 2014. If you no longer have a copy of the SS-4 Application or remember who was named as the “responsible party,” you may wish to file a Form 8822-B before March 1, 2014.

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I spend a lot of time talking to founders of Silicon Valley start-ups about the stock they will receive in exchange for their contributions to their new company, and then preparing restricted stock purchase agreements for the founders. In the last couple of blogs, I have discussed the issues surrounding how founders’ stock could vest.

The concept of vesting is usually intertwined with the concept of repurchase rights. Simply put, for founders’ stock, vesting is where the repurchase rights held by the company disappear or change. In a typical scenario, when a triggering event occurs, a company can repurchase unvested stock for its original purchase price. A company may not, however, repurchase any vested stock or may only repurchase vested stock at the stock’s then fair market value.

What kind of triggering events might allow a company to purchase unvested stock? One common trigger is anything that results in the shareholder not working for the company. Most often, this means a termination of employment.

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At a recent conference with San Jose and Silicon Valley real estate owners and lenders, Attorneys Jack Easterbrook and Tamara Pow presented their “Top 10 List” of issues that commonly arise in commercial real estate loan transactions. Having been involved in countless real estate and commercial loan transactions, Tamara and Jack developed the list to share with the participants key points to be attentive to when entering into a real estate transaction. The Top 10 List assumed that the basic business terms of the transaction had been decided, so the focus was on items that can arise in the documentation phase and create issues or obstacles in getting a deal to closing.

A previous blog presented three items from this Top 10 List, including: (1) inconsistency between a borrower’s state of registration and a lender’s requirement; (2) the special purpose entity and the independent direct/manager requirements of the lender; and (3) the personal guaranty. Here are three more items to keep in mind when negotiating a commercial real estate loan:

No. 4: Treatment of Other Creditors, Including Any Mezzanine Lender.

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Working with start-ups in San Jose, I have often had to counsel founders on the intricacies of business law as it relates to issuing stock. A large part of initial discussions with the founding group involves the funding needs of the new corporation, how shares will be divided, and the best way to provide equity incentives to founders, advisors, and new employees.

As I discussed in my last blog, one of the key issues involved in issuing stock to founders is how to incentivize them to stay with the new corporation. One mechanism discussed is reverse vesting, where the corporation can repurchase a founder’s shares of company stock at their original purchase price when certain events specified in a contract occur.

A typical reverse vesting structure is to allow the corporation to purchase a declining number of a founder’s shares at their original purchase price as time goes on. Typically the number of shares the corporation can repurchase will reduce on a straight-line basis over the course of three or four years.

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Attorneys Tamara Pow and Jack Easterbrook recently participated in a panel discussion of San Jose and Silicon Valley commercial real estate owners, lenders, borrowers and other professionals about issues arising in recent commercial real estate transactions. Jack and Tamara, at the conference, presented a “Top 10 List” of things to be alert to in real estate loan documents. It was assumed that the basic business terms of the purchase and sale agreement and loan transaction had been negotiated and agreed upon. The question posed was, “So what pitfalls can occur after that, and what issues do you want to be alert to as the deal gets documented – particularly in connection with the debt financing?” The point being emphasized was that a transaction can move to a closing with a minimum of angst if the parties identify early on those issues that will be important deal points, but may not be covered in detail in the financing terms outlined in a term sheet or commitment letter.

This blog addresses three of the “Top 10” points raised in the presentation. Subsequent blogs will address remaining items discussed at the conference. No one point is necessarily more important than the others, as the relative importance of a particular item will vary transaction to transaction. However, the attorneys at Structure Law Group see these factors repeatedly arising in real estate loan transactions.

No. 1: Inconsistency Between Borrower’s State of Registration and Lender’s Requirement.

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Practicing business law in Silicon Valley over the past year, I have seen start-up activity pick up. We are in that part of the cycle where the survivors of the not so great recession have decided that they are better off on their own and have decided to make their dreams come true by forming their own companies.

Because many of these companies hope to become a welcome opportunity for outside investors, their choice of entity is the corporation. From the legal end, the process of incorporation is fairly straightforward and can be accomplished relatively quickly. Founders have a number of decisions to make, such as how much they want to each contribute to the new venture, and who will have which role.

Where a group of founders is involved, one of the most difficult issues, relatively speaking, is the issuance of stock. The first issue involves what percentage of the corporation each of the founders should receive. There are few, if any, rules of thumb as to whom should get what, and the decision is typically made by the founders assessing each of their respective strengths and weaknesses, and their contribution to the new venture, and deciding on a split. If the new corporation never expects to issue any new stock, and each founder will be actively involved in the business with profits being split at the end of each year, there may be little more to do with the stock other than to create a suitable buy-sell relationship.

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As a business and real estate attorney in California, I often assist clients in real estate transactions using Internal Revenue Code Section 1031 to defer the tax on the sale of their real estate by transferring the tax attributes of that property into a new, like-kind, property. IRC Section 1031 is a federal statute, but we can also take advantage of the tax deferral on the exchange of like-kind property for California income taxes.

However, historically, when the exchange was made into property in another state, it was difficult for California to track these exchanges and make sure the state eventually got its share of deferred taxes. For example, if a real estate investor were to sell a shopping center in Sunnyvale, California and buy a shopping center in Incline Village, Nevada, and the real estate investor satisfied all of the IRC 1031 requirements, both federal and California taxes could be deferred until the later taxable sale of the Nevada property (or any other property into which it had been exchanged). The problem was that part of those deferred taxes were California income taxes, and California had no system in place to make sure the FTB was aware of the eventual tax recognition event. A new rule now provides the Franchise Tax Board with the information it needs to keep track of these transactions and the deferred taxes so that it can collect them when the time is right.

Starting January 1, 2014, if you exchange California property for out-of-state property you will be required to file an information return with the FTB for the year of the exchange and every subsequent year that the gain is deferred. Regardless of your state of residency at the time of the exchange, if you are a California resident when the out-of-state property is later sold, all of the gain is taxable in California. But don’t think that moving to Nevada can get you out of theses deferred taxes. If you were a California resident at the time of the exchange but you are a nonresident when it is sold, the previously untaxed California gain is still taxable to California. Also, if you exchange out-of-state property for California property you must reduce the California basis on the property by the amount deferred, even if you were a nonresident at the time of the exchange. [Source: Spidell’s California Taxletter, Vol. 35.7, July 1, 2013]. The new filing requirements will help the FTB track these exchanges.

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