The best practice for dealing with minority shareholders is a well thought out buy-sell agreement which includes simple to follow and execute buy-out or redemption provisions. But what if your small business (for example a multigenerational agribusiness or family farm) has legacy shareholders who are not subject to a buy-sell agreement? Even worse, what if those shareholders are irrational, create conflict and/or are not contributing in a meaningful way to the business? Most state corporate statutes (including Nebraska) contain a simple solution by allowing a squeeze-out maneuver through the creation of fractional shares (i.e. script) which in turn allows the corporation to simply cancel the minority shareholder’s shares in exchange for tendering cash equal to the fair value of their stock. This can be a win-win for family and small businesses because it allows the business to move forward without having to deal with issues created by the presence of the minority shareholder and also provides a fair mechanism for valuing the shares of minority shareholders when their position is liquidated. You should consult with an experienced attorney about the ins and outs of executing this maneuver if you want to remove a minority shareholder. Often a simple letter from your counsel to the minority shareholder’s counsel is all that is needed to resolve your disputes with the minority shareholder.
Nebraska Still Allows Structured Avoidance of Capital Gains Taxes (Even to Family Members)
Every Nebraskan business owner (or their trust) should be aware that they are entitled to claim a one-time capital gains exemption from the sale of their stock. The exemption is seemingly not available when there are less than five shareholders and at least two of those shareholders who are not related to each other – but not so fast. Artful drafting of sale documents would allow the placement of strawmen shareholders to meet these requirements which would create substantial tax savings for a just a few additional pages of paperwork. Normally this sort of structuring is a no-no under normal tax rules. But not in Nebraska. The Nebraska Supreme court in 2016 interpreted the statute to allow this sort of structuring and the Legislature has not yet acted to update the statute to prevent this practice. Nebraska business owners should consult their accountants and deal counsel to make sure that if this benefit is available to them that their documents are drafted in a way that takes advantage of the statute as interpreted by the Supreme Court.
Personal Assets are Not Protected If Corporate Formalities Are Not Followed
A recent Nebraska Supreme Court case illustrates the need for your business to comply with basic corporate formalities to protect yourself from personal liability. In Thomas Grady Photography v. Amazing Vapor, the Nebraska Supreme Court held that a business owner must disclose his or her capacity as an agent of a corporation to escape personal liability for contracts made. 301 Neb. 401 (2018). Grady Photography filed suit against Amazing Vapor, MCJC Companies, Manuel Calderon, and Thomas Anderson for breach of contract for failing to pay on two contracts for photography services. The court ultimately held that Anderson was individually liable for breach of both oral contracts because Anderson did not inform Grady of the corporate status of Amazing Vapor throughout the entirety of their business relationship.
Erickson | Sederstrom’s attorneys have significant experience working with entities of all sizes to ensure that their corporate structure protects them from personal liability. If you have any questions about whether your entity is in fact protecting you from personal liability or if you need assistance in forming a corporation, limited liability company or other entity to protect your personal assets, attorneys Paul Heimann, Bill Foley, Andrew Collins and Michelle Elkin would be happy help.
Bitcoins and the Law
Last year Bitcoin and other cryptocurrencies went “mainstream” with regular financial reporting of prices and tales of fortunes made or lost. This has prompted many ordinary investors to try their hand at cryptocurrency investing. This has fed an ever widening set of cryptocurrency products being offered to consumers and businesses alike. These products range from Wall Street backed crypto currency exchanges like coinbase.com to initial coin offerings (“ICOs”) now being used by start-ups to attempt to bypass the regulations that normally apply to the capital-raising process.
The sheer exuberance surrounding cryptocurrencies and the often inaccurate depiction of cryptocurrencies as not subject to ordinary laws is fertile ground for fraudsters and high-risk unsound investment schemes. For example, numerous market players still promote their ICOs as not subject to state or federal securities regulation despite convincing and sound conclusions to the contrary. In fact, use of an ICO may very well expose the entity (and its individual managers) using it as a capital-raising device to potential civil and criminal charges, sanctions, and personal liability to individual investors.
Due diligence requires that before you or your business involves yourself in any crypto currency undertaking that you consult with competent and experienced business counsel so you can fully understand the true risk of the undertaking. Investors who have already lost money in a crypto currency scheme should also exercise due diligence by consulting with counsel because, under existing law, those who involved them in the scheme may be personally obligated to repay for the lost investment.