Erickson | Sederstrom is pleased to announce that attorneys Joseph C. Byam and Joseph C. Byam II, from the law firm of Byam & Hoarty, have joined the firm.
“Erickson | Sederstrom is a long-standing Nebraska firm that has attorneys who specialize in numerous practice areas. The merger will allow us to provide our clients with the depth of these practice areas, and the experience and expertise of the attorneys who practice in these areas. We think it is a great fit and are excited to get started,” says Joseph C. Byam II.
Joseph C. Byam will serve as Of Counsel to the firm, and continue to assist clients in estate planning, probate, and general business and corporate matters.
Joseph C. Byam II will join the firm as an Associate working in the areas of estate planning. His practice includes preparing estate plans, trust administration, probate of estates, and issues related to both federal and state inheritance tax. He also advises clients in corporate or company formations.
Erickson | Sederstrom welcomes the addition of attorneys Joseph C. Byam and Joseph C. Byam II to their team.
Although Nebraska does not currently have an estate tax, it does still impose an inheritance tax. The Nebraska inheritance tax applies to an individual who (1) dies a resident of Nebraska, or (2) regardless of residency, an individual who owns real property in Nebraska at the time of their death. The inheritance tax must be filed in and paid to the county in which the decedent resided or within the county in which his or her real property was located. The inheritance tax is due and payable within twelve (12) months of the decedent’s date of death, and failure to timely file and pay the requisite tax may result in interest and penalties.
The tax rate and applicable exemption amount varies based on the degree of kinship between the decedent and the respective beneficiary. Now for some good news. On February 17, 2022, Legislative Bill 310 was signed into law. The new law effectively reduces inheritance tax rates and increased inheritance tax exemptions for deaths occurring in 2023 and beyond.
Currently, spouses receive a full exemption from paying Nebraska inheritance taxes, and they will continue to be exempt under the new law. In addition, the inheritance tax will not apply to transfers to individuals twenty-one (21) years or younger, and there is no tax imposed upon property passing to an entity organized exclusively for religious, charitable, public, scientific, or educational purposes. Beyond that, the Nebraska inheritance tax is as follows:
Transfers to immediate family members other than the surviving spouse -- The tax rate on transfers to immediate relatives (e.g., children, grandchildren, siblings, parents, etc.) will remain 1%, however, the exemption amount will increase from $40,000 to $100,000, per beneficiary.
Transfers to more remote family members -- The tax rate on transfers to remote relatives (e.g. aunts, uncles, nieces, and nephews) will be reduced from 13% to 11%, and the exemption amount will increase from $15,000 to $40,000, per beneficiary.
Transfers to unrelated persons -- The tax rate on transfers to unrelated individuals will be reduced from 18% to 15% and the exemption amount will increase from $10,000 to $25,000, per beneficiary.
If you have questions regarding Nebraska inheritance taxes, the aforementioned updates, or are interested in reviewing your current estate plan in light of these changes, please reach out to any of the highly knowledgeable and experienced estate planning attorneys at Erickson & Sederstrom.
The 2022-2023 Occupation Tax Reports (“OTRs”) are now due for all domestic and foreign Nebraska corporations. OTRs are biennial reports that must be filed with the Nebraska Secretary of State by March 1, 2022. If the report is not filed, along with the applicable fee, by April 15, 2022, the entity will be administratively dissolved by the Nebraska Secretary of State.
The OTRs may be filed online at the Nebraska Secretary of State website or by mail. The Secretary of State has begun mailing out reminder cards to the registered agent for each domestic and foreign Nebraska corporation. If you have not received your notice, make sure your records are up to date with the Nebraska Secretary of State.
If you would like assistance in filing your OTR or with updating your records with the Nebraska Secretary of State, the corporate attorneys at Erickson Sederstrom can provide you with the help you need to assure that your entity remains active and in good standing with the State of Nebraska.
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.
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.
The United States Small Business Association (“SBA”) will no longer require loan necessity review for Payment Protection Program loans of $2 million or more and any open requests for additional information regarding the loan necessity review can be closed.
The loan necessity review required completion of the Loan Necessity Questionnaire (SBA Form 3509 for for-profit borrowers and SBA Form 3510 for not-for-profit borrowers) which led to a lawsuit by the Associated General Contractors of America against to the SBA that challenged the legality of the forms.
The changes are effective immediately and the SBA will issue guidance on this issue which will provide more details.
Selling Assets Versus Equity
One of the more critical initial items to consider when selling a business is determining whether the sale involves selling the equity or assets of the business. The choice of structure will have an impact on several items, including, (i) the tax consequences to each of the buyer and seller, (ii) the party responsible for the company’s liabilities, and (iii) third-party consents required to consummate the transaction. In many cases, the buyer and seller will benefit differently depending on the structure, so it is important for the seller of a business to fully understand the impact of each structure. This article will briefly describe the mechanics of an asset sale and equity sale, and then discuss some important items that are implicated depending on the chosen structure.
Equity Sales
A sale of equity involves the buyer, which may be an individual, group of individuals, or a company, purchasing the stock (in the case of a corporation) or interests (in the case of an LLC or partnership) of the business directly from the owner(s) of the equity. After the sale of the equity is consummated, the buyer takes the entire business as a whole, including all of the business’s assets and liabilities.
Diagram 1 shows the structure of a proposed equity sale. Note that ABC, LLC is the target company and owned by the seller prior to the sale. The buyer is proposing to transfer cash to the seller in order to purchase the equity of ABC, LLC. Diagram 2 shows the results of the transaction after the closing, with the buyer owning the equity of ABC, LLC and the seller now holding the cash from the buyer. Note that the buyer takes ABC, LLC with all of the assets and liabilities of the company and, except as may be agreed between the buyer and seller, the company is still responsible for satisfying all of the liabilities it had when it was owned by the seller.
Asset Sales
In contrast to an equity sale, a sale of the assets of a business involves the buyer (almost always an entity) purchasing only certain assets and assuming only certain liabilities of the target company. After the sale is consummated, the target company retains any unpurchased assets and liabilities that were not assumed by the buyer.
Diagram 3 shows the structure of a proposed asset sale. Note that ABC, LLC is the target company and the buyer is proposing to transfer cash to the target company in order to purchase certain assets and assume certain liabilities of ABC, LLC. Diagram 4 shows the results of the transaction after the closing, with the buyer owning the purchased assets and liabilities and the target company now holding the cash from the buyer, as well as certain retained assets and liabilities. This is an important distinction from an equity sale since the cash generated from the asset sale may now need to be used to pay off certain retained liabilities.
Impact of Structure
Tax Consequences
In an asset sale of a business with significant depreciable assets, the buyer will often receive a tax benefit while the seller may experience a tax disadvantage. This is because the purchase price in such an asset sale is often greater than the basis of the depreciable assets. This allows the buyer to receive a stepped-up basis in such assets and further depreciate the assets to reduce the buyer’s income. Meanwhile, the seller will have to pay taxes at the ordinary income rate for the difference between the assets’ basis and the purchase price.
In an asset sale without significant depreciable assets, the tax benefit to the buyer (and disadvantage to the seller) will generally be much lower.
In an equity sale, the seller typically receives a tax advantage because in most equity sales, the equity that is sold receives tax treatment as a capital gain (which is taxed at a lower tax rate than ordinary income). State rates for capital gains vary by state. In Nebraska, capital gains may be avoided altogether through the use of certain tax planning strategies.
There are also certain tax elections that may apply to some transactions that can provide benefits to both the buyer and seller. For example, a 338(h)(10) election made in connection with the sale of stock allows a seller to receive capital gains tax rates on the sale and the buyer to receive a stepped-up basis in the assets.
Treatment of Liabilities
As touched on above, in a sale of equity, all of the liabilities of the target company stay with the target company after the sale. This means that the seller of equity generally does not have to worry about responsibility for further liabilities of the company after the sale (although the seller will likely have agreed to backstop the buyer for certain undisclosed liabilities that may arise for some period after the closing).
Contrast this with an asset sale, where the buyer of the assets generally takes few liabilities. This means that the seller of the assets will remain responsible for future liabilities of the target company, and owners of the target company may thereafter remain liable for several years after dissolution. This is why asset sales are generally preferred by buyers and equity sales are generally preferred by sellers.
Assignment of Intangible Assets
In a sale of equity, contracts (such as leases, customer agreements, etc.) transfer with the target company by operation of law. This means that, unless any contracts have restrictions on a change of control of the target company, there is no need to obtain the consent of contract counterparties in order to consummate the transaction.
However, in a sale of assets, such transfer does not occur automatically, and most contracts will have a restriction on assignment without the consent of the counterparty. This can take considerable effort depending on the number of consents that are needed, and may jeopardize the confidentiality of the transaction. Thus, all other items being equal, a sale of equity is generally preferential if the target company has a large number of material contracts.
The bottom line is that the choice of transaction structure can have a significant impact on the pre-closing duties and post-closing obligations of the parties and have a direct effect on the amount of cash that the seller ultimately receives from the transaction. Thus, any business owner should seek competent legal advice to understand the risks and benefits of various transaction structures very early on in a potential sale process.
Buy-Sell Agreements, sometimes referred to as Shareholder Agreements in corporations or Members’ Agreements in LLCs, serve as a valuable tool in small businesses, especially in the area of transition planning. Generally, Buy-Sell Agreements are entered among equity holders and the business and dictate when and how an equity interest can or must be purchased or sold, and by whom. Some attorneys refer to them as “prenups for business owners,” because they generally govern how business owners can or must separate from one another, and what will become of the respective ownership interests upon such separation. The primary functions of these types of agreements are to protect the value of the various stakeholders’ interest in the business and ensure smooth and workable transitions in ownership of the business by preventing disagreements and potential lawsuits from undercutting the efficient operation of a business. Every business lawyer has stories of disputes, costs and expenses, time and even businesses that could have been saved had the lawyer advised and the client or clients agreed that a properly drafted Buy-Sell Agreement should be negotiated and entered. This article will discuss some of the key concepts Buy-Sell Agreements typically cover.
General Structure
Most Buy-Sell Agreements are intended to allow the equity holders in a business one or more mechanisms to divest themselves of their interest in the business, and/or protect their interest in the business in the event another equity holder elects to divest. This means, most often, that one stakeholder or another has either (1) a right or an obligation to purchase another stakeholder’s interest in certain events; or (2) a right or an obligation to sell such stakeholder’s interest in certain events. These mechanisms take many forms and should be specifically designed and drafted to meet the needs and goals of the applicable small business and its equity holders. In the most typical agreements, they prevent a party from divesting without meeting certain requirements.
For example, in some small businesses, the most important goal is to achieve some stability and consistency and a clear process and power structure in the event of a transition. In others, the primary objective is to protect one party’s investment in the company, or the value derived therefrom, either for that equity holder or that equity holder’s family and loved ones. In other businesses, the primary objective is to allow an equity holder to avoid being locked into a company controlled by others. All of these are potential interests that can be balanced in negotiating and implementing a Buy-Sell Agreement.
Triggering Events
One of the core features of a typical Buy-Sell Agreement is that certain events or circumstances trigger a right or obligation to sell or purchase an interest in the business. The most commonly agreed upon triggering events include those over which the relevant member has little or no control, such as death, disability or termination; those over which the relevant member may have some measure of control, such as divorce or bankruptcy; and those over which the member likely has control, such as an election to transfer or sell such member’s interest in the business, retirement, or other voluntary separation from the business. There may be others, depending on the specific circumstances of the business and its stakeholders. Depending on the surrounding circumstances, and the exact interests the stakeholders intend to protect, different triggering events may trigger different rights and obligations. For example, the operators of a business may wish to treat a retirement more favorably than a voluntary resignation prior to retirement age, or may wish to treat a termination for cause differently from an election to leave the business for health or other reasons. A Buy-Sell Agreement is flexible enough to allow for these variations in treatment in order to conform to the needs and desires of the stakeholders.
The Purchaser
Another important concept to build into a Buy-Sell Agreement is the appropriate purchasing party – who specifically has the right or obligation to purchase the equity interest? The most common potential purchasers are 1) the company or 2) the other equity holder(s). This portion of a Buy-Sell Agreement allows for some creativity. The Agreement can be structured so that, upon a triggering event, the remaining equity holders have the option to purchase the interest and if they decline, the company then has the option (or obligation) to purchase the interest. The roles can be flipped, with the company having the first option and the equity holders the second. There is flexibility in determining who will purchase the interest and whether they have the option or obligation. This is an important conversation topic for equity holders and gives them some flexibility to achieve a good result for all interested parties from a variety of perspectives, including tax treatment, operations, cash flow, and others.
Valuation
Another important element of a Buy-Sell Agreement is how the purchase price or other consideration to be paid in connection with a transaction will be determined. In most scenarios, this starts with a methodology for valuing the interest to be sold and determining what value the parties seek to protect. This valuation can take many different forms, including an agreement among the equity holders (annual or otherwise), a third-party appraisal, or implementation of a predetermined formula for calculating value. It can also account for certain discounts or other adjustments at the parties’ discretions, such as marketability and lack of majority control. These valuation methods and potential adjustments should dovetail with the agenda of the parties in making the agreement, including possible variation for precise circumstances, as contemplated previously in discussing triggering events. In considering and fleshing out these issues in advance, parties can take full advantage of a Buy-Sell Agreement in preventing uncertainty and attendant disputes down the road.
Transaction Terms
Another key element to consider is how the sale and purchase of the equity interest will play out. This includes determining when, where, and how the payment will be made. The process is dependent on the facts and circumstances surrounding the company, such as whether the company or other buyer has sufficient cash available at any given time to pay in full or if financing will be required. The stakeholders have to weigh and balance the potentially competing interests of a departing equity holder receiving value, the remaining equity holders’ access to and available resources, the company’s cash flow and other operational considerations. A Buy-Sell Agreement can be negotiated and structured to protect any or all of those interests to the extent the stakeholders deem it necessary or appropriate.
Specific Provisions
Buy-Sell Agreements often address other potential transaction scenarios, providing stakeholders with certain rights or obligations on account thereof. For example, drag-along rights generally allow a majority stakeholder to force a minority stakeholder to participate in a transaction the majority stakeholder has elected to consummate. Conversely, tag-along rights generally allow a minority stakeholder a right to force its way into such a transaction. Shootout provisions generally allow one stakeholder to elect to trigger a mechanism for a buyout and another stakeholder to elect who will purchase and who will sell, or some other material aspects of the transaction. Buy-Sell Agreements can contain preferential rights for certain buyers or other acquirers, or provisions intended to benefit certain groups of stakeholders to the exclusion of others. All of these provisions depend, again, on the particular circumstances surrounding the business and the parties’ balancing of potentially competing interests in the business.
Conclusion
Buy-Sell Agreements, “pre-nups for business owners,” are an adaptable tool that stakeholders can use to manage transition in a business to properly balance the potentially competing interests among various stakeholders and the business itself. As discussed, they can be negotiated and implemented to fit a wide variety of circumstances and address a wide variety of needs or interests. Business owners should consider implementing a Buy-Sell Agreement or similar arrangement in some form at the earliest opportunity, as they allow business owners to achieve a degree of certainty in the business environment, which is rarely, if ever, a negative. Lawyers should raise the possibility as early as possible and do what they can to educate business owner clients about the advantages a solid Buy-Sell Arrangement can provide.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES”) has been signed into law to aid against the economic impacts created by the spread of the coronavirus. One program under the CARES Act, known as the Paycheck Protection Program (“PPP”), provides protection to small businesses and nonprofits by providing low interest loans (with interest capped at 4%) with loosened requirements compared to those generally applicable to small business loans. The loans are made by private lenders and will be guaranteed by the Small Business Administration (“SBA”). The loans are nonrecourse loans, meaning there is no recourse against an individual shareholder, member, or partner so long as the proceeds are used for one of the reasons outlined below. There are no personal guarantee or collateral requirements for these loans. In addition, these loans may be fully forgivable, subject to certain requirements outlined below.
Beginning April 3, 2020, small businesses and sole proprietorships can apply for the loans under the PPP through existing SBA lenders. Applications can be submitted beginning April 10, 2020 for independent contractors and self-employed individuals through existing SBA lenders. Applications can be submitted through all other lenders once they enroll in the PPP. Although the PPP is open until June 30, 2020, borrowers are encouraged to apply as quickly as possible because there is a cap on the amount allotted for the loans.
These loans apply to businesses that employ no more than the greater of:
• 500 employees; or
• The size standard established by the SBA for the industry in which the business operates.
The loans also apply to certain restaurant, hotel, food and beverage service and hospitality industry businesses with an NAICS code beginning with 72 that employ fewer than 500 employees per physical location. For the purposes of determining the 500-employee threshold, applicants should include full time, part-time and other basis employees. General SBA affiliation rules apply, subject to certain waivers for NAICS 72 businesses, franchises, and businesses licensed under Section 301 of the Small Business Investment Act. This may preclude many companies owned by private equity from taking advantage of the program.
The maximum loan amount is determined as the lesser of:
• 2.5 times the average monthly payroll costs during the 1-year period prior to the date the loan is made plus the outstanding amount of certain SBA loans made on or after January 31, 2020; or
• $10,000,000.
The maximum loan amount equation outlined above varies for seasonal employers and those not in business during the period beginning 2/15/2019 and ending 6/30/2020.
These loans can be used for the following payments (subject to certain specified exclusions):
• Payroll costs;
• Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Employee salaries, commissions, or similar compensations;
• Mortgage interest payments incurred before February 15, 2020;
• Rent under leases entered into before February 15, 2020;
• Utilities for which service began before February 15, 2020; and
• Interest or other debt obligations that were incurred before the covered period.
Guidance from the United States Treasury Department has indicated that the loans will be forgiven so long as they are used for the purposes outlined above over the 8 weeks after receiving the loan and employee headcount and compensation levels are maintained. Also, it is anticipated that no more than 25% of the forgiven amount can be used for non-payroll costs. Borrowers have until June 30, 2020 to restore full-time employment and salary levels for any changes made between Feb. 15, 2020 and April 26, 2020.
In order to obtain a loan, the borrower must make the following certifications:
• The uncertainty of economic conditions makes necessary the loan request to support operations;
• The funds will be used for one of the above-listed uses; and
• Borrower has not previously submitted an application or received proceeds for the same purpose and amount.
Further, borrowers will need to have been in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes.
We understand the SBA has been working to create a streamlined loan application through an electronic portal to facilitate its and the participating lenders’ ability to move applications through the system and disburse the $349 billion as quickly as possible. We also understand that the SBA is working on regulations implementing the PPP and providing guidance in anticipation of the CARES Act enactment. The regulation may come out in stages, and we will attempt to provide further guidance to our clients as new information becomes available. If you have any questions regarding the PPP, please contact a member of our Corporate/Business Law group.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.
On September 3, 2017, Nebraska LB 517 went into effect. The passing of this bill has resulted in the enactment of Nebraska Revised Statute §30-2333, titled “Revocation by divorce or annulment; no revocation by other changes of circumstances.” What exactly does this mean? Well, absent a court order, express terms of a governing instrument, or contract relating to the division of the marital estate, it means a few different things.
First, a divorce or annulment revokes any revocable transfer or appointment of property made by a divorced individual to his or her former spouse, or to a relative of his or her former spouse. For instance, let's say Spouse 1 is both the owner and insured of a life insurance policy that lists Spouse 2 as the primary beneficiary. In the event Spouse 1 and Spouse 2 legally divorce, Spouse 2 is no longer treated as the primary beneficiary of said policy, assuming the contrary is not specified under the policy, by court order, or by other contractual agreement between the parties. In this case, the provisions of the life insurance policy are given effect as if Spouse 2 disclaimed all interest in the life insurance policy. The same principle applies to accounts with payable on death designations, last wills, interests in certain trusts, pensions, retirement plans, transfer on death deeds, annuity policies, profit-sharing plans, etc.
Also revoked by a divorce or annulment is any revocable provision giving the former spouse, or relative of the former spouse, a general or non-general power of appointment. An individual's estate planning documents often contain such powers of appointment. Also found in estate planning documents are nominations of certain fiduciaries. Any revocable nomination of the former spouse, or relative of the former spouse, as a fiduciary or representative is revoked upon divorce or annulment. Examples of potential nominations include an executor, trustee, guardian or power of attorney.
Next, a divorce or annulment severs any interest in property held together by former spouses as joint tenants with a right of survivorship at the time of the divorce or annulment. The former spouses then become equal tenants in common. What does “joint tenants with a right of survivorship” mean? Let’s say you have Spouse 1 and Spouse 2 and they own property together as joint tenants with a right of survivorship. Now if Spouse 1 dies, Spouse 2 automatically obtains the percentage of the property previously held by Spouse 2. Now what about “equal tenants in common”? Now you have Spouse 1 and Spouse 2 and this time they get a divorce. Upon the divorce, Spouse 1 and Spouse 2 both have equal shares in the property, and upon the later death of one spouse, the surviving spouse no longer has a right to the deceased spouse's interest in the property. Again, it is important to note that these are default rules absent express terms of a governing instrument, court order, or other property settlement agreement. Also, unless there has been a writing declaring the severance and the writing was noted, registered, filed, or recorded in appropriate records, this severance does not affect a purchaser’s interest in the property so long as the purchaser purchased it for value and in good faith relied on the fact that the title was in survivorship in the survivor of the former spouses.
Also, it is important to note that a decree of legal separation is not considered a divorce or annulment for purposes of this statute. Moreover, provisions revoked solely by this statue are revived by the divorced individual's remarriage to the former spouse or by nullification of the divorce or annulment.
How are third parties affected by this statute? A third party is not liable for making payment or transferring property to a beneficiary designated in a governing instrument that is affected by the divorce, annulment, or remarriage, or for taking any other action in good faith reliance on the validity of the governing instrument, before such third party receives notice. If a third party receives written notice of the divorce, annulment, or remarriage, the third party then becomes liable for payments or action taken regarding the property after said notice. Finally, a former spouse, relative of a former spouse, or other person who received, without giving value in return, a payment, an item of property, or any other benefit to which that person is not entitled under this section is obligated to return the payment, item of property, or benefit, or is personally liable for the amount of the payment or the value of the item of property or benefit, to the person who is entitled to it.
