The Bamberger Blog » laura scott

Buying a Business: Do I Need a Letter of Intent?

kjewell — Mon, 29 Mar 2010 13:13:26 +0000

Most business owners are aware that a purchase of a business is typically accomplished through a purchase agreement signed by all parties. However, there is an important step that needs to be taken in the purchase and sale of a business before a purchase agreement is prepared.

Once the buyer and seller have moved past the very basic step of sharing and reviewing information (typically under the protection of a confidentiality agreement), then they may begin to discuss specific terms of the deal. Before the parties go through the time and expense of putting together a formal asset purchase agreement, the next step would be for the prospective buyer to put together a letter of intent addressed to the seller. In the letter of intent, the buyer can set out all of the basic terms of the deal: what assets are being purchased, the purchase price, due diligence requirements, closing contingences, and any other points of the deal that the buyer wants included. This letter of intent is nonbinding, which means that either party is still free to change their minds at any time before the final asset purchase agreement is signed. However, the letter of intent is a good way for the parties to have a written starting point for discussing the terms of the deal. Once the terms in the letter of intent are agreed upon by both parties, then the process of drafting and negotiating an asset purchase agreement is much more smooth and efficient.

By taking this preliminary step early on in the purchase and sale of a business, both parties can save themselves from spending a lot of resources on a transaction that is doomed to failure and can move forward in a manner that is safe and efficient for both parties. If you have questions about buying or selling a business, feel free to contact a Bamberger attorney.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Selling Your Business: Confidentiality is the First Step

kjewell — Fri, 26 Mar 2010 13:08:03 +0000

When considering a sale of their business, many business owners are unsure about the best way to begin negotiations with a prospective buyer. Most business owners are aware that at some point an asset purchase agreement needs to be signed that sets out all of the final terms and conditions of the deal. However, there is a very important and often overlooked step that should be taken prior to negotiations taking place.

One concern that many business owners have is sharing information either about the assets that their business owns or about their financial condition with a prospective buyer. Particularly if the interested purchaser is a competitor, the business owner may have legitimate concerns that if the business owner shares this information with a potential buyer, that the potential buyer may not proceed with the transaction but may use the information learned in these early stages of the process to the disadvantage of the seller. On the other side of the coin, a potential buyer often will not be in a position to decide whether or not they want to proceed with the purchase of a business until they have had an opportunity to access very basic information about the assets and financial condition of the business. This problem is easily addressed by having both the seller and the potential buyer sign a confidentiality agreement.

Generally speaking, the confidentiality agreement will provide that the seller will share information about his business with the prospective buyer, but the prospective buyer is prohibited from using this information for any purpose other than negotiating the business transaction at hand. The agreement can provide for quick court remedies and stiff penalties if the prospective buyer violates the terms of the confidentiality agreement. The confidentiality agreement can also discuss the return of information shared with the prospective buyer if the deal falls through and can address any other areas of concern that the business owner may have in sharing information with a potential purchaser. If you have questions about selling a business, feel free to contact a Bamberger attorney.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Membership Interests in an LLC – Perfecting a Security Interest

kjewell — Wed, 24 Mar 2010 15:41:32 +0000

The Uniform Commercial Code provides for several methods by which a secured party can perfect a security interest in the membership interest of a limited liability company, particularly when such membership interest is uncertificated.

Although other methods of perfection exist, the best way to perfect a pledge of a membership interest in an LLC is to file a UCC financing statement. The financing statement should list the owner of the membership interest as the debtor and the description of collateral should describe the membership interest pledged.

This method of perfection is different than the method of perfection used to perfect a pledge of stock in a corporation, and lenders should be cautious to use the correct method of perfection depending on whether the pledged collateral is an ownership interest in an LLC or an ownership interest in a corporation.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Fast Facts on PACA

kjewell — Wed, 17 Mar 2010 15:37:59 +0000

The Perishable Agricultural Commodities Act (PACA) promotes fair trading in the fresh and frozen fruits and vegetables industries. One of the aspects of PACA is that it imposes a statutory trust on all produce related assets held by agricultural merchants, dealers, and brokers in order to better assure that suppliers of produce are paid.

A PACA trust is a nonsegregated “floating” trust composed of all perishable agricultural commodities received by a dealer in all transactions and all inventories of food or other products derived from perishable agricultural commodities and any receivables or proceeds from the sale of such commodities or products. The dealer receiving the commodities must hold the trust for the benefit of any unpaid seller of the commodity until the seller has received full payment owing in connection with the transaction by the buyer.

There are certain notice requirements that a seller must provide to the dealer in order to preserve the seller’s benefits under the PACA trust. However, when the statute and regulations are properly complied with, the seller’s interest will generally trump liens of other creditors, including secured lenders. Aside from produce dealers, PACA liens are also typically applicable to grocery operations and also to large restaurant operations.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Default and Prepayment Language Does Not Defeat a Demand Note

kjewell — Fri, 12 Mar 2010 20:33:12 +0000

In a case recently decided by the U.S. 7th Circuit Court of Appeals, the Court upheld that a bank was not liable for breach of contract or fraud for pointing out that the note was payable on demand to the borrower. In this case, a development company obtained a line of credit. The line of credit was a demand note, meaning that the bank could demand payment in full at any time of the outstanding balance. Although the note was not in default, the Bank asked the Borrower to term out a portion of the note with a loan to a related entity and to reduce the remaining availability on the line of credit. The Borrower was not expecting this request and asked about the consequences if it did not make these changes. The Bank responded by pointing out to the Borrower that this was a demand note and that it was possible that the Bank could demand payment in full at any time.

The Borrower responded by filing a lawsuit against the Bank for breach of contract alleging that the Bank acted arbitrarily and capriciously by demanding payment under the note even though the Borrower was not in default. The Borrower also alleged that the Bank unilaterally changed and attempted to change the essential terms of the contract. The Borrower also sued the Bank for fraud. While the note indicated in three separate places that it was payable on demand, the Borrower argued that two provisions of the note were inconsistent. The Borrower pointed to a provision that referred to default and “due date” and a provision that referred to the Borrower’s ability to prepay the note at any time. The Court was not convinced by the Borrower’s arguments and found that the language of the note was clear that it was a demand note and that the Bank was entitled to demand full payment at any time. The Court also upheld the dismissal of the fraud allegation on the basis that the Borrower did not allege any fraudulent intent on the Bank’s part.

This case highlights the importance of a Borrower understanding the terms of any loan that it enters into and understanding the nature of a demand note. Borrowers need to make sure that they read carefully and obtain assistance of counsel where needed before entering into any financial transaction.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Preparation Clauses in Kentucky Mortgages

kjewell — Wed, 10 Mar 2010 15:30:12 +0000

Kentucky law indicates that a mortgage must contain a preparation clause signed by an attorney. The requirement for an attorney to sign the preparation clause cannot be satisfied by having a bank employee or other loan officer sign the preparation clause.

Aside from constituting the unauthorized practice of law, the bank employee improperly signing the preparation clauses on mortgages could subject the employee to prosecution and the bank could be subject to liability if it was aware of such activity and did not take any action to stop it. An improper signature on a preparation clause does not necessarily invalidate the mortgage if the county clerk’s office accepts the mortgage for recording. The recorded mortgage is still notice of the mortgage even though it fails to meet the technical requirements of the statute.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

How to Legally Dissolve a Not-for-profit Corporation

kjewell — Thu, 22 Oct 2009 15:40:50 +0000

In today’s challenging economic climate, not-for-profit organizations may be some of the organizations hardest hit. Much like a for-profit corporation, not-for-profit corporations are also vulnerable to failure. When faced with a situation where a not-for-profit organization can no longer keep its doors open, the leadership of that organization may be unfamiliar with what procedures must be followed in order to properly dissolve the not-for-profit corporation.

In Indiana, the dissolution process for a not-for-profit corporation must start with a vote of a majority of the board of directors to dissolve the corporation. The vote must occur at a properly noticed meeting of the board of directors. Once the board of directors has voted to dissolve the corporation, then there is a series of filings that must be made with the Indiana Secretary of State, the Indiana Department of Revenue, the Indiana Department Workforce Development, and the Indiana Attorney General’s Office. There is also a federal filing that must be made with the Internal Revenue Service.

The dissolved corporation must also go through a process of giving notice to claimants that may have a claim against the not-for-profit corporation. Indiana law sets out both the method of notice and the deadlines by which claims must be submitted.

Once dissolved, a corporation can only continue its existence for the period of time that it takes to wind up and liquidate the corporation’s affairs. This includes discharging the corporation’s liabilities and obligations, returning any property that is required to be returned as a result of the dissolution, following any provisions in the company’s articles or bylaws regarding disposition of property upon dissolution, or transferring the corporation’s assets to another 501(c)(3) corporation if no other provisions exist in the corporation’s articles and bylaws for disposition of property upon dissolution.

Directors of a not-for-profit corporation facing dissolution need to be aware that there are requirements that must be followed in order to properly dissolve the corporation and terminate its existence. If you have questions regarding the proper procedure for dissolving a not-for-profit corporation, feel free to contact any of the attorneys in Bamberger’s Business and Corporate Services Section.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Sharing The Wealth: Participated Loans

thartmann — Wed, 30 Sep 2009 20:26:16 +0000

A participation is a contractual arrangement in which the lead lender makes a loan to his borrower and then sells a share of that loan to another lender known as the participant. Participants and lenders customarily document the terms and conditions of their deal in a participation agreement which will control the rights and duties between them.

Unlike a joint or syndicated loan, where each lender makes a loan directly to the borrower and each lender is in contractual privity with the borrower, the participant’s only contractual relationship is with the lead lender. As a result, a participant is not a creditor of the borrower or entitled to assert claims against it. Typically, only the lead lender has the right to collect and enforce payment against the borrower, hold and enforce security interests in the borrower’s assets, grant forbearances, or otherwise administer the borrower’s loan.

The participant can only look to the lead lender for repayment of its participation and usually only upon the lead lender’s receipt of payment from the borrower. The participant and lender typically agree to share those payments as made and in proportion to their respective interest in the loan.

An advantage for the participant is that participations can allow the participant to diversify and expand its loan portfolio without having the necessary administration to find and service the loans. However, the disadvantage to the participant is that they are still subject to the risks associated with bad loans and often the participant is at the mercy of the lead lender when it comes to the management of such risks. We can help both participants and lead banks assess the pros and cons of entering into these types of lending arrangements.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com