San Jose Business Lawyers Blog

Articles Posted in Mergers & Acquisitions

Many startups in the tech sector are idea-rich and cash-poor, meaning that their most valuable (and often only) asset is their intellectual property that may have the potential to be worth a substantial amount of money. While some startups are able to move their ideas from concept to deployment with relatively little labor involved, many of these ideas require the assistance of developers, programmers, engineers, and marketers, all of whom are skilled professionals who can easily command salaries well into the hundreds of thousands of dollars per year.

For this reason, many startups are faced with the issue of how to pay their employees during the development and launch phase, before they are generating any revenue. Of course, one option is to borrow the money or to seek investors – a solution that has significant pros and cons which should be considered. Another very popular option is to offer employees equity shares in a company in lieu of cash compensation. In some cases, this may take the form of equity for a lower salary than they would normally expect, while in others an equity share may be the only compensation they receive.

There are many issues that tech entrepreneurs and founders should consider when offering equity as compensation. These include the following:

  • How to issue equity – Equity in a company can be issued in a variety of ways, including common stock, preferred stock, stock options, or even being made a limited partner. These options all have different tax and legal consequences which should fully be explored with legal counsel prior to deciding which one to use.
  • A vesting schedule – In many cases, the success of a particular employee’s contribution to a venture requires a long-term sustained effort, and people have been known to grow tired of working when they seemingly are receiving nothing in return. To solve this problem, founders can issue equity shares that only vest after a certain period of time, ensuring that employees are incentivized to see the project through.
  • Dilution of current ownership – It is important to remember that every time the owners of a company give up equity, they are diluting their ownership stake in their own company. While this may not be an issue for some time, it is an important thing to consider as more and more employees start to receive equity as a form of compensation.
  • Resale restrictions – Many startups will not want employees that receive equity as compensation to sell their shares to a third party. For this reason, it may be necessary to have employees enter into contracts that require them to sell the equity back to the company upon the occurrence of certain events.

Call Structure Law Group, LLP today to discuss your options with a San Jose startup lawyer

Entrepreneurs and business owners who are considering using equity shares as compensation should fully explore potential legal consequences of doing so. The San Jose startup attorneys of Structure Law Group, LLP are qualified to advise tech startups at any stage of their growth regarding a variety of issues, including corporate formation, governance, equity compensation, and preparing for acquisition, just to name a few. To schedule a consultation with one of our lawyers, call our office today at 408-441-7500. Prospective clients can also reach us via email through our online contact form.

A comprehensive evaluation of a target company is a critical component of any successful corporate acquisition. Often referred to as a “due diligence evaluation” or “due diligence review,” this process involves fully evaluating the company that is being acquired (the target) in terms of its assets, liabilities, litigation risks, intellectual property matters, as well as other issues that could have an impact on the feasibility and advisability of a particular acquisition.

The most effective way to ensure that a thorough due diligence investigation is conducted is to retain legal counsel that is familiar with representing buyers in mergers & acquisitions. Some of the most important issues to address in a due diligence review of a potential corporate acquisition are discussed below.

  • The target company’s financial matters – Issues such as financial statements, liabilities, margins, future projections, and potential capital expenditures should all be fully evaluated. This is often the first aspect of due diligence.
  • Issues regarding customer and sales – A due diligence review should thoroughly evaluate the target company’s customer base. Issues that a buyer should be on the lookout for include customer concentration problems, potential problems retaining customers once an acquisition has been made, whether the sales pipeline has been actively maintained, unusual levels of returns, exchanges, or refunds, seasonal sales cycles, customer satisfaction, and others.
  • The target’s contractual obligations – One of the most important issues for a buyer to fully investigate are the review of all contractual obligations the target company may have. The kinds of contracts to review include those regarding loans, credit agreements, settlements, leases for necessary equipment, joint venture agreements, employment agreements, exclusivity agreements, and real estate leases.
  • Pending or threatened litigation – A buyer should conduct a thorough analysis of any pending or threatened litigation in which the target company is involved or may become involved in. Reviewing the issue of litigation often requires the analysis of complaints that have been filed, threatened claims, the resolution of previous litigation, letters to or from attorneys, issues that are in arbitration, administrative issues that involve government agencies, and settlement agreements that have been executed.
  • General issues regarding the corporation – A potential buyer should always engage in a thorough review of corporate records and organizational documents including the articles of incorporation, bylaws, the list of corporate officers and directors, stock sale agreements, and a list of states in which the company is authorized to conduct business, as well as others. Reviewing the list of corporate officers and directors will allow you to review their reputations and any associated risks.

Contact Structure Law Group, LLP today to discuss your situation with an experienced Silicon Valley mergers & acquisitions attorney

It is critical for corporate executives or individuals who are considering acquiring another company to discuss their situation with an experienced attorney. The Silicon Valley mergers & acquisitions lawyers of Structure Law Group, LLP can conduct a thorough due diligence investigation that can ensure that you are fully apprised of the relevant characteristics of the target company. To schedule a consultation with one of our attorneys, call our office today at 408-441-7500 or send us an email through our online contact form.

A corporate merger is a transaction in which two or more companies combine to form one entity. Generally speaking, most mergers occur by the mutual assent of the parties involved, while takeovers of other corporate entities are generally referred to as “acquisitions.” While it may seem unnecessary for the CEO or other chief executive of a corporation that is engaging in an agreed-upon consolidation to retain legal counsel, there are many reasons why it is prudent to do so. There are various legal issues that can have significant financial repercussions and may even derail a corporate merger altogether. Some of the ways in which an attorney can assist in a corporate merger are detailed below.

An attorney will structure the way that a transaction occurs

Mergers can occur in a variety of ways. For example, one company could merge with another company through stock transactions, by becoming a subsidiary that eventually merges with the acquiring company, or through a cash transaction, just to name a few. Each of these merger structures have various legal and tax implications that are often significant. For this reason, the advice of a skilled attorney is critical to structuring a merger transaction in the most beneficial way possible.

A lawyer will conduct a thorough due diligence review

An essential part of any corporate merger is conducting a thorough due diligence review. All parties to a merger should conduct an in-depth investigation of the other parties involved, including reviewing corporate documents such as the articles of incorporation, bylaws, as well as tax returns and financial reports. Due diligence review allows all parties to have a comprehensive and informed understanding of the transaction into which they are considering entering and can also limit corporate officer’s liability in the event that a transaction proves unprofitable.

An experienced mergers and acquisitions attorney will ensure that the relevant regulations are observed

Corporate mergers are often subject to significant regulations under both state and federal law. For example, corporate mergers of a certain size will be reviewed for compliance with anti-trust regulations, and companies that are subject to Securities and Exchange Commission disclosure rules will need to report the proposed merger to that agency. An attorney can be an invaluable asset in identifying the relevant rules and regulations that must be observed and ensuring compliance with them.

Call a San Jose M&A law firm today to schedule a consultation with an experienced attorney

Business owners or executives considering entering into a corporate merger should always consult with legal counsel well before making any decisions or entering into any type of contractual obligation. The attorneys of Structure Law Group, LLP are committed to representing both buyer and sellers in mergers and acquisition transactions of all sizes. To schedule a consultation with one of our lawyers, call our office today at 408-441-7500 or send us an email through our online contact form.

Enforceable contracts that accurately describe an agreement between the parties are essential to any business, regardless of industry. Contracts arise in many relationships, including with partners, businesses, suppliers, employees, and client or customers, and a company of even moderate size could easily have thousands of contracts with various parties. For this reason, implementing a system to manage contracts and ensure compliance can significantly improve efficiency, improve compliance, and reduce the risk of incurring legal liability that can arise from contract disputes. In addition, an effective contract management system can help automate certain tasks, significantly reducing the risk of human error resulting in a costly dispute. Below are 4 ways in which implementing a contract management system can help businesses in every aspect of the contract lifecycle management process.

  • Keep all contracts in a central repository – This benefit may seem simple, but consider the inefficiency involved in an employee searching through files upon files for a contract that may have been executed years ago. An effective contract management system can keep a copy of the contract itself while also summarizing key facts regarding the agreement in a way in which they are easily accessible to those searching.
  • Create a database of standard agreement and pre-approved substitutions – There is no need to reinvent the wheel every time your company enters into a new agreement. Creating a standardized contract for use in recurring situations as well as standard substitutions that are pre-approved for use can significantly improve efficiency in contract drafting and execution.
  • Send out alerts to appropriate parties when certain triggering events occur – Many contracts have provisions that trigger significant obligations or forfeitures on a certain date or in the event of a particular occurrence. A sophisticated contract management system can alert the appropriate party to the existence of a deadline, renewal, payment error, or terminating event.
  • Provide insight into corporate obligations – An effective contract management system will be able to provide clear data as to a company’s obligations, whether they are being met, their performance in meeting obligations, and a more comprehensive view of the company’s performance as a while. In addition, it can provide legal counsel with insight as to areas in contract management that may benefit from changes.

Contact a San Jose business law firm today to schedule a consultation with an experienced lawyer

A comprehensive and well-maintained contract management system can increase efficiency and reduce costs for businesses of all sizes. In addition, automating certain tasks associated with the life-cycle of a contract has the potential to reduce contract disputes and legal liability. For this reason, it is advisable for business owners to discuss their contract management options with an attorney familiar with contract management systems and their implementation. To schedule an appointment with one of our experienced San Jose business attorneys, call the Structure Law Group today at 408-441-7500.

Selling a business is a major decision that often has the potential to leave entrepreneurs with significant financial freedom. In fact, in many cases, entrepreneurs start a business with the intention of selling it once they reach a certain valuation point. One only has to look at the recent sales of Instagram to Facebook ($1 billion) or Beats Audio to Apple ($3 billion) to see why selling a business can be an attractive proposition to many entrepreneurs. Of course, these billion-dollar examples represent a fraction of the kinds of mergers & acquisitions that regularly occur in the business marketplace. That being said, a deal worth a fraction of these sums could still put a hefty sum of life-changing money into an entrepreneur’s pocket.

As a result, it is important for people who are considering selling their business to do so with the guidance of legal counsel that understands the legal issues that often arise in selling an existing venture. Below are four tips for entrepreneurs who are thinking of putting their business on the market.

  • Determine your goals – Of course, everyone who puts a business on the market is ultimately looking to make money. Some people, however, have a set amount that they feel that they need to obtain in order to make a sale worth it. For others, it is extremely important to stay involved with their “baby” after a sale has been made.
  • Have a plan for growth – Most parties that are interested in buying a business are doing so as an investment and want to know that their investment will produce some sort of return. Part of your sales pitch as an entrepreneur is to show your potential buyer that your existing business has significant growth potential.
  • Demonstrate scalability – This aspect of a business is inherently intertwined with growth. Investors need to see that they can take your idea and scale it up in a way that will drive profits and also that the operation could smoothly continue without your personal leadership and effort.
  • Hire professionals familiar with selling a business – Selling an existing business is often very complicated, and it is important to present the business you are selling in the best light. Professionals that are familiar with these types of transactions will ensure that your business is correctly valued and that your best interests are protected.

Contact a Silicon Valley mergers and acquisitions attorney today to retain legal counsel

Selling or acquiring an existing business can be a legally complicated matter fraught with potential pitfalls. As a result, it is important that any party to a merger, sale, or acquisition retain an attorney familiar with effectively structuring these kinds of transactions. The attorneys of Structure Law Group, LLP are experienced business lawyers who are committed to providing their clients with professional and solution-oriented legal counsel and representation. To schedule a meeting with one of our M&A attorneys, call our office today at 408-441-7500 or send us an email through our online contact form.

If your company is the target of a merger or acquisition, you are undoubtedly facing a process called due diligence. Due diligence is essentially a thorough investigation into the state of the target company so that the buyer can be aware of all potential liabilities and other issues prior to the completion of the transaction. Due diligence is necessary for several reasons, including that your company is accurately valuated, that there are no major impediments to closing the deal, and to ensure all relevant documentation is properly drafted.duediligence

If you have never been involved in the due diligence process as part of a major business transaction before, you may be easily overwhelmed by the complicated and time-consuming process. However, acting appropriately during this process can help to ensure the deal is as beneficial for your company as possible. Due diligence is crucial to corporate transactions, but if handled correctly, the process can be done efficiently. Here are some steps to take. Continue Reading

Selling your business can make a good profit when sold to the right buyer. When you decide to exit the company, selling your business may be a good strategy. A business sale may not be easy, but there can be many rewards and benefits. If you’re interested in selling your business for profit, there are 3 things to keep in mind to make sure the process goes smoothly and without a legal hitch.

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3 Tips for Selling Your Business

  1. Hire Counsel

You’ll need someone in your court with a background on financial and business transactions. An experienced business attorney can help you prepare necessary documents and close the sale. You’ll want to lay out all finances to see how they may impact your personal wealth. You also won’t want to let the stress of the sale process lead to missed deadlines or late filing of documents. There are a lot of planning, structural, legal, and financial issues involved with the sale of a business, so having an experienced business attorney will be critical to ensure you’re making the right decisions. Continue Reading

A merger or acquisition can be a great way to grow your business. Joining forces or purchasing another company increases your market share and potential profits. There’s no real way to know if the venture will pay off. However, the proper due diligence can provide reassurance that the move you’re making is a good one. Due diligence is a multi-step process, so in this post we’re going to focus on just one part: liabilities.

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Understanding Liabilities

Any merger or acquisition comes with a degree of risk. Liabilities are the debts and obligations incurred through the course of doing business. Loans are considered a liability as are accounts payable and accrued expenses. It’s important to take a look at the total number and dollar value of all liabilities. Also, look at the company’s payment history. Are bills paid on time? Is there a record of default? These are red flags that should give you pause. Remember, once you’ve assumed liabilities the responsibility is yours.

Unrecorded Liabilities

An unrecorded liability is exactly as it sounds. This type of liability won’t show up on any records or accounting statements. Before you call off your merger or acquisition, understand that unrecorded liabilities are normal. A common example is vacation time. Let’s say an employee rolls over vacation time and, come retirement, hasn’t used it all. He or she will be owed money in exchange for the hours. This can be a substantial cost if enough employees have banked their hours. The best way to find out about a company’s unrecorded liabilities is to ask the right questions and request the relevant documents, or you can hire an experienced attorney.

Due diligence is a critical component of any merger or acquisition. Failure to do your homework can have dire financial consequences.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

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.

What is an Acquisition?

An acquisition is when one company purchases another. The target company is absorbed by the purchaser and no longer exists. A recent example is the acquisition of Bell South by AT&T. AT&T bought Bell and reformed it as AT&T South.

Mergers and Acquisitions: The Benefits

There are several perceived benefits to merging or acquiring another company. A business can save money on labor and expand its reach into new markets. Also, bigger companies have more purchasing power. Finally, a target company might have a unique product or skill set that creates new revenue for the parent.

So is the deal between AT&T and DirecTV a merger or acquisition? The telecommunications giant is buying the satellite provider. However, DirectTV will still keep its name but will be operating under AT&T. Confused? You’re not alone. The media can’t seem to decide. Given the basic definitions we discussed earlier this would be an acquisition.

There are many types of mergers and acquisitions. If you’re considering either one make sure to get some assistance. Legal professionals, like the ones at Structure Law Group, are needed to sort through the mess.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

One of my clients is a medium sized manufacturing plant here in San Jose. Although not a high-tech business, they have extensive capital assets and specialized skills. The business is being run by the second generation of family members, and the third generation is now being trained to take the reins someday. The family has recognized that many of their competitors are still being run by the first generation of owners, and it does not look like those businesses are likely to transition to other family members. As the owners of the competitive businesses age and want to retire, they will be looking to sell their manufacturing plants. My client wants to buy them. We recently sat down and discussed acquisition strategies. I explained that there are two common ways to buy a business – either you buy the stock, or you buy the assets. What most people do not realize, is that even when you are only buying the assets, you could be liable for up to three times the purchase price in state taxes that should have been paid by the seller.

Most people know that when you buy the stock of a corporation (or membership interests in an LLC), you get all of the assets as well as all of the liabilities in that company. As a result, many of my clients want to buy only the assets of a company as a strategy to avoid the liabilities (known and unknown) that come with a business with history behind it. To accomplish this, we draft an asset purchase agreement that includes lists of which assets we are buying, which liabilities we are buying, and which liabilities we are not taking on. For example, when you buy the stock of a company, you get all of its employees including their accrued and unpaid vacation time. When you buy the assets of a company, we ask the selling business to terminate all of its employees so that we can start over by hiring them in the acquiring company as new employees, without any potential claims for what came before. However, many people do not realize that certain tax liabilities may follow the business of the company rather than the company itself. So, if you buy enough of the assets to be considered as having purchased the company, you could be buying tax liabilities… even if they are on your list of items excluded from the sale.

Each of the Franchise Tax Board (state franchise and income taxes), the Board of Equalization (sales taxes) and the Employer Development Department (employment taxes) has the right to come after the buyer of a business for unpaid taxes in an amount up to the entire purchase price. So, if you pay $100,000 for the assets of a company, you could be liable for unpaid taxes of up to $100,000 to each of those three government entities. Your $100,000 purchase price just became $400,000!

Most asset purchase agreements deal with this concern in two ways: First, they request a representation and warranty from the seller that there are no unpaid taxes. Second, the agreement includes an indemnification provision whereby the seller has to indemnify the buyer if any claim for unpaid taxes is made against the buyer for the time period before the company’s assets were purchased. However, an indemnification provision is not enough protection. All it does is provide a contractual claim against the seller. The buyer still has to sue the seller and get a judgment and then collect that judgment.

A much better way to protect yourself as a buyer of a business is not to rush into things. In only 60 days, you can get tax clearance certificates from all three entities showing you exactly how much unpaid taxes, if any, are outstanding. Each agency has its own requirements for submitting such a request. If the agency does not return a tax clearance certificate within 60 days (30 days for the EDD), then the buyer may not be held liable for outstanding taxes of the seller’s business. So, take your time, open an escrow, and get tax clearance certificates prior to closing escrow on the purchase. And of course, consult with an attorney if you need help with an acquisition. Otherwise that $100,000 business may cost you $400,000 in the end.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.