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Today’s post highlights important considerations when transferring LLC ownership interests, including transfer restrictions and the right of first refusal.

When buying or selling an ownership interest in an LLC, it’s important to consider several key issues that may affect the transaction. Today’s post highlights some of these important considerations when transferring LLC ownership interests.

Are there any restrictions on your ability to transfer the interest?

Most operating agreements will provide provisions that discuss the process for transferring a member’s interest. Many operating agreements require the member to provide notice of the transfer and often include a right of first refusal, which right allows the company to match the terms of a sale of a member’s interest (more on this topic below). And some operating agreements do not allow for a member to transfer his or her interest without unanimous member consent.

If…

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Restrictions

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This post discusses five key securities-related issues for merger and acquisition transactions.

In business acquisitions, and especially in business acquisitions structured as stock purchases, there are a number of securities issues you’ll want to be on the lookout for. For the purposes of this post, you can think of a security as the stock or other equity interest in a company like an option or warrant. (You can check out this post for a more detailed discussion of what a security is.) Below I’ve listed 5 key securities-related due diligence issues for you to consider when purchasing a business.

We’ll start with the two key issues that are important for acquisitions of both stock and assets; we’ll finish with three key issues that primarily affect stock acquisitions:

Issues for acquisitions of either stock or assets

Two issues are of…

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M&A Securities Issues

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We continue our Alternative Dispute Resolution Series with a discussion of Early Neutral Evaluation.

We continue our Alternative Dispute Resolution Series with a discussion of Early Neutral Evaluation. Early Neutral Evaluation (ENE), also known as “Neutral Case Evaluation” and “Case Evaluation,” is when one or both parties use a third-party neutral to evaluate the strength of their case, generally early in the life of the dispute. Just as with arbitration and mediation, there are different forms and styles of ENE, but the core structure is the same. In ENE, the third-party neutral reviews the evidence, listens to parties’ summaries of their cases, and gives the parties a written evaluation of the case.

The Benefits of Early Neutral Evaluation

Parties, including clients and their attorneys, often inaccurately assess the strength of a case. This can lead to…

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Early Neutral Evaluation

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This post discusses what you should know about voluntary, administrative, and judicial dissolution of a business entity in Washington.

As a business owner, you may find yourself in a situation where you either need to dissolve your company, you are being forced to dissolve your company (either by other owners or by the state), or you simply want to know what your potential exits are. This post will explain dissolution in Washington, and how it can affect your business.

In Washington, closely-held corporations may be dissolved in one of three ways: 1) voluntarily, by vote of the shareholders or directors; 2) by administrative dissolution; or 3) by judicial dissolution.

Voluntary Dissolution

To voluntarily dissolve a corporation, generally the corporation’s board of directors may propose dissolution for submission to a vote of the shareholders. Two-thirds of the authorized shareholders then must approve the proposed dissolution….

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Business Entity Dissolution

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This post discusses business valuation, including the methods for valuing your business for a sale, merger, acquisition, divorce, or exit.

Entrepreneurs and business owners will generally need to value their business on many occasions during the course of a career. Whether part of a seed investment round, follow-on series investment round, merger or acquisition, partnership or owner dispute, or a partnership or ownership dissolution, you will likely need to fix a value to your business at least once.

Behavioral study indicates that people tend to value that which they are selling higher than they would value the same thing if they were buying. This means that most of the time, and especially when the valuation is forced, the number the buyer proposes and the number the seller will accept are far apart. So you often see business owners and entrepreneurs turning to…

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Business Valuation - Bean Counting

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In today's post, we explore why startup companies use vesting schedules when issuing stock to founders of the company.

As a startup founder, you’ve probably heard that your startup’s shares should be subject to a vesting schedule. You may not know why a vesting schedule is important when issuing startup founders’ shares. Today’s post highlights some of the major reasons why a vesting schedule makes sense for most startup companies, including why investors prefer investing in companies that use vesting schedules when issuing stock to the founders.

An  example of why startup companies use vesting schedules for founders
Suppose ABC Company was founded by John and Jane. ABC has created a new crowdfunding portal where investors can invest in businesses online. ABC raised a small friends and family round of investment to help launch the company. John and Jane have been…

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Founder exits the company

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This week's news roundup addresses Jos. A. Bank's acquisition debacle, Bump's shutdown, Snapchat's data security issues, and the 2014 economic outlook.

Mergers and Acquisitions

Jos. A. Bank Amends Poison Pill in Response to Men’s Wearhouse’s Unsolicited Bid
The clothing retailer Jos. A. Bank amended its shareholder rights plan today to prevent rival retailer Men’s Wearhouse from acquiring it without a “level playing field.” The amendment came in response to Men’s Wearhouse’s unsolicited bid to purchase Jos. A. Bank in November, which followed an attempt by Jos. A. Bank to takeover Men’s Wearhouse via an unsolicited bid in October.

After Jos. A. Bank’s $2.3 billion October bid, which Men’s Wearhouse rejected, Men’s Wearhouse amended its shareholder rights plan to alter the poison pill threshold to apply if an outside investor acquires 10 percent or more of its common stock, or if an institutional investor takes…

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The Court affirmed that directors which were designated by the venture capital preferred shareholders owed fiduciary duties only to the common shareholders.

The Delaware Chancery Court issued the post-trial decision in In re Trados Incorporated Shareholder Litigation. The Court affirmed that directors which were designated by the venture capital preferred shareholders owed fiduciary duties only to the common shareholders.

The Court found that the directors had interests that conflicted with the interests of the common shareholders. And because they were conflicted, the directors lost the protection of the “business judgment rule”—the BJR presumes that directors are acting in the best interests of the company and its shareholders when making a decision. Instead, the directors were judged by the “entire fairness” standard. Under that standard, the directors were affirmatively required to prove that the process they followed to make the decision was fair and…

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Any time an executive of a successful company decides to exit, investors fear that the successor executive will fail to maintain the company’s success.

I recently read a New York Times article that discussed investor reactions to a successful chief executive deciding to exit a company. The article discussed how Manchester United’s coach, Alex Ferguson, announced Wednesday that he will retire at the end of the season. As a result, Manchester United’s shares fell nearly five percent Wednesday morning. Today’s post explores the impact of Ferguson’s exit, as well as the general impact of exiting executives.

A Brief Background
Manchester United, the English soccer club, raised $232 million in its IPO last year. During the IPO process, there were serious concerns about the club’s financial projections once Ferguson retired. Many believed that the club’s success over the prior two decades was attributable in large part to…

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This post discusses legal issues you should consider during the due diligence process of the purchase and sale of a business.

In the introduction to due diligence, we explained the importance of engaging in extensive due diligence prior to purchasing a business, and we broke down due diligence into six categories. Today’s post will highlight the key legal issues the purchaser should be aware of when purchasing a business.

Reviewing the Owner’s Governing Documents
Prior to any acquisition, the purchaser will need to know the basic organizational structure of the business, i.e. how it was formed, its governing documents, and its key personnel. Knowing how the business is organized will dictate how the transaction will be structured.

Securities Matters
Is the purchase going to be structured as a stock purchase? How many shareholders currently own stock in the company? Is there a shareholder agreement? Are…

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