Business and Corporate

By Angela W. Adolph

Construction Work in Progress (“CWIP”) is generally recognized as property that is in the process of changing from one state to another, such as the conversion of personal property from inventory to asset or fixture by installation, assembly, or construction.  See Valuation of Machinery and Equipment Construction in Progress (CIP), Pollack and Meier, Institute for Professionals in Taxation Property Tax Symposium.  Determining how a state treats partially-completed properties for purposes of ad valorem tax is an important question for any taxpayer, but it is particularly critical for an industrial taxpayer during the site location process.

There is no clear consensus among taxing jurisdictions as to whether or how CWIP is to be valued by a tax assessor on the applicable assessment date.   Many states, including Alabama, Missouri, and North Carolina, value CWIP based on the value or percentage of completion on the assessment date.  Kansas values incomplete construction based on the cost incurred as of the assessment date.  Florida, Maryland, Virginia, and West Virginia assess CWIP when the work has progressed to a degree that it is useful for its eventual purpose.  And in South Carolina, improvements are only assessed upon completion.

With the exception of a few errant assessments in the early 1930’s, Louisiana has never assessed CWIP for ad valorem tax purposes.  Rather, the completed property is added to tax rolls and assessed as of January 1 of the year immediately following completion of construction. La. R.S. 47:1952.   This comports with and complements Louisiana’s industrial tax exemption program, which exempts certain manufacturing property from ad valorem taxation for a specified number of years.  LAC Title 13, Part 1, §53(D).   Unfortunately, property on which ad valorem taxes have been paid is not eligible for participation in the exemption program.  LAC Title 13, Part 1, §515.  Thus, if ad valorem taxes are paid on property as CWIP, the property would no longer eligible for the industrial tax exemption and would remain on the taxable rolls subject to assessment each year.  Obviously, assessing CWIP in this manner would significantly diminish the value of the program to taxpayers and undermine its usefulness as an incentive tool by economic development agencies.

In 2016, a local assessor broke with established practice and initiated an audit that included CWIP on a major industrial taxpayer.  This audit raised statewide and local uniformity concerns (assessment of CWIP of a single taxpayer in a single parish) and jeopardized the taxpayer’s existing industrial tax exemption.  The taxpayer immediately filed an injunction action in district court, and the Louisiana Legislature took note of the situation during its regular 2017 legislative session.  Recognizing the need to formalize the exemption, the Legislature referred a constitutional amendment to codify CWIP’s exemption from assessment. Louisiana is one of 16 states that require a two-thirds supermajority in each chamber of the legislature to refer a constitutional amendment to the ballot, so their vote underscores the strong support among lawmakers to codify the exemption.

Slated to appear on the Oct. 14 statewide ballot, Act 428 would add an additional subsection to Article VII, Section 21 of the Louisiana Constitution, which lists property that is exempt from ad valorem tax assessment. The new language would read as follows:

(N)(1) All property delivered to a construction project site for the purpose of incorporating the property into any tract of land, building, or other construction as a component part, including the type of property that may be deemed to be a component part once placed on an immovable for its service and improvement pursuant to the provisions of the Louisiana Civil Code of 1870, as amended. The exemption provided for in this Paragraph shall be applicable until the construction project for which the property has been delivered is complete. A construction project shall be deemed complete when construction is finished to the extent that the project can be used or occupied for its intended purpose. A construction project shall not be deemed complete during its inspection, testing, or commissioning stages, as defined by reasonable industry standards.

(2) Notwithstanding the provisions of Subparagraph (1) of this Paragraph, this exemption shall not apply to any of the following:

(a) Any portion of a construction project that is complete, available for its intended use, or operational on the date that property is assessed.

(b) For projects constructed in two or more distinct phases, any phase of the construction project that is complete, available for its intended use, or operational on the date the property is assessed.

(c) Any public service property, unless the public service property is otherwise eligible for an exemption provided by any other provision of this constitution.

If approved by voters, CWIP would be exempt from property taxes until construction is “completed.” The proposed amendment defines a completed construction as occurring when the property “can be used or occupied for its intended purpose.” The exemption would thus remain effective until the construction project (or a given distinct phase of the project) is ready to be used or occupied for its intended purpose or for occupancy.

By Amanda Bourgeois

The substantial flexibility afforded by the limited liability company structure has made it an increasingly popular business entity choice.  Indeed, most of the default provisions in the Louisiana Limited Liability Company Law, La. R.S. 12:1301, et seq. (the “La LLC Law”) may be altered or superseded by the articles of organization or operating agreement of the limited liability company.  One such provision that is quite frequently altered or superseded in the operating agreements of many limited liability companies is that of the transfer or assignment of a membership interest in the limited liability company.

Unless the articles of organization or operating agreement of the limited liability company provide otherwise, a membership interest is freely assignable, in whole or in part, under the La LLC Law.[1]  This default provision is often unattractive to members of limited liability companies, especially ones that may be family-owned or formed for a particular joint venture project.  The desire to keep membership in the entity limited to either the current members or certain defined groups of persons drives many members of limited liability companies to include rules and restrictions to limit or prohibit the rights of a member to transfer or assign the membership interest in the limited liability company.  Most transfer restrictions included in a written operating agreement or the articles of organization are not problematic under Louisiana law.  However, members should be aware that restricting a member’s ability to pledge or encumber the membership interests in the limited liability company can be rendered ineffective by certain provisions of the Uniform Commercial Code – Secured Transactions, La. R.S. 10:9-101, et seq. (“UCC Chapter 9”).

Although there are some exceptions, in most cases, an interest in a limited liability company is considered a general intangible under UCC Chapter 9.  As a comparison, in most cases, shares of stock in a corporation are considered a security under UCC Chapter 9.  Under Louisiana law, this classification of general intangible versus security can affect, among other things, the available methods of perfecting the security interest, the determination of priority of competing security interests, and the effectiveness of anti-assignment provisions.

Pursuant to La. R.S. 10:9-408, certain contractual restrictions on the creation and perfection of a security interest of a general intangible are negated and rendered ineffective.  In the context of a limited liability company, Section 9-408 could be used to render ineffective a provision in an operating agreement or articles of incorporation (i) prohibiting a member from pledging or encumbering his or her membership interest or (ii) requiring the prior consent of the limited liability company or the other members thereof to the pledge or encumbrance of membership interests in the limited liability company.

Importantly, although the restrictions under Section 9-408 may permit a lender to take a perfected security interest in limited liability company interests despite contrary provisions in the organizational documents of the limited liability company, it does not necessarily mean that the secured creditor will have the right to enforce the security interest.  Further, it does not otherwise negate the default assignment provisions of the La LLC Law, or any similar provisions in the limited liability company organizational documents, that provide that any assignment of membership interests shall not grant to the assignee full membership rights absent the consent of the other members.  Consequently, absent contrary provisions in the organizational documents of the limited liability company or the unanimous consent in writing of the other members, in the event of a seizure of or foreclosure upon the membership interests, the creditor or any purchaser in a foreclosure sale is treated as an assignee of the membership interest, which only entitles the assigned to a right to receive distributions, share in the profits and losses, and receive allocations of income, gain, loss, deduction, credit or similar items to which the assignor member would otherwise have received.

__________________________________________

[1] It should be noted that even under the default provisions of the La LLC Law, an assignment of a membership interest does not entitle the assignee to become or exercise any rights or powers of a member, such as voting or participating in the management of the business, until such time as the assignee is admitted as a member, which requires the unanimous consent in writing of the other members of the limited liability company pursuant to the La LLC Law.  The assignment does, though, entitle the assignee to receive distributions, share in the profits and losses, and receive allocations of income, gain, loss, deduction, credit or similar items to which the assignor member would otherwise have received.   

 

labor

By Jaye Calhoun and David Hamm

It’s time to amend the governing documents of flow-through entities taxed as partnerships to address recent federal legislative changes impacting all such entities.  Failure to amend now could result in unfavorable tax consequences.  Section 1101 of The Bipartisan Budget Act of 2015 (the “BBA”) substantially changes how the Internal Revenue Service may conduct audits of flow through entities taxed as partnerships.  Due to the increased popularity of limited liability companies, most taxed as partnerships, the Internal Revenue Service has been chafing under the relatively restrictive rules governing audits found in the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”).  The BBA eliminates many of the provisions of TEFRA that made IRS’ job of policing compliance by partnerships with the tax laws more difficult and replaces them with new centralized partnership audit rules, effective for returns filed for partnership tax years beginning after Dec. 31, 2017. In order to implement the new rules, IRS has re-released proposed regulations on June 13, 2017 and has invited comments in anticipation of a hearing on the proposed regulations currently scheduled for September 18, 2017.  The proposed regulations were initially released on January 18, 2017, but were withdrawn on January 20, 2017 in light of the Trump Administration’s freeze on all new and proposed federal rule making.

As a result of BBA, and as fleshed out in the proposed regulations, the new partnership audit rules provide that, among other things:

  • Out with the TMP and in with the PR – There is no longer a “tax matters partner/member,” but, instead, partnerships must designate a “partnership representative,” who will have the sole authority to act on behalf of the partnership (including, under certain circumstances, to decide which partners will pay any deficiency) and who is not required to be a partner.  If the partnership fails to designate the partnership representative, the IRS will designate a partnership representative for it.
  • Partnership Itself May be the Taxpayer – Unless certain partnerships makes an election to “push out” additional taxes owed as a result of an audit to the audited (“reviewed”) year partners, such additional taxes will now be paid by the partnership;
  • Annual Election Out Available to Certain Partnerships – The new rules apply to all partnerships except for those that are both qualified to “elect out” (generally partnerships with under 100 partners, none of which can be a disregarded entity or another partnership), and which make an annual election that the new rules do not apply.

The significant changes brought about by the BBA and the proposed regulations (likely to become final in substantially similar form) require substantive amendments to governing documents of all entities taxed as partnerships to address these issues and others. Of note, Louisiana does not currently tax partnerships, as partnerships, and will have to adopt rules to adapt to the federal changes.  In the meantime, the January 1, 2018 effective date of the BBA is approaching. Thus, the time for providing notice and counsel to your clients is quickly running out.

  • This article originally appeared in the New Orleans Bar Associations Tax Law Committee Blog.

Louisiana State Capital

By Matthew C. Meiners

Under Louisiana law, workers’ compensation is the exclusive remedy that an employee may assert against his employer or fellow employees for work-related injury, unless he was the victim of an intentional act. That exclusive remedy also extends to statutory employers.

Workers’ compensation legislation was enacted to provide social insurance to compensate victims of industrial accidents, and it reflects a compromise between the competing interests of employers and employees: the employer gives up the defense it would otherwise enjoy in cases where it is not at fault, while the employee surrenders his or her right to full damages, accepting instead a more modest claim for essentials, payable regardless of fault and with a minimum of delay. However, due to the fear that employers would attempt to circumvent that liability by interjecting between themselves and their workers intermediary entities which would fail to meet workers’ compensation obligations, the law provides that some principals are by statute deemed, for purposes of liability for workers’ compensation benefits, the employers of employees of other entities. This is what is known as statutory employment, and it is intended to provide greater assurance of a compensation remedy to injured workers.

Under Louisiana law, there are two bases for finding statutory employment:

First Basis: The existence of a written contract recognizing the principal as the statutory employer. A “principal” is any person who undertakes to execute any work which is a part of his trade, business, or occupation in which he was engaged at the time of the injury, or which he had contracted to perform and contracts with any person for the execution thereof. Such a contractual provision creates a rebuttable presumption of a statutory employer relationship between the principal and the contractor’s employees, whether direct or statutory employees. This presumption may be overcome only by showing that the work is not an integral part of or essential to the ability of the principal to generate that individual principal’s goods, products, or services.

Second Basis: Being a principal in the middle of two contracts, referred to as the “two contract theory.” The two contract theory applies when: (1) the principal enters into a contract with a third party; (2) pursuant to that contract, work must be performed; and (3) in order for the principal to fulfill its contractual obligation to perform the work, the principal enters into a subcontract for all or part of the work performed. The two contract statutory employer status contemplates relationships among at least three entities: a general contractor who has been hired by a third party to perform a specific task, a subcontractor hired by that general contractor, and an employee of the subcontractor.

A statutory employer is liable to pay to any employee employed in the execution of the work or to his dependent, any compensation under the Louisiana Worker’s Compensation Act which the statutory employer would have been liable to pay if the employee had been immediately employed by the statutory employer. In exchange, the statutory employer enjoys the same immunity from tort claims by these employees as is enjoyed by their direct employer. Additionally, when a statutory employer is liable to pay workers’ compensation to its statutory employees, the statutory employer is entitled to indemnity from the direct employer and has a cause of action therefor.

Statutory employer status can provide very valuable protection to companies who contract for work to be performed in Louisiana; however, you should consult your attorney to make sure you meet the legal requirements, and to properly draft the necessary contractual provisions.

 

structure

By Matthew C. Meiners

In targeting a company for purchase, many buyers prefer to purchase the assets of a company, as opposed to the stock (or other equity) of the company because, as a general rule, the buyer of assets in an asset acquisition does not automatically assume the liabilities of the seller.  Accordingly, an asset acquisition generally allows the buyer and seller to select which assets and liabilities will be transferred.  However, in certain circumstances, the buyer can be held responsible for liabilities of the seller if a court determines that certain exceptions are met.  Louisiana courts have been willing to impose liability on asset-sale successors on the following grounds:

  1. The buyer assumed the liabilities;
  2. The transaction was entered into to defraud the seller’s creditors;
  3. The buyer company is a “mere continuation” of the seller company; and
  4. The transaction was “in fact” a merger.

The “mere continuation” exception is probably the most likely to catch a buyer off guard.  Louisiana courts, in considering whether an asset-sale successor is a “mere continuation” of the seller company, have considered the extent to which the buyer company has retained the same employees, supervisory personnel, company name, and physical location as the seller company.  Further, prior business relationships may be considered, as well as the continuity of general business operations and the identity of the business in the eyes of the public.  A threshold requirement to trigger a determination of whether successor liability is applicable under the “mere continuation” exception is that one company must have purchased all or substantially all the assets of another.

If you plan to purchase all or substantially all of the assets of a company, especially if your goal in choosing an asset purchase over a stock purchase is to avoid or minimize your liability for the seller’s liabilities, you should carefully consider the ways in which you could be seen as merely continuing the seller’s business under the factors described above.  You may be signing on for more liability than you anticipate.

By J. Eric Lockridge

Large and small offshore service companies are turning to the Bankruptcy Code for help with restructuring their balance sheet, and turning to Washington for help with generating more work.

One of the largest offshore service companies in the world, Tidewater, announced this week that it will file a Chapter 11 bankruptcy petition in Delaware on or before May 17, 2017. This is not a surprise to the markets. Tidewater received notice from the New York Stock Exchange in April that it is at risk of being delisted before the end of the year because its average stock price sat below $1.00 per share for too long. Tidewater’s press release announcing the upcoming bankruptcy says the company has secured broad support from secured creditors for a pre-packaged plan that will effectuate a form of debt-for-equity swap. The plan will also reject certain sale-lease back agreements for a portion of Tidewater’s fleet. Expect a fight over lease-rejection damages.

A smaller operator focused on the Gulf of Mexico, GulfMark Offshore, also announced this week that it is planning a Chapter 11 filing. Offshore Support Journal reported that GulfMark Offshore’s most recent SEC filing discloses the company will likely file a Chapter 11 bankruptcy petition on or before May 21, 2017. The company is working with advisors to secure support for a restructuring agreement that will include a backstop commitment from certain note holders and a debt-for-equity swap.

Some in the offshore industry are lobbying the White House and others to extend the “America First” agenda to the offshore-service industry in hopes that might provide a boost. For example, see Harvey Gulf’s recent open letter to President Donald Trump here. Many in the offshore service industry would like to see the current administration enforce regulations requiring proper plugging and abandonment (P&A) of many non-producing or low-producing wells in the Gulf of Mexico’s shallow water. They have to be careful about how loudly they push that agenda, however, or they may alienate the very exploration and production (E&P) companies that would hire them. Many E&P companies would like to see enforcement of those regulations delayed as long as possible, and at least until the price of oil is higher.

Enforcing P&A obligations would likely create thousands of jobs and boost the economy along the Gulf Coast, where President Trump received strong electoral support. The House Majority Whip, Rep. Steve Scalise (R-LA), represents a district along the Louisiana coast that is home to scores of offshore service companies and their vendors, which gives that industry some important clout on Capitol Hill. Delaying enforcement of P&A obligations and/or making them less onerous might be more consistent with a “regulation-roll-back” agenda and with the interests of many E&P companies, several of which have strong ties to the current administration and deep relationships in Congress.

Will Washington take any action to provide some relief for offshore service companies, their employees, vendors, and lenders? How will an increase in Chapter 11 cases for offshore service companies affect the industry and the companies that have (so far) avoided bankruptcy? Kean Miller and many of our clients will keep a close watch as events unfold.

 

Delaware

By David P. Hamm, Jr.

In Sandys v. Pincus, the Delaware Supreme Court reversed a “thoughtful forty-two page opinion” by Chancellor Bouchard that dismissed a derivative action based upon the stockholder’s failure to make pre-suit demand.[1] The court’s opinion can be found here.  The underlying Court of Chancery opinion can be found here.

Expansion of the Rales Test for Demand Futility

The authority of the board of directors to manage the business and affairs of a corporation under Section 141(a) of the Delaware General Corporation Law extends to the board’s authority to decide whether to initiate or refrain from initiating litigation. Thus, pursuant to Court of Chancery Rule 23.1, a plaintiff in a derivative action must “either make a demand upon the board to initiate the litigation or demonstrate that such demand would be futile.”[2]

Delaware courts apply either the Aronson test or the Rales test in determining whether a plaintiff’s demand upon the board would be futile. In general, the Aronson test requires the plaintiff to plead particularized facts that create a reasonable doubt that either “the directors are disinterested and independent” or that “the challenged transaction was otherwise the product of a valid exercise of business judgment.”[3] In general, the Rales test requires the plaintiff to plead particularized facts that create a reasonable doubt that, at the time the complaint was filed, “the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.”[4] The timing of the inquiry is a chief distinction between the two tests.

The Aronson test has been criticized over the years and exceptions to the application of the Aronson test have been created in several contexts. Three such exceptions were outlined in Rales as follows:

“A court should not apply the Aronson test for demand futility where the board that would be considering the demand did not make a business decision which is being challenged in the derivative suit. This situation would arise in three principal scenarios: (1) where a business decision was made by the board of a company, but a majority of the directors making the decision have been replaced; (2) where the subject of the derivative suit is not a business decision of the board; and (3) where . . . the decision being challenged was made by the board of a different corporation.”[5]

Chancellor Bouchard’s application of the Rales test to the plaintiff’s Brophy and Caremark claims do not result in the expansion of the test’s application. However, the Chancellor’s application of the Rales test in the context of the plaintiff’s claim that the board breached its fiduciary duties by approving the secondary offering in question (the “Secondary Offering Claim”) does constitute an expansion of the Rales test. The novelty of the test’s application is acknowledged by Chancellor Bouchard as follows:

“In identifying these three scenarios, the Court [in Rales] included a qualification that they were the ‘principal’ scenarios where Aronson would not apply, implying that there could be other scenarios. In my opinion, this case presents such a scenario.”[6]

The Chancellor set forth the following facts in support of his application of Rales to the Secondary Offering Claim:

  1. A majority of the board that approved the secondary offering “had a personal financial interest in the transaction such that they may have received an unfair benefit and the transaction may be subjected to entire fairness review.”[7]
  2. A majority of the board was not changed from the time the secondary offering was approved to the time the complaint was filed. Thus, the “principal scenario” set forth by the Court in Rales did not find application.
  3. The board composition changed from the time the secondary offering was approved to the time the complaint was filed to the extent that a majority of directors derived no personal financial benefit from the secondary offering.

These facts led Chancellor Bouchard to conclude that the demand futility inquiry should be focused solely upon the board that existed at the time the complaint was filed (as required by Rales) rather than the board that existed at the time the second offering was approved (as required by the second prong of Aronson).

The application of the Rales test was also supported by the Chancellor’s position that it “functionally covers the same ground as the Aronson test” and “investigates the same sources of potential partiality that Aronson would examine.”[8]  The Chancellor further reasoned that the Rales test “provides a cleaner, more straightforward formulation to probe the core issue in the demand futility analysis for each board member who would be considering plaintiff’s demand.”[9]

Although the Delaware Supreme Court did not expressly adopted Chancellor Bouchard’s expansion of the Rales test, it did implicitly do so by utilizing the test in its analysis: “On appeal, neither party contests the applicability of the Rales standard employed by the Court of Chancery. Therefore, we use it in our analysis to determine whether the Court of Chancery erred in finding that a majority of the board was independent for pleading stage purposes.”[10]

As a result, the Delaware Supreme Court has, at least implicitly, expanded the application of the Rales test in the demand futility context.

Particularized Facts Providing Grounds of Reversal

While the Delaware Supreme Court implicitly approved of Chancellor Bouchard’s utilization of the Rales test, it expressly reversed his application of same.  The reversal was based upon “particularized facts” that created a reasonable doubt as to the impartiality of three directors (Ellen Siminoff, William Gordon, and John Doerr).

The Delaware Supreme Court reversed Chancellor Bouchard’s independence determination as to Ellen Siminoff based upon the particularized fact that she and her husband co-own an airplane with Mark Pincus (the controller). Despite the fact that the plaintiff simply characterized the co-ownership of the airplane as a business relationship, the court saw more there and concluded that the co-ownership of the plane was “suggestive of an extremely intimate personal friendship” and created “a reasonable doubt that she [could] impartially consider a demand adverse to his [Pincus’] interests.”[11] While admittedly limited to the facts of this case, the Delaware Supreme Court’s analysis on this point arguably lowers the level of proof needed to show demand futility.

Of greater import, the Delaware Supreme Court reversed Chancellor Bouchard’s independence determination as to William Gordon and John Doerr based upon particularized facts that evidenced “a mutually beneficial network of ongoing business relations” between several of the directors.[12] Gordon and Doerr are both partners at Kleiner Perkins Caufield & Byers, a venture capital firm. Kleiner Perkins owns 9.2% of Zynga, Inc.’s stock, invested in a company co-founded by Pincus’ wife, and has an equity position in a company where another Zynga director, Reid Hoffman, is both a shareholder and director.

The court’s analysis on this point has potentially significant implications given the realities of the venture capital landscape. However, such implications can be qualified by the fact that William Gordon and John Doerr did not qualify as independent directors under the NASDAQ Listing Rules.[13] The import of this fact for the court is clearly seen by the following dicta: “[T]o have a derivative suit dismissed on demand excusal grounds because of the presumptive independence of directors whose own colleagues will not accord them the appellation of independence creates a cognitive dissonance that our jurisprudence should not ignore.”[14]

Conclusion

In sum, Sandys arguably expands the application of the Rales test and provides the representative plaintiff bar with a lower threshold for demonstrating demand futility. While limited to the facts of the case, the court’s analysis should be considered when making internal determinations as to the independence of directors.

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[1] Sandys v. Pincus, No. 157, 2016, 2016 WL 7094027 (Del. Dec. 5, 2016) (Valihura, J., dissenting).

[2] Sandys v. Pincus, No. CV 9512-CB, 2016 WL 769999, at *6 (Del. Ch. Feb. 29, 2016), rev’d, No. 157, 2016, 2016 WL 7094027 (Del. Dec. 5, 2016).

[3] Id. (quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del.1984).

[4] Id. (quoting Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).5. Rales v. Blasband, 634 A.2d 927, 933–34 (Del. 1993) (emphasis added).

[6] Id. at *12.

[7] Id.

[8] Id.

[9] Id. at *13.

[10] Sandys, 2016 WL 7094027, at *3.

[11] Id. at *1.

[12] Id. at *5.

[13] See NASDAQ Marketplace Rule 5605(a)(2).

[14] Sandys, 2016 WL 7094027, at *5.

 

Louisiana

By William J. Kolarik, II

On April 25, 2017, State Representative Sam Jones requested that the Louisiana House Committee on Ways and Means voluntarily defer HB628, which would have imposed a commercial activity tax upon many business organizations doing business in Louisiana.  The Committee’s vote to voluntarily defer the bill means that the proposed commercial activity tax is likely dead for the 2017 legislative session.  The proposed commercial activity tax was the centerpiece of Louisiana Governor Edwards’ tax package and the deferral of the proposed bill means that Governor Edwards and Louisiana legislators will need to resolve Louisiana’s current budget crisis through other means.  The Kean Miller State and Local Tax team is reviewing proposed Louisiana tax legislation and will update its blog when our review is complete.

la house of reps

By William J. Kolarik, II

On April 17, 2017, the legislation that composes the centerpiece of Governor Edwards’ proposed tax reforms was filed in the Louisiana House of Representatives.  House Bill 628, introduced by state Rep. Sam Jones, contains the legislation that would establish the commercial activity tax.  The Kean Miller State and Local Tax team is reviewing the proposed legislation and will update its summary of the proposed Louisiana tax reform package after our review is complete.

 

compass

By David P. Hamm, Jr.

Helping sellers navigate the uncertain horizon of post-closing indemnification claims is a crucial part of a deal lawyer’s job on the sell-side of any M&A transaction. According to a relatively recent study by Shareholder Representative Services (the “2013 SRS Study”), approximately 67% of private M&A transactions have “material post-closing issues.”[1]  While post-closing liability exposure is industry and deal specific, the empirical data presented by the 2013 SRS Study provides crucial insight for the deal lawyer tasked with helping her client navigate these uncertain waters. A copy of the full 2013 SRS Study can be found here.

2013 SRS Study Sample

The 2013 SRS Study is based upon claims made against escrow holdback funds for 420 private-target acquisitions that closed between 2007 and 2013. There were approximately 700 such claims made in connection with the analyzed acquisitions. Each of these claims was sorted by its type and size.

As the saying goes, a picture is worth a thousand words. To that end, two key graphics contained in the 2013 SRS Study are set forth below that highlight several of the study’s insights.

Breakdown of Claims in General

hamm pic

As the graphic above shows, roughly 400 of the 700 post-closing claims within the 2013 SRS Study Sample were related to alleged breaches of representations and warranties. The graphic below illustrates the representations and warranties that are most frequently the subjects of indemnification claims.

Breakdown of R&W Claims

hamm pic 2

This chart is the most valuable chart in the entire 2013 SRS Study as it provides a solid basis for clear counsel to sell-side clients in the M&A context. It also shows the particular representations and warranties that should be focused upon prior to closing to minimize post-closing claims.

Conclusion

The 2013 SRS Study enables the M&A lawyer to take the abstract notion of post-closing liability exposure and convert it into a discussion of empirical data. Again, while post-closing liability exposure is industry and deal specific, the 2013 SRS Study provides helpful market data that can help inform clients and prevent post-closing claims.

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[1] https://www.srsacquiom.com/files/2013escrowstudy.pdf