Category Archives: Publications

Indemnification and Advancement of Directors and Officers for a Utah Corporation Doing Business in California

Corporate counsel is asked to make many decisions on behalf of a corporate client. A corporate client may seek advice on choice of law selection or where it should incorporate. At the initial founding stages, many clients do not consider that the place of incorporation and choice of law will affect the corporation’s obligations to indemnify and advance expenses to directors and officers.sealofutahstateseal

For this analysis, even if the client chooses to incorporate in Utah, if most of its business is being performed in California, it will be deemed a “quasi-California” corporation pursuant to California Corporations Code section 2115 and will be made subject to several California laws regulating corporations.[1] If the corporation wants to initiate a lawsuit against a director or officer that has failed to act in the best interest of the corporation, counsel must consider where the corporation should file the lawsuit. Crucial to this consideration is that California and Utah have different standards for granting indemnification and advancement of expenses. The choice of forum will dictate the requirements and obligations of the corporation to advance and indemnify its officers and directors.

Indemnification:

A Utah corporation that meets the requirements set forth in California Corporations Code section 2115 will be deemed a “quasi-California” corporation and will be subject to a host of expressly delineated laws regulating out-of-state corporations. Included in the list of applicable provisions is California Corporations Code section 317, California’s law on indemnification and advancement. Section 317(e) provides the law on indemnification:

“any indemnification under this section shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct …”

The indemnification provision of section 317 is limited by a standard of conduct determination, meaning that the corporation will have some ability to control who receives indemnification and who does not. The standard of conduct set forth in section 317(b) requires a determination that the person to be indemnified “acted in good faith and in a manner the person reasonably believed to be in the best interest of the corporation…” By comparison, the indemnification statute in Utah operates the same way, requiring the corporation to make a determination that the person to be indemnified has met the applicable standard of conduct and has taken action in good faith and in a manner he or she reasonably believed was in the best interest of the corporation.[2] With little variance between the indemnification provisions in California and Utah, it could be expected that the law on advancement would also be similar. But that would be an incorrect assumption.

Advancement:

The Utah statute on advancement is similar to the indemnification statute, requiring that, “a determination is made that the facts then known to those making the determination would not preclude indemnification…”[3] However, unlike the Utah statute, the advancement provision in California is not limited by a standard of conduct determination, or any determination at all. Instead, the California advancement statute states:

“Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of the proceeding upon receipt of an undertaking by or on behalf of the agent to repay that amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this section.”

See Cal. Corp. Code § 317(f).

The only requirement for advancement under California law is that the person seeking advancement deliver an undertaking to repay the amount advanced if it is ultimately determined that he or she is not entitled to be indemnified. It is unclear whether the delivery of an undertaking requires anything more than a written promise to pay back any amounts advanced.

This is an important and interesting distinction between California and Utah law, and one that counsel must consider in evaluating disputes between a Utah corporation and its officers and directors. The result of choosing to apply California law is that the corporation might be obligated to provide advancement to its directors and officers without any determination of whether that person meets the applicable standard of conduct, limiting its ability to deny advancement those who have acted outside the best interests of the corporation.

[1] For the full list of provisions quasi-California corporations are made subject to, see California Corporations Code § 2115(b).

[2] Utah Revised Business Corporation Act 16-10a-902(1).

[3] Utah Revised Business Corporation Act 16-10a-904(1).

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For more information about this topic, contact Gina Correia at (818) 444-4500 or gcorreia@stubbsalderton.com.  Gina Correia is a litigation associate of the Firm. Gina’s practice focuses on all stages of business litigation. Prior to joining the firm, Gina worked in-house as a business affairs law clerk for HBO. Gina’s prior experience in the entertainment industry focused on talent engagement negotiations including drafting contract request, calculating actor, producer, and writer fees for top-tier talent, and evaluating comprehensive deal points. Gina also previously worked for The Los Angeles Office of the District Attorney in the Consumer Protection Division where she researched and analyzed wire-tapping violations under Penal Code and Federal Trade Commission guidelines.

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Counterfeit Pharmaceutical Kills Music Legend Price – by Anthony Keats

counterfeit-pharmaceuticalsCOUNTERFEITING IS NOT A VICTIMELESS CRIME. In the last 24 hours it has been reported by CNN and others that the iconic music legend, PRINCE, became another victim of counterfeit pharmaceuticals. In bottles marked as Vitamin C and Aspirin pills were found containing the powerful anesthetizing drug, fentanyl. It is reported that fentanyl is fifty times stronger than heroin and one hundred times stronger than morphine in its debilitating effects on the human body. It is legitimately used with terminal cancer patients or as an anesthetic during surgery.

The US Food and Drug Administration (“USDA”) refers to counterfeit prescription drugs as: “fake, contaminated, ineffective, or otherwise unsafe ingredients; drugs that have not been tested by the FDA for safety and efficacy; drugs that don’t carry the correct amount of active ingredients or; drugs that carry harmful ingredients. How far are counterfeiters willing to go to victimize the pill-popping citizens of the United States? These organized efforts are part of a criminal secondary market that has produced incredible profits because legitimate prescription drugs are often too expensive for the average American. Part of the problem rests with big pharma itself which over the past several decades has inundated media with consumer advertising for prescription drugs from Viagra to Avastin.

The problems arising from counterfeit prescription drugs has been documented since at least as early as the 1980’s.Two well-publicized incidents attracted headlines. First, counterfeit Ovulen-21 birth control pills were being sold to American women. These pills had originated from Panama and were found to be ineffective. Second was the distribution of counterfeit Ceclor, an antibiotic, and Naprosyn, a pain reliever, by a sophisticated pharmaceutical educated resident of Iran. In line with these developments Congress passed the 1987 Prescription Drug Marketing Act or PDMA. The PDMA required states to license prescription drug wholesalers; put in place a requirement for non-authorized distributors to show the “pedigree” of the drug; and third, imposed requirements for the distribution and accountability of drug samples. Under pressure from various interest groups Congress and the FDA delayed imposing the “pedigree” requirements for decades until technology was developed in the form of Radio Frequency Devices (“RFD”) which allows manufacturers to track and trace each of the prescription drug products. Unfortunately, track and trace technology does not necessarily get used during the supply chain process of base chemical ingredients which are often sourced from third-world or lesser developed nations with lax quality control oversight.

In 2015, Congress enacted the Drug Supply Chain Security Act, which required all health care providers to provide prescription drugs to patients which are purchased from authorized licensed trading partners. However, as evidenced by a July 22nd release from the FDA; see “Counterfeit Prescription Pills Containing Fentanyls: A Global Threat” at www.DEA.gov. When it comes to fentanyl, the danger appears to be increasing. Chinese suppliers of legitimate ingredients are at the same time manufacturing large amounts of uninspected synthetic ingredients like fentanyl. The report indicates that counterfeiters can transform as little as one kilogram of fentanyl powder costing a few thousand dollars into hundreds of thousands of counterfeit pills reaping millions of dollars in profits.

Trafficking in counterfeit pharmaceuticals is subject to both criminal and civil penalties. So when consumers think that it’s fun to buy knock-offs they ought to think about the fact that they themselves could be a victim of this dangerous game. The death of the icon of the “Minneapolis Sound” in his Paisley Park home will effect America’s culture for decades to come.

To learn more about anti-counterfeiting, contact Anthony Keats,  the co-chair of the Copyright & Trademark Practice at Stubbs Alderton & Markiles, LLP. You can reach him at akeats@stubbsalderton.com or (310) 746-9802.

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Ready for the Market – How to Successfully Position Your Company to be Sold

MERGER SIGN BELOW OFFICE BUILDINGNow is a great time for entrepreneurs to sell their companies. However, even in good times investment bankers will tell a seller that the company must be positioned for sale to be successful.

What needs to be prepared to position a company for sale?
The seller must have his or her company financials in good order. This usually means reviewed financials at a minimum. Most sophisticated buyers, like a private equity fund for example, will require audited financials as part of their internal investment criteria. They may also perform a quality of earnings report to detect any flaws in your accounting system or non compliance with GAAP.

You must have your corporate records and minute book in order. This includes your organizational documents, director and shareholder actions, stock register and other customary items. These items should be complete, signed and in the minutes book.

Make sure your contracts are signed, in writing (where applicable), and in one place with all amendments. This will help to expedite the buyer’s due diligence review and reflect favorably on your management skills.

You should also have offer letters or employment agreements, assignments of inventions and nondisclosure agreements in place for key employees, particularly if your business is dependent on key technology and personnel. If you have an HR function, you should have employment policies in place.

Determine the impact on employees if information about a possible sale leaks out to the work force. If that is an issue, handle all due diligence off site or online through a secure website (a data room) and limit the buyer’s access to personnel until the latest possible time.

What legal issues might come up in the sale process?
There are obviously many legal issues that will come up, but here are just a few.

If you have been sued or are about to be, you should have your litigation counsel prepared to explain the status of the cases, the likely cost you may incur if you lose (or even if you don’t lose but have big attorneys fees), the effect on the company’s business, etc. This will surely come up in the buyer’s due diligence. There will likely be an escrowed amount from the sale proceeds to handle the cost of the litigation so as to shift some or all of the risk to the seller.

If you are in a regulated business, make sure you are in compliance with applicable rules and that your counsel can confirm this. The buyer likely will require a legal opinion from counsel to address this and other customary legal issues.

If you are in a technology business, be thinking about how you have protected your intellectual property, including trade secrets, and whether there are any infringement issues. This will be heavily negotiated in the purchase agreement.

How can companies stay on top of contractual matters?
Securing landlord or third-party contract approvals to a sale often takes weeks or longer to secure. If this is going to be an issue in your company, plan ahead and start the process as early as possible — recognizing that the deal may fall apart, so don’t jump the gun too soon.

Check all contracts for change of control provisions to ensure compliance with those provisions.

Start the process early with your lawyer to go over representations and warranties that are likely to be included in a purchase agreement. You will need to be thinking about scheduling exceptions to representations, insurance coverage, environmental matters, undisclosed liabilities, and numerous other matters that will be the subject of representations and covenants in the purchase agreement.

Start thinking about the letter of intent. Will it be binding or nonbinding? Will it go into extensive detail so you know upfront whether you will be able to resolve all material business points at the letter of intent stage? Will there be an earn-out? Will there be a financing contingency? Will you have to provide seller financing? How will the deal be structured? Will there be a standstill period?

Who should be involved in the process and what should be communicated to them?
Locate and engage suitable M&A counsel, accountants (if you do not already have one) and an investment banker to assist in the sale. If your golf buddy is your lawyer, chances are he may not be up to the task of doing an M&A deal. You will need a lawyer that specializes in M&A because it is complicated and part of the negotiations revolve around what are ‘market’ terms in the current environment.
There is often tax structuring necessary to secure a tax efficient sale, so engage tax experts early in the process. The M&A law firm you use will likely have this expertise.

Discuss with your investment banker (if you plan to use one) what they believe is the current market valuation for a company such as yours in today’s market so your expectations are met when the company is marketed. There are investment bankers who handle middle market as well as larger, or smaller, deals. M&A counsel can help you select a banker for your deal.

Even though you think you know all the buyers in your market niche, investment bankers have big rolodexes and have contacts with strategic as well as financial and foreign buyers. Although the investment banker will charge a fee, you can often get a significantly higher price using an investment banker. This is not essential but certainly something to consider carefully.

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Jonathan R. Hodes is a partner of the Firm, and co-chair of the Mergers and Acquisitions Practice Group.  Jonathan concentrates in the area of domestic and international business structures and operations with an emphasis on corporate law, securities, and general business law, including international cross-border transactions.  He devotes substantial time to buy side and sell side mergers and acquisitions, management buy-outs, leveraged buy-outs, leveraged recaps, mezzanine and senior debt financing transactions, work-outs and secured lending and leasing transactions.

Jonathan’s experience includes a broad range of corporate work including complex public and private, domestic and international mergers and acquisitions with emphasis on middle market companies, purchases and sales of middle market companies, representation of emerging growth companies from inception through various tiers of venture capital financing and IPO’s and corporate finance transactions. He also works on private equity deals with emphasis on add on portfolio acquisitions to existing platforms, and dispositions of portfolio companies.

Jonathan’s practice also includes corporate, partnership and limited liability company formation and ongoing representation; as well as securities offerings including public, private, Rule 144A, and international Regulation S offerings as well as securities compliance matters. He has a broad range of industry experience in many industries, including biologics, money service business, television production and distribution, real estate developers, construction management, technology companies, hotel owners and operators, video game publishers, and the manufacturing sector.

For more information regarding our Mergers & Acquisitions Practice Group, please contact Jonathan Hodes at jhodes@stubbsalderton.com or (818) 444-4508.

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Brexit and Intellectual Property Rights

brexitThe withdrawal of the United Kingdom from the European Union will have many consequences for businesses around the globe. However, it appears to be the consensus of expert commentators on the law of the UK and the EU that it is unlikely that there will be any immediate dramatic changes to how intellectual property rights will be treated in the UK.  To read the full publication in the Los Angeles Daily Journal, written by Tony Keats, click here.

Tony-Keats-v2Anthony Keats, co-chair of the Copyright & Trademark Practice. Tony’s almost three decade legal career has focused on both the business and the legal protection of brands and creative content from consumer products to entertainment, from designer goods to the Internet. Since he commenced practice, he has provided counsel and has litigated cases on behalf of many of the world’s largest consumer product and entertainment companies, as well as individual entrepreneurs, actors, and musicians.

 

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INCENTIVE COMPENSATION IDEAS

Incentive Compensaton PlanThere are a number of types of instruments that an employer can issue key employees and independent contractors (employees and independent contractors are referred to collectively as “service providers” to signify that the benefit discussed applies to independent contractors as well as employees) to give the service providers a piece of the upside in the enterprise.  This article will a summary of most of the popular ones, their standard terms and their tax treatment for the employer and employee or contractor.

What can be issued depends in large part on the type of entity that the employer is.  There are some instruments like options that both a corporation and a limited liability company (LLC) may issue and some that only one or other may issue.

CORPORATIONS

Corporations may issue incentive instruments that are geared to the value of their stock, like options and stock appreciation rights.  An option is the right to purchase a share of the employer’s stock at an agreed price.  The exercise price should not be less than the stock value as of the date of issuance of the option.  Failure to do so will result in income inclusion to the recipient service provider under Section 409A of the Internal Revenue Code (the “Code”). That income would be able to be included in the year of receipt and annually as the spread between stock value and exercise price increases.  (Treasury Regulation §1.409A-1(b)(5).)  The need to value the stock of closely held employers to maintain compliance with Section 409A has created a demand for “409A appraisals” within the valuation industry.  Treasury Regulation §1.409A-(b)(5)(iv)(B)(2)(iii) affords a safe harbor for an employer that bases its valuation on a good faith written valuation report.

There are two kinds of options that a corporation may issue, incentive stock options (“ISOs”) and non-qualified options (“NQOs”).   The benefits of ISOs are (a) the exercise of an ISO does not result in ordinary compensation income for the option holder and (b) income, in the form of capital gain, is not recognized until the stock is disposed of.  (Code Section 422(a).)  If the optionee holds the stock for at least two years from the date of issuance of the ISO and at least one year from date of exercise of the ISO, the gain on the sale of the stock would be long term capital gain.

To be an ISO the option must have been issued to an employee (not an independent contractor or outside director) of an employer corporation; the option must have been issued pursuant to a plan approved by the corporation’s shareholders within 12 months of the adoption of the plan by the corporation’s board;  the option may not have more than a 10 year term from the date of issuance; the option may not be transferable and may not be issued to a 10% or more shareholder (the option must have an exercise price of more than 110% of the stock’s value on the date of issuance if the option is issued to a 10% or more shareholder).  (Code Section 422(b).)

Exercise of an NQO results in income for the service provider in the difference between the value of the stock and the exercise price on the date of exercise.  That benefit is tempered by the inclusion of the difference between stock value and exercise price of an ISO in alternative minimum taxable income, potentially implicating the alternative minimum tax for the option holder.

A stock appreciation right (SAR) is the right of a service provider to receive a cash bonus in the amount of the stock value on the date of exercise over the stock value on the date of issuance.  Exercise of the SAR may be limited to certain events or may exercisable at any time by the service provider, both employee and independent contractor.  To avoid the reach of Section 409A, the SAR must be based on appreciation over the value of the stock on the date of issuance of  the SAR.

Phantom stock rights and restricted stock units (RSUs) are the right to receive a cash bonus equal the value of the employer’s stock.  (“A RSU provides a right to receive an amount of compensation based on the value of stock that is payable in cash, stock, or other property.”  (Treas. Dec. 9716 (Apr. 1, 2015).)  Because Section 409A applies to the right to receive a cash bonus, payments with respect to phantom stock rights and RSUs effectively have to be limited as follows:

(1) the service provider’s “separation from service”, subject to a six-month delay requirement for separation from service of a “specified employee” (generally an officer or highly compensated employee of a public company);

(2)  the date the service provider becomes “disabled”;

(3)  the service provider’s death;

(4)  a specified time or fixed schedule specified under the plan at the date of the deferral of the compensation;

(5)  a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the corporation’s assets; or

(6)  the occurrence of an “unforeseeable emergency.”

Grants of equity or any property (options are excluded from the term property for this purpose) to a service provider result in compensation income upon the earlier of issuance of the property or the lapse of any restrictions on the grant.  (Code Section 83(a) and Treasury Regulation §1.83-3(a)(2).)  The recipient service provider has the ability to include the value of the unvested equity grant in income as of the date of receipt.  (Code Section 83(b).)  In a start up, the election is almost always made to include the value of the equity grant in income as of the date of issuance, despite the risk that the vesting requirements might never vest, but with any gain on the sale of the equity eligible for long term capital gain treatment if the holding period of one year is met.

 

LIMITED LIABILITIES COMPANIES

Limited liability companies (LLCs) as well as limited partnerships and general partnerships may offer all of the incentive compensation instruments that a corporation can except for ISOs.  But, LLCs may offer profits interests which are probably the best incentive compensation instruments available.

A profits interest is an interest in an LLC that by definition would yield the recipient no share of the proceeds if the LLC’s assets were sold at fair market value and then the proceeds were distributed in a complete liquidation of the LLC. This determination generally is made at the time of receipt of the LLC interest.  (Revenue Procedure 93-27, 1993-2 C.B. 343.)  The profits interest treatment is only open to interests granted for services to the LLC.  The concept of a profits interest as not being includible in the recipient’s income on receipt is beneficial as the benefit is not dependent on the valuation of the interest granted, but on the assets of the LLC.

When a profits interest is granted, the LLC values its assets and sets that value as the “base value” or the “threshold amount.”  Once the LLC has made cumulative distributions equal to the base value/threshold amount, the profits interest participates along with the other holders of the class of LLC interest granted.  If the LLC sells an asset and recognizes long term capital gain, the profits interest holder recognizes long term capital gain as well.

Unlike an ISO in the corporate context, there is no income on grant of the profits interest (either for regular tax or alternative minimum tax purposes).

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Michael Shaff joined the firm in 2011 as Of Counsel. He is chairperson of the Tax Practice Group. Michael specializes in all aspects of federal income taxation. Mr. Shaff has served as a trial attorney with the office of the Chief Counsel of the Internal Revenue Service for three years. Mr. Shaff is certified by the Board of Legal Specialization of the State Bar of California as a specialist in tax law. Mr. Shaff is a past chair of the Tax Section of the Orange County Bar Association. He is co-author of the “Real Estate Investment Trusts Handbook” published annually by West Group.

For more information about the Incentive Compensation Plans and the Tax & Estate Planning Practice at Stubbs Alderton & Markiles, LLP, contact Michael Shaff at mshaff@stubbsalderton.com

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“How to Tighten Contracts & Minimize the Expense of Litigation” by Ryan C.C. Duckett

Simple Contract Drafting and Negotiation Tips

From the inception of creating a contract to the closing prior to execution, word accuracy and term clarity helps shield contracts from that not so slim chance that, my contract won’t be litigated.  Do not be so quick to “Frankenstein” a contract with a myriad of cut and pastes. A little precaution can save your client a great deal of fortune.

Introduction of Contracts: The introductory clause of a contract is as critical as the body because it identifies the parties of an agreement. What seems so simple is easy to overlook. For instance, in a 2015 celebrity case dismissed on 9/11, and affirmed in 2016 by the California Court of Appeal, Kanye West and Kim Kardashian filed suit against Chad Hurley and AVOS Systems, Inc. for broadcasting confidential video of Kanye’s marriage proposal to Kim in violation of a confidentiality provision precluding publishing any video of Kanye’s proposal before it was published by Kim’s reality TV show Keeping Up With The Kardashians. The case was decided on whether Hurley’s tweet with a link to video of the proposal was a breach of the agreement by AVOS. Although Hurley was CEO of AVOS, he never signed the agreement on behalf of AVOS – according to him – and, whether someone is acting on behalf of a company is a question of facts, which means, it’s for a jury to decide[1]. Hurley was found liable but his company AVOS got off scot-free. Seriously? How could it be more obvious what was intended by Kanye and Kim? Simple…A quick definition defining all parties at the onset of the contract removes any question of fact, making it clear who the agreement binds.

Terms of Contracts: The terms of a contract should be as black and white as the paper it’s on. Many common words such as “material”, “full disclosure” or “efforts,” originally thought of as pinpointing the intentions, recently are vastly becoming more diluted from overuse, leaving too much room for interpretation. For example, what is material to one may not be so material to another, especially in contracts when interests are adverse and what one cares about, the other does not. Unfortunately, parties wait until the heat of litigation until clarifying what was originally intended.

By way of another example: Q. How are best efforts different from reasonable efforts?When parties enter into an exclusive distribution agreement, they like to set the tone for the distributor about the “efforts” the distributor must apply. Although California courts have yet to divulge into intricacies behind levels of effort, New York courts have and find it “murky.” Under the Uniform Commercial Code § 2-306(2), the producer may want to remain silent on the degree of effort to be expended by the distributor because it requires “best efforts…unless otherwise agreed.” In an original case defining best efforts, Falstaff Brewing Co. bought Ballantine brewing labels, trademarks, and everything else but the beer, with a promise to use “best efforts” to distribute it. Well, along came Guinness beer with an unprecedented low price. Falstaff intuitively succumbed to distributing the lower priced beer. Falstaff, however, was held in breach for failing to continue selling Ballantine, even though Falstaff was forced to incur an economic loss by doing so.[2]

Where parties have contracted to use a lesser degree of efforts, such as ”reasonable efforts” or “commercially reasonable efforts,” the courts held that such efforts are “interchangeable” with “best efforts.”[3]  Bottom line being to expressly articulate criteria intended to qualify as meeting your client’s “justifiable expectations,”[4]instead of leaving it to a precarious chance by courts’ “case by case” rulings.

Dispute Resolution of Contracts:  At the negotiation stage, many parties try to rush through the dispute resolution terms in the face of a breach, hoping this will never be the case. Coincidentally, this is the best and only time to negotiate such difficult terms. In a February 18, 2016 case initiated by Allstate Insurance for an insured’s alleged breach, the Defendants successfully dismissed the action immediately when the trial court ruled that a pre-litigation demand letter adequately satisfied the terms to enter into “good-faith negotiations” before filing a lawsuit.[5] Literally, “good faith negotiations before filing a lawsuit” really means an agreement to try to agree, but requires no back and forth process. If you want more good faith interaction before someone races to file a lawsuit, the contract should explicitly state each step a party must take.

Although, only a few primary examples are discussed, there are frequent circumstances that ultimately lead to litigation resulting from contracts using common pitfalls. Taking the time to contact an attorney like those at Stubbs Alderton & Markiles, LLP, may be the solution to tighten a contract enough to minimize the potential expense of litigation.

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151215-Stubbs-116-retouched_600x400For any further information on tips or avoiding litigation, contact Ryan C. C. Duckett at rduckett@stubbsalderton.comor 818-444-4546. Ryan Duckett is an attorney of Stubbs Alderton & Markiles, LLP. Ryan’s practice focuses primarily on employment, commercial, intellectual property and entertainment litigation. He has successfully litigated cases for both plaintiffs and defendants with trials and appellate experience that has secured over millions of dollars in jury verdicts for his clients, to arguing California jury instructions that were created by the case he second chaired.  He manages and handles all aspects of civil actions from pre-litigation matters to law & motion to trials, post-trials & appeals.

 

[1] Pacific Concrete Products Corp. v. Dimmick (1955) 136 Cal.App.2d 834, 838.

[2] Bloor v. Falstaff Brewing Co. (1979) 601 F.2d 609, 609-613.

[3] Samson Lift Tech., LLC v. Jerr-Dan Co. (Sup. Ct. 2014)

[4] E. Allan Farnsworth, Contracts § 7.17 (3d Ed. 2004)

[5] Allstate Ins. Co. v. Berg (Cal.1st.Dist., Div. 4, Feb. 2016 – affirmed)

The contents of this article do not constitute legal advice and are not intended to be used as a substitute for specific legal advice or opinions.

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Highlights of the PATH Act and How It Benefits Startup Companies – By: Michael Shaff

PATH-Act-carnegie-invest.jpgCongress passed and the President signed a tax act in December. Here are some highlights that may benefit startup companies.

R&D Changes

  1. R&D Credit made permanent. The research and development (“R&D”) credit of 20% of qualified research expenditures had expired for costs incurred after December 31, 2014. The new tax act (known as the Protecting Americans from Tax Hikes or the PATH Act) retroactively extends the credit for costs incurred after December 31, 2014. If your company filed a tax return for a fiscal year or a short year ending during 2015 and your company had qualifying R&D costs, consider filing an amended return to claim the credit on the qualifying expenses.
  1. R&D Credit applicable against AMT. An eligible small business (one with average annual gross receipts over the most recent three year period of not more than $50 million) may claim the R&D Credit against the alternative minimum tax (“AMT”). AMT is imposed when the alternative minimum tax [imposed at 20% for corporations and for individuals and other non-corporate taxpayers at 26% (for AMT net income not more than $175,000) or 28% (for AMT net income over $175,000) but computed without many deductions and credits], exceeds the regular tax. The regular tax is imposed at up to 39.6% for individuals and other non-corporate taxpayers and 35% for corporations.
  1. R&D Credit applicable against payroll tax. A qualified small business—meaning an entity having less than $5 million in gross receipts and which did not have taxable receipts in any year more than five years previous (meaning a startup that recently started to have sales income)—may claim some or all of the R&D Credit against the employer portion of FICA withholding. The amount of the R&D credit that may applied to reduce the business’s employment tax liability is limited to $250,000 per year. There are several further limitations on the use of the R&D credit against employment taxes, one of which applies to limit the use of the R&D credit against the entity’s employment tax liability, to the lowest of (a) the amount of the R&D credit elected for use against the employment tax liability, (b) the amount of the R&D credit for the year, or (c) the amount of the R&D credit that would otherwise go unused for the year.

Small Business Changes

  1. 1374 tax on built in gain for S corporations only applies for 5 years now. When a C corporation elects S corporation status or when an S corporation acquires assets of a C corporation in a tax-free transaction, it must determine its subchapter C built in gain—the excess of (i) the value of the assets of the C corporation at the time that the corporation’s subchapter S election becomes effective or the time that the acquisition of the assets of the C corporation by the S corporation is effective over (ii) the tax basis of those assets. If the S corporation sells those assets within five years of the date of the subchapter S election or the date of acquisition of those assets, the S corporation is taxable at the corporate level on the subchapter C built in gain. That five year period was reduced from ten years. A C corporation now only has to wait five years after the effective date of its subchapter S election before it becomes a completely pass-through entity.
  1. Section 1202 100% exclusion now permanent. Section 1202 allows a complete exclusion from tax on gain from the sale of stock of a qualified small business corporation. This may be a very attractive provision for startup companies that engage in a qualified business, in general any business other than personal services, real estate, farming or hotel management. Any C corporation engaged in a qualified business with aggregate gross assets having a value of $50 million or less may be a qualified small business. If an investor (other than a C corporation investor) holds the qualified small business stock for five years, any gain on the sale is permanently excluded from federal income taxation. This had been the treatment since 2010. This provision was annually extended. The PATH act made the 100% exclusion permanent. Incidentally, if qualified small business stock is disposed of after being held for six months but less than five years, the gain may be deferred if the amount realized (not just the gain) is rolled into new qualified small business stock within 60 days of the first sale. That latter rule was unaffected by the PATH act.

Section 179 Expensing Changes

  1. Section 179 allows a business to deduct up to $500,000 in qualified capital expenditures that otherwise would have to be capitalized and depreciated over the useful life of the assets purchased. The PATH act provides that the $500,000 expensing limitation will now be indexed for inflation. The ability to expense the cost of capital assets is reduced for each dollar over $2 million that capital expenditures represent, so at $2.5 million in capital expenditures, the deduction is reduced to zero.
  1. Section 179 allows for expensing of the cost of computer software that might otherwise have to be depreciated or amortized. The computer software would have to satisfy the other requirements of Section 179 for expensing capital expenditures.
  1. The right to revoke the 179 election without IRS consent has been made permanent by the PATH act.
  1. The PATH act made permanent the right to expense up to $500,000 (commencing in 2016) of the cost of qualified real property, which is defined as qualified restaurant property or qualified retail improvement property that was (1) of a character subject to the allowance for depreciation, (2) acquired for use in the active conduct of a trade or business and (2) not excluded under any of the rules that exclude other types of property from being “section 179 property.” The cap on the cost of qualified real property that could be expensed was $250,000 for 2015.

Section 181

Section 181 of the Internal Revenue Code allows expensing of up to $15 million ($20 million for expenses incurred in certain designated distress and low income communities) in film and TV production costs as long as 75% of the compensation costs for actors, directors, production personnel and producers were for services performed in the U.S. Section 181 was supposed to sunset for production costs incurred after 2015, but the PATH act extended the eligibility for the Section 181 deduction for production costs.

______________________

Michael_Shaff_crop

Michael Shaff joined the firm in 2011 as Of Counsel. He is chairperson of the Tax Practice Group. Michael specializes in all aspects of federal income taxation. Mr. Shaff has served as a trial attorney with the office of the Chief Counsel of the Internal Revenue Service for three years. Mr. Shaff is certified by the Board of Legal Specialization of the State Bar of California as a specialist in tax law. Mr. Shaff is a past chair of the Tax Section of the Orange County Bar Association. He is co-author of the “Real Estate Investment Trusts Handbook” published annually by West Group.

For more information about the PATH Act and the Tax & Estate Planning Practice at Stubbs Alderton & Markiles, LLP, contact Michael Shaff at mshaff@stubbsalderton.com

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“How to Tighten Contracts & Minimize the Expense of Litigation” by Ryan C.C. Duckett

Simple Contract Drafting and Negotiation Tips

From the inception of creating a contract to the closing prior to execution, word accuracy and term clarity helps shield contracts from that not so slim chance that, my contract won’t be litigated.  Do not be so quick to “Frankenstein” a contract with a myriad of cut and pastes. A little precaution can save your client a great deal of fortune.

Introduction of Contracts: The introductory clause of a contract is as critical as the body because it identifies the parties of an agreement. What seems so simple is easy to overlook. For instance, in a 2015 celebrity case dismissed on 9/11, and affirmed in 2016 by the California Court of Appeal, Kanye West and Kim Kardashian filed suit against Chad Hurley and AVOS Systems, Inc. for broadcasting confidential video of Kanye’s marriage proposal to Kim in violation of a confidentiality provision precluding publishing any video of Kanye’s proposal before it was published by Kim’s reality TV show Keeping Up With The Kardashians. The case was decided on whether Hurley’s tweet with a link to video of the proposal was a breach of the agreement by AVOS. Although Hurley was CEO of AVOS, he never signed the agreement on behalf of AVOS – according to him – and, whether someone is acting on behalf of a company is a question of facts, which means, it’s for a jury to decide[1]. Hurley was found liable but his company AVOS got off scot-free. Seriously? How could it be more obvious what was intended by Kanye and Kim? Simple…A quick definition defining all parties at the onset of the contract removes any question of fact, making it clear who the agreement binds.

Terms of Contracts: The terms of a contract should be as black and white as the paper it’s on. Many common words such as “material”, “full disclosure” or “efforts,” originally thought of as pinpointing the intentions, recently are vastly becoming more diluted from overuse, leaving too much room for interpretation. For example, what is material to one may not be so material to another, especially in contracts when interests are adverse and what one cares about, the other does not. Unfortunately, parties wait until the heat of litigation until clarifying what was originally intended.

By way of another example: Q. How are best efforts different from reasonable efforts? When parties enter into an exclusive distribution agreement, they like to set the tone for the distributor about the “efforts” the distributor must apply. Although California courts have yet to divulge into intricacies behind levels of effort, New York courts have and find it “murky.” Under the Uniform Commercial Code § 2-306(2), the producer may want to remain silent on the degree of effort to be expended by the distributor because it requires “best efforts…unless otherwise agreed.” In an original case defining best efforts, Falstaff Brewing Co. bought Ballantine brewing labels, trademarks, and everything else but the beer, with a promise to use “best efforts” to distribute it. Well, along came Guinness beer with an unprecedented low price. Falstaff intuitively succumbed to distributing the lower priced beer. Falstaff, however, was held in breach for failing to continue selling Ballantine, even though Falstaff was forced to incur an economic loss by doing so.[2]

Where parties have contracted to use a lesser degree of efforts, such as ”reasonable efforts” or “commercially reasonable efforts,” the courts held that such efforts are “interchangeable” with “best efforts.”[3]  Bottom line being to expressly articulate criteria intended to qualify as meeting your client’s “justifiable expectations,”[4] instead of leaving it to a precarious chance by courts’ “case by case” rulings.

Dispute Resolution of Contracts:  At the negotiation stage, many parties try to rush through the dispute resolution terms in the face of a breach, hoping this will never be the case. Coincidentally, this is the best and only time to negotiate such difficult terms. In a February 18, 2016 case initiated by Allstate Insurance for an insured’s alleged breach, the Defendants successfully dismissed the action immediately when the trial court ruled that a pre-litigation demand letter adequately satisfied the terms to enter into “good-faith negotiations” before filing a lawsuit.[5] Literally, “good faith negotiations before filing a lawsuit” really means an agreement to try to agree, but requires no back and forth process. If you want more good faith interaction before someone races to file a lawsuit, the contract should explicitly state each step a party must take.

Although, only a few primary examples are discussed, there are frequent circumstances that ultimately lead to litigation resulting from contracts using common pitfalls. Taking the time to contact an attorney like those at Stubbs Alderton & Markiles, LLP, may be the solution to tighten a contract enough to minimize the potential expense of litigation.

________________________________

151215-Stubbs-116-retouched_600x400For any further information on tips or avoiding litigation, contact Ryan C. C. Duckett at rduckett@stubbsalderton.com or 818-444-4546. Ryan Duckett is an attorney of Stubbs Alderton & Markiles, LLP. Ryan’s practice focuses primarily on employment, commercial, intellectual property and entertainment litigation. He has successfully litigated cases for both plaintiffs and defendants with trials and appellate experience that has secured over millions of dollars in jury verdicts for his clients, to arguing California jury instructions that were created by the case he second chaired.  He manages and handles all aspects of civil actions from pre-litigation matters to law & motion to trials, post-trials & appeals.

 

[1] Pacific Concrete Products Corp. v. Dimmick (1955) 136 Cal.App.2d 834, 838.

[2] Bloor v. Falstaff Brewing Co. (1979) 601 F.2d 609, 609-613.

[3] Samson Lift Tech., LLC v. Jerr-Dan Co. (Sup. Ct. 2014)

[4] E. Allan Farnsworth, Contracts § 7.17 (3d Ed. 2004)

[5] Allstate Ins. Co. v. Berg (Cal.1st.Dist., Div. 4, Feb. 2016 – affirmed)

The contents of this article do not constitute legal advice and are not intended to be used as a substitute for specific legal advice or opinions.

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Preccelerator Program Company LockAware Publishes Article Regarding Locksmith Scams and their Entrepreneurial Journey

 

Lockawre-logoSAM Preccelerator Program company LockAware published an article about the source of their idea for LockAware, a startup designed to combat fraud in the locksmith industry.  To read the full article, click here.

For more information about LockAware, visit www.lockaware.com

For more information about the Preccelerator® Program, visit www.preccelerator.com or contact Heidi Hubbeling at hhubbeling@stubbsalderton.com.

 

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SAM Wire – November 2015

 

 

November 10, 2015
SAM Wire

You’re Invited! Startup Superhero Series with James Citron and Networking Under the Stars – Nov 12, 2015

Please join Stubbs Alderton & Markiles, LLP and CohnReznick LLP for a special invitation-only speaker session followed by an opportunity to network under the stars.
What is a startup superhero? Join us as James Citron, CEO of Pledgeling, is interviewed by Matt Swider, US Mobile Editor for TechRadar, on the highs and lows of entrepreneurship and what it feels like to create a brand used by thousands of people.
When:
Thursday, November 12, 2015
5:30-7:00pm – Startup Superhero Series with James Citron
7:00pm-9:30pm – Networking Under the Stars (2nd Floor Patio)
Location:
Stubbs Alderton & Markiles, LLP
1453 3rd Street Promenade, Suite 300
Santa Monica, CA 90401
RSVP:
Katie Garcia, 310-843-8218

For more information, click here.

 Preccelerator Program Spotlight

 

Rally provides location-based marketing services for mobile companies. We convert foot traffic at our partner locations into mobile engagement and users through the use of digital technology, including free wifismart phone charging, proximity beacons and digital displays.
We engage customers with contextual messaging at points of influence. Our sponsorship campaigns offer methods of exclusive, high-impact interactions for your brand to maximize your reach and attract valuable users within key demographics.

Partner locations include bars, restaurants, coffee shops, malls, stadiums and hotels. For more information, check out  www.rallypwr.com 

Stubbs Alderton & Markiles, LLP Featured as One of the 25 Top Boutique Law Firms in California by the Daily Journal

Stubbs Alderton & Markiles, LLP is proud to announce that we have been selected as one of the top 25 boutique law firms in California by the Daily Journal in their October 2015 “Top Boutiques” supplement. Only two firms were selected whose practice is primarily business and technology law.  The term “boutique” is assigned to a law firm of any size where at least 90 percent of the firm’s attorneys devote 100 percent of their practice to one specialty.
Stubbs Alderton is a business law firm with a niche in emerging growth and technology. We handle public securities, mergers and acquisitions, entertainment, intellectual property and brand protection while representing Southern California businesses from venture-backed emerging growth companies to midsize and large companies involved in technology, entertainment, video games, apparel and medical devices.

Stubbs Alderton & Markiles, LLP also sets itself apart with our innovative business model which includes SAM Venture Partners, SAM Development Company, Preccelerator Program, and its joint venture FlashFunders.
We take great pride in fostering growth in the Los Angeles startup eco-system.

 

To read the full article, click here.

 

SAM Joint Venture Online Equity Funding Platform FlashFunders Surpasses Twelve Million In Investments for Startups

 

SAM joint venture, FlashFunders, the online equity funding platform accelerating innovation within the capital raising landscape, today announced on its one-year anniversary that it has successfully funded over twelve million dollars in startup seed rounds. In addition to this investments milestone, FlashFunders will partner with Raven Ventures to further ensure that featured offerings are provided access to an extensive global network of accredited investors. Raven Ventures, a leading global seed and early stage venture capital firm, has committed to investing five million dollars in startups listing on the FlashFunders platform effective immediately.
 
To read the full article, click here. 

 Preccelerator Program Pizza and Pitch Day

Big shout out to our Preccelerator companies that participated in this month’s Pizza and Pitch day!  A mock pitch session was organized for each company to present to their peers and mentors and receive constructive critiques.  A great success!  Prizes were given for pitching the closest to the alotted time frame, best PowerPoint presentation, and the People’s Choice award.   A big “thank you” to Preccelerator mentor Mark Wald of Supporting Strategies for sitting in as a guest judge today.  For more information about the Preccelerator Program, contact Heidi Hubbeling, Director of Operations, at hhubbeling@stubbsalderton.com or (310) 746-9803.
To view Pizza and Pitch day!, click  here.

 

Startup Formation – 4 Points to Consider When Deciding to Form Your Startup as a California or Delaware Corporation

A preliminary (legal) question that startup companies typically want answered is where they should form their startup entity.  With the rise of “Silicon Beach” in the LA market, this question often arises in the context of whether a company that has set up shop in LA should form a California or Delaware corporation.[1]  There are several items to consider in answering this question and while there is often no “right” or “wrong” answer, here are four common discussion points.
To register, click  here.

 

Issue: 16

In This Issue

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November 12, 2015 

 

 
 
 
 
 
 
 
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Tax & Estate Planning 

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