Raleigh Estate Planning and Corporate Law Attorneys

Business Law

Starting The Transaction – Non-Binding Agreements On Primary Terms

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mergers and acquisitions

Most mergers and acquisitions begin with a non-binding agreement on primary terms. If you’re considering a business transaction, you might wonder how non-binding agreements on primary terms work. Primary agreements are critical to the negotiations process, but it’s important to draft them carefully in order to ensure that they have their intended effect. Here’s what you should know about non-binding agreements on primary terms in mergers and acquisitions:

What is a non-binding agreement on primary terms?

In a merger or acquisition, a non-binding agreement on primary terms is a document that lays out the rough terms of the business transaction. It allows the parties to put some terms on paper and then work to iron out the details. A non-binding agreement lays the framework for additional negotiations in hopes of finalizing the merger or acquisition.

What’s the purpose of a non-binding agreement on primary terms?

Parties enter into non-binding agreements as a way to facilitate business negotiations. A preliminary agreement allows the parties to ensure that they’re generally on the same page when it comes to the terms of the agreement. In that way, the agreement helps them ensure that there’s a good chance that their negotiations are going to be worth their while. A preliminary agreement also helps the parties agree on terms for negotiating.

What’s in a non-binding agreement on primary terms?

A non-binding agreement on primary terms may contain any number of terms. The exact language depends on the preference of the parties. A non-binding agreement on primary terms might include any of the following provisions:

  • Timeline for negotiations
  • Goal timeline to reach a final deal
  • Scope of negotiations – what entities, goods or services are up for discussion
  • A general purchase price
  • Confidentiality
  • Exclusivity
  • Choice of law for interpretation of the agreement
  • Defined damages for a violation of the agreement
  • A statement that the parties are not required to reach an agreement

Is a non-binding agreement ever binding?

Although it might seem ironic, a non-binding agreement can be binding. The entire agreement may be binding, the entire agreement may be non-binding or portions of the agreement may be binding. When you draft a non-binding preliminary agreement, it’s critical to take into account whether you want the agreement to be binding in any way. If you don’t want to require that the parties reach a final agreement, you should also consider whether you want any preliminary terms to be binding while you work on negotiating a final deal.

What parts of a non-binding agreement may be binding?

Some of the parts of a non-binding agreement that may be enforceable include:

Confidentiality

One part of a non-binding agreement on primary terms that’s often binding is a confidentiality requirement. A confidentiality agreement requires the parties to keep the negotiations a secret for a period of time. The reason for a confidentiality agreement is to prevent third parties from trying to compete for business. Even if the agreement doesn’t ultimately require the parties to reach a final deal, a confidentiality clause in a non-binding agreement can be enforceable.

Exclusivity

Most non-binding preliminary agreements require the parties to negotiate exclusively for a period of time. A party in negotiations generally can’t shop the offer around to third parties until the parties involved in negotiations have time to fully explore the possibilities for a final agreement. In addition to confidentiality requirements, exclusivity provisions require the parties to negotiate only with each other for a set period of time.

Good-faith negotiations

If a non-binding preliminary agreement contains a good-faith clause, the parties must negotiate with each other in good faith. A good-faith clause ensures that neither party wastes their time preparing information or conducting due diligence if the other party isn’t really interested in the deal. Good-faith clauses are typically binding during a negotiation period if they’re a part of the preliminary agreement.

How do I know if a non-binding preliminary agreement is enforceable?

A non-binding agreement can specifically state what terms are terms are binding and non-binding. If the agreement explicitly states what provisions are enforceable, that can go a long ways to determine whether the agreement or any of its provisions are binding. In addition, the courts look at the intent of the parties and their behavior. They look at whether the contract is ambiguous. The court interprets a non-binding agreement in the same way that they interpret any other kind of contract.

What’s the penalty if a party violates enforceable terms in a non-binding agreement?

A non-binding preliminary agreement can include liquidated damages. The parties can agree on an amount that a party has to pay if they breach the enforceable provisions of the agreement. Damages for a breach might seek to compensate the non-breaching party for the time and expense that they invest in negotiations. Damages might also try to give the non-breaching party the benefit of the bargain. The damages that apply might depend on the body of law that applies to the agreement.

Choice of law considerations

Because interpretation of a preliminary agreement often depends on the body of law that applies, each party should carefully consider whether to include a choice of law provision in their agreement. An agreement may be governed by the laws where either party is located. An agreement may be interpreted by the laws whether either business is incorporated. The parties can choose the body of law that applies by stating a choice of law provision in their agreement. A choice of law provision can take some uncertainty out of how damages might be calculated in the event of a breach. Each party to a non-binding agreement should consider how each state interprets contracts and what law they want to apply to the agreement.

Be wary of emails and electronic signatures

One thing to be aware of when you’re negotiating a preliminary non-binding agreement is emails and the prevalence of electronic signatures. Most states have laws that are quite permissive in terms of using an electronic signature to execute a binding agreement. Parties negotiating or discussing through email shouldn’t assume that what they state in email is non-binding just because it’s in an email. Remember to be clear in preliminary emails in order to avoid surprises and misunderstandings that can turn into litigation.

Using a preliminary, non-binding agreement to your benefit

A non-binding, preliminary agreement is a common and important part of most mergers and acquisitions. As you draft an agreement, it’s important to carefully consider whether you want each provision of the agreement to be enforceable. Then, it’s important to effectuate your wishes in the agreement. An experienced mergers and acquisitions attorney can help you pursue your goals and avoid pitfalls in the negotiation and drafting process. Call us today or fill out our online contact form to speak with our team about your specific situation.

What Is a Letter of Intent?

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letter of intent m&a

If you’re in business or thinking of selling your business, you might hear the term “letter of intent”, or LOI. You might not know what a letter of intent is or how it can help your business. A letter of intent can be a contract, and it can also just be a statement of the future intent of the parties. It’s a written document executed by two parties that may or may not be binding. Here’s how to know when you need a letter of intent and how a letter of intent can help you in the business world:

What is a letter of intent?

A letter of intent is a written document between two parties. It can help you prepare or finalize a business deal. It outlines the major components of a business deal. A letter of intent is different from a contract because it’s often written in shorthand, and it may not be complete. Generally, it outlines the major points of a business deal between the parties so that the parties can work out the details at a future date.

What is the purpose of a letter of intent?

A letter of intent allows the parties to finalize some terms while they negotiate the remaining details of an agreement. If the parties want to begin conducting business without waiting for a complete contract, a letter of intent can give them some binding terms. In the absence of an agreement, the court might imply a contract between the parties. That can leave the terms of their business open to interpretation and uncertainty. A letter of intent allows the parties to formalize the terms they agree to right away. It allows them to state what they agree to now in hopes of negotiating a more complete agreement in the future.

How are letters of intent used in the business world?

There are multiple ways that letters of intent are typically used in the business world. First, the parties might use a letter of intent to make some of the terms of an agreement binding while they iron out the rest of the details. For example, a business might agree to merge with another company but need time to figure out details like a timeline for sale, transfer of assets and salaries for employees. The parties might use a letter of intent to memorialize their agreement and even state a selling price while leaving time for the parties to work out a timeline and other specifics.

A letter of intent might also be used to give the parties time to negotiate whether they want to enter into a deal. The parties might agree to exclusive and confidential negotiations for a period of time. They might use a letter of intent to state their intent to negotiate and also state their agreements regarding confidentiality and exclusivity. These terms can be binding. One letter of intent might look very different from another depending on the purpose of the letter.

You might use a letter of intent when you need fast performance from another party. You might use it when you have a complicated deal and you want some agreement in place before you iron out the details. A letter of intent can give you time to raise capital or do due diligence in order to decide if you want to complete a business deal.

What are the benefits of a letter of intent?

A letter of intent can be beneficial for business by giving each party the confidence to negotiate in good faith and motivation to invest resources in the negotiations. It can be a psychological boost for each party knowing that the other is serious enough about creating a deal that they want to continue negotiations. When a letter of intent helps the parties begin business quickly, it can help the parties avoid the uncertainty that comes from doing business without certain terms.

What are the drawbacks of a letter of intent?

Because of their ambiguous nature, a letter of intent is often vague. If the parties can’t agree on the final terms of the agreement, the deal might fall apart. They might engage in long negotiations for a deal that ultimately doesn’t end up happening. Alternatively, they might lock in terms that they later determine are unfavorable. The parties may also disagree on the enforceability of some or all of the letter of intent. Finally, leaks or publicity of the letter of intent may attract competing buyers or sellers.

What does a letter of intent typically contain?

A letter of intent may contain any of the following:

  • The basics – Most letters identify the parties and contain a brief statement of the deal that they hope to negotiate.
  • Confidentiality – The parties agree not to talk about the negotiation with third parties. The purpose of confidentiality is to prevent third party buyers or sellers from trying to compete.
  • Exclusive negotiations – If the parties want to negotiate only with each other, they might put an exclusivity requirement in a letter of intent. An exclusivity term can give each party confidence that the other party is present to negotiate in good faith.
  • A fee for backing out – A buyer might want a fee if the seller backs out. That can ensure that the seller negotiates in good faith and that the negotiations and due diligence that the buyer undertakes is worth their time.
  • Good faith negotiations – A requirement that the parties negotiate in good faith can encourage both parties to put their best effort into negotiations.
  • Choice of law – In a letter of intent, a choice of law provision states what state or federal law applies if the parties disagree about any terms of the letter of intent. If there’s a choice of law term, that’s the body of law that the court applies in order to decide the dispute.

Is a letter of intent enforceable?

Whether the letter of intent is enforceable comes down to the intent of the parties. In the event of a dispute, the court looks at the letter and the actions of the parties in order to determine if the parties intended for the letter of intent to be binding. One major factor the court considers is whether any terms in the letter are conditional. That is, if one of the parties only has to perform if an event occurs, the agreement likely isn’t enforceable unless the event happens. For example, if the sale of a business is conditional on the approval of shareholders, and the shareholders don’t approve, the agreement likely isn’t enforceable.

How can I make sure that my letter of intent is good?

To make sure your letter of intent does what you want it to do, it’s important to be clear on what’s enforceable and what’s not. Clearly state whether the entire agreement is enforceable or whether none of it’s enforceable. If you want only some parts of the letter to be enforceable, it’s important to clarify what parts you want to be binding. It’s also important to state what penalties you want to apply to either party if the deal falls through.

Done correctly, a letter of intent can help your business by formalizing agreeable terms and allowing the parties to move forward. If you’re considering selling your business, or if you’re looking at buying one, contact our team of experienced M&A attorneys to schedule a consultation.

WHAT BUSINESS STRUCTURE IS BEST FOR YOUR BUSINESS

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Choosing from the differing business structures available for the formation of your business can be difficult and the choice depends on your preferences and the work to be performed by your business.

Should it be a limited liability company, a partnership, a sole proprietorship, or a corporation? Whenever you start a business, you will have to select one organizational type from the different business structures. This choice determines how your business will be set up and organized. In most instances, you will probably have to choose between a limited liability company (LLC), a partnership, a corporation or a sole proprietorship.

Making the right choice for your business will generally depend upon the type of business, how you want the business to be run, how many owners the business will have, and the financial situation of the business. It may not be possible to find the business structure that will perfectly fit with the needs of your business, but there are some criteria that you can use to find the one that works the best. These criteria are:

  • The different types of liabilities that come with each business structure
  • The expenses and procedures associated with establishing and continuing to run the various business structures
  • Income tax
  • Investment needs

Varied Liabilities
The general rule for this category is that the more dangerous or risky the activity that your business will engage in, the less personal liability you want to have. For example, if your business is going to be engaging in risky activity, such as window-washing high-rise buildings, or constructing bridges for highways, you will probably want to form your business in a way that will minimize any potential liability that you, personally, will have for anything that goes wrong.

Both corporations and LLCs allow business owners a type of “limited liability,” where anyone seeking claims against the business will have a very hard time placing personal liability on you as the owner. Conversely, if you were to organize your business as a partnership or a sole proprietorship, you could be personally responsible for anything the business did wrong.

In a general partnership, every partner can be held personally liable for any claims against the business. For example, if a plaintiff won a lawsuit against the partnership for $1 million, and every other partner, including the partnership, except you was broke or in bankruptcy, you would probably be responsible for paying out the entire $1 million. The same is true for a sole proprietorship, except that there is no one to spread the liability to because you are the sole owner. As a sole prorietor, you are personally responsible for all liabilities incurred by your business.

Expenses and Procedures
If all of the business structures were placed on a scale that depicted how difficult and expensive it is to establish and maintain them, partnerships and sole proprietorships would be near the bottom. In general, there is no special paperwork that needs to be filed in order to establish either of these business structures. In addition, there are rarely any fees associated with establishing or maintaining either of these business structures.

LLCs and corporations, on the other hand, are almost always more difficult and expensive to establish and maintain. In order to establish a corporation or limited liability company, you must file “Articles of Incorporation” with your secretary of state and pay fees associated with the incorporation. The details of the articles of incorporation and is the amount of the fee will vary depending upon the state where you set up your business. In addition, when deciding to form a corporation or LLC, the owners of the business must decide which officers to elect to run the company. The officers typically must include at least a president, vice president and secretary. LLCs and corporations must keep specific and detailed records of any important business decisions, and follow many other formalities that are associated with these business structures.

If you are forming a business on a limited budget or a tight timeframe, it would probably make more sense to use one of the simpler forms of business structures – either a sole proprietorship or a partnership. You would use a sole proprietorship if you are going to be the only owner of the business, and a partnership if there is going to be more than one business owner. If you are going to be engaging in a risky business activity, however, you may want to put in the time, effort and money associated to organize your business into a corporation or LLC in order to gain the advantages associated with limited personal liability.

Income Taxes
The easiest way to think about the different income tax structures that these business structures will use is to break them into two categories — one comprised of those business structures where the business owners pay taxes on business profits, and one that includes all business structures where the business owners do not pay taxes on business profits.

The first category includes sole proprietorships, partnerships and LLCs. These business structures are often referred to as “pass-through” tax entities because the taxes on the business profits and losses pass through to the business owners on their personal income taxes. This means that owners of these three business structures can expect to have complex income tax returns.

Business owners of sole proprietorships, partnerships and LLCs must report and pay taxes on all net profits from their business, even if they take no money out of the business’ account during the tax year. For example, suppose a partnership that has four general partners makes $1 million in a tax year. The partners do not take any money out of the business account because the business must pay its bills in the next tax year. However, because the business had $1 million in net profit for the tax year, each partner must report $250,000 of income on his or her personal taxes.

Unlike the pass through tax businesses, the owners of a corporation do not pay taxes on the net business profits of the corporation. Instead, the business owners of a corporation pay taxes only on the profits they actually take from the corporation in the form of salaries, dividends and bonuses.

Because a corporation is a separate tax entity, it must pay taxes on any profits that remain within the company during a tax year, and also on any profits that it pays out in the form of dividends to shareholders.

There is a tax benefit to forming your business as a corporation. The owners of a corporation do not pay taxes on any profits that the corporation keeps, and the corporation pays taxes at a lower rate than do some individuals. This means that a corporation and its owner may pay less in the form of taxes than if the owner had organized his business as a sole proprietorship, or any of the other business structures.

Investment Needs
Structuring a business as a corporation allows a business to sell shares of ownership in the business through stock offerings. This is different than the other three business structures, which do not allow the selling of part of the business through the sale of stocks. Because of this investment scheme, it may allow owners of a corporation to attract investors and retain employees more easily by offering stock.

If you never plan on having your business go on sale to the public, however, and don’t need the investment incentives to retain employees, you probably do not need to go through the added procedure and cost of forming a corporation. If you desire the limited personal liability that comes from a corporation, you could instead form your business as a LLC. An LLC provides many of the advantages of a corporation while remaining more flexible.

Changing it up
You shouldn’t worry about having your business organization plan set in stone, it rarely is. Often, businesses that start out as sole proprietorships or partnerships grow and convert to LLCs and corporations. If your business needs and plans change, your business structure can probably change with them. Contact Wilson Ratledge and speak with one of the attorneys today about the best structure for your business.

Contact Wilson Ratledge and have one of the attorneys assist you with your business planning needs.

A Brief Overview of Common Business Structures

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At Wilson Ratledge we have helped many clients build their businesses with our expertise on variety of corporate law specifics, such as formation and governance, finances, and disputes. Because corporate law is such a strong point in our areas of practice, we wanted to inform our readers about the basics of the most common business ownership structures.

Sole Proprietorship and Partnerships
Sole proprietorships and partnerships are usually the best initial structures for new business owners. These are structures that do not have to file any special papers to form, simply register your business name as a business entity with the state. In sole proprietorships and partnerships the business and the owner are considered inseparable as far as taxes and financials are concerned. This means that the business owners reports business income and losses on their personal tax return and is personally liable for any business obligations. The only difference between sole proprietorships and partnerships is that a sole proprietorship is just one owner and a partnership is multiple.

Limited Partnerships
While a limited partnership is not generally recommended for most small business owners, because of cost and complexities, they divide financial responsibilities from the daily duties of running the business. The creator of the business, the “general partner” will take care of the functionality of the business, and solicit investments from the “limited partners” who in turn have minimal control over daily business decisions and operations. Due to this trade off, general partners are personally liable for any business debts (unless the general partner is a corporation or LLC), and the limited partners are not personally liable for business debts or claims.

Corporations and LLCs
The main benefit with these types of structures is that personal liability for business debts or claims is minimal and limited, however they can be complicated and costly to start. Corporations are separated legally and as a tax entity, from the people who own or manage the business. The owners only pay taxes on their income in the form of salaries and bonuses; the company pays its own taxes based on income and loss.

With an LLC, the liability is similar to a corporation, but the owners pay taxes on their shares of the business income on their personal tax returns, much like a partnership.

Nonprofit Corporations
A nonprofit corporation is created for charitable, educational, religious, or scientific purposes. Because of their contributions to society, nonprofits can solicit donations and grant money without usually paying taxes on money related to their purpose.

Cooperatives
Also called “groups,” “co-ops,” or “collectives,” a cooperative business is one that is owned and operated democratically by its members. Most states have specific laws to organize the creation of a cooperatives, and managers can file paperwork with the Secretary of State’s office to become formally recognized by the state.

Starting a business can be exciting and hectic, so sometimes important things get left to the wayside. For experienced help in starting your business, turn to the Boca Raton business lawyers of Wilson Ratledge. Our corporate attorneys in Raleigh and Boca Raton, can help you protect your existing business as well. Click here or call us today at (561) 338-4911 to speak with an experienced Raleigh, NC or Boca Raton, FL business lawyer.