Nashville Bar Journal June 2012 - VOL 12, NO. 5
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Cashing Out: Exit Strategies for Closely Held Companies Michael R. Holzman & Kelly Frey
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Proxy Voting at Tennessee Nonprofit Corporation Board Meetings Kerry Ewald & Ralph Levy, Jr
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Summer Reading List
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Trust our combined skills and experience to serve you. We are pleased to announce that on June 1, MGLAW merged with Frost Brown Todd. For information on how we can help your business, visit us at frostbrowntodd.com.
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What Does That Attorney Look Like Who You Only Communicate With Via Email? Need to find the New Address of an Old Law Parnter? ******************************************* Find Out In The New 2012 NBA Attorney Directory!
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2012 DIRECTORIES ARE IN! ORDER YOURS ONLINE TODAY @ WWW.NASHVILLEBAR.ORG
150 4th Avenue North, 10th Floor, Nashville, TN 37219 (615) 242-9272 Fax:(615) 255-3026 www.nashvillebar.org
Nashville Bar Journal A Monthly Publication of the Nashville Bar Association
www.nashvillebar.org
Cashing Out: Exit Strategies for Closely Held Companies
June 11, 2012 - 12:00 p.m. o ADR Committee Meeting
PAGE 6
June 12, 2012 - 11:30 a.m. o L.A.W. Board Meeting
Michael R. Holzman & Kelly Frey
June 13, 2012 - 12:00 p.m. o LRIS Committee Meeting
Proxy Voting at Tennessee Nonprofit Corporation Board Meetings PAGE 8
Kerry Ewald & Ralph Levy, Jr
FROM THE PRESIDENT The Debt We Owe
PAGE 2
John Kitch
__________________________________________________________________ 4 Communiqué • Carbolic Smoke Ball • Golf Tournament • Lawyers for Littles • Film Making Article Update • Golden Oldies • Upcoming Events __________________________________________________________________ 10 Minority Opportunities Committee Summer Intern Program Rita Roberts-Turner
November 3, 2012 o NBF Fellows Dinner @ Hutton Hotel November 13, 2012 o NBA Swearing-In Ceremony @ Justice AA Birch Building
June 14, 2012 - 12:00 p.m. November 15, 2012 o Federal Court Committee Mtg o Memorial Service @ @ Federal Courthouse Downtown Presbyterian Church June 15, 2012 - 12:00 p.m. o Minority Opps. High School November 16, 2012 Intern Lunch & Learn Healthy Bar Party @ Waller Lansden June 19, 2012 - 12:00 p.m. o Ethic & Professionalism December 6, 2012 Committee Meeting o Annual Banquet @ Wildhorse Saloon July 14, 2012 o YLD Carbolic Smoke Ball @ The Ruby September 27, 2012 o NBA Picnic @ Hall of Fame Park
View Full Calendar online at www.nashvillebar.org
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Bill & Phil’s Gadget of the Month: Good Things Come to Those Who Wait
-Golden Oldies-
Bill Ramsey, Neal & Harwell, PLC Phillip Hampton, LogicForce Consulting
__________________________________________________________________ CLE Information - Center Section
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Profile: Chancellor Russell Perkins Bart Pickett
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Summer Reading List
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Disclosure - Announcements • Kudos • People on the Move • Firm News • In Memory
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Classified Listings
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-------------------------------------------------------------------------------Identify the individuals in the photo. Be the first to email the correct answer to nikki.gray@nashvillebar.org and your name (along with your correct entry) will appear in next month’s issue. ------------------------------------------------------------------------
Nashville Bar Journal A Monthly Publication of the Nashville Bar Association
www.nashvillebar.org
John Kitch, Publisher William T. Ramsey, Editor-in-Chief ramseywt@nealharwell.com
FROM THE PRESIDENT
by John Kitch
The Debt We Owe
Eleanor Wetzel, Managing Editor eleanorwetzel@jis.nashville.org
Journal Staff: Nikki Gray, Director of Communications nikki.gray@nashvillebar.org
Tina Ashford, Communications Coordinator tina.ashford@nashvillebar.org
“Remember those that gave their lives, so that we may continue to live in freedom as spelled out in the Constitution of the United States and the Declaration of Independence . . . Lest we forget.” Johnny Q. Gogue III, Desert Storm/Shield veteran
Editorial Committee: Kelly L. Frey Kathleen Pohlid Tim Ishii Tracy Kane Everette Parrish Bill Ramsey Rita Roberts-Turner Eleanor Wetzel David Winters Victoria Webb
Nashville Bar Association Staff Gigi Woodruff Executive Director ----------Tina R. Ashford Communications Coordinator Susan W. Blair Director, Continuing Legal Education Shirley Clay Finance Coordinator Wendy K. Cozby Lawyer Referral Service Coordinator Nikki R. Gray Director of Communications Traci L. Hollandsworth Programs & Events Coordinator Judy Phillips CLE Coordinator Vicki Shoulders Membership Coordinator/Office Manager The Nashville Bar Journal, ISSN 1548-7113, is published monthly by the Nashville Bar Association at 150 Fourth Avenue North, Suite 1050, Nashville, TN 37219, (615) 242-9272. Periodicals Postage Paid, Nashville, TN (USPS 021-962). Subscription price: $25 per year. Individual issues: $5 per copy. POSTMASTER: Send address corrections to Nashville Bar Journal, 150 Fourth Avenue North, Suite 1050, Nashville, TN 37219 No part of this publication may be reprinted without written permission of the Nashville Bar Journal Editorial Committee. The Nashville Bar Journal is not responsible for the return or loss of unsolicited manuscripts or for any damage or other injury to unsolicited manuscripts or artwork. All Articles and Letters contained in this publication represent the views of the authors and do not necessarily reflect the opinions of the Nashville Bar Association.
Nashville Bar Association 150 Fourth Avenue North Suite 1050 Nashville, TN 37219 615-242-9272 Fax 615-255-3026 www.nashvillebar.org
2 Nashville Bar Journal - June 2012
I am writing this column on Memorial Day, Monday, May 28, 2012. As you may know Memorial Day is a federal holiday which originated after the Civil War and is a day for remembering the more than one million men and women who have given their lives in the service of our country. On Memorial Day the flag of the United States is raised to the top of the staff, then lowered to half-mast where it remains until noon to honor the memory of the dead. At noon it is raised to full-staff for the rest of the day, symbolizing our resolve not to let their sacrifice be in vain and the resolve of we, the living, to continue the fight for our freedoms. In reading this morning’s Tennessean I counted forty-one military men and women from Tennessee who had died in Afghanistan and ninety-six who had died in Iraq. The front page had an article about an eleven year old boy from Spring Hill who never knew his dad, a helicopter crew chief who died in Iraq. The young man had only a Book of Memories compiled by his mother to remember his father. The sacrifice of service members from Tennessee and the impact that sacrifice has had on their loved ones has been great, and we should always remember them, not only on Memorial Day, but every day of the year. However, we owe a debt of gratitude, not only to the valiant dead, but to those men and women who are now serving or have served in the armed forces of our country. I recently attended a meeting of members of the Nashville Bar Association who also were veterans of military service. More than forty men and women who had worn the uniform of our country were invited and nearly all of them attended. It was a splendid affair, and it was fascinating for me to see colleagues I had known for years but had not known of their time in the military. There was a retired Army Brigadier General, a former Navy SEAL, a man who as a 19 year old Marine was on Iwo Jima, more officers from the various branches of service than I care to count, and a sprinkling of enlisted men. I was the lowest ranking, having been discharged as an E-4 Specialist Fourth Class (think Corporal without the ability to command troops). I had an almost uncontrollable urge, even after 34 years as a civilian, to salute everyone in sight. The stated purpose of the gathering was for socializing, reminiscing, and telling “war stories,” but the most important was to consider how as a group we might be able to address the needs of less fortunate veterans in our community. During the meeting Judge Bob Echols (that Army Brigadier General I mentioned) issued a “call to arms” for this group to support veterans who need our help; even today many of our veterans are homeless and/or suffering from disorders that keep them from prospering in our society. Lawyers are already answering this call to arms. One of the organizations that have been created to help our needy veterans is Operation Stand Down, a non-
2012 NBA BOARD OF DIRECTORS
profit resource for veterans in Middle Tennessee providing transitional housing, employment readiness training and placement assistance, and coordination of the activities of other agencies in the delivery of similar services. Its clients are honorably discharged veterans with an emphasis on veterans who are homeless. I am proud that my law school classmate Bob Tuke chairs this group and that several other Nashville lawyers are serving on its board or in an advisory capacity. Lawyers can help in other ways, even if not veterans themselves. For example, this last May 4 at its spring conference here in Nashville members of the American Bar Association Young Lawyer’s Committee, hosted by our own NBA Young Lawyers Committee, held a free legal clinic at Operation Stand Down on 12th Avenue South to help veterans and their families understand available federal benefits and complete the required forms to obtain those benefits. I will be asking the Board of Directors of the Nashville Bar Association to consider creating a new committee, a Veterans’ Committee, to provide a framework for those lawyers who are veterans to serve their comrades in need. We lawyers are uniquely positioned to help these people who have given so much to preserve our way of life, and I call upon you all to give of yourselves to help these returning heroes. That is the debt we owe. n
John D. Kitch, President Tom Sherrard, President-Elect Hon. Randy Kennedy, First Vice President Hon. Marietta Shipley, Second Vice President Rebekah Shulman Secretary M. Bernadette Welch, Treasurer Trace Blankenship, Assistant Treasurer Gareth Aden, General Counsel Rebecca C. Blair Robert E. Boston C. Dewey Branstetter, Jr. C. Dawn Deaner Charles K. Grant Barbara D. Holmes Michele M. Johnson Edward D. Lanquist, Jr. John C. McLemore Jeffrey Mobley Patricia Head Moskal Maria M. Salas John R. Tarpley Overton Thompson, III Mandy Haynes Young
Got an Idea for an NBJ Article? We want to hear about the topics and issues readers think should be covered in the magazine. Send it to nikki.gray@nashvillebar.org
The 15th Annual Nashville Bar Association Member Picnic will be held on September 27, 2012! This event is FREE for all NBA Members
BBQ l Open Bars l Socializing l The Hall of Fame Park is located centrally downtown between the Country Music Hall of Fame, Downtown Hilton Hotel and the Schermerhorn Symphony Center.
Nashville Bar Journal - June 2012 3
communiqué
NBA NEWS n COMMITTEE INFORMATION n SPECIAL EVENTS n NBA NEWS n COMMITTEE IN
Carbolic Smoke Ball The YLD's Carbolic Smoke Ball will be held on Saturday, July 14, 2012 at Ruby. Ruby is located at 2411 Blakemore Avenue Nashville, TN 37212 on the edge of Hillsboro Village, surrounded by Fannie Mae Dees Park (aka Dragon Park) and across the street from the Vanderbilt.
Hors d’oeuvres - Open Bar - Live Music - Casino Games Sponsor Amounts – PLATINUM: GOLD: SILVER: BRONZE: SOLO/SMALL FIRM1 1
$5,000.00 $3,000.00 $1,500.00 $750.00 $350.00
(includes 10 tickets) (includes 8 tickets) (includes 6 tickets) (includes 4 tickets) (includes 2 tickets)
Solo/Small firms are those having 5 or less attorneys
Ticket prices - $65 in advance, $75 at the door Contacts: Will Hicky – 615-320-3225; whicky@tpmmlaw.com Colleen Bracken – 615-344-5860; Colleen.Bracken@hospitallaborlaw.com
Film Making in Nashville Article Update We have an update to last month's cover story by Kelly Frey, "You Ought to Be in Pictures: Film Making in Nashville." In a last minute amendment to the state’s budget implementation bill (SB3771), Tennessee’s bifurcated film incentive program was changed to provide for a single 25% cash rebate on expenses incurred in film production to be administered entirely through the Tennessee Film, Entertainment, and Music Commission. The new legislation provided for some very limited grandfathering of the 17%/15% rebates previously administered through the Commission and the Department of Revenue, respectively, for expenses incurred prior to July 1, 2012.
-Golden Oldies-
There was not a correct identification of the individuals in the May 2012 Golden Oldies photo. Any one out there know these gentlemen?
UPCOMING EVENTS: YLD Carbolic Smoke Ball Ruby Saturday, July 14, 2012 -------------------------------------NBA Picnic Hall of Fame Park Thursday, September 27, 2012 -------------------------------------NBF Fellows Dinner Hutton Hotel Saturday, November 3, 2012 4 Nashville Bar Journal - June 2012
-------------------------------------NBA Swearing-In Ceremony Justice AA Birch Building Tuesday, November 13, 2012 -------------------------------------Memorial Service Downtown Presbyterian Church Thursday, November 15, 2012 -------------------------------------Annual Banquet Wildhorse Saloon Thursday, December 6, 2012
-------------------------------------Healthy Bar Party Waller November 16, 2012 10:30 a.m. - 3:30 p,m. Featured Topics: topics such as time-saving and stress-reducing technology for modern attorneys, the science of Mindfulness and achieving true work/life balance Hospitality Room will feature: chair massages stretching, posture, & alignment tutorials nutritionist consultations
NFORMATION n SPECIAL EVENTS n NBA NEWS n COMMITTEE INFORMATION n SPECIAL EVENTS n NBA NEWS n COMMITTEE INFORMATION n
2012 Nashville Bar Association & Nashville Bar Foundation Golf Tournament May 10, 2012 - The Annual Golf Tournament was held this year at the Nashville Golf & Athletic Club in Brentwood, TN. The tournament drew 25 teams that participated in a 4-person scramble. Thanks to everyone who took part in this year’s event.
The Winners: Individual Contests: Closest to the Pin – Bobby Lewis Longest Putt – Steven Hooper Longest Drive (Male) – Mark Donnell Longest Drive (Male) – Gerard Stranch Longest Drive (Female) – Peggy Mathes
First Flight – First Place Blair Durham – Josh Offutt – Jimmy Turner – Ben Winters
Second Flight – First Place Jamie Hinson – Scott Safford – Jonathan Skeeters – Frank Wilbert
First Flight – Second Place Brett Carter – Gil Schuette – Scott Sims – Jeff Switzer
Second Flight – Second Place Phillip North – Ron Pursell – Jon Stewart – Renee Stewart
First Flight – Third Place Mark Donnell – Griffin Dunham – Michael Ewing – Will Helou
Second Flight – Third Place Albert Bart – John Farringer – Scott Hickman – Greg Pease
Third Annual “Lawyers for Littles” Event Raises Over $20,000 for Big Brothers Big Sisters of Middle TN Nashville-area attorneys recently organized a bowling fundraising event that helped raise over $20,000 for Big Brothers Big Sisters of Middle Tennessee. The third annual “Lawyers for Littles” Bowl for Kids’ Sake event, organized by Laura Bishop of the Law Offices of John Day, P.C. and Thomas W. Shumate IV of Kay, Griffin, Enkema & Colbert, P.L.L.C., took place April 19, 2012, at Hillwood Strike and Spare in West Nashville. Twenty-two teams of attorneys, law firms and other organizations participated to help make this year’s event a striking succes. Over the past three years, this event has raised more than $65,000 for Big Brothers Big Sisters of Middle Tennessee. While the night was more about raising money for the “Littles” than anything else, there were several outstanding team and individual efforts. Those taking home the creatively-designed bowling pin trophies were: Top Fundraising Team – “Mind over Gutter” – Kay, Griffin, Enkema & Colbert Top Fundraising Individual – Thomas W. Shumate IV – Kay, Griffin, Enkema & Colbert Best Dressed Team – "Saved by the Bowl" – Hall, Booth, Smith & Slover Most Team Spirit – “Motions to Strike” - Law Offices of John Day, P.C. Best Team Name – “Ex-Par[tay] - With a Vengeance" – Appellate Court Clerks for the Middle Section Highest Team Score – “DOL Bowlers” – Tennessee Department of Labor Highest Individual Score – Josh Massaro – Frost Brown Todd
For more information on how to get involved with the “Lawyers for Littles” event next year, please contact
Laura Bishop (lbishop@johndaylegal.com) or Tom Shumate (tom.shumate@kaygriffin.com).
Teams participating in the event were: Kay, Griffin, Enkema & Colbert; Law Offices of John Day; Hall, Booth, Smith & Slover; Rudy, Wood,
Winstead & Williams; The Nahon Firm; Tennessee Department of Labor; North, Pursell & Ramos; Ortale, Kelley, Herbert & Crawford; Durham and Dread; Bank of America; Brentwood Court Reporting Services; Young Lawyers’ Division of the Robertson County Bar Association; Appellate Court Clerks for the Court of Appeals Middle Section; Corbett Crockett; Dickinson Wright; Frost Brown Todd; Lawyers’ Association for Women; Metro Legal; Sherrard & Roe; Nissan; Bart Durham Injury Law and Rose Immigration Law Firm. Nashville Bar Journal - June 2012 5
FEATURE
CASHING OUT: Exit Strategies for Closely Held Companies by:
Michael R. Holzman and Kelly M. Frey
Your client has worked a lifetime to create a successful business. Now what? How does your client recapture the full economic value of all of those years of sweat equity that has made him/her a success? How will you deal with succession planning when the business owner is ready to retire? What is the exit strategy that turns your clients’ years of service into cash? Elements of a Successful Exit Strategy The starting point of any business succession plan is identifying the objectives of each business owner and crafting a plan to accommodate these collective objectives. The following objectives must be considered: 1. Return. How much value the succession alternative will permit the business owner to extract from the business; 2. Taxes. Succession alternatives must be viewed in light of their relative tax efficiencies (i.e. measured on an “after-tax” basis); 3. Liquidity. Succession alternatives offer differing amounts of liquidity (cash); 4. Diversification. Often, a significant amount of the business owner’s wealth is tied up in the business, which is an illiquid, undiversified asset. The potential for wealth diversification under each succession alternative must be evaluated; and 5. Control. Many business owners loathe surrendering control of the business they created; however, business owners seeking to maximize liquidity typically must surrender control. 6 Nashville Bar Journal - June 2012
Typical Exit Strategies for Closely Held Companies Liquidation Doing something is almost always better than doing nothing. Business owners that do nothing with respect to exit strategies may find that the only exit option remaining at the end of their careers is to liquidate the company. Generally, the company sells its assets at a fraction of the fair market value of the on-going business (especially if the liquidation is a forced sale triggered by the death or incapacity of the business owner). Creditors must be repaid first out of the proceeds of the sale and the business entity may be dissolved. To make matters worse, in a dissolution scenario the business owner’s lifetime legacy disappears (adding an emotional trauma to the economic loss). Liquidation of assets of a closely held business is probably the worst value proposition for its owners (which dictates active engagement of counsel, and economic advisors, to assist the business owners in obtaining more favorable outcomes). Sales to Third Parties One of the most aggressive exit strategies is to sell the business to a third party. Typically the greatest value (and therefore the greatest purchase price) comes from the sale to a synergistic buyer (a buyer for whom the business provides something more than just the value of cash-flow and assets). Obviously, in this scenario the business owner losses control of the closely held company (to the acquiring company) and quite often the acquirer will pay only a portion of the purchase price in cash (with holdback of the remainder of the purchase price contingent upon the acquired company meeting specific performance goals and/or a combination of stock in the acquiring company and/or promissory notes from the acquiring company). Sales to third parties can be structured as asset sales (usually prefer-
able for the purchaser who receives a step-up in tax basis in the assets and assumes only the liabilities directly associated with the asset, but which trigger ordinary income tax liability to the seller for any gain in the asset sale) or as equity sales (transferring the equity ownership of the owner of the closely held company). Although gains realized from the sale of equity may receive preferential capital gains tax treatment, the buyer does not enjoy a stepped-up tax basis in the assets and cannot select which liabilities to assume (which can reduce the valuation of the closely held company or result in holdbacks against the purchase price by the buyer to mitigate against future liability). Sale to Management/Related Parties Often closely held companies will incorporate provisions in their legal documentation that allow/require the sale of any one specific owner’s equity in a closely held company to the other equity owners. Most of the time these types of sales are based upon a fair market appraisal of the on-going business concern value, with each ownership interest being a pro-rated portion of that total value. However multiple owners of a closely held company can also agree upon some formula for valuation of an equity interest in the event one owner wants to liquidate their equity in the company. Usually, the retiring business owner loses control of the company (through sale of his/her ownership interest to the other owners) and the valuation may be subject to future “earn outs” rather than one lump sum cash payment. From a seller’s perspective, the sale of equity to other equity owners of a closely held business is treated as “capital gains” from a tax perspective. Shareholders of a closely held company could alternatively sell their interest to managers of the company (a “management buyout”). In some instances, management may be able to borrow the purchase price from a third party such that any cash to the seller comes from a loan that the company repays over time (a “leveraged management buyout”). Again, the seller
loses the ability to control the company as a result of the sale; however, the seller will receive preferential capital gains treatment on any tax from the sale of the equity interest. Leveraged Employee Stock Ownership Plan (ESOP) An ESOP is a tax-qualified retirement plan with two unique characteristics; it can borrow money and is designed to be invested primarily in employer securities. A common leveraged ESOP structure consists of the following steps: (1) a corporation establishes an ESOP; (2) a lender lends the corporation funds and the corporation lends these same funds to the ESOP; (3) the ESOP uses these borrowed funds to purchase selling shareholders’ stock, which is placed in a suspense account; (4) the corporation makes tax-deductible contributions to the ESOP to enable the ESOP to repay its debt obligation to the corporation; (5) shares are allocated to employee accounts each year in proportion to the amount of the loan paid for that year; and (6) employees receive their vested account balances when they retire or otherwise depart from the business. In short, an ESOP is a flexible vehicle that can allow a business owner to sell some (or all) of his/her equity interest for full fair market value, possibly in a tax deferred manner, continue to collect market salary and benefits, and retain control of the company as long as desired. Relative to a sale to a third party buyer, a leveraged ESOP may not provide the greatest pre-tax dollar value to the business owner. ERISA prohibits an ESOP from paying more than fair market value for the business owner’s stock. However, a tax-deferred sale to an ESOP under IRC 1042 can often yield more posttax value to the selling owner than a taxable stock or asset sale of the business. Promissory notes with detachable warrants and equity incentive plans, available by virtue of tax-free operations and increased cash flow in an S Corporation ESOP, offer enhanced returns to
the business owner that simply are not available under other succession alternatives. For example, business owners often decide to finance a portion of the transaction themselves to realize a rate of return equal to commercial lenders (especially where cash-rich owners have fairly low-return options for their cash available in today’s financial market). These business owners accept junior subordinated promissory notes in exchange for a portion of their stock. This debt instrument can be structured so as to accrue a minimal cash pay interest rate (which is taxable as ordinary income) and have the bulk of the return come in the form of detachable warrants (which is taxable as a long-term capital gain).1 An ESOP can also be combined with other equity based incentive plans, such as a Stock Appreciation Rights plan (SAR)2 to realize the post-transaction appreciation in the stock price even after he/she has sold all of his/her stock to the ESOP. ESOPs provide several tax advantages to companies, business owners, and employees, including: 1. Tax Deferral. Business owners may be able to defer longterm capital gains tax liability from the sale of their equity to an ESOP under IRC 1042. This tax deferral is designed to be indefinite where the business owner holds qualified replacement property until death; 2. Tax Deductions. Businesses can deduct contributions to the ESOP that are used to repay both principal and interest on the ESOP loan (Dividends are also deductible when paid on stock owned by the ESOP and used by the ESOP to amortize its debt.); 3. Tax Free Operations. An S corporation that is owned 100% by its ESOP operates tax-free by virtue of the pass-through entity Continued on Page 16 Nashville Bar Journal - June 2012 7
FEATURE
Proxy Voting at Tennessee Nonprofit Corporation Board Meetings by:
Kerry Ewald & Ralph Levy, Jr
If you serve on the board of directors of a nonprofit corporation in Tennessee, it has probably happened to you before. At a regularly scheduled meeting of the board, a few well intentioned directors do not attend but provide some notice that they are “giving their proxy” 1 to another director who is in attendance for quorum and voting purposes. Between the members of the board present and the proxy count a quorum is established. The meeting goes as planned. Motions are made and voted on by the directors present and holding the necessary proxies and the nonprofit corporation proceeds to act based upon the voting of the board at the meeting. The problem with this well-intentioned course of action is that these so-called “proxies” by members of the board of directors of nonprofit corporations in Tennessee are not valid and cannot be counted for either quorum or voting purposes! Any action taken based upon proxy voting by directors at such board meetings is subject to being invalid (or invalidated). The Tennessee Nonprofit Corporation Act Tennessee law is consistent with the majority in prohibiting proxy voting by board members of nonprofit corporations. While not explicitly mentioning proxy voting by board members as states such as California have done in their statutes,2 the Tennessee Nonprofit Corporation Act incorporates language that requires the presence (physically or telephonically) of a board member for voting purposes.3 The Tennessee statute begins by defining a quorum of a board of directors as “a majority of the directors in office immediately before a meeting begins.”4 Subsection (b) of the statute affirmatively states: “If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board unless chapters 51-68 of this title, the charter or bylaws 8 Nashville Bar Journal - June 2012
require the vote of a greater number of directors.” (emphasis added). While the term “present” may be open to some interpretation (especially given current telecommunications capabilities which allow a director to hear and participate in a board meeting without being physically present), it does not include the abdication of a director’s fiduciary duty to another board member via a proxy.5 Distinguishing Proxies by Shareholders from Proxies by Directors Perhaps the confusion in this area comes from the relative lack of authority and commentary with respect to proxy voting by directors of a non-profit corporation’s board and the pervasive use of proxies for votes of shareholders and/ or members of a non-profit corporation (which are both common and valid delegations of authority). Shareholders and members of a non-corporation can freely grant others the authority to exercise their respective ownership/voting rights.6 However, board members of a nonprofit corporation have particular fiduciary duties that shareholders and members do not. Board members of nonprofit corporations owe a fiduciary duty of inquiry and deliberation in the control of the entity that shareholders and members do not have.7 It is these specific fiduciary duties that create the conflict with respect to proxy voting at the board level; a member of the board of directors of a nonprofit corporation cannot delegate either the duty to inquire or the duty to deliberate to another (even another board member).8 Alternatives of Board Members Being Physically Present While proxy voting by board members of a nonprofit corporation is not permitted, Tennessee law does provide at least two alternatives to the physical attendance of a director at a board meeting.
First, the governing documents of a nonprofit corporation (charter, bylaws, etc.) may permit a director to participate in a meeting by “any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting.”9 Therefore, if permitted a director can participate in a board meeting by telephone, two-way internet conferencing, or any other means of communication that allows all present to simultaneously hear and speak with each other. The rationale for this option is that via such means of communication a director can both hear and consider management presentations and the views of other directors, as well as actively participate in such deliberations (fulfilling the director’s fiduciary duties of inquiry and active deliberation). Second, subject to the governing documents of a nonprofit corporation, Tennessee law also provides alternatives for nonprofit corporations to take action without any physical meeting at all. This option is somewhat more cumbersome in that it requires the action by all board members and written evidence of such action must be signed by all such members. If all directors consent, “the affirmative vote of the number of directors that would be necessary to authorize or take such action at a meeting is the act of the board.” In order to have the effect of a meeting vote, the “action must be evidenced by one (1) or more written consents describing the action taken, signed by each director, and included in the minutes filed with the corporate records reflecting the action taken.” Unless a different date is specified, the action is effective when the last director signs the consent.10 Traps for the Unwary – Conflicts Created by Charter or Bylaws In identifying available alternatives to
the presence requirement for voting, it is important to note that both options discussed above only apply if the charter and bylaws do not provide otherwise. Most state statutes provide that a nonprofit corporation, through its charter and bylaws, may reject such options explicitly. If the governing documents of the non-profit corporation do not allow either such alternative, the only option left to a director is to attend the meeting in person in order to be adequately informed, actively deliberate, and cast an effective vote. Curing Board Actions that Are Invalid or that Can Be Invalidated Which leaves the lingering question: what happens to all of those prior votes taken via proxy representation at board meetings of non-profit corporations? Since such votes were probably not effective in binding the non-profit corporation, prudence suggests that any current affirmative act involving such proxy activities be considered at a board meeting properly constituted with board members in physical (or telephonic) attendance and that such activities be approved at such duly constituted meeting. This is especially important when written evidence of such actions may be required by third parties (such as lenders requiring evidence of a board vote for the extension of credit or sellers requiring evidence of a board vote for purchase of real property). Conclusion As an attorney, whether you serve as a board member or you provide legal advice to the board of a nonprofit corporation, you will likely be faced with the issue of proxy voting by board members. Current law suggests that proxies by board members of such nonprofit corporations are not effective for either quorum or voting purposes. As a result, any prior board action taken pursuant to such proxies is invalid (or capable of being invalidated). The prior actions of Continued on Page 15
Nashville Bar Journal - June 2012 9
Minority Opportunities Committee Summer Intern Program by:
Rita Roberts-Turner
For the last 20 years, the Nashville Bar Association’s Minority Opportunities Committee has provided minority high school students the chance to learn about the legal profession through internship assignments at various law firms and government agencies. This year, eight Davidson County students were selected to participate. Following the late Justice A.A. Birch’s motto that, “you can’t be what you don’t see,” students will spend seven weeks shadowing attorneys, handling various assignments, and attending lunch and learn sessions with elected officials, judges, and community leaders. This year’s employers are: Baker Donelson Berman Caldwell & Berkowitz, Bass Berry & Sims, Bradley Arant Boult Cummings, Cornelius & Collins, Harwell Howard Hyne Gabbert & Manner, P.C., Sherrard & Roe, and the Tennessee Attorney General’s Office. For the first time, the Napier-Looby Bar Foundation is also sponsoring a student for the program. “We recognize that this is a valuable experience for these students and are happy to be a part of the program again this year,” said Diane S. Kiser, Director of Human Resources for Harwell Howard Hyne Gabbert & Manner, P.C. Deputy Attorney General Ruth Thompson added, “the Office of the Tennessee Attorney General is proud of its long association with the Nashville Bar Association’s Minority Opportunities High School Summer Internship Program. Each summer we have the opportunity to work with fine young students while providing them with an opportunity to learn more about the practice of law. In turn, we have been extremely pleased with the high quality of work and dedication provided by our interns.” Michael Hoskins, chair of the Minority Opportunities Committee sees each intern class as ambassadors for the program as well as the legal profession. "Today's participation in the NBA High School Internship Program helps ensure diversity in tomorrow's legal community,” he said. This year marked the largest applicant pool in recent memory, with some 30 students applying for only eight positions. Hoskins said his goal is to increase the number of participating employers so that more students will have an opportunity. Continued on Page 20
10 Nashville Bar Journal - June 2012
Nashville Bar Journal - June 2012 11
BILL AND PHIL’S GADGET OF THE MONTH CLUB By: Bill Ramsey of Neal & Harwell, PLC and Phillip Hampton of LogicForce Consulting
Good Things Come to Those Who Wait ‘Ah, all things come to those who wait,' (I say these words to make me glad), But something answers soft and sad, 'They come, but often come too late.' Tout vient ß qui sait attendre —Violet Fane (1843-1905) Our parents always told us that patience is a virtue and that delayed gratification is best, but we have a hard time waiting to buy the stuff we want. Nevertheless we have compiled a list of devices you would be a fool to buy right now. We will tell you why you should wait. The iPhone We know you want that iPhone right now (if you don’t already have one), but you should wait. We are told that the new, improved iPhone coming out in the fall will “knock your socks off.” It will likely have a bigger screen, 4GLTE, a faster processor, and a sharper camera and screen. I know it will be tough, but if our information is correct, it will be worth the wait. An Ultrabook Ok, we are hypocrites, we both have new Ultrabooks, but we are trained professionals. (Also, we have no self-control.) The next generation of these ultrathin devices will be available this summer. They will have the much-faster “Ivy Bridge” Processors (Intel’s 3rd Generation Core-iseries processors) Sprint Phones Yes, Phillip does have a Sprint Phone, but why? Sprint still does not have a full 4G LTE network. It is retiring its 4G WiMAX network in favor of LTE on new handsets. What will you be able to do with a phone that still runs on WiMAX? Those that do have 4G LTE will only get 3G until LTE rolls out in selected cities this summer. Better to wait and see what Sprint does. MacBook Pros Yes, we know everyone is changing to Apple notebooks. Many are turning to the MacBook Air (which may be ok). However, Apple’s MacBook Pro is its powerhouse. Get ready for more power though. We are pretty sure that Apple will release a new group of MacBook Pros this month. They will have better displays, run faster, weigh less, have USB 3.0 and Ivy Bridge CPUs. Hold off a little longer. Smart TVs We are pretty sure Apple will launch its own brand of television this year. It will have voice control, an iPad-like interface, iTunes and iCloud. “Rumor has it” (apologies to Adele) that the new Apple TV (as opposed to its current small network device) will be a monster and will revolutionize television. In addition, many other manufacturers will soon release TVs with similar features, such as LG’s G2 Smart TV. I think we have made our case. Let’s hope these new gadgets don’t “come too late.” n See you next month, Bill & Phil
12 Nashville Bar Journal - June 2012
The Nashville Bar Association 100% Club is a special category of membership that demonstrates a commitment to the legal profession and our community from legal organizations with more than three attorneys that enroll 100% of their Nashville attorneys as members of the NBA. Contact Vicki Shoulders at 615-242-9272 or vicki.shoulders@nashvillebar.org. Firms, law departments and legal organizations that join this Bar year will be recognized as such throughout the year.
Waller (162) Bradley Arant Boult Cummings LLP (105) Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (79) Miller & Martin PLLC (49) Stites & Harbison, PLLC (46) Adams and Reese LLP (36) Bone McAllester Norton PLLC (31) Neal & Harwell, PLC (30) Sherrard & Roe, PLC (30) Harwell Howard Hyne Gabbert & Manner, P.C. (28) Gullett, Sanford, Robinson & Martin, PLLC (26) Lewis, King, Krieg & Waldrop , P.C. (26) Manier & Herod, P.C. (26) Dickinson Wright PLLC (24) Leitner, Williams, Dooley & Napolitan, PLLC (20) Ortale, Kelley, Herbert & Crawford (20) Riley Warnock & Jacobson, PLC (19) Cornelius & Collins, LLP (17) Brewer, Krause, Brooks, Chastain and Burrow, PLLC (15) Frost Brown Todd LLC (15) Ogletree, Deakins, Nash, Smoak & Stewart (15) Waddey & Patterson, P.C. (15) Walker, Tipps & Malone, PLC (15) Branstetter, Stranch & Jennings, PLLC (13) Burr & Forman LLP (13) Hughes & Coleman (13) Smith Cashion & Orr, PLC (13) Tune, Entrekin & White, P.C. (13) Parker, Lawrence, Cantrell & Smith (12) Dollar General Corporation (11) Watkins & McNeilly, PLLC (11) Corrections Corporation of America (10) Hall, Booth, Smith & Slover, P.C. (10) Kay, Griffin, Enkema & Colbert, PLLC (10) Spicer Rudstrom, PLLC (10) Taylor, Pigue, Marchetti & Mink PLLC (10) DHPM, PC (9) Levine, Orr & Geracioti (9) Schulman, LeRoy & Bennett, P.C. (9) White & Reasor, PLC (9) Farris Mathews Bobango, PLC (8) Jones Hawkins & Farmer, PLC (8) Buffaloe & Associates, PLC (7)
Mudter & Patterson (4) Dodson Parker Behm & Capparella, P.C. (7) Rutherford & DeMarco (4) Evans, Jones & Reynolds, P.C. (7) Thrailkill, Harris, Wood & Boswell, PLC (4) Howard Mobley Hayes & Gontarek, PLLC (7) Video Gaming Technologies, Inc. (4) Lassiter, Tidwell & Davis, PLLC (7) Affinion Benefits Group, LLC (3) MGLAW, PLLC (7) Baker, Campbell & Parsons (3) Morgan & Akins, PLLC (7) Barry Gammons, Attorney at Law (3) American General Life and Accident Ins. Co. (6) Cheadle Law (3) Hollins, Raybin & Weissman, P.C. (6) Cheatham, Palermo & Garrett (3) Holton Blackstone & Mayberry, P.C. (6) Keller, Turner, Ruth, Andrews, Ghanem & Heller, PLLC (6) Glasgow & Veazey (3) Grissim & Hodges (3) Leader, Bulso & Nolan, PLC (6) Hix & Gray, PLC (3) Loeb & Loeb, LLP (6) IASIS Healthcare LLC (3) Reno & Cavanaugh PLLC (6) Larry R. Williams, PLLC (3) Barrett Johnston, LLC (5) Marlowe Law Offices, PLLC (3) Chaffin & Burnsed, PLLC (5) May & Ryan, PLC (3) Haynes, Freeman & Bracey, PLC (5) McKenzie Laird, PLLC (3) Kinnard, Clayton & Beveridge (5) Moseley & Moseley, Attorneys at Law (3) Littler Mendelson, P.C. (5) Nashville Electric Service (3) Luna Law Group, PLLC (5) Norris & Norris, PLC (3) Moses Townsend & Russ, PLLC (5) Papa & Roberts, PLLC (3) Prochaska Thompson Quinn & Ferraro, P.C. (5) Puryear Law Group (3) Rocky McElhaney Law Firm, PC (5) Rogers, Kamm & Shea (3) Shackelford, Zumwalt, Hayes, LLP (5) Rothschild & Ausbrooks, PLLC (3) Trauger & Tuke (5) Sarah Cannon Research Institute (3) Dobbins, Venick, Kuhn & Byassee, PLLC (4) Smythe & Huff (3) Garfinkle, McLemore & Young, PLLC (4) Tennessee Justice Center (3) Hale & Hale, PLC (4) Weatherly, McNally & Dixon, PLC (3) Law Offices of John Day, P.C. (4) Lieff, Cabraser, Heimann & Bernstein (4)
Nashville Bar Journal - June 2012 13
Profile
Chancellor Perkins took over Chancery Part IV in the spring of 2008. He and his wife, Renita, have four children and four grandchildren. Prior to coming onto the bench, Chancellor Perkins worked at Williams and Dinkins and the Tennessee Attorney General's office.
Chancellor Russell Perkins by:
Bart Pickett
Chancellor Russell Perkins has come a long way from the Preston Taylor housing projects where he spent the first ten years of life. Chancellor Perkins desire to become a lawyer was not always evident. Growing up he went through multiple careers in his head including architect and doctor. It wasn't until his senior year in college that he even considered the law. A native Nashvillian, Chancellor Perkins graduated from Pearl High School in 1974. He went on to graduate from Tennessee State University in 1978, as Political Science major and English minor. Chancellor Perkins played baseball at TSU his freshman year but gave it up after one year to focus on academics and work. His senior year at TSU, he visited Ohio State University Law School where he was offered a scholarship. Chancellor Perkins received his J.D. from Ohio State in 1981. Following law school graduation, Chancellor Perkins took a job with the Ohio Attorney General's office working in the administrative agency section which was in charge of administrative hearing and appeals. Chancellor Perkins moved his family back to Nashville as soon as he got an offer from Williams and Dinkins law firm in 1982. He worked for Senator Avon Williams and current Court of Appeals Judge Richard Dinkins for almost twelve years. Chancellor Perkins' private practice was almost exclusively civil litigation and about one-third of his practice focused on civil rights
14 Nashville Bar Journal - June 2012
In 1994, Chancellor Perkins joined the Tennessee Attorney General's office. He had the pleasure of working under four different AGs during his tenure there. He started in the Civil Litigation and State Services (CLASS) section defending employment discrimination claims. While the CLASS section provided Chancellor Perkins with significant trial experience, the nature of that job required him to be out of town for multiple week trials, which kept him away from his family more than he wanted. Because of this, he transferred to the consumer affairs division. Chancellor Perkins served as the lead on all of the tobacco litigation that sprang up in the 1990's. Chancellor Perkins had never really considered being a judge until General Summers suggested that he should look into the possibility. Prior to being selected by Governor Bredesen in 2008, to serve as chancellor of Davidson County Chancery Court, Part IV, Chancellor Perkins applied for a few appellate positions. In hindsight, Chancellor Perkins is extremely pleased to be a part of Chancery Court. Trial practice, and Chancery Court in particular, is where most of his experience comes from. When asked if he would continue to follow in Judge Dinkins footsteps and seek an appellate position, Chancellor Perkins wouldn't rule it out but is quick to say, "I like the interaction with lawyers you have at the trial court level. My favorite parts of the week are motion dockets."
Proxy Voting at Tennessee Nonprofit Corporation Board Meetings may read less cumbersomely Continued from page 9
Chancellor Perkins met his wife, Renita, when they were just teenagers playing baseball in the summertime. He married her on June 30, 1978. The newlyweds moved to Ohio two months later for Chancellor Perkins to begin law school. Mrs. Perkins serves as the principal at Chadwell Elementary School in Madison. The Perkins have four children and four grandchildren. When he's not playing with his grandchildren, Chancellor Perkins can likely be found at a Vanderbilt baseball game as his love for the sport carries on. He and his wife attend the Bread of Heaven Church and live in the White's Creek area.
the board of a nonprofit corporation taken via proxies can be easily remedied by an affirmative vote of the board at a new meeting duly constituted with board members in physical (or telephonic) attendance or via written consent of all board members. Prospectively, members of the board of a nonprofit corporation need to be advised of the commitment they are making (for physical attendance) when they are being considered for or accept a board position. Such board positions are no merely honorific, but rather create certain fiduciary duties that cannot be implicitly or explicitly delegated to others (by proxy or otherwise).n Kerry Ewald is an associate with Dickinson Wright PLLC. She regularly counsels companies with respect to corporate/regulatory compliance. She concentrates her practice in civil litigation matters and has served on numerous non-profit boards. She can be reached at kewald@dickinsonwright.com or 615-620-1712.
Even though he's more a fan of politics academically than in practice, you can expect to see Chancellor Perkins' name on the ballot again in 2014. n Bart Pickett is an attorney with Hall, Booth, Smith & Slover, P.C., specializing in general civil litigation and medical malpractice defense. He is a graduate of the University of Tennessee College of Law and former law clerk to the Honorable Thomas W. Brothers of the Sixth Circuit Court of Davidson County and the Honorable Joe P. Binkley, Jr. of the Fifth Circuit Court of Davidson County.
Ralph Levy, Jr. is Of Counsel with Dickinson Wright PLLC. He regularly counsels closely-held corporations with respect to corporate transactions and serves on the board of non-profit corporations. He can be reached at rlevy@dickinsonwright.com or 615-620-1733. (Endnotes) A proxy is authority “to act as a substitute for another.” Black’s Law Dictionary 1241 (7th ed. 1999).
1
“No director may vote at any meeting by proxy.” Cal. Corp. Code § 5211 (2011); see also Public Counsel Law Center, Legislative Alert: New California Law Affects Nonprofit Governance Practices, http://www.publiccounsel.org/tools/publications/files/ab1233.pdf.
2
3
Tenn. Code Ann. § 48-58-205 (2011).
4
Tenn. Code Ann. § 48-58-205(a) (2011).
The Directors and Officers chapter of the Act is silent about proxy voting in the applicable voting statute. Tenn. Code Ann. § 48-58-205 (2011). By contrast, proxy voting by members of a non-profit corporation in Tennessee is permitted. Tenn. Code Ann. § 48-57-205 (2011). 5
6
Id.
See Greenberg v. Harrison, 124 A.2d 216 (Conn. 1956), in which the court invalidated action by a nonprofit board taken via proxy voting. “The affairs of a corporation are in the hands of its board of directors, whose duty it is to give deliberative control to the corporate business. This requires the physical presence of a director at directors’ meetings, and he cannot act by proxy.” Id. at 218. 7
Id.; see also 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations 4.2 E (1997 Supp); James J. Hanks, Jr., Maryland Corporation Law 6.12 (1994 - 1 Supp.); Alice Sturgis, The Standard Code of Parliamentary Procedure 147-48 (4th ed. 2001). See generally ABA Section of Business Law, Conduct 8
unbecoming a stockholder (Jan./Feb. 1999) http://apps.americanbar.org/buslaw/blt/83conduct.html. 9
Tenn. Code Ann. § 48-58-201(c) (2011).
10
Tenn. Code Ann. § 48-58-202(b) (2011).
Nashville Bar Journal - June 2012 15
CASHING OUT: Exit Strategies for Closely Held Companies Continued from page 7
being wholly-owned by a taxexempt trust; and 4. Tax Deferred Retirement Benefit. Employees receive a tax-deferred retirement benefit in the form of company stock and the opportunity to share in the success of the business. When the benefits of the ESOP are properly communicated to employees, employees understand that their hard work is directly tied to the value of their company stock in their ESOP retirement account. Other succession alternatives do not offer the same tax benefits that an ESOP offers. ESOPs offer business owners the opportunity to defer long-term capital gains tax on the gain they realize. Stock sales to third-party buyers (synergistic buyers, financial buyers, management, or parties to a buy-sell agreement) offer only preferential capital gains treatment when compared to asset sales; they do not offer business owners the opportunity to defer tax liabilities. Moreover, ESOPs offer significant tax deductions to the corporation and the ability to operate tax-free (as a 100% S corporation ESOP). Generally, a business owner must relinquish control of the business in exchange for the value he/she receives from selling his/her interest in the business. However, an ESOP offers the business owner the opportunity to retain control through creditor rights protections and corporate governance structures despite selling all of his/her equity in the business. For example, a business owner who finances part of the liquidity transaction may retain the right to appoint a specified number of directors to the board of directors until his/her promissory note is repaid in full, thereby retaining control of the company. In addition, the corporation may establish a corporate governance structure requiring the trustee to select directors from 16 Nashville Bar Journal - June 2012
nominees provided by a nomination committee of the board. Liquidity is typically maximized by the sale of a business to a synergistic buyer. However, an ESOP offers a business owner a market in which he/she can sell less than all of his/her entire stockholdings of a business for full fair market value (and in a tax deferred manner if a 1042 election is made). The liquidity offered by an ESOP will depend on the debt capacity of the business and the amount of stock the business owner is willing to sell. A business with significant debt capacity can borrow more cash and lend it to the ESOP, which the ESOP will then use to acquire stock from the business owner. A business with little debt capacity may need to resort to seller financing, which will reduce the liquidity a leveraged ESOP can provide to the business owner. However, a sale of only a portion of the business owner’s stock can be structured in this case – leaving the opportunity to sell more stock to the ESOP or a third party buyer in the future at a greater price. An ESOP offers business owners several opportunities to diversify their wealth. A seller-financed transaction offers less opportunity for diversification because the business owner receives a promissory note in exchange for his/her shares and continues to carry risk in the business as they await note payments. In addition, warrants offer little opportunity for diversification because the value of the warrants, like the value of the promissory note held by the business owner, depends on the success of the business. Unlike most succession alternatives, an ESOP offers the business owner the opportunity to diversify his/her wealth on his/her terms (possibly tax deferred if 1042 is elected), not a third-party buyer’s terms. Conclusion As the old movie announcement and current flight attendants suggest, one
of the first things any business owners should do as they settle into their management seats is “take a look around to familiarize yourself with the exits.” The cash flow and the assets accumulated over a lifetime of work are only part of the business’s true value – and a well-planned exit strategy can add significantly to the total value a small business owner realizes over the life of his/her investment. A number of options are available that can maximize return and reduce total tax liability to all concerned. Lawyers should be familiar with all of these options, including the leveraged ESOP approach, in discussing with clients how best to realize the full value of their closely held company. n Michael R. Holzman is a member in the Washington, D.C. office and Kelly M. Frey is a member in the Nashville, Tennessee office of Dickinson Wright PLLC. Mr. Holzman concentrates his practice on employee stock ownership plans and other forms of qualified and non-qualified employee benefit plans. He can be reached at 202-6596931 or mholzman@dickinsonwright.com. Mr. Frey concentrates his practice on representing the headquarters locations of Fortune 1000 companies in corporate transactions and corporate compliance. He can be reached at 615-620-1730 or at kfrey@ dickinsonwright.com. The authors would like to thank Christopher T. Horner II for his time and assistance in developing this article. Mr. Horner is an Associate in the Washington, D.C. office and concentrates his practice on employee stock ownership plans. He can be reached at 202-659-6961 or at chorner@dickinsonwright.com. (Endnotes) 1 A warrant is a security giving the business owner the right to purchase stock from the company at a specified price and within a specified time, much like a stock option. Warrants are often referred to as “equity kickers” because they allow the business owner to participate in the upside of the company even though he has sold all of his/her stock to the ESOP. SARs entitle the SAR holder to receive the appreciation in the value of the company’s stock over a specified period of time (meaning the selling shareholder gets the benefit of the difference between the future strike price negotiated at the time the shareholder cashes out and the fair market value of the company at the time of exercise – which future fair market value can be much greater than the company’s present value).
2
ESOP relative to other common succession alternatives SUCCESSION ALTERNATIVE
RETURN
TAX EFFICIENCIES
LIQUIDITY
DIVERSIFICATION
CONTROL
Shareholder Capital gains tax liability from stock sale may be deferred, potentially indefinitely; Company Deductions for principal and interest paid on loan to ESOP; Employees Tax deferred retirement benefit to employees.
Liquidity is a function of the debt capacity of the company and the amount of stock shareholders are willing to sell.
Seller-financing component exposes seller to risks associated with financial performance of the business
Leveraged ESOP
Selling shareholders receive full fair market value for their stock, possibly in a tax-deferred sale; Business owner can continue to collect salary, participate in ESOP, and other equity based incentive plans for as long as desired
Business owner retains control for as long as promissor y note is outstanding; Business owner retains ability to nominate board members
Liquidation
Liquidation value may be significantly lower fair market value, particularly in the context of forced sale.
Ordinary income tax liability on gain realized from asset sale
Creditors have priority over shareholders over proceeds from asset sale
100% diversification, but significant difference between liquidation value and fair market value
Business owner loses control over assets which are sold and business which is dissolved
Return is often a function of the buyout formula agreed to buy the shareholders.
Capital gains tax liability from stock sale;
Liquidity is a function of the buyback formula which may not equate into fair market value
Diversification is a function of the form of consideration offered under the buyback formula
Business owner loses control with equity buyback
Third-party synergistic buyer may offer maximum return to selling shareholders.
Ordinary income tax liability from asset sale; Capital gains tax liability from stock sale.
Opportunity for maximum liquidity; Earn out provision may erode liquidity
100% diversification to the extent cash proceeds received; partial diversification to the extent stock or notes are received
Business owner loses control
Business owner receives fair market value for his/her stock
Capital gains tax liability from stock sale;
Opportunity for maximum liquidity where management has private equity backer; Otherwise, MBO may be impossible without sellerfinancing reduced liquidity.
Opportunity for diversification is a function of consideration received; Seller financed buyouts limit the opportunity for diversification because business owner’s wealth is still tied to financial performance of the company
Business owner loses control and management acquires control
Buy-Sell Agreement
Third-Party Sale
Management Buyout
Nashville Bar Journal - June 2012 17
SUMMER READING LIST By:
NBJ Committee Members
A Town Like Alice by Nevil Shute (1950). A Town Like Alice, tells the story of a young woman, Jean Paget, attempting to re-establish her life and heal the wounds of war in the aftermath of World War II. Shortly after returning to England, Jean learns that she is the sole heir of an estranged Scottish uncle. The trustee, and narrator of the story, of the testamentary trust is a London solicitor who falls in love with his young ward and grapples with his fiduciary obligations as trustee and his acceptance that his love is some decades late. Jean convinces the trustee to financially support her travels back to the Malaya village where she was a prisoner of war and eventually to Australia to find the soldier who risked his life to save hers. Once in Australia, Jean's story is one of a pioneer woman who uses her inheritance and ingenuity to improve the lives of her newly adopted community. Recommended by Tracy Kane. 1493: Uncovering the New World Columbus Created by Charles C. Mann – There is a reason there are tomatoes in Italy, oranges in Florida, chocolates in Switzerland, and chili peppers in Thailand (and it isn’t because each species is native to the area). It’s called the Columbian Exchange – how ecologies, economies, and societies began a transglobal exchange that didn’t exist prior to 1492 (and that included not only plants, but also precious metals, humans, and social infra-structure). Guaranteed that you will never look at your dinner plate in the same way again after reading this book. Recommended by Kelly Frey Getting Things Done by David Allen. This is a personal productivity book. Mr. Allen’s premise is that you are more productive when you are relaxed. You are only relaxed when your mind is clear and your thoughts orgainized. He provides instruction on how to take all you clutter, notes, etc. and put them all in a single inbox. Then you apply the "do it, delegate it, defer it, drop it" rule to get your in-box to empty. Then you can stay focused, plan projects and feel fine about delegating and things that you are not doing. Skim most of the introduction and skip the last section. Learn the system and keep the book for reference. - Recommended by Bill Ramsey What Every Body is Saying by Joe Navarro. An ex-FBI agent “summerizes” popular psychology on non-verbal communication. A quick read on the basics of body language and how professionals can use non-verbal cues to provide more context for the words that are spoken. While a lot of people will be interested in how the examples provided might give insight into when other people are being less than candid, one of the big benefits of the read is to provide cues on how to make sure your own non-verbal communication is consistent with the message you are delivering. Brave New World by Aldous Huxley. A literary alternative to The Hunger Games if you are in to dysfunctional utopian futures. And yes, I read them both (the benefit of The Hunger Games being there is apparently no sentence longer than eight (short) words and the benefit of Brave New World being that it is actually a good read and observers who see the cover of the book will think you are smart, especially when you tell them how much better it is than The Hunger Games). US Army Survival Manual – reprinted from the Department of the Army Field Manual – Forget all of those fru-fru summer “how to” manuals and go to the original manual designed to guide you through a summer hike (or the final apocalypse). Covers everything from basic land navigation to identifying poisonous serpents. Teaches how to construct a snare to trap you dinner, make a container in which to cook it, build a campfire, and treat any resultant ill-effects – the “Army way”. Body for Life by Bill Phillips. Eat better and exercise … period. No fancy diets or special equipment, just the basics on how to treat yourself to a lifestyle that encourages longevity. You may never get the killer abs of the author, but then you might just lose your beer gut or make it into the bikini before the summer is over. Falcon Guide to Hiking in Tennessee by Kelley Roark. 62 of the best hiking trails just down the street. What’s the purpose of living in a state that has such tremendous natural diversity unless you actually take the time to enjoy it? Whether it is a short hike with your pre-schooler or a cheap date, the descriptions of the trails will give you firsthand information that will allow you to turn your trip into an adventure in discovering our beautiful state. 18 Nashville Bar Journal - June 2012
SUMMER SPECIALS on 2012 RX and ES models.
VISIT LEXUS OF NASHVILLE COOL SPRINGS OR RIVERGATE TODAY FOR DETAILS. 19 WWW.NASHVILLELEXUS.COM Nashville Bar Journal - June 2012
Minority Opportunities Summer Internship Program Continued from page 10
2012 NBA MINORITY HIGH SCHOOL INTERNS AUSTIN BLACKWELL School: Montgomery Bell Academy
GERALD JONES School: Davidson Academy
Activities: Varsity basketball and African American Studio Club
Activities: Mock Trial and National Honor Society
Why interested in a legal career: I want to find the niche between both math and law. I enjoy the analytical challenges of math and feel there is a similar challenge in contract or investment law. I plan to major in business and I want to get the legal perspective of business this summer.
Why interested in a legal career: I think the 2012 High School Summer internship program will enable me to get ahead in my goal toward law school. It will open the door for me to explore other types of law and meet others who have similar aspirations as I do.
GIA CLAYBROOKS School: Hume-Fogg Academic High School
BRITTANY SHERRILL School: Hume-Fogg Academic High School
Activities: Student Government and HFA choir
Activities: Law Explorers Program and Junior Achievement
Why interested in a legal career: I want to become a part of the justice system and dedicate my life to ensuring equality for all people. This summer I want to see if being a lawyer is really something I want to do for the rest of my life.
KASEY FREEMAN School: Martin Luther King Jr., Magnet High School Activities: Girls United and Lambda Nu Theta high school sorority Why interested in a legal career: I would like to become a lawyer because I believe I have what it takes and I want to be one of the best lawyers. I hope to gain a connection with some lawyers this summer that will go beyond this internship and help me move into my future career.
Why interested in a legal career: My passion is helping those in need and I will be able to accomplish this goal through the justice system. This summer employment opportunity will allow me to absorb all that I will need to take into consideration when deciding whether or not to pursue the career path of law. CHRISTINA SLAY School: Ensworth Activities: Varsity basketball and spirit leader Why interested in a legal career: For many years I have watched from a distance lawyers in the courtroom fight for other people’s justice and lives and to finally get a chance to work the with them firsthand will be a true blessing. I want to gain knowledge from mentors, my employer and others to see if this is what I want to do for the rest of my life.
SHAINA JOHNSON School: Antioch High School
BRIEANNA SMITH School: University School
Activities: National Honor Society and Track and Field
Activities: Clark Memorial UMC Youth President and ALBANIE Alliance (school diversity club)
Why interested in a legal career: My biggest love is to prove people wrong, get my point across and debate. This summer I want to learn the ups and downs of being a lawyer, and see what it really takes for the road to success.
20 Nashville Bar Journal - June 2012
Why interested in a legal career: Two summers ago I had the opportunity to attend Lipscomb University’s Law Camp. This experience sparked my interest even more because my eyes were opened to the various career choices in the area of law. This summer, I want to learn as much as possible and get experience so I can learn which type of law I’m interested in.
I work to protect our clients’ interests. Now I know a bank that does the same for my firm.
Private Wealth Management Legal Specialty Group. You’re always focused on what’s best for your clients. With SunTrust’s dedicated Legal Specialty Group, you’ll get that very same treatment. Our knowledgeable financial advisors provide firms like yours with valuable strategies on everything from cash flow to expense management to insurance. Simply put, your interests are our passion. Visit us at suntrust.com/law or contact an advisor and get to know all the benefits of working with SunTrust. Bob Lawhon, Client Advisor, SunTrust Investment Services, Inc. 615.748.5803 or bob.lawhon@suntrust.com
Deposit products and services are offered through SunTrust Bank, Member FDIC. Investment and Insurance Products: Are not FDIC or any other Government Agency Insured • Are not Bank Guaranteed • May Lose Value SunTrust Private Wealth Management is a marketing name used by SunTrust Banks, Inc. and the following affiliates: Banking and trust products and services, including investment advisory products and services, are provided by SunTrust Bank. Securities, insurance (including annuities) and other investment products and services are offered by SunTrust Investment Services, Inc., an SEC registered broker-dealer and a member of the FINRA and SIPC, and a licensed insurance agency. Investment advisory products and services are offered by SunTrust Investment Services, Inc., RidgeWorth Capital Management, Inc., and GenSpring Family Offices, LLC, investment advisers registered with the SEC. © 2012 SunTrust Banks, Inc. SunTrust is a federally registered service mark of SunTrust Banks, Inc.
Nashville Bar Journal - June 2012 21
Disclosure Robert L. Harris and Brent E. Hill have been elected to the board of directors at Waller. Both will serve a two year term. Harris is the past leader of the firm’s finance and restructuring practice group. He provides legal counsel on strategic acquisitions, investments and complex financial transactions to businesses and private equity firms in the healthcare space. He received his J.D. from Columbia University and his B.A. from Dartmouth College. Hill has extensive experience in the healthcare industry and a practice that focuses primarily in the area of mergers and acquisitions. Hill received his J.D. from Emory University and his B.A. from Vanderbilt University. Miranda Kelley is a partner at Waller and has become chair of Women of Waller, an initiative that provides professional development for women attorneys with a focus on building long-term careers with the firm. In addition, Women of Waller have been actively involved with YWCA Weaver Domestic Violence Center as well as other local organizations that provide services and programs helping women. Kelley’s legal practice focuses on mergers and acquisitions and securities law, with experience also in real estate syndications and reporting of equity and debt offerings. Kelley is a member of the Nashville, Tennessee and American Bar Associations. She earned her J.D. from Vanderbilt University and received her B.S. from Lipscomb University. Mary Ellen Pickrell is a partner at Waller and will now also serve as the firm’s new professional development partner. As the previous leader of Waller’s corporate group, she has focused her legal practice on mergers and acquisitions. Pickrell is a member of the 22 Nashville Bar Journal - June 2012
\Dis*clo”sure\ (n) The act of revealing, releasing or bringing to light relevant information concerning NBA Members & Staff. n Announcements n Kudos n People on the Move n Firm News n Nashville, Tennessee and American Bar Associations, ABA Health Law Section, American Health Lawyers Association, and the Nashville Health Care Council. She earned her J.D. from Vanderbilt University and received her B.A. from Williams College. The Napier-Looby Bar Foundation recognized community leaders, law firms and lawyers during its 8th Annual Barristers' Banquet. Former ABA President Dennis Archer was keynote speaker at the event. Honored with the Justice A. A. Birch Outstanding Service Award was Robin Harris Kimbrough, who is the legal counsel for the Tennessee Coalition to End Domestic and Sexual Violence. Along with her professional work there, she is also pastor of Scott United Methodist Church and an active volunteer in the community. Presented a J. C. Napier Trailblazer Award was the Hon. Keta Barnes, who is currently the Smyrna Municipal/General Sessions Court judge. She is the city's first AfricanAmerican elected official and the first African-American female judge elected in Rutherford County. Also recognized with a J. C. Napier Trailblazer Award was General Sessions Judge Angelita Blackshear Dalton, who was the first African-American woman elected to a judgeship in Nashville. In addition to these awards, the organization also presented the Z. Alexander Looby Lifetime Achievement Award to Criminal Court Judge Monte Watkins.
John B. Burns has been named Baker, Donelson, Bearman, Caldwell & Berkowitz, PC’s Nashville Pro Bono Attorney of the Year. Over the last several years, Burns, a shareholder in the Firm's Nashville office, has provided tax and corporate assistance to dozens of non-profit organizations ranging from the Memphis in May International Festival to the Fannie Battle Day Home for Children and the Historic Elmwood Cemetery. He has also helped numerous individuals with estate and guardianship matters and handled the legal work to establish BakerCares, Inc., a non-profit that will provide temporary financial assistance to Baker Donelson employees in times of emergency need. "The list of John's pro bono clients covers the waterfront," said Lisa W. Borden, the Firm's Pro Bono Shareholder. "He continually puts his transactional experience to work for a wonderfully varied list of nonprofits that work on causes from health care and children's issues to community preservation and improvement, as well as for individuals in need of help." Through its commitment to pro bono representation, Baker Donelson provides legal services to groups and individuals likely to be marginalized in the legal system due to economic barriers. Over the years, the Firm's attorneys have provided a variety of counsel to many populations, including immigrants, refugees, the elderly and the impoverished. Baker Donelson's efforts include work on a wide range of matters, such as advocating for the homeless and organizations that serve the homeless, death penalty litigation, providing corporate legal services to non-profit organizations, and much more.
WELCOME NEW NBA MEMBERS Allen Brown J. Allen Brown, PLLC
DIAL - A - LAWYER
Dial-A-Lawyer is held the first Tuesday of each month. May Volunteers: Helen Cornell Tom Lawless Michael Smith
Lauren Castles The Parker Firm
To volunteer your time, please contact Wendy Cozby, LRIS Coordinator at wendy.cozby@ nashvillebar.org or 242-9272. Pro Bono credit does apply and dinner will be provided.
Carl A. Esterhay Regions Bank
2012 NBA Premier Members INCLUDE:
D'Andrea D. Evans Ann R. Gough LATA Environmental Services of Kentucky, LLC Edward D. Hastings Law Office of Edward D. Hastings Christy Hruska Frost Brown Todd LLC* April L. Jackson Lindsey A. Milam Morgan & Akins, PLLC* Patrick L. Rice Sr. Patrick L. Rice Sr. Law Robert Sartin Frost Brown Todd LLC* Marcia N. Topiwala Wyatt, Tarrant & Combs, LLP David Watson Frost Brown Todd LLC* Katie Mathews Zipper The Parker Firm * Belongs to a 100% Club firm
Nashville Bar Association members may send Disclosure announcements via email to nikki.gray@nashvillebar.org Submissions are subject to editing.
Tara Aaron Gail Vaughn Ashworth Robert L. Ballow Kathryn E. Barnett Barbara Bennett Michael Weimar Binkley Charles W. Bone Jay S. Bowen C. Dewey Branstetter Jr. Teresa Rider Bult Joshua Burgener C. Mark Carver Robert Garry Chaffin Mark P. Chalos Jonathan Cole Lee Lawrence Coleman Dixie W. Cooper John A. Day Karl F. Dean David Clyde Downard Blair Durham John Franklin Floyd Mark Thomas Fraley Samuel P. Funk Barry James Gammons Angus Gillis III Benjamin Ealey Goldammer Charles K. Grant John J. Griffin Jr. Mitch Grissim Jr. William L. Harbison Marian F. Harrison Trey Harwell Barbara D. Holmes Paul T. Housch John D. Kitch William C. Koch Jr. Thomas W. Lawless
Richard Wesley Littlehale Leslie Stophel Maclellan Cheryl White Mason Richard McGee Rob McKinney John C. McLemore Robert J. Mendes Natasha K. Metcalf Jeffrey Mobley Elizabeth Enoch Moore Marlene Eskind Moses Patricia Head Moskal Michael I. Mossman Phillip L. North Robert J. Parker Katharine (Betsy) Elizabeth Phillips Tracy A. Powell Mark Bradley Reagan Edgar M. Rothschild III Maria M. Salas Thomas J. Sherrard III Marietta M. Shipley Emily A. Shouse James Gerard Stranch IV James G. Stranch III Robert T. Vaughn Irwin Bruce Venick Howard H. Vogel Henry Martin Walker Karl D. Warden James L. Weatherly Jr. Wesley Grant Weeks Peter Weiss Eleanor K. Wetzel Thomas V. White Larry R. Williams Nicholas S. Zeppos
NBA Premier Membership is a special category that recognizes our members who desire to demonstrate the utmost in commitment and support to the NBA Programs & Services. Contact Vicki Shoulders (615.242.9272, vicki.shoulders@nashvillebar.org) for details.
Nashville Bar Journal - June 2012 23
Classifieds
Office Space
OFFICE SPACE
Downtown Office condos for Lease or Sale. 500 to 2500 sq. feet. 501 Union Street, 5th floor. Near Legislative Plaza. Call Lynne at (615) 259-1550.
Music Row Music Row law offices. Space for one or two lawyers and support. Prefer criminal and/ or civil litigation practice. No domestic work. Contact Michael 293-7109 Terry & Gore
DOWNTOWN Law firm has office space to rent for two attorneys and assistants, if needed or option 2 attorney can sublease entire suit which will accommodate four to five attorneys and staff. Office is located in the Regions building downtown on the first floor with window view. Includes internet, all utilities, use of copy/fax/scanner, and postage machine. If interested, please e-mail rpnimmo@nimmolaw.com or contact Price Nimmo at 615-244-2244. DOWNTOWN Prime, A++ office space with two conference rooms for lease in the 5th 3rd Bank Tower, Downtown Nashville. State of the art copier, scanner, fax, high speed internet access, digital phone system and receptionist all provided. Receptionist provided to answer your phone line and greet your clients. $1,750.00 per month. Contact: John Agee @ (615)256-5661 or (615)218-7131 DOWNTOWN OFFICE SPACE AVAILABLE NEAR COURTHOUSE Downtown office space available on the first floor in the historic Barristers Building at 329 Union Street in Nashville. Four offices, library, conference room, kitchen, secretary space and reception area available. One block from courthouse, banks and restaurants. Call Jonathan Williams, 615-256-8880. Midtown Midtown : 682 square feet with beautiful view of Centennial Park; $19.15 per square foot with annual increases; available as is or with build-out cost to be prorated over term of sublease; space is newly carpeted and newly painted, with small kitchen area; covered parking; available immediately. Please call 615-321-5659. Midtown-1900 Church Executive office suites for lease in Midtown Nashville located at 1900 Church, Suite 300. Free covered parking, conference rooms, break room, color copier, and receptionist to greet your clients. Administrative support and flexible terms available. For more information, please call Cheryl Gunn at (615) 983-6935. green hills Established Green Hills law association has office and adjoining secretarial space available for immediate occupancy. Free parking, excellent on-line and hard-cover Tennessee library, conference rooms, receptionist, and voice mail available. Call 383-3332.
Nashville Bar Journal Classifieds Online at www.nashvillebar.org
24 Nashville Bar Journal - June 2012
Music Row Music Row law office – Entire 2nd floor – 4 very nice offices available, total 665 sq ft for $1,750/month, internet and utilities included and shared kitchen on 1st floor. Also, large reception area/office on 1st floor for $500/ month. (615) 327-7386 METROCENTER AREA LAW FIRM Established Nashville law firm has one office space immediately available. Includes receptionist services, cable internet, telephones and fax, conference room, kitchen, copiers, some LexisNexis subscription services, website advertising and more. Professional work environment. Free and convenient parking. Contact Cynthia Bohn at (615) 252-8866 for details.
Accounting
Advertising: Contact Tina Ashford at tina.ashford@nashvillebar.org or (615) 242-9272
Advertise your Office Space in the Nashville Bar Journal
CC
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Do You Need a Mediator? Meet One of Ours. Are you trying to find a mediator for your next case but can’t seem to figure out which professional is best? Let the NBA help! The NBA has a panel of professional attorney mediators who are Rule 31 listed in both civil and family disputes. Don’t lose valuable time guessing about your next mediator selection. The NBA panel provides information on mediators who are Bar members and their professional and legal backgrounds. Are you an attorney mediator? Call NBA LRIS (615-242-9272) today to join the mediator panel. Contact: Wendy Cozby, LRIS Coordinator (615) 242-9272 wendy.cozby@nashvillebar.org
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