Wednesday, November 30, 2011

When Buying a Business: Asset Purchase vs Stock Purchase?

There are essentially three ways how to structure an acquisition of a company. The primary methods include a statutory merger or share exchange; purchase of business assets; or purchase of shares from the existing shareholders. When purchasing assets, the purchaser only buys specified assets of a business (which may or may not be substantially all business assets) and specified liabilities (if any at all). When purchasing the shares, the purchaser buys ownership in the company, including all of its assets and liabilities. Which method is preferable? Below are some advantages and disadvantages of each method. Please note that it is essential to involve a tax lawyer or an accountant in the structuring of the acquisition.

Asset purchase advantages:

• Buyers can purchase only selected assets of the business and not liabilities to minimize the risk.

• Under Delaware law, sale of all or substantially all assets requires the majority vote of the target’s shareholders and there are no appraisal rights for shareholders who did not vote in favor of the transaction.

• An asset purchase allows buyers to allocate the purchase price among the assets to reflect their fair market value. This results in a step-up of tax basis, allows higher depreciation and amortization deductions, and results in future tax savings.

Asset purchase disadvantages

• It may be a challenge to define which assets the purchaser wants to acquire. Usually, businesses sell a subsidiary or a division. So, they typically sell the assets that are used exclusively or primarily in that subsidiary or division. However, there may be “shared assets” that would need to be negotiated, properly licensed to the purchaser, and accounted for in the purchase price.

• An asset sale typically requires numerous third party consents, approvals (such as agreeing to substitute a lesee on an office space lease, or consent to assign a contract, or transfer a permit). The third parties may view the transaction as an opportunity to renegotiate their contracts, which could delay the deal and add to the transaction costs.

• If there are any liabilities (disclosed or undisclosed) that the buyer is not including in the purchase, parties have to make sure that the purchase is not being made for less than the fair value of the assets and that following the sale, the company will still be sufficiently capitalized to pay its debts and liabilities. Otherwise, the transaction may violate fraudulent conveyance laws. Parties would need to obtain a solvency opinion, which can add to the transaction costs.

• An asset sale is subject to double taxation if the target is a C-corporation, so it is not advantageous from the perspective of the target’s shareholders. However, this disadvantage disappears if the target is an S-corporation or another entity with pass-through taxation (LLC, partnership).

Given the challenges associated with an asset purchase transaction, between 2002 and 2009, only 18% of all acquisitions were structured as asset purchases.

In the next post, I’ll discuss advantages and disadvantages of a stock purchase.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Wednesday, November 2, 2011

Maximum Interest on Private Loans in New York

Much has been written about how difficult it is now to obtain financing for small businesses. Banks charge high interest rates, and it is tough to qualify even for a bank loan. Angel or VC funding is even harder to come by. So, to secure funding, business owners turn to their friends and family members for loans. Business owners may feel so appreciative of much needed loans, that they may be willing to pay whatever interest they are asked, even if it is 50%.

This blog is to educate the New York residents and business owners as to how much interest they can really charge or be charged on such private loans made by private individuals or corporations (not banking institutions or credit card companies, where separate laws apply).

Charging high interest rates (that exceed the state maximum) is called “loansharking” (as many may be familiar with such term through the movies). In legal jargon, excessively high interest rates are called “usurious”, i.e., illegal. Usury laws regulate within each state the maximum interest rate that may be charged on a money loan. In New York, there are civil law limits found in the General Obligations Law and the Banking Law, and there are criminal law limits, found in the Penal Code.

So, what are the usury limits in New York?

For loans made to individuals, if the loan does not exceed $250,000, the maximum annual civil law interest rate is 16%, and the maximum criminal law interest rate is 25%. For loans between $250,000 and $2.5 million, there is no maximum civil law rate, but there is a 25% maximum criminal law rate. There is no maximum on the interests charged on loans over $2.5 million.

For loans made to corporations, there is no maximum civil law rate of interest, but there is a 25% maximum criminal law interest rate for loans not exceeding $2.5 million.

What happens if the interest rate exceeds the state limit?

If this happens, the entire loan is considered void, and the lender may be denied the right to recover the interest and even the principal. In addition, the borrower may be allowed to recover any “extra” portion of interest that he or she has paid to the lender. If the interest exceeds the maximum criminal usury limit, the lender may face a felony prosecution.

Please note that laws change all the time, and the information in this blog is only accurate as of the time when it was written. Also, this blog does not provide information regarding loans secured by mortgages (where separate rules apply). It is always best to consult a business attorney to check the current usury laws and to prepare the appropriate loan documentation.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Tuesday, November 1, 2011

Protecting Your Trade Secret While Protecting Your Code with Copyright Registration

This post is about protecting the secrecy of your code while registering it with the US Copyright Office. Copyright.gov website provides useful information about copyright in general and the process of filing a copyright application in particular. Circular 61, available on the copyright.gov website, addresses copyright registrations of computer programs.

A copyright application contains three elements: (1) a completed application form, (2) a fee, and (3) a non-refundable deposit (a copy of the work being registered and “deposited” with the Copyright Office). The main concern that developers express is that the deposit requirement causes them to reveal their confidential source code.

Below is what developers should do, according to the Copyright Office:

For software without trade secrets, the registrant needs to submit the first 25 and last 25 pages of source code. If making an on-line application, the source code can be downloaded electronically, in a pdf format. If the entire source code is less than 50 pages long, you should send in the entire source code.

For software containing trade secrets, you need to submit a cover letter stating that the claim contains trade secrets, a page with copyright notice, if any, and the source code as described below:

For new software:

First 25 and last 25 pages of source code with portions containing trade secrets blocked out, OR

First 10 and last 10 pages of source code along, with no blocked out portions, OR

First 25 and last 25 pages of object code plus any 10 or more consecutive pages of source code, with no blocked-out portions, OR

If less than 50 pages, - entire source code with trade secret portions blocked out.

There are also rules applicable for revised computer programs.

Note that the blocked out portions must be proportionately less than the remaining material, and the visible portion must represent an appreciable amount of original computer code.

Finally, as Circular 61 points out, each subsequent version of the software should be registered separately. The first registration covers the entire software, whereas submissions with subsequent version – only the new or revised material.

Please note that the information in this blog is derived from Circular 61 published by the US Copyright Office and is not intended as legal advice.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.