1 comment on “Considering Selling Your Business and Wondering Where to Begin? The Role of a Letter of Intent”

Considering Selling Your Business and Wondering Where to Begin? The Role of a Letter of Intent

By Rajnish Puri |

Part two of a four-part series.

In this four-part series on the subject of selling your business, I plan to share with you, based on my experiences, the various stages an owner of a privately-owned business can expect to go through when considering an exit strategy.

Once a seller has completed the initial steps in deciding to sell its business (please see last week’s article) and also has identified the most suitable buyer, generally speaking, the first formal expression of interest between the two parties to carry out the sale and purchase transaction is memorialized in a Letter of Intent.  Traditionally, the buyer prepares and submits the signed letter to seller who, after consultation with its team of experts, elects to either accept the proposal as presented or provide modifications for buyer’s consideration.  In certain situations, prior to executing the Letter of Intent, the parties may enter into a confidentiality agreement to facilitate exchange of information about seller’s business for buyer’s preliminary evaluation.  As is implicit in its title, the Letter of Intent is a medium through which a willing seller and a willing buyer communicate to each other their respective “intent,” and not a definitive promise, to enter into a transaction under certain terms and conditions.  Nonetheless, with the exception of certain provisions (discussed below), the commitment, though primarily non-binding at this stage, is sophisticated enough to convey that each party is serious about pursuing the deal.  Letters of Intent may vary in style, length and the extent of details included, but often address the following primary matters.

Establishing the Principal Framework.  Depending on the nature and size of the target business, its history and ownership structure, parties make an early decision to agree on the structure of the proposed transaction, with the primary choices being an asset or a stock purchase transaction.  When uncertain, parties defer the decision on the structure pending further evaluation of the business by buyer.  The purchase price buyer is willing to pay to seller is the next key component of a Letter of Intent, as are the associated conditions, such as expectations about the level of debt to be assumed by buyer and adjustments to the purchase price based on the working capital available at closing. The timing of payment of the purchase price – what portion is to be paid at closing and how much is subject to a holdback or linked to the post-closing performance of the business – is another aspect the parties tend to describe at this stage.  Finally, if buyer has engaged in prior, even if limited, due diligence about the business, buyer sets forth the conditions it expects to be completed prior to closing the proposed transaction.

Non-Binding v. Binding.  Because buyer has plenty to investigate about the target business before legally committing itself to go through with the proposed transaction, with the exception of select provisions, a Letter of Intent is predominantly non-binding.  A binding commitment between the parties is expressed in a definitive agreement, typically entered into between the parties following buyer’s due diligence investigation.  From buyer’s perspective, some of the prerequisite investigations imposing demands on its time are understanding the financial statements, contracts and ongoing obligations of the business, evaluating third party relationships, and understanding employee matters and related aspects – all of which could impact buyer’s decision on the structure and financing of the transaction or, in some cases, whether or not it is even prepared to move forward.  The provisions that are typically binding in a Letter of Intent are the obligations of the parties to bear their respective expenses, ensuring confidentiality of information shared by seller (although it could be addressed through an independent non-disclosure agreement), granting buyer and its team of advisors extended access to information about the target business, and buyer having exclusive rights to evaluate the business for a limited period of time.

Due Diligence and Confidentiality.  Unless previously addressed in the context of a non-disclosure agreement executed between the parties, a Letter of Intent, when signed, permits buyer and its designated team of advisors (attorneys, accountants, and members of buyer’s management) to begin their due diligence investigation of the target business.  To ensure that the information seller shares about the business remains protected and is limited to use by buyer solely to evaluate if buyer should acquire the business, a confidentiality provision is an important element. Occasionally, the confidentiality provision also includes names of select individuals from seller’s team who are the only ones authorized to receive and respond to buyer’s inquiries to ensure a coordinated and efficient due diligence process.

Exclusivity and Termination.  The last thing a potential buyer wants to do is to engage in the investigation of seller and the target business, incur costs and fees, and make the related time commitments – only to later learn there are other potential buyers invited to the party, triggering the need for an exclusivity provision seeking seller’s assurance that buyer is the only party engaged in negotiations.  What frequently gets negotiated is the duration of the exclusivity period, which, depending on the size of proposed transaction, varies between 30 to 90 days.  Naturally, seller prefers the shorter end of the spectrum to allow itself other options should the buyer have a change of heart, and buyer likes to maximize the duration.  And, finally, there is seller’s need for certainty about the process, which is addressed through listing the conditions – satisfied or failed – that trigger the termination of the Letter of Intent, again with a select surviving the termination.

In Part One of this series, I shared thoughts on First Steps.  In Part Three of this series, I plan to focus on What to Expect between Signing a Letter of Intent and Closing.  Stay tuned for another conversation on ClarkTalk!!

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering the sale or purchase of a business.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Raj Puri by email at rpuri@clarktrev.com or telephonically by calling the author at (213) 341-1322.

0 comments on “Do I Need a Will, a Trust or Both?”

Do I Need a Will, a Trust or Both?

By Tiffany A. Halimi |

To some, Trusts are believed to be used exclusively by the ultra-wealthy.  Should your baby be a Trust fund baby?  Is there a minimum level of wealth a person should have in order to benefit from a Trust?

Given today’s legal climate, a living Trust is a great tool for any individual whose total assets exceed One Hundred Fifty Thousand Dollars ($150,000) or whose real property assets exceed Fifty Thousand Dollars ($50,000).  Once an individual’s estate exceeds either or both of those minimum thresholds, then that estate must go through the probate court system before it can reach the heirs, unless the deceased individual (“decedent”) executed a Trust, or took some other action, prior to the decedent’s demise.

Intestate-SuccessionThe use of a Trust can (a) facilitate the avoidance of probate and (b) direct to whom and how assets will be distributed.

A.     Avoid Probate

A funded Trust allows a decedent’s estate to pass directly to the decedent’s designated beneficiaries, without having to go through probate.  Avoiding probate is beneficial to the beneficiaries for several reasons.

1.) Trust administration can expedite the time it takes to administer an estate.

First, the probate courts in Los Angeles County are severely backed up, and a probate administration often takes a year or more to complete.  The decedent’s estate cannot be paid out until the probate administration is complete.  Currently, a petition to open a new probate in Los Angeles Superior Court will not be heard for at least 4-6 weeks.  A Trust, on the other hand, can often be administered without court supervision, thereby expediting the total process.  Additionally, the Trustee will have immediate ability to manage the assets that are held by the Trust, and will not have to wait 4-6 weeks for a Court to grant such authority.

2.)  Trust administration keeps the decedent’s information confidential from the public.

Second, a probate becomes public record, making otherwise private information relating to a decedent’s assets publicly accessible.  A Trust administration without court supervision is private.

3.)  Trust administration does not give an attorney a percentage of the decedent’s estate.

Third, an attorney is statutorily entitled to take attorneys’ fees as a percentage of the estate, regardless of how much time the attorney puts into the matter.  See Probate Code Section 10810.  With a Trust administration, an attorney can offer guidance to the Trustee and only bill for the attorney’s time, rather than take a percentage of the estate.

Thus, in order to avoid administration through the probate courts, an estate that is comprised of total assets valued more than $150,000 or real estate valued more than $50,000 should be administered pursuant to a Trust declaration

B.     Decide Who Receives Your Assets

In addition to avoiding probate, there is another important reason to consider a Trust or a Will.  A Trust or a Will allows a person to determine to whom they would like their assets to pass and when.  For more information on the distributive benefits of a Will or a Trust, please see If Uncle Sam Already Bought You an Estate Plan, Why Hire an Attorney? The Pitfalls of Intestate Succession.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other trust and estate issue.  If you wish to consult with the author of this post, please contact Tiffany Halimi by email at thalimi@clarktrev.com or telephonically by calling her at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this article is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com

0 comments on “Traps for the Unwary Lurk in New Paid Sick Leave Law”

Traps for the Unwary Lurk in New Paid Sick Leave Law

By Leonard Brazil

We’ve entered a new year and employers are scrambling to ensure they are in compliance with another layer of employment laws.  But first make sure you’ve already properly implemented the paid sick leave law that effectively kicked in on July 1 of last year and has already been amended once!

You are probably aware of the paid sick leave law so I won’t summarize it.  (You can review a summary here).  Instead, I want to focus on some of the traps for the unwary–nuances in the law which leave employers vulnerable to unknowing violations.

Employee Handbook’s Inclusion of Introductory Period.  Check whether your employee handbook includes a policy that a new hire’s first 30, 60 or 90 days is an “Introductory Period.”  Some of those policies state new hires must complete their Introductory Period before they begin to accrue sick leave or paid time off (PTO).  Such a delay in the accrual of sick leave or PTO would violate the paid sick leave law.  New hires are to commence accrual (or sick leave front loaded) immediately when hired if the employee has already worked in California for at least 30 days for the same employer within a year of commencement of employment.

Inconsistency With Family & Medical Leave Act.  Another trap for employers arises if they are covered by the federal Family & Medical Leave Act/California Family Rights Act (collectively “FMLA”).  Under the FMLA, the minimum increment of leave you may require an employee to take cannot exceed 1 hour.  However, the paid sick leave law states the minimum increment an employer may impose for the use of sick leave cannot exceed 2 hours.  The FMLA and paid sick leave law have different minimum increments of leave an employer can require.  A problem may arise because some FMLA policies state employees are required to use available sick leave while on FMLA for their own serious medical condition.  If employees take leave of 1 hour under the FMLA for their own serious medical condition and the employer applies available sick leave to the FMLA absence of 1 hour, the employer will have violated the sick leave law which does not allow sick leave in increments of less than 2 hours.

Determining Minimum Front Load Requirement.  The poorly drafted sick leave law also exposes employers to another surprise violation.  The law states an employer may “front load” sick leave at the beginning of the year instead of having it accrue through the year so long as the leave is not less than 24 hours or 3 days.  The California Division of Labor Standards Enforcement (DLSE) interprets the “24 hours or 3 days” differently than you may have thought.  The DLSE states that if a part-time employee works, for example, 4 hours a day, the minimum amount of leave which must be front loaded is not the amount of time they worked in 3 days (12 hours) as one would think—it would be 24 hours (See August 8, 2015 DLSE Opinion Letter).  I hope the DLSE’s interpretation will be rejected by the courts because it seems absurd to give employees more sick leave pay for their absence than would have been received if they actually worked those days!  Likewise, the DLSE states an employee working a regular shift in excess of 8 hours would be entitled to receive sick leave based on the total hours worked in 3 days.  For example, employees with a regular 10-hour shift would be front loaded 30 hours, not 24 hours.

Plaintiff employment lawyers will automatically look at an employer’s sick leave policy with the hope of snaring unsuspecting employers who think they are safe because they prepared a sick leave policy to comply with the new law—but have they?

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other employment issue.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Debbie Petito dpetito@clarktrev.com or Leonard Brazil lbrazil@clarktrev.com by email at or telephonically by calling the author at (213) 629-5700.

0 comments on “Ever Heard of Comparable Worth? California’s New Gender Equity Law May be the Next Big Employment Issue”

Ever Heard of Comparable Worth? California’s New Gender Equity Law May be the Next Big Employment Issue

In the 1980s there was an to attempt to require employers to compensate male and female employees equally for comparable work.  It was commonly referred to as “comparable worth.”  It required that jobs of various types be compared to other “similar” jobs and that employees in both jobs be compensated at the same rate.  The idea was that some jobs were normally occupied by women and others by men so the types of duties and responsibilities of different positions should be compared to determine if these jobs were comparable to others and should be paid at the same rates.  The problem was determining what constituted “similar” work.  Is a nurse the same as an engineer?  Or a mechanic?  You can see the problems that arose and it was eventually abandoned.

The Amended Law

This year, the California Legislature has taken a step back towards comparable worth in their amendment of Labor Code section 1197.5.  This is not a new law.  Labor Code section 1197.5, passed in 1949, has always required that employees be compensated equally.  It previously prohibited an employer from paying an employee less than the compensation paid to an employee of the opposite sex in the same establishment for equal work in jobs that required equal skill, effort and responsibility.  The changes in the law effective January 1, 2016, remove the location element and place the burden on the employer to show that the differences in pay  are not based upon gender.

Specifically, the California Legislature has amended the statute eliminating the terms “within the same establishment,” “equal work” and “equal skill, effort and responsibility.”  Now California law prohibits an employer from paying any of its employees of the opposite sex different compensation for “substantially similar work, when viewed as a composite of skill, effort and responsibility.”  It appears that location can no longer be a consideration.  Should a  position in San Francisco be paid the same as a “similar” position in Los Angeles?  What about Fresno?  What is a similar position?  What happened to compensation to recruit and retain?  As you can see, employers are now required to make very difficult judgment calls on which positions are similar.

The changes place the burden on the employer to affirmatively show that any difference in compensation is not unlawful.  The employer cannot pay employees of the opposite sex different rates for “substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.”  These terms are not defined.  However, the employer can pay different rates if such rates are based on (1) a seniority system; (2) a merit system; (3) a system that measures earnings by quantity or quality of production;  or (4) a bona fide factor other than sex such as education, training or experience.

The law also now prohibits retaliation against an employee who discloses their own wages, discusses the wages of others, inquires about another employee’s wages, or aids and encourages another employee to exercise his or her rights under this statute.  California already has a law that prohibits employers from preventing employees from discussing their compensation (sometimes referred to as the 9 to 5 law because it was authored by Tom Hayden, then married to Jane Fonda who starred in the movie “9 to 5”) and, therefore, employees are able to discuss their compensation if they choose to do so.

If an employer violates this law, the employee is entitled to the difference in the wage rates and an equal amount as liquidated damages.

The amended law is likely to generate additional litigation and new case law in California as the courts determine whether positions are comparable and evaluate employer defenses to differences in pay rates.

Affirmative Steps to Take to Determine if the Wages Paid by your Company or Organization are in Compliance

So, what precautions may an employer take?  There are several proactive steps that you can take:

  1. Conduct an audit of your compensation for the same positions and do that on a state-wide basis.
  2. Compare positions that are close to the same compensation level.  Determine if certain jobs are paid less and whether there is a gender tie to the pay differential.  Remember that paying a man (or woman) more because they are the “head” of the family or the sole or major breadwinner will be in violation of the law.
  3. Evaluate all positions to determine which ones are require similar skill, effort and responsibility. Do these jobs tend to be held by women or men?  Are they paid at different rates?
  4. Make sure any compensation adjustments are adequately documented so you can justify raises that are unequal.
  5. Make sure that anyone involved in hiring, or those who determine starting salaries and/or increases in wages are aware of the new law and that decisions are carefully documented.

Although immediate litigation in this area is not likely, it is prudent to try to bring your company or organization into compliance now rather than when you are gathering documents and preparing for litigation.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering conducting a review of your pay practices.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Debbie Petito dpetito@clarktrev.com or Leonard Brazil lbrazil@clarktrev.com by email at or telephonically by calling the author at (213) 629-5700.

0 comments on “AIR Lease Forms – Good for the Goose or Good for the Gander? A View From the Tenant’s Perspective”

AIR Lease Forms – Good for the Goose or Good for the Gander? A View From the Tenant’s Perspective

By James S. Arico

Despite what a landlord may tell a prospective tenant, there is nothing “standard” about any lease form.  This is true even for pre-printed leases labeled as “standard,” like the AIR Commercial Real Estate Association lease forms (collectively, the “AIR Form”) for both net (where tenant pays a base rent amount plus its share of taxes, maintenance and insurance) and gross (where tenant pays a base rent amount plus its share of increased taxes, maintenance and insurance over a base year amount) lease transactions.  Traditionally, the AIR lease forms have been landlord orientated and designed to protect the commercial real estate brokerage community.  While the AIR lease forms have become more tenant-friendly in recent years, tenants should take care in reviewing an AIR Form prepared by either landlord or landlord’s broker.  Preferably, tenant should seek the assistance of commercial real estate counsel to review and negotiate the AIR provisions, since the form itself is generally favorable to landlord.

With respect to changes to the AIR Form made by landlord, any revisions using the copywrited AIR Form or AIR software are easily recognizable.  Form language landlord wishes to delete will appear as strike throughs and additions or revisions will either appear in the AIR Form in conspicuous type (i.e. different from the form type font) or will be addressed in a separate lease addendum.

The following are some examples of lease items that you, the prospective tenant, should be aware of that are in both the net and gross AIR lease forms:

Condition of the Premises.  In paragraph 2.2 of the AIR Form, landlord warrants that, among other things, the existing plumbing, electrical, and heating, ventilation and air conditioning (“HVAC”) systems are in good working order and the structural condition of the building in which the premises is located is free of material defects.  While this landlord warranty is a benefit for tenant, the warranty period is only thirty (30) days, with the sole exception being the HVAC system, which carries a six (6) month warranty.  Any problems incurred with these items following the expiration of the warranty period are tenant’s responsibility to fix at tenant’s sole cost.  Since a prospective tenant needs to “live” in its new premises for some to determine which building systems may be defective, tenant should request that, at a minimum, landlord’s warranty for all building systems and the building structure be extended to six (6) months.

Security Deposit.  The security deposit section of the AIR Form (paragraph 5) provides that if the base rent increases during the term of the lease, landlord has the right to increase the amount of tenant’s security deposit to maintain the same proportion as the initial security deposit bears to the initial base rent amount.  To avoid surprises, tenant should seek to strike this provision of the lease.

Tenant Improvements and Surrender of Possession.  Paragraph 7.3 of the AIR Form provides for tenant’s right to make alterations/improvements to the premises.  Tenant should keep in mind that, except for movable items of personal property used in tenant’s business (called trade fixtures), landlord has the right to keep or require removal of any other alterations or improvements tenant makes to the premises at the end of the lease term.  Since some alterations may be as expensive to remove as to install, tenant should request that all tenant improvements (other than trade fixtures) remain with the premises or, alternatively, that landlord make the “remove or remain” decision on all tenant improvements prior to installation.

Partial Damage that is an Insured Loss.  Under paragraph 9.2 of the AIR Form, if damage to the premises occurs that is insured and the cost to repair is $10,000 or less, landlord has the option to give tenant the insurance proceeds and have tenant undertake the repairs.  Two immediate issues arise with this concept.  First, tenant is usually not in the construction business and undertaking repair responsibilities, even if of minor nature, is a distraction to the ability of tenant to conduct its business.  Second, tenant may be responsible for any gap between the insurance proceeds received by landlord and the actual cost of the damage repair.  Tenant should carefully review its responsibilities in the event of damage or destruction and make sure that the provisions are “even handed.”

Accessibility ADA.  The last numbered paragraph of the AIR Form (Paragraph 50 on the net form and Paragraph 49 on the gross form) identifies three important things.  First, whether the premises has been inspected by a Certified Access Specialist (a “CASp”); second, that landlord makes no guarantees that the premises is ADA compliant; and third, that any ADA modifications required by tenant’s use will be the sole responsibility of tenant.  Tenant should consider the following:  First, if the premises have not been inspected by a CASp, tenant may want to retain its own CASp to inspect the premises; and second, tenant should negotiate a fair resolution of the allocation of costs related to any required ADA modifications.  For example, tenant should be responsible for only those non-structural modifications related to the unique nature of tenant’s use of the premises (as opposed to any other use of a tenant in the building, or a general office/warehouse use) and landlord should be responsible for all other modifications.

NOTE: THE ABOVE LEASE ITEMS ARE ONLY EXAMPLES OF POTENTIAL PITFALLS A TENANT MAY ENCOUNTER.  For this reason I reiterate the suggestion to seek the assistance of a commercial real estate counsel.

Good luck!

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering your real estate needs.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Jim Arico by email at jarico@clarktrev.com or telephonically by calling the author at (213) 629-5700.

1 comment on “If Uncle Sam Already Bought You an Estate Plan, Why Hire an Attorney? The Pitfalls of Intestate Succession”

If Uncle Sam Already Bought You an Estate Plan, Why Hire an Attorney? The Pitfalls of Intestate Succession

By Tiffany A. Halimi

Why spend a few thousand dollars on an estate plan when federal and state law bought one for you for free? Why pay for private health insurance when you can rely on Medicaid?  Why purchase media (books, magazines, music), when you can use it online or in a public library for free?

The law’s default estate plan that is in place for individuals who do not have their own estate plan can be a useful stop gap for specific situations and certain individuals.  But free initiatives implemented by the government are not always the best approach for each individual.

All U.S. citizens who die without a Will or a Trust will have an estate plan in place for them free of charge, compliments of federal and state law.  That estate plan is referred to as “intestate succession” and is set forth under the Probate Code[1].  Pursuant to Probate Code Section 6400 et seq., intestate succession (when a person dies without a will or trust) mandates that the estate of a deceased individual (“decedent”) who was married shall pass to that individual’s spouse, if that individual dies without children.  If the decedent dies with a spouse and one child, and no children or grandchildren from a deceased child, then the decedent’s estate passes one-half (1/2) to that decedent’s spouse, and the other one-half (1/2) to that decedent’s sole child.  The estate of a decedent who dies intestate with a spouse and more than one child will pass one-third (1/3) to the surviving spouse, and the other two-thirds (2/3) to be divided equally among the surviving children and the offspring of any deceased children. These are general guidelines, which can change depending on the facts and circumstances of each specific case.

cinderella_s_evil_step_sister__drizella_by_lemiacrescent-d8f5h8z
Drizella, Cinderella’s evil stepsister.

When the Probate Code refers to a child, what is included in that definition?  Under Probate Code Section 21115, a child includes, but is not limited to, halfbloods, adopted persons, persons born out of wedlock, stepchildren and foster children.  Thus, a person who may not wish to leave their estate to a stepchild, but who dies intestate, may be out of luck.

By using  a Will or a Trust, a person can change the recipient of their estate assets to individuals other than the ones provided for by the Probate Code section relating to intestacy succession.  Additionally, a person can choose to leave all or part of their estate to an entity, such as a charity or a school.  Through the use of a Trust or a Will, a person can even control when a beneficiary will receive their distribution, within certain limitations.

Not only is the distribution of the property of the intestate decedent provided for by federal and state law, as illustrated above, the estate tax and property tax planning of the intestate decedent is also provided for by federal and state law.  To learn more about estate tax and property tax planning, please contact Tiffany A. Halimi, Esq. or one of our other estate and tax planning attorneys.

[1] All references to the Probate Code are to the California Probate Code