Jennifer L. McDowell enjoys representing owners and their businesses in all forms and sizes from formation through sale. She assists and advices businesses and their owners in organizational planning, succession planning, mergers, divestitures and acquisitions, employment matters, general contracts and business transactions, real estate, financing,... tax compliance and tax planning. Ms. McDowell began her career in a state and local tax litigation boutique, where she honed her tax and financial expertise and developed a proficiency in administrative and appellate practice. She continues to guide business taxpayers through audit, refund, protest and other administrative processes; work with governmental authorities to obtain positive outcomes for her clients; and litigate state and local tax disputes. More

The Supreme Court’s Pen Strikes Down Quill-Now What???

On June 21, 2018, in South Dakota v. Wayfair, Inc., the U.S. Supreme Court struck down over fifty years of precedent when it ruled that retailers are no longer required to have a physical presence in a state to be subject to the state’s tax jurisdiction for sales tax purposes. Importantly, the question before the Court was never whether South Dakota has the authority to tax the sales of goods and services delivered to consumers within its borders, as there is no doubt that such transactions are subject to South Dakota sales and use tax. Rather, the question was: who bears the tax compliance responsibility – the retailer or the consumer?

Sales and use taxes can often be thought of as two sides to the same coin. If a transaction is subject to sales tax, generally, the retailer must collect the tax from the consumer then report the sale and remit the tax to the appropriate taxing authorities. If a retailer is not subject to the tax jurisdiction of the state (or local authority) to which the tax is owed, the consumer is required to remit the tax (as a use tax) and report their purchase to the appropriate taxing authority. The question before the Court in Wayfair was: when may a state exercise tax jurisdiction over a retailer and require such retailer to collect, remit and report sales tax to the state?1

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1041 Hits

Know When to Hold ‘em and Know When to Fold ‘em - Managing Deal Fatigue During the Negotiation Process ~ Part 2

Upon completion of the majority of due diligence, frustration with the transactional process has generally started to set in, at least for sellers. However, the process is far from over. If a purchase and sale agreement has not already been signed, the real negotiations begin at this stage. It may also take time to draft other major transaction documents such as employment contracts and forward-looking operational agreements such as operating agreements and shareholder agreements.

It is extraordinarily important for parties to review all documents, or at least changes to those documents, as those documents and changes are prepared. The parties should discuss the documents with their attorneys and accountants so that they understand the financial and legal implications for each document as well as the purpose of each document. The role of accountants, attorneys and similar advisors is to provide advice, counsel and guidance during the negotiation process; however, all decisions are ultimately up to the parties. Consequently, the parties must understand the implications and nuances of each term and condition in the various documents.

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Know When to Hold ‘em and Know When to Fold ‘em - Managing Deal Fatigue in Mergers and Acquisitions ~ Part 1

Anyone who has ever purchased a car or bought a house knows that purchases and sales of large assets are stressful, time consuming, expensive and involve more paperwork than expected. In many transactions, either or both parties reach a point in the process where they just want the process to be done.  In corporate transactions, this point in the decision making process can be dangerous because parties agree to liabilities, indemnities, potential losses, reductions in the purchase price, broad or too narrow non-competes, unreasonable or unlikely forward measured financial requirements and generally unfavorable terms, or they cut corners on due diligence simply to make the process stop.  Alternatively, either or both parties throw their hands up and walk away from a good deal, not because of the deal terms, but out of frustration with the process.

My partner, Ken Barbe, has astutely termed this behavior “Deal Fatigue.”  We liken it to the point in a torture session where the individual being tortured is willing to say anything in order to make the torture stop.  Decisions made as a result of Deal Fatigue can have long-reaching fiscal, legal and mental impacts. Accordingly it is important to manage Deal Fatigue to the extent possible so that parties do not make a bad deal or walk away from a good deal.

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Get out of my sandbox! Expulsion of a LLC Member under Wyo. Stat. 17-29-602

So, you have a bad apple as a member of your Wyoming limited liability company (LLC), how do you get rid of them? The best option is usually to reach an agreement for the company or a specific member to purchase the troublemaker’s membership interest. If, however, an amicable solution cannot be reached, the company may be able to expel the member pursuant to Wyo. Stat. 17-29-602. Section 602 governs the general circumstances when dissociation of a member occurs but also provides for expulsion of a member in the following circumstances: i) pursuant to the company’s operating agreement; ii) with unanimous consent of the other members; and iii) by judicial action.

Pursuant to Section 602, the easiest course of action is to expel the member under the company’s operating agreement but, unfortunately, few operating agreements address the expulsion of troublemakers. The next simplest course of action under Section 602 is to vote them out. However, this option is only available in very limited circumstances. Specifically, voting the bad apple out pursuant to the statute is available when it is either: unlawful to carry on the company’s activities as long as the troublemaker remains a member or there has been a transfer of all of the troublemaker’s transferable membership interest. Note: even if the troublemaker’s membership interest has been fully transferred, they cannot be expelled if the transfer was: a transfer for security purposes or due to a charging order in effect under Wyo. Stat. 17-29-503.

The company may be left with the most expensive and least desirable but still possible remedy of filing a lawsuit to expel the member. In order to expel the troublemaker by judicial action, the company (as opposed to an individual member) must bring the action and prove one of the following:

(A) the member has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;

(B) the member has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s fiduciary duties or obligations under Wyo. Stat. 17-29-409; or

(C) the member has engaged in, or is engaging in, conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.

Beyond the expense and general litigation risk for the company, even if the member is judicially expelled, there are a couple of caveats that require careful consideration. First and foremost, expulsion of the troublemaker will successfully remove him from all management and other business operations BUT the troublemaker will continue to own his interest in the company as a “transferee interest” also known as an “economic interest”. See Wyo. Stat. 17-29-603. Accordingly, the former member will be entitled to certain financial information owned by the company and, perhaps more importantly, will continue to be entitled to his share of the profits, losses and distributions under the company’s operating agreement. So, effectively, the company may kick the offending member out of the sandbox but still have to pass him buckets of sand to build his castle. Secondly, if the company is member-managed, the troublemaker’s fiduciary duties as a member end with regard to matters arising and events occurring after his dissociation. Terminating fiduciary duties owed by the troublemaker may be too disadvantageous to the company for the company to expel him, particularly if the member begins competing with the company while still receiving distributions as an economic interest owner.

Expulsion of a member is, obviously, an aggressive course of action and must be thoroughly examined. The risk of litigation to the company and its other members must be studied even if expulsion occurs under the operating agreement or by unanimous vote. However, Section 602 does provide some options for a company to remove a problem member at least from the company’s management and business operations.

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2914 Hits