Fed says Texas Economy Stabilizing

A recent report issued by the Federal Reserve Bank in Dallas indicates that the Texas economy may be stabilizing and shows  signs of “some hope of improvement toward the end of the year.”

Employment

Although Texas employment rates fell rapidly during the the first half of the year,   the employment decline is expected to slow during the third quarter.

Commercial Real Estate

Commercial real estate markets remain weak, with vacancy rates on the rise. Commercial real estate transactions have slowed but may increase by year’s end.

Manufacturing & Energy

The general level of business activity in Texas continues to improve. Expectations of future manufacturing activity appears to be improving. With oil prices returning to nearly $70 per barrel, some oil rigs have been resumed operations.

Proposed Surcharge of 5.4 percent on High-Income Taxpayers

On July 14 House health care negotiators unveiled a proposed surcharge of up to 5.4 percent on high-income taxpayers,  and other revenue raisers, including the codification of the economic substance doctrine, and a limitation on treaty benefits for deductible related-party payments, to pay for the sweeping overhaul of the U.S. healthcare system proposed by Democrats and the Obama Administration.

Foreign Bank Account Disclosure Deadline

The June 30, 2009 deadline for filing the current year Report of Foreign Bank and Financial Accounts, Treasury Form TD F 90-22.1 (FBAR) is quickly approaching. FBAR forms are deemed filed when received by the IRS, not when postmarked. 

Persons required to file the FBAR form who fail to do so by June 30th are subject to a penalties of $10,000 for non-willfull violations or up to the greater of $100,000 or 50% of the amount in the foreign account in the case of a willful violation.

Taxpayers who have properly reported taxable income earned from such foreign sources and listed those accounts on required IRS forms can file prior year FBARs without penalty.

A copy of the FBAR form is available here.

How to Collect a Debt in Texas

When a creditor is owed money by a debtor, whether that debtor is a vendor or a customer, or an individual or company, the process can be daunting when deciding what to do.

THE LEGAL ASPECTS OF THE DEBT COLLECTION PROCESS

The debt collections process against consumers must comport with federal and state statutes, including the Federal Fair Debt Collection Practices Act and the Texas Debt Collection Act. Debt collection in the commercial context is not required to follow these statutes, but it is good business practice to use these statutes as the standard. Other considerations when collecting debts owed to you include locating the debtors’ assets, fraudulent transfer of assets, the possibility of pre-judgment actions, impacts of bankruptcy, and ultimately filing suit.

FILING A COLLECTIONS LAWSUIT

If filing a law suit becomes necessary, it is important to understand the type of debt. For example, the collections procedures and options for promissory notes can differ from the procedures and options used for goods and services provided on an account basis. After a successful suit and a creditor obtains a judgment against the debtor, the possibility always exists that the debtor will not pay the judgment. In such a case, consideration will need to be given to how to execute on that judgment.

New report shows four of the nation’s top five cities for economic performance are in Texas

According to the Brookings Institute MetroMonitor study of economic indicators from March 2008 to March 2009, the top five cities for economic performance were: San Antonio, Oklahoma City, Austin, Houston and Dallas.

What are the Differences between Chapter 7, Chapter 11 and Chapter 13 Bankruptcy Proceedings?

Chapter 7 – Liquidations

Chapter 7 of the Bankruptcy Code governs the liquidation process under the bankruptcy laws of the United States. When a distressed business is unable to service its debt or pay its creditors, the business or its creditors may file for bankruptcy under Chapter 7. A Chapter 7 filing requires the business to cease operations unless and until it is continued by the Chapter 7 Trustee. A Trustee will be appointed by the federal bankruptcy court to sell the company’s assets and distribute the proceeds to the creditors. As a result of the Chapter 7 proceeding, the bankrupt entity will be dissolved.

Chapter 11 – Business Reorganization

Chapter 11 of the US Bankruptcy Code permits a business to reorganize and have its debts discharged. When a business is unable to service its debt or pay its creditors, the business or its creditors can file for protection under Chapter 11. In most Chapter 11 proceedings, the debtor remains in control of its business operations as a debtor in possession, but is subject to the oversight and jurisdiction of the bankruptcy court.

Chapter 13 – Individual Bankruptcy

Chapter 13 bankruptcy filings are available to individuals as a personal relief from debt and to avoid foreclosure and certain other collections proceedings.

About “Spain Chambers”

Spain Chambers is a full-service law firm representing clients throughout Texas including Fortune 500 clients as well as entrepreneurs, privately-held companies and multinational corporations. Our clients come from a range of industries including Energy and Oil Field Services, Real Estate and Construction, Healthcare and Information Technology.

Our legal services include commercial and corporate litigation, employment law,  business transactions, product liability defense, real estate transactions and taxation.

Due Diligence Checklist

Every deal is different, so due diligence must be tailored to fit each particular deal. When we begin the due diligence process on behalf of a buyer, we prepare a checklist that is specifically designed to enable the buyer to evaluate the sellers business, assets and prospective liabilities. The following simple due diligence checklist is an example of some of the items that should be included in a typical due diligence review. This form is not comprehensive.

Due Diligence Checklist

Company Formation and Corporate Governance

●	The Company’s Certificate of Formation or Articles of Incorporation
●	The Company’s Bylaws, Limited Liability Company Agreement, Limited Partnership Agreement or equivalent governing documents
●	The Company’s minute book, including all minutes and written resolutions of shareholders and directors
●	The Company’s organizational chart
●	The Company’s list of shareholders listing the number of shares held by each shareholder
●	Copies of agreements relating to rights of first refusal and options
●	A Certificate of Good Standing from the Secretary of State of the state where the Company is formed

Financial Information

●	Audited (if available) financial statements for three years
●	The Company’s general ledger
●	Any management reports, projections, and capital expenditure budgets
●	A schedule of all debt and contingent liabilities
●	An inventory schedule
●	Accounts receivable and accounts payable schedules
●	Copies of any business or asset valuations

Physical Assets

●	A schedule of fixed assets and their locations
●	Copies of all U.C.C. filings
●	Copies of all equipment leases
●	A schedule of sales and purchases of equipment in the prior three years

Real Estate and Environmental

●	A schedule of the Company’s locations
●	Copies of all real estate leases, deeds, mortgages, and title policies
●	Copies of any environmental audits
●	A list of hazardous substances used or handled by the Company
●	Copies of all environmental permits and licenses
●	A list of any environmental litigation or investigations

Intellectual Property

●	A schedule of domestic and foreign patents, trademarks, copyrights and applications
●	A description of know-how and other unregistered intellectual property
●	Copies of all consulting agreements, work for hire agreements, licenses, and any assignments of intellectual property
●	A list of any claims by or against the Company regarding intellectual property

Licenses and Permits

●	Copies of any governmental licenses, permits, or consents

Employees and Employee Benefits

●	A list of employees including titles and salaries
●	Copies of all employment, consulting, confidentiality,  or non-competition agreements
●	A copy of the Company’s employee handbook
●	Copy of the summary plan descriptions of qualified and nonqualified retirement plans
●	Copies of any collective bargaining agreements
●	A description of all employee litigation, claims and disputes as well as labor disputes within the last three years
●	A description of benefits of all employee health and welfare insurance policies

Material Contracts

●	Copies of all contracts between the Company and any related parties, such as officers, directors, shareholders, or affiliates
●	Copies of all loan agreements, lines of credit, or promissory notes, including security agreements, mortgages, indentures, and similar agreements
●	Copies of any distribution agreements, sales representative agreements, and supply agreements
●	Copies of all material contracts

Product and Service Information

●	A list of all products or services
●	Copies of the Companys standard terms & conditions and samples of invoices
●	Copies of all complaints or warranty claims

Customer Information

●	The Companys customer list, indicating the amount of sales to each customer
●	A description of the Company’s marketing plans, budgets, and printed marketing materials

Litigation and Insurance

●	A list and summary of all pending and threatened litigation
●	Copies of all insurance policies, including general liability, product liability, errors and omissions, directors and officers, personal and real property, worker’s compensation, and other insurance
●	A schedule of the insurance claims history over the prior three years

Taxes 

●	Copies of all federal, state, local, and foreign tax returns for the last three years
●	Description of any federal, state, local or foreign audits or correspondence from tax authorities
●	Copies of any tax settlement documents from the IRS from the prior three years
●	Copies of all employment tax filings from the past three years
●	Copies of any tax liens

Buy-Sell Agreements

Buy-Sell Agreements are designed to ensure ownership succession upon certain triggering events such as the death, divorce, bankruptcy, disability, or retirement of a partner, or the sale of interests by one or more business owners. Buy-Sell Agreements are effective at providing a set of rules and procedures for resolving shareholder or partner disputes, providing liquidity to the heirs of a deceased partner, protecting any S election made by the business, and protecting the business from a shareholders creditors.

TYPES OF BUY-SELL AGREEMENTS

Cross-Purchase Agreements

Cross-purchase arrangements allow or require the remaining shareholders to purchase the shares of any shareholder leaving the company by virtue of death, disability or other triggering events. Cross-purchase agreements are typically funded with life insurance policies owned by each shareholder on the lives of the other shareholders. This is an unduly cumbersome arrangement when there are more than just a few shareholders.

Upon the sale of shares under a cross-purchase agreement, the selling shareholder will have a capital gain. However, if the event triggering the buy-sell is the death of the shareholder, the heirs will have a stepped up basis in the decedents shares and may avoid recognizing a capital gain.

Redemption Agreements

Redemption agreements allow or require the company to buy the shares of a shareholder upon certain triggering events. Redemption agreements are typically funded with life insurance policies owned by the company on the lives of the shareholders, unless the company has sufficient cash reserves to dedicate a sinking fund to the redemption of the shareholders shares.

Redemption agreements are simpler to administer than cross-purchase agreements because the company is the only policy owner.

Under a redemption agreement, the selling shareholder typically will report the sale as a capital gain. Again, if the triggering event is the death of the shareholder, the heirs will enjoy a stepped up basis, and may not recognize any capital gain.

There are certain tax pitfalls related to the redemption agreement. If the agreement is not structured and implemented properly, it is possible for the IRS to characterize the redemption as a dividend. In that case, the departing shareholder would likely be required to report the redemption amount as ordinary income. With proper planning and documentation, this can be avoided.

Unregistered Offerings of Securities

The offer and sale of securities in the United States is regulated by the federal Securities and Exchange Commission (SEC) and by each state under what are commonly known as the blue sky laws. Every offer or sale of a security must be registered with the federal and appropriate state agency unless the offering is subject to an exemption from registration.

Registration is very time consuming and expensive process that typically involves conducting a public offering through underwriters and the preparation of a prospectus. Registration should be avoided by early-stage start-ups, by issuing stock pursuant to an exemption from registration. Anti-fraud rules apply to all transactions involving the exchange of securities, whether or not the offering is exempt from registration under federal or state law.

Anti-fraud rules require that the persons offering securities disclose any material information about the business. Material information is anything that a reasonable investor would want to know prior to making an investment decision.

Promoters of securities offerings should be careful to comply with state and federal broker-dealer registration requirements.

Intrastate Offering Exemption

Section 3(a)(11) of the Securities Act provides an “intrastate offering exemption” from the registration requirements of the federal securities laws with respect to securities issued to investors within a single state. To qualify for the intrastate offering exemption, the issuing company must:

●   Be incorporated in the state where it is offering the securities; 

●  Carry out a significant amount of its business in that state; and 

●  Make offers and sales only to residents of that state. 

There is no monetary limit on the offering or the number of purchasers. If any of the securities are offered or sold to a single non-resident, the exemption may be lost. Thus it is critical to determine and document the residence of each offeree by means of an investor suitability questionnaire. If a purchaser resells any of the unregistered securities to a person who resides outside the state within a period of approximately nine months the entire transaction, including the original sales, may violate the Securities Act. Accordingly, the securities issued under this exemption should be treated as restricted securities and should bear a legend to that effect.

Private Offering Exemptions under Regulation D.

Rule 505. This rule exempts certain offerings from the registration requirements of the federal securities laws when the issuing company:

●   Does not sell more than $5 million of its securities in any 12-month period;

●  Sells the securities to an unlimited number of “accredited investors” and up to 35 other persons (who do not have to meet any sophistication or suitability requirements); 

●  Informs purchasers that they are acquiring “restricted” securities, (i.e, the securities cannot be sold for at least a year without being registered); and 

●  Does not use general solicitation or advertising to sell the securities. 

 Accredited Investors. For purposes of Rule 505 and Rule 506, discussed below, an “accredited investor” is:

●  A bank, insurance company, registered investment company, business development company, or small business investment company;

●  An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

●  A charitable organization, corporation or partnership with assets exceeding $5 million; 

●  A director, executive officer, or general partner of the company selling the securities; 

●  A business in which all the equity owners are accredited investors;

●  A natural person with a net worth of at least $1 million; 

●  A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or 

●  A trust with assets of at least $5 million, not formed to acquire the securities offered, and whose purchases are directed by a sophisticated person. 

Rule 505. Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings, including financials (i.e. a private placement memorandum). The company must also be available to answer questions by prospective purchasers.

Issuing companies using the Rule 505 exemption do not have to register their securities and usually do not have to file reports with the SEC. However, such companies must file as “Form D” upon selling their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters.

Rule 506. Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption. Companies using the Rule 506 exemption can raise an unlimited amount of money. This safe harbor is available if the following standards are met:

●  The issuing company cannot use general solicitation or advertising to market the securities; 

●  The issuing company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment; Issuing companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. Issuing companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings (i.e., a private placement memorandum).

●  The issuing company must be available to answer questions by prospective purchasers; Financial statement requirements; and

●  Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them. 

 As with the Rule 505 exemption, issuing companies using the Rule 506 exemption do not have to register their securities and usually do not have to file reports with the SEC. However, such companies must also file a “Form D” upon selling their securities, just as with Rule 505.