Announcement

Collapse
No announcement yet.

problems with merger Utah

Collapse
This topic is closed.
X
X
  • Filter
  • Time
  • Show
Clear All
new posts

  • problems with merger Utah

    I'm a 25% owner of an email marketing company. We've been in business for 7 years. There are 4 equal partners. I'm essentially a silent partner - I bought my 25% in the very beginning, when the company was desperate for money. 2 members are full time employees of the LLC. The 3rd is the accountant, who draws some pay for his part-time work.

    Recently we partnered with another company on a project, and decided it would be in our best interest to merge with them. There are 2 partners in the other company.

    Now our 2 working partners, one of which was my best friend, say that when we merge with the new company they want the accountant and me to accept 8% each of the new company, with the other 4 getting 21% each.

    The accountant just wants out. Although he's not happy with the new terms, he feels the enhanced possibility of the company selling is worth it. I don't want to settle for 8%. I want the 4 partners from my existing company to get equal shares.

    I probably provided details I didn't need to, and omitted others I should have included. But I'm a wreck, and any advice regarding this will be greatly appreciated.

    Questions:
    1) Do all partners have to agree to the merger?
    2) Could the other partners agree to the merger, and force me to accept the 8% or less?
    3) In the new company, can the working partners give themselves raises, and essentially eat up all the profits coming into the company in salary?

  • #2
    Originally posted by leosmith View Post
    The accountant just wants out. Although he's not happy with the new terms, he feels the enhanced possibility of the company selling is worth it. I don't want to settle for 8%. I want the 4 partners from my existing company to get equal shares.

    I probably provided details I didn't need to, and omitted others I should have included. But I'm a wreck, and any advice regarding this will be greatly appreciated.

    Questions:
    1) Do all partners have to agree to the merger?
    2) Could the other partners agree to the merger, and force me to accept the 8% or less?
    3) In the new company, can the working partners give themselves raises, and essentially eat up all the profits coming into the company in salary?
    1) This depends on your agreement setting up the LLC and perhaps amended. Read your documentation; we can't see it.
    2) Same answer as number 1, but an agreement that would force a diluted ownership on one partner is very much non-standard.
    3) Determination of salaries of working partners should be dealt with in your agreement.

    It would appear that you may have put your money in without clear understandings of how the business would be run, maybe without even reading your agreements in setting up the LLC. There may be provisions there which would take precedent over anything I can say.

    But, in general, in an LLC there are benefits of ownership that should go to the members in proportion to their ownership. For working members, there are benefits, including salaries, as payment for their services. If it were me, I would never agree to a reduction of the former. As such, in a merger I would insist on equal ownership with the other original partnership unless I received compensation for the diluted ownership.

    Review your documentation to see if you have the authority to block what they are trying to do. If you do not, you may need an attorney to help you sort it out.
    Please post questions on the forum rather than sending me a private message or email. That way others who have similar issues have access to the discussion.

    Comment


    • #3
      Thanks for your reply. I've gone over the agreement again. All benefits are based on percentage of ownership. The agreement doesn't spell out exactly what happens in case of a merger, but the conclusion I would draw is that everyone retains their percentages.

      I'm now being told that the other company doesn't like non-working partners, and that it was their suggestion that got our working members to try to reduce our ownership. I'm thinking this is not an all out lie, but an exaggeration to soften us up. Our working members say the others have had bad experiences with non working members, and are afraid we'd cause trouble. I don't see how a 15% owner can cause much more trouble than an 8% owner.

      Is there a site that talks about common "tricks" experienced partners play when they are about to sell their company? I'd like to prepare for the worst.

      Comment


      • #4
        I agree with Scott67 but I would add that it can get very complicated.

        For example, if the merger partner viewed the value of the services of the 2 worker/members as more than just their share of the value of the entity, then they could issue all four of you 8% each in connection with the merger and then after the merger is completed issue another 13% to each of the worker/members for their services (there are tax consequences to that action, of course). Although it is possible that your LLC's operating agreement gives you the power to block the issuance of those membership interests, it would often not be the case.

        Assuming the LLC has an operating agreement, that should answer some of your questions. If the LLC does not have an operating agreement, then typically you need to look to the state LLC statute. Some state laws require that in the absence of an agreement, all members are entitled to equal shares. Other states have other rules. I am not familiar with the details of the Utah LLC statute.

        There are also typically fiduciary duties that members or managers have. Whether the proposed actions of the worker/members would violate their fiduciary obligations is, again, a state law question.

        The best advice is to consult an attorney who is familiar with Utah LLCs.
        David K. Staub (www.illinoisbusinessattorney.com)
        Forum posts are not legal advice, are for informational and educational purposes only, and are not a substitute for proper consultation with legal counsel.

        Comment


        • #5
          Originally posted by leosmith View Post
          Is there a site that talks about common "tricks" experienced partners play when they are about to sell their company? I'd like to prepare for the worst.
          I'm not aware of such a site or even any articles on the subject.
          David K. Staub (www.illinoisbusinessattorney.com)
          Forum posts are not legal advice, are for informational and educational purposes only, and are not a substitute for proper consultation with legal counsel.

          Comment


          • #6
            Originally posted by leosmith View Post
            Is there a site that talks about common "tricks" experienced partners play when they are about to sell their company? I'd like to prepare for the worst.
            Like dkstaub, I am not aware of any site that even attempts to do that.

            The worst? That is hard to say. But, from a control point of view, the Members Committee controls an LLC. So, assuming that you succeed in keeping your percentage of ownership, they try to establish the merged company's Members Committee as being of working partners. To hold a voice, you insist on being on the Members Committee. But, if they are united in thought, your minority vote may not protect your interests. If you are truly at odds with 4 partners in a 6 partner company, you may be better off to negotiate a buyout and be on your way.
            Please post questions on the forum rather than sending me a private message or email. That way others who have similar issues have access to the discussion.

            Comment


            • #7
              Originally posted by dkstaub View Post
              they could issue all four of you 8% each in connection with the merger and then after the merger is completed issue another 13% to each of the worker/members for their services (there are tax consequences to that action, of course). Although it is possible that your LLC's operating agreement gives you the power to block the issuance of those membership interests, it would often not be the case.
              Fortunately, nothing like this has been proposed, but thanks for the heads up.

              Originally posted by dkstaub View Post
              Assuming the LLC has an operating agreement, that should answer some of your questions. If the LLC does not have an operating agreement, then typically you need to look to the state LLC statute. Some state laws require that in the absence of an agreement, all members are entitled to equal shares. Other states have other rules. I am not familiar with the details of the Utah LLC statute.
              We have an operating agreement, but it doesn't get as specific as I would like in our current situation. I will investigate the Utah LLC statute.

              Originally posted by dkstaub View Post
              The best advice is to consult an attorney who is familiar with Utah LLCs.
              You are probably right, but I hope it doesn't come to this.

              Originally posted by Scott67 View Post
              If you are truly at odds with 4 partners in a 6 partner company, you may be better off to negotiate a buyout and be on your way.
              Unfortunately, a buyout is probably not an option (the other members can't afford to buy me out).

              Comment


              • #8
                After talking to some friends and family about this situation, I've decided to look for a lawyer. Can anyone suggest a good place to search for one?

                Comment


                • #9
                  Talk to your state bar association, your local legal aide, or any law schools in your area.

                  We cannot provide specific referrals, sorry.
                  The above answer, whatever it is, assumes that no legally binding and enforceable contract or CBA says otherwise. If it does, then the terms of the contract or CBA apply.

                  Comment


                  • #10
                    I have an article on my website "Finding and Selecting a Business Attorney" that gives some tips on how to find a business attorney. I'm a firm believer that recommendations from people whose judgment you trust is the best way to find a lawyer, but that is not always an option. Bar association referral services often simply rotate recommendations among attorneys who have signed up in the particular practice area. There are probably exceptions, but I think that most bar association referral services don't spend much, if any, time or effort to match an attorney with your specific needs, so you still need to to your own homework.
                    David K. Staub (www.illinoisbusinessattorney.com)
                    Forum posts are not legal advice, are for informational and educational purposes only, and are not a substitute for proper consultation with legal counsel.

                    Comment


                    • #11
                      Great article. Thanks!

                      Comment

                      Working...
                      X