The phrase “Corporate Transparency Act” is quite possibly unfamiliar to you at this time
(October 2023), but if you run a business entity in the U.S., you will certainly be hearing about it in the coming months. The regulations are not fully-formed at this writing, but my goal here is just to give you the gist so you are aware of what is coming down the pike.

• The purpose of this regulation is to enable the federal government to combat money laundering and other illegal activities that use business entities as shell companies. As of now, a Certificate of Formation filed in Delaware, for example, typically contains no information about the entity’s ownership and management, so law enforcement needs to use additional tools to obtain information.
• The Act will require entities to file a form with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) containing basic identifying information (name, home address, copy of ID, etc.) about each beneficial owner of 25% of the entity and those who exercise substantial control over the entity, and then update the form when there are changes.
• The personal information on the form will be available to law enforcement and national security personnel, not to the general public.
• The filing requirement applies to all domestic and foreign entities (yes, including that single-member LLC you formed for your consulting work on the side), except for a laundry list of exempt entities that are subject to existing regulation already, such as banks and insurance companies, as well as larger companies (more than 20 full-time employees, located in the U.S. and over $5 million in annual sales).
• The filing requirement will go into effect on January 1, 2024 for newly formed entities after that date. Existing entities will have to comply sometime during that year, before January 1, 2025.

The post Heads-Up for the Corporate Transparency Act appeared first on Andrew Abramowitz, PLLC.

Below is a post I wrote about remote work in the “before days” of 2014. (I called it “Virtual Law Offices,” which was a more common term then than “remote work.”) It’s interesting to read it now with the hindsight provided by having gone through the pandemic and seeing attitudes to remote work change overnight. The points I made below, such as how it’s possible to be more efficient by eliminating a commute, were not widely shared by my colleagues back then. One thing that’s changed for me since then is that the door-to-door commute is now a bit shorter because the Long Island Railroad introduced routes directly to Grand Central Terminal, near my office. But I still don’t go in most days, since a shorter commute is still longer than no commute at all.

---

I live in the quaint seaside town of Port Washington, Long Island (at least, it’s as quaint as is possible 20 miles from Manhattan).  Local residents have, in the past year or so, been much more likely to see me around town running errands during normal business hours than in the past.  This is because my law firm is gradually morphing towards becoming a so-called virtual law firm.  When I started the firm in 2010, I set up my office on 5^th Avenue and 46^th Street, and dutifully commuted in every day (75 minutes door-to-door each way, at best, notwithstanding the puffery of the real estate agents who will tell you only how long it takes for the train to get to Penn Station, which never happens on time anyway).

As my firm’s workload and breadth of practice has increased, I’ve been bringing in attorneys and other law firms on a contract basis to help.  I don’t have the space at 5^th Avenue to physically house these people, and my primary go-to contract attorney spends most of the year in Andalucía, Spain (now that would be a commute).  So these attorneys do their work from wherever they want to work.  The fact that they are not physically present has almost no practical effect on how we work together, which is done primarily via email and phone.

Observing the ease of these virtual relationships, I started to question why I was trudging into the city myself.  Of course, I’m the face of my firm and therefore need to meet with clients from time to time.  Nevertheless, 95% of what I do is email, phone calls and review of Word documents, which can be done anywhere with an Internet connection.  Accordingly, I’ve been working mostly from home lately, though I often come in for meetings, in one of the conference rooms at 5^th Avenue or elsewhere, as needed.  This required a couple of technological adjustments – using cloud computing for my documents and email and call forwarding for calls that come into Manhattan – which has been seamless.  All the time I save on commuting gives me that much more time to devote to my work and has made me much more productive overall.

It will be interesting to see whether my arrangement becomes the norm for how law is practiced in the future, particularly for areas of the law, like corporate, that are less likely to require physical presence somewhere at a particular time.  It clearly works well for firms like mine – experienced lawyers working with a network of other experienced lawyers.  Time will tell whether it could potentially work for the big firm setup, where young attorneys are being trained by mentors.

The post Remote Work – Post-Pandemic Update of an Old Post appeared first on Andrew Abramowitz, PLLC.

A client in the music industry called recently, saying he’d been asked to make an investment for a 10% passive stake in a new restaurant. The client said he didn’t want to become a member (equity owner) of the LLC formed to operate the restaurant, because he didn’t want any legal liability. He understood that he could potentially lose his investment if the restaurant fails (which, believe it or not, does happen from time to time!), but his fear, as someone with a more public profile than the other members, was being an individual target for a suit against the restaurant, being perceived as deep-pocketed.

I told him that the only way to guarantee no liability or at least not being named in a suit is to not make the investment at all, but assuming he does, he should want to be a member of the LLC, to properly document the financial arrangement, i.e., that he’d put in some cash in exchange for 10% of future profits, and also, through the documentation, to appropriately limit his liability.

Below are some tips/considerations for limiting liability in passive investments of this type:

1. Limited Liability Entity – Ensure that the investment is made in a private company structured as an LLC or corporation. In these entities, investors are shielded from personal liability for the company’s debts and obligations. Their liability is generally limited to the amount of their investment. Investors can also make the investment through their own LLC for an additional layer of liability protection.
2. Properly Drafted Investment Agreements – Investors should carefully review and negotiate investment agreements to ensure adequate protection. These agreements should clearly define the investor’s role as a passive participant, outlining their limited involvement in the company’s management and decision-making processes, and providing for indemnification or members/shareholders. By explicitly establishing their status as passive investors, they can minimize potential liability arising from the company’s actions.
3. Due Diligence – Before investing in a private company, passive investors should conduct thorough due diligence. By investigating the company’s financials, operations and legal standing, investors can identify potential red flags and mitigate future risks. This proactive approach helps ensure that investors are aware of any potential liabilities the company may be exposed to, reducing the chance of unforeseen legal issues.
4. Insurance Coverage – Investors should ensure that the company they’re investing in has an appropriate degree of insurance coverage, in amount and type, for the particular operations of the company. Even though the policy would directly cover the company, not the individual equity owners, the insurer would defend any suit that attempts to name passive investors as co-defendants.
5. Legal Advice – Self-serving, but true: Be sure to engage a qualified corporate/securities attorney to assist with all of the above. In cases where the investment is for a small stake in the company and negotiation is not really possible, the attorney can at a minimum do a review of the documentation to summarize key issues and identify potential red flags.

The post Tips on Limiting Liability for Passive Investors in Private Companies appeared first on Andrew Abramowitz, PLLC.

If I am forming an LLC to purchase real property in New York, should I organize the LLC in New York or Delaware?

I received the following response after a few seconds:

The decision to organize your LLC in New York or Delaware depends on your specific circumstances and goals. Both states have their own unique advantages and disadvantages. Here are some factors to consider:

Organizing in New York:

Organizing in Delaware:

In summary, it is important to weigh the benefits and drawbacks of each state and consult with a knowledgeable attorney or accountant before making a decision.

Then, I pasted the exact same question into Google, and the first non-sponsored link was to this LegalZoom article.

It’s immediately apparent in looking at both results that the ChatGPT response is far more tailored to my question than the article identified via Google, which doesn’t even mention New York LLCs. (To be clear, this is not a criticism of the article, which seems fine, but the point is that it wasn’t written to be directly responsive to my question; it’s just the web page that the Google algorithm thought was closest to what I was seeking.)

So, would I be able to simply pass along the ChatGPT response to my client without modification? No. It doesn’t mention, for example, the annual cost to a New York client forming a Delaware LLC of engaging a registered agent in Delaware, which wouldn’t be an issue if the LLC was just formed in New York. However, this response absolutely would be a useful starting point for me if I hadn’t already answered it for clients before. It’s clear that that this will be a significant time-saver for lawyers as it gets refined.

Attorneys, and other white-collar professionals, have been hand-wringing in the months since ChatGPT was introduced about how their jobs could be eliminated in the long-run by AI. However, the story of the last 100 years or more is that the introduction of a new technology has initially triggered this “replaced by robots” fear, but then somehow people manage to find remunerative work in the subsequent years. Lawyers, in particular, have worried for years about developments like document review software for litigators and form purveyors (like LegalZoom) for transactional attorneys. But here we are, and as of late last year, the unemployment rate for attorneys was a microscopic 0.1%.

If past is prologue, then, these AI tools will improve and become incorporated into attorneys’ practices, without replacing the job category. If I’m wrong, well, I guess I’ll get much better at golf in the coming years.

The post Will I Be Replaced by ChatGPT? appeared first on Andrew Abramowitz, PLLC.

We all know that most users of web-based products (which is to say everybody) do not read the lengthy terms of service that they are asked to accept with a click before proceeding. These users make a probably reasonable calculation that the stakes are pretty low given the nature of the transaction and that by clicking “accept,” they are not agreeing to bequeath their estate to Apple or Microsoft. But what about agreements that are more significant to the signer, like an agreement to sell one’s business to a buyer? Does the seller need to read every word and understand them before signing? Their lawyers will usually say yes, because after all, the seller is the one signing the agreement and giving up the business, not the lawyer. But like all experts, lawyers can sometimes forget how utterly foreign contractual language is to lay people and need to take steps to ensure actual comprehension beyond a mere CYA admonition to read every word. Of course, some clients have had long business experience and have seen many agreements of a particular type, so the need to hand-hold needs to be tailored depending on the client.

When people think of legalese, they primarily are concerned with arcane words such as “heretofore” or whatever. But a more significant factor in client incomprehension, I think, is that they don’t have the background knowledge with these agreements to know the purpose of various provisions and how they all interact. For example, in a typical agreement for acquisition of a business, there are provisions relating to the seller’s potential liability to buyer after the closing, including various defined terms such as Fundamental Representations, Cap, Basket and Survival Period. These concepts are, needless to say, not experienced by the average person in their lifetime, even if it’s a well-educated lifetime. But the idea behind all of it is not terribly complex and is very important to the parties in an M&A deal: The buyer should be compensated for damage that occurs after closing if the seller misrepresents facts about the business being purchased when the agreement is signed, but assuming this misrepresentation is not intentional/fraudulent, there should be reasonable limits placed on the amount of compensation and the length of time after closing during which the buyer can bring this up. So, while it’s unrealistic to expect clients to start using all of the contractual lingo in ordinary conversation, it is important for the lawyer to impress upon the client the importance of, to take the above example, ensuring that representations in the agreement are correct to avoid post-closing liability.

So, my message to fellow lawyers is to try to remember how clueless you were as a law student and junior associate and, accordingly, guide your clients with the goal of ensuring true comprehension of important concepts.

The post Ensuring that Clients Understand the Agreements they are Signing appeared first on Andrew Abramowitz, PLLC.

There are those who are addicted to the new online word game, Wordle, and then there are those who gripe about their friends who post their Wordle scores on social media every day. This being a blog about corporate and securities law and transactions, I am not writing to opine on this question, though the fact that I’m mentioning the game at all probably tells you where I stand.

The New York Times recently agreed to acquire Wordle from its Brooklyn-based creator, Josh Wardle, as reported by the, well, New York Times. According to the newspaper/acquiror, the purchase price is “in the low seven figures.” I’m not sure whether that means a million-ish or some amount that is less than $5 million, but in any event, it is a nice payday for Mr. Wardle for a product released just a few months ago.

The New York Times is a public company and would have to promptly disclose terms of the acquisition with a greater degree of precision than “low seven figures” if the acquisition was material to the company, but the Times is of a size where this particular acquisition is not deemed material (even though it was material enough to be reported on by itself as a news item). The Times did make a material acquisition about a month prior, when it acquired the sports publication The Athletic for $550 million, which it then reported on a Form 8-K.

Because the Wordle acquisition wasn’t publicly reported via SEC filing, we don’t know any more than the vague range for the purchase price, but let’s assume for purposes of this post that the transaction was extremely simple: the Times paid Mr. Wardle the seven-figure sum in cash, and perhaps also agreed with him on some sort of short-term consulting arrangement for his help in integrating the game into the Times’ other game offerings. On one hand, I can see why he would take that deal: it’s a nice chunk of change for a few months of work, and maybe three weeks from now, game players will move on to another obsession, so he wanted to strike while the iron was hot.

However, let’s consider the other possibility, that it becomes an institution for years to come, even after the initial craze passes (something like Sudoku). In that case, letting it go for what seems like a nice cash payment won’t look so wise in retrospect, while the Times reaps many millions from it over the years. If I was advising Mr. Wardle, I would have advised him to incorporate provisions in the agreement to enable him to benefit from the blowout success scenario. (Again, I want to stress that the agreement isn’t public, so I can’t say for sure that this didn’t happen.) The agreement could incorporate milestone payments, i.e., the initial seven-figure payment up front, but then additional payments if and only if the game is a big success for the Times, and the Times would be obligated to use reasonable efforts to make that happen. Or there could be some form of royalty-type payment, where he’d share in a small percentage of the Times’ earnings from the game.

First-time sellers of companies are presented with the possibility of getting paid what seems like an unfathomably large amount, but it’s important for those in that position to take a deep breath and try to negotiate the best possible deal, or in certain circumstances, hold off on doing a deal at all.

The post Thoughts About the Wordle Acquisition (updated) appeared first on Andrew Abramowitz, PLLC.

I was recently representing a seller in a proposed acquisition. The purchase price was under $20 million – in the context of M&A, a relatively small deal. The purchaser was represented by one of the top 10 most profitable law firms in the world. The firm organized a due diligence call, blocking off two hours for the attorneys to ask questions of the seller that related to legal matters. I was the sole attorney on the call for the seller. From the purchaser’s law firm, there were a couple of corporate/M&A attorneys, and then one representative from each of any applicable specialty practice area: tax, employee benefits, real estate, intellectual property, etc. As far as I could tell, each of these specialists spent the whole time on this long call, waiting their turn and then taking, like, five minutes to ask the specific questions applicable to their specialty. The presumptive cost of that call to the purchaser, aggregating all those high billing rates for a couple of hours each, was, to my boutique firm way of seeing things, completely unfathomable.

Clients assessing prospective law firms will often focus on a single number: the hourly rate of the highest-ranking partner assigned to the matter. Witness all the ink spilled in recent years on how rates for many partners at large firms have blown well past $1,000 per hour. (This helps my marketing efforts, frankly, as it’s easy for me to show that my firm’s rates are lower than those at large and mid-sized firms in New York.) After bills are rendered, clients will sometimes question the amount of time it took for a particular attorney to handle a particular task. But as my anecdote about the conference call illustrates, often the real driver of cost is the firm’s staffing practices and whether the firm will seek to prioritize efficiency. On most matters handled by my firm, I am the only person from the firm on any call. Other attorneys are very much involved in the matter, handling behind-the-scenes tasks such as drafting, but they will generally not spend those couple of hours on the call with me; rather, I briefly summarize for them the upshot of what they need to know. To the extent other specialty attorneys are involved on my team, they will also communicate with me separately and generally not participate in a group call unless it’s primarily about their area.

To be clear, I am not saying that having multiple attorneys on a call is necessarily inappropriate or part of a conscious effort to jack up fees. But I do think that if clients are looking to exercise some oversight on legal costs, they would be better served by looking at a calendar invite for a Zoom meeting, seeing how many attorneys have been asked to join and inquiring about whether that is necessary, as opposed to arguing after a bill is rendered that a particular agreement should take three hours to draft, rather than five hours, without really knowing exactly what’s entailed in the process of drafting one.

The post The Real Cause of Large Legal Bills appeared first on Andrew Abramowitz, PLLC.

A small but significant part of my firm’s practice involves doing corporate and securities work on real estate development deals. I’m not a real estate lawyer (or, a “dirt lawyer” as they sometimes call themselves, in a bit of rather harsh-sounding self-deprecation), who handles core real estate transactions like purchases and leases of real estate, but I collaborate with those attorneys by forming entities and drafting their operating agreements, and ensure compliance with securities laws when there are outside investors helping to fund the projects.

The operating agreements for the entities formed for the project need to address the economics of the deal, including how any earnings from the project are divvied up between the developer (or, the “sponsor”) and the outside investors. These structures tend to be quite complex, and they have their own jargon that corporate attorneys who practice outside the real estate industry will find quite forbidding, even those who have plenty of experience with sophisticated transactions. Therefore, I thought it would be helpful to decipher a bit of that jargon as a service to the uninitiated among the corporate attorney community. I won’t address here the various other terms of art in real estate finance (cap rates, loan-to-value ratio, etc.) that aren’t directly relevant to the attorney needing to draft the operating agreement, nor will I address operating agreement concepts that are common outside the real estate context on the assumption that, if you’ve made it this far in this post, you know them already.

From a 30,000-foot perspective, in most cases, the outside investors will get most of the first money to come out of the project, to ensure they get at least their investment back plus a reasonable return, and the sponsor will have more of the back end, so they will do quite well if the project is successful over the long term.

Fees – There are a variety of flavors of fees that are paid to the sponsor or others for serving certain functions at various stages of development:

• Acquisition fee –for the work in locating and purchasing the property.
• Refinance fee – for the work in securing a mortgage to replace the one used to purchase the property, which often involves additional cash borrowed that is immediately distributed to the members.
• Asset management and property management fees – these are ongoing fees, as opposed to fees triggered by a particular action, for work done on the regular operation of the property.
• Development fee – for coordinating construction work.
• Leasing fee – for securing tenants.
• Disposition fee – for work done to sell the property.

Most of these fees are expressed in the operating agreement as a percentage, e.g., the sponsor will receive an acquisition fee equal to 1% of the purchase price for the property. While as noted above the investors tend to receive the first money out, these fees are a way to compensate the sponsor for its work throughout the process, and they are paid as company expenses before any distributions are made to the equity holders.

Waterfall – This is the informal term describing the distributions section of the operating agreement, setting forth the rules by which earnings are distributed to various classes of members at different times. Think of it like a literal waterfall, with money raining down and landing on various rock formations as it goes down.

Hurdle – The various elements of the waterfall are separated by milestones that lead you to the next step, i.e., the investors get all the initial distributions until “X” happens, at which point distributions are split between investors and sponsor. “X” is the hurdle.

Preferred Return/IRR – This will be familiar to most corporate attorneys as the LLC equivalent of preferred stock. In real estate, it is common to use internal rate of return (IRR) for calculation purposes. For example, the investors could receive all initial distributions until they have received a 7% IRR (that’s the hurdle).

Promote – In this context, “promote” is a noun, not a verb. With investors often getting the first money out through a preferred return, the promote is the sponsor’s way of getting a larger share of the back end. As an example, after the preferred return hurdle is reached, the sponsor may receive a promote of 30% of all future distributions, indefinitely. This is a similar concept as a “carry” in the world of funds.

Tiers – Hurdles such as preferred return can be split into tiers, e.g., investors receive all returns until they reach an IRR of 7% (Tier 1), then there is an 80/20 investor/sponsor split until the investors receive an IRR of 14% (Tier 2), and thereafter there is a 60/40 investor/sponsor split.

Catch-up – In this scenario, the investors get the first distributions, and after the first hurdle is reached, then the sponsor can receive all distributions until a second hurdle is reached (i.e., they are catching up), after which there is a split.

Capital Event – The waterfall will often have different provisions for a “capital event” like a sale of the property or a mortgage refinance that results in a special distribution to the members, as opposed to ordinary distributions reflecting earnings from the regular operation of the property such as rent payments.

Crystallization – While the promote is generally deferred to a later portion of the waterfall to reward the sponsor for a good job over the long term, to provide a reward and incentive to the sponsor, the parties can negotiate an earlier installment of promote payments, triggered by particular events. This is called “crystallization” of the promote.

The post Deciphering Real Estate Jargon for Corporate Attorneys appeared first on Andrew Abramowitz, PLLC.

Although the majority of the transactions I advise on can be described as additive – one company acquiring another one, a company selling newly-issued stock to a new investor – I do spend some time on subtractive (is that a word?) matters, including business divorces. In its simplest form, this term refers to a decision of two business partners to wind down a business, often because some tension has developed in the relationship, just like a personal divorce.

As a purely transactional lawyer, I would only get involved in a business divorce if the parties want to resolve it amicably, without bringing a claim in court, though it can be useful to get the parties moving toward a solution to raise the specter of litigation and its associated costs and delay. In the world of family law, there are attorneys who specialize in collaborative or cooperative divorces, and I try to play a similar role in business divorces by encouraging compromise, even though I’m clearly representing one side and looking out for that party’s interests. Any effort to achieve total victory in these situations is likely a fool’s errand, or at least a very stressful and expensive errand.

In some business divorce cases, the company’s operating agreement or other governing document sets forth an exit procedure that the parties follow. For example, a 50/50 agreement may have a so-called “shotgun” buyout provision that allows one party to initiate a buyout process by setting a value for the company, and then the other party has the option to either buy the initiating partner’s interest or sell to the initiating partner, in either case at the price set forth in the initiating partner’s notice.

If the parties are not following a particular pre-determined procedure, just mutually agreeing to wind down the business, then the parties likely need to draft a dissolution agreement, or similarly-titled document, that details the steps the parties need to take in the wind down. Especially in high-tension situations, the parties will want to exchange mutual releases of claims based on past events, though they would retain the ability to sue based on future actions to be taken under the new agreement, and a mutual non-disparagement clause, so the parties can move on in their respective professional lives without worry about their reputation being sullied by the ex-partner.

The post Business Divorces appeared first on Andrew Abramowitz, PLLC.

Over my 25 years of practicing transactional law, I’ve often been mildly (or sometimes not so mildly) exasperated by common inconsiderate behaviors by opposing counsel on my deals.  Of course, our primary job as attorneys is to represent our clients and not befriend opposing counsel, but unnecessarily agitating other attorneys does not, in the long run, serve our clients’ interests.  The following are some frequently-occurring examples of bad corporate attorney etiquette to avoid:

Sending Uneditable Drafts. Often I will receive initial drafts of an agreement in PDF or read-only form.  In other words, I can’t easily get into the document to provide edits. Sometimes it’s possible to convert the PDF to Word, but the formatting is garbled. Of course, I can provide the comments in other ways besides directly editing the document, but the point is that you’ve made it harder for me to do my job. If the intent in doing this is to discourage commenting, at least with me it may have the opposite effect, by reducing my trust of the other side. The time to create PDF versions is when both sides are in agreement and ready to execute.

Providing Comments in Installments. When you provide a set of comments, they should represent all of your side’s input on the agreement, unless you state otherwise explicitly (e.g., the client is still reviewing, it’s subject to tax counsel’s review, etc.). When you’ve received a set of comments, you can decide with the client that of the, say, ten substantive comments, you’ll compromise on five of them and push back on the remainder. If, however, the other attorney then announces that they have five new substantive comments that they could have raised earlier, then the universe of comments is larger than you had understood when responding to the initial set.

Feigned Outrage over Business Issues.  Part of our role as attorneys in a negotiation is to negotiate legal issues, such as those that allocate risk, but we also are involved in business issues, such as the amount of a purchase price and timing of payment, by communicating our clients’ positions and ensuring they’re documented correctly. Most attorneys understand that, for those issues, they are mainly just the messenger, but some take their obligation to “zealously” advocate for their clients a bit too literally and lay on the rhetoric on an attorney-only call.

Inaccurate Blacklining.  If you send your comments to an agreement with a markup showing your changes (which you should), please be sure that the markup actually shows all of the changes you’ve made from the appropriate previous version.  As a matter of course, I run my own blackline on incoming revisions showing the changes that the attorney made, and fairly often, the blackline sent by the other attorney isn’t accurate. Probably more often than not, this is an inadvertent failure of version control by the attorney, but it inevitably suggests the possibility that the attorney was trying to slip a change past you.

Failure to Explain Comments.  If you’re commenting on my draft, unless the changes are completely self-evident, don’t just send the markup without explaining in a cover note where you’re coming from. At the very least, offer to go through the changes in a subsequent phone call.

The post A Few Etiquette Tips for Corporate Attorneys in Dealing with Other Attorneys appeared first on Andrew Abramowitz, PLLC.