November 2019: Ask A Lawyer: Jake Goldsmith
In our nineteenth installment of “Ask a Lawyer” we featured questions from Jake Goldsmith. He answers questions about Buying or Selling a Business and Employee Agreements.
Who is Jake Goldsmith?
Jake Goldsmith is a new associate at the firm and a member of the New Mexico State Bar. Jake is a life-long New Mexican and recently graduated cum laude from the University of New Mexico School of Law. As a law student, Jake served as a manuscript editor of the New Mexico Law Review and Treasurer of the Black Law Student Association. Upon graduation from law school, Jake was awarded the Felix Briones Award for Ethical Integrity in Business Law. Prior to becoming an associate, Jake was employed by the firm as a law clerk.
Jake also currently serves in the New Mexico Air National Guard as an Intelligence Analyst and holds the rank of Technical Sergeant. In 2014, Jake was named the United States Air National Guard Outstanding Airman of the Year. Jake completed his Bachelor of Arts in Criminal Justice, while serving full time in the Air Force. In 2016, Jake left active duty service to pursue his dream of attending law school.
Read it here
I have an offer to sell my company. The people wanting to buy the company are wanting to do an asset purchase. My neighbor told me it would be better to do a stock purchase but didn’t really elaborate on why. What is the difference and is one better than the other?
An asset purchase and a stock purchase can both be good ways of selling a company, but there are a lot of factors to consider. In fact, depending on what kind of business entity you have, the choice may already be made for you. Let’s start by looking at some aspects of the two methods, then we’ll talk a little about which is better.
ASSET PURCHASE: An asset purchase involves the sale not of the actual company, but of everything the company owns. Now this doesn’t just mean the equipment, inventory, and other tangible property of the company, although that is typically included. An asset purchase also includes the intangibles owned by the company, usually including the company’s name, any trademarks the company owns, trade secrets, goodwill of the company, and other intangibles. Keep in mind here that if any of the assets are leveraged, you will have to make sure that your contracts allow for transfer. If they don’t the contracts will have to be renegotiated before you can sell the assets. This can also be an issue for non-assignable licenses or other contracts of the company.
Understand that once the company’s assets are sold, you still own the company. This means you are still responsible for any reporting requirements to the state such as annual reports. To avoid this, you would typically just dissolve the company once the assets are sold. However, you have to be careful because if the company has any liabilities, dissolution may either not be a good option, or not be an option at all.
STOCK PURCHASE: A stock purchase is the process of actually selling the company itself. Basically, this is done by selling all of the stock (or membership interests if it’s an LLC) in the company. Notably, this means that there must be a separate legal entity to sell. Therefore, a stock purchase is an option if we’re talking about a corporation or LLC, but not if we’re dealing with a sole proprietorship or a partnership. One of the big advantages to a stock purchase for you as the seller, is that when you sell the company you are also selling the liabilities of the company. This means that any debts of the company are now the buyer’s problem. Also, there is no need to renegotiate the company’s contracts because they pass along with the company. Usually, as long as the company is listed as the party to the agreement, the agreement will remain unchanged after the sale. The exception to this would be contracts that contain provisions for termination or modification in the event of a change of ownership.
Depending on the size and character of the company, a stock purchase can implicate securities laws. This can greatly complicate the process and if the securities laws are not complied with, it can lead to some serious headaches for both you and the buyer, down the road.
WHICH IS BETTER?
This isn’t really a question that can be answered without A LOT more information. In most cases, a stock purchase is more favorable to the seller, but that’s not always the case. One big upside for the seller is that you are no longer on the hook for the liabilities of the company. However, if you signed as a personal guarantor of any of the liabilities, you are still bound to that. Also, like I mentioned before, if you have a sole proprietorship you can’t do a stock purchase.
Hopefully, you now have a basic idea of the differences between an asset purchase and a stock purchase, but this is just a very limited overview and doesn’t address a lot of the nuance. Hopefully you see that this is not a decision you should make alone. Your attorney can give you a better idea of which method best suits your particular circumstances. It is also important to include a CPA or tax attorney in your decision, because there can be significant tax implications with either choice.
Want to learn more about Buying or Selling a Business? Go to https://www.l4sb.com/blog/spotlight-on-buying-or-selling-a-business/
What is a “garden clause” and how is it different from a non-compete?
A garden clause and a non-compete clause can both be valuable tools for a company, and they are somewhat similar, so I understand the confusion. Both clauses concern an employee who is leaving the company, but there are some fundamental differences between the two.
A garden clause typically provides for a notice period for termination of the employee. Basically, the employer is required to give the employee notice of termination, before the employee is actually terminated. The employee is still employed by the company during the notice period and still receives pay during that time. This period is typically referred to as “garden leave,” hence the term “garden clause.” However, there are typically some stipulations during the garden leave. For example, it is not uncommon for the employee to be required to stay away from the company during the garden leave. The term garden leave originated in Europe and arose to describe a situation where the employee was essentially being paid to tend his/her garden. We don’t see them very often here in the US, but they are becoming more common. The intent behind garden leave is typically to prevent an employee from engaging in behavior which could be harmful to the company during the time in which the employee knows that their employment is coming to an end.
A non-compete, on the other hand, contains restrictions on what the employee can do after they have left the company. A non-compete clause will usually prevent an employee from engaging in business in the same industry as the company for a certain period of time, within a certain distance of the company. There are legal limitations on both how long the non-compete can apply and how large a geographical area can be restricted, but those limitations will vary from state to state. The intention behind a non-compete is usually to keep the employee from taking the knowledge acquired through their employment with the company and using it to benefit one of the company’s competitors.
You may have figured this out already, but these two clauses are not mutually exclusive. It is entirely possible to have both a garden clause and a non-compete. In some circumstances, you may benefit greatly from including both. Of course, the language, conditions, and restrictions can vary greatly with both garden and non-compete clauses. Therefore, it is very important to make sure that your clause does what you intend it to do. If you simply pull a standard clause off the internet for your employment agreements, there is a good chance you could be locking your company into terms that differ greatly from what you expected.
The big takeaway here is that a garden clause is effective at the end of the employment but while the employee is still with the company. A non-compete takes effect after the employee has left the company altogether. Both are useful devices, but you have to consider what your specific concerns and intentions are when drafting these clauses.
Want to learn more about Employee Agreements? Go to https://www.l4sb.com/services/employee-management/employee-agreements/
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