2.12 family law presentation final

Panel:

Irwin Nachimson, Partner, Nigro Karlin Segal & Feldstein, LLP

Robert C. Brandt, Partner, Feinberg, Mindel, Brandt & Klein, LLP

Ronald J. Silverman, Managing Director, Bel Air Investment Advisors LLC

Rachael S. Wexler, Partner, Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP

Moderator: Alexander B. Kasdan, Managing Director, DelMorgan & Co.

Event Organized by

Irwin Nachimson is a partner of Nigro Karlin Segal & Feldstein, LLP and has been with the firm for approximately 20 years. Irwin has worked on family law, fraud, investigative and litigation support assignments. His assignments have included calculating cash flow available for support, dividing community and separate assets, tracing assets and valuing companies. Irwin has also worked on various assignments with asset based lenders in troubled debt scenarios and been involved with numerous assignments in Chapter 11 cases. Irwin�s assignments have included monitoring companies, analyzing cash flow forecasts, tracing sources and uses of funds and investigating fraudulent transactions. Irwin has worked in a variety of industries including the Petroleum, Real Estate, Non-Profit, Computer, Entertainment, Distribution, Manufacturing, Agriculture, and Food industries. Irwin has worked on projects for financial institutions including Bank of America, Wells Fargo, Comerica, Union Bank of California, Bank of the West and Silicon Valley Bank. Irwin also specializes in merchandising and profit participation audits on behalf of actors, directors and producers in the entertainment industry as well as other high net worth individuals. As part of these audits he as visited and done extensive work at various major studios. Irwin is a graduate of The University of California Los Angeles (UCLA) and earned his MBA from The University of Southern California (USC). Irwin is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants, The California Society of Certified Public Accountants and The Association of Insolvency and Restructuring Advisors. Irwin is certified in Financial Forensics by the American Institute of Certified Public Accountants (AICPA). Prior to his work at Nigro Karlin Segal & Feldstein, LLP, Irwin worked with Arthur Andersen. Irwin is married to his wife of 16 years, Sharona, and has four children. Irwin is a board member of National Conference of Synagogue Youth. He is also on the Board and a member of the audit committee of the Union of Orthodox Jewish Congregations of America.

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10960 Wilshire Blvd. Suite 500 Los Angeles CA 90024 (310) 229-5161 www.nksf.com [email protected]

Robert C. Brandt, Partner, Feinberg, Mindel, Brandt & Klein, LLP, is the head of the firms Family Law Department. Mr. Brandt is a Certified Family Law Specialist by the State Bar of California Board of Legal Specialization. Mr. Brandt graduated from Southwestern University School of Law, J.D., 1976, University of California at Los Angeles, M.A., 1972, and San Diego State University, B.A., 1971 Graduating with Distinction in Speech Arts. Mr. Brandt was named one of Southern California’s Top 10 Lawyers in 2012 and 2013, one of Southern California's Top 100 lawyers in 2009 – 2013, and was named as a Super Lawyer by Los Angeles Magazine, 2005 - 2013. Mr. Brandt was also selected by his peers for inclusion in The Best Lawyers® 2010 – 2012, and has an AV rating with Martindale-Hubbell. • Fellow of the American Academy of Matrimonial Lawyers, where he serves as Treasurer of the Southern California Chapter. • Fellow of the International Academy of Matrimonial Lawyers. • Member of the Association of Certified Family Law Specialists. • Member of the Los Angeles County Bar Association. • Member of the Los Angeles County Bar Association Family Law Section Executive Committee for more than eight years. • The Immediate Past Chair of the Los Angeles County Bar Association Family Law Section, and former Chair, Chair Elect, Vice Chair, Treasurer and Secretary. • Member of the Los Angeles County Bar Family Law Section Executive Committee “Court Liaison/Family Court Services Committee.” • Member of the Beverly Hills Bar Association Family Law Section Executive Committee (2009-present). • Previously served as the Chairperson of the Continuing Legal Education Subcommittee. • Frequently participates in Continuing Legal Education seminars as a lecturer, moderator and panel member. • Co-authored Chapter 3A, entitled, "Family Law/Domestic Relations Issues Affecting a High Net Worth Athlete or Coach," in the Thompson West four-volume treatise, "Law of Professional Amateur Sports" (c) 2009. • Co-authored the article, "Under Influence in Probate and Family Law Matters," with partner Howard Klein. The article was published in the September 2008 issue of Los Angeles Lawyer, and Brandt and Klein were featured on the cover of the magazine.

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12424 Wilshire Blvd. Ninth Floor Los Angeles, CA 90025 (310) 447-8675,ext. 227 www.fmbklaw.com [email protected]

Rachael S. Wexler is a Partner at Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP. Ms. Wexler is a transactional attorney whose practice focuses on digital entertainment, social media, mergers and acquisitions, joint ventures and capital markets. Ms. Wexler has represented digital studios in acquisitions, joint ventures, licensing and website development, as well as small, mid-market and large public and private companies, investors and underwriters in the technology and tech-solutions, including the renewable energy, industries in connection with securities offerings, business combination transactions and strategic growth initiatives. In 2010, Ms. Wexler was named a “Ground Breaker” by Brownfield Renewable for her legal work and business innovation in the arena of renewable energy financing. In 2009, Ms. Wexler was recognized as one of Los Angeles Business Journal’s “Who’s Who in L.A. Law.” Ms. Wexler recently spoke at Digital LA's NewFronts Panel. This panel discussed how content studios are monetizing the content of shows via advertising, sponsorship, show integration and more. She graduated with honors from the University of Chicago where she received a bachelor's and a master's in the philosophy of science. Ms. Wexler received her juris doctorate degree from Columbia University School of Law, where she was a Harlan Fiske Stone Scholar.

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10250 Constellation Blvd. Suite 1900 Los Angeles, CA 90067 (310) 556-7805 www.glaserweil.com [email protected]

Ronald J. Silverman is a Managing Director at Bel Air Investment Advisors. Prior to joining Bel Air in 2003, Ron was a Senior Managing Director and a member of the Management Committee of Gerard Klauer Mattison & Co., Inc., an investment bank headquartered in New York. Before GKM, Ron was a partner of the Beverly Hills-based law firm Weissmann, Wolff, Bergman, Coleman, & Silverman for 15 years; earlier he was a partner of the Los Angeles law firm Manatt, Phelps, Rothenberg & Tunney. Ron started his legal career as a trial attorney with the United States Department of Justice, Antitrust Division. Ron is on the Board of Directors of the City of Hope. He previously served on the Board of Directors of Cedars-Sinai Medical Center. Ron has also been active in Jewish Federation activities, leading the Los Angeles chapter on its first mission to Cuba in 1999 and co-chairing a UJF Major Gifts Mission to Washington, D.C. Ron is also on the Board of Trustees of Children Institute Inc. Ron serves on the Board of Advisors of the George Washington University Law School, where he received his J.D. degree. He received his B.A. degree from Pennsylvania State University.

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1999 Avenue of the Stars Suite 2800 Los Angeles, CA 90067 (877) 229-1500 www.BelAir-LLC.com [email protected]

Alexander B. Kasdan is a Managing Director at DelMorgan & Co. He has more than twenty years of investment banking, real estate, corporate law and corporate strategy experience. Mr. Kasdan has executed over 100 domestic and cross-border transactions totaling more than $10 billion in overall volume in a variety of industries. Prior to joining DelMorgan, Mr. Kasdan founded and ran Convergence Capital Partners, LLC, a boutique investment banking advisory firm and was an investment banker at Barrington Associates in Los Angeles, where he headed the restructuring group, Peter J. Solomon Company, Credit Suisse First Boston and Merrill Lynch. Mr. Kasdan practiced law with O’Melveny & Myers LLP (formerly O’Sullivan Graev & Karabell LLP) and Paul, Hastings, Janofsky & Walker LLP (formerly Battle Fowler LLP), where he specialized in mergers and acquisitions, private equity and corporate finance transactions. In addition, Mr. Kasdan served as Corporate Counsel in charge of business development at SchlumbergerLtd., a global oilfield and information services company. Mr. Kasdan graduated magna cum laude from Middlebury College with a B.A. degree in Economics and Italian and was elected to Phi Beta Kappa during his junior year. In addition, he holds a J.D. degree from Columbia University Law School and has studied at the University of Florence in Italy. Mr. Kasdan is admitted to the Bar in the State of New York. Mr. Kasdan is a Senior Advisor to Governance and Transactions LLC, an advisory firm established in 2003 by Mr. James L. Gunderson, former Secretary and General Counsel of Schlumberger Limited, to assist boards, management and owners with corporate governance, compliance, structuring and strategic transactions. Mr. Kasdan is a frequent speaker and published author on the subjects of mergers and acquisitions, corporate finance and restructuring.

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100 Wilshire Blvd. Suite 750 Santa Monica, CA 90401 (310) 980-1718 www.delmorganco.com [email protected]

Anna Spektor is the Founder and President of Expert Presence, a marketing, business development and brand communications consultancy.

Expert Presence is frequently engaged by law, accounting and other professional services firms to design and implement comprehensive strategies focused on cultivating new and solidifying existing referral relationship and building brand awareness.

Founded upon creativity, accountability and delivering results, Expert Presence is well equipped to provide solid, cost-effective and accountable counsel for clients across the United States.

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1250 Constellation Blvd. Suite 2320 Los Angeles, CA 90067 (310) 995-6579 www.expertpresence.com [email protected]

Family Law Considerations Robert C. Brandt, Partner

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Question 1: How does a family law court allocate between SP and CP the business income (or increase in value) of a SP business that is owned and managed by one spouse during the marriage?

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Business Remains the Spouse’s SP: Although the business remains the spouse’s SP, family law courts apply two formulas to allocate the business income earned during the marriage. 1. Pereira Approach: Courts apply the Pereira formula if the growth in value of the SP business is attributed to a community effort (i.e., the efforts of the managing spouse results in increased profits and sales). • Formula: Community Income = Value of Business (-) Fair return on the SP investment. The SP spouse receives as much as if he/she had taken SP and put it in a bank account instead of investing in a SP business. o Does Not Subtract Family Expenses: Periera does not subtract family expenses paid by business earnings because it calculates the value of the SP, and the remainder, which is already reduced by money withdrawn to pay family expenses, is CP. • Benefits Community: Pereira benefits the non-SP spouse because it gives the SP spouse only a fair return on his/her investment.

Question 1 (cont.)

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2. Van Camp Approach: Courts apply the Van Camp formula if the increase in the value of the SP business is attributed to general market conditions or something other than the community effort (i.e., increase in oil prices is directly responsible for growth in a family-owned gas station). • Formula: Community Income = Reasonable value of services performed by the SP spouse (-) Amount of family expenses paid from the business earnings. o Subtracts Family Expenses: Family expenses are property taken into account insofar as they were paid from the business income. • Benefits SP Spouse: Van Camp benefits the SP spouse because it apportions only a standard salary to the community, and the remainder belongs to the SP spouse. Example: Assume that the original value of a spouse’s SP business is $10,000. Assume that the value of the SP owner spouse’s efforts is $20,000 annually, the annual family expenses are $15,000 per year. Assume that a fair of return is 7 %. • Periera: Take the original value of the SP business ($10,000), and multiply it by the fair rate of return (7%), which equals $700 SP income annually. If the business earned $40,000 per year, subtract $700, so the annual CP income would be $39,300. • Van Camp: Subtract the owner spouse’s efforts ($20,000) from the annual family expenses ($20,000), which equals $15,000 per year. The remainder ($5,000) is CP. If the business earned $40,000 per year, $5,000 of that is deemed CP and the remaining $35,000 is deemed SP.

Question 2: What is the safest mechanism to ensure that a SP business remains the spouse’s SP business upon divorce?

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Premarital Agreement: Spouses may protect their separate property businesses by executing a premarital agreement. Parties may use premarital agreements to avoid California CP presumptions, and may validly provide that earnings/profits from a spouse’s SP business will remain that spouse’s SP. • Courts Favor Premarital Agreements: Family law courts favor premarital agreements, as long as they do not violate public policy. • Requirements of Premarital Agreements: In order to be enforceable, a premarital agreement must be voluntarily executed and cannot be unconscionable. Family Code § 1615. o “Voluntary” Defined: The party against whom enforcement is sought: (1) was represented by counsel at the time of execution or waived the right to counsel; (2) had at least 7 days between the time that party was presented with the agreement (and advised to seek independent legal counsel) and the time the agreement was signed; and (3) if unrepresented by legal counsel, was fully informed of the terms and basic effect of the agreement. o “Unconscionable” Defined: The agreement was unconscionable and (1) the party was not provided a fair, reasonable, and full disclosure of the property or financial obligations of the other party; (2) the party did not waive the right of disclosure; and (3) the party did not have an adequate knowledge of the property or financial obligations of the other party. • ATROS: The ATROS still apply even if a premarital agreement designates a business as a spouse’s SP.

Question 3: Can the spouse who owns a SP business sell the SP business during a dissolution proceeding without the other spouse’s knowledge or consent?

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ATROS (Automatic Temporary Restraining Orders): ATROS significantly restrict a spouse’s ability to sell or in any way reorganize a SP business during a dissolution proceeding, even if the business is entirely the spouse’s SP. • Family Code § 2040(a)(2): Both parties are restrained from “transferring, encumbering, hypothecating, concealing, or in any way disposing of any property, real or personal, whether community, quasi-community, or separate, without the written consent of the other party or an order of the court, except in the usual course of business or for the necessities of life, and requiring each party to notify the other party of any proposed extraordinary expenditures at least five business days before incurring those expenditures and to account to the court for all extraordinary expenditures made after service of the summons on that party.” o Usual Course of Business: The Family Code offers no guideline in determining whether a property disposition was made in the “usual course of business” or for “necessities of life.” o Extraordinary Expenditures: Each party is required to notify the other of any proposed “extraordinary expenditures” at least five business days before incurring those expenditures and to account to the court for all extraordinary expenditures made after service of summons. • Operation of Business During Divorce: If one spouse is the primary operator of a business and the other spouse is not actively involved, the operating spouse retains responsibility for running the business during the divorce. The court, however, may issue restraining orders against third parties (i.e., a business partner) in order to protect the community interest in the property. See Family Code § 2045(a).

Question 4: If only one spouse manages and runs a CP business, then what duty does the managing spouse owe to the other spouse during the dissolution proceeding?

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Fiduciary Duty: Family Code § 721 defines the fiduciary duty as follows: “a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relationships with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship. • Nature of Fiduciary Duty: During a divorce, the managing spouse owes the highest duty of “good faith and fair dealing” on the out-spouse, which includes providing the out-spouse with access to books, disclosing true and full information upon request, and providing an accounting. As long as the fiduciary duty exists, each spouse has the affirmative obligation to “immediately, fully, and accurately update and augment” their required disclosures. Family Code § 2100(c). • Termination of Fiduciary Duty: The fiduciary duty continues until the date of distribution of the community asset (even after the dissolution). Therefore, if the business is part CP, then, pursuant to the Family Code, the managing spouse must manage the business in a way that does not prevent the other spouse from receiving the benefit of the business. • Relationship between Fiduciary Duty and Managing Business: Even if the business is only partially community property, the managing spouse still owes the other spouse the fiduciary duty to protect the other spouse's interest in the business and to constantly apprise the other spouse about material/significant transactions in the business.

Question 5: How does a court value a family business and how is it divided?

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Valuing Businesses: As illustrated In re Marriage of Foster, courts are free to accept any legitimate, evidence-based valuation. In re Marriage of Foster (1974) 42 Cal. App. 3d 577. • Common Valuation Methods: o Sale; o Auction between parties (In re Marriage of Cream); o Buy-Sell Agreement (In re Marriage of Nichols); o Comps (often used for franchises); o Book and adjusted book value; o Going concern, return on investment. • Elements of Business Value: In determining the value of a family business, courts will focus primarily on the real property (whether fee or leasehold interest), the work in process, assets (including accounts receivable), and goodwill. • Goodwill: To the extent a business has acquired recognized goodwill, the goodwill is generally an asset to be included in the valuation of the family business. In re Marriage of McTiernan & Dubrow (2005) 133 Cal. App. 4th 1090. https://1.next.westlaw.com/Link/Document/FullText?findType=Y&serNum=2007583254&pubNum=7047&originationContext=document&transitionType=DocumentItem&contextData=(sc.Search)

Question 5 (Cont.)

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• Date of Valuation: Family Code § 2552(a) provides that the “court shall value the assets and liabilities as near as practicable to the time of trial.” However, for good cause and upon 30 days notice, the court may value a business at a date after separation and before trial “to accomplish an equal division of the community estate of the parties in an equitable manner.” Family Code § 2552(b). o Separation Date: When the value of a business is largely attributed to a spouse’s skill and management (as opposed to underlying capital), the court will likely use the separation date as the valuation date. o Minimizing Costs in Valuing Businesses: Determining the date to value a business is difficult, as it is a still picture of a moving object; so it will likely be cost-efficient for the parties to stipulate in advance to a valuation date. Division of the Business: • If Only One Spouse is Capable of Running Business: The court usually awards it to the managing spouse, as opposed to selling it to a third party or ordering a division in-kind. • If Both Parties are Capable Managers: The court will usually require that one spouse buy the other out (as opposed to selling it to a third party).

Question 6: Are there any other preventative measures a business owner expecting a divorce can take to protect his business?

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Buy-Sell Agreement: A buy-sell agreement can effectively limit a spouse's ability to acquire ownership, deprive a divorcing spouse of voting rights, or give other business partners the right to buy at a specific price. • What Should a Buy-Sell Agreement Include? o A mechanism to determine the price, terms, and conditions for the sale o Source of funds for the purchase of any ownership interests (i.e., life insurance, cash on hand) o Require all owners to have an acceptable premarital agreement in place to require that the soon-to-be spouse waves ownership interests in the business in the event of divorce. • Formula in the Buy-Sell Agreement: The buy-out formula for purchasing a business interest is probative of the value for purposes of dividing the community interest in the business, but not necessarily conclusive. In re Marriage of Nichols (1994) 27 Cal. App. 4th 661. • In re Marriage of Nichols: The court used a stock purchase agreement to value H and W’s community interest in H’s business. The court emphasized that it “possesses broad discretion to determine the value of community assets as long as its determination is within the range of the evidence presented.” In re Marriage of Nichols (1994) 27 Cal. App. 4th 661, 670. The court also adopted the following considerations in determining whether to use a formula set forth in a buy-sell agreement: “(1) the proximity of the date of the agreement to the date of separation to ensure that the agreement was not entered into in contemplation of marital dissolution; (2) the existence of an independent motive for entering into the buy-sell agreement; and (3) whether the value resulting from the agreement’s purchase price formula is similar to the value produced by other approaches.” Id. at 672.

Forensic Accounting Issues in Divorces Irwin Nachimson, Partner

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Income Issues and Property Issues

There are two categories through which we need to look at a small business in a Divorce Setting

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• How much income is currently being generated by the small business for the purpose of calculating support and value.

• What is its value?


Income being generated by the company is typically assigned to the �in-spouse� for the purposes of calculating support.

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• How do we determine the true income of a company and what documents are needed?


• Basic Documents Needed To Determine True Income: –  Company Tax Returns –  Company Trial Balances and General Ledgers –  Company Contracts –  Bank Statements –  Account Receivables and Payable Ledgers

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Income Available for Support


•  Typically we look at Income for the most recent 12 Month Period –  How do We Determine a True Income Number?

1.  Add Backs: Prerequisites – Example:

Auto expenses Meals and Entertainment Travel Charitable Contributions Divorce Legal Fees Pensions Medical and Life Insurance

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How do We Determine a True Income Number? (continued)

2.  Taxable vs. Non Taxable

3.  Depreciation – Non Recurring Expenses

4.  Reductions From Income – Non Recurring Income

(i.e., Expiring Contracts)

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Income

•  Income vs. Cash Flow

•  Income Generated – Includes Accrued Receivables vs. Cash Approach (Does Not Include Accrued Sales)

•  Also Applies to Payables

•  How much is other spouse retaining within the Company and not reporting as a distribution

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Income

•  Fraud

•  Un-Reported Income

•  Bogus Employees (Girlfriend)

•  Fictitious Vendors

•  Hidden Bank Accounts

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Income and Valuation •  Valuation Methods I. Income Approach

–  Takes into account •  Risk •  Appropriate Multiple & Reasonable Compensation •  Historical Earnings

II.  Market Approach – Other Comparable Companies

III.  Asset Approach – Assets Only

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Asset Approach

•  Various Discounts Lack of Control Lack of Marketability

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Asset Approach

•  How do you buy them out? Award Other Assets (House) Notes Payable Share of the Profits

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Valuation - Issues Involved

•  Value of Small Business •  Dates of Valuation

Date Closest to Trial Service Business – Date of Separation Other Stipulated Date

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Overview


Splitting up a private family-owned business in the context of a divorce proceeding is ALMOST the same as splitting up any

privately-owned business.

SPECIAL CONSIDERATIONS

Emotions and personal dynamics create new obstacles to the orderly sale of the most successful business.

• The requirement that any “transmutation” of property interests be made in writing by an express declaration that is accepted by the spouse whose interest is adversely affected.

• The imposition of fiduciary duties in transactions between spouses: “a duty of the highest good faith and fair dealing on each spouse and neither shall take advantage of the other.”

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Special Requirements of Family Law

Honest Evaluation


• Spouses have different roles and meaning to the business:• Both spouses are active in the business and have similar roles

and interests.• Both spouses are active in the business and have different roles

and/or interests (e.g., one spouse is central to the development and growth of the business and one is in a supporting role).

• One spouse is active in the business, the other is a co-owner only (at least for the most part).

• Risk tolerance• Past monetary and creative contribution

When divorce means splitting up the family business, there are several different ways to implement the split-up. The best course depends on economic objectives of each spouse, cooperation and advance planning.

Implementation of the Split-Up


• One spouse buys out the other.• The company is liquidated and the proceeds distributed to the

owners.• The company is sold to a third party.• The spouses figure out some middle ground to continue the

company by finding a trusted third party to operate and control the business working together or giving one spouse substantial control and protecting the rights of the other to their share of assets and profits.

Tools for Dealing with Split-Ups


• Governance provisions• Restrictions on transfer, rights of first refusal• Buy-sell agreements• Information rights• Fiduciary duty provisions• Covenants not to compete• Capital structure


Allocate control of day-to-day operations to a Board of Directors or Manager:

• Consider composition of the board/manager and the need to avoid or break deadlocks

• Consider rights to elect and remove directors or manager and prevent abuse

• Consider composition of executive officers

• Consider financial and operational controls

• Consider control of compensation and related party transactions

Governance Provisions

Governance Provisions (continued)


Approval / veto rights of shareholders for strategic transactionsand other significant actions

• New equity issuances

• Debt financing

• Large capital expenditures

• Acquisitions or dispositions

• Material litigation

• Compensation and related party transactions

• Changes to organizational documents

• Dissolution, liquidation and winding up

Restrictions on Transfer, Rights of First Refusal


Controlling the sale process and the timing of liquidity:

• Imposing waiting periods before a sale

• Limited “Permitted Transfers”

• Effects of restrictions on liquidity

• Preemptive rights for new offerings

• The difference between a “ROFR” and a “ROFO”

• Comparing multiple offers with terms including equity or in-kind consideration, closing contingencies, time to closing and post-closing liabilities

Buy-Sell Agreements


The ability of either spouse to be a buyer or a seller of the other’s interest. Issues include:

• When can Buy-Sell be initiated?

• What are the payment terms (period of time, installments of principal, interest rate)? Building in flexible terms for a cash poor spouse.

• What is each spouse’s financial capacity to pay the reasonably expected price?

• Is there a disproportionate likelihood for either spouse to be a buyer or a seller?

• How to determine the purchase price?


Access to information is essential to protecting a client’s investment, particularly in private family-owned business where there is unlikely to be audited financial statements.

• Minimum rights are available by statute and the available statutory rights are different depending on the state and the entity.

• Specific rights to information should be included in the organizational documents of the business.

• Impose the discipline of information delivery before a divorce to avoid surprises to the spouse not in charge of the books.


• The statutory duties (under corporate law) of ownersto each other are very limited.

• Spousal transactions bring heightened fiduciary duties: “a duty of the highest good faith and fair dealing on each spouse and neither shall take advantage of the other.”

• Fiduciary duties of unrelated parties may be waived, but the Duty of Care and the Duty of Loyalty may not.


• Duties of Care: The duty to use good judgment and to use ordinary care and prudence in the operation of a business.

• Duties of Loyalty: Corporate fiduciaries breach their duty of loyalty when they divert corporate assets, opportunities or information for their personal gain; corporate fiduciaries are generally prohibited to put their personal interests ahead of those of the corporation.


• Sale of the business to a third-party or a buy out by one spouse of the interests of the other spouse in the business, it is likely that the buyer will request a non-compete from the seller(s).

• Buy-sell agreements will probably include an obligation of the seller to agree to a non-compete as a condition to receiving the buyout price.

• The selling spouse will be “beached” for a few years and the economic divorce settlement should take this reality into account.

• California disfavors restrictions on competition, except in limited situations, and drafting is paramount for their enforceability.


There are various alternatives for using the capital structure of a company (before and/or after split-up) to achieve objectives:

• Different classes of equity interests: Differentiate economic returns, voting rights, priorities, and liability exposure to third parties.

• Debt instruments: Can provide one spouse with a priority payment that can reduce risk to the creditor spouse and limit the ability of the spouse controlling the company to adversely affect the rights of the creditor spouse.

• Separating assets and business: Can separate an asset (e.g., intellectual property) and give it a protected return (e.g., a royalty).

• Shareholders agreements: Can provide an alternative way to give one shareholder specific control over certain governance or operational issues.


• If no resolution with respect to a split-up can be reached, a shareholder holding not less than 1/3 of the equity interests can file a complaint seeking involuntary dissolution, if one of the statutory grounds exists.

• Statutory grounds include:• An even number of directors who are equally divided and cannot

agree as to management of the company’s affairs. • Internal dissension of 2 or more factions of shareholders who are

deadlocked so that the company’s business cannot be conducted.

• Involuntary dissolution can be avoided if 50% or more of the shareholders purchase for cash the shares of the shareholders seeking dissolution at their fair value.

Valuation / Recapitalization / Sale Alexander B. Kasdan, Managing Director

Assembling the Working Group

•  Investment Banker   Pre-engagement diligence – solid financials, reputation, etc.

  Desirability of client – our reputation and time are on the line

  Selling on the �uptick�

  Identify all appropriate add-backs and adjustments to EBITDA

  Recast historical financials

  Projections and pro-forma adjustments

  Knowledge of marketplace and process

  Due diligence issues

  Management issues

  Investment banking fees – exclusivity, retainer, success fees

Assembling the Working Group

•  Transaction Counsel   Familiarity with M&A issues

  Knowledge of various deal structures

  Confidentiality of the sale process

  Non-compete agreements

  Stock sale v. asset sale

  Employment and/or consulting agreements

  Board and minority shareholder/passive investor issues

  Legal fees

Valuation of the Business

  Reason for Valuation

  Fair Market Value

  Fair Value

  Other

  Methodology

  Minority and Marketability Discounts

  Personal transactional tax implications

  Due diligence issues

Issues to Consider

 Familiarity with M&A issues

 Knowledge of various deal structures

 Confidentiality of the sale process

 Non-compete agreements

 Stock sale vs. asset sale

 Employment and/or consulting agreements

 Board and minority shareholder/passive investor issues

 Legal fees

Illustrative Sale Process – Steps and Timeline

Company Preparation

Marketing the Company

Receive Proposals

Due Diligence and LOI

Negotiations and Closing

5-7 weeks 6-12 weeks 3-4 weeks 4-6 weeks 4-8 weeks • Information gathering • Prepare Company Summary • Prepare Information Memorandum (IM) • Finalize list of targets

• Contact targets

• Execute CAs

• Distribute IMs • Organize Virtual Data Room • Address any other issues

• Receive written indications of interest • Select �short list� • Management Presentations • Initial due diligence

• Solicit final bids (LOIs) • Distribute draft agreements • Receive final offers

• Evaluate LOIs • Negotiate with final bidders • Coordinate working group (counsel, accountants, other advisors)

• Final due diligence

• Closing

Total Time =

22–37 Weeks

The main responsibility of business owners and management is to continue running

the business – need to meet all projections and forecasts

Bel Air Investment Advisors

1999 Avenue of the Stars, Suite 2800 Los Angeles, CA 90067 Phone: (877) 229-1500 Fax: (310) 229-1505 WWW.BELAIR-LLC.COM

Prepared By: Ronald J. Silverman

David Sadkin

February 12, 2013

Changed Circumstances: How to Manage a Portfolio for Income and Growth

1 Bel Air Investment Advisors

•  It is a challenge to take responsibility for finances. This is even more difficult given fresh memories of the financial crisis.

•  While there remain risks, the �worst case scenario� is unlikely to materialize.

• Resolution of tax side of the fiscal cliff (though spending cuts could be drag on economy.

• Europe no longer in crisis (though long term problems remain).

• China �hard landing� averted (though growth likely slower than in past).

•  Interest rates remain at all-time low.

• 10-Year Treasury remains below 2%.

• Municipal bond yields anemic – less than inflation.

• Rising rates would decrease bond values

•  Economy growing – but slowly.

•  We believe stocks will outperform bonds over the next three to five years.

Things to Consider


•  Investment Objectives: Cash Flow, Time Horizon, Risk Tolerance •  Strategies:

−  Fixed Income to generate income and wealth preservation. •  Municipal Bonds – tax exempt, low volatility, modest yields •  Taxable Bonds – corporate, mortgages, global, and high yields bonds can be

used to increase income −  Equities to generate dividends and grow the portfolio over time.

•  Domestic equities – growth, value, dividends •  International equities – developed countries including Europe and Japan •  Emerging Market equities – more volatility but more opportunity for long-term

economic growth −  Alternative Investments to complement traditional strategies.

•  Income oriented investments including MLPs, mezzanine debt, real estate, and structured credit

•  Growth oriented investments including long/short strategies and private equity •  Energy, natural resources, and commodities •  More aggressive strategies including venture capital

•  Diversification can reduce volatility and smooth out returns over time

Examples


Equities30%

Alternatives22%

Fixed5Income48%

Municipal)Fixed)Income100%

Municipal Bond Portfolio

Moderate Allocation Portfolio

Assumptions:

Starting Value of $10 million

Annual After-Tax Distributions of $500,000

Example Projections


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Moder ate Mun icpal.

Estimated Annual After-Tax Net of Fee Return: +4.83%

Estimated Value of Portfolio After 25 Years: $9.2mm

Estimated Annual After-Tax Net of Fee Return: +2.78%

Estimated Value of Portfolio After 25 Years: $2.1mm