Dear Fellow M&A Source Members:

Dear Fellow M&A Source Members:

As most of you know, I have a dual “Main Street” and “M&A” practice in Las Vegas. I try to do things by the books, minimize my exposure to liability, and document everything I do. I have also been involved in the effort to have the SEC address licensing requirements for business brokers for a long time. Back in 2005, when all we had was the IBEC letter, I drafted a document, entitled “Stock Sale Acknowledgment, Notification, and Disclaimer,” to disclose the fact that I didn’t have an SEC license and didn’t intend to structure a deal as a stock sale. This document was based on the IBEC No-Action letter (1986) and I did the things it said I should do, and didn’t do the things it said I shouldn’t do; I performed in accordance with the IBEC letter. In every deal I was involved in, which morphed into a stock sale, I obtained the signatures of both the buyer and seller. I never had a party refuse to sign it.

Subsequently, as soon as the CBI No-Action letter came out in the Fall of 2008, I updated the document to reflect the CBI letter “clarified” points. Shane Hansen, the attorney for the Task Force, has reviewed this agreement. Most of you know that I freely give it to anyone who requests an electronic copy; I have a sample in the workshop handout materials for my IBBA workshop “Minimizing Broker Liability.” Countless numbers of business brokers and intermediaries now use this agreement as a band-aid, when an ordinary asset sale turns into a stock sale. However, the SEC laws are still in force and a “no-action” letter is merely SEC staff’s opinion on that specific case.

It’s really no big deal to get a series 7 or 62/63 license; that’s not the point. I took two companies public on NASDAQ and was president of one of them; I simply do not want to get involved in anything that requires more SEC reporting. So, I choose not to get licensed. If I did big deals all the time and they tended to start out or morph into stock sales, maybe it would make sense.

Three weeks ago something occurred that I thought you might want to know about because it might be used as a legal precedent regardless of which “side” wins. If I prevail, then that will be good for all of us. If I lose, I believe that it will be really bad for all of us. That assumes that I am not the only one in the world who was forced to conclude a transaction as a stock sale, unintentionally.

Here’s a quick overview:

  1. I represented Steve Palacios in the sale of his business, “MSI.” The listing agreement was a standard asset sale agreement; it did not address the possibility of a “stock” sale (my current one does).
  2. We were able to generate some buyers, including Mr. McDonald, who ended up purchasing the business for his son-in-law to run.
  3. McDonald’s original offer was in the form of a standard asset purchase agreement; it did not mention the acquisition of stock.
  4. The attorney and tax accountant, who were part of Mr. McDonald’s team, advised him that he should structure the transaction as a Stock Sale, not Asset Sale. Maybe that was for tax purposes, I don’t know. We have copies of both agreements. I wasn’t involved in that decision. The assets were owned by several entities, so the stock sale was for the acquisition of each entity.
  5. At that point, I had both parties, with approval from their attorneys, execute our standard “Stock Sale Acknowledgement,….” form, which was based on the IBEC no-action letter. The parties also indemnified us several other times along the way and at closing.
  6. The transaction closed escrow in August 2006, and I agreed to take a settlement on the fee, but also defer part of it, and receive payment coincidentally with my client, though a third-party loan servicing company. In fact, I did receive the entire $349,000 commission on a $5.4 million deal.
  7. Meanwhile, as part of the transaction, my client also entered into a 2-year employment agreement, with salary and incentive bonuses. During that period, he acted sa President and was to train McDonald’s son-in-law.
  8. I heard second-hand that the son-in-law was not working out and that Steve was being circumvented and not given the “tools,” such as sufficient line of credit, to get the job done. I am pretty sure that MSI ended up closing down, but I was not involved with the parties at that point.
  9. McDonald sued Steve, and then, Steve sued McDonald. I was named as a third-party defendant, claiming that I am not licensed to sell securities and that I received more commission than I was due in the deal. Both of which are completely false. The attorney for Steve Palacios is aware that the parties signed my agreement form. He doesn’t care because what I did was sell stock without a license. Therefore, I am in violation of both Federal and State SEC laws. Both parties were from Nevada at the time of the transaction. However, I did advertise the opportunity (asset sale) using the Internet, so the SEC would probably say that Federal Laws apply as well as State Laws.
  10. The law suit is in Federal Court and my attorney believes that, unless the court approves our motion to dismiss, I will spend at least $250,000 to defend myself before this is over. Obviously, should I lose, the costs, fee forfeiture, and punitive damages will be a great deal more. Meanwhile, my old company, United Business Broker of Nevada, LLC (a Utah LLC) was also named, but is no longer operating. I’m sure that Mike Drury, who controls that entity, will simple dissolve the company, and I’ll be on my own as the Broker and only real third-party defendant.
  11. The E&O insurance policy that was in place will not cover it because the claim had to be made when the policy was in force. My current E&O policy’s retro-active period doesn’t cover August 2006…

I think every one of us and many of the members of the IBBA, and other non-IBBA member business brokers and intermediaries, have had similar transactions, or will have them someday. Sometimes, without any warning or consultation with the broker, the parties decide to turn a perfectly fine asset sale deal into the sale of equity in the business. This can easily happen on a $200,000 sale, if the company is a C-Corp., and if there are contracts in place that the Buyer doesn’t want to disturb. It doesn’t just happen in M&A deals.

We are along for a ride; what can we do? Can we stop the deal? No. Can we go back and make it a “Finder’s Fee?” No, it doesn’t meet the SEC’s “Finder’s Fee” definition. Why do we have this exposure when we didn’t intend for the deal to be under the SEC laws?

I wanted you to know that I am now going to be the “test dummy” for this whole thing. I thought I was covered since both parties signed the agreement, but, now, 4.5 years after the transaction was concluded, it appears to coming back to haunt me. I think you would agree that this is ironic, since I am the one who invented the “Stock Sale Acknowledgment, …..” agreement. What if this happened to you and you didn’t even have that signed?… You are sunk in court.

I am currently concluding a $5.1 million sale of a privately-held company (C Corp) to a public company. Without my permission, the parties have morphed this into a stock sale. The public company is going to do a 338(h) (10) election and treat it as an asset sale for tax purposes. The parties have both agreed to sign my agreement, and I am backing away from the negotiations (pursuant to the CBI no-action letter. Here we go again… My attorney says that I need to key my fee to certain assets being transferred. I want to make this transaction in two parts: (1) The sale of Personal Good Will and (2) the Stock purchase. We are commissioning an appraisal of the personal good will shortly.

We are all in this boat together. If I sink, you sink. If anyone has any ideas, strategies, or comments… I’m all ears. If anyone would like to review the documents involved in this law suit, I’ll be happy to send them to you. Maybe the M&A Source or Task Force should take this on to make sure that an unfavorable precedent is not set.

  1. We are trying to get the “licensing” complaint dismissed.
  2. We are trying or get it moved out of Federal Court.
  3. We are going to use the statute of limitations to get it thrown out, if possible.
  4. I have had a tremendous response from fellow brokers (M&A Source and, AM&AA). They are really circling the wagons for me. None are offering to help pay the legal fees, but they are concerned. Maybe I struck a nerve when I said that it might set a precedent. The attorney for TABB and the Joint Task Force (Shane Hansen) as well as Craig McCrohon (who was the attorney who obtained the “CBI” no-action letter) have all offered to defend me (but not for free).
  5. My attorney is licensed in Nevada and was Assistant State SEC official in Ohio, so he is pretty sharp on the SEC laws and codes. I think I’ll stick with him for now. However, since the others offered to consult/review his work for free, initially, I may have him speak with them when the time is right.

Meanwhile, I am trying to get some bigger deals done so I can pay all these legal fees and court costs.

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