Richard II

Monday, 29 August 2005 09:51

Corporate structuring

For many years, there has been a general assumption that going public through an initial public offering (IPO) is a desirable and important rite of passage for an emerging growth company. However, due to the financial costs, increased responsibilities and greater potential for civil and criminal liability of directors and management, many have no doubt hesitated at the suggestion of an IPO.

Despite these and other new challenges, emerging companies should anticipate the eventual return of a sustained, healthy IPO market. Due to the sheer size, liquidity and relative transparency of the public capital markets, new public companies will inevitably emerge from the ranks of companies now building their businesses. The SEC is currently considering comprehensive rulemaking proposals to modernize the offering process under the Securities Act of 1933.

To go public
Below are some of the traditional reasons companies offer when going public.

  • Gain funds. When the securities are sold for the account of the company, the substantial funds derived may be used for such common purposes as increasing working capital, performing research and development, expanding plants and equipment, retiring existing debt, acquiring other businesses or diversifying company operations.
  • Increase company value. A public offering of stock will improve net worth, enabling the company to obtain capital or borrowings on more favorable terms.

  • Find new opportunities. Many companies contemplate expansion through acquisitions of other businesses. A company with publicly traded stock is in a position to use its own securities to make acquisitions without depleting its cash resources.
  • Improve work force. The business may be better able to attract and retain personnel if it can offer stock or options to purchase such stock.
  • Gain personal protection. Public ownership may enable company principals to eliminate existing personal guarantees to lenders, landlords and suppliers, and generally to avoid any future personal guarantees.

Not to go public
In addition to the new burdens placed on public companies by Sarbanes-Oxley, there are disadvantages to going public.

  • Disclosure. Once the public is admitted ownership, information must be disclosed on a quarterly and annual basis.
  • Loss of flexibility. By incurring a responsibility to the public, the owners of a business lose some flexibility in management.
  • Influence. Once a company is publicly owned, management inevitably will consider the impact on the market price of its stock when making various decisions.
  • Costs. Routine legal and accounting fees can increase materially.
  • Loss of control. Insiders may be threatened with by loss of control of the company if a sufficiently large proportion of the shares are sold to the public.
  • Legal action. In the current legal environment, a public company and its officers and directors may become subject to a class-action or derivative lawsuit alleging violations of corporate and securities laws. Even if the claim has no merit, establishing a defense can be time-consuming, distracting and expensive.

A company’s success (or lack of) in an IPO also depends on timing. Consider the predictability of the business’s operating results. The more predictable the operational results, the more prepared a company is for an IPO. For companies that do not have a long or consistent operating history, meeting performance expectations for one or two additional quarters before going public can often add significantly to their credibility with potential investors. Examining the track records of comparable companies that have recently gone public and their subsequent performance in the stock market also provides useful guidance. A company that attempts an IPO before it is ready runs the risk of an unattractive IPO valuation, a postponed transaction, or even worse, disappointing investors with its operating results after going public.
 
Verne C. Hampton II is a consulting member in Dickinson Wright’s Detroit office. For additional information, visit www.dickinsonwright.com.

Tuesday, 24 May 2005 07:24

Dispute resolution

Here's a money-saving idea for Michigan businesses -- reduce the cost of resolving disputes involving your company by using mediation as an alternative to lengthy grievance, hearing or court proceedings.

Conflicts arise even in the best-run businesses. Disputes involving managers, employees, business partners, suppliers or customers can disrupt work, delay projects, distract management and end business relationships. There are times when litigating these disputes is the only answer.

However, going to court can be costly and time-consuming. You can lose even if you win when the result is a damaged relationship that once was profitable.

While litigation may be necessary for some disputes, mediation can reduce transaction costs by saving time and expense, and can result in satisfactory outcomes for all parties. The parties develop solutions that fit their situation. They control their own destinies.

Disputes are often caused by miscommunication, differing perceptions or interests that go unsatisfied in the work or business-to-business relationship. In mediation, the parties can address these issues and devise solutions that courts cannot offer.

Instead of discipline or damages, a dispute may be turned into revised working arrangements, revamped supply schedules, more accurate product specifications, clearer customer service policies or simply better communication. All parties stand to gain, and that can increase productivity, free management to focus on business and strengthen relationships with those who can help the company prosper.

A neutral third party who is trained in mediation skills and has experience in business matters aids the mediation process. The mediator helps the parties communicate effectively and focus on solving the problem. He or she has no authority to impose an outcome.

Mediation is designed to be a quick, voluntary, confidential and impartial process that enables the parties to find solutions at minimal cost and in a collaborative fashion before running the adversarial gauntlet. It can significantly reduce transactional costs while preserving important business relationships. Successful mediation results in written agreements enforceable in court.

Mediation can be used at any time. Indeed, a dispute that goes to court may very well be referred to mediation under Michigan court rules. Agreeing to mediate early on, by contract or company policy, can create or reinforce a commitment to joint enterprise, including the enterprise of reducing dispute resolution costs.

Mediation is having an impact. In a prominent study of Fortune 1000 companies by the ICR Cornell/PERC Institute on Conflict Resolution with PricewaterhouseCoopers LLP, 80 percent of respondents said that mediation saves time and money. Nearly 83 percent said they used mediation because it enables the parties to resolve disputes themselves.

Eighty-one percent found it a more satisfactory process than traditional methods. Sixty-seven percent said it yields more satisfactory settlements. Fifty-nine percent said it preserves good relationships.

"In sum, these responses indicate that mediation provides not just an alternative means to conventional dispute resolution but a superior process for reaching a resolution," the survey concluded.

Leaders from the Dispute Resolution Association of Michigan, the State Bar of Michigan ADR Section, Michigan State University College of Law and the business community are forming a Michigan business mediation program known as MBA. The purpose of this program is to help Michigan businesses reduce costs and develop solutions in resolving their disputes.

The program will work in tandem with Michigan's Community Dispute Resolution Program, a network of nonprofit conflict resolution centers that serves all 83 counties in Michigan. This program represents a cooperative effort between the business and nonprofit communities to offer a professional service for efficient resolution of business disputes.

Richard L. Braun II is a member in the Detroit office of Dickinson Wright PLLC. He serves as treasurer and as a member of the executive committee of the State Bar of Michigan Alternative Dispute Resolution Section. For additional information on the mediation program, e-mail resolve@tds.net or contact Braun directly at (313) 223-3575 or rbraun@dickinsonwright.com.

Wednesday, 29 June 2005 12:28

Captive insurance

The high cost of insurance and lack of control over claims processing are common frustrations experienced by insurance consumers. A captive insurance company and a segregated-cell captive program are creative approaches to solving insurance-cost and claim-control concerns.

Captives have been a recognized method of providing cost-effective insurance coverage for more than 40 years. These solutions work by primarily insuring the risks of policy owners and related business entities. As a result of the popularity of the captive concept, the number of states adopting captive insurance company legislation has increased dramatically in recent years.

While Vermont continues to be the most popular stateside domicile, many other states and the traditional offshore domiciles of Bermuda and Grand Cayman are creating a very competitive marketplace.

Who should consider captive insurance?

Companies and trade associations with members that historically have excellent claims experience are good candidates for captive insurance. That's because their traditional insurance premiums are funding the claims of customers with poor claims experience, as well as the insurance company's overhead and return-on-investment goals.

Captive programs provide flexibility. Policy owners have some control in determining coverage, who is insured, stabilized pricing over the long term, claims handling and settlement, and selection of defense counsel. Additionally, premiums paid to a captive program are tax-deductible business expenses, just like premiums paid to traditional insurance companies, as long as there has been a shifting of risk and an assumption of risk. These requirements are met when the captive insurance program insures a number of individuals and entities.

However, a captive insurance program isn't the right answer for everyone. Successful captives limit participation to persons and entities that have excellent claims experience and adhere to comprehensive risk-management programs.

Looking offshore

Captives formed as offshore entities are subject to United States taxes if the captive is classified as a controlled foreign corporation. If it is not, profits are subject to U.S. taxes only when the profits are distributed to owners in the form of dividends or return of premium, or upon sale of an owner's interest in the captive.

Capitalization requirements

Required capitalization is a function of the premium written, the risks insured, the amount of coverage provided and the actuarially anticipated claims experience. Preferred premium to capital surplus ratios usually range from 3:1 to 5:1.

In all events, minimum capitalization typically starts at $250,000. Capitalization can usually be funded by cash infusions (paid up front or over a reasonable pay-in schedule), irrevocable letters of credit or a combination of both.

Keys to a successful program

A successful captive program is comprised of many elements.

* Long-term commitment to the success of the captive (minimum of five years)

* Design of a sound insurance program with appropriate deductibles, stop-loss levels and reinsurance

* Commitment to sound risk-management programs

* Careful selection of insured parties and insured risks

* Close attention to handling of claims

* Selection of competent advisors and legal counsel

Getting started

The timeframe for setting up a captive program varies by jurisdiction. As a general rule, once the captive insurance company application is complete (including any required actuarial study and coverage documents), it will take 30 to 60 days to obtain the captive insurance company license from the domicile's regulatory authorities.

A properly formed captive insurance program that is well-capitalized and well-managed will provide its insured with predictable insurance coverage at reasonable, stable rates through insurance market cycles, while providing the insured with a greater voice in the insurance process. The bottom line is that a well-run captive insurance program saves money while increasing control over claims handling.

Robert W. Stocker II is a member in Dickinson Wright's Lansing office. He has practiced law for more than 37 years and specializes in the areas of corporate, gaming, insurance and securities. For additional information, visit www.dickinsonwright.com.