Corporate and M&A Insights

Liquor licenses are state-issued licenses that enable your business to legally sell alcohol. The laws around liquor licenses vary by state and New Jersey has some of the most restrictive liquor license laws in the nation (along with being some of the most expensive). In New Jersey, the Division of Alcoholic Beverage Control (“ABC”) regulates the sale of alcoholic beverages and the conduct of licensees through the issuance of licenses. There are three types of licenses: manufacturing, wholesale and retail.  The subject of this article is a “33 License” or a Plenary Retail Consumption license (i.e. the license you need for a restaurant or similar.)

New Jersey law grants individual municipalities substantial discretion in passing ordinances regulating the sale and consumption of alcoholic beverages within their limits. The number of 33 Licenses available is determined by a municipality’s population, and may be further limited by the town’s governing body. As a result, the availability of alcohol and regulations governing it vary significantly from town to town. Retail licenses tend to be difficult to obtain. The market is in high demands and because of this 33 Licenses are subject to exorbitant prices if and when they become available. License holders (“licensees”) resell their license on the private market — subject to limitation. A license may only be used within the municipality that issued it originally. Moreover, any sale must be approved by the issuing authority. Here is how to get a liquor license broken down into four steps.

  1. Find the license, for sale on the private market. You will have to enter into a Purchase and Sale Agreement contingent upon successful application to the municipal ABC Board. You will also want to check to ensure the license is in good standing, has been properly renewed, etc. In order to do this you will want to run lien searches, request documentation of renewals, etc.

Good news is a brew for New Jersey craft beer advocates. In February 2018, the New Jersey Assembly’s Agriculture and Natural Resources Committee paved the way for the introduction of Bill A2196, which would remove a current licensing rule requiring breweries and distilleries to provide a tour of their facilities before serving alcoholic beverages to consumers. Currently, breweries holding a New Jersey Limited Brewery License are prohibited from selling their brews at the brewery, unless patrons first complete a tour of the premises. This requirement applies to every customer, regardless of whether it is their first or fifteenth visit to a particular brewery, and failure to issue a tour can result in a hefty fine. If passed, Bill A2196 would be the latest step in a number of recent legislative changes aimed at easing New Jersey’s complex and stringent liquor laws.

New Jersey craft beer production has exploded over the past four years. As of February 2018, the New Jersey Craft Beer Association has identified ninety-eight breweries and brew pubs in the State of New Jersey, as well as twenty-four “startup” breweries in the process of obtaining licensing or permits. The growth of craft breweries in the State is in no small part due to a trend in Trenton towards loosening the State’s strict liquor laws by steadily expanding the rights for breweries with Limited Brewery Licensees.

Prior to 2013, breweries were limited to selling their products to licensed retailers and wholesalers. If a brewery was interested in establishing a tasting room, it would be required to obtain a special permit—issued by a different regulatory agency—that limited service to 4 oz. samples. Then, in December 2013, a noticeable shift in policy took hold when the Limited Brewery License was amended to consolidate these laws and permit the consumption of full-sized beers on the premises. The amendment permitted breweries to sell their brews on site for consumption, but only if such beverages were offered in connection with a brewery or distillery tour.

Lindabury partner, Robert Anderson, shares his insight in NJBIZ’s recent article:  “The inside scoop on M&As: Plenty of big companies have learned the hard way how difficult mergers can be”

Sometimes, a planned M&A can get torpedoed because of decisions that were made long ago, notes Robert W. Anderson.  So a potential seller may wish to review its books and records long before putting up a “For Sale” sign.

One suggestion: do some housecleaning, and scour around for any loose ends. That’s because for a buyer, a “big part of an M&A involves due diligence; understanding what they’re buying and how the target company fits in with the acquirer’s business operations and goals,” says Anderson. “If they see a lot of issues, like unsigned contracts, or potential tax and other liabilities, they may back away from the deal.”

Corporate deadlock is often cited as a reason why the court should invoke its powers and order the sale of one shareholder’s stock in minority shareholder litigation. While deadlock is a legitimate reason to bring a lawsuit seeking the court’s intervention, it is not a magic bullet that will automatically lead to the court ordering a buyout of one or more shareholders.

Deadlock is defined under the New Jersey Business Corporations Act and can be found under one of two circumstances. Deadlock can be found to exist when “the shareholders are so divided that they have not been able, for two consecutive meetings, to elect successors to directors whose terms have expired or would have expired if successors had been elected and qualified.” N.J.S.A. 14(a):12-7(1). The second manner in which deadlock may exist is if “the directors or other persons having management authority are unable to effect action on one or more substantial matters respecting the management of the company’s business.” N.J.S.A. 14(A):12-7(1).

The first deadlock provision may seem like an easy one to satisfy in closely held companies since many small companies do not hold formal shareholder meetings as required under the statute. The owners of small closely held companies are so focused on running the business that they forget about the formal requirements. Instead, since the shareholders in such companies generally work together closely and see each other practically every day, they make management decisions informally as necessary to operate the business and without formal meetings or corporate resolutions.

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Because of the fiduciary duties owed by business owners to each other, whether they are shareholders in a closely held corporation, members in a limited company, or partners in a general or limited partnership, a business owner generally is prohibited from competing with the company. This general prohibition can be modified by an agreement among the owners, but in the absence of such an agreement the prohibition stands.

Failure to do so is referred to as the diversion of corporate opportunities. An owner of a closely held business has a duty to bring to the company any business opportunity that the company would normally expect to seek to pursue. The opportunity must be presented to the company and cannot be pursued individually unless the company decides not to pursue that opportunity.

As with the prohibition on competition, the requirement to present all opportunities to the company can be altered by contract. Pursuant to N.J.S.A. 14A:3-1, a corporation can renounce its interest in, or expectancy of the opportunity to pursue, specific opportunities. One manner in which corporate opportunities can be relinquished is to insert the pertinent language in the Certificate of Incorporation. When starting a new business, if there is any thought that one or more owners might want the right to pursue competing opportunities, you want to include language in the Certificate of Incorporation, or a separate shareholder agreement, that specifies what competing businesses the shareholder may appropriate.

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Have you ever heard a story among your friends about a company where two partners got along great, but then one suffered an untimely death and then his widow or children caused the company to breakup? That is a common scenario, although one might not be able to place the blame on the surviving spouse or the children. This is one of the ultimate worst case scenarios that proper planning can help avoid.

As shareholders in a small company each shareholder may have a reasonable expectation of continuing employment and participation in management of the company. When one shareholder dies, unless an agreement among the shareholders is in place providing a right for the company or remaining shareholder to purchase the deceased shareholder’s stock, that stock will be transferred to that deceased shareholder’s heirs, whether by will or by intestacy. As a result, most often the deceased shareholder’s stock ends up in the hands of a surviving spouse or children. In some cases the heir of the deceased shareholder will be able to step into his or her shoes and be able to participate meaningfully in the operation of the business. There may be personality conflicts and other difficulties in operating the business with a new partner, but hopefully, those can be worked out.

More often, however, the deceased shareholder’s stock is inherited by someone who does not have any clue about the business and cannot be expected to participate in or contribute to the operation of the business in any realistic sense. Sometimes this leads the remaining original shareholder to think that he will not pay them a salary since they are not working in the business and he can retain the earnings to reinvest in the business since he is not required to pay dividends. This is a recipe for disaster and some really unfortunate consequences.

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Cybersecurity experts have observed that hackers and cybercriminals are increasingly targeting small and medium-sized businesses and that these efforts account for 60% of all cyberattacks. One expert described these companies as the “soft underbelly” of cybersecurity. Companies of all sizes face potentially significant costs in responding to a data breach and losses including business disruption, lost revenue and loss of reputation. The average time to resolve a cyberattack has been estimated at 46 days and costs can increase if the damage is not resolved quickly.

Such expenses could be catastrophic for small or medium-sized businesses so it is important for such companies to understand the insurance implications and select the appropriate coverage to protect against losses from a cyberattack.

TRADITIONAL INSURANCE

Statutory remedies are made available to shareholders in a small, closely held corporation should harmful actions be undertaken by other shareholder or directors of the corporation. Importantly, these statutory remedies are available only to owners of a corporation with 25 or fewer shareholders.

Pursuant to N.J.S.A. 14A:12-7(1)(c), a shareholder in a closely held corporation may seek judicial remedies if the directors or other persons in control of a corporation have:

  • Acted fraudulently;
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Identity theft is an area of major concern for consumers and businesses alike. Roughly nine million individuals in the U.S. can expect to have their identity stolen each year. With just a few items of personal information (such as the name, social security number, and the date of birth of an individual) a cyber-criminal can potentially drain existing accounts or open new credit card accounts with devastating consequences for the unwitting consumer’s credit ratings and future path in life. If your business has been lax in protecting the privacy of such personal information in its possession, you may be inviting your own devastating consequences: lawsuits by individuals experiencing identity theft as a result of your lax procedures, regulatory enforcement actions, and damage to your business reputation and loss of trust by your customers.

The Red Flags Rule, issued by the Federal Trade Commission (“FTC”), requires financial institutions and creditors with covered accounts (as defined in the Red Flag Rule) to develop a written program that identifies and detects the relevant warning signs, or red flags, of identity theft.

Red flags can include, for example:

Does your business partner owe you anything? We’re not talking about money, although that may be an ultimate outcome, we’re talking about how they treat you. Do they owe you any duty to be fair or to bring business opportunities to your company? Whether you are a shareholder in a small, closely held corporation or a member in a limited liability company, the answer to this question is yes, with some exceptions.

Every small business owner, again, whether be it a corporation or limited liability company, has a fiduciary relationship with the other business owners. What is a fiduciary relationship? A person who is a fiduciary is someone charged with a legal and/or ethical relationship of trust with one or more other persons. A fiduciary duty, in turn, is the highest standard of care that can be imposed on someone. A fiduciary is required to be loyal to the beneficiaries of that duty and there must be no conflict of interest between the fiduciary and beneficiaries. The fiduciary cannot profit personally from his position as a fiduciary.

Since each shareholder or limited liability company member owes each other a fiduciary duty the responsibility is reciprocal. Therefore, as a small business owner, you owe a fiduciary duty to your other partners whether you own 60% of the company or 5% of the company and they also owe you a reciprocal fiduciary duty.

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