World425_tas_01

Task prompt

What the agent was asked to do

Review the due diligence file for Summit Filing Solutions, Inc. and identify any potential deficiencies relative to its claimed status as an S-Corporation. Draft a set of indemnities, for incorporation into the Harbor Bridge share purchase agreement, covering the claimed S-Corporation status and specifically referencing any potential deficiencies in the file relative to that status. Reply back to me here, outlining what you find.

Grading rubric

Criteria and grader verdict (showcase run)

1. States that Sellers will indemnify Harbor Bridge Private Equity for all Taxes and other losses arising from any deficiencies in connection with the status of Summit Filing Solutions, Inc., as an S-Corporation

   Pass

   Evidence: The proposed Section 11.2(g) says “Sellers, jointly and severally, shall indemnify... Buyer Indemnified Persons from and against any and all S Corporation Losses” relating to “any S Corporation Tax Matter or any Specified S Corporation Deficiency.” “S Corporation Losses” includes “all Losses, Taxes, interest, penalties...” Assessment: The criterion requires indemnity for all Taxes and other losses from S-Corporation status deficiencies; this is clearly stated, though phrased as Buyer Indemnified Persons rather than Harbor Bridge by name. Pass.

2. States that Sellers will indemnify Harbor Bridge Private Equity for all Taxes and other losses arising from the transfer of shares to a non-resident alien, Carrie Canuck

   Pass

   Evidence: “Specified S Corporation Deficiencies” includes “the June 1, 2022 transfer... to Carrie Canuck, including any issue relating to whether Carrie Canuck was or is a nonresident alien, an ineligible shareholder...” The indemnity covers “any... Specified S Corporation Deficiency.” Assessment: The criterion requires indemnity for Taxes/losses from the transfer to non-resident alien Carrie Canuck; the response expressly covers that event and resulting S Corporation Losses. Pass.

3. States that Sellers will indemnify Harbor Bridge Private Equity for all Taxes and other losses arising from risk that the Amended and Restated Shareholder Agreement creates a second class of stock

   Pass

   Evidence: The response identifies “Single-class-of-stock / pro rata distribution risk” and says the shareholder agreement clause is “a classic non-identical economic-rights issue.” The indemnity covers “any governing document... arrangement that could be treated as creating... a second class of stock, including Section 2.3 of the Amended and Restated Shareholder Agreement Rev. B.” Assessment: The criterion requires indemnity for losses from the risk that the Amended and Restated Shareholder Agreement creates a second class of stock; this is explicitly included. Pass.

4. States that Sellers will indemnify Harbor Bridge Private Equity for the dimuntion of Tax attributes

   Pass

   Evidence: “S Corporation Losses” includes “lost Tax benefits, loss of pass-through treatment, corporate-level Taxes... and any reduction in value or increase in purchase price cost arising out of or relating to an S Corporation Tax Matter.” Assessment: The criterion requires indemnity for diminution of Tax attributes. The response does not use the exact phrase, but its definition covers lost tax benefits and value reductions arising from S-status issues, which reasonably encompasses diminution of tax attributes. Pass.

5. States that the list of examples S-corporation status termining events in the indemnity clause is non-exhaustive

   Pass

   Evidence: The response defines deficiencies as “including” listed matters, and the indemnity says “Without limiting the foregoing, this indemnity applies to any Loss arising out of...” followed by enumerated examples. Assessment: The criterion requires that the examples of S-corporation status terminating events in the indemnity be non-exhaustive; “including” and “Without limiting the foregoing” clearly make the list non-exhaustive. Pass.

6. States all of the following: that the indemnification obligations will survive the closing of the acquisition, and continue in effect until the expiration of the statute of limitations for the assessment of the subject Taxes

   Pass

   Evidence: The survival clause states claims “may be made at any time until 60 days after the expiration of the applicable statute of limitations, including any extensions, for the relevant federal, state, local, or other Tax period.” Assessment: The criterion requires stating that indemnification obligations survive closing and continue until the statute of limitations for assessment of the subject Taxes expires. The proposed post-closing SPA survival clause provides that timing and applies to S Corporation Tax Matter claims. Pass.