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Emerging Trends for Fund General PartnersO C TO B E R 3 0 , 2 0 1 9

TO RECEIVE CPE CREDIT

• Individuals Participate in entire webinar Answer polls when they are provided

• Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form

Submit group attendance form to training@bkd.com within 24 hours of webinar

• If all eligibility requirements are met, each participant will be emailed their CPE certificate within 15 business days of webinar

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INTRODUCTIONS

Melissa PozniakBKD Partnermpozniak@bkd.com

Chris KramerBKD Partnerckramer@bkd.com

TAX REFORM & BEYOND

• Choice of entity Rate changes 199A deduction Capital recovery NOL/excess business losses Small business §1202 stock

• Limited business interest• Carried interest• International tax• Changes to state taxes

Wayfair

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REDUCED CORPORATE TAX RATES

Taxable Income

Previous Law

TCJA

$0–$50,000 15%

21%

$50,001–$75,000 25%

$75,001–$100,000 34%

$100,001–$335,000 39%

$335,001–$10,000,000 34%

$10,000,001–$15,000,000 35%

$15,000,001–$18,333,333 38%

More than $18,333,333 35%

CREATED NEW 20 PERCENT DEDUCTION

• New IRC Section 199A provides 20 percent deduction of domestic qualified business income (QBI) for individuals, trusts & estates for 2018–2025 tax years

• When taxable income exceeds $160,700 ($321,400 for joint filers or surviving spouse) in 2019, limitations partially apply until taxable income reaches $210,700 ($421,400) W-2 wages Qualified property Specified service trade or business

Expires after December 31, 2025

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Effective in 2018; sunsets December 31, 2018Deduction(10) = 20 percent of excess of taxable income over sum of any net capital gainFull phaseout(8) = $207,500 (single) | $415,000 (married filing jointly (MFJ)), indexedThreshold(9) = $157,500 (single) | $315,000 (MFJ), indexed

QUALIFIED BUSINESS INCOME DEDUCTION

EXPANDED CAPITAL RECOVERY PROVISIONS

• Enhanced bonus depreciation September 28, 2017–December 31, 2022 –

100 percent Reduces by 20 percent per year thereafter

through 2026 Available for both new & used assets Made changes to qualified improvement

property, creating unintended need for technical correction

Expires after December 31, 2025

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Expires after December 31, 2025

• Expanded §179 Up to $1,020,000 for 2019 (adjusted annually for

inflation) Phase out beginning at $2,550,000 of assets

placed in service for 2019 Definition of qualified property expanded to

include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security systems

EXPANDED CAPITAL RECOVERY PROVISIONS

MODIFIED & ADDED LOSS LIMITATIONS • Net operating loss (NOL)

Modified NOL deduction Limits deduction to 80 percent of taxable

income for losses arising in tax years beginning after December 31, 2017

May generally not be carried back Carried forward indefinitely

Expires after December 31, 2025

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MODIFIED & ADDED LOSS LIMITATIONS • Excess business loss limitation

Limits aggregate deductions attributable to trades or businesses over the aggregate gross income/gain to $255,000 for single filers ($510,000 MFJ) in 2019

Any excess losses treated as an NOLExpires after December 31, 2025

QUALIFIED SMALL BUSINESS STOCK

Gain exclusion under §1202 equal to greater of

OR

$10 million ($5 million married filing separately) minus any amount excluded with respect to that corporation’s stock in prior years

10 times aggregate basis of stock

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WHAT IT TAKES TO QUALIFY FOR §1202?

*See next slide for list of excluded trades or businesses

Corporation with respect to which

§936 election made

DISC

CAN’T BE

REITCo-op

RIC

80 percent of value of corporation’s assets used in qualified trade or business during substantially all of taxpayer’s holding period

MUST BE

Domestic C corporation

Stock acquired in an original issuance in

exchange for money, other property or as compensation

Total adjusted basis of cash & other assets ≤ $50 million at all times from August 10, 1993, through immediately after the stock was issued

QUALIFIED TRADE OR BUSINESS ≠

• Trade or business involving the performance of services in fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees

• Banking, insurance financing, leasing, investing or similar business

• Farming business (including the business of raising or harvesting trees)

• Production or extraction of products subject to percentage depletion

• Hotel, motel, restaurant or similar business

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LIMITED BUSINESS INTEREST EXPENSE

• Deduction generally limited to sum of Business interest income Floor plan financing interest 30 percent of adjusted taxable income (ATI)

LIMITED BUSINESS INTEREST EXPENSE

• ATI = taxable income with following adjustments +/- items of income, gain, deduction or loss not

properly allocable to trade/business + depletion, depreciation & amortization for taxable

years beginning before January 1, 2022 + net business interest expense + NOL + QBI deduction

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LIMITED BUSINESS INTEREST EXPENSE

• Limitation does not apply to Businesses with average gross receipts ≤ $25

million (affiliated group basis) Regulated public utility businesses including

electric cooperatives Real property businesses & farming businesses

(including agricultural & horticultural cooperatives) may elect not to be subject to limitation provided they use ADS method for depreciation

CARRIED INTEREST

• Capital gains rate after three-year holding period

• Gains recognized after 2017

• §1231 application

• Goodwill – capital or §1231

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MOVED TO TERRITORIAL SYSTEM • Dividend received deduction

• Repatriation tax Cash & cash equivalents, 15.5 percent Otherwise, 8 percent Generally payable over eight years

• GILTI (income & deduction)• FDII (deduction)• BEAT (anti-abuse minimum tax)

Questions?Melissa Pozniak | mpozniak@bkd.com

Chris Kramer | ckramer@bkd.com

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Thank You!

Living in a Post-Basho World –Navigating the Shifting Landscape of Conflicts of InterestP R E S E N T E D B Y: P H I L F E I G E N , N O A M F I S C H M A N & T O N Y S C H E L L

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ABOUT US

Phil Feigen serves as the Managing Partner of the Washington, D.C. office. Phil provides complex business counsel to clients inever‐changing regulatory environments. For more than 20 years, he has counseled clients with respect to small businessinvestment companies and other small business administrative regulations, federal and state banking laws and federal securitieslaws. Phil focuses on helping clients through the SBIC licensing process so that they may realize the benefits of the program andincrease the amount of investment dollars they are able to manage in their funds. While he works with funds of all sizes, Phil’sexperience has been focused on specialty funds under $300 million.

Noam Fischman serves as the Co‐Chair of Polsinelli’s Mergers & Acquisitions Litigation Working Group, a task force dedicated todeal‐related litigation. Noam has extensive experience litigation matters involving fraud and fiduciary duties, among other claims,in both the commercial and the health care‐related context. Within the past few months alone, Noam has won dismissal of twocomplaints for fraud against his clients, and he has successfully resolved another case against former directors of a privately heldlife sciences company, which alleged damages for breach of fiduciary duty and fraud exceeding $500 million.

Tony Schell is a Managing Director at Escalate Capital. Prior to Escalate, Tony was a Managing Director of the Technology and LifeSciences Division for Comerica Bank and its predecessor, Imperial Bank. Prior to Comerica, he held a variety of corporate financepositions with The Sabre Group and Coopers & Lybrand. Tony began his career as a commercial lender with MBank Dallas(subsequently acquired by Bank One) and First Gibraltar Bank (subsequently acquired by BofA). Tony earned both a BBA and MBAfrom The University of Texas. Tony is also a member of the Advisory Council at The University of Texas McCombs School ofBusiness, is a CPA and an ISTJ.

AGENDA

• What are the standards?

• Why does this matter?

• Are there consequences?

• How do we avoid pitfalls throughanticipation & preparation?

• Questions?

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WHY?

• Basho Technologies Holdco B, LLC et al. v. Georgetown Basho Investors, LLC, et al., decided on July 6, 2018 (VC Laster)

• Judgment against noncontrolling board member, who represented a noncontrolling shareholder/investment fund

• Among other things, defendant Fund used consent rights as a mechanism to force company to borrow only from that Fund despite terms that were worse than other offers

• 126-page ruling upshot: control can be over the business or over a specific transaction. Impact …

(POTENTIALLY) COMPETING FIDUCIARY OBLIGATIONS

• Most LPAs create contractual requirements between the general partner & limited partners, which parallel the fiduciary duties of care typically owed by board members to portfolio companies, i.e., the fiduciary duties of loyalty, due care & good faith

• A single individual could be Fiduciary to the Fund

Fiduciary to the shareholders of the portfolio company &

Fiduciary to shareholders other companies on whose board(s) the representative sits

• Delaware Law Post-Basho: {DISCUSS}

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DIRECTORS SERVING MULTIPLE MASTERS

• A board member owes the same duties to the board irrespective of other hats worn

• Business judgment rule: directors are presumed to act on an informed basis, in good faith & in the honest belief that the action taken was in the best interest of the corporation. This does not require directors to satisfy all shareholders The main question for the courts is whether the potential cost or potential benefit of

an action is strong enough to sway a director to make a choice that is not in the best interest of the company

• Duty of loyalty: does Basho change how you have to navigate conflicting duties/obligations & the potential for self-dealing?

HYPOTHETICAL

• What if …

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REPRESENTATIVE CHART

Status

Problem Lender Minority Shareholder/Board

Member

Control the Board/Control of the

CompanySeek new debtSeek new capitalBe acquired

What happens when the representative is torn

between the needs of the portfolio company & the

desire of the fund ?

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IMPLICATIONS

• Damage to reputation

• Shareholder derivative suits Breach of fiduciary duty

• Litigation by third parties Breach of contract

• Personal liability???

REAL-WORLD CONSEQUENCES OF FALLING INTO ONE OF THE TRAPS

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THESE ISSUES CAN BE AVOIDED

SOLUTIONS

• Limit liability with good corporate governance• Exercise duty of care • Exercise duty of loyalty & independent judgment

Duty to disclose the conflict of interest or influence

• Cannot be independent: recuse oneself from deliberations to avoid the risk that participation taints the board’s decision

• Maintain confidential information

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GOOD COMPANY PRACTICES

LIMITING PERSONAL LIABILITY

• May be limited by company charter for duty of care• Cannot be eliminated or limited for

Duty of loyalty Intentional misconduct or breaching duty of good faith Unlawful payment of dividend or unlawful stock purchase or redemption Any transaction from which improper personal benefit was derived

• An interested director who played no role in the board’s decision making process will not be liable for claims that the board’s action was wrongful

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ADVANCEMENT, INDEMNIFICATION & UNDERTAKINGS

• Advancement – right contained in governing documents &/or contracts between the company & officers or directors to pay, real-time, defense costs

• Indemnification – right contained … for the company to cover liability• Undertaking – document signed at the time right(s) are invoked for

payback if …• Insurance available. But …

Pitfall – insured vs. insured exception

Questions?Phil Feigen | 202.626.8330 | pfeigen@polsinelli.com

Noam Fischman | 202.626.8360 | nfischman@polsinelli.com

Tony Schell | 512.651.2105 | tony@escalatecapital.com

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CONTINUING PROFESSIONAL EDUCATION (CPE) CREDIT

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered

CPE CREDIT

• CPE credit may be awarded upon verification of participant attendance

• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com

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Thank You!