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Dutchess OfficeGoldman/Facebook – New Media Invokes Old Laws
Media reports on January 18 indicate that Goldman Sachs has halted its private placement of Facebook stock due to ‘regulatory concerns’ with respect to the enormous publicity the transaction has received in both traditional press and new media.
It is a cornerstone of the private placement exemption that no ‘publicity’ is utilized in the transaction in order to demonstrate that no general solicitation has occurred, the foundation of a private placement under Regulation D.
Given that there are some pretty smart people who work at (and represent) Goldman and Facebook…this is yet another indicator that the securities laws established in 1933 (and even Regulation D, promulgated in 1982) are way behind the times when it comes to technology, information dissemination and the internet. Nevertheless, it is an important lesson to a company seeking to conduct a private placement that the regulators, particularly the SEC, will seek to enforce the laws, rules and regulations that are on the books regardless of the disconnect between the intent of such now aged investor protections and the manner in which information is now instantaneously spread throughout the world.
Head’s Up for Broker Dealers Conducting Private Placements
According to the FINRA Website, the FINRA Board of Governors took action regarding various rulemaking items at its December 8, 2010, meeting. The following was announced with respect to private placements:
Private Placements
The Board considered proposed amendments to expand FINRA Rule 5122 (Private Placements of Securities Issued by Members) to govern all private placements in which a member firm participates (subject to limited exceptions). The fundamental elements of the rule—disclosure, filing requirements and limitations on the use of offering proceeds—have broad applicability to private placements, and are not only pertinent when a firm offers its own securities (or those of certain affiliates). Expanding the rule would extend investor protections and regulatory oversight to a broader range of private placements. The proposal retains all current exemptions, except the one pertaining to when a broker-dealer acts primarily in a wholesaling capacity. (Emphasis Added).
The Board authorized staff to issue a Regulatory Notice requesting comment on the rule proposal.
We will post another blog entry when the Regulatory Notice is issued.
Reverse Merger Candidates, Take Note
New FINRA Rule 6490 ties into Securities Exchange Act (SEA) Rule 10b-17 (Untimely Announcements of Record Dates) and became effective on September 27, 2010.
Over-The-Counter Market (OTC) issuers must now give FINRA at least ten (10) calendar days advance notice of transactions including, but not limited to, any issuance or change to a symbol or name, mergers, acquisitions, dissolutions or other company control transactions, bankruptcy or liquidations. They must also pay a non-refundable $200 fee. Late notices can incur penalty fees as high as $5,000.
FINRA also may request further supporting documentation during its review transactions for clarification and accuracy. Such documentation must be submitted to FINRA in a timely manner or the review of the transaction may be completely halted and the case “closed.” FINRA can also exercise the right to reject any transaction which it deems deficient. “The Department may determine that it is necessary for the protection of investors, the public interest and to maintain fair and orderly markets, that documentation related to such SEA Rule 10b-17 Action or Other Company-Related Action will not be processed.”
To see the complete rule, please go to http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=12829&element_id=9364&highlight=6490#r12829)
All About Partnership Agreements
New businesses face lots of risks, no doubt.
One of the best things you can do if you are beginning a business with a partner is to put together a partnership agreement. This legal document clearly spells out the rights and responsibilities of each partner, which can minimize the chance of a legal dispute down the road. There are lots of things that can sink a new business, but a lack of clarity concerning job responsibilities or other issues does not have to be one of them.
Each state has a uniform partnership law, but a partnership agreement can provide further specifics. Here are some of the things that a partnership agreement might address:
- What procedure is in place if one partner wishes to leave or passes on?
- How are profits going to be shared?
- What are each person’s management responsibilities?
- How does each partner contribute to cash flow?
- What is the reach of each partner’s authority?
- How would a new partner be added?
- Which partner holds title to physical property?
- How are salaries computed?
If you have a new business and are interested in a partnership agreement, an experienced attorney can help you draft this legal document. It could mean the difference between success and failure, between a healthy partnership and a failed friendship.
A Brief Look at Liquidation Preference
In the world of venture capital, one of the common methods for minimizing investor risk is liquidation preference.
But what is it, and how does it work?
Liquidation preference, a common tool included in a venture financing deal sheet, assures that, should the company be liquidated or sold, preferred shareholders will always get something back for their preferred shares before common shareholders get anything. The scope of liquidation preference varies between term sheets. Some deals are more favorable to investors than others. And some companies may even wish to include a cap on the amount preferred shareholders can receive should liquidation occur. Payment of the liquidation preference only occurs if there is a sale or liquidation of the company.
Liquidation preference is usually referred to as a multiple of the issue prices, such as “2x.” In this case, a holder of Series B Preferred Stock would be entitled to receive two times the issue price. Example: the purchase price of the preferred stock is $10 per share and the deal term calls for “2x,” the liquidation preference is $20 per share.
There are many levels of liquidation preference and it is important to determine who gets what in different exit scenarios. Liquidation preference is something about which even the most confident entrepreneur needs to be aware.
How to Design and Implement an Equity Incentive Plan
It is obviously important for companies to attract and retain top-level workers. It is equally important to motivate and encourage them to strive for success.
Offering equity incentive plans to high-level employees frequently accomplishes both tasks. An equity incentive plan is a contract between the employee and the employer to provide an equity interest in the company. If the employee’s success is tied to the company’s success, it can create more incentive for stellar performance.
Equity incentive plans can vary greatly, but they typically include some combination of stock and stock options.
Here are several key tips for drafting a quality equity incentive plan:
- Clearly define the purpose of the agreement.
- As with any legal document, make sure that key terms such as “annual award” and “covered employee” are explained in detail.
- Include the name of the committee or other parties responsible for administering the plan. Who is on the committee? What are the limits of its authority?
- How many shares and under what circumstances is the employee entitled to equity?
- How does the employee exercise his options? Be specific.
- Include the jurisdiction where laws will govern the agreement.
Mitchell Littman to Speak at Silicon Valley Event
Littman Krooks LLP founding partner Mitchell Littman will be among the experts speaking at Private Company Stock Conference 2010, to be held Sept. 27 at the Four Seasons – Silicon Valley in East Palo Alto, California.
Mr. Littman will participate in a panel discussion concerning “Legal Considerations for Issuers: Protecting Private Company Exemptions,” scheduled to take place from 11:20-12:10 p.m.
When a company’s stock is sold in the secondary market, the company walks a fine line between behaving like a public company while retaining private company status and exemptions. Mr. Littman and the other legal professionals will review the regulatory issues and explain how to avoid common pitfalls that can affect a company’s SEC status.
With a career spanning nearly three decades, Mitchell Littman heads Littman Krooks LLP’s corporate and securities group. His practice includes public and private offerings, broker dealer matters, venture and private equity capital investments, mergers and acquisitions. For more information about the conference, visit http://www.dealflowmedia.com/conferences/pes_conference_10.cfm.
Special Purpose Acquisition Corporations Benefit Mergers
Special Purpose Acquisition Companies (SPACs) can offer a number of advantages to benefit mergers–from creating more liquidity to attracting new investors.
A Special Purpose Acquisition Company or Corporation (SPAC) is a publicly-traded buyout company that raises money for the purposes of pursuing the acquisition of an existing company. SPACs can be an excellent vehicle for raising blind pool money – most of which typically ends up in trusts. The money is usually raised from the public for an unspecified merger, often in a targeted niche or industry. Individual SPACs are typically sold at an agreed-upon price per unit for one share of common stock (to be publicly traded in the future) and two warrants that can buy additional shares. A SPAC is also sometimes referred to as a TAC – or Targeted Acquisition Company.
The SPAC raises money initially and then begins searching for a private company to buy. Traditionally, many of these purchases have been in the high tech sector. In many cases, SPACs play a crucial role in bringing exciting new technologies to the market.
Why does a company decide to go public? The primary incentive is to raise capital in support of, and often in anticipation of, a period of exponential growth. A well envisioned SPAC might be able to raise tens of millions of dollars in a short interval – sometimes within a few weeks. This influx of capital can be like a river of instant liquidity which can be a boon to the original “shell” with which the SPAC is actually merging.
Another reason for bringing in SPACs for mergers is to cultivate image. If a public company is perceived more favorably by consumers, it can soon achieve status as powerful, reliable, and established – which may attract new investors. New investors can be the lifeblood of such a merger.
Pulling off these kinds of mergers in a restricted credit environment can be challenging, but the upside might justify much of the risk. In such an environment, it might also become a resourceful move – perhaps a creative way to re-capitalize a distressed company or to ensure post-merger liquidity. Integrating SPACs into a merger might even be a way to negotiate or re-negotiate with shareholders or a method of salvaging value lost by a previous liquidation.
The Business Judgment Rule and Director Liability
The business judgment rule is a legal concept that gives the directors and officers of a corporation a measure of protection against liability while they are conducting business for their corporation. Directors and officers are entrusted with the responsibility of managing the corporation’s affairs. In this role, they often face difficult questions concerning whether to sell assets, acquire or merge with other businesses, expand to new areas of business, or issue stocks and dividends. In addition, they may be forced to deal with hostile takeovers by other businesses.
The courts have been sensitive to the challenging nature of the decisions the directors and officers must make. Under the business judgment rule, the officers and directors of a corporation are protected from liability for losses incurred in corporate transactions within their authority, as long as there is sufficient evidence that the transactions were made in good faith and with reasonable skill and forethought.
Doing business inherently involves having to make decisions which may be controversial or risky in nature. Boards of directors might not be able to act freely and in the best interest of their corporations if they had to constantly be concerned about the potential for a lawsuit from shareholders. The business judgment rule gives them the freedom to make decisions without the constant fear of litigation.
Drafting a Buy-Sell Agreement
A buy-sell agreement is meant to protect the interests of the business and all the partners involved by establishing guidelines for selling the business shares. A company’s buy-sell agreement should dictate when shares can be sold, in what manner they can be sold, and the price at which they can be sold. The agreement will protect the business in the event that certain life changes occur, such as divorce, bankruptcy, death, or the dissolution of partnerships.
When you sit down with your partners to discuss a buy-sell agreement, there are a number of things you should consider to avoid future conflict. You should decide how to handle the sale of shares by a partner in the event of a partnership dissolution. Will a partner be allowed to sell shares to a third-party buyer, or will the partner be required to offer the shares to another partner before offering shares to a third party? Will the selling partner need the consent of the other partner(s) before selling shares?
A buy-sell agreement should also establish procedures in the event that a partner faces divorce. Will his or her former spouse be required to sell any shares received through the divorce back to the other partner(s)? If so, how will the value of these shares be determined?
Another important issue to discuss when drafting the agreement is how to proceed in the event of a partner’s death. Will the remaining partner(s) be obligated to buy the deceased partner’s stock from his or her surviving family members? Alternatively, will the family be obligated to sell the shares to the remaining partner(s)?
Finally, your buy-sell agreement should detail how you will manage a partner’s personal bankruptcy. Will the bankrupt partner be required to give the other partner(s) notice before filing for bankruptcy?
When drafting a buy-sell agreement, it’s a good idea to consult a corporate attorney, who can offer advice on avoiding conflicts.