Sunday, October 11, 2015

Praise for "The Boom"

Last month I had the pleasure of attending an event at TCU at which Russell Gold was the keynote speaker.  The event was part of the "Leaders in Energy" speaker series sponsored by the TCU Energy Institute.  Russell Gold is the Senior Energy Editor at the Wall Street Journal and the best-selling author of "The Boom: How Fracking Ignited the American Energy Revolution and Changed the World."

I read "The Boom" recently and cannot recommend it highly enough for anyone interested in the energy industry, technology, the environment, the North Texas history and economy, or the world economy. The book explores history, technology, and personalities that have developed and exploited hydraulic fracturing (a/k/a "fracking") to change the oil and gas industry, which is in turn changing the world. Although it no doubt increases my interest in the book that some of our own clients and my own friends are mentioned and quoted in its pages, I suspect that most readers would find the material in the book interesting and well organized and presented.  

It is hard to believe how much the world has changed since the first successful modern frack of a natural gas well in shale rock was conducted by Mitchell Energy on the S.H. Griffin #4 well in Ponder, Texas on June 11, 1998.

Given that generally everybody in the oil and gas business credits George P. Mitchell of Mitchell Energy with being the father of modern fracking, this blogger cannot help but wonder why more public buildings, roads or other public structures have not been named after him, especially here in Tarrant County, the heart of Barnett Shale country.

Here's a picture of Mr. Gold signing my copy of "The Boom":


Sunday, September 13, 2015

Heroes and Devils

One of the cool things about practicing law at a firm that is 130+ years old is that it seems I'm always hearing new bits of our firm's history.  

A recent example is an article in the August 24-30 issue of Fort Worth Business about H.H. Holmes, America's first serial killer.  Mr. Holmes and his murder spree at the 1893 World's Fair in Chicago was the subject of the best selling book by Erik Larson titled "Devil in the White City."  

According to the article, the co-founder of Cantey Hanger LLP (originally Capps & Cantey), Willam Capps, represented three of Mr. Holmes's victims, and Mr. Capps's investigation of their mysterious deaths was a factor in Mr. Holmes choosing to depart from Fort Worth before completing construction of the "murder manor" Mr. Holmes was building in downtown Fort Worth near the present-day Mercury Chop House. Mr. Holmes used a similar "Murder Castle" that he built in Chicago as the venue to torture and kill many of his victims.

Hence, our firms intrepid founder's investigation may well have saved the lives of many Cowtown residents by hastening Mr. Holmes's exit from town before the murder manor could be completed and placed into operation. Well done, Mr. Capps, well done.

Monday, August 17, 2015

The Endless Shareholder Agreement

Congratulations to the Texas legislature for authorizing the Endless Shareholder Agreement.

Virtually every closely held private corporation should have a shareholder agreement to address, if nothing else, restrictions on transfer of the shares. Otherwise, you may find that one of your fellow shareholders has transferred his shares of the company's stock to the company's biggest competitor, or worse yet, your ex-wife!  Shareholder agreements are especially important for a corporation taxed as an S-corporation, because a transfer of shares to a person who is not eligible to be a shareholder of an S-corp can terminate the company's S-corp status and result in adverse tax consequences for the company's shareholders. Shareholder agreements can also address other issues, such as establishing a procedure for shareholders to buy or sell each other's shares (i.e., a buy-sell agreement), modifying shareholders' statutory voting rights or strengthening shareholders' information rights.

But for shareholder agreements adopted prior to September 1, 2015, there has been a trap for the unwary.  Under Section 21.102 of the Texas Business Organizations Code (TBOC),  shareholder agreements were only effective for ten years unless the agreement provided otherwise. Thanks to recently adopted S.B. No. 860, which amends Section 21.102 of the TBOC, however, the default assumption for shareholder agreements will flip on September 1, 2015.  Shareholder agreements adopted after that date will be effective forever unless the shareholder agreement provides otherwise. Shareholder agreements adopted before that date will continue to be subject to the 10-year limit under the prior law, unless the agreement provides otherwise.

The new law is probably more consistent with shareholders expectations and is therefore a step forward for Texas business law.       

Saturday, August 1, 2015

M&A and the Wisdom of Seinfeld - Vol. 2

George Costanza: That's why I'm different. I can sense the slightest human suffering.
Jerry Seinfeld: Are you sensing anything right now?

This is my second blog post in my occasional series on "M&A and the Wisdom of Seinfeld."  You can read my first blog on knowledge qualifiers here.  I'm a big believer in the notion that practically every aspect of our lives has been commented upon in a Seinfeld episode!

The exchange between George and Jerry above is a great example of the importance and utility of materiality qualifiers in an M&A transaction.  Materiality qualifiers help ensure that parties to an M&A transaction aren't unduly damaged by the slightest suffering.  Let me explain.

Let say BigCo wants to acquire TargetCo and the parties enter into an asset purchase agreement (APA) with a purchase price of $50 million. The APA includes numerous representations and warranties by TargetCo, including a representation that TargetCo's financial statements are true and correct in all respects.  Suppose also that one of BigCo's conditions to closing the APA is that all representations and warranties of TargetCo are true and correct in all respects. Finally, let's suppose the indemnification provisions of the APA permit BigCo to sue TargetCo for the breach of any representation or warranty, whether or not BigCo knew about the breach prior to the closing.  

Now assume that after the APA is signed but before the transaction closes BigCo determines that the amount of cash on TargetCo's balance sheet was misstated by $2.37.  Under a strict reading of the APA, BigCo can now weasel out of the deal and refuse to close!  One of TargetCo's representations and warranties was false, so one of the conditions to BigCo closing the deal cannot be satisfied, and BigCo can walk.

Suppose instead that TargetCo had represented and warranted only that its financial statements were true and correct "in all material respects."  Or suppose the closing condition only required representations or warranties to be true and correct in all material respects.  In either case, arguably the $2.37 misstatement would be deemed immaterial in the context of a $50 million transaction, and if BigCo wanted to walk the deal, it would be forced to try to find another reason to do so. 

Likewise, if TargetCo had added a materiality qualifier to the representation and warranty regarding the accuracy of its financial statements, or if the indemnification provisions of the APA included a materiality qualifier, TargetCo could avoid being sued for a breach of the APA as a result of the financial statement error (again, assuming the $2.37 misstatement was indeed immaterial with respect to the transaction).             

Thursday, July 16, 2015

Drones Ahoy!

This week I had the pleasure of attending the Unmanned & Autonomous Systems (UAS) Consortium, which is sponsored by the North Texas Association of Manufacturers (NTAM) and the Arlington Chamber of Commerce's Center for Innovation (CFI).

Unmanned & Autonomous Systems (a/k/a drones) are getting more important and more common every day for military operations, hobbyists, news and entertainment, agriculture, and many other areas.

According to their website, which is available here, the UAS Consortium was formed "for the research, development, implementation and commercialization of new technologies to improve all aspects of the unmanned aircraft system industry, and the related education and training needed to ensure a competitive workforce."

North Texas is the perfect place to hold such a consortium because of the many aviation industry participants and defense contractors that call this area home.  This week's consortium featured presentations by representatives of NTAM, who manages the UAS Consortium, Romeo Engineering, who designs and builds some amazing machinery for the defense industry and private industry, and Texas Tech University, where some important research on drones is being conducted.

The North Texas area is lucky to have so many leaders in the emerging UAS industry.

If you'd like to learn more about the use of drones in Texas, my partner, Scott Fredricks, recently published an article on the use of drones in Texas which is available here.

Monday, June 29, 2015

M&A and the Wisdom of Seinfeld

George Costanza: "Jerry, just remember, it's not a lie if you believe it.

Today I'm starting a new feature on this blog called "M&A and the Wisdom of Seinfeld." We'll explore some of my favorite quotes from the greatest sitcom of all time, Seinfeld, and how those quotes provide (perhaps unexpected) insights for lawyers and other professionals involved in merger and acquisition transactions.

George Costanza's advice to Jerry Seinfeld (quoted above) which guides Jerry in attempting to fool a lie detector test is a great example of knowledge qualifiers and how they can be used in an M&A agreement.

Among the most negotiated portion of any M&A transaction agreement is the representations and warranties section. The buyer typically asks the seller to provide a laundry list of promises (i.e., to represent and warrant) that certain facts are true about the seller's company.  For example, the buyer might ask the seller to promise that the seller's company has complied with all applicable environmental laws.  The seller might strike that representation from the initial draft of the M&A agreement arguing: "I'm pretty sure I haven't violated any environmental laws, but what if it turns out that I have - I don't want the buyer to be able to sue me or to walk from the deal if the buyer's due diligence activities identify an environmental issue that I never even knew about."  The buyer might be sympathetic to the seller's concerns, but the buyer wants the seller to disclose any environmental issues known to the seller.  Thus, the parties might compromise by changing the representation to read something like: "To the best of seller's knowledge, the company has complied with all environmental laws."

Notice how George's maxim "It's not a lie if you believe it" comes into play here.  If the seller truly believes that the seller's company has complied with all environmental laws, even if as a matter of fact the seller's company has violated dozens of environmental laws, the seller will not be liable under the knowledge qualified representation at the end of the previous paragraph.

Of course, just because the parties have agreed to include a knowledge qualifier doesn't mean the matter is completely resolved.  The buyer might insist that "knowledge" of the seller should include a duty to reasonably investigate the truth of the underlying representation before the seller can rely upon the knowledge qualifier.  On the other hand, the seller might argue that "knowledge" of the seller should mean only the seller's "actual knowledge," without any duty to investigate. The parties might also argue who's "knowledge" should be deemed to be included in the definition of seller's knowledge.  For example, what if a low level employee of the seller's company knew the company had violated environmental laws, but that employee never reported the violation to the seller's company's officers and/or directors - should the seller be deemed to know about anything any of the seller's company's employees knew or only a handful of the seller's company's most senior executives?

As you can see, there are many issued to be considered and resolved regarding knowledge qualifiers before one can accurately state that "It's not a lie if you believe it."

Monday, June 1, 2015

More Praise for the Middle Market and Private Equity

I have blogged in the past about America's marvelous Middle Market and how important it is to our national economy.  Here comes further proof of that fact from the Association for Corporate Growth (ACG), perhaps the most important voice in the middle market transaction space. According to ACG:

  • The middle market represents 1% of all business establishments, but provides 26.5% of all jobs in the United States; and
  • From 1995 through 2013, U.S. private equity-backed companies grew jobs by 83.7%, while all other U.S. companies grew jobs by 27%. Over 3/4 of this growth came from the middle market. 

So what is the middle market?  While everyone has there own definition, ACG defines the middle market as companies with annual sales between $10 million and $1 billion.

Here are a few Texas-specific private equity facts that I found on ACG's website:
  • Between 2003 and 2014, Texas enjoyed 5,825 private capital investments worth an aggregate of $435.4 billion.  
  • There are 4,025 Texas companies backed by private capital. 
  • The 497 private firms based in Texas.