Friday, February 17, 2017

My last blog post, "The Divisive Merger: A Powerful Tool in Texas," was named one of the Top 10 legal blog posts of last week by Texas Bar Today.  What do I win, you might ask?  This cool seal:

Wednesday, February 15, 2017

The Divisive Merger: A Powerful Tool in Texas

What the heck is a divisive merger?

A divisive merger is a merger involving splitting up one company up into two or more new companies.

It's a potentially powerful tool available to Texas companies under the Texas Business Organizations Code (TBOC).  And it's a tool that is not available in most other states, including Delaware.

The concept of the divisive merger is baked into the definition of the word "Merger" in Section 1.002(55)(A) of the TBOC, which defines "Merger" to include, among other transactions, "the division of a domestic entity [such as a Texas LLC or Texas corporation] into two or more new domestic entities or other organizations or into a surviving domestic entity and one or more new domestic or foreign entities or non-code organizations."

So why is a divisive merger so powerful?

Let's say you and another person own Texas Widgets, Inc., a Texas corporation that does business in two Texas cities - Dallas and Fort Worth.  Now say you wish to split the business in half, with one shareholder taking the Fort Worth operations (which will continue in business as Cowtown Widgets, Inc.) and the other partner taking the Dallas operations (which will continue in business as Big D Widgets, Inc.).  You'll just assign half of the company's assets to one shareholder or the other, right? But wait - what if one or more of the company's leases, permits, licenses, contracts or other instruments setting forth the company's legal rights include non-assignment provisions that prohibit the company from conveying rights from Texas Widgets to Cowtown Widgets or Big D Widgets?  Is the split-off transaction doomed without getting the consent of the company's landlord(s) or other parties?  Maybe not.  Depending upon the exact language prohibiting assignment in the contract or other document, the company may be able to enter into a divisive merger to split up the company's assets without triggering the anti-assignment provisions which would otherwise require the company to obtain another party's consent. If a company merges, technically no assignment has taken place - legally, it is as if the surviving company always owed the asset or other legal rights.

Even if your company is not a Texas entity, you might be able to convert or merge your company into a Texas entity, then take advantage of the divisive merger statute to complete a transaction with similar hurdles to overcome.

And there may be other situations where a divisive merger makes sense - perhaps where taking the time, effort, and expense of conveying individual assets might be unduly costly (such as conveying dozens of working interests in oil and gas properties in numerous counties throughout Texas). A merger might be able to immediately vest title to assets to a newly merged company as a short-cut to individually conveying a series of individual assets.    

Although the divisive merger can be a valuable tool, it can also be a sword used against you by savvy operators.  So when drafting anti-assignment provisions in business contracts, you might consider if the other party might be able to use a divisive merger as an end-run to a anti-assignment provision that permits mergers but not assignments by the other party.

Saturday, January 21, 2017

Trump Tweet Suggestions

I'd like to thank the Fort Worth Business Press for publishing an article I wrote titled "Hail to the Tweet: 5 Tweets I'd like Trump to send out to make America great again."  The article is available here.

Wednesday, January 18, 2017

U.S. Supreme Court Clarifies Insider Trading Rules

The U.S. Supreme Court recently ruled in the case of Salman v. United States, 137 S.Ct. 420 (2016), that an insider may not avoid securities liability for insider trading by tipping inside information to the insider's family member or friend who trade shares of stock rather than the insider trading in the shares directly.

This result seems obvious - why should an insider who is prohibited from trading on insider information under federal securities laws - who is also restricted from selling the information by those same laws - nonetheless be permitted to gift that same information to the insider's family member or friend and permit that relative or friend to be unjustly enriched by trading on that same inside information?

The U.S. Supreme Court was forced to weigh in on this issue because the Second Circuit Court of Appeals had previously ruled that a jury could not infer that the tipper received a personal benefit from tipping confidential information to a family member or friend without proof of a gain to the tipper of a "pecuniary or similar valuable nature." And if the tipper did not receive any personal benefit from the tip, the tipper could not be guilty of insider trading.    

Insider Trading Law Background:

Insider trading is prohibited by Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated by the Securities and Exchange Commission (SEC) thereunder. Rule 10b-5 makes it unlawful for anyone to, among other things, "engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

The U.S. Supreme Court had previously interpreted that language of Rule 10b-5 to prohibit any person in a position of trust and confidence with regard to a public company (such as an officer, director, attorney, accountant, or other insider)(an "insider") from trading on confidential information for the benefit of the insider. Importantly, an insider could not be liable for tipping inside information unless the tipper breached a fiduciary duty by disclosing confidential information for a personal benefit. Supreme Court case law precedent had asked courts to consider "whether the insider receives a direct or indirect personal benefit from the disclosure." Without such personal benefit,there was no breach of fiduciary duty, and thus no fraud or deceit within the meaning of Rule 10b-5, and no liability for insider trading. If the tipper has a duty not to trade on inside information, a person who knowingly receives such information in violation of the tipper's duty of confidentiality (a "tippee") has the same duty as the tipper to refrain from trading on that inside information.

So the key issue in the Salman case was whether or not is would be appropriate for a jury to just assume that an insider is receiving a personal benefit when the insider tips confidential inside information to the insider's family member or friend - or must the party alleging insider trading bring forth further evidence demonstrating such personal benefit - such as the tipper's receipt of cash, property, or other item of tangible value as a result of the tip?

As the Salman Court explained, a tip by an insider as a gift to a family member or friend is no different than an insider trade by the insider followed by a gift of the proceeds of the trade. Accordingly, once it is established that the tippee is a relative or a close friend, it is unnecessary to show any tangible reward to the tipper to find the tipper guilty of insider trading.

This result was so obvious that the Court unanimously agreed with the opinion.

Wednesday, December 28, 2016

So long, Rule 505, We Barely Knew Ya'

The Securities and Exchange Commission (SEC) has repealed Rule 505 under Regulation D, effective May 22, 2017.

What is Rule 505, you might ask?  Exactly.  Rule 505 has been an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") upon which virtually nobody has relied. And now it will soon be gone.

Overwhelmingly, issuers conducting private placements of securities have relied upon Rule 506 as the preferred exemption from the registration requirements under the Securities Act. Why? Because there are no dollar limits on the amounts that can be raised under Rule 506.  And because relying on Rule 506 has meant that state-level securities registration requirements were preempted. And if the issuer sold securities exclusively to accredited investors, there were no information disclosure requirements necessitating the preparation of a detailed private placement memorandum. Hence, Rule 506 offerings are generally quicker, easier, and less costly than a Rule 505 offering.

According to the SEC's final rule release abolishing Rule 505 (SEC Release 33-10238), less than 3% of the 132,091 Form Ds filed from 2009 to 2015 reporting private placements conducted under Regulation D were made in reliance on Rule 505.  And only 1.2% of the Form Ds in the study reported offerings exclusively under Rule 505 (as opposed to 1.7% of the offerings relying upon Rule 505 in addition to other rules under Regulation D).

In fact, in 2015, less than 1% of all new Regulation D offerings claimed an exemption under Rule 505.

And because Regulation 505 offerings are required by rule to be no more than $5 million in any 12 month period, the offerings have been smaller dollar-sized offerings, and thus Rule's 505 overall impact on our capital markets has been quite minor.  Securities offerings under Rule 504 and Rule 505 collectively accounted for less than 0.1% of all capital raised in Regulation D offerings from 2009 to 2015, according to the SEC release.  

In the same SEC final rule release, the SEC expanded the dollar limit for private placements made in reliance on Rule 504 in any 12 month period from $1 million to $5 million.  With that change, the SEC felt reliance on Rule 505 had become even less attractive to potential issuers of securities - so much so that Rule 505 had become obsolete.  

So Rule 505 will soon be abolished.  So long, Rule 505 - we barely knew ya'!

Wednesday, November 30, 2016

Fort Worth, Texas Magazine 2016 Top Attorney List

Special thanks to Fort Worth, Texas magazine for including me on their annual list of Top Attorneys for the third straight year.  I was among those honored in the Corporate Finance/Mergers and Acquisitions category.  The reception for award winners at the Fort Worth Club was a blast, as usual. What could be more fun than a night out with attorneys?!

Thursday, November 17, 2016

Time to Sell: Five Tips

Thanks to FW inc. ("Greater Fort Worth's Premier Business Magazine") for publishing an article I wrote on preparing to sell your business.  The article is available here.