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.

Wednesday, May 27, 2015

Follow SEC's Fort Worth Regional Office On Twitter

Now you can follow the Fort Worth Regional Office of the U.S. Securities and Exchange Commission on Twitter at @FortWorth_SEC.

As of the date of this blog post, since the Fort Worth Regional Office signed on to Twitter on September 22, 2014, it has "tweeted" 314 times, has amassed 1,128 followers.

Most of the tweets relate to:

  1. warnings and other information to help protect investors, 
  2. reminders and other information for securities registrants and other securities industries participants, or 
  3. reports of enforcement actions or other activities of the office.

Friday, May 15, 2015

TECH Fort Worth Still Making an IMPACT

Wednesday I had the pleasure of attending the 2015 TECH Fort Worth IMPACT Awards.  As always, the event had a lot of energy and showcased some of TECH Fort Worth's most successful past and current clients.

This year's keynote speaker was Alvaro Guillem, Ph.D., the President and co-founder of ZS Pharma Inc. ZS Pharma became a client of TECH Fort Worth in 2009, and as of the posting of this blog post, it has a market capitalization of $1.2 billion.  Dr. Guillem walked the audience through the benefits of its drugs for those suffering from hyperkalemia (elevated potassium levels) and ZS Pharma's early stage financing efforts. I was especially interested to learn that ZS Pharma benefited from an investment from the Texas Emerging Technology Fund, a $485 million fund created by the State of Texas to, among other things "help start-up companies get off the ground faster and attract high-tech jobs" (according to the website of the Office of the Texas Governor).

The event also spotlighted the successes of following TECH Fort Worth clients:

  • Beartek Gloves, who makes "smart" gloves that allow wearers to control electronic devices without removing the gloves. They are marketing especially to motorcyclists, skiers, and snowboarders, to make their activities safer and more convenient.
  • Ben Hogan Golf, who is re-launching the Ben Hogan brand of high quality, precision golf clubs.
  • Encore Vision, who is developing eye drops to treat presbyopia (farsightedness). [Wikipedia says that presbyopia comes from Greek words meaning literally "trying to see as old men do."]
  • Ampcare, who sells devices and techniques involving therapeutic neuromuscular stimulation technologies for the treatment of dysphagia (swallowing disorders). Ampcare was the "people's choice" award winner based upon a real-time vote by audience members at the event.
It is truly inspiring to see all of the great ideas, great people, and great companies that are attracted to and benefit from TECH Fort Worth, "a business incubator focused on helping entrepreneurs bring innovative technologies to market."  The Fort Worth business community is certainly lucky to have the TECH Fort Worth team in our corner.

Monday, May 11, 2015

Time for Chancery Courts to come to Texas?

There is a currently bill in the Texas House of Representatives which would create the first Chancery Courts in Texas.  What are chancery courts and why would Texas benefit from them?

Chancery courts specialize in complex business disputes, especially those involving mergers and acquisitions and corporate and securities matters. The theory is that a court that specializes in complex business disputes is likely to understand the issues better, provide swifter justice, and provide more consistent and therefor more predicable business law decisions.

Of course, the most famous chancery courts are those in the State of Delaware. Part of the reason Delaware is such a popular state in which to incorporate a business is that companies know they can gain access to the Delaware chancery courts, which are regarded is especially good at delivering (relatively) swift, certain, and fair decisions. That may not always be the case in other states where "regular" courts cannot focus on complex business issues because they must also hear cases involving family law, torts, probate, and a myriad of other non-business matters.

As you might have guessed, I think having chancery courts in Texas is a terrific idea. It helps underscore the message that Texas is business-friendly and a great place to start a business and to obtain justice for your business, if necessary.

A copy of the bill that would create the Texas Chancery Court system (House Bill 1603) is available here. The bill would grant Texas Chancery Courts jurisdiction to hear cases involving the following matters:
  1. a derivative action on behalf of an organization;
  2. an action arising out of or relating to a qualified transaction in which the amount in controversy exceeds $10 million, excluding interest, statutory damages, exemplary damages, penalties, attorney ’s fees, and costs;
  3. an action regarding the governance or internal affairs of an organization;
  4. an action in which a claim under a state or federal securities or trade regulation law is asserted against: (A) an organization; (B) a governing person of an organization for an act or omission by the organization or by the person in the person ’s capacity as a governing person; (C) a person directly or indirectly controlling an organization for an act or omission by the organization; or (D) a person directly or indirectly controlling a governing person for an act or omission by the governing person; 
  5. an action by an organization, or an owner or a member of an organization, if the action:(A) is brought against an owner, managerial official, or controlling person of the organization; and (B) alleges an act or omission by the person in the person’s capacity as an owner, managerial official, or controlling person of the organization;
  6. an action alleging that an owner, managerial official, or controlling person breached a duty, by reason of the person ’s status as an owner, managerial official, or controlling person, including the duty of care, loyalty, or good faith;
  7. an action seeking to hold an owner of an organization, a member of an organization, or a governing person liable for an obligation of the organization, other than on account of a written contract signed by the person to be held liable in a capacity other than as an owner, member, or governing person;
  8. an action in which the amount in controversy exceeds $10 million excluding interest, statutory damages, exemplary damages, penalties, attorney’s fees, and costs that: (A) arise against, between, or among organizations, governing authorities, governing persons, members, or owners, relating to a contract transaction for business, commercial, investment, agricultural, or similar purposes; or (B) involve violations of the Finance Code or Business & Commerce Code;
  9. an action brought under Chapter 37, Civil Practice and Remedies Code, involving: (A) the Business Organizations Code; (B) an organization’s governing documents; or (C) a dispute based on claims that fall within the provisions of the applicable subsection of the bill; and
  10. an action arising out of the Business Organizations Code.
The bill was introduced by Texas State Representative Jason Villalba, who represents North Dallas in the Texas House, and is a very capable corporate and securities lawyer. Rep. Villalba's occupation and experience make him especially well qualified to understand the value of chancery courts.  As he notes on his website here: "By creating this business-focused, specialized Chancery Court, we are telling the world that Texas is open for business and that there is no greater state in the United States to incorporate and begin operations.”



Sunday, May 3, 2015

Rule 506(b)'s Merit - and Is there Merit to Merit Review?

An overwhelming majority of private placements of securities in America are done by means of sales strictly to accredited investors in reliance upon the exemption from the registration requirements under the Securities Act of 1933 afforded by Rule 506 under Regulation D (now known as Rule 506(b)).

So what so great about Rule 506(b)?  Some of the key benefits are as follows:

  1. No Uncertainty.  Rule 506(b) provides a tremendous amount of clarity for issuers of securities seeking to ensure that they have a valid private placement exemption. So long as an issuer has a reasonable belief that all of its investors are accredited and the issuer refrains from engaging in public solicitation activities, the issuer will generally have a valid private placement. Outside of the "safe harbor" of Rule 506(b), other factors (some of which are identified below) can complicate the analysis and/or limit an issuer's freedom when offering securities. For example, if an issuer wishes to rely upon the exemption afforded by Section 4(2) of the Securities Act, it better get ready to sort through decades of case law and SEC releases on what exactly it means to have a "transaction by an issuer not involving any public offering." 
  2. No Dollars Limits.  This benefit speaks for itself.  Rule 506(b) puts no limits on the dollar size of a private placement.  Contrast that with Rule 504 which limits issuers to raising $1 million or Rule 505 which limits issuers to raising $5 million.
  3. No Investor Limits.  Rule 506(b) permits sales to an unlimited number of accredited investors. Contrast that with the Section 4(2) exemption which provides no statutory guidance regarding how many investors may invest before a private placement turns into a public offering. 
  4. No Blue Sky Compliance.  Securities sold in reliance on Rule 506(b) are deemed to be "covered securities," thereby preempting most state level blue sky regulation. States may require issuers to make a notice filing, pay a small filing fee, and consent to service of process in any state where it sells securities, but issuers who sell "covered securities" need not register or find a valid exemption from registration in up to 50 different states.
  5. No Disclosure Requirement.  While Rule 506(b) permits sales to up to 35 unaccredited investors, issuers rarely permit unaccredited investors to participate in Rule 506(b) private placements because doing so requires issuers to provide a detailed private placement memorandum to every investor, which is generally cost prohibitive. By limiting sales exclusively to accredited investors, there is no information disclosure obligation upon the issuer (though it is generally advisable to provide at least some disclosure document to each investor to insulate the issuer from potential securities fraud claims).  
  6. No Verification Requirement. The SEC recently adopted Rule 506(c) which permits issuers to engage in public solicitation in connection with private placements so long as the issuer "verifies" that all investors are accredited. But since the steps that an issuer must take to "verify" an investor's status are somewhat vague (and/or are somewhat intrusive on the investor) at this point, most issuers engaging in private placements continue to rely upon Rule 506(b) and its lower standard that the issuer have a "reasonable belief" that its investors are accredited. 
Today I want to focus on Item 4 above - the preemption of potential multi-state blue sky registration and/or review by state level securities regulators (such as the Texas State Securities Board).  How valuable is it to avoid such review and regulation?  Very.  Even if every individual state securities regulatory body was a marvel of efficiency and reasonableness, merely getting familiar with the registration requirements and/or exemptions from registration in up to 50 states would be a challenging task for issuers. 

But consider states that require so-called "merit review" of a securities offering. That's when a state-level blue sky regulator takes it upon themselves to look beyond whether or not the issuer has fully disclosed the material information about the issuer and the offering to determine if a particular investment is "fair" to potential investors.

I have serious doubts that the twin goals of investor protection and facilitating capital formation for the US economy are advanced by merit review by state blue sky securities regulators.  For example, according to an article by Samual S. Guzik in a recent issue of the Texas Journal of Business Law, in 1980 securities regulators in the Commonwealth of Massachusetts and other states prohibited "ordinary investors" from participating in an IPO for Apple Computer, reasoning that the offering price was too high relative to the company's book value!