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.

Monday, October 31, 2016

Survivng Boot Camp

A couple of weeks ago, I had the honor of speaking to the TCU MBA Entrepreneurship Boot Camp event hosted by the TCU MBA Graduate Entrepreneurship Organization (GEO). Specifically, I presented "Choosing the Right Entity for your Start-Up Business" to a group of bright and talented MBA students who were very engaged and asked a lot of great questions. The GEO and its chairman, Eric Coulter, put on a terrific event and really made me feel welcome at the TCU Neeley School of Business.

The future of entrepreneurship in North Texas appears to be in great hands!

Monday, October 17, 2016

Identical or Deceptively Similar Entity Names in Texas - A Change For the Better?

Among the corporate law changes enacted by the 2015 Texas Legislature is a new requirement that consents to use similar entity names must now be notarized prior to filing.

The Texas Business Organizations Code (TBOC) prohibits each Texas entity (and each out-of-state entity registering to do business in Texas) from having a name that is the same as, or deceptively similar to, an existing Texas entity (or an existing out-of-state entity registered to do business in Texas). Texas law has long recognized an exception to that rule if the existing entity consented to the use of a similar name in writing. Under the amended law, a consent to use a similar name must be notarized and filed with the Texas Secretary of State. This change impacted Section 5.053, 5.102 and 5.153 of the TBOC.

According to the bill's author, the purpose of this change was to protect existing Texas companies from new entities who might forge documents claiming that they have the consent of the existing entity to the use of a similar name when in fact no consent has been given.

While I agree that the notarization requirement does make it more difficult for a new entity to forge and file a consent to the use of a similar name, I am skeptical that this change in law was actually necessary or an improvement on existing law.  I have not heard or read about an epidemic of Texas companies who have suffered forged consents to the use of similar names. And existing law already made it a crime for a party to file an instrument known to be materially false with the Texas Secretary of State's office. Section 4.008 of the TBOC makes such a false filing a Class A misdemeanor - unless the offender had the intent to defraud or harm another, in which case the offense is a felony.

The bill's author acknowledged in the Bill Analysis submitted with this bill that a forgery is a crime, but argues that a forgery victim "likely will have a difficult time convincing a law enforcement agency to prosecute the crime."  That may well be the case - our law enforcement officials may choose to employ their limited resources in prosecuting other crimes. But Section 4.007 of the TBOC already grants forgery victims a private right of action against any party who signs or files a forged document in violation of Section 4.008 of the TBOC.

The new notary requirement will add a layer of administrative hassle to both new entities requesting consents and existing entities granting consents.  I can imagine a scenario where an existing entity might be willing to grant its consent, but not at the cost of locating and engaging a notary to witness a consent signing.

Nonetheless, the notary requirement is now law in Texas.

Wednesday, October 12, 2016

Texas Equity Crowdfunding Success Stories

Thanks to the Fort Worth Business Press for publishing an article I wrote on Texas companies who have successfully used the SEC's new Regulation Crowdfunding rules to raise capital via equity crowdfunding.  The article is available here.

Friday, September 2, 2016

Talking Two-Step Tender Offer Transaction Techniques for Texas Targets

Are we living in the Golden Age of the two step tender offer acquisition technique?  Probably so - last year, the process got a whole lot easier for buyers seeking to acquire publicly traded M&A targets incorporated in Texas.

What is Two Step Tender Offer?

A buyer seeking to acquire all of a public company (a Target) may either:
(1) propose a one-step merger - which generally must be approved by the Target's shareholders; or
(2) propose a tender offer - in which case the buyer offers to buy at least a majority of the Target's shares (STEP 1); followed by a "squeeze-out" merger in which a successful vote of the Target shareholders is already assured (because that was the minimum number of shares purchased in the tender offer) (STEP 2).

Historic Second Step Merger Thresholds Requirements

Historically, both the Delaware corporate law (Section 253 of the Delaware General Corporation Law (DGCL)) and Texas corporate law (Section 10.006 of the Texas Business Organizations Code (TBOC)) required that the buyer acquire at lease 90% of the Target shares after the tender offer in order to enter into a short-form merger.  Qualifying for short-from merger treatment was important because the short-form merger did not require a vote of the Target shareholders. It was presumed that such a vote would be meaningless because 90% of the shareholders would doubtlessly vote to approve the merger.

Shareholder merger votes cost time and money because state corporate law and SEC proxy voting rules require the preparation or a detailed disclosure document, an SEC review, and distribution of the disclosure document to the Target's shareholders.  

New Second Step Merger Threshold Requirements

Eventually, Delaware realized that a merger vote by the Target's shareholders would be equally meaningless if the buyer acquired at least a majority of the Target shares (or whatever the minimum number of shares otherwise necessary to approve a long-form merger under the DGCL and the corporation's certificate of incorporation).  So in 2013, Delaware adopted a new subsection (h) to Section 251 of the DGCL which permits the buyer to merge with a publicly traded Target (or a Target with more than 2,000 shareholders) following a tender offer under certain conditions.

Effective September 1, 2015, the State of Texas adopted new sub-sections (c), (d) and (e) to Section 21.459 of the TBOC, thereby granting public companies formed in Texas the right to merge without a shareholder vote following a successful tender offer.  The (relatively) new Texas rule is substantially similar to Section 251(h) of the DGCL.

Why do buyers like Two Step Tender Offers?

Simply put, a two step tender offer is a whole lot faster and cheaper than an acquisition via a traditional one-step merger, especially when the buyer is paying cash (rather than stock) to the Target's shareholders. This is because the SEC review process is generally more limited and more expedited for a tender offer than it is for a one-step merger.

According to a recent a survey conducted by the M&A Market Trends Subcommittee of the Mergers & Acquisitions Committee of the Business Law Section of the American Bar Association (ABA), from the announcement of a public M&A deal until the closing of the deal, the average cash tender offer takes 49 days, the average stock tender offer takes 54 days, the average cash merger takes 129, and the average stock merger takes 199 days.  (Thanks to Richard E. Climan, Joel I. Greenberg, and Claudia K. Simon for providing the survey data in a recent webcast sponsored by the ABA).  

What are the requirements to use the Two Step Tender Offer?

In order for a buyer to take advantage of Section 21.459(c) of the TBOC to obtain a shareholder vote waiver following a tender offer, certain conditions must be met, including the following:
  1. The Target's certificate of formation cannot prohibit merger without a shareholder vote;
  2. The Target's shares must be listed on a national securities exchange or held of record by at least 2,000 shareholders;
  3. The plan of merger must expressly: (A)  permit or require the merger to be effected under Section 21.459(c) of the TBOC; and (B) provide that the merger be effected as soon as practicable following the consummation of the tender offer;
  4. The tender offer must be for all of the outstanding voting shares of the corporation on the same terms provided in the plan of merger, except that the offer may exclude shares owned by: (A)  the Target corporation; (B) the buyer; (C) any person who owns, directly or indirectly, all of the ownership interests in the buyer; or (D) any direct or indirect wholly owned subsidiary of any of the foregoing persons;
  5. The buyer must acquire in the tender offer (together with shares held prior to the tender offer) a number of shares of the Target equal at least the percentage of the shares that, absent Section 21.459(c), would be required to approve the plan of merger under both: (A) the TBOC (generally, two-thirds (2/3) of the shares); and (B) the certificate of formation of the Target;
  6. The buyer must merges with or into the Target pursuant to the plan of merger; and
  7. Each outstanding share of the Target not purchased in the tender offer must be converted or exchanged in the merger into the same consideration as those selling in the tender offer.

Kudos to the Texas Legislature for following Delaware's lead in modernizing the two step tender offer rules for Texas Targets.

Friday, August 26, 2016

Crowdfunding Offers New Ways for Companies to Access Capital

Effective May 16, 2016, the United States Securities and Exchange Commission (SEC) has adopted rules permitting private companies to offer and sell shares of their stock and other securities via crowdfunding. The SEC’s new rules, named “Regulation Crowdfunding,” permit companies to raise up to one million dollars per year through crowdfunding.

Crowdfunding means raising capital in small amounts from a large number of investors, typically over the internet. The concept has been around for years, with companies using websites like Kickstarter, Indiegogo, or GoFundMe to raise funds for all sorts of projects, such as new technologies, movies, music, or any other sort of project one might imagine. Proponents of crowdfunding cite the “wisdom of crowds” to support the notion that if a large number enough number of people were willing to financially support a project through crowdfunding, it was likely that there would be support for the finished product of the project as well. Investors in such projects historically received some sort of reward for participating in the crowdfunding effort, such as a t-shirt, or a role in the movie being produced, a free copy of the finished product, or at least a discount on its purchase price of the finished product.

Prior to the adoption of Regulation Crowdfunding, however, a company generally could not legally offer stock to crowdfunding investors because to do so would be conducting an unregistered public offering of securities, which was prohibited by state and federal securities laws. Conducting a registered offering of securities is expensive and time consuming, and therefore is not a practical solution for smaller projects seeking crowdfunding support.

Companies considering raising capital through crowdfunding should be aware of the following rules under Regulation Crowdfunding:
  • Annual company limit. A company may raise up to $1,000,000 via crowdfunding in any 12-month period.
  • Annual investor limit. The aggregate amount of crowdfunding investments that any one investor may make in any 12-month period across in all companies conducting crowdfunding offerings is limited as follows:
    • If the investor has either an annual income or a net worth of less than $100,00, then the investor’s annual investment limit is equal to the greater of (i) $2,000, or (ii) 5% of the lesser of the investor’s annual income or the investor’s net worth; and
    • If the investor has both an annual income and a net worth of $100,000 or more, then the investor’s annual investment limit is equal to 10% of the lesser of the investor’s annual income or the investor’s net worth.
  • Crowdfunding platform required. A company must conduct crowdfunding offerings only through a single intermediary that maintains a crowdfunding platform registered with the SEC.
  • Offering disclosure requirements. A company conducting a crowdfunding offering must file a new form adopted by the SEC called a Form C.  The Form C is required to provide potential investors and the SEC with information about the company, the company’s officers, directors and promotors, the company’s financial performance, the securities offered, and the offering itself. The disclosure must include the minimum and maximum dollar amount of securities offered via crowdfunding and risks involved in making the investment.
  • Ongoing reporting requirements. After completing a crowdfunding offering, a company is required to file an annual report with the SEC which includes financial statements. If the company has had its financial statements reviewed or audited by a CPA, it must file those reviewed or audited financial statements.  
  • Advertising limited. A company is not permitted to advertise its crowdfunding offering, but the company is permitted to advertise a simple notice of the offering directing investors to the company’s crowdfunding platform. The notice must be limited to factual information about the company and the crowdfunding offering and may include a brief description of the company’s business.
  • Promotor compensation. A company is permitted to compensate promotors of the crowdfunding offering, but any such compensation must be disclosed to potential investors in connection with the promotion of the offering.
  • Resale restrictions. Securities purchased in a crowdfunding offering generally may not be re-sold or otherwise transferred by investors during the first 12 months after their investment.
  • Bad actor disqualifications. A company is generally not permitted to conduct crowdfunding offerings if the company or any of its officers, directors, substantial shareholders, promotors or affiliates have been involved in any disqualifying events, such as regulatory bans from participation in the banking or securities industries or felony convictions related to past securities industry activities.
  • Crowdfunding platform mechanics. A company must file its Form C with the SEC and make it available to potential investors through their crowdfunding platform at least 21 days before selling any securities and at all times during the offering. The crowdfunding platform must provide a communication channel which permits potential investors to communicate with each other and with the company. The crowdfunding platform must be operated by a registered broker-dealer or it must maintain an escrow account for investor funds with a broker-dealer, bank or credit union. The company must identify a deadline for cancelling an investment in its offering materials and grant investors the right to cancel their investment. The cancellation right generally expires 48 hours prior to the deadline unless there is a material change to the offering.  If the company does meet receive the minimum amount of investments by the deadline or the offering otherwise is not completed, the platform must return any investor funds received.   
The SEC hopes that Regulation Crowdfunding will open up new opportunities for small business to access capital. Time will tell if companies and investors determine the new regulations meet their capital and investment needs.