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.

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.