tag:blogger.com,1999:blog-56071974078866401482024-03-28T22:29:56.759-05:00North Texas SEC LawyerBlogging on corporate and securities law issues affecting companies in North Texas and around the state.
Exploring legal issues related to mergers and acquisitions, public offerings (including IPOs), private placements, venture capital, entity formation and corporate governance.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.comBlogger177125tag:blogger.com,1999:blog-5607197407886640148.post-86864325316731037582019-10-26T14:10:00.002-05:002019-10-28T19:07:34.457-05:00When is an Oil and Gas Joint Venture Interest a Security?<br />
When is an Oil and Gas Joint Venture Interest a Security? <br />
<br />
The recent case of <i>SEC v. Arcturus</i>, decided by the U.S. Court of Appeals for the Fifth Circuit, tackled that very question. I wrote about that case in an article published in the November 2019 issue of the Dallas Bar Association's "Headnotes" newsletter. The article is titled, surprisingly enough, "When is an Oil and Gas Joint Venture Interest a Security?" It is available <a href="http://canteyhanger.com/wp-content/uploads/2019/10/DClayton_Energy_Securities_article_published.pdf">here</a>.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com6tag:blogger.com,1999:blog-5607197407886640148.post-43986330606058546512019-09-06T13:41:00.000-05:002019-09-06T13:41:46.878-05:00The Death of County-Level Assumed Name CertificatesGood news for corporations (and limited partnerships, limited liability partnerships, limited liability companies, and foreign filing entities) using assumed names in Texas and their attorneys. Effective September 1, 2019, they will no longer be required to file assumed name certificates at the county level.<br />
<br />
As I have blogged about in the past, Texas law previously required companies operating under an assumed name to file an assumed name certificate with both the Secretary of State and in the appropriate Texas county. I always thought the county level filing was a big waste of time. Once the state level filing had been made, the entire state had been placed on notice who was using the assumed name - so why the need to file the same information again at the county level? To make matters worse, the county level filing was required to be notarized, which added another sometimes cumbersome step in the process. Fortunately, the Texas legislature seems to have agreed and rationalized its assumed name certificate rules.<br />
<br />
The new law (HB 3609 in the 86th legislative session) and is available to read <a href="https://capitol.texas.gov/tlodocs/86R/billtext/pdf/HB03609F.pdf#navpanes=0">here</a>.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com17tag:blogger.com,1999:blog-5607197407886640148.post-4733892537033916692019-04-01T13:23:00.001-05:002019-04-01T13:23:58.793-05:00Frequently negotiated deal terms in M&A transactionsThanks to the Fort Worth Business Press for publishing my article below, which is available on the FWBP website <a href="http://www.fortworthbusiness.com/news/banking_finance/frequently-negotiated-deal-terms-in-m-a-transactions/article_5483abbc-5264-11e9-8eb9-576974296fea.html">here</a>.<br />
<br />
<h2>
<span style="-webkit-text-stroke-width: 0px; background-color: transparent; color: #333333; display: inline !important; float: none; font-family: "Helvetica Neue",Helvetica,Arial,sans-serif; font-style: normal; font-variant: normal; letter-spacing: normal; orphans: 2; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">Frequently negotiated deal terms in M&A transactions</span></h2>
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As any experienced merger and acquisition (M&A) professional can attest, some deal points get negotiated in virtually every M&A transaction. Sure, every transaction is unique. But M&A transactions are like love songs; as Randy Travis tells us: “Every one is different and every one’s the same.”</div>
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An M&A transaction involves the buyer and the seller entering into a purchase agreement. As part of the purchase agreement, the seller will make a series of representations and warranties about the condition of the seller’s company and its assets.</div>
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If those representations and warranties are not true, the buyer may make a claim against the seller for a breach of contract. That’s called seeking indemnification. The purchase agreement may limit the buyer’s ability to seek indemnification claims against the seller.</div>
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The tension between the buyer’s desire to know exactly what it is buying (and be protected if the seller’s company does not live up to the buyer’s expectations) and the seller’s desire to limit its exposure to post-closing indemnification liability is the source of many of the frequently negotiated deal points.</div>
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<b>Survival Period</b></div>
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How long after the closing should the buyer be able to seek indemnification from the seller for an alleged breach of one or more of the seller’s representations or warranties in the purchase agreement? That time period is called the survival period. As you might expect, sellers would like the survival period to be as short as possible (ideally, none). The buyer wants the survival period to be as long as possible.</div>
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<b>Indemnification Basket</b></div>
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After the closing, the seller does not want to hear about every tiny issue that the buyer may have with the company. Often, the buyer and seller will agree that the buyer cannot seek indemnification from the seller for an alleged breach of one or more of the seller’s representations or warranties until the buyer’s damages for such breaches exceed an agreed-upon dollar amount. That’s called an indemnification basket.</div>
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<b>Indemnification Cap</b></div>
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Similarly, the seller will seek to have the purchase agreement include a limit on the seller’s maximum exposure for potential indemnification claims from the buyer. That is called an indemnification cap.</div>
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<b>Holdbacks/Escrow</b></div>
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The buyer may be concerned that the seller will be unwilling or unable to pay indemnification claims after the closing – or that pursuing such an indemnification claim will be prohibitively expensive. If so, the buyer may seek to have the purchase agreement include a provision that the buyer will hold back a portion of the purchase price for a period of time until the buyer confirms that the seller’s representations and warranties were correct. If the seller agrees not to accept all of the purchase price at the closing, the seller might insist that rather than holding back a portion of the purchase price, that amount should instead be delivered to an independent third party that will hold the funds in escrow.</div>
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<b>Qualifiers</b></div>
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While the buyer will want the seller’s representations and warranties to be as broad and unqualified as possible, the seller will prefer for the seller’s representations and warranties to be qualified so they only apply to matters that are “material” or to matters of which the seller has actual “knowledge.”</div>
<b>Sandbagging</b><br />
<b></b><br />
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What if the buyer knew that the seller’s representations and warranties were not true before the purchase agreement was ever signed or the deal was closed? That’s called “sandbagging.” The seller will seek to include an anti-sandbagging provision in the purchase agreement that provides that the buyer cannot seek indemnification from the seller for representations and warranties that the buyer knew were untrue. The buyer will resist including an anti-sandbagging provision.</div>
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<b>Conclusion</b></div>
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There are no right or wrong answers to how any of these issues should be addressed in the purchase agreement – it depends on the relative bargaining power of the buyer and the seller and how willing each side is to fight for its preferred position. Regardless, it is helpful to know the landscape of the issues that will be addressed. And it is helpful to have experience dealing with these issues and with how other buyers and sellers in the market have ultimately reached agreement on these frequently negotiated issues.</div>
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><br />NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com3tag:blogger.com,1999:blog-5607197407886640148.post-61684365053074706562019-03-28T17:57:00.001-05:002019-03-28T17:57:51.349-05:00Praise for Acceleration<br />
For anyone interested in corporate and securities law as it relates to startup companies, I would recommend "Acceleration: What All Entrepreneurs Must Know About Startup Law," a new book by Ryan Roberts. Ryan is a longtime friend of mine and an outstanding corporate lawyer. In fact, his blog, www.startuplawyer.com, was one of the inspirations for this blog.<br />
<br />
Ryan does a great job of cutting through the clutter to deliver sound advice in an understandable, entertaining, and informative way. The book is available on Amazon <a href="https://www.amazon.com/Acceleration-What-Entrepreneurs-about-Startup-ebook/dp/B07NLK5GZM/ref=cm_cr_arp_d_product_top?ie=UTF8">here</a>. It looks like this:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisbGMFV6HewwTq5MOJKunJZbrIxHco4c5yC2yycbtGijBNb1HO8CvgdqK2Tteh9fVnu6GVnO6t-2pG51pr9YhA1YJz0UgLs8kYRblmTG1t2Juk0S5C8wxZ10njEobvRnc8i3e8zl5u0Cs/s1600/41c-4ZBh-nL%255B1%255D.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="500" data-original-width="324" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisbGMFV6HewwTq5MOJKunJZbrIxHco4c5yC2yycbtGijBNb1HO8CvgdqK2Tteh9fVnu6GVnO6t-2pG51pr9YhA1YJz0UgLs8kYRblmTG1t2Juk0S5C8wxZ10njEobvRnc8i3e8zl5u0Cs/s320/41c-4ZBh-nL%255B1%255D.jpg" width="207" /></a></div>
<br />NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com31tag:blogger.com,1999:blog-5607197407886640148.post-68772086802300707642019-01-20T23:39:00.003-06:002019-01-20T23:39:54.730-06:00Fort Worth Inc. Top AttorneyThanks to <i>Fort Worth Inc. </i>magazine for including me in their list of Top Attorneys for 2018 (published in their Jan/Feb 2019 issue). I was included in their "annual listing of the best lawyers in town" in the Corporate Finance/Mergers & Acquisitions category.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com7tag:blogger.com,1999:blog-5607197407886640148.post-64227784011647924912018-10-04T10:55:00.002-05:002018-10-04T15:23:22.861-05:00SEC Disclosure Update and SimplificationKudos to the SEC for adopting amendments to update and simplify some of its disclosure requirements that had become "redundant, duplicative, overlapping, outdated, or superseded."<br />
<br />
It's unclear if that description of the need for amendments was intended as a joke by the SEC staff or was just a very comprehensive description of the requirements being amended. Regardless, it reminded me of the episode of "Cheers" where Diane expressed concern to Frasier that Frasier had too often voiced suspicions that Sam was trying to woo Diane back. Frasier objects, exclaiming: <b><i>"Oh, now you're saying that I'm redundant, that I repeat myself, that I say things over and over!"</i></b><br />
<br />
The amendments, which become effective November 5, 2018, amend numerous disclosure requirements previous required by SEC rules and regulations, including those in Regulation S-K, Regulation S-X, Form S-1, Form S-3, Form 10-K, among many others.<br />
<br />
I won't try to summarize the entire 314 page SEC release which is available <a href="https://www.sec.gov/rules/final/2018/33-10532.pdf" target="_blank">here</a>, but I did want to highlight my least favorite change. You may have noticed language in SEC filings instructing readers that they may access publicly filed documents at the SEC's Public Reference Room, such as:<br />
<br />
<b><i>"We file reports with the Securities and Exchange Commission ("SEC"). These reports include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these filings. The public may read any of these filings at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549 on official business days during the hours of 10 a.m. and 3 p.m." </i></b><br />
<br />
Well, no more. The SEC has removed that disclosure requirement. It always brought a smile to my face to imagine a grumpy old man, perhaps wearing a mustache, a bow tie, and a three piece suit, taking a bus to the SEC's office building in Washington D.C. and pounding on the SEC's front door with the end of his cane demanding access to their Public Reference Room so that he could comb through his favorite company's 10-Ks and 10-Qs, only to be kicked out at 3:00 p.m., at which point he would shuffle back to the bus stop. Maybe he'd take a detour for some taffy or a cold sarsaparilla on his way home. How can this gentleman afford to be a direct investor in the US equity markets but he can't pay for a dial-up modem to access the SEC's EDGAR database online?NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com3tag:blogger.com,1999:blog-5607197407886640148.post-90403150207245995812018-09-26T17:48:00.000-05:002018-09-27T09:47:07.226-05:00For-Profit Corporation vs. Nonprofit Corporation vs. Social Purpose Corporation vs. Public Benefit Corporation<div class="MsoNormal" style="text-align: justify;">
If you are interested in forming
a corporate vehicle for “doing good,” you may have considered forming a for-profit
corporation, a nonprofit corporation, a public benefit corporation, or a social
purpose corporation.<span style="mso-spacerun: yes;"> </span>But which corporate
vehicle is right for you and your cause(s) in Texas? I’m going to compare and
contrast these corporate forms for you.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u>For-Profit Corporation</u>:<u><o:p></o:p></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><br /></b></div>
<div class="MsoNormal" style="text-align: justify;">
A for-profit corporation is
exactly what it sounds like – it’s in business to make a profit for its shareholders.
Thanks to the magic of the "invisible hand” of capitalism, virtually every successful
for-profit corporation will end up doing a lot of good things for its
customers, vendors, employees, and other stakeholders. But ultimately the board
of directors of a for-profit corporations owes fiduciary duties to seek to
maximize profits for its shareholders. That’s true even if the board faces a
choice that may be right for its shareholders, but may not be in the best
interests of the community, the world, or other stakeholders of the corporation.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
So if you want to earn a profit for
yourself and impact the world in a positive way by providing great products or
services, but with no obligation (or opportunity) to consider stakeholders
other than the corporation’s shareholders when making business decisions, the
for-profit corporation is probably right for you.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
For-profit corporations are governed
by Chapter 22 of the Texas Business Organizations Code (TBOC).<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u><br /></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u>Nonprofit Corporation</u>:<o:p></o:p></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><br /></b></div>
<div class="MsoNormal" style="text-align: justify;">
Being a “nonprofit” corporation does
not mean that the corporation may not earn a profit - it just means that all
profits earned by the corporation must ultimately flow to a “good cause” and
not flow to the benefit of any individual or for-profit corporation. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Nonprofit corporations are governed
by Chapter 22 of the TBOC. Section 22.01(5) of the TBOC defines a nonprofit
corporation as “a corporation no part of the income of which is distributable
to a member, director, or officer of the corporation, except as provided in
Section 22.054.”<span style="mso-spacerun: yes;"> </span>Section 22.054 of the
TBOC permits non-profit corporations to (1) pay reasonable compensation for
services provided, (2) confer benefits to its members in conformity with the corporation’s
purpose, (3) make distributions to its members upon winding up and termination
as otherwise permitted by Chapter 22 of the TBOC, and (4) make distributions of
its income to 501(c)(3) organizations under certain circumstances. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
So if you just want to “do good”
and don’t care about earning any profits for yourself, a nonprofit corporation
might be a great option for you.<span style="mso-spacerun: yes;"> </span>But if
you want to personally share in any of the profits of the corporation as its
founder and owner while helping society or the public at the same time, then
you might want to consider another type of corporation. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Also, because non-profit
corporations may not distribute profits to its members, they often have a more
difficult time raising capital – what venture capitalist wants to invest in a
corporation with a 0% chance of earning a profit?! <span style="mso-spacerun: yes;"> </span>So if you want to attractive investors (not
just donations) to your project, the non-profit corporation will not work for
you.<o:p></o:p></div>
<div class="MsoNormal" style="page-break-after: avoid; text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u><br /></u></b></div>
<div class="MsoNormal" style="page-break-after: avoid; text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u>Social Purpose Corporation</u>:<o:p></o:p></b></div>
<div class="MsoNormal" style="page-break-after: avoid; text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><br /></b></div>
<div class="MsoNormal" style="text-align: justify;">
In 2013, the Texas legislature adopted
the concept of the social purpose corporation in the TBOC. The social purpose
corporation sought to bridge the historical divide between for-profit
corporations seeking only financial gain for its shareholder or non-profit corporations
seeking only to further a social purpose or cause. Why couldn’t a corporation
do both? According to the author of the bill that created the social purpose
corporation in Texas, the social purpose corporation was adopted in response to
a national movement of social entrepreneurship – “a person or entity who uses
entrepreneurial principles to affect change in a particular social purpose or
cause.” <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
A new Section 3.007(d) was added to
the TBOC, which permits a for-profit corporation to elect to have a social
purpose in addition to its for-profit purpose. That Section also permits a
for-profit corporation to include a provision in its certificate of formation
requiring the corporation’s board of directors and its officers to consider any
social purpose of the corporation in discharging their duties. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
A new Section 1.002(82-a) was
added to the TBOC to define social purposes as “one or more purposes of a
for-profit corporation that are specified in the corporation's certificate of
formation and consist of promoting one or more positive impacts on society or
the environment or of minimizing one or more adverse impacts of the
corporation's activities on society or the environment.<span style="mso-spacerun: yes;"> </span>Those impacts may include: (A) providing
low-income or underserved individuals or communities with beneficial products
or services; (B) promoting economic opportunity for individuals or communities
beyond the creation of jobs in the normal course of business; (C) preserving
the environment; (D) improving human health; (E) promoting the arts, sciences,
or advancement of knowledge; (F) increasing the flow of capital to entities with
a social purpose; and (G) conferring any particular benefit on society or the
environment.”<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
And new Sections 21.401(c) and
(d) were added to the TBOC to explicitly grant the directors and officers of a
social purpose corporation the right to consider any social purposes specified
in the corporation’s certificate of formation in discharging their duties to
the corporation.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
As you can see, the social purpose
corporation grants the for-profit corporation and its management the right, but
not necessarily the obligation, to pursue social purposes while also pursuing a
profit for the corporation’s shareholders. <span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u><br /></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u>Public Benefit Corporation</u>:<o:p></o:p></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><br /></b></div>
<div class="MsoNormal" style="text-align: justify;">
In 2017, the Texas legislature adopted
the concept of the public benefit corporation, which is kind of a social
purpose corporation on steroids. Pubic benefit corporations are governed by a
newly created Subchapter S of Chapter 21 (For-Profit Corporations) of the TBOC.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The certificate of formation of a
public benefit corporation must (1) identify one or more public benefits to be
promoted by the corporation, and (2) include a statement that the for-profit
corporation has elected to be a public benefit corporation. Section 21.952 of
the TBOC defines public benefit as “a positive effect, or a reduction of a
negative effect, on one or more categories of persons, entities, communities,
or interests, other than shareholders in their capacities as shareholders of
the corporation, including effects of an artistic, charitable, cultural,
economic, educational, environmental, literary, medical, religious, scientific,
or technological nature.” <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The name of a public benefit corporation
may include the words “public benefit corporation,” “P.B.C.,” or “PBC."
Otherwise, the corporation must notify any potential shareholder of its public
benefit corporation status before issuing any shares of stock.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The public benefit corporation
provisions of the TBOC also include many provisions that corporation’s might
view as onerous. For example, two-thirds of the corporation’s shareholders must
approve (1) a merger with a corporation that is not a public benefit corporation,
or (2) an amendment to the corporation’s certificate of formation to remove its
status as a public benefit corporation. Also, at least every other year, the public
benefit corporation must provide its shareholders a statement which must
include (A) the corporation’s objectives in promoting the public benefit, (B) standards
to measure the corporation’s progress toward such public benefit, (C) objective
factual information based on such standards, and (D) an assessment of the
corporation’s success in meeting its objectives. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The public benefit corporation
really goes all in on the concept of benefiting the public. Section 21.953 of
the TBOC requires the public benefit corporation’s board of directors to manage
the corporation “in a manner that balances: (1) the shareholders’ pecuniary
interests; (2) the best interests of those persons materially affected by the
corporation’ s conduct; and (3) the public benefit or benefits specified in the
corporation’s certificate of formation.” That’s quite a balancing act for any
board. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u><br /></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u>Conclusion</u>:<o:p></o:p></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
While any of these types of
corporations may be right for you or your particular situation, I would note
that a social purpose corporation (i.e., a for-profit corporation with a social
purpose) would seem to give the corporation the maximum amount of freedom
achieve both profit and social purposes without many of the requirements and restrictions
applicable to the public benefit corporation.<o:p></o:p></div>
NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com2tag:blogger.com,1999:blog-5607197407886640148.post-72914985356575966412018-09-18T14:25:00.001-05:002018-09-18T14:27:53.662-05:00NVCA Recognizes Importance of Life Science and Bio-TechLife sciences and bio-tech companies continue to have a major impact the venture capital landscape.<br />
<br />
The National Venture Capital Association (NVCA) provides model legal forms for venture capital investors and entrepreneurs seeking venture capital. The NVCA model forms are the starting point for many venture capital transactions. In a nod to the growing important of the life sciences industry, the NVCA model forms have recently been updated to become more life-sciences friendly.<br />
<br />
As the NVCA's press release from February noted: "For the first time, the documents now incorporate drafting options that are specific to the unique nature of life science transactions."<br />
<br />
Examples of new life science focused terms and footnotes in the NVCA Model Legal Forms include the following additions to the NVCA's model Stock Purchase Agreement:<br />
<ul>
<li>Noted that life sciences transactions often include "Milestone Closings" with tranched investments in which investors are expected to make additional contributions to the company (such as upon FDA approval).</li>
<li>Added potential penalty provisions applicable to investors who fail to fund Milestone Closings. </li>
<li>Noted that the "Use of Proceeds" section may be more specific for life sciences companies and "may include 'discovery, research and pre-clinical development' of a particular therapeutic." </li>
<li>Noted that for life science transactions, it is common to define "Company Intellectual Property" in greater detail with respect to patent rights, including “patent disclosures and all related continuation, continuation-in-part, divisional, reissue, reexamination, utility model, renewals, extensions, certificate of invention and design patents, patent applications, registrations and applications for registrations.”</li>
<li>Proposed more detailed representations and warranties regarding:</li>
<ul>
<li>Intellectual property held or funded by the government or academic or medical institutions;</li>
<li>Compliance with HIPPA;</li>
<li>Pre-clinical development;</li>
<li>Clinical trials; and </li>
<li>FDA approvals.</li>
</ul>
</ul>
NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com1tag:blogger.com,1999:blog-5607197407886640148.post-26994191103341232112018-09-06T11:03:00.003-05:002018-09-06T11:03:30.806-05:00Who the Heck Signs Our Stock Certificates?One of the first things a new corporation must do is issue stock certificates to its founding stockholders (assuming the corporation has not elected to issue uncertificated shares, of course). But who should sign the stock certificates on behalf of the corporation?<br />
<br />
To answer that question, the corporation should look first to its Bylaws. For example, I often use a form of Bylaws for Texas corporations which provide that the share certificates should be signed by "the President or a vice president and the Secretary or an assistant secretary."<br />
<br />
But what do the underlying corporate statutes provide?<br />
<br />
The answer is not as easy to find as you might expect. There is nothing in Title 2 (Corporations) of the Texas Business Organizations Code (TBOC) addressing the issue. Instead, one must look to Title 1 (General Provisions). Specifically, Section 3.203 of the TBOC provides that a Texas corporation's stock certificates must be signed by "[t]he managerial official or officials of [the corporation] authorized by the [certificate of formation and bylaws]." Section 1.002(52) of the TBOC defines "managerial official" as an officer or a governing person. Section 1.002(37) defines "governing person" as a person serving as part of the "governing authority." Section 1.002(35)(A) defines the "governing authority" of a corporation as its board of directors. Accordingly, a Texas corporation's stock certificate may be signed by any of the corporation's officer(s) or director(s) as authorized in the corporation's certificate of formation and bylaws. I have never seen a certificate of formation which addressed this issue, though it is a hypothetical possibility. So as a practical matter, that means the issue is governed by the Texas corporation's Bylaws. <br />
<br />
Section 158 of the Delaware General Corporation Law is much easier to navigate. It provides that certificates representing shares of stock in a Delaware corporation must be signed by "2 authorized officers of the corporation."NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com1tag:blogger.com,1999:blog-5607197407886640148.post-25488223223060915092018-06-30T17:31:00.001-05:002018-06-30T17:31:11.933-05:00360 West Magazine Top Attorney 2018Thank you to <i>360 West</i> magazine for including me in their list of Top Attorneys for 2018 and to the other attorneys in our region who voted for me. I was nominated in the category of Civil Law/Transactional. <i>360 West </i>hosted a festive reception for the 2018 Top Attorneys at Autobahn Fort Worth last week. It was an honor to spend the evening with some truly exceptional attorneys. A complete list of the Top Attorneys is available <a href="https://www.360westmagazine.com/legal-directory/" target="_blank">here</a>.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com2tag:blogger.com,1999:blog-5607197407886640148.post-17262008813131840422017-11-29T12:45:00.001-06:002017-11-29T12:45:53.664-06:00Fort Worth Magazine Top Attorneys 2017T<span style="background-color: transparent; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">hank you to </span><i style="-webkit-text-stroke-width: 0px; background-color: transparent; color: black; font-family: Times New Roman; font-size: 16px; font-style: italic; font-variant: normal; font-weight: 400; letter-spacing: normal; orphans: 2; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">Fort Worth </i><span style="background-color: transparent; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">magazine for including me on their annual list of Top Attorneys for the 4th straight year! I was among those honored in the Corporate Finance/Mergers and Acquisitions category. Here I am making my way into the reception honoring 2017 Top Attorneys at the Fort Worth Club last night:</span><br />
<span style="background-color: transparent; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXewxK1MmNwsZjewCYgESQizWmu2o9DVgZgwguebRULzbi9BD1ylEhHp0fL2ZxCRphk8c7IGbuFMl34m0tyX83Z4bPBAMdJAF5asNTy_R00cKV9AhOiXRSKbNse8p8NYyyFB4lw-gUWkw/s1600/IMG_5066.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1600" data-original-width="1200" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXewxK1MmNwsZjewCYgESQizWmu2o9DVgZgwguebRULzbi9BD1ylEhHp0fL2ZxCRphk8c7IGbuFMl34m0tyX83Z4bPBAMdJAF5asNTy_R00cKV9AhOiXRSKbNse8p8NYyyFB4lw-gUWkw/s400/IMG_5066.JPG" width="300" /></a></div>
<br />NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com0tag:blogger.com,1999:blog-5607197407886640148.post-85474681761470058742017-11-15T11:19:00.000-06:002017-11-15T11:19:15.455-06:00Blowing the Whistle on Confidentiality Agreements that Restrict Whistleblowers<span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">Recent changes to federal whistleblower
protection law have made it necessary to revisit the form of confidentiality
agreements (sometimes called non-disclosure agreements or NDAs) used by
companies to protect their trade secrets and other confidential information.</span><br />
<br />
<div style="line-height: normal; margin: 0px; text-align: justify; text-indent: 0.5in;">
<br /></div>
<span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">Whistleblowers are parties who become
aware of illegal or unethical conduct within a company and seek to report such
conduct to the proper governmental authorities. In the wake of the collapse of
Enron, the Bernie Madoff Ponzi scheme, and other financial and accounting scandals,
the government has sought to make it easier for company insiders to report
illegal or unethical conduct within a company without fear of retribution from
the company. As you might expect, there is often a tension between the company’s
desire to protect legitimate trade secrets, often through the use of
confidentiality agreements, and the law’s desire to protect and encourage whistleblowers.
<span style="margin: 0px;"> </span></span><br />
<br />
<div style="line-height: normal; margin: 0px; text-align: justify; text-indent: 0.5in;">
<br /></div>
<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">Defend Trade Secrets Act</span></i></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">.</span></b><span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;"> One example of this recent trend is the federal
Defend Trade Secrets Act (DTSA), which was adopted in 2016. Under the DTSA, an
individual cannot be held criminally or civilly liable for “blowing the
whistle” and confidentially reporting a suspected violation of law to the
government or to an attorney. The DTSA also protects a whistleblower who
confidentially discloses trade secrets to an attorney or to a court in
connection with a lawsuit alleging that an employer retaliated against the
whistleblower. </span><br />
<br />
<div style="line-height: normal; margin: 0px; text-align: justify; text-indent: 0.5in;">
<br /></div>
<span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">The DTSA requires that any company that
enters into a confidentiality agreement with an employee, consultant or
independent contractor must include a notice in the confidentiality agreement of
the DTSA whistleblower protections described in the previous paragraph. If the
company fails to provide the DTSA notice, the company cannot sue the employee,
consultant or independent contractor under the DTSA for exemplary damages or
for attorneys’ fees as otherwise permitted to be recovered under the DTSA for
willful, malicious or bad faith theft of trade secrets.</span><br />
<br />
<div style="line-height: normal; margin: 0px; text-align: justify; text-indent: 0.5in;">
<br /></div>
<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">SEC Rule 21F-17</span></i></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">.</span></b><span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;"> The Dodd-Frank Wall Street Reform and Consumer
Protection Act added a new Section 21F to the Securities and Exchange Act of
1934 (the Exchange Act) which, among other things, prohibits companies from
retaliating against whistleblowers who have reported concerns about securities
law violations to the Securities and Exchange Commission (SEC) or who have
assisted the SEC in any investigation or judicial or administrative action. To
further clarify a company’s obligations under Section 21F of the Exchange Act,
the SEC adopted Rule 21F-17, which provides that “no person may take any action
to impede an individual from communicating directly with the [SEC] staff about
a possible securities law violation, including enforcing, or threatening to
enforce, a confidentiality agreement . . . with respect to such communications.”
</span><br />
<br />
<div style="line-height: normal; margin: 0px; text-align: justify; text-indent: 0.5in;">
<br /></div>
<span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">The SEC has taken administrative action
against several companies that have entered into agreements with employees that
contain confidentiality provisions that the SEC has alleged to violate SEC Rule
21F-17 by potentially “stifling” whistleblowers. The challenged agreements have
included confidentiality agreements, severance agreements, and separation
agreements, but any agreement that requires confidentiality obligations for the
employee without providing an exception for whistleblowing reports to the SEC
would arguably run afoul SEC Rule 21F-17.<span style="margin: 0px;">
</span>In connection with an SEC cease and desist order, the SEC has indicated
that including the following language in an agreement with a confidentiality
provision would cause the agreement to comply with SEC Rule 21F-17:</span><br />
<br />
<div style="line-height: normal; margin: 0px; text-align: justify; text-indent: 0.5in;">
<br /></div>
<br />
<div style="line-height: normal; margin: 0px 48px; text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">“Nothing in this
Confidentiality [Agreement] prohibits [the employee] from reporting possible
violations of federal law or regulation to any governmental agency or entity,
including but not limited to the Department of Justice, the Securities and
Exchange Commission, the Congress, and any agency Inspector General, or making
other disclosures that are protected under the whistleblower provisions of
federal law or regulation.<span style="margin: 0px;"> </span>[The employee
does] not need the prior authorization of the [the company] to make any such
reports or disclosures and [the employee is] not required to notify the company
that [the employee has] made such reports or disclosures.” <span style="margin: 0px;"> </span></span></div>
<br />
<div style="line-height: normal; margin: 0px 48px; text-align: justify;">
<br /></div>
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">Takeaways.
</span></b><span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;">Any
company entering into a confidentiality agreement or other agreement with an employee,
consultant or independent contractor that includes a confidentiality provision
should consider including the DTSA notice described above to ensure that the
company will enjoy the full benefit of the trade secret protection and remedies
afforded by the DTSA. And companies (especially publicly traded companies) should
consider including carve-outs for whistleblowers in their confidentiality
agreements, such as the SEC-blessed disclosure described above, to ensure that
those confidentiality agreements comply with SEC Rule 21F-17.<span style="margin: 0px;"> </span></span><br />
<span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;"><span style="margin: 0px;"><br /></span></span>
<span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;"><span style="margin: 0px;">Special thanks to CityBizList-Dallas for publishing this article <a href="http://dallas.citybizlist.com/article/452529/blowing-the-whistle-on-confidentiality-agreements-that-restrict-whistleblowers" target="_blank">here</a>.</span><span style="margin: 0px;"> </span></span><br />
<span style="font-family: "Times New Roman",serif; font-size: 12pt; margin: 0px;"><span style="margin: 0px;"><br /></span></span>
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike>NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com1tag:blogger.com,1999:blog-5607197407886640148.post-39854847746553910702017-09-08T15:32:00.002-05:002017-09-12T15:41:09.212-05:00What's in a Name (of a Texas company)?<b><i>"What's in a name? That which we call a rose</i></b><br />
<b><i>By any other name would smell as sweet."</i></b><br />
<br />
- Spoken by Juliet in <i>Romeo and Juliet </i>(Act II, Scene II), by William Shakespeare<br />
<br />
Sometimes, it seems the hardest part of forming a new company can be picking its name - as if all of the good names have already been taken! And historically, Texas law has done company organizers no favors by preventing companies from using names which are the same as, or "deceptively similar" to, names of existing companies doing business in Texas. At times, the Texas Secretary of State has taken a broad view of names which it considered deceptively similar - further narrowing the field of available names. But thanks to the 85th Texas legislature, picking a name for a Texas company is about to get a little easier.<br />
<br />
House Bill 2856, which becomes effective June 1, 2018, will amend the Texas Business Organization Code (TBOC) to permit new filing entities (such as corporations, limited liability companies, limited partnership, etc.) and foreign entities registering to do business in Texas to use any name which is "distinguishable" from the names of all other companies formed, registered, or reserved for use in Texas.<br />
<br />
In short, Texas companies will soon be able to have "deceptively similar" names, so long as the names are "distinguishable" from one another.<br />
<br />
The change will make Texas law more uniform with the requirements established in other states, including the State of Delaware (see Section 102(a)(ii) of the Delaware General Corporation Law). It is hoped that this change will facilitate the formation of new business entities and expedite the registration of out-of-state business entities to transact business in Texas.<br />
<br />
Perhaps all those newly formed or registered Texas companies will soon be humming a Jim Croce tune:<br />
<br />
<b><i>"Like the pine trees lining the winding road</i></b><br />
<b><i>I got a name, I got a name."</i></b><br />
<br />
Then again, maybe not.<br />
<br />
Regardless, I view this change as a positive one for Texas corporate law.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com0tag:blogger.com,1999:blog-5607197407886640148.post-90974900310616133012017-08-21T14:37:00.000-05:002017-08-21T14:37:56.139-05:00SmartVest Presentation: "Ins and Outs of Term Sheets" Last week I had the honor of making a presentation as part of SmartVest, a Startup Investor Series sponsored by TECH Fort Worth. I presented "Ins and Outs of Term Sheets," discussing some of the common terms found in Series A investment term sheets. The presentation was a lot of fun to give, primarily because the accredited investors in attendance asked a lot of really great questions. <br />
<br />
Thanks to TECH Fort Worth for including me in this valuable educational program for the startup investment community.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com22tag:blogger.com,1999:blog-5607197407886640148.post-27896189112082939702017-08-09T18:27:00.000-05:002017-08-14T11:09:40.407-05:00Takeaways from SEC's Access to Capital and Market Liquidity Report to CongressYesterday, the United States Securities and Exchange Commission’s (the SEC's) Division of Economic and Risk Analysis published its Report to Congress on "Access to Capital and Market Liquidity." The Report is available <a href="https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-2017.pdf" target="_blank">here</a>.<br />
<br />
The Report attempts to assess, among other things, the impact of the Dodd-Frank Act, on access to capital for consumers, investors, and businesses.<br />
<br />
A few interesting takeaways from the Report:<br />
<br />
<b>New Rule 506(c) has been a disappointment.</b> That's my conclusion, not the SEC's, but the numbers speak for themselves. <br />
<br />
<div>
Rule 506(c) permits companies to engage in "general solicitation" in connection with private placements of securities strictly to "verified" accredited investors. The traditional Rule 506 (now re-numbered Rule 506(b)) prohibits issuers from engaging in general solicitation, but it permits up to 35 non-accredited investors and has a looser "reasonable belief" standard (as opposed to "verified" under Rule 506(c)) for confirming an investor's accredited investor status.</div>
<div>
</div>
<div>
The premise of Rule 506(c) was that companies would have greater access to capital if they could solicit funds broadly from any accredited investor rather than limiting investment to investors with which the company has a preexisting relationship (those that could be reached without engaging in general solicitation) as required under Rule 506(b).</div>
<div>
<br /></div>
<div>
But overwhelmingly, companies raising capital through Rule 506 have continued to use Rule 506(b) rather than taking advantage of the newly created Rule 506(c). The Report indicates that during the period from the effectiveness of Rule 506(c) (September 23, 2013) through December 31, 2016, issuers reported raising an aggregate of $108 billion using Rule 506(c) as compared to $4.2 trillion raised through Rule 506(b). </div>
<div>
<br /></div>
<div>
That means less than 3% of all capital raised through Rule 506 took advantage of the new Rule 506(c)!</div>
<div>
<br /></div>
<div>
<b>Regulation Crowdfunding has been a disappointment.</b> Again, that's my conclusion, not the SEC's, but once gain the numbers speak for themselves. </div>
<div>
<br /></div>
<div>
Regulation Crowdfunding permits issuers to raise up to approximately $1 million over a 12-month period in small amounts from a large number of investors over the Internet. The SEC's sanctioning of equity crowdfunding received a lot of hype and attention in the business press at the time of its adoption.</div>
<div>
<br /></div>
<div>
Unfortunately, during the period from the date Regulation Crowdfunding, went effective on May 16, 2016 through December 31, 2016, only 156 companies have taken advantage of Regulation Crowdfunding, by conducting a total of 163 crowdfunding offerings nationwide. Of those offerings, only 28 issuers successfully met their minimum target capital raise. And of those successful offerings, the median amount of capital raised was only $171,000. </div>
<div>
<br /></div>
<div>
And the aggregate amount of all capital raised through crowdfunding under Regulation Crowdfunding nationwide during 2016 was only $8.1 million! I wouldn't be surprised if publishers spent more than that amount on paper and ink writing articles about how significant the crowdfunding revolution was going to be.</div>
<div>
<br /></div>
<div>
<b>Regulation A offering are showing some signs of life.</b> </div>
<div>
<br /></div>
<div>
Regulation A (Reg A) previously allowed companies to raise up to $5 million in a 12-month period. But issuers virtually never took advantage of the traditional Reg A, in part because the dollar limits under Reg A were so low. The JOBS Act required the SEC to adopt rules increasing the dollar limits on Reg A offerings. Those new rules (dubbed Reg A+) now permit offerings up to $20 million (under Tier 1 of the new Reg A) or up to $50 million (under Tier 2 of the new Reg A) in a 12-month period.</div>
<div>
<br /></div>
<div>
The market has certainly noticed. From 2005-2016 issuers typically conducted only about 14 Reg A offerings per year, raising an aggregate of approximately $163 million per year. During the period from the date Reg A+ went effective on June 19, 2015 through December 31, 2016, there were 97 Reg A offerings seeking to raise an aggregate of $1.8 billion. </div>
<div>
<br /></div>
<div>
Although the SEC does not have access to the precise amount of funds actually raised in such offerings, the SEC estimates that 56 issuers raised an aggregate of approximately $315 million during this period. </div>
<div>
<br /></div>
<div>
<b>Conclusions.</b></div>
<div>
<b><br /></b></div>
<div>
I should caution that all of the trends reported in the Report and summarized above are early, and it is certainly possible that any or all of Rule 506(c), Crowdfunding, and Reg A+ will show gains in popularity as issuers and investors grow more comfortable and more experienced with each of these exemptions from the registration requirements under the Securities Act. But preliminary results certainly have not been encouraging for any of these new or amended exemptions. </div>
<div>
<b><br /></b></div>
<div>
</div>
<div>
</div>
NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com2tag:blogger.com,1999:blog-5607197407886640148.post-47472818047330869622017-08-03T11:48:00.000-05:002017-08-04T14:10:36.460-05:00Surprising Quirks of Texas Nonprofit Corporation Governing Documents<div class="MsoNormal" style="text-align: justify;">
How do the governing documents (certificate
of formation and bylaws) of a Texas nonprofit corporation differ from those of
a Texas for-profit corporation?<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Quite a bit, actually. Below is a non-exclusive list of ways in which
the certificate of formation and bylaws of a Texas non-profit
corporation often differ from those of a Texas for-profit corporation. Some of
these differences may be surprising to those who more frequently deal with for-profit
corporations.</div>
<div class="MsoNormal" style="text-align: justify;">
<b style="text-indent: -0.25in;"><br /></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="text-indent: -0.25in;">1. Fewer restrictions on the name of a nonprofit
corporation.</b><span style="text-indent: -0.25in;"> Section 5.054 of the
Texas Business Organizations Code (TBOC) requires that the name of a Texas for-profit
corporation include the word “company, corporation, incorporated, or limited”
or an abbreviation of one of those words, such as “Inc.” or “Co.” There is no
such requirement for a Texas nonprofit corporation.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="text-indent: -0.25in;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="text-indent: -0.25in;">2. More restrictions on the purpose of a
nonprofit corporation.</b><span style="text-indent: -0.25in;"> Section 2.001 of the TBOC provides that a Texas
for-profit corporation is generally permitted to have any lawful purpose.
Section 2.003 of the TBOC restricts any Texas corporation (whether nonprofit or
for-profit) from engaging in certain prohibited purposes, such as unlawful
activities or operating as a bank, trust company, savings association,
insurance company, cemetery association (with certain exceptions), or abstract
or title company. Section 2.002 of the TBOC limits a nonprofit corporation to
only one or more of the following purposes:</span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"><br /></span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"> a. Serving charitable, benevolent, religious,
eleemosynary, patriotic, civic, missionary, educational, scientific, social,
fraternal, athletic, aesthetic, agricultural, or purposes;</span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"> b. </span><span style="text-indent: -0.25in;">Operating or managing a professional,
commercial, or trade association or labor union;</span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"> c. </span><span style="text-indent: -0.25in;">Providing animal husbandry; or </span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"> d. Operating on a nonprofit cooperative basis for
the benefit of its members.</span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"><br /></span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"> Section 2.010 of
the TBOC also restricts the permissible activities of a nonprofit corporation.</span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"><br /></span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<span style="text-indent: -0.25in;"> Moreover, a nonprofit corporation desiring status as an organization exempt
from federal income tax under Section 501(c)(3) of the Internal Revenue Code
(the Code) must comply with Section 501(c)(3) of the Code, which requires nonprofit corporation</span><span lang="EN" style="text-indent: -0.25in;">s to be “organized and operated exclusively for religious, charitable,
scientific, testing for public safety, literary, or educational purposes, or to
foster national or international amateur sports competition (but only if no
part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals.”</span></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<br /></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
In its Instructions
to Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code), the Internal Revenue Service (IRS) suggests including the following
language as the nonprofit corporation’s purpose to ensure compliance with the
purpose requirement in Section 501(c)(3) of the Code: “<i>The organization is organized exclusively for charitable, religious,
educational, and scientific purposes under Section 501(c)(3) of the Internal
Revenue Code, or corresponding section of any future federal tax code</i>.”</div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<b><br /></b></div>
<div class="MsoListParagraphCxSpFirst" style="text-align: justify; text-indent: -0.25in;">
<b>3. May have no members or no board of
directors.</b> Every for-profit corporation has at least one shareholder and at
least one director, but under Section 22.151(a) of the TBOC, a nonprofit
corporation need not have any members – it may be managed exclusively by the
nonprofit corporation’s board of directors. Alternatively, Section 22.202 of
the TBOC provides that a nonprofit corporation may have no board and may instead
be managed exclusively by its members. If the nonprofit corporation elects to
have no members or no board of directors, Section 3.009(1) of the TBOC requires a
statement to that effect in the nonprofit corporation’s certificate of formation. <o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;">4. Must have at least three directors.</b><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">If a Texas nonprofit corporation elects to
have a board of directors, it must name at least three people to serve as directors
of the corporation under Section 22.204 of the TBOC.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">For-profit corporations are only required to
have at least one director under Section 21.403 of the TBOC.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;"><br /></b></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;">5. Action by written consent of less than all directors. </b><span style="text-indent: -0.25in;">Sections 6.201 and 21.415(b) of the TBOC
permit the board of directors of a Texas for-profit corporation to take action
by unanimous written consent in lieu of holding a formal meeting of the board, but only
if the written consent is signed by all of the directors. On the other hand, Section
22.220 of the TBOC permits the board of a nonprofit corporation to take action by
written consent signed by the number of directors necessary to take the action
at a meeting in which all of the corporation’s directors are present (typically, a majority), if non-unanimous written consents are authorized in the nonprofit
corporation’s certificate of formation or bylaws.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;"><br /></b></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;">6. Board committees generally must have at
least two members and only a majority of the committee need be directors.</b><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">The board of a Texas for-profit corporation may
establish a board committee composed of one or more directors under Section 21.416(a)
of the TBOC. If a Texas nonprofit corporation wishes to establish a board committee,
it must comply with Section 22.218(b) of the TBOC, which requires that the
board committee consist of at least two persons. That Section permits persons
who are not otherwise directors be named to the committee so long as at least a
majority of the committee members are directors of the nonprofit corporation. A
nonprofit corporation which is a religious institution may establish committees
composed entirely of non-directors.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;"><br /></b></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;">7. President and Secretary cannot be the same
person.</b><span style="text-indent: -0.25in;"> A Texas for-profit corporation is required to have a President and
a Secretary under Sections 21.417 of the TBOC, but such offices may be held by the
same person under Section 3.103(c) of the TBOC. Conversely, Section 22.231(a)
of the TBOC requires that the offices of President and Secretary of a Texas
nonprofit corporation be held by different persons.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;"><br /></b></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;">8. Directors may vote by proxy.</b><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">Section 22.215 of the TBOC permits a director of
a Texas nonprofit corporation to permit someone else to vote on the director’s
behalf by granting a proxy to the other person, if proxy voting is permitted by
the nonprofit corporation’s certificate of formation or bylaws. There is no
analogous provision applicable to Texas for-profit corporations.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">Directors of a for-profit corporation must
vote for themselves - either in person, by written consent, or via electronic
means, such as attending a meeting via teleconference.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;"><br /></b></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<b style="text-indent: -0.25in;">9. Liquidating distributions for charitable
purposes.</b><span style="text-indent: -0.25in;"> A Texas for-profit corporation exists for the financial benefit of
its shareholders, and after all of its creditors have been paid or reserved for,
liquidating distributions from a for-profit corporation are to be made to the
corporation’s shareholders under Section 11.053(c) of the TBOC. On the other
hand, nonprofit corporations exist only for one or more of the non-profit
purposes described above. Upon liquidation of a nonprofit corporation, Section
22.304(a)(2) of the TBOC generally requires that any assets of the nonprofit
corporation remaining after all creditors have been paid must be paid to one or
more 501(c)(3) organizations. For the nonprofit corporation itself to qualify
as a 501(c)(3) organization, the nonprofit corporation must include a provision
in its certificate of formation requiring that liquidating distributions will
be made for charitable purposes.</span><span style="text-indent: -0.25in;"> </span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;">
<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
</div>
<div class="MsoListParagraphCxSpLast" style="text-align: justify;">
The IRS’s Instructions
to Form 1023 suggest the following language to meet the dissolution clause
requirement in Section 501(c)(3) of the Code: “<i>Upon the dissolution of this organization, assets shall be distributed
for one or more exempt purposes within the meaning of Section 501(c)(3) of the
Internal Revenue Code, or corresponding section of any future federal tax code,
or shall be distributed to the federal government, or to a state or local
government, for a public purpose</i>.”<o:p></o:p></div>
NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com0tag:blogger.com,1999:blog-5607197407886640148.post-68477627226259094912017-07-15T12:03:00.000-05:002017-07-15T12:03:44.368-05:00Texas Secretary of State’s Form of Certificate of Formation<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
“<i>Mother, should I trust the government?</i>”
– Pink Floyd</div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<o:p></o:p></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
That question answers itself, does it not? <o:p></o:p></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
I’m pretty sure Pink Floyd did not have form documents promulgated by
the Texas Secretary of State’s office in mind when those lyrics were
written. Nonetheless, it’s a helpful
reminder that you often get what you pay for when it comes to free legal forms. Or perhaps the economic maxim of TANSTAAFL (“There
ain't no such thing as a free lunch”) would be a more suitable reference.</div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
Regardless, for those looking to incorporate a Texas for-profit
corporation, I do not recommend using the Texas Secretary of State’s form of
Certificate of Formation (Form 201), which is available on the Secretary of
State’s website <a href="http://www.sos.state.tx.us/corp/forms/201_boc.pdf">here</a>.
<o:p></o:p></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
What’s so bad about Form 201?
Well, nothing is horrible about it – you could certainly file it (and
pay the related filing fee) and have yourself a functioning Texas for-profit corporation. But an experienced Texas corporate lawyer is
likely to suggest a using a form of Certificate of Formation that includes
other helpful provisions in addition to the minimum required provisions
dictated by the Texas Business Organizations Code (TBOC).<o:p></o:p></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
For example, Form 201 does not include any of the following provisions
which are common for Texas for-profit corporations:</div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
<b style="text-indent: -0.25in;"><u><br /></u></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
<b style="text-indent: -0.25in;"><u>Director
Exculpation</u>.</b><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">As a rule,
directors do not like to be subject to potential personal liability in
connection with their service as a director of a corporation. So Texas
corporations often elect to take advantage of Section 7.001 of the TBOC, which
permits a Texas corporation to exculpate (relieve from liability) its directors
from liability to the corporation or its shareholders.</span><span style="text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">They may achieve director exculpation by adopting
a director exculpation provision as part of the corporation’s Certificate of
Formation. </span><span style="text-indent: -0.25in;">The basic Form 201 does not
include a director exculpation provision, though one could elect to supplement
the basic Form 201 by adding such a provision (or any of the other provisions
discussed below). Our clients typically elect to include a director exculpation
provision in their Certificate of Formation when forming a new Texas
corporation.</span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
<b style="text-indent: -0.25in;"><u><br /></u></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-align: justify;">
<b style="text-indent: -0.25in;"><u>Mandatory
Indemnification of Directors and Advancement of Expenses</u>.</b><span style="text-indent: -0.25in;"> Likewise,
directors typically think it’s a good idea to have corporations on which they
serve indemnify (cover the costs of) directors from potential liability arising
from their service as a director. While exculpation relieves directors of
liability to the corporation and its shareholders, indemnification protects
directors from claims made by third parties. Section 8.101(a) of the TBOC
permits Texas corporations to indemnify its directors who gets sued by a third
party because of their service as a director so long as the director (1) acted
in good faith, (2) reasonably believed that his or her actions taken in an
official capacity were in the corporation’s best interest, (3) reasonably
believed that his or her actions in all other cases were not opposed to the
corporation’s best interests, and (4) in the case of criminal proceedings, did
not have reasonable cause to believe his or her conduct was unlawful.</span></div>
<span style="text-align: justify;"><div>
<span style="text-align: justify;"><br /></span></div>
<div style="text-align: justify;">
Section 8.103(c) of the TBOC permits a
Texas corporation to adopt a provision as part of its Certificate of Formation
which makes permissive indemnification mandatory. That means that once it has been determined
that a director has met the 4-part standard described in the previous paragraph
for a corporation to be permitted to indemnify a director, then the corporation
would be required to provide such indemnification for the benefit of the
director.</div>
</span><div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Of course, sometimes it is unclear at
the outset of a suit against a director whether or not the director has met the
standard for permissive indemnification. Meanwhile, the director may be
incurring substantial expenses in defending himself or herself against third
party claims. In cases where it has not yet been determined if the director has
met the standard for permissive indemnification, Section 8.104(a) of the TBOC
permits Texas corporations to advance expenses to directors in connection with
their defense of a claim, so long as the director provides a written statement confirming
that (1) the director believes he or she has met the standard for permissive
indemnification, and (2) the director will repay any expenses advanced if it is
ultimately determined that he or she has failed to meet the standard for
permissive indemnification. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Section 8.104(b) of the TBOC permits
corporation to adopt a provision in part as part of its Certificate of Formation
requiring the corporation to advance expenses to directors who have provided
the written confirmation described in the previous paragraph. As one might
expect, directors of Texas corporations typically think it is a good idea to
include such an advancement of expenses provision in the corporation’s
Certificate of Formation.</div>
<div style="text-align: justify;">
<b style="text-indent: -0.25in;"><u><br /></u></b></div>
<div style="text-align: justify;">
<b style="text-indent: -0.25in;"><u>Action
by Written Consent of less than all Shareholders</u>.</b><span style="text-indent: -0.25in;"> Let’s say you want to amend the
corporation’s Certificate of Formation to change the name of the
corporation. As with any other amendment
to the Certificate of Formation, that change requires the approval of the corporation’s
shareholders. If all shareholders are willing and able to sign a written consent approving the name change, then shareholder approval is fairly simple. But let’s further assume that all shareholders fully support the name
change, but one of the shareholders, holding only 1% of the corporation’s
outstanding shares of stock, is on vacation and is unable to sign a written
consent approving the name change. What
then? Well, if the name change is
important and the corporation does not have a provision in its Certificate of
Formation authorizing shareholder action by less than unanimous consent, the
only way the corporation may change its name is to call a meeting of the
shareholders to approve the name change. Such a meeting must be done in
compliance with applicable notice, quorum, proxy, and other provisions of the
corporation’s bylaws and relevant provisions of the TBOC. Finding a time and
place convenient for an adequate number of shareholders to attend in person or
by proxy may be difficult. On the other
hand, a corporation with a Certificate of Formation that includes a provision
permitting shareholder action by less than unanimous written consent of its
shareholders (as permitted by Section 6.202 of the TBOC) can very easily
circulate a written consent to its shareholders requesting approval of the name
change. Once signed by a sufficient
number of shareholders, the name change may proceed. </span></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Section 6.204 of the TBOC provides that
a corporation need not provide advance notice to shareholders of shareholder
action taken by written consent, so depending upon the advance notice of a
shareholder meeting required in the corporation’s bylaws, the right of
shareholders to take action by written consent can be important when timing is
critical for a matter requiring shareholder approval.</div>
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: 38.4pt; margin-right: 0in; margin-top: 0in; mso-add-space: auto; text-align: justify;">
<o:p></o:p></div>
<div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; margin-left: 38.4pt; margin-right: 0in; margin-top: 0in; mso-add-space: auto; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
Of course, that’s just of few of the possible
Certificate of Formation provisions ignored by the Secretary of State’s Form
201. A Texas corporation might elect to include all sorts of other provisions
in its Certificate of Formation, including provisions authorizing preferred
stock, providing for preemptive rights, providing for cumulative voting rights,
electing status as a “close corporation,” or adopting other provisions which
may be appropriate for some Texas corporations. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
Bottom line, careful consideration should be given
to the options available to a new corporation before just grabbing Form 201 and
filing away.</div>
</div>
NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com0tag:blogger.com,1999:blog-5607197407886640148.post-32166480039599384172017-06-30T17:28:00.003-05:002017-06-30T17:28:53.321-05:00360 West Magazine Top Attorney 2017I'd like to thank 360 West Magazine for including me in their list of "Top Attorneys 2017"(their annual list of our region's best attorneys)! This year, I was named in the practice areas of Business Law and Civil Law and Transactional. <br />
<br />
The complete list is available <a href="http://digital.360westmagazine.com/publication/?i=419811#{"issue_id":419811,"page":0}" target="_blank">here</a>. NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com0tag:blogger.com,1999:blog-5607197407886640148.post-33562823138581969352017-04-03T14:55:00.000-05:002017-04-12T23:53:33.294-05:00Regulation Crowdfunding Inflation AdjustmentsLimits on the amount of capital that companies can raise through equity crowdfunding just grew a tad.<br />
<br />
On March 31, 2017, the Securities and Exchange Commission (SEC) adopted amendments to Regulation Crowdfunding which adjust dollar thresholds and limits to account for inflation.<br />
<br />
Specifically, companies that raise capital through equity crowdfunding are now permitted to raise up to $1,070,000 per 12-month period (up from $1 million).<br />
<br />
The inflation adjustments also impacted other dollar limits and threshold throughout Regulation Crowdfunding. For example:<br />
<br />
<br />
<ul>
<li>The threshold for assessing a crowdfunding investor's annual income or net worth to determine investment limits applicable to such investor increased from $100,000 to $107,000;</li>
</ul>
<ul>
<li>For a crowdfunding investor whose income or net worth is below the new $107,000 threshold, the maximum amount of securities that can be sold to such investor in a crowdfunding offering has increased from $2,000 to $2,200 [or, if greater, 5% of the lessor of (i) the investor's annual income or (ii) the investor's net worth]; and </li>
</ul>
<ul>
<li>The maximum amount that any investor can invest in all crowdfunding offerings in any 12-month period has increased from $100,000 to $107,000.</li>
</ul>
<div>
<br /></div>
<div>
The SEC was required under the JOBS Act of 2012 to adjust the limits and thresholds under Regulation Crowdfunding to account for the impact of inflation. Further adjustments are required at least every five years.</div>
NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com0tag:blogger.com,1999:blog-5607197407886640148.post-74604248440695283162017-03-14T10:06:00.000-05:002017-03-15T10:22:07.289-05:00Cracking the SAFE: Financing Option for Start-ups<div class="MsoNormal">
<b><i>What the heck is a SAFE start-up investment and is it right for you?<o:p></o:p></i></b></div>
<div class="MsoNormal">
<b><i><br /></i></b></div>
<div class="MsoNormal">
SAFE stands for <i>Simple
Agreement for Future Equity</i>. The
investment approach and the acronym itself were developed and coined by Y
Combinator, a Silicon Valley-based start-up accelerator and seed investor. SAFEs
have been getting quite a bit of buzz in the start-up community.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A SAFE is a convertible equity instrument used by start-up
companies. The investor invests cash today in exchange for the company’s
promise to issue equity in the future. What type of equity and upon what
terms? <i>Exactly. </i>SAFE’s are
convertible into the next round of equity issued by the company (typically a
Series A preferred stock financing round) - whatever that financing round ends
up looking like. SAFEs typically
convert at a price discount to the Series A round and/or with a valuation cap applicable
to the Series A round so that the early stage SAFE investor gets some benefit
from taking on more risk by investing in the company at an earlier stage.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Here’s how it works.
Say you have a start-up company that has a great idea but urgently needs
funding (sound familiar?). You have some
friends and family or angel investors that have bought into the concept and
your vision, but because the company is early-stage, pre-revenue, there are no
obviously appropriate valuation metrics.
The company needs equity financing sooner rather than later, but how do
you price the equity at such an early stage? Whatever valuation you pick is
likely to be unfair to the founders or the investors. And what other equity terms will apply
(common or preferred equity, liquidation preference, dividend rate, registration
rights, tag-along rights, board membership rights, voting rights, etc.)? As you can see, when you start funding a start-up,
a lot of questions arise quickly. Does
it really make sense to spend a start-up’s limited time and money negotiating
valuation and other deal terms at such an early stage? The parties could spend thousands of dollars and
countless hours putting deal terms in place for a concept that never gets off
the ground.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The SAFE investment instrument allows you to kick these
sorts of issues down the road to a more appropriate stage of the start-up’s
life cycle. When the start-up engages in a true Series A financing round,
perhaps the financing round led by more sophisticated professional investors,
such as a venture capital firm. Often the Series A investor is better able to
take on the task of valuing the company and structuring the terms of the Series
A investment. And perhaps the company has a revenue stream to value or at least
a clearer path to defining and measuring a potential revenue stream at that
point. When things go as planned, the SAFE investors can piggy-back off the
added time, information and expertise of the Series A investors to hopefully
achieve more equitable deal terms. The SAFE converts into the same (or
substantially similar) security purchased by the Series A investors at the same
time the Series A round closes. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
If SAFEs sound familiar, it’s because SAFEs are in many ways
similar to convertible notes, which have long been a tool used by early-stage
start-up investors. SAFEs, like convertible notes, involve a cash investment
today with an expectation of conversion in an equity security in the future.<o:p></o:p></div>
<div class="MsoNormal">
Advocates for SAFE, such as Y Combinator, argue that SAFEs
are superior to convertible notes because, among other things (1) SAFEs accrue
no interest, (2) SAFEs have no maturity dates, and thus, no potential solvency
issues for the start-ups, (3) SAFEs have fewer terms to negotiate, and thus are
less expensive to implement (a SAFE is typically only about 5 pages long), and (4)
SAFEs are more reflective of economic reality – investors in convertible notes
rarely really intended to be a lender to the company (the convertible note is
just a placeholder until conversion, typically when the Series A terms are
known).<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
There is much positive to be said for SAFEs as a
quick-and-dirty mechanism to bridge a start-up to a more formal round of equity
financing. From the company’s perspective, there is much to love about SAFEs. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
From the investor’s perspective, on the other hand, SAFE is
a misnomer. The instrument isn’t “safe,” or at least not as safe as a
convertible note or a priced equity financing round. If the start-up never issues it’s “next” round
of equity, the SAFE exists in investment purgatory as neither an equity
investment nor a loan. SAFEs typically provide that SAFE investors get a
liquidation preference or get converted into equity upon a sale or liquidation
of the company – but that could be many years down the road – or never! Of course, no start-up equity investment is
truly safe. If the company fails
spectacularly, a convertible note holder is likely to be every bit as
“wiped-out” as a SAFE holder. Still, there are advantages to an investor having
the status and rights of a lender or a true equity holder. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
That said, a SAFE investor could reasonably conclude that
the cost savings to the investor (and to the company) of investing in a SAFE
might outweigh the added investor protections of negotiating to acquire
convertible notes or a full-blown common or preferred equity investment. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
While the SAFE investment vehicle is not for everyone, it is
certainly a worthy addition to a start-up’s financing tool-box. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
SAFE form documents proposed by Y Combinator are available
on their website <a href="https://www.ycombinator.com/documents/" target="_blank">here</a>.</div>
NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com4tag:blogger.com,1999:blog-5607197407886640148.post-16381896874935558122017-03-10T13:03:00.000-06:002017-03-12T12:19:35.352-05:00J.R. Ewing -Types Continue to Vex Courts and Corporate LawSince the dawn of our legal system, courts have had to deal with the problem of the sneaky contracting party (think: J.R. Ewing from tv's "Dallas" - or to cite a more recent example, Rumpelstiltskin from tv's "Once Upon a Time"). You know the type - someone who tricks another party into signing a contract - only after signing the contract does the other party learn further information which, had it been disclosed at the time, the other party never would have agreed to the deal terms in the contract.<br />
<br />
On the one hand, courts like to uphold contracts freely entered into by parties which are otherwise legally enforceable. <br />
<br />
On the other hand, courts hate to permit contracting parties to get away with fraud or otherwise sneaky behavior.<br />
<br />
I've blogged about this issue before <a href="http://www.northtexasseclawyer.com/2011/09/fraud-vitiates-everything-it-touches.html" target="_blank">here</a> when the Texas Supreme Court tackled the case of the stinky restaurant. In that case, the court came out on the side of the duped tenant whose landlord failed to disclose that the space they were renting smelled like sewer gas.<br />
<br />
Two recent corporate law cases decided in Delaware Chancery Court highlight this ongoing tension.<br />
<br />
In <i>Prairie Capital III, L.P. v. Double E Holding Corp.</i>, the court considered a case in which a company was sold based in large part upon falsified monthly sales information created by the seller. Unfortunately for the buyer, the stock purchase agreement included two key provisions: (1) one in which the buyer confirmed that it was relying exclusively on its own due diligence and the seller's representations and warranties in the agreement itself, and (2) a standard integration provision in which the parties agreed that the stock purchase agreement was the entire agreement of the parties (i.e., there were no oral agreements, side deals, etc.). Fortunately for the buyer, the seller also breached some expressed representations and warranties in the agreement itself, so the buyer's case was able to proceed against the seller on other legal theories. Nonetheless, the court concluded that so-called extra-contractual misrepresentations by the seller could not be the basis of a fraud claim by the buyer. In the court's view, the buyer had adequately disclaimed reliance on any such extra-contractual statements, even though the buyer did not use any particular "magic words" to do so.<br />
<br />
In <i>FdG Logistics LLC, v. A&R Logistics Holdings, Inc. </i>the court considered a case with almost identical facts as the <i>Prairie Capital</i> case but reached the opposite result - the buyer was permitted to pursue fraud claims against the seller. In that case, the seller was alleged to have made extra-contractual misrepresentations (i.e., misrepresentations other than those explicitly set forth in the representations and warranties section of the purchase agreement) in documents provided to the buyer during the due diligence period before the merger agreement was signed. Even though the merger agreement in question included a statement from the seller that it was not making any representations or warranties other than those explicitly set forth in the agreement itself and there was a standard integration (entire agreement) provision, the court ruled that there was not a clear disclaimer of reliance by the buyer in the merger agreement. Without such a clear disclaimer of reliance <i>by the buyer</i>, the buyer's fraud claims could proceed. The court admitted that it was splitting hairs, noting that statement by the seller that it is exclusively making certain representations and a statement by the buyer that it is exclusively relying on such representations seem "like two sides of the same coin." Nonetheless, because courts hate to permit parties to get away with fraud, it will only find an adequate disclaimer of reliance by a victim when such disclaimer is crystal clear.<br />
<br />
It is easy to see the tension at work in these types of case. Courts want to allow sophisticated and well represented parties to set the terms of their own deals - and tailor the scope of the relevant representations and warranties upon which the parties relied. That sort of flexibility keeps parties from endlessly claiming to have relied upon all sorts of statements made outside of the contract itself. On the other hand, courts don't like the idea of rewarding those who commit fraud for their dishonesty and underhanded tactics, such as failing to disclose material facts that fall outside the scope of the representations and warranties in the agreement itself but are nonetheless important to the other party. <br />
<br />
<b>Takeaways:</b><br />
<b><br /></b>
The takeaways here are fairly obvious:<br />
<br />
<ul>
<li>If you are a buyer and you relied upon a particular piece of information received from the seller in making a decision to enter into a transaction, you'll want to have the agreement say so explicitly in the seller's representations and warranties in the agreement itself. Then, you won't have to worry about whether or not the court will tolerate extra-contractual misrepresentation or fraud by the other party in your particular case.</li>
<li>If you are a seller, and wish to minimize your exposure for alleged extra-contractual misrepresentations, you'll want to include an explicit disclaimer from the buyer of reliance on any other statements from the seller other than those in the agreement itself. And after <i>FdG Logistics</i>, we now know that such disclaimer should be written such that it reads as a statement from the buyer's perspective disclaiming reliance, not just a statement from the seller that it is not making any other representations or warranties. And even though courts often claim they aren't looking for any particular "magic words," sellers should seek to include the magic words "disclaim reliance" on other statements of the seller or seller's representatives. <b>PUTTING THE DISCLAIMER OF RELIANCE IN BOLD AND ALL CAPS IS ALSO A GOOD IDEA. </b></li>
</ul>
<div>
But regardless of how carefully contracts are drafted by the parties, society will always have parties seeking to game the system by complying with the letter but not the spirit of agreements, and courts will have to decide whether to let them get away with those games or not.</div>
NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com2tag:blogger.com,1999:blog-5607197407886640148.post-32767802463905192002017-02-17T22:07:00.000-06:002017-03-14T17:01:13.689-05:00Texas Bar Today - Top 10 Blog PostMy last blog post, "<a href="http://www.northtexasseclawyer.com/2017/02/the-divisive-merger-powerful-tool-in.html" target="_blank">The Divisive Merger: A Powerful Tool in Texas</a>," was named one of the Top 10 legal blog posts of last week by <i>Texas Bar Today</i>. What do I win, you might ask? This cool seal:<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEJnMUyw27Luft49eh6ttXVmUxIVrAUfOi-bLl74RvVxbhCsCtsylDTojO_nR3aEGnQNssT9QWerSgoBvAlQKTMuN7cQh9D6kiLF8O3YnHqUH5pNrKmzR8JX0m5mY32cWMjYmClfyxZQs/s1600/TexasBarToday_TopTen_Badge_June2016.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEJnMUyw27Luft49eh6ttXVmUxIVrAUfOi-bLl74RvVxbhCsCtsylDTojO_nR3aEGnQNssT9QWerSgoBvAlQKTMuN7cQh9D6kiLF8O3YnHqUH5pNrKmzR8JX0m5mY32cWMjYmClfyxZQs/s320/TexasBarToday_TopTen_Badge_June2016.jpg" width="225" /></a></div>
<br />NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com152tag:blogger.com,1999:blog-5607197407886640148.post-37322782874406487702017-02-15T14:54:00.000-06:002017-02-15T14:54:09.987-06:00The Divisive Merger: A Powerful Tool in TexasWhat the heck is a divisive merger?<br />
<br />
A divisive merger is a merger involving splitting up one company up into two or more new companies. <br />
<br />
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.<br />
<br />
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."<br />
<br />
So why is a divisive merger so powerful? <br />
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com6tag:blogger.com,1999:blog-5607197407886640148.post-11124151319037460112017-01-21T21:53:00.000-06:002017-01-21T21:53:16.448-06:00Trump Tweet SuggestionsI'd like to thank the <i>Fort Worth Business Press</i> 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 <a href="http://www.fortworthbusiness.com/news/government/hail-to-the-tweet-tweets-i-d-like-trump-to/article_7b70afe0-de71-11e6-9a3d-1f5ad95a31be.html" target="_blank">here</a>.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com1tag:blogger.com,1999:blog-5607197407886640148.post-3034877892360667812017-01-18T12:08:00.000-06:002017-01-18T12:08:16.509-06:00U.S. Supreme Court Clarifies Insider Trading RulesThe U.S. Supreme Court recently ruled in the case of <i>Salman v. United States,</i> 137 S.Ct. 420 (2016), that an insider may <u><b>not</b></u> 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.<br />
<br />
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?<br />
<br />
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. <br />
<br />
<b><i>Insider Trading Law Background:</i></b><br />
<b><br /></b>
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."<br />
<br />
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. <br />
<br />
So the key issue in the <i>Salman</i> 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?<br />
<br />
As the <i>Salman</i> 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.<br />
<br />
This result was so obvious that the Court unanimously agreed with the opinion.NorthTexasSECLawyerhttp://www.blogger.com/profile/12828865495213301601noreply@blogger.com0