I must take a detour from my usual discussion of corporate and securities law topics to congratulate the Southlake Carroll High School football team. The Dragons just finished off an undefeated season with a record-tying 8th Texas state football championship. The Dragons showed tremendous heart and determination in coming from behind to win five of their six playoff games. Thier playoff run included the "Miracle on Mockingbird," in which Carroll scored two touchdowns and recovered an onside kick in the final two minutes to erase a 10-point lead by Dallas Skyline High School. That state semi-final game also featured a wild fox running out on to the field on the same play the go-ahead touchdown was scored. What an amazing run for this team which inspired so many of us!
I am pleased to report that this blog recorded its 10,000th pageview this week. I look forward to sharing much more with you in 2012. Merry Christmas and Happy New Year!
Tuesday, December 20, 2011
Thursday, December 15, 2011
New Texas Securities Commissioner
Yesterday, the Texas Securities Board announced that it has named John Morgan as the new Texas Securities Commissioner. He replaces Benette L. Zivley, who resigned in November. Further details are available in the Texas State Securities Board's press release here: http://www.ssb.state.tx.us/News/Press_Release/12-14-11_press.php.
Monday, December 12, 2011
Annual UT-CLE Securities Regulation Conference Approaching
In the heart of the Christmas season, I thought it would be a great time to mention that the gift every securities attorney in Texas has on their wish list is a ticket to the UT-CLE 34th Annual Conference on Securities Regulation and Business Law. Okay, I can't confirm that, but I can tell you that this conference is always one of the best around for those of us interested in securities law. The 2012 conference will be February 9 and 10 at the Belo Mansion in Dallas. The conference includes 13.25 hours of programming over two days, including the latest on fracking and other hot topics in energy, issues facing microcap public companies, and the new investment advisors rules. And Yours Truly will be serving as a Presiding Officer. You can learn more about the conference here: http://www.utcle.org/conference_overview.php?conferenceid=1007. Hopefully, I'll see you there.
Friday, November 11, 2011
Is Going Public a viable Exit Strategy?
When I began practicing securities law in the late 1990's, it was the golden era of public offerings. It seemed anybody with a hot idea and a Silicon Valley address was taking their company public. That's no longer the case. The Great Recession has really put a damper on the number of public offerings generally, and initial public offerings in particular. According to the September issue of Inc. magazine, only 67 companies have gone public so far this year in the United States, 109 went public in 2010, and only 48 went public in 2009. Accordingly, shareholders of private companies seeking a near-term exit strategy should generally be thinking of a sale in a privately negotiated M&A transaction rather than tapping into the public equity markets.
Tuesday, November 8, 2011
Fort Worth Public Company Shareholders Speak on Say-On-Pay Frequency
Among the many new rules introduced by the Dodd-Frank Act of 2010, are the so-called "say-on-pay" provisions, which give shareholders of public companies the right to a non-binding advisory vote approving or disapproving of the company's executive compensation. In connection with the say-on-pay rules, public companies are required to give their shareholders a say on the how frequently the say-on-pay votes will be held: annually, every other year, or every third year. The say-on-pay and say-on-frequency rules have been codified by the SEC as Exchage Act Rule 14a-21(a) and Rule 14a-21(b), respectively.
We were curious how companies have reacted to the new SEC rules, so we conducted a survey of the proxy statements of the 20 largest publicly traded companies based in the Fort Worth area as reported by the Fort Worth Business Press. Of those 20 companies, 15 have conducted say-on-frequency votes. Of those 15 publicly traded companies, the board recommended annual say-on-pay votes in 10 cases (67%), but the shareholders voted for annual say-on-pay votes in 14 cases (93%). In fact, only one Fort Worth-based publicy traded company in our survey had shareholders who voted for a say-on-pay vote every 3 years. Below are graphs showing our results:
We were curious how companies have reacted to the new SEC rules, so we conducted a survey of the proxy statements of the 20 largest publicly traded companies based in the Fort Worth area as reported by the Fort Worth Business Press. Of those 20 companies, 15 have conducted say-on-frequency votes. Of those 15 publicly traded companies, the board recommended annual say-on-pay votes in 10 cases (67%), but the shareholders voted for annual say-on-pay votes in 14 cases (93%). In fact, only one Fort Worth-based publicy traded company in our survey had shareholders who voted for a say-on-pay vote every 3 years. Below are graphs showing our results:
Tuesday, October 25, 2011
Piercing the Veil of a Texas LLC
Good news for members of Texas limited liability companies ("LLCs"):
As a general rule, a member or a manager of a Texas LLC may not be held liable for the debts or obligations of the LLC unless the LLC's company agreement provides otherwise. In fact, the Texas Business Organizations Code ("TBOC") makes that point explicitly in Section 101.114.
On the other hand, Texas corporate law has long recognized the concept of "veil-piercing" in which a corporation's shareholder may be held liable for obligations of the corporation in extraordinary circumstances, such as when the shareholder has used the corporation as an instrument of fraud. Texas corporate law statutes provide strict limits on such corporate veil piercing, however. See Sections 21.223 through 21.226 of the TBOC.
So are members of a Texas LLC entitled to enjoy the same limits of veil piercing as those enjoyed by shareholders of a Texas corporation under Texas corporate law statutes?
Although logic would dictate that the answer should be "yes," at least two out-of-state courts interpreting the TBOC have concluded that the Texas corporate law anti-veil piercing statutes by their own terms apply only to Texas corporations and thus have no application to Texas LLCs.
The Texas legislature recently corrected the potential for unequal treatment for members of Texas LLCs by adopting a new Section 101.002 to the TBOC. The new provision explicitly provides that the anti-veil piercing provisions enjoyed by shareholders of Texas corporations under Sections 21.233-21.236 of the TBOC will apply to members of Texas LLCs as well. The new provision took effect September 1, 2011.
As a general rule, a member or a manager of a Texas LLC may not be held liable for the debts or obligations of the LLC unless the LLC's company agreement provides otherwise. In fact, the Texas Business Organizations Code ("TBOC") makes that point explicitly in Section 101.114.
On the other hand, Texas corporate law has long recognized the concept of "veil-piercing" in which a corporation's shareholder may be held liable for obligations of the corporation in extraordinary circumstances, such as when the shareholder has used the corporation as an instrument of fraud. Texas corporate law statutes provide strict limits on such corporate veil piercing, however. See Sections 21.223 through 21.226 of the TBOC.
So are members of a Texas LLC entitled to enjoy the same limits of veil piercing as those enjoyed by shareholders of a Texas corporation under Texas corporate law statutes?
Although logic would dictate that the answer should be "yes," at least two out-of-state courts interpreting the TBOC have concluded that the Texas corporate law anti-veil piercing statutes by their own terms apply only to Texas corporations and thus have no application to Texas LLCs.
The Texas legislature recently corrected the potential for unequal treatment for members of Texas LLCs by adopting a new Section 101.002 to the TBOC. The new provision explicitly provides that the anti-veil piercing provisions enjoyed by shareholders of Texas corporations under Sections 21.233-21.236 of the TBOC will apply to members of Texas LLCs as well. The new provision took effect September 1, 2011.
Wednesday, October 12, 2011
Private Placements outside of Safe Harbors
Is it possible to conduct a lawful private placement of securities under federal securities laws without relying upon Regulation D or other so-called "safe harbor" exemptions from registration under the Securities Act of 1933, as amended (the "Securities Act")?
Absolutely. By definition, a legal safe harbor means that compliance with the safe harbor is not required, but failure to comply is done at one's own peril. Accordingly, an issuer of securities who fails to comply with each and every term and condition of Regulation D or other safe harbor exemption from registration may still be exempt from registration under federal securities laws. An issuer who chooses to sail outside of those safe harbors, however, takes the risk that the Securities and Exchange Commission ("SEC") or a judge may conclude that the issuer has conducted a public offering rather than a private placement of securities in violation of the Securities Act. Failure to comply with the registration requirement under the Securities Act has serious consequences, so most issuers conducting a private placement play it safe by relying or attempting to rely on Regulation D as a safe harbor exemption from the registration requirements.
The November 2010 issue of The Business Lawyer, a legal journal published by the Business Law section of the American Bar Association ("ABA"), has a terrific report summarizing the history and current state of the law of private placements outside of safe harbors. Its title, appropriately enough, is "Law of Private Placements (Non-Public Offerings) Not Entitled to Benefits of Safe Harbors - A Report." It was written by the Committee on Federal Regulation of Securities of the ABA Section of Business Law.
The report notes that whether an offering of securities will be considered a public offering or a private placement which is therefore exempt from registration under Section 4(2) of the Securities Act depends upon the facts and circumstances of the offering. The report says that the concepts that underlie the Regulation D safe harbor are the same factors that should be considered in evaluating whether or not an offering should be deemed a private placement for the purposes of Section 4(2) of the Securities Act. Specifically, the four critical factors in determining whether of not an offering is a private placement are:
(1) Manner of offering. The issuer may not use "general solicitation" or "general advertising."
(2) Sophisticated Purchasers. The issuer must reasonably believe that all purchasers in the offering are knowledgeable and sophisticated.
(3) Access to Information. The purchasers must have access to information about the issuer and the offering to make an informed decision.
(4) Resale Limitations. The issuer must take reasonable steps to prevent the purchasers from reselling the securities.
Importantly, the report noted a few factors which should not be considered to be relevant factors independently, except to the extent that such factors inform one of the factors listed above, such as manner of offering. Items which are sometimes cited as relevant, but which should not be considered independently relevant include:
(1) Number of purchasers. As long as the purchasers are capable of evaluating the investment, the number of purchasers should not matter.
(2) Preexisting relationship with purchaser. The purchaser need not have a preexisting relationship with the issuer.
(3) Eligibility of Offerees and Purchasers. It should not matter whether or not an offeree who does not ultimately become a purchaser is knowledgeable or sophisticated. Also, the ability of a purchaser to bear the economic risk of an investment should not be relevant, except to the extent that concept is baked into the definition of "accredited investor," who are persons assumed to be financially sophisticated.
(4) Size of the Offering.
(5) Number of Units.
(6) Manner of Offering. The existence of an investment banker (whether the broker-dealer is acting as principal or agent of the issuer) should not be a relevant factor. Also, dissemination of information about the offering by parties other than the issuer or someone acting on its behalf should not be deemed a "general solicitation" which would destroy the issuer's exemption from registration.
(7) Information. It should not matter whether or not a non-purchasing offeree received full access to information. Generally, purchasers will be deemed to have adequate information about any issuer that is publicly traded and therefore subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.
(8) Resales. If the issuer takes reasonable steps to prevent resales of the securities, it shouldn't matter if one or more purchasers nonetheless resells the securities in violation of the issuer's resale restrictions.
Absolutely. By definition, a legal safe harbor means that compliance with the safe harbor is not required, but failure to comply is done at one's own peril. Accordingly, an issuer of securities who fails to comply with each and every term and condition of Regulation D or other safe harbor exemption from registration may still be exempt from registration under federal securities laws. An issuer who chooses to sail outside of those safe harbors, however, takes the risk that the Securities and Exchange Commission ("SEC") or a judge may conclude that the issuer has conducted a public offering rather than a private placement of securities in violation of the Securities Act. Failure to comply with the registration requirement under the Securities Act has serious consequences, so most issuers conducting a private placement play it safe by relying or attempting to rely on Regulation D as a safe harbor exemption from the registration requirements.
The November 2010 issue of The Business Lawyer, a legal journal published by the Business Law section of the American Bar Association ("ABA"), has a terrific report summarizing the history and current state of the law of private placements outside of safe harbors. Its title, appropriately enough, is "Law of Private Placements (Non-Public Offerings) Not Entitled to Benefits of Safe Harbors - A Report." It was written by the Committee on Federal Regulation of Securities of the ABA Section of Business Law.
The report notes that whether an offering of securities will be considered a public offering or a private placement which is therefore exempt from registration under Section 4(2) of the Securities Act depends upon the facts and circumstances of the offering. The report says that the concepts that underlie the Regulation D safe harbor are the same factors that should be considered in evaluating whether or not an offering should be deemed a private placement for the purposes of Section 4(2) of the Securities Act. Specifically, the four critical factors in determining whether of not an offering is a private placement are:
(1) Manner of offering. The issuer may not use "general solicitation" or "general advertising."
(2) Sophisticated Purchasers. The issuer must reasonably believe that all purchasers in the offering are knowledgeable and sophisticated.
(3) Access to Information. The purchasers must have access to information about the issuer and the offering to make an informed decision.
(4) Resale Limitations. The issuer must take reasonable steps to prevent the purchasers from reselling the securities.
Importantly, the report noted a few factors which should not be considered to be relevant factors independently, except to the extent that such factors inform one of the factors listed above, such as manner of offering. Items which are sometimes cited as relevant, but which should not be considered independently relevant include:
(1) Number of purchasers. As long as the purchasers are capable of evaluating the investment, the number of purchasers should not matter.
(2) Preexisting relationship with purchaser. The purchaser need not have a preexisting relationship with the issuer.
(3) Eligibility of Offerees and Purchasers. It should not matter whether or not an offeree who does not ultimately become a purchaser is knowledgeable or sophisticated. Also, the ability of a purchaser to bear the economic risk of an investment should not be relevant, except to the extent that concept is baked into the definition of "accredited investor," who are persons assumed to be financially sophisticated.
(4) Size of the Offering.
(5) Number of Units.
(6) Manner of Offering. The existence of an investment banker (whether the broker-dealer is acting as principal or agent of the issuer) should not be a relevant factor. Also, dissemination of information about the offering by parties other than the issuer or someone acting on its behalf should not be deemed a "general solicitation" which would destroy the issuer's exemption from registration.
(7) Information. It should not matter whether or not a non-purchasing offeree received full access to information. Generally, purchasers will be deemed to have adequate information about any issuer that is publicly traded and therefore subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.
(8) Resales. If the issuer takes reasonable steps to prevent resales of the securities, it shouldn't matter if one or more purchasers nonetheless resells the securities in violation of the issuer's resale restrictions.
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