Bitcoin Investment Pioneer

On March 10, the Texas State Securities Board (TSSB) issued an Emergency Cease and Desist Order against Balanced Energy LLC, a Southlake, Texas-based oil and gas exploration company.  The company claims to be the first in the oil and gas industry to accept Bitcoin from investors rather than cash.  A copy of the TSSB press release is available here.

Based on a review of the Cease and Desist Order available here, it appears the TSSB objected to the company's unregistered sales of securities to unaccredited investors and the lack of adequate disclosure of, among other things, the risks of using Bitcoin as a currency.

Putting aside those objections for the purposes of this blog, it will be interesting to see if other oil and gas companies or other companies seeking to raise capital will consider accepting investments in Bitcoin.  Bitcoin is a virtual, digital currency that allows users to send money over the Internet without using a credit card or bank account.  Privacy hawks and anti-government zealots love that Bitcoin is a money supply free from government regulation.  On the other hand, the unregulated nature of Bitcoin has contributed to its reputation for having highly volatile pricing.    

Regardless of whether or not Bitcoin takes off as an investment currency, the TSSB's Cease and Desist Order is a reminder to all companies issuing securities of the timeless requirements of US securities laws:  Every issuance of securities, such as working interests in oil and gas wells, (whether for Bitcoin, US dollars or any other currency) must be registered with the SEC and applicable state securities regulators or must be made in compliance with an applicable exemption from those registration requirements.

Drafting Texas LLC Agreements

Few, if any, know as much about Texas limited liability company law as Professor Elizabeth S. Miller of Baylor University Law School.  Professor Miller published a terrific article titled "Practical Pitfalls in Drafting Texas Limited Liability Company Agreements" in the Fall 2012 Texas Journal of Business Law.  It should be required reading for anyone drafting company agreements for Texas LLCs.  I could not find the article cited online, but a substantially similar article is available on Baylor's website here.

For example, Professor Miller notes in the article that the default rule under Texas LLC law is that a majority vote of the members of an LLC by number (rather than by percentage interest) is required to take many extraordinary company actions, such as approving a merger or other fundamental business transaction (See Sections 101.354 and 101.356(c) of the Texas Business Organizations Code ("TBOC")). That might come as a major shock to a member of an LLC holding say, 90% of the percentage interest, along with five other members whole collectively hold the remaining 10% of the percentage interests of the LLC!

Another default rule under Texas LLC law that might come as a surprise to LLC members is that members may take action informally without a meeting, such as by a series of phone calls or e-mails, rather than at a formal meeting of the members (See Sections 101.358 and 101.359 of the TBOC).  In fact, Section 101.359(2)(A) of the TBOC provides that a member may be deemed to have consented to a company action if the member knew about it but failed to object to the action in a timely manner.

Professor Miller reminds us that the default LLC rules can generally be modified by contrary provisions in an LLCs company agreement.  Drafters of LLC company agreements can avoid surprises by being careful to address each default provision that is not consistent with the LLC members' wishes.

Introducing the M&A Broker

What is an m&a broker?  It is a new term recently introduced by the Securities and Exchange Commission (SEC) to describe a business broker who may be involved in private company merger and/or acquisition transactions involving stock without registering as a broker-dealer. This is great news for unregistered business brokers and the small, mid-sized and family owned privately-held companies that they typically represent.

Previously, business brokers were required to be registered with the SEC if they were in the business of effecting transactions in securities, such as the sale of stock.  However, there is no SEC registration requirement to serve as a broker in the sale of assets.  So under the prior law, an unregistered business broker could earn a commission on the sale of 100% of a business’s assets, but could not earn a commission for the sale of 100% of the same business’s stock. Many felt that different treatment for stock deals and assets deals made little sense. The old rules often required buyers and sellers to structure transactions as a sale of assets, even in cases when a sale of stock would make more sense for the buyer and seller from the standpoint of tax, accounting, regulatory or other considerations.

On February 4, 2014, the SEC came to the relief of unregistered business brokers and their clients by issuing a no-action letter creating the m&a broker exemption from SEC broker-dealer registration requirements. A copy of the no-action letter is available here. The m&a broker exemption permits unregistered business brokers to be involved in transactions involving the sale of control stock of a privately-held company to a buyer who will actively control the business.  The transaction may be structured as a merger, acquisition, business sale or business combination.  There is no dollar limit on the size of the private company that may be involved in the transaction.  There are other restrictions on use of this exemption set forth in the no-action letter, including that the broker may not bind either party, provide financing for the transaction or handle funds.

Easing the regulatory burden on business brokers should result in brokers bringing more buyers and sellers to each other’s attention, thereby facilitating the closing of more business transactions, which in turn should result in fairer prices and greater liquidity for business owners seeking to sell their company.      

Risks of Electronic Contracting

How easy is it to enter into a multi-million dollar (or more) contract via e-mail?  As easy as clicking "send" on an e-mail, it would seem.

Under the Texas Uniform Electronic Transactions Act (UETA), parties can enter into a legally binding agreement by e-mail or other electronic communications, even for matters that traditionally were required to be in writing, such as agreements to purchase real property, including oil and gas interests.  Under UETA, if the parties intend to enter into an agreement electronically, an otherwise enforceable agreement will not be unenforceable solely because it was entered into electronically.

A recent court case, 2001 Trinity Fund, LLC v. Carrizo Oil & Gas, Inc., which was decided by a Texas state appeals court in Houston, illustrates the danger of negotiating the terms of a business transaction over e-mail.  In that case, the trial court analyzed a series of e-mail messages between two oil and gas companies and concluded that the e-mails collectively constituted a binding legal agreement to amend and revive their existing participation agreement.  The e-mails including statements such as:

• “I agree in principle, but need to have this interest flow directly back to me.”

• “[i]f you are in agreement in principle, then I’m assuming we can work out the mechanics.”

• “That will work.  I will call before the day is over and give you an exact time.”

• “Yes, has been my final answer.  I will give you the final date ASAP.”

• “As I told you before, I intend on being involved in the drilling program.”

The trial court initially awarded one of the parties over $10 million in damages for the other party’s breach of the alleged electronic agreement. That trial court verdict was later overturned on appeal when the appellate court reached the opposite conclusion, finding that the evidence was legally insufficient to support the jury’s conclusion that an electronic agreement existed.

Nonetheless, the takeaway is obvious.  When in discussing a business transaction via e-mail or other electronic means, one should make sure it is crystal clear whether or not the party desires or intends to enter into an electronic agreement, or if the party does NOT have such desire or intent.  Otherwise, courts may be deciding whether or not an electronic agreement exists, and you may not like its decision.  

New Assumed Name Certificate Form

Good news for businesses operating in Texas under an assumed name: the assumed name certificate is now shorter as easier to complete!

As many readers probably know, Section 71.101 of the Texas Business and Commerce Code requires any company regularly conducting business in Texas under a name other than its legal name to file an assumed name certificate with the Texas Secretary of State and the appropriate Texas county.

Thanks to Senate Bill 699 of the 83rd Texas Legislature, effective September 1, 2013, the State of Texas no longer requires an assumed name certificate to include the address of the company's registered office or similar information for company's who are not required to maintain a registered office in Texas.  The only address now required to be included is the principal office of the company, whether such office is inside or outside of Texas.

The Texas Secretary of State's office has prepared a new form of assumed name certificate, which is available here.

This is a change for the better for Texas law because the older, longer information requirements for assumed name certificates were redundant and therefore did not seem to serve any meaningful purpose.

2013 ABA Deal Points Study

The 2013 Private Target M&A Deal Points Study has been released by the M&A Market Trends Subcommitte of the Mergers & Acquisitions Committee of the Business Law Section of the American Bar Association.  It's available to members of the Business Law Section of the ABA here.

I've blogged about the value of the Deal Points Study before here.  In fact, that has been one of my most popular blog posts based upon number of pageviews.

The 2013 Private Target M&A Deal Points Study reviewed 136 publicly available purchase agreements for acquisitions of private companies by public companies completed in 2012.  The transaction sizes in the study ranged from $17 million to $4.7 billion, with an average transaction size of $305 million and a median transaction size of $150 million.  The study analyzed a few dozen frequently negotiated deal points with a goal of being able to provide some guidance on "what's market."

For example, a few of the study findings are as follows:

• 64% of the purchase agreements in the study included a representation from the target company similar to the SEC's Rule 10b-5, such as: "No representation or warranty or other statement made by [Target] in this Agreement, the Disclosure Letter, any supplement to the Disclosure Letter, the certificates delivered pursuant to this Agreement, or otherwise in connection with the Contemplated Transactions contains any untrue statement of material fact or omits to state a material fact necessary to make the statements in this Agreement or therein, in light of the circumstances in which they were made, not misleading."  That is up dramatically from 32% in the 2008 Deal Points Study.

• 19% of the purchase agreements in the study required a legal opinion from target's counsel.  That's down from the 58% of the deals in 2008 that included such a requirement.

• 83% of the purchase agreements in the study provided that the representations and warranties would survive the closing for a period of between 12 and 18 months.  The most popular survival period length was 18 months (44%).

• 89% of the purchase agreements included caps on indemnification obligations.  Of those agreements with caps, 89% of those agreements included caps at or below 15% of the purchase price.

As always, thanks to the hard-working members of the M&A Market Trends Subcommittee for gathering the valuable information provided by the survey.

How Much Is My Business Worth?

How much can you sell your business for?  Well, that depends on many factors, including historic revenues, profit margins, cash flow, industry trends, customer loyalty, availability of potential buyers and their access to capital, barriers to entry by competitors, and a host of other factors.  If you are serious about selling, you should certainly consult with an experienced business broker-dealer or similar certified professional.  That said, here are a few interesting data points from a recent Dallas Business Journal article (citing BizBuySell.com).  On average, Dallas-Fort Worth small business owners selling their business have an asking price equal to:

• 90% of their annual revenues; and
• 3.28 times their annual cash flow.

The median small business sales price for small business in DFW listed on BizBuySell.com was $223,000. Food for thought.   

Thanks for reading this blog in 2013.  Hope everyone has a healthy and prosperous 2014!