Intersection of Law and Business

Why do I have a picture of Wall Street as the wallpaper for this blog? 

Well, for one thing, it comes free with Google's Blogger application.  For another, it really captures the essence of corporate and securities law - the place where money, people, ideas, plans, and dreams come together to build businesses and the whole U.S. economy.

To practice corporate and securities law is to operate at the intersection of law and business.  That was the mantra of Ron Frappier, one of the finest securities lawyers around and the former head of the corporate and securities law section of Jenkens & Gilchrist, P.C.   He even wrote an excellent article elaborating on that topic which is available here: http://roadaccidentlawyer.com/the-intersection-of-law-and-business. 

What Ron understood better than most attorneys is that knowing the law is great, but knowing how the law impacts a client's business is much more important.  Clients generally want real world, practical business advice in light of legal risks ("What should I do now?") - not a 25 page memorandum exhaustively analyzing every nuance of a legal question without reaching an actual conclusion. 

That's the intersection of law and business - and it's something try to keep in mind every day.        

Raising Capital for the Future of Your Business

NET Business Resource magazine has published an article I wrote on Raising Capital for the Future of Your Business in its Jan/Feb 2011 issue.  Here is a link to the article:

http://www.branchsmith.com/eBook/GREN/27800_GREN/27800_GREN/flash.html#/40/

Texas Two-Step Trap for Secured Lenders

When is a secured lender not a secured lender?  When a loan guarantor steps into the secured lenders shoes through subrogation following foreclosure of the borrower's equity.  Suddenly, the lender owns the equity of the borrower, but the guarantor has a lien on the borrower's assets!  It's what I call the Texas Two-Step Trap. 

Allow me to back up and explain.  Let's say a Bank lends $20,000,000 to Borrower, which loan is secured by (1) all of Borrower assets, (2) a guaranty of the loan by Guarantor, the 100% owner of Borrower, and (3) a pledge of all of the stock of Borrower by Guarantor.  Now let's say Borrower defaults on the loan and Bank acquires all of Borrower's stock pledged by Guarantor at a foreclosure sale with a credit bid equal to all amounts owed to Bank by Borrower under the loan.  So now Bank owns all of the stock of Borrower and the debt has been extinguished.

But wait.  Bank has exercised its right to enforce the guaranty against Guarantor, thereby giving Guarantor the right to seek reimbursement from Borrower.  Guarantor probably also has a right of subrogation to step into Bank's shoes as a secured creditor of Borrower.  Hence, now the Guarantor is structurally ahead of Bank with regard to claims against the assets of Borrower! 

One possible way for Bank to avoid this Texas Two-Step Trap is to make sure its credit bid is for an amount less than 100% of the oustanding balance of Borrower's loan.  Guarantees typically provide that the Guarantor waives its right of subrogation until the lender has been paid in full. 

Thanks to Lynn Soukup and Steven Weise who explored this hypothetical in their CLE presentation earlier today.

E-corporate Law

Like it or not, the electronic age has envaded virtually every corner of our lives.  And corporate law is no exception.  In a world which once required wax seals to make contracts "legal," today parties can enter into multi-billion dollar contracts with merely the click of a mouse. 

I'll be speaking on the current state of e-corporate law under federal law and Texas and Delaware state law on February 10 at the Belo Mansion in Dallas as part of the UT-CLE Securties Regulation and Business Law Conference.

Thanks for being a part of my blog during 2010. 

Have a happy and prosperous New Year!

Delaware Usury Exemption

Why is Delaware considered to have a friendly legal environment for corporations?  Well, for a lot of reasons.

One reason I will be focusing on in this post is its usury law.  More specifically, Delaware has a broad and clear exemption from its usury law for transactions over $100,000.

Many states cap the amount of interest a lender can charge a borrower, thereby limiting the access to loans for many businesses with weaker credit. 

In Delaware, a lender may legally charge any rate of interest for a loan over $100,000 which is not secured by a mortgage against a principal residence of the borrower.  See Section 2301(c) of the Delaware Commerce and Trade Code.

Is your Texas Guaranty Waiver language up-to-date?

If you have ever seen a typical loan guaranty, you probably know that it takes about one sentence to say that the guarantor guarantees certain indebtedness on behalf of the borrower and several paragraphs (perhaps several pages) for the guarantor to waive many of the defenses to such guaranty and many of the rights of the guarantor.   A lender relying on such guaranty certainly hopes that it has covered all of its basis with respect to such waivers.

For example, Section 43.002 of the Texas Civil Practice and Remedies Code provides that upon a lender having a right of action against a brorrower (such as for the borrower's failure to repay a loan in a timely manner), the guarantor may require the lender to "without delay bring a suit on the contract."  If the lender fails to promptly sue the borrower, the guarantor may be discharged from liability under the guaranty.  As you might expect, it is not unusual for the lender to seek a waiver of this right from the guarantor. 

This right of the guarantor to require the lender to promptly sue the borrower could previously be found in Section 34.02 of the Texas Business and Commerce Code until it (and several similar provisions) were moved to the Texas Civil Practice and Remedies Code effective April 1, 2009.

Texas lenders would be wise to update their guaranty forms to ensure that references to the old Chapter 34 of the Texas Business and Commerce Code now reference Chapter 43 of the Texas Civil Practice and Remedies Code instead.

Special thanks to my colleague, Paul Hendry, who brought this statutory change to my attention.

Delaware LLC Operating Agreements and the Statute of Frauds

Delaware's Limited Liability Company Act permits a Delaware limited liability company to have an oral operating agreement (Section 18-101(7)).

Delaware's Statute of Frauds makes unenforeceable, among other things, oral contracts which cannot be performed within one year (Title 6, Section 2714).

So would a provision in an oral operating agreement of a Delaware LLC that could not be performed within one year be enforceable, such a a buyout of an exiting member over a three-year period?

Until recently, the answer to that question was unclear. As of August 2, 2010, the Delaware LLC has been amended to clarify that an LLC operating agreement is not subject to the statute of frauds.