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!

SEC Annual Report

One of the nice things about the holidays is that it gives you a chance to catch up on some light reading, such as the 152-page U.S. Securities and Exchange Commission (SEC) Fiscal Year 2013 Agency Financial Report (AFR).  For those who are interested, the AFR is available here.

The SEC is required by law to prepare the AFR, which reports on the SEC's accomplishments, activities and financial position.  As you might expect, the report has many positive things to say about the SEC's mission and its activities in support of its mission.  To quote the report, the SEC's mission is "to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation."  

A few factoids from the report that I found especially interesting:

• Much of the SEC's agenda in 2013 was driven by implementing the provisions of the Dodd-Frank Act.  The Dodd-Frank Act contains more than 90 provisions that require SEC rulemaking according to page 14 of the AFR.  I wonder how many Members of Congress who voted for the Dodd-Frank Act actually read all 90+ provisions before they cast their vote?!
• The SEC has 11 regional offices, including one in Fort Worth, Texas.  The SEC's Fort Worth Regional Office covers Texas, Oklahoma, Arkansas and Kansas (except that Kansas's exam program is administered by the SEC's Denver Regional Office).  Kansas is the only state in the country in which the entire state is subject to joint responsibility by two SEC Regional Offices.  California is split into two Regional Offices - Northern California is the responsibility of the SEC's San Francisco Regional Office and Southern California is the responsibility of the SEC's Los Angeles Regional Office.  (See page 9 of the AFR.)
• The Sarbanes-Oxley Act requires the SEC to review the financial disclosures of at least 33% of all companies publicly reporting under the Exchange Act each year.  In 2013, the SEC reviewed 52% of all reporting companies.  (See page 44 of the AFR).
• On average, the SEC's Division of Corporate Finance took 25.6 days to provide initial comments to company filings under the Securities Act.  (See page 44 of AFR).     

E-Corporate Law Presentation

I am pleased to announce that I will be making a presentation to the Corporate Counsel Section of the Tarrant County Bar Association on December 4, 2013.  The presentation is titled "E-Corporate Law" and tackles issues related to electronic contracting and taking corporate actions by electronic means.  This will be an updated version of a similar presentation I made in 2011 to the UT-CLE Annual Conference on Securities Regulation and Business Law.

Jamie Bryan will be co-presenting with a discussion of Protecting Communications.

BrokerCheck: Researching Your Investment Professional

"I had a very strong work ethic. The problem was my ethics in work."
- Giovanni Ribisi as Seth Davis in "Boiler Room"

How can you find out if your securities broker or other investment professional is a straight shooter or an extra from the movie "Boiler Room"?  There is no substitute for thorough due diligence, and a great place to start such research is FINRA's BrokerCheck.  FINRA stands for the Financial Industry Regulatory Authority, an independent organization that regulates the securities industry.
     
FINRA's website homepage (www.FINRA.org) includes the BrokerCheck feature.  BrokerCheck is a terrific (and free!) online tool which allows users to conduct a background check on investment firms and investment professionals, such as brokers, brokerage firms, investment advisers and investment adviser firms. By inserting the name of an investment professional or their firm name into the BrokerCheck dialogue box, users can access information such as:

• is this person registered and a broker or investment adviser with the SEC, any self-regulatory organization or one or more states?
• how long has this person been registered?
• which securities firms has this person been affiliated with and what is his or her employment history for the last 10 years?
• has this person had any "Disclosure Events," such as customer complaints, arbitrations, regulatory actions, employment terminations, bankruptcy filings or criminal or civil judicial proceedings?
• has this person passed any state or federal securities industry exams? 

To the extent the investment professional or investment firm has been involved with one or more reported Disclosure Events, users can review the allegations made against the professional or firm, the status of the claim, and a summary of how the matter was resolved.

Special thanks to John Fahy for bringing to my attention the news that FINRA recently released an enhanced version of BrokerCheck which is more user-friendly.   

Doing Good and Doing Well: Texas Corporations with a Social Purpose

The wall between for-profit and not-for-profit corporations in Texas may be tumbling.

Historically, under Texas corporate law, one could either:

(1) form a for-profit corporation, in which case the corporation ans its management team was expected to maximize shareholder value by maximizing profits for the benefit of the corporation's shareholders; or

(2) form a not-for-profit corporation, in which case the corporation and its management team was expected to pursue one or more social goals (such as enhancing education, culture or the arts) without paying any dividends or other economic benefits to any particular owner or investor.

The so-called "social entrepreneurship" movement has objected to this dichotomy.  Why shouldn't a corporation be allowed to pursue both profits and social benefits so long as the stockholders approved of the approach, this movement asked.  Under prior Texas law, officers and directors of a for-profit corporation might risk liability for breaching their fiduciary duty to the corporation if they pursued a social purpose at the expense of profits.  

But Texas law has become more social entrepreneurship-friendly.  Effective September 1, 2013, Section 3.007 of the Texas Business Organizations Code (TBOC) has been amended to authorize Texas corporations to include a social purpose in their certificates of formation.

Under the new law, "social purpose" is defined as: "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. 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."

Section 21.101(a) of the TBOC now permits shareholders of a for-profit corporation to enter into an agreement governing the manner in which the corporation may exercise its power pursue a social purpose permitted by its certificate of formation.

Finally, Section 21.401 of the TBOC now authorizes directors and officers of a for-profit corporation to consider the social purpose of the corporation in discharging their duties to the corporation if such social purpose is stated in the corporation's certificate of formation.

It will be interesting to see how many Texas for-profit corporations take advantage of this new flexibility permitting Texas corporations to seek to both "do good" and "do well."

2013: The Year of the IPO?

Is 2013 shaping up to be the Year of the Initial Public Offering?

Well, probably not, but IPO deal flow is trending up this year. According to the Federal Securities Law Reports, the 96 IPOs completed during the first two quarters of 2013 is the highest mid-year total since the first half of 2007 saw 141 IPOs completed.   Unfortunately, those 96 IPOs in the first half of 2013 resulted in "only" $20.76 billion in offering proceeds.  That's down from $29 billion in 2012 and $27 billion in 2011.