The Super Bowl of Corporate-Friendly Law

Well, Super Bowl XLVII (that's 47 to you and me) is now in the books, with Baltimore's 34-31 win over San Francisco.  This was an especially good Super Bowl for story lines, including the Brothers Harbaugh, Beyonce's singing/syncing, the Blackout, the comeback, the goalline stand, the commercials, Ray Lewis, deer antler spray, the Pistol formation, post-Katrina New Orleans, and everything else.  But what I found most interesting about the game was the lack of major college pedigree from the two starting quarterbacks.  Baltimore's Joe Flacco played at the University of Delaware Fightin' Blue Hens.  San Francisco's Colin Kaepernick played for the University of Nevada Wolf Pack.

Besides being the breeding ground for two of the top young quarterbacks in pro football, Delaware and Nevada are also two of the most corporation-friendly states in the country.  Delaware corporate law is the gold standard for corporate law in the country.  Nevada is quickly rising as a popular place to incorporate based upon, among other factors, its lack of franchise tax or corporate income tax.

Delaware and Nevada.  Quarterbacks and Corporations.  Hmmmm.

UT-CLE Securities Regulation Conference

It's time for my annual plug for the Conference on Securities Regulation and Business Law sponsored by the University of Texas Law School.  As a member of the conference's Planning Committee, I'm certainly biased, but I think it's the best securities law conference around.  This year's conference will be held in Austin February 7 and 8 and will, as usual, include numerous high profile presenters, including:

• Commissioner Troy A. Paredes of the U.S. Securities and Exchange Commission;
• David Woodcock and Matthew Martens of the U.S. Securities and Exchange Commission;
• Joseph Rotunda of the Texas State Securities Board;
• Chief Justice Myron Steele of the Supreme Court of Delaware;
• James R. Doty of the Public Company Accounting Oversight Board;
• John Morgan of the Texas State Securities Board; 
• Lona Nallengara of the U.S. Securities and Exchange Commission; and
• Thomas M. Selman of FINRA.

I would encourage anyone interested in corporate and securities law to attend.

Shareholder Oppression in Texas

"I know it [hard-core pornography] when I see it ." -  Former United States Supreme Court Justice Potter Stewart

Just like Justice's Stewart's take on pornography, the legal doctrine of shareholder oppression in Texas has not been well defined.  Perhaps our lawmakers feel that a judge will "know it [shareholder oppression] when they see it."  It a very basic level, shareholder oppression occurs when a majority shareholder causes a corporation to take one or more corporate actions which are "unfair" to one or more minority shareholders.  Of course, by definition, minority shareholders do not have control of the decision-making of the corporation.  It is not usual for a minority shareholder to accuse a majority shareholder of oppression.  It is up to Texas courts to decide when a corporate decision that the minority shareholders don't like is fair, and when it is so unfair as to rise to the level of shareholder oppression.

Unfortunately, Texas case law has not given us much guidance on this issue.  Recently, the Dallas Court of Appeals decided the case of Ritchie v. Rupe.  That court identified "two non-exclusive definitions for shareholder oppression" under prior case law:

"1. majority shareholders' conduct that substantially defeats the minority's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join the venture; or

2. burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company's affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely."

Ritchie v. Rupe has become the most important shareholder oppression case in Texas in many years because the Texas Supreme Court has agreed to hear an appeal of the Dallas court's decision.  That case involved a claim of shareholder oppression based upon the corporation's controlling shareholders instructing the corporation's management to refuse to meet with potential buyers for the minority shareholder's stock thereby making the minority stock extremely difficult to sell.

Texas corporate lawyers are watching this case closely.  The petition for review and other briefs for the Ritchie v. Rupe Texas Supreme Court case are available here.  You'll note several amicus briefs, including my favorite one written by Carol Bavousett Mattick, Chair of the Securities Law Committee of the Business Law Section of the Texas State Bar, which is available here.  Ms. Mattick noted in her brief that the most recent Texas Supreme Court opinion on shareholder oppression that the Dallas Court of Appeals was able to cite was a case from 1955 - before the Texas Business Corporation Act became effective!  The Texas Business Corporation Act was replaced by the current Texas Business Organization Code effective 2006.   

The Texas Supreme Court will hear oral arguments for the Ritchie v. Rupe case February 26, 2013 in Sherman, Texas.  The Texas business bar will be listening.

The Marvelous Middle Market

"The middle of the road is for yellow lines and dead armadillos." - Former Texas Agriculture Commissioner, Jim Hightower

Mr. Hightower's famous observation may be true for political candidates, but the middle has been marvelous for American business.  Or at least the Great Recession hasn't been as bad for middle market companies as it has for big business and small business.  Everybody has his or her own definition of the "middle market," but the National Centre for the Middle Market at Ohio State University defines the middle market as companies with annual revenues between $10 million and $1 billion.  As reported by The Economist, the middle market employs over 40 million people in the US and makes up 1/3 of the private sector GDP.  From 2007 to 2010, middle market companies added 2.2 million new jobs while big companies lost 3.7 million jobs and only 57% of small businesses survived.

As the second of three kids in my family growing up, I've always believed the middle was marvelous.  Now we have proof!     

Texas IPO Market 2012

Further evidence has emerged that energy continues to drive the Texas securities law market.

According to The Texas Lawbook, there have been 13 IPOs priced by companies based in Texas in 2012.  Those 13 IPOs offered an aggregate of $3.9 billion of securities.  As was the case in 2011, more than half of the 2012 Texas IPO's (7 of 13), representing more than half of the value of the offerings ($2.5 billion of $3.9 billion) were conducted by energy sector companies.

This will probably be my final blog of 2012.  Thanks to all my readers and have a very Happy New Year!

Rule 506: the 500 Lbs. Gorilla of Regulation D

When it comes to raising capital for small businesses, Rule 506 is where all the action is.

As readers of this blog will probably know, every offering of securities must be registered or exempt from registration. Because registering an offering of securities is an expensive and time-consuming enterprise, most small businesses seek to find an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act").

In 1982, the Securities and Exchange Commission ("SEC") adopted Regulation D, which provided three rules exempting private placements of securities from the registration requirements of the Securities Act: Rule 504, Rule 505 and Rule 506.

Rule 504 provides an exemption from registration requirements for private companies offering not more than $1,000,000 of securities to an unlimited number of investors.

Rule 505 provides an exemption from registration requirements for companies offering not more than $5,000,000 of securities to not more than 35 investors and an unlimited number of accredited investors.


Rule 506 provides an exemption from registration requirements for companies offering any dollar amount of securities to not more than 35 investors, each of whom must be sophisticated, and an unlimited number of accredited investors.

So which rule get used the most in practice?  Overwhelmingly, most issuers of securities in private placements under Regulation D choose to rely on Rule 506, selling strictly to accredited investors.

Rutherford B. Campbell, Jr., a professor at the University of Kentucky, conducted a study of 27,000 Form D's filed from 2008 to 2010 which was published in the August 2011 issue of The Business Lawyer.  Professor Campbell found that 94% of all Regulation D offerings relied upon Rule 506, 1.6% relied upon Rule 505 and 4.4% relied upon Rule 504.  88.5% of the Regulation D offerings studied limited their offerings exclusively to accredited investors.  Even among offerings of $1,000,000 or less (which would therefore qualify under Rule 504), 78.6% of the issuers chose to rely upon Rule 506 rather than Rule 504.

Professor Campbell attributed the popularity of Rule 506 to the exemption such offerings enjoy from state level blue sky regulations under the National Securities Markets Improvement Act of 1996 ("NSMIA").  I agree.  

Texas's New Trademark Law

The State of Texas adopted changes to our trademark law which went effective September 1, 2012.  The trademark law has been revised to conform with the Model State Trademark Bill and to be more consistent with federal trademark law.

Here are some of the highlights of the new law:

• The initial term and each renewal term of a state trademark registration has been reduced from 10 years to 5 years.
• Trademark registrations must now be notarized and must now include 3 specimens of the trademark in use.
• The Texas Secretary of State's office must now search the database of the United States Patent and Trademark Office in addition to its own trademark database before approving an initial trademark application.  The USPTO trademark database is available here.
• Licenses and security interests of trademarks may now be recorded for notice purposes with the Secretary of State.
• Holders of registered trademarks in Texas may now recover profits earned by an infringer against the trademark as well as triple-damages if the infringer acted with actual knowledge of the trademark or in bad faith.

The new trademark law can be found in Section 16 of the Texas Business and Commerce Code.  The Secretary of State's office provides FAQ's regarding the new law here.  Texas also adopted new Trademark Administrative Rules in connection with the new law, which rules are available here.