Federal Securities Law Source

How to structure a joint venture

Joint ventures should be considered as an alternative to an acquisition if the acquiring party feels it does not have the experience or the business risk appetite to do it individually. They have the benefit of allowing parties to have greater success working together on a specific project than if they did it themselves.

Benefits of a joint venture

There are many benefits of entering into a joint venture. Some of them include: Continue Reading

Boilerplate provisions in a contract

The term “boilerplate” refers to standardized language in a contract that usually appears at the end of the agreement (often in a section titled “miscellaneous” or “general terms”). While boilerplate provisions are common clauses in a contract, they should always be checked carefully and tailored to the particulars of the situation as they will address important issues that will be determinative of the parties’ rights with respect to the business contract. You should remember that every clause in a contract may be negotiated – even the boilerplate provisions. Continue Reading

Methods to minimize indemnification obligations

Because most indemnification claims are made by a buyer, the seller seeks to limit its indemnification obligations. Some ways in which the indemnification obligations can be limited include:

  • Materiality of breach or claim amount
  • Caps on indemnification
  • Baskets
  • Payment adjustments for insurance proceeds or tax benefits

Sellers often like to include materiality qualifiers in the indemnification clause as to the claim amount and the type of claim. These qualifiers serve the purpose of limiting the right of the buyer to indemnification. Continue Reading

Litigation provisions v. arbitration provisions in business contracts

Arbitration is an increasingly popular method of resolving disputes, but drafters of business contracts need to be aware that arbitration may not be suitable for every dispute. The question of whether or not to arbitrate often comes down to when you want to decide arbitration is right – before or after a dispute.

Many people decide to include an arbitration clause during the negotiation of the business contract. The parties may decide to include an arbitration clause in their business contract that applies to future disputes. The decision to arbitrate after a dispute has occurred is clearer at this point because the matters in dispute are known. It can be difficult to reach an agreement to arbitrate at this stage if one of the parties has an interest in delaying matters or believes litigation provides a strategic advantage. Continue Reading

Delaware limits appraisal rights, but at what cost?

Back in August 2016, Delaware amended Section 262 of the Delaware General Corporation Law to address the rise of the appraisal arbitrage strategy where certain sophisticated investors would find a target company that is involved in a merger or acquisition, buy stock in the target company, and then invoke appraisal rights under Section 262. The main goal of the strategy is to strong-arm management to settle for a higher sale price in order to avoid litigation costs and/or gain from receiving statutory interest that accrued on the court-appraised amount. The idea behind the 2016 amendments was to curtail this appraisal arbitrage strategy by limiting a shareholder’s appraisal rights under Section 262 in two main respects: (i) by allowing surviving corporations to prepay dissenting shareholders prior to a final court determination in order to avoid paying statutory interest on the final appraisal value,[1] and (ii) by taking away appraisal rights from de minimis shareholders who hold stock that is listed on a national security exchange.[2]

A recent study published by the Harvard Law School has analyzed the effect of the 2016 amendments on appraisal actions in Delaware since the amendments went into place one year ago. The study found that appraisal actions did, in fact, decrease by 33 percent in 2017 as compared to the same period in 2016. The analysis also found that, surprisingly, the average deal premium fell from 28.3 percent in 2016 to 22.4 percent in 2017, the lowest of any year since at least 2005. As deal premiums fell, the average total change-in-control payments to CEOs (i.e. golden parachute payments) rose from 0.9 percent of transaction equity value to 2.1 percent, which brings into question whether CEOs acquiesced in lower deal premiums for higher parachute payments at the conclusion of the transaction. All in all, the study found that the decrease in deal premiums from 2016 to 2017 resulted in target shareholders losing around $77.4 billion, which, by any standards, isn’t a nominal amount. Continue Reading

Rate increases for issuers registering securities

New rates will take effect at the beginning of the next fiscal year, Oct. 1, 2017, for public companies and other issuers to register their securities with the U.S. Securities and Exchange Commission (SEC).

The SEC announced on Aug. 24, 2017, that the fiscal year 2018 fees to register securities will be set at $124.50 per million dollars. This is up from the $115.90 per million dollars fee for fiscal year 2017. The 7.4 percent increase is significantly less than the increase from fiscal year 2016 to fiscal year 2017 ($100.70 to $115.90, or 15.1 percent). However, issuers saw the rates lowered for fiscal year 2015 to 2016. Continue Reading

Some thoughts on mimicking a corporate governance structure in Ohio LLCs

Part One

It is quite common for members of a recently formed LLC accustomed to a corporate governance structure (that is, one having directors, a board of directors and officers versus members and managers) to direct their attorney to draft their operating agreement so that the LLC will have a corporate governance structure too. The intention being to permit the members to continue to use the governance structure with which they are most familiar. (Some clients even enjoy holding board of directors meetings and the formalities of decision making.) Ordinarily, this is accomplished by a provision inserted into the operating agreement that states, more or less, that:

The members agree that the company shall be governed by a board of directors [or managers] (the board) acting collectively; and not by its members. The board shall be comprised of three (3) directors appointed by the members [or by the company’s managers if the company is manager-managed] designated on the attached Exhibit A. The foregoing is an express delegation to the board by the members of their individual right to manage the company including all powers and authority necessary for, ancillary to, or implied by such delegation to direct, manage and control the company’s business and affairs. The board may appoint one or more officers having such titles, rights and duties as are commonly given to them and as prescribed in Chapter 1701 of the Ohio Revised Code. . .

The Ohio Limited Liability Company Act (the Act), Revised Code Chapter 1705, provides in at least one provision that this type of corporate governance structure is implicitly allowed under the Act because it furthers the right of LLC members to govern their internal LLC affairs as they see fit subject however to certain non-waivable provisions of the Act. Specifically: Revised Code Section 1705.081(D), Effect of Operating Agreement, states that “it is the policy of this chapter [1705], subject to the limitations of (B) and (C) of this section, to give maximum effect to the principle of freedom on contract and to the enforceability of operating agreements. . .”

So, given that the LLC’s members have elected and contractually provided for a corporate governance structure are they then bound by implication by the other ancillary duties that fall upon corporate directors and/or officers under Chapter 1701? Continue Reading

Reminder: SEC exhibit hyperlink and format rules become effective Sept. 1, 2017

Effective for filings on and after Sept. 1, 2017, registrants will be required to include a hyperlink to each exhibit identified in the exhibit index of periodic reports, current reports and registration statements. For registration statements, the rule applies to the initial registration statement, and to each subsequent pre-effective amendment.

The SEC adopted the final rules on March 1, 2017. According to the SEC’s adopting release, the rules are intended to address the inefficient and time-consuming search required to locate exhibits that have been incorporated by reference into reports and registration statements.

These rules apply to the following types of filings:

  • Form 8-K
  • Form 10-Q
  • Form 10-K
  • Form 10
  • Form 10-D
  • Registration statements:
    • Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3, F-4, SF-1, SF-3, SF-3, F-10 and 20-F

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The impact of efforts clauses in transactional documents

Most transactional documents include effort clauses as covenants to require a party to perform a certain act or acts to achieve a stated goal. These terms generally include the following:

  • Best efforts
  • Reasonable efforts
  • Commercially reasonable efforts

There are no universally accepted definitions or standards for interpreting these terms. As a result, their use can create ambiguity and uncertainty when a dispute arises, making it difficult to predict an outcome.

When a court evaluates whether a party has exerted the necessary effort standard, the court generally first examines the business contract for a definition of the efforts term. If the business contract contains such a definition, the court will apply that standard. If the business contract is silent, the court has discretion to interpret an efforts clause or term by considering the business contract’s facts and circumstances.

In the absence of a definition, a court will impose standards of:

  • Good faith, which requires honesty and fairness from the acting party
  • Reasonableness, which requires diligence from the acting party and is often a more demanding standard than good faith

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Retaining key employees in an acquisition

Imagine identifying an acquisition target that looks great on paper: strong earnings, efficient operations and good workplace environment. But after acquiring the target, a key employee leaves, taking with him or her key customers and suppliers. From day one, the newly acquired business is treading water due to the lack of business continuity after the acquisition.

Even though an acquisition might look good in theory, the reality of its execution poses multiple threats that could disrupt the business after the transaction, including employees who view the change in ownership as a threat or a risk, customers who feel the change in ownership might be a good time to shop around and suppliers wanting to perhaps renegotiate contracts. In order to alleviate some of these risks, potential buyers need to address these considerations head-on during the due diligence and negotiation process.

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