Corporate Finance

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Monday, I had the privilege of moderating a discussion on structuring merger and acquisition transactions that I had organized as part of a continuing legal education program for the Tennessee Bar Association.  Rather than doing the typical comparison/contrast of different business combination structures (with charts, etc.), I organized the hour-long discussion around the banter that corporate/securities and tax folks have in structuring a transaction.  We used the terms of a proposed transaction (an LLC business being acquired by a public corporation) as a jumping-off point.

The idea for the format came from a water cooler conversation–literally–among me (in the role of a corporate/securities lawyer), one of my property lawyer colleagues, and one of my tax lawyer colleagues.  The conversation started with a question my property law colleague had about the conveyance of assets in a merger.   I told him that mergers are not asset conveyance transactions but, rather, statutory transactions that have the effects provided for in the statute, which include a vesting of assets in the surviving corporation.  I told him that I call this “merger magic.”  I showed him Section 259(a) of the Delaware General Corporation Law:

When any merger or consolidation shall have become effective…

Perhaps this post would have been timelier before the spring submission cycle, but hopefully it will be helpful in framing title options for pieces being developed this summer.  One of the many benefits of co-authorship is learning substantive and procedural knowledge from your collaborators.  On a recent article, I worked with three economists who have different skill sets, perspectives, and discipline standards.  When we were trying to finalize our title, we came up with several different categories or types of article titles—a framework that I will utilize again in the future and which I am sharing with you today.  We selected the “themed” based title for our article, Institutional Investing When Shareholders Are Not Supreme, and a play on words, Institutional Investors’ Appetite for Alternatives, for a shorter piece appearing on Columbia Blue Sky Blog.

 Title Framework:

SOBER: Institutional Investing after Constituency Statutes

QUESTION:  Does Changing Shareholder Value Maximization Standards Change Institutional Investors’ Behavior?

CONTRAST:  Institutional Investors Behavior Before and After Constituency Statutes

PLAY ON WORDS:  Appetite for Alternatives:  Institutional Investors’ Behavior in the Fact of Shareholder Value Maximization Pressures

FORWARD THINKING:  What Does Institutional Investors Behavior after Constituency Statutes Tell Us Regarding…

The following guest blog post on my recent article,  Institutional Investing When Shareholders Are Not Supreme, is available at Columbia’s Blue Sky Blog discussing institutional investors’ attitudes towards alternative business forms and similar issues raised by Etsy’s IPO.

-Anne Tucker

For thirty years, I have had a pet peeve about the media’s routine reporting on mergers and acquisitions.  I have kept this to myself, for the most part, other than scattered comments to law practice colleagues and law students over the years.  Today, I go public with this veritable thorn in my side.

From many press reports (which commonly characterize business combinations as mergers), you would think that every business combination is structured as a merger.  I know I am being picky here (since there are both legal and non-legal common parlance definitions of the verb “merge”).  But a merger, to a business lawyer, is a particular form of business combination, to be distinguished from a stock purchase, asset purchase, consolidation, or statutory share exchange transaction.

The distinction is meaningful to business lawyers for whom the implications of deal type are well known.  However, imho, it also can be meaningful to others with an interest in the transaction, assuming the implications of the deal structure are understood by the journalist and conveyed accurately to readers.  For instance, the existence (or lack) of shareholder approval requirements and appraisal rights, the need for contractual consents, permit or license transfers or applications, or regulatory approvals, the tax treatment, etc. may differ based on the transaction structure.

Yesterday was the third anniversary of the JOBS Act. President Obama signed it into law on April 5, 2012. The JOBS Act, as regular readers of this blog know, requires the SEC to adopt rules to enact an exemption for crowdfunded securities offerings. The statutory deadline for the SEC to do so was December 31, 2012. The SEC proposed the required rules on October 23, 2013, but it still has not adopted them.

It is now

  • 1096 days since Congress passed the JOBS Act
  • 826 days since the deadline for the SEC to adopt the required rules
  • 530 days since the SEC proposed the rules

. . . and still no crowdfunding exemption.

If I treated my tax returns like the SEC has treated the crowdfunding rules, I would be in jail.

SEC Chair Mary Jo White has recently said that the SEC hopes to finalize the rules by the end of the year. I certainly hope so.

In connection with the current legislative debate on benefit corporations in Tennessee (which has been gathering momentum since I last wrote on the topic), I have repeatedly asked about the impetus for the bill.  Of course, there is the obvious “push” for benefit corporation legislation by the B Lab folks, who have gotten the ear of folks at the Chamber, convincing them that the legislation is needed in Tennessee to protect social enterprise entities from the application of a narrow version of the shareholder wealth maximization norm (a conclusion that I dispute in my earlier post).  But what else?  What real parties in interest in Tennessee, if any, have expressed a desire that Tennessee adopt this form of business entity?

There is anecdotal information from one venture attorney that some Tennessee entrepreneurs have indicated a preference for the benefit corporation form and have specifically requested that their business be organized as a Delaware benefit corporation.  Leaving aside the Delaware versus Tennessee question, why are these entrepreneurs looking to organize their businesses as benefit corporations?  Where does this idea come from?

Earlier this week I went to a really useful workshop conducted by the Venture Law Project and David Salmon entitled “Key Legal Docs Every Entrepreneur Needs.” I decided to attend because I wanted to make sure that I’m on target with what I am teaching in Business Associations, and because I am on the pro bono list to assist small businesses. I am sure that the entrepreneurs learned quite a bit because I surely did, especially from the questions that the audience members asked. My best moment, though was when a speaker asked who knew the term “right of first refusal” and the only two people who raised their hands were yours truly and my former law student, who turned to me and gave me the thumbs up.

Their list of the “key” documents is below:

1)   Operating Agreement (for an LLC)– the checklist included identity, economics, capital structure, management, transfer restrictions, consent for approval of amendments, and miscellaneous.

2)   NDA– Salmon advised that asking for an NDA was often considered a “rookie mistake” and that venture capitalists will often refuse to sign them. I have heard this from a number of legal advisors over the past few…

On March 25, 2015, the SEC Commissioners unanimously adopted final rules amending Regulation A, effective in 60 days,  extending an existing exemptions for smaller issues as required under Title IV of the Jumpstart Our Business Startups (JOBS) Act.  SEC information on the new regulations are available here and commentary is available here.

The SEC Release states that:

The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. 

***

The final rules, often referred to as Regulation A+, provide for two tiers of offerings:  Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.

The final rules pre-empt states from reviewing and approving Tier 2…

Vanderbilt

After teaching my early morning classes, I will spend the rest of the day at Vanderbilt Law School for their Developing Areas of Capital Market and Federal Securities Regulation Conference.

This is Vanderbilt’s 17th Annual Law and Business Conference and they have quite the impressive lineup, including Commissioner Daniel Gallagher, Jr. of the U.S. Securities and Exchange Commission. 

I am grateful to the Vanderbilt faculty members who invited me to this event and others like it. Vanderbilt is only about 1 mile from Belmont and I have truly enjoyed getting to know some of the Vanderbilt faculty members and their guest speakers.

Today, part of the assignment for my Securities Regulation students was to read a chapter in our casebook and, as assigned by me, come to class prepared to teach in  a three-to-five-minute segment a part of the assigned reading.  The casebook is Securities Regulation: Cases and Materials by Jim Cox, Bob Hillman, and Don Langevoort.  The chapter (Chapter 7, entitled “Recapitalization, Reorganizations, and Acquisitions”) covers the way in which various typical corporate finance transactions are, are not, or may be offers or sales of securities that trigger registration under Section 5 of the Securities Act of 1933, as amended (the “1933 Act”).  I have used this technique for teaching this material before (and also use a student teaching method for part of my Corporate Finance course), and I really enjoy the class each time.

I find that the students understand the assigned material well (having already been through a lot of registration and exemption material in the preceding weeks) and embrace the responsibility of teaching me and each other.  I am convinced that they learn the material better and are more engaged with it because they have had to read it with a different intent driven by a distinct…