When forum selection bylaws first became a thing, the response from the plaintiffs’ bar was a bit muted.  This is because at least some plaintiffs’ firms viewed forum selection bylaws as beneficial, in that they had the potential to cut down on competition among plaintiffs’ firms for control over a given case.  No longer would a firm filing a case in Delaware have to fear that a competing firm, filing a case in another jurisdiction, would settle on sweetheart terms – or worse, end up getting dismissed, with collateral estoppel effects – before the Delaware firm had a chance litigate. 

 Which brings us to the Walmart litigation and a dispute between two plaintiffs’ firms.

 [More under the jump]

Continue Reading How Would a Forum Selection Bylaw Play Out in This Scenario?

Smart

If you pay attention to college sports news, you know that Shaka Smart is leaving VCU to coach men’s basketball at the University of Texas.

As a professor, my interest, of course, is in the coaching contract.

Like most coaching contracts, Shaka Smart’s contract with VCU includes a buy-out provision, which is currently $500,000. (The buy-out was set at $600,000, with a $100,000 reduction per year. This is the second year of this VCU-Smart contract, hence the $500,000 amount).

More interestingly, the contract includes a provision that requires a home-and-home series with VCU and Smart’s new team or payment of an additional $250,000 to VCU. Smart took VCU to the Final Four in 2011, so in 2013 when this new contract between Smart and VCU was signed, VCU knew that Smart was one of the most sought after coaches in the country. As such, this seems like an excellent (and creative) clause to include; if Smart left VCU, he would likely be headed to a top-program and games with that top-progam could be quite valuable.

All of the above has been reported in other outlets. What I haven’t seen reported (though I obviously haven’t read all the reports) is the required timing of the home-and-home series. The VCU-Smart contract states that the series is “to commence at [VCU’s] venue within one year of the resignation.” I am not an expert on college basketball, but I believe the schedules are usually finalized well in advance. To comply with the contract and avoid the additional $250,000 buyout, it appears that Texas would have to agree to play VCU this coming season. If VCU prefers the $250,000 payout to the home-and-home series, then maybe this tight time table makes sense. If VCU prefers the home-and-home series, then this seems like it might be an impractically tight deadline. Perhaps VCU will attempt to negotiate with Texas and give Texas another year to comply if they need it.

Also of possible interest, it appears that if Texas had waited from March 29 until April 1 to fire their former coach (Rick Barnes…who we are welcoming to Tennessee) they could have possibly saved  $250,000. If Smart would have waited until May 1 to resign from VCU, Texas could have saved  $100,000 on Smart’s buyout. But perhaps time was of the essence in this case. If Texas would have waited, maybe Smart would not have been available, or maybe the time is needed for other things like recruiting, media promotion, and fundraising. 

In related news, football coach John Chavis, LSU, and Texas A&M are litigating over the date that Chavis “resigned,” which impacts his buyout. Like the VCU-Smart-Texas situation, careful attention to the wording of contracts is quite important.     

*Creative Commons photograph

Amanda Rose (Vanderbilt) was one of the many distinguished speakers at the law and business conference I attended last week. She spoke about her forthcoming article in the Northwestern University Law Review, which focuses on the SEC’s new whistleblower program in relation to Fraud- on-the-Market class action lawsuits. I have added her article to my reading list and the abstract is reproduced below for interested readers.

The SEC’s new whistleblower bounty program has provoked significant controversy. That controversy has centered on the failure of the implementing rules to make internal reporting through corporate compliance departments a prerequisite to recovery. This Article approaches the new program with a broader lens, examining its impact on the longstanding debate over fraud-on-the-market (FOTM) class actions. The Article demonstrates how the bounty program, if successful, will replicate the fraud deterrence benefits of FOTM class actions while simultaneously increasing the costs of such suits — rendering them a pointless yet expensive redundancy. If instead the SEC proves incapable of effectively administering the bounty program, the Article shows how amending it to include a qui tam provision for Rule 10b-5 violations would offer several advantages over retaining FOTM class actions. Either way, the bounty program has important and previously unrecognized implications that policymakers should not ignore.  

Many thanks to Marc Edelman (Zicklin School of Business, Baruch College, City University of New York) for guest blogging with us in March.

His posts are linked to below:

March Madness Is Coming — And Legally Speaking, It Is Madness

Should Law Professors Abstain From Online NCAA Tournament Pools?

NCAA Claims To Put Education Ahead of Profit. Really?

The “Daily Fantasy Sports” Marketplace Is Booming, But Is It Legal?

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?

Continue Reading Why Do Social Enterprise Entrepreneurs Want Benefit Corporations?

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 years, and Ycombinator specifically says they won’t sign one.

3)   Term Sheets– the seminar used an example for a Series AA Preferred Stock Financing, which addressed capitalization, proposed private placement, etc.

4)   Independent Contractor Agreement– the seminar creators also provided an IRS checklist.

5)   Consulting Agreement– this and some other documents came from  Orrick’s start-up forms page and ycombinator. FYI, Cooley Goddard also has some forms and guidance.

6)   Employment Agreement- as a former employment lawyer, I would likely make a lot of tweaks to the document, and vey few people have employment contracts in any event. But it did have good information about equity grants.

7)   Convertible Promissory Note Purchase Agreement- here’s where the audience members probably all said, “I need an attorney” and can’t do this from some online form generator or service like Legal Zoom or Rocket Lawyer.

8)   Stock Purchase Agreement– the sample dealt with Series AA preferred stock.

9)   IRS 83(b) form- for those who worry that they may have to pay taxes on “phantom income” if the value of their stock rises.

10) A detailed checklist dealing with basic incorporation, personnel/employee matters, intellectual property, and tax/finance/administration with a list of whether the responsible party should be the founders, attorney, officers, insurance agent, accountant, or other outside personnel.

What’s missing in your view? The speakers warned repeatedly that business people should not cut and paste from these forms, but we know that many will. So my final question- how do we train future lawyers so that these form generators and workshops don’t make attorneys obsolete to potential business clients?

 

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 offerings to “qualified purchasers.”  For a further discussion on merit review and preemption, see The SEC’s New ‘Regulation A+’ and the States’ ‘M’ Word, posted on JDSupra. 

Supporters have commended the change as decreasing reliance on costly gate keepers to capital such as investment bankers, and facilitating an easier path to raise capital by allowing qualifying companies to offer their stock directly to the public. Initial reaction quotes in the alternative finance world are available here.

-Anne Tucker

Yesterday, Prof. Bainbridge annotated my “creed” on corporate governance, and I appreciated his take. In fact, many of his chosen sources would have been mine.

In a later footnote, he noted that he was not sure what I meant by my statement: “I believe that public companies should be able to plan like private companies . . . .” I thought I’d try to explain. 

My intent there was to address my perception that there is a prevailing view that private companies and public companies must be run differently.  Although there are different disclosure laws and other regulations for such entities that can impact operations, I’m speaking here about the relationship between shareholders and directors when I’m referencing how public and private companies plan. 

Public companies generally have far more shareholders than private companies, so the goals and expectations of those shareholders will likely be more diverse than in a private entity. Therefore, a public entity may need to keep multiple constituencies happy in a way many private companies do not.  However, that is still about shareholder wishes, and not the public or private nature of the entity itself.  A private company with twenty shareholders could crate similar tensions for a board of directors.

As an example, consider Investopedia’s description of Advantages of Privatization in an article called “Why Public Companies Go Private” (emphasis added):

Private-equity firms have varying exit time lines for their investments depending on what they have conveyed to their investors, but holding periods are typically between four and eight years. This horizon frees up management’s prioritization on meeting quarterly earnings expectations and allows them to focus on activities that can create and build long-term shareholder wealth. Management typically lays out its business plan to the prospective shareholders and agrees on a go-forward plan. 

This is often a practical reality, but I disagree (or at least believe it should not be the case) that a company must be private to “free up management’s prioritization on meeting quarterly earnings expectations and allows them to focus on activities that can create and build long-term shareholder wealth.”  

This, I think, connects with Prof. Bainbridge’s point in his footnote annotation 4, where he says, “I think too many hedge funds are pressing too many boards to pursue short-term gains at the expense of sustainable long-run shareholder wealth maximization and, accordingly, that boards need more insulation from shareholder pressure.” I agree completely with his point there, and that’s the kind of issue facing public companies that I was intending to address in my assertion.  

Ultimately, director primacy means ensuring a large measure of director autonomy (or insulation). This works in both directions, whether it relates to short- versus long-term planning or providing workplace benefits (or not). Ensuring a robust business judgment rule as an abstention doctrine preserves director primacy, and in the long run, will benefit corporate governance and shareholder choice.  

Over the past few weeks I have posted extensively on how gambling laws treat commercial NCAA Tournament pools.  However, March Madness pools are not the only form of online sports gaming proliferating on the Internet.  Indeed, play-for-cash “daily fantasy sports” contests have recently become big business.  Even the National Basketball Association is now a shareholder in one of these ventures (FanDuel).

With the legal status of “daily fantasy sports” still relatively unsettled, it is my pleasure to announce the online publication of sections 1-4 of my newest law review article “Navigating the Legal Risks of Daily Fantasy Sports: A Detailed Primer in Federal and State Gambling Law.”   This article explores the legal status of “daily fantasy sports” in light of both federal and state gambling laws, and explains why the legal status of such contests likely varies based on both contest format and states of operation.

The full version of this article will be published in the January 2016 edition of University of Illinois Law Review.  In the interim, I welcome any thoughts or comments.

When I write a law review article, I usually include in the author’s footnote a brief note of thanks to the student research assistants who helped me on that article. When I write a book, I thank my research assistants in the preface.

My research assistant also helps me from time to time with research related to this blog. (Yes, I actually research some of the things I write on this blog. Hard to believe, isn’t it?) Blogs don’t have prefaces or author’s footnotes, so there’s no convenient way to acknowledge his help. I decided to give him his own blog post.

My thanks to Stephen Knudsen, University of Nebraska College of Law Class of 2015, for the assistance his has given me over the past year on this blog. (He is, of course, totally responsible for anything I wrote that you found objectionable or wrong.) The two or three people who read what I write here are now aware of his contribution and he can provide the link to his parents, almost doubling my usual readership.