Category Archives: Corporate Terms

Weinstein Clause

Leave a reply

The #MeToo movement has found its way into M&A.  Companies are taking steps to prevent liability for the inappropriate behavior of its executives by including in contracts a “Weinstein Clause” or a “MeToo Rep”.

What Is It

A Weinstein Clause allows a buyer to recover proceeds in the event allegations of misconduct arise with respect to those in leadership. The purchase agreement will include a representation of the seller that no misconduct or allegations of misconduct have been made against executives. A portion of deal proceeds is then subject to escrow or holdback in the event that representation is found to be false. Deal proceeds may also be subject to clawback. The Weinstein Clause is intended to shift the liability of bad actors from the buyer to the seller

Benefits

Aside from providing recourse to buyers, the Weinstein Clause has the benefit of incentivizing the seller to do social due diligence on itself. Sellers and their counsel will provide due diligence materials for all aspects of the business but often this does not include information on the key employees and leadership. People can be more important than the technology or product behind the company (see previous post on acquihires) so it makes sense to protect against the liability that can arise from misconduct.

New Standard?

Misconduct in the workplace is not a new phenomenon but the #MeToo movement has certainly brought light and greater scrutiny to the issue. The inclusion of the Weinstein Clause is still in its early stages and it will be interesting to see how disclosures are made to address this representation.

What Is Schmuck Insurance?

Leave a reply

Schmuck insurance is a form of protection a seller may request in an M&A.  If the buyer sells the acquired company (or otherwise experiences some sort of liquidity event) within some defined period of time after closing for a price that exceeds some defined hurdle, the buyer is obligated to share in some way with the seller the excess of the price in that subsequent transaction over the original deal price. Schmuck insurance is often less about the money and more about protecting one’s reputation. A seller does not want to appear foolish for having sold his company for far less than it was actually worth.

A famous case involving schmuck insurance involved Bill Ackman and Carl Icahn. Ackman sold his shares of Hallwood Realty to Icahn for $80 a share. It was trading at $60 a share and Ackman believed it was worth north of $100 a share. The unit purchase agreement included schmuck insurance which said if Icahn sold the shares within 3 years at a profit of 10% or higher, Ackman would be entitled to share in the sale proceeds. The case ultimately hinged on what was meant by the word “sale” (a reminder to all lawyers that even intuitive words can be ambiguous).

Photo taken at the Aggretsuko pop up in San Francisco. It’s what I imagine sellers would look like upon receiving news that they would have benefited from schmuck insurance.

Link

Representations and Warranties Insurance (RWI) is insurance designed to cover losses resulting from a breach of representations and warranties.  It is increasing in popularity in the M&A world and will certainly change how escrows and allocation of risk will work.  There is a lot to read out there on RWI, but one article I found helpful is here.

What is a Ratchet (IPO Edition)?

Leave a reply

20151015_Square

Square Reveals Ratchet Right

In corporate speak, a ratchet usually refers to a form of anti-dilution calculation, however, the term has expanded its meaning to apply to initial public offerings. Square, the mobile payment processing company, filed its S-1 with the Securities and Exchange Commission yesterday. In the prospectus, it was revealed that certain institutional investors would be guaranteed a return of at least 20% in the initial public offering (“IPO”), regardless of whether the IPO is valued lower than the last round of private financing.

What is a Ratchet

What is a ratchet in the IPO context? A ratchet in the IPO context is similar to a ratchet in the anti-dilution context and provides that investors will receive additional shares of the company’s stock if the IPO is priced at a low value.

A Lawyer’s Take

This application of the ratchet right is great for lawyers representing investors in a late stage investment where the company is targeting an IPO. Depending on the amount of leverage your client may have, the amount of investment and a host of other factors, this may be a negotiable ask. Square’s prospectus is also a great example that although a prospectus can be lengthy and difficult to sift through, sometimes they contain nuggets of great information that one can use to be a better equipped lawyer. Learn from good examples and expand your knowledge base.

Debt and M&A

Leave a reply

20151014_Dell

M&A Weekly Watch

Back in my day, students didn’t tote around macbooks or ipads. We had Dell laptops and for many, they were the go to computer maker of choice. Times have changed and we hear less about Dell, especially after it went private in 2013. That has changed since the announcement that Dell has proposed to acquire EMC for $67 billion, which numerous news sources have cited as the biggest tech deal ever.

Aside from making the headlines for the overall deal size, the Dell EMC proposed M&A is big news because it will be one of the largest leveraged deals in history, with Dell taking on an estimated $50B in debt to finance this M&A.

Debt and M&A – A Lawyer’s Take

As lawyers we may recuse ourselves from business decisions, like how a deal is going to be financed but questions like this are crucial to deal structure and effective negotiations. Knowing that debt will be used in an M&A may affect closing conditions, termination rights and timing of the deal. Due diligence is normally reserved for the target, but in a debt deal, the buyer may want to do its own due diligence to ensure it’s not prohibited from incurring such debt, for example, if there are agreements with covenants requiring a certain leveraged ratio.

Interest Rates and M&A

Many news articles have been reporting that Dell is motivated to undertake this M&A now before the rumored interest rate hikes occur. An October 12, 2015 report by Marketplace on the proposed Dell EMC M&A cited academics who don’t believe that interest rates drive M&A or that they even affect corporate decisions. Without more study on this topic, I can’t say for sure, but it’s likely that interest rates will continue to be heavily discussed in M&A.

 

What is Secondment?

Leave a reply

20151012_Secondment

Secondment in the legal industry is when a lawyer is assigned to work directly for a client at a client’s office. Secondment can be either full time or part time depending on the client’s needs and the firm’s arrangement with the client. Typically a client will pay a fixed fee to have the seconded attorney on site, although again this can depend on the firm’s arrangement with the client and may be structured as a reduced rate in the attorney’s billable rate. A seconded attorney typically does the same work that the in-house lawyers do, be it project based (ex: the client is preparing for an IPO) or group specific (ex: the client needs extra help in the corporate group to meet the every day demands).

Secondment is a valuable opportunity for all parties. The firm is able to meet the needs of a client. The client is able to get a seasoned lawyer’s assistance for a period of time. The lawyer is able to develop new skills and build relationships. Everyone wins.

Legal life has taken a turn for me and I am currently on full time secondment. I will be writing about my experiences on secondment as well as posting on instagram fun photos of this great opportunity. Instagram: corptrends, #secondmentshorty. I’m excited about this new opportunity and will be sharing tips for law firm attorneys to provide better service with my new in-house knowledge, as well as general observations about in-house life.

What is Circular 7?

Leave a reply

20150707_Circular7

One of the most important jobs of a corporate lawyer is to issue spot and if need be, recruit colleagues in a specialized practice area like intellectual property, employee benefits or tax to opine on a particular issue. Issue spotting is a skill (remember the bar exam?) and it can be particularly tricky when dealing with cross border transactions.

Defining Circular 7

I recently completed a transaction involving a target company with assets in China and the issue of Circular 7 was raised pretty early on. Circular 7 refers to a tax provision by China’s State Administration of Taxation that provides that:

“a nonresident enterprise transferring shares in an offshore intermediary enterprise that directly or indirectly holds an equity interest in a PRC enterprise re subject to PRC tax on the gains from the transfer if the PRC tax authorities determine that the arrangement lacks a bona fide commercial purpose and re-characterizes the indirect transfer as a direct transfer of the PRC enterprise”.

Why Circular 7 Matters to Lawyers

Tax is an area I leave to the experts given the many fine nuances and the financial risks if tax assessment/tax planning is not done well. If you’re interested in learning more about Circular 7, please see the linked article above from Deloitte. Otherwise, remember that if you are working on an M&A where a target company has a connection to China, Circular 7 may be an issue. You may not be able to opine on its particulars, but in spotting this potential issue, you have definitely made a value add to the transaction.

Spin-Off and M&A Combination

Leave a reply

M&A Weekly Watch

Verizon’s announcement that it will acquire AOL for $4.4 billion is the big M&A news of the week. Many view AOL as a dinosaur internet provider, however, AOL is a mass media corporation which, according to Verizon’s press release, can help Verizon “build the biggest media platform in the world”. AOl has acquired several companies in its corporate history, including Mapquest, Moviefone, Techcrunch and The Huffington Post.  The Huffington Post has been one of the most discussed issues of the Verizon-AOL acquisition, as rumors have swirled that Verizon plans to spin-off The Huffington Post for $1 billion.

20150520-Spin-OffWhat is a Spin-Off?

A spin-off is a mechanism for creating an independent company separate from the parent company. In a 100% spin-off, the parent company will dividend shares in the new company to its shareholders. This compensates the shareholders for the loss of value of the new company. In a partial spin-off, the parent company will distribute fewer than all of the shares in the new company.

What is the Purpose of a Spin-Off?

A spin-off is undertaken when the new company is expected to generate more value on its own than it would if it remained as part of the parent company. There are other reasons why corporations cite for pursuing a spin-off including allowing each entity to focus on its business strategy or to create a targeted investment opportunity in each of the business entities.

Spin-Off and M&A

A spin-off can also be combined with an M&A transaction, which is a particularly favorable option for shareholders of the parent company. Several media outlets have suggested that not only could Verizon spin-off The Huffington Post after the AOL acquisition, but that the Huffington Post may be acquired by a private equity firm or German based digital publisher Axel Springer.

In a spin-off and M&A combination, one of the key factors your client is going to be looking for is how to structure the transaction in a tax free manner. As always, one of the key initial steps when undergoing a complex transaction is to consult your tax colleagues and to do so as early as possible. The spin-off and M&A combination can take on different structures, but one option which I wanted to highlight in light of the Verizon/AOL/The Huffington Post Deal is what’s known as the Reverse Morris Trust.

Investopedia defines a Reverse Morris Trust as when a parent company “creates a subsidiary, and that subsidiary and a smaller external company merge and create an unrelated company. The unrelated company then issues shares to the shareholders of the original parent company. If those shareholders control over 50% of the voting right and economic value in the unrelated company, the Reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-free, to the smaller external company.”

There are many issues you should consider in structuring a spin-off and M&A combination, and these are deal term specific so I won’t go into greater detail here, but as a corporate law practicioner, it is always good to generally know that this spin-off and M&A combinations exists, can be done semi-concurrently and if effected correctly, can yield financial benefits for your corporate client’s shareholders.

What is Wi-Fi First?

Leave a reply

20150427_Wi-Fi-First

Defining Wi-Fi First

Wi-Fi First means a device or a system that uses Wi-Fi first (hence the name) and cellular service second only as needed. It is a heavily used term these days in discussions on the future of mobile communication. Google recently announced that it plans to launch its own wireless Wi-Fi First service, Project Fi, which many claim has the potential to revolutionize the cellular industry.

Why Wi-Fi First Matters to Lawyers

Wi-Fi First is a term lawyers should know to better understand certain clients and the goal of their particular product or service. It won’t be just Google who seeks to capitalize on this service. Project Fi is an example of a disruptive innovation (See: What is Disruptive Innovation?) and one which will (a) bring new innovation and players to the wireless market and (b) cause existing players such as the big name mobile carriers to have to reconsider their current business model.

Wi-Fi First is also a concept which should interest the masses as it has the potential to save smart phone users a lot of money. It will be interesting to see how the mobile industry will respond and whether this service inspires smart phone users to change their device preference. Project Fi is currently available on an invite only basis and works only with one device, the Nexus 6.

For more information on Project Fi in particular, check out the Project Fi page as well as Engadget’s Cheat Sheet to Project Fi.

What is a Micro Acquisition?

Leave a reply

20150420_Micro Acquisition

Defining Micro Acquisition

Micro acquisition is a term used by Amit Paka, a co-founder at Parable and a contributing writer to Techcrunch, to describe a particular type of acquisition of a small startup, which has the following characteristics:

Acquiree has a small number of specialized employees

In a micro acquisition, the acquiree only has a handful of team members. More often than not, the team is comprised of just the founders. Although the number of people in the company is small, the expertise is great. These individuals are experts in their particular field. A micro acquisition has at its core an acquihire objective (See: What is an Acquihire?) where the acquiror seeks to benefit from the people more so than the product or service of the acquiree. For the acquiror, a micro acquisition is an opportunity to bring great talent in house without the complications that can arise in a larger acquisition involving a greater number of people, such as issues of culture fit, individually negotiated offers and compensation packages.

Acquiree is early stage with few investors

Not only is the team small, but the investor base is few in number for an acquiree in a micro acquisition. The acquiree is usually an early stage startup, with a relatively low valuation compared. This may make negotiations on acquisition consideration easier since there are fewer parties to consider in the liquidation analysis, and the bulk of the consideration can go to retention packages of the employees.

Acquiree’s product or service is rarely stand alone

In a micro acquisition, the product or service of the acquiree is rarely something that can generate high revenue without being integrated into a larger well known product or service. Such product or service is a refinement or a potential solution to a particular issue. This is attractive to acquirors who can save money by simply buying an existing solution rather than trying to develop it in house.

Implications of Micro Acquisitions for Lawyers Representing Startups

The potential rise of micro acquisitions means that lawyers need to be ready to represent their startup clients in an M&A deal sooner rather than later. Traditionally, the path for our clients was incorporation, a few rounds of financing (including a mixture of debt and equity), and finally for the chosen few, the crossroads of M&A or IPO. This process could take several years. If micro acquisitions become more prevalent, it is possible that more startup companies could be acquired within just a few years of their formation. Lawyers should start thinking earlier rather than later about M&A issues, including consent requirements, vesting schedules, and acceleration provisions.