Category Archives: Staying Sharp

Staying Sharp is a series highlighting recent news, trends and developments that may aid a corporate lawyer in their practice and interactions with clients. The postings in the series may not be updated after their initial posting.

Mergers and Acquisitions Weekly Watch

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Mergers and Acquisitions: Pinterest Acquires Kosei

Target: Kosei
Consideration: Not Disclosed
Date Announced: January 21, 2015

In mergers and acquisitions news, Pinterest announced earlier this year that it acquired Kosei, a small startup that specializes in product recommendations. Kosei’s technology allows for personalized product recommendations and more targeted accurate suggestions of items of interest to consumers. According to the Pew Research Center Social Medial Update 2014, Pinterest saw a significant increase in the past year in the proportion of online users to their site, however only 17% of users visit the site daily. Pinterest is hoping to leverage the Kosei technology to provide its users with more useful walls of pins, which would then lead to users visiting Pinterest more often and staying longer on the site.

The Kosei acquisition is an example of a micro acquisition (See: What is a Micro Acquisition?); the company is early stage, having been founded in April 2014, and has a small number of team members, including Lance Riedel and Jure Leskovec, both of whom are considered experts in machine learning.

Pinterest has engaged in a steady stream of acquisitions, with the Kosei acquisition marking the 6th acquisition for Pinterest thus far. Many of these other acquisitions are micro acquisitions, such as the acquisition of Icebergs and Hackermeter, which were also early stage companies having a small number of team members.

Pinterest appears to be sticking to a micro acquisition formula to expand its discovery service, mobile application and talent pool, and it will be interesting to see if this approach continues and if the other large social media platforms adopt the same approach.

What is a Micro Acquisition?

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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.

Delaware Rapid Arbitration Act (DRAA)

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Corporate lawyers get ready- it’s time to revise those alternative dispute resolution provisions. The Delaware Rapid Arbitration Act (DRAA) was recently approved by the Delaware House of Representatives and Delaware Senate and will become effective on May 4, 2015. The DRAA is heralded as a “real alternative to the litigation process“. Arbitration is strongly preferred by companies to litigation, which can be expensive, unpredictable and time consuming. Arbitration is not a new concept for companies and lawyers. Most have included arbitration clauses in contractual agreements, such as arbitration through JAMS (Judicial Arbitration and Mediation Service). The DRAA establishes a clear arbitration procedure for Delaware business entities “by which they may resolve business disputes in a prompt, cost-effective, and efficient manner, through voluntary arbitration conducted by expert arbitrators, and to ensure rapid resolution of those business disputes.” (Delaware House Bill No. 49).

Requirements of the DRAA

In order to avail of the DRAA, certain requirements must be met:

At least one of the parties must be a Delaware business entity or have a principal place of business in Delaware. No party to the agreement may be a consumer.
All parties must explicitly agree to arbitration under the DRAA and select Delaware law to govern the agreement.

DRAA Process

The parties can identify the arbitrator or arbitrators to hear the dispute or set forth the process by which such arbitrator(s) will be selected. If an arbitrator is unable to hear the dispute or the parties cannot agree to an arbitrator under the process specified, then the Court of Chancery can select the arbitrators.

As the provision is deemed rapid arbitration, the arbitrator must issue a final award within 120 days from the date appointment was accepted or as otherwise provided by the agreement, and any extensions cannot exceed 60 days. Lawyers should be aware that if for some reason a client wants an option for a longer period for arbitration, they must specify that in the agreement, as 180 days is the default limit.

The arbitrator will decide all substantive issues and has broad discretion in granting relief. To keep them up to speed, the bill provides that arbitrators can face a penalty for not meeting the deadlines. Once a final ruling is issued, the parties have 15 days to bring a challenge to the Delaware Supreme Court, which will review pursuant to the Federal Arbitration Act.

According to the Global Delaware Blog, Delaware is home to over 1.1 million business entities. Given the strong preference for both incorporation/formation in Delaware and arbitration as the method of dispute resolution, it is very likely that many agreements going forward will be relying on the DRAA. Corporate lawyers should prepare to draft and include a DRAA provision in agreements going forward.

Mergers and Acquisitions Weekly Watch

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Mergers and Acquisitions: LinkedIn Acquires Lynda.com and Refresh.io

In recent mergers and acquisitions news, LinkedIn has announced two acquisitions, both of which highlight the company’s goal to become more than an online professional networking source and resume repository.

Acquisition of Lynda.com: Move to Higher Education

Target: Lynda.com, an online repository of learning videos
Consideration: $1.5 billion in cash and stock
Date Announced: April 9, 2015

LinkedIn’s acquisition of Lynda.com will help LinkedIn expand its current job posting service by allowing job seekers to automatically find online courses for skills and credentials which employers are seeking. Lynda.com has various learning videos which presumably will be integrated into LinkedIn’s features. BuzzFeed notes that this acquisition may also signal a move by LinkedIn to break into the higher education market by creating a platform for MOOCs (See: What is a MOOC?). I would be very interested to see if companies like PLI could integrate with LinkedIn to promote the continuing education courses taken by attorneys to satisfy MCLE requirements. I use LinkedIn to better know my clients and potential clients, and I’m sure they do the same to me. It would be great if they could see how I am continually learning to expand the skills I offer to them.

Acquisition of Refresh.io: Move to Anticipatory Computing and Every Day App

Target: Refresh.io, a software start-up that provides consolidated detailed information about one’s contacts through web and social network searches
Consideration: Not Disclosed.
Date Announced: April 2, 2015

Techcrunch notes that this is both a technology and talent acquisition (See: What is an Acquihire?). This acquisition allows LinkedIn to further expand into the area of anticipatory computing. I see this acquisition as LinkedIn’s goal to become an app people use every day, like Facebook or Twitter. Most people use LinkedIn sporadically to add new business contacts or find contact information for existing business contacts, but with features and acquisitions like Refresh.io, LinkedIn can provide up to date information about one’s contacts or let you know when you’re near someone in your network. These features can help to form a more personal relationship. I think it would be useful to know if my business contacts have been promoted, switched jobs or are working on the latest roll out of a product. It will be interesting to see if people take to LinkedIn for these personal updates.

What is Disruptive Innovation?

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Defining Disruptive Innovation

Disruptive innovation is a term coined by Clayton Christensen in his book, The Innovator’s Dilemma, which refers to an innovation that creates a new market through new technology or creates a new market through technology used in a different way. My favorite example of disruptive innovation is Netflix, which took the standard market for movie rentals and revolutionized it, first through the mailing of DVDs and then through online streaming of movies.

Why Disruptive Innovation Matters to Lawyers

Disruptive innovation is a term corporate lawyers should know to better understand certain clients and the goal of their particular product or service. It is also a term all lawyers should know, as there is much discussion on how disruptive innovation could revolutionize the legal field. Businesses like LegalZoom and UpCounsel have certainly changed some aspects of the legal field, in particular the ease by which people can obtain certain legal services and by which people can hire lawyers. What will be interesting to see in the future is if there is a disruptive innovation that does away with the billable hour. There is a growing trend towards flat fee billing, but it certainly is not the norm. Disruptive innovation takes a traditional business model and turns it on its head and my bet is that the legal field is not immune to this trend.

What is an Acquihire?

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Defining Acquihire

An acquihire is an acquisition of a company for the key purpose of recruiting a target’s employees. In the last few years, acquihires have become increasingly popular in the technology sector, as good talent is one of the most valued and rare assets.

3 Tips for Lawyers Working on an Acquihire Transaction

An acquihire transaction has nuance differences compared to standard acquisitions. When staffed on an acquihire transaction, lawyers should mind the following.

1. Acquihire Reps and Warranties Focus on Personnel

If you look at a form M&A agreement, you are bound to see representations and warranties related to physical properties/leases, accounts receivable, software usage and other reps that make sense if buyer is acquiring target with the intention of maintaining or integrating operations. In an acquihire, the people are what matter which means you can trim down the reps related to tangible property and beef up the reps related to personnel.

2. Non-Competes in California Are Enforceable if Connected to Sale of a Business

Non-competition agreements in California are generally void as a matter of law, except under limited situations enumerated in Section 16601 of the California Business and Professions Code. Employees typically receive payout as equity holders and also payment through a retention program of some sort. Given that they are selling their equity interests in a business, a non-competition agreement would be enforceable in an acquihire (and should be obtained from each of the key employees selling their interests who are joining buyer), although lawyers should take note to tie the non-competition agreement to the sale of the equity interest and not to the continued employment.

3. Don’t Delay Getting Shareholder Approval

In an acquihire, the bulk of the consideration payout may be pushed by the buyer into the retention program rather than the purchase price for the company. This tends not to sit well with investors who may not receive the return multiple they were hoping for. To avoid delays, lawyers should work with their clients early to ensure that shareholder approval can be obtained and the deal will not be blocked.

Mergers and Acquisitions Weekly Watch

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Mergers and Acquisitions: Heinz and Kraft

The merger of H.J. Heinz Co. and The Kraft Foods Group as announced last week was big news as it will create the fifth largest food and beverage company in the world. It also made headlines due to the involvement of Warren Buffet’s company, Berkshire Hathaway, one of the major shareholders in Heinz and a multinational conglomerate holding company wholly owning or partly owning some of the most well-known companies in the world.

Takeaways from Deal Terms

For corporate lawyers, the true excitement of the Heniz-Kraft merger can be found in the deal terms and a recent article by the New York Times highlights some of these gems. Here are a few deal terms related to the Heinz-Kraft merger that I found most interesting and which highlight key issues corporate lawyers should consider when advising on the structure of a merger:

1. Consideration of Stock and Cash

Kraft shareholders will receive one share of Heinz stock for each share of Kraft stock, plus a cash dividend of $16.50 per share. The transaction consideration is important in two ways.

Cash and Stock

The consideration includes cash as well as stock to ensure that Berkshire and 3G together retain control of the new company. When stock is contemplated to be issued as consideration in a merger, the analysis of who will control the company post-transaction should be done immediately.

Get Tax Lawyers Involved ASAP

This deal highlights one of the most important tenets that I have learned as a corporate lawyer, which is get tax lawyers involved at the structuring phase as early as possible. According to the NY Times, the cash is being paid as a dividend in order to not trigger a buyback of Kraft’s debt and to ensure that the stock component of the merger consideration is tax-free.

2. MAE

Given the size of both companies and the fact that both are in the business of packaged foods, the merger will be subject to HSR (Hart Scott Rodino Antitrust Improvement Act of 1976). Heinz has agreed to take all necessary steps to file for HSR approval, except “as would have a material adverse effect”. The NY Times notes that material adverse effect (MAE) is not defined in the merger agreement, which in my experience is not uncommon, although depending on the terms of the deal, a defined MAE term may be useful. The NY Times also notes that this type of requirement is known as a “modified hell or high water provision”.

3. Minority Shareholder Protection

Minority stockholders will be left to rely on the general protections for stockholders set forth in the Delaware General Corporation Law, as there will be no protective provisions for their benefit in the organizational documents of the new company. Depending on the deal and the parties involved, protection for minority shareholders may be something to include.

4. Forum Selection

Kraft has already amended its bylaws to include a forum selection provision providing that any litigation shall be brought in Virginia. Including a forum selection clause is fairly common practice, especially when a merger is likely to attract litigation. As the NY Times points out though, a forum selection provision in anticipation of litigation may be struck down by the courts. When structuring deal terms, corporate lawyers should certainly consider the risk of litigation and take appropriate precautions, including, at least for the time being, adopting a forum selection provision.

Mergers and Acquisitions Weekly Watch

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In recent mergers and acquisitions news, Microsoft seeks to promote real time collaboration and Net-a-Porter is in talks to partner up for what may be an online high fashion juggernaut.

Mergers and Acquisitions: Microsoft Acquires LiveLoop

Target: LiveLoop, a software company
Consideration: Not Disclosed
Date Announced: March 26, 2015

LiveLoop has a plugin that enables modification of a single presentation by a group in real time. MBA students everywhere will surely rejoice if this becomes a standard option for PowerPoint.

Mergers and Acquisitions: Potential Acquisition of Net-a-Porter

Talks of an acquisition of Net-a-Porter are abuzz, with the open question of who will be the buyer. Reports earlier this week suggested that Amazon may be in talks to acquire the high fashion retailer, but according to Forbes, an Amazon spokesperson has said that this rumor is not true. Italian online fashion retailer Yoox may announce a deal this week, according to Reuters. Of note is that Net-a-Porter has turned down acquisition proposals in the past, but an offer from Yoox may be accepted as Yoox is viewed as a “strategic partner” and a “strong operator”, and together they would be able to play a more dominant role in online fashion sales in Asia. Yoox is a publicly traded Italian online retailer, and a partnership with Net-a-Porter could result in a powerhouse high fashion online retailer that changes the game for trendy spending. As a Net-a-Porter customer, I will definitely be keeping an eye out for this potential deal.

Pinterest Policy To Set New Standards for Option Exercises for Departing Employees?

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According to a recent Fortune article, Pinterest has adopted a new policy whereby employees who have been with the company for at least two years and who subsequently leave shall be able to hold onto their vested stock options for seven years before they must either exercise such options or the options automatically terminate. This is a marked departure from the standard of most companies which allows for options to be held by a departed employee only for ninety days before they must decide to exercise or lose their options.

From the employee’s standpoint, this is a positive change which rewards service to the company and allows an employee to wait and see how the fair market value or trading price of the company’s stock is doing. As the Fortune article points out, the extension is also tax advantageous for the employees, allowing them to defer any tax consequences until such time as they are able to offset the tax liability through a potential secondary sale.

It will be interesting to see if other companies follow Pinterest’s lead and if corporate talent is swayed to join a company based on the availability of this plan. For corporate lawyers, an adoption of the Pinterest philosophy would necessitate greater vigilance as to the capitalization ownership of the company, along with a general revision to standard option plan documents.

Mergers and Acquisitions Weekly Watch

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In recent mergers and acquisitions news, Giphy will expand into mobile and Rakuten continues its quest to grow its digital content.

Mergers and Acquisitions: Giphy to Acquire Nutmeg

Buyer: Giphy, a search engine for gifs
Target: Nutmeg, a gif messaging app
Consideration: Not disclosed
Date Announced: March 19, 2015

This is Giphy’s first acquisition but given the popularity of gifs, it will likely not be its last. The Nutmeg development team is expected to join Giphy, which is typical in an acquisition as the development team can assist with any necessary integration in addition to continued growth of the acquired product. This acquisition is intended to help Giphy expand in mobile, bringing gifs to sms. Sorry emojis, you’re about to meet your match.

Mergers and Acquisitions: Rakuten to Acquire OverDrive

Buyer: Rakuten, an internet services company
Target: OverDrive Holdings Inc., operator of OverDrive Inc., an ebook and audiobook content marketplace
Consideration: $410M cash
Date Announced: March 19, 2015

This is one of several acquisitions Rakuten has made in the last few years in attempt to grow its digital content. Rakuten acquired Viber (a chat and calling app) in 2014, Viki (a global video platform) in 2013, and Wuaki (a Netflix-like global video platform) in 2012.