By Thomas L. McLain
Whether your small company is a corporation or a limited liability company, most legal advisors recommend that buy-sell provisions be a part of your company documentation. Buy-sell provisions accomplish at least two purposes. First, by specifying the terms pursuant to which an equity owner may sell or transfer an equity interest in the company, the buy-sell provisions provide continuity of ownership and control. Second, buy-sell provisions provide liquidity in the event of the death or disability of an equity owner. By spelling out up front the terms pursuant to which these and other goals are accomplished, the owners should eliminate anxiety, pain, and real controversy later. However there is a lot to consider and this outline of the basics of buy-sell provisions will prime the business owner for an effective consultation with their company attorney.
Types of Buy-Sell Structures. In the case of a corporation, the buy-sell agreement is a stand-alone agreement. In contrast, in the case of a limited liability company, the buy-sell provisions are typically incorporated into the operating agreement. In either case, there are two types of buy-sell structures based upon how the payments are actually made.
· Redemption structures. This type of structure contemplates that the company purchase the equity interest of the selling equity owner.
· Cross-purchase structures. This type of structure contemplates that the remaining owners purchase the equity interest of the selling equity owner.
Triggering events. When an event occurs that causes the buy-sell provisions to be applied, it is said to be a triggering event. There are a variety if triggering events and some of the most common are summarized below.
· Death. The death of an equity owner is usually a triggering event, either based on the theory that the estate of the deceased owner will need liquidity, or based on the theory that the remaining owners do not want to be forced to deal with a representative of the estate. Sometimes the death of an equity owner gives the representative of the estate the right to force the purchase of the equity interest; other times, the death of an equity owner gives the company or the remaining equity owners the right to force the sale of the equity interest.
· Disability. Permanent disability is a triggering event for most of the same reasons that death is a triggering event. If the company has disability insurance, then the terms of the buy-sell provisions need to be coordinated with the terms of the disability insurance policy.
· Bankruptcy. The bankruptcy of an equity owner is almost always a triggering event because having a pre-determined method for the valuation and sale of an equity interest reduces the involvement of the company in the bankruptcy process and provides liquidity.
· Voluntary or Involuntary Departure. Some buy-sell provisions allow the company to force the sale of the equity interest of an equity owner who is no longer involved in the company as a result of a resignation or termination.
· Divorce. Some buy-sell provisions allow the company to force the sale of the equity interest of an equity owner who becomes a part of a divorce proceeding. There are pros and cons to divorce as a triggering event and these need to be considered.
· Proposed Transfer. The most common triggering event occurs when an equity owner decides to sell or transfer their equity interest to a third party. If it’s a sale, there is typically an opportunity to match the terms of the sale. If it’s a transfer, there is typically an opportunity to approve or disapprove the transferee.
Valuation. One of the key reasons for adopting buy-sell agreement is to provide a rational approach to business valuation in the case of a departing equity owner. Some buy-out provisions use different valuation techniques depending on the nature of the departure: For example, the valuation for a departing owner who has been terminated for cause by the company may be less favorable that then valuation used for a payment to the estate of a deceased equity owner. Some of the mechanisms used for valuations include:
· Book Value. Usually the least favorable to the departing equity owner.
· Market value. This method is implicitly used when a departing equity owner has a bona fide third party offer and that offer must be matched by the company or remaining equity owners.
· Appraised Value. Appraisals may or may not give full value to the business due to the variety of methodologies that can be used and discounts applied.
· Agreed Value. Many buy-sell agreements use this method. All equity holders agree to a value of the business on an annual basis.
· Insured Value. In the case of a cross-purchase agreement funded by insurance, the amount of insurance will often be used as the measure of the value of the company. Key man life insurance can also provide a value.
Terms of Sale. In instances where the buy-sell provisions have been triggered as a result of a bona fide offer from a third party, then the terms of the sale are usually dictated by the terms of that third party offer. In other instances, there are several different considerations. For example:
· Should the departing equity owner be able to force the purchase of the equity interest? The answer to this may depend on the circumstances; for example, it may be appropriate to allow a representative of an estate to force the purchase of the equity interest.
· Should the company be able to force the sale of the equity interest? The answer to this may depend on the circumstances; for example, it may be appropriate to allow the company to force a sale of the equity interest in the event of a divorce.
· Should the company or the remaining equity owners be required to borrow the purchase price from third parties? If not and the buyers may use notes, the interest, term and payment schedule of such obligation will need to be determined.
· Should any debt obligations be secured by the equity interest being sold or other security?
Other. There are many other things that can be considered in connection with a buy-sell agreement
· Non-compete. Although not common, buy-sell provisions may include non-competes and other restrictive covenants.
· Exceptions. There are often exceptions to the buy-sell agreement, particularly in the area of transfers. An equity owner may be allowed to transfer all or a portion of an equity interest to a close relative without there being a triggering event.
· Business Continuity. Particularly in the case of buy-sells structured as a redemption that are funded by insurance, additional life insurance may be purchased to make sure that the company receives funds to recover from the loss of a key owner. If so, this needs to be coordinated with the buy-sell provisions.
Monday, September 21, 2009
Tuesday, September 15, 2009
Corporate social media/networking policies; Part 2 - Framework
By Thomas L. McLain
For companies, the fundamental problem with social media and social networking is that employees use them to manage not only their professional relationships, but also their personal relationships. While this dual purpose component of social media may not seem any different than email, the very public nature of social media makes it far different. Part 1 of this series on corporate social media/networking policies established the need to develop policies to address micro-blogging sites such as Twitter, professional networking sites like LinkedIn, social networking like Facebook, and information sharing sites such as Digg, YouTube, and Flickr. In this Part 2 of the series, the framework of a corporate social networking policy will be outlined.
Definition of Social Media. Any social media policy needs to contain a definition of the term "social media" so that employees will know what will be governed by the policy. Social media applications are all Web 2.0 applications; applications that essentially allow real time interaction and collaboration over the Internet. The definition should describe generically the sorts of Web 2.0 applications that are included within the definition and it should also contain a non-exclusive list of specific applications.
Company Social Media Philosophy. A company needs to determine how far its policy will extend in the workplace and beyond. In the workplace, it will want the policy to govern company-sponsored communications, or "official communications," and personal communications. Common topics for official communications include: proactive sales/marketing, reactive sale/marketing (monitoring social media and reacting to "bad press"), direct inquiry customer service, reactive customer service (monitoring social media and reacting to problems), and human resources recruitment. Official communications and personal communications outside the workplace will also have to be addressed. The philosophy should stress that regardless of whether personal communications or official communications are involved, employee productivity is not to suffer as a result of involvement with social media.
Mechanics. Employees will often already have social media accounts so the policy will need to require disclosure to the corporation of all social media accounts. Accounts which will be used for official communications will need to be reviewed for consistency with the public image the company wishes to portray. The company should also have the passwords to all accounts from which official communications are sent. Employees need to understand that accounts will be monitored and that violations of the policy may result in the termination of the employee.
"Playing the Game" and Online Demeanor. Many social media sites are set up so that a participant needs to endorse others in order to gain credibility; however, such endorsements may give the appearance that the company is actually giving the endorsement. Thus, the company has an interest to protect in connection with any social media account used by an employee that identifies the employee as an employee of the company. The policy will need to be defined and require that the employee exercise appropriate business behavior. This requirement will need to be supplemented by training. Employees must not forget that, despite the informality of the communications, the comments they make online are public and essentially permanent.
Compliance. The policy will need to be conformed to all other policies, such as the company's email, confidentiality, privacy and communications policies. The policy will need to remind employees to protect proprietary and confidential company information and trade secrets.
Legal Issues, Monitoring, Training and Enforcement. Whether addressed directly in the corporate social media policy or indirectly outside of the policy, these topics will be discussed in Part 3 of this series.
For companies, the fundamental problem with social media and social networking is that employees use them to manage not only their professional relationships, but also their personal relationships. While this dual purpose component of social media may not seem any different than email, the very public nature of social media makes it far different. Part 1 of this series on corporate social media/networking policies established the need to develop policies to address micro-blogging sites such as Twitter, professional networking sites like LinkedIn, social networking like Facebook, and information sharing sites such as Digg, YouTube, and Flickr. In this Part 2 of the series, the framework of a corporate social networking policy will be outlined.
Definition of Social Media. Any social media policy needs to contain a definition of the term "social media" so that employees will know what will be governed by the policy. Social media applications are all Web 2.0 applications; applications that essentially allow real time interaction and collaboration over the Internet. The definition should describe generically the sorts of Web 2.0 applications that are included within the definition and it should also contain a non-exclusive list of specific applications.
Company Social Media Philosophy. A company needs to determine how far its policy will extend in the workplace and beyond. In the workplace, it will want the policy to govern company-sponsored communications, or "official communications," and personal communications. Common topics for official communications include: proactive sales/marketing, reactive sale/marketing (monitoring social media and reacting to "bad press"), direct inquiry customer service, reactive customer service (monitoring social media and reacting to problems), and human resources recruitment. Official communications and personal communications outside the workplace will also have to be addressed. The philosophy should stress that regardless of whether personal communications or official communications are involved, employee productivity is not to suffer as a result of involvement with social media.
Mechanics. Employees will often already have social media accounts so the policy will need to require disclosure to the corporation of all social media accounts. Accounts which will be used for official communications will need to be reviewed for consistency with the public image the company wishes to portray. The company should also have the passwords to all accounts from which official communications are sent. Employees need to understand that accounts will be monitored and that violations of the policy may result in the termination of the employee.
"Playing the Game" and Online Demeanor. Many social media sites are set up so that a participant needs to endorse others in order to gain credibility; however, such endorsements may give the appearance that the company is actually giving the endorsement. Thus, the company has an interest to protect in connection with any social media account used by an employee that identifies the employee as an employee of the company. The policy will need to be defined and require that the employee exercise appropriate business behavior. This requirement will need to be supplemented by training. Employees must not forget that, despite the informality of the communications, the comments they make online are public and essentially permanent.
Compliance. The policy will need to be conformed to all other policies, such as the company's email, confidentiality, privacy and communications policies. The policy will need to remind employees to protect proprietary and confidential company information and trade secrets.
Legal Issues, Monitoring, Training and Enforcement. Whether addressed directly in the corporate social media policy or indirectly outside of the policy, these topics will be discussed in Part 3 of this series.
Tuesday, September 1, 2009
We need a social media/networking policy?!? Why, what could possibly go wrong?
Corporate Social Media Policies- Part 1
By Tom McLain
Do companies really need to develop policies to address social networking or social media? The answer to this question may be surprising – Yes. Or, in light of reports of the NFL's recent decision to implement restriction on the use of Twitter (a micro-blogging site) on game days, maybe a "yes" is not so surprising. Still, the NFL is a lot different than most businesses and the fact that it feels the need to put limits or bans in place does not necessarily mean that other companies should. The reality is that the social networking/media phenomenon may be falling below the radar screen of management of many companies for many reasons, including the informality of the media. However, there are some very real dangers that need to be considered.
At the outset, the terms "social networking" or "social media" are themselves misleading, due to the inclusion of the word "social" and due to mistaken belief that, because they occurs on a computer over the Internet, they are not a serious endeavor. For example, it is easy to dismiss social networking as just a new way to chat or gossip. However, a better way to think of social networking it is "computer-based" networking. Company executives understand the concept of networking in the traditional sense – meeting with people in face to face settings that may or may not be social for the purpose of advancing one's business. "Social networking" needs to be thought of in the same terms – its just traditional networking facilitated by computers instead of being face to face.
It is also a mistake for company executives to dismiss or underestimate the social media phenomenon as a fad or as something that is reserved to a small number of people. In August, 2009, a video was produced (for the Internet, of course) entitled "Social Media Revolution" that provided some amazing statistics:
1. By 2010 members of Generation Y will outnumber Baby Boomers;
2. The fastest growing segment on Facebook is 55-65 year-old females;
3. There are over 200,000,000 blogs and 54% of bloggers post content or "tweet" (post on Twitter) daily;
4. What happens in Vegas no longer "stays in Vegas," but shows up on YouTube, Flickr, Twitter, Facebook…
Quite simply, the raw numbers associated with social media are huge and so the question quickly becomes whether social media has any real power, reach, or impact. There is little doubt that the sheer numbers have caught the attention of sales and marketing teams. Consider the following additional statistics from "Social Media Revolution:"
1. 78% of consumers trust peer recommendations, while only 14% of consumers trust advertisements;
2. People care more about how their social group ranks products and services than how Google ranks products and services;
3. 34% of bloggers post opinions about products and brands and 25%Internet search results for the world’s top 20 largest brands are links to user-generated content.
Very quickly, two things become evident: first, the sales and marketing groups of any company will be forced to begin using social networking and social media to promote the company's products and services and, second, the sales and marketing groups of any company will be forced to begin monitoring social networking and social media to manage negative publicity about the company's products and services.
Given the informal nature of these media, there will be a stronger need to establish guidelines on how to promote products and services and how to defend them, particularly with respect to company-sponsored communications or "official" activities. Unfortunately, it’s the "unofficial" activities that can raise even higher levels of concern.
One of the aspects of social networking and media is that user profiles of the party doing the communicating typically indicate where the person works. Moreover, the communications themselves are public and may be of endless duration. So informal, unofficial communications by employees are of considerable potential concern. It is easy to imagine all manner of scenarios which could lead to embarrassment if not liability for the company. For example, suppose a public company employee is active on Twitter and well identified as a mid-level manager for the company. Suppose further than an unrelated but unscrupulous twitter user decides to use twitter as a part of a pump and dump stock scheme for that company. If our mythical company employee were to innocently pass along information from the unscrupulous Twitter user simply because he was proud of his company and that information was false, would our mythical company employee be an accomplice to the pump and dump scheme? Perhaps not, but the circumstances could prove to be highly embarrassing.
Thus, there are several points which need to be addressed in any social media policy adopted by a company. Such policies will need to address communications that are made on behalf of the company or clearly in a person's capacity as an employee. The policy may also need to address communications made in other capacities. The details of how to develop a social media/networking policy will be discussed in later blog posts, but some of the things to be weighed and considered are:
1. "Official Communications"
(a) Procedures used to approve communications?
(b) Personnel authorized to communicate?
(c) Subject matters to be communicated?
(d) Require a separate "official" account?
2. "Unofficial Communications"
(a) Require a separate "personal account?"
(b) Disclosure to company of all accounts?
(c) No references to the employee's company affiliation?
(d) Disclaimer?
(e) During office hours
(1) Time restrictions?
(2) Subject matter restrictions?
(3) Network restrictions?
(f) During personal time
(1) Subject matter restrictions?
(2) Other restrictions?
By Tom McLain
Do companies really need to develop policies to address social networking or social media? The answer to this question may be surprising – Yes. Or, in light of reports of the NFL's recent decision to implement restriction on the use of Twitter (a micro-blogging site) on game days, maybe a "yes" is not so surprising. Still, the NFL is a lot different than most businesses and the fact that it feels the need to put limits or bans in place does not necessarily mean that other companies should. The reality is that the social networking/media phenomenon may be falling below the radar screen of management of many companies for many reasons, including the informality of the media. However, there are some very real dangers that need to be considered.
At the outset, the terms "social networking" or "social media" are themselves misleading, due to the inclusion of the word "social" and due to mistaken belief that, because they occurs on a computer over the Internet, they are not a serious endeavor. For example, it is easy to dismiss social networking as just a new way to chat or gossip. However, a better way to think of social networking it is "computer-based" networking. Company executives understand the concept of networking in the traditional sense – meeting with people in face to face settings that may or may not be social for the purpose of advancing one's business. "Social networking" needs to be thought of in the same terms – its just traditional networking facilitated by computers instead of being face to face.
It is also a mistake for company executives to dismiss or underestimate the social media phenomenon as a fad or as something that is reserved to a small number of people. In August, 2009, a video was produced (for the Internet, of course) entitled "Social Media Revolution" that provided some amazing statistics:
1. By 2010 members of Generation Y will outnumber Baby Boomers;
2. The fastest growing segment on Facebook is 55-65 year-old females;
3. There are over 200,000,000 blogs and 54% of bloggers post content or "tweet" (post on Twitter) daily;
4. What happens in Vegas no longer "stays in Vegas," but shows up on YouTube, Flickr, Twitter, Facebook…
Quite simply, the raw numbers associated with social media are huge and so the question quickly becomes whether social media has any real power, reach, or impact. There is little doubt that the sheer numbers have caught the attention of sales and marketing teams. Consider the following additional statistics from "Social Media Revolution:"
1. 78% of consumers trust peer recommendations, while only 14% of consumers trust advertisements;
2. People care more about how their social group ranks products and services than how Google ranks products and services;
3. 34% of bloggers post opinions about products and brands and 25%Internet search results for the world’s top 20 largest brands are links to user-generated content.
Very quickly, two things become evident: first, the sales and marketing groups of any company will be forced to begin using social networking and social media to promote the company's products and services and, second, the sales and marketing groups of any company will be forced to begin monitoring social networking and social media to manage negative publicity about the company's products and services.
Given the informal nature of these media, there will be a stronger need to establish guidelines on how to promote products and services and how to defend them, particularly with respect to company-sponsored communications or "official" activities. Unfortunately, it’s the "unofficial" activities that can raise even higher levels of concern.
One of the aspects of social networking and media is that user profiles of the party doing the communicating typically indicate where the person works. Moreover, the communications themselves are public and may be of endless duration. So informal, unofficial communications by employees are of considerable potential concern. It is easy to imagine all manner of scenarios which could lead to embarrassment if not liability for the company. For example, suppose a public company employee is active on Twitter and well identified as a mid-level manager for the company. Suppose further than an unrelated but unscrupulous twitter user decides to use twitter as a part of a pump and dump stock scheme for that company. If our mythical company employee were to innocently pass along information from the unscrupulous Twitter user simply because he was proud of his company and that information was false, would our mythical company employee be an accomplice to the pump and dump scheme? Perhaps not, but the circumstances could prove to be highly embarrassing.
Thus, there are several points which need to be addressed in any social media policy adopted by a company. Such policies will need to address communications that are made on behalf of the company or clearly in a person's capacity as an employee. The policy may also need to address communications made in other capacities. The details of how to develop a social media/networking policy will be discussed in later blog posts, but some of the things to be weighed and considered are:
1. "Official Communications"
(a) Procedures used to approve communications?
(b) Personnel authorized to communicate?
(c) Subject matters to be communicated?
(d) Require a separate "official" account?
2. "Unofficial Communications"
(a) Require a separate "personal account?"
(b) Disclosure to company of all accounts?
(c) No references to the employee's company affiliation?
(d) Disclaimer?
(e) During office hours
(1) Time restrictions?
(2) Subject matter restrictions?
(3) Network restrictions?
(f) During personal time
(1) Subject matter restrictions?
(2) Other restrictions?
Friday, July 10, 2009
Hart-Scott-Rodino Not Limited to M & A
By Tom McLain
When the Hart-Scott-Rodino Antitrust Improvements Act ("HSR") is mentioned, most people think of it as a requirement that may come into play in a merger transaction or some other type of acquisition transaction. However, there are occasional reminders that other sorts of transactions that cannot be classified as a merger or acquisition can be subject to HSR notification requirements. Just this week, such a reminder came with the announcement of an collaboration and exclusive global license agreement between Merck and Portola Pharmaceuticals. According to news reports, the licensing deal requires Merck to pay Portola a $50 million initial fee, followed by additional payments of up to $420 million upon achievement of certain milestones and also provides for double-digit royalties on worldwide sales of betrixaban, a drug for the prevention of stroke in patients with atrial fibrillation. In its press release, Merck commented that the "effectiveness of the collaboration agreement is subject to the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, if applicable."
While it is true that the vast majority of HSR notifications are filed as a result of a transaction involving a merger or acquisition transaction, the formation of a joint venture or other corporation can trigger a requirement to file an HSR notification. More importantly for Merck, the Federal Trade Commission (the "FTC"), through its informal opinions, has explained that certain exclusive licenses will be treated as the transfer of an asset for purposes of the HSR Act. With respect to the Merck/Portola transaction, the underlying collaboration and license agreement will have to be analyzed to determine whether it is sufficiently exclusive for the FTC to consider it to be an transfer of an asset. Assuming that the Merck/Portola arrangement is sufficiently exclusive, then the parties will have to determine whether other reporting threshold tests are met such as the" size of person test" and the "size of transaction test." The FTC's Introductory Guide II provides basic information regarding the reporting thresholds.
Given that, as of the 2009 amendment to the regulations, the daily penalties that can be assessed for a failure to make a required notification filing are $16,000 per day, it is quite important to remember that the HSR Act applies to things beyond mere mergers and acquisitions. Thus, it is important to remember that, whenever two companies come together to form a joint venture, form a corporation or limited liability company, or undertake a collaborative or exclusive arrangement, the implications under the HSR Act should be considered.
When the Hart-Scott-Rodino Antitrust Improvements Act ("HSR") is mentioned, most people think of it as a requirement that may come into play in a merger transaction or some other type of acquisition transaction. However, there are occasional reminders that other sorts of transactions that cannot be classified as a merger or acquisition can be subject to HSR notification requirements. Just this week, such a reminder came with the announcement of an collaboration and exclusive global license agreement between Merck and Portola Pharmaceuticals. According to news reports, the licensing deal requires Merck to pay Portola a $50 million initial fee, followed by additional payments of up to $420 million upon achievement of certain milestones and also provides for double-digit royalties on worldwide sales of betrixaban, a drug for the prevention of stroke in patients with atrial fibrillation. In its press release, Merck commented that the "effectiveness of the collaboration agreement is subject to the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, if applicable."
While it is true that the vast majority of HSR notifications are filed as a result of a transaction involving a merger or acquisition transaction, the formation of a joint venture or other corporation can trigger a requirement to file an HSR notification. More importantly for Merck, the Federal Trade Commission (the "FTC"), through its informal opinions, has explained that certain exclusive licenses will be treated as the transfer of an asset for purposes of the HSR Act. With respect to the Merck/Portola transaction, the underlying collaboration and license agreement will have to be analyzed to determine whether it is sufficiently exclusive for the FTC to consider it to be an transfer of an asset. Assuming that the Merck/Portola arrangement is sufficiently exclusive, then the parties will have to determine whether other reporting threshold tests are met such as the" size of person test" and the "size of transaction test." The FTC's Introductory Guide II provides basic information regarding the reporting thresholds.
Given that, as of the 2009 amendment to the regulations, the daily penalties that can be assessed for a failure to make a required notification filing are $16,000 per day, it is quite important to remember that the HSR Act applies to things beyond mere mergers and acquisitions. Thus, it is important to remember that, whenever two companies come together to form a joint venture, form a corporation or limited liability company, or undertake a collaborative or exclusive arrangement, the implications under the HSR Act should be considered.
Friday, July 3, 2009
Should businesses risk using form agreements from the Internet?
By Tom McLain
You can find anything on the Internet. That includes form legal documents. However, just because you can find a form legal document that seems to pertain to your particular situation, should you use it? In the majority of instances the answer is no. Is that simply a self-serving answer from a lawyer or is there a rational basis for the answer? Read on and make your own determination.
Let me provide you with a peek into how I and many other attorneys draft contracts. At the core of the process is a skill you learned in kindergarten: cutting and pasting. Even when I am drafting a contract involving a subject matter that is new to me, there is always some component of reusing clauses and parts of agreements that I have used before. The primary driving force behind this is efficiency: if I do not have to draft everything from scratch, then I can deliver the contract to my client far more quickly (and cheaply). Moreover, I am able to reuse clauses that I have spent considerable time tweaking to get just right. In effect, the contracts that I write are generally a compilation of various "form agreements." Of course, there is also a significant amount of customized drafting and creation of clauses that are necessary to fit the particular situation.
So, if I use forms, why do I say that non-lawyers should not? Well, let me answer this by explaining a little more of my drafting process. When I consider which document to use as a starting point, I need answers to four questions: 1) which party did we represent, 2) was there equal bargaining power, 3) were there unusual circumstances, and 4) how heavily negotiated was the agreement. Thus, if I were representing a seller of a business, I would not want to start with an asset purchase agreement that I drafted while I was representing a buyer who had all the bargaining power in a transaction where the seller was desperate for cash and had no attorney. If I used that particular asset purchase agreement, then I would be using a document that was heavily stacked in favor of a buyer when I was representing a seller. This drives home a most important point: when it comes to legal documents, ONE SIZE DOES NOT FIT ALL.
So lets look at a particular example that seems to be quite common. Suppose you decide to search the Internet for a free confidentiality agreement form because you need to hire a consultant for your business. The point of a confidentiality agreement is to protect the confidential and proprietary information that your company uses to create whatever competitive advantage it has in the marketplace, arguably the single most valuable asset of the company. So, when you find a free confidentiality agreement form on the Internet that looks like it may be a good one, can you tell whether it was drafted to favor the company or to favor the consultant? If the form is "neutral," is that good enough for you or are you more interested in using a document that provides your company with as much protection as possible? Do you have the experience to know whether the form agreement is missing any key elements? Was the form agreement prepared to protect a business like yours? (Drafting to protect a technology company is far different than drafting to protect a brick manufacturer). Is the only document you need a confidentiality agreement or are there other ancillary agreements that are important? Do the provisions in the form agreement comply with the law applicable in your state or could portions of it be unenforceable? Without the answers to these questions, there is no way for you to safely predict whether using the form confidentiality agreement will protect your company or leave it vulnerable.
A confidentiality agreement may seem like a generic and harmless agreement that could be picked up from almost any source. Hopefully, this discussion has made it clear that there are many factors that need to be considered and that you need experience legal counsel to guide you through those considerations. In short, a confidentiality agreement needs to be customized to fit the particular business and the particular circumstances. The same sort of analysis holds true for almost any legal agreement you can imagine. So, can you find free legal documents on the Internet and use them? Sure. Will there be consequences? If you are extremely lucky, maybe not, but is it a risk worth taking? If you execute a form agreement, it could actually wind up being worse than having no agreement at all. Only you can decide if your business to too valuable to take such risks. You may decide that the risk is acceptable, but at least you now have an idea of the nature of that risk.
You can find anything on the Internet. That includes form legal documents. However, just because you can find a form legal document that seems to pertain to your particular situation, should you use it? In the majority of instances the answer is no. Is that simply a self-serving answer from a lawyer or is there a rational basis for the answer? Read on and make your own determination.
Let me provide you with a peek into how I and many other attorneys draft contracts. At the core of the process is a skill you learned in kindergarten: cutting and pasting. Even when I am drafting a contract involving a subject matter that is new to me, there is always some component of reusing clauses and parts of agreements that I have used before. The primary driving force behind this is efficiency: if I do not have to draft everything from scratch, then I can deliver the contract to my client far more quickly (and cheaply). Moreover, I am able to reuse clauses that I have spent considerable time tweaking to get just right. In effect, the contracts that I write are generally a compilation of various "form agreements." Of course, there is also a significant amount of customized drafting and creation of clauses that are necessary to fit the particular situation.
So, if I use forms, why do I say that non-lawyers should not? Well, let me answer this by explaining a little more of my drafting process. When I consider which document to use as a starting point, I need answers to four questions: 1) which party did we represent, 2) was there equal bargaining power, 3) were there unusual circumstances, and 4) how heavily negotiated was the agreement. Thus, if I were representing a seller of a business, I would not want to start with an asset purchase agreement that I drafted while I was representing a buyer who had all the bargaining power in a transaction where the seller was desperate for cash and had no attorney. If I used that particular asset purchase agreement, then I would be using a document that was heavily stacked in favor of a buyer when I was representing a seller. This drives home a most important point: when it comes to legal documents, ONE SIZE DOES NOT FIT ALL.
So lets look at a particular example that seems to be quite common. Suppose you decide to search the Internet for a free confidentiality agreement form because you need to hire a consultant for your business. The point of a confidentiality agreement is to protect the confidential and proprietary information that your company uses to create whatever competitive advantage it has in the marketplace, arguably the single most valuable asset of the company. So, when you find a free confidentiality agreement form on the Internet that looks like it may be a good one, can you tell whether it was drafted to favor the company or to favor the consultant? If the form is "neutral," is that good enough for you or are you more interested in using a document that provides your company with as much protection as possible? Do you have the experience to know whether the form agreement is missing any key elements? Was the form agreement prepared to protect a business like yours? (Drafting to protect a technology company is far different than drafting to protect a brick manufacturer). Is the only document you need a confidentiality agreement or are there other ancillary agreements that are important? Do the provisions in the form agreement comply with the law applicable in your state or could portions of it be unenforceable? Without the answers to these questions, there is no way for you to safely predict whether using the form confidentiality agreement will protect your company or leave it vulnerable.
A confidentiality agreement may seem like a generic and harmless agreement that could be picked up from almost any source. Hopefully, this discussion has made it clear that there are many factors that need to be considered and that you need experience legal counsel to guide you through those considerations. In short, a confidentiality agreement needs to be customized to fit the particular business and the particular circumstances. The same sort of analysis holds true for almost any legal agreement you can imagine. So, can you find free legal documents on the Internet and use them? Sure. Will there be consequences? If you are extremely lucky, maybe not, but is it a risk worth taking? If you execute a form agreement, it could actually wind up being worse than having no agreement at all. Only you can decide if your business to too valuable to take such risks. You may decide that the risk is acceptable, but at least you now have an idea of the nature of that risk.
Monday, June 29, 2009
Should you fear earnouts in M&A deals?
By Tom McLain
The Corporate Dealmaker section of The Deal.com (the online version of The Deal magazine) recently asked the question: Who's Afraid of Earnouts? The occasion for the question was a study of the deal making philosophy of Jim McCann, founder and CEO of 1-800-Flowers.com Inc., whom Kenneth Klee, writing for The Deal on June 19, 2009, dubbed the "Entrepreneurial acquirer." Mr. McCann says that his company uses earnouts in every acquisition of a company. The counter-argument to the use of earnouts is found in Klee's June 5, 2009 article, Arguments postponed. So we have Mr. McCann extolling the virtues of an earnout and other experts saying that earnouts usually wind up being nothing more than a postponement of an argument. The point behind this article is to weigh in on the question of "Who's afraid of Earnouts?"
Like any good attorney, I'll start by reframing the question before I answer it. The question that is probably a little more appropriate is: "Who's very cautious about using earnouts in an acquisition?" Answer: I am. Perhaps the primary reason for my caution is that, in my experience, a significant number of earnouts creep into deals when buyers and sellers disagree over the value of a business. Since many of these disagreements are based on a different view of the future (the seller claims to see explosive growth and the buyer claims to see conservative growth or even contraction), an earnout serves as a compromise between the optimism of the seller and the pessimism of the buyer. These types of earnouts are usually tied in some way to the revenues (either gross or net) of the business after it has been acquired: if the revenue thresholds are met, the seller will receive some additional compensation. Lets call these "business performance earnouts."
One of the first cautious in connection with earnouts, in general, and business performance earnouts, in particular, is the tendency for both sides to believe that their assumptions will be borne out. This is usually a bigger problem for sellers because they may count the additional compensation embodied in the earnout as “money in the bank.” So if a seller accepts a deal that only works economically if earnout is paid, there is a significant risk of disappointment. Not only is the earnout dependent on how the business does as a unit of the acquiring company, but the earnout can also be influenced by overall economic conditions. It is quite easy to imagine that a significant number of performance-based earnout thresholds have been missed over the last 18 months due in large measure to the overall economic malaise. However there are other reasons to be cautions about earnouts.
Business performance earnouts can be quite tricky to define. Picking an appropriate performance criteria can be much more difficult to do that it may seem. It is not unusual for one of the parties to discover after the fact that the measurement rewards behavior that would not otherwise be desired. So, a lot of careful thought needs to be done by the financial and business due diligence teams before signing off on an earnout formula. The due diligence done in support of developing an earnout formula should include many things, including, without limitation, analysis of historical trends in the business, validation of the sales efforts, determination of the sensitivity of the business to adverse economics or increased competition, careful modeling, understanding the metrics of the business and determining how best to measure its success. Even when all the homework has been done, it is not unusual for me to caution sellers to assume that they will never see a dime of the earnout and to caution buyers to assume that they will wind up paying the entire earnout irrespective of whether either side feels like the performance thresholds have been met or missed. This is because there are often ways to "game" the formula and there are many unpredictable and uncontrollable influences on the formula. In other words, in this regard, I tend to fall into the camp that says that earnouts are merely a way to delay arguments until later.
However, the most difficult part of business performance earnouts can be the way in which they impact the integration the purchased business operations into the acquiring business. This is less of a concern with financial buyer than with strategic buyers, since much less business integration is required in the case of financial buyers. The fundamental obstruction to effective integration is that the former owners of the acquired business tend to want to continue running the business in the same manner as they have always run it in order to make sure they get their earnout. Thus, it is quite easy to have the old owners become quite obstructive to change because of their desire to protect their earnout. Again, this can be controlled to a degree in the manner in which the business performance earnouts formula is designed, but the argument that can often be raised somewhere along the way by the seller is "the buyer's actions prevented me from earning my earnout." The bottom line is that the impediments to business integration that are created by business performance earnouts need to be very carefully considered.
In other cases, the earnout may be more directly related to retention of the seller for a long period of time after the acquisition. Let's call these "retention earnouts." From reading Klee's article about Mr. McCann, this seems to be the primary reason for the earnouts that 1800 Flowers uses. Mr. McCann explains that "about 60% of the company's executive team has joined through deals." If you want to retain the seller's expertise, the challenge is keeping them motivated after they have received a big payday. Thus, retention earnouts are typically less results oriented and more oriented to service longevity and quality. They can simply take the form of requiring the seller to continue to work for a period of time in order to receive the full deal consideration. More often, retention earnouts combine longevity components and revenue components and, as in the case of 1800 Flowers, there may be complimentary programs providing employment incentives. The tension in retention earnouts is not so much over whether there will be problems with integration but over whether the seller will actually remain in productive service. Needless to say, retention earnouts be difficult to design but, since they are not serving as a bridge over a dispute, they can be a little easier to create.
Earnouts have been and will continue to be part of mergers and acquisitions. Earnouts that are created primarily as a way to resolve a current dispute in the future by making payments based on thresholds that are tied solely to company performance are the ones that are least likely to work as intended and the most likely to create future problems. It may be the case that, in these uncertain economic times, there may be an upswing in the use of business performance earnouts to fill in valuation gaps. In contrast, earnouts that are designed to encourage specific behaviors like the retention of services tend to be a little more likely to operate as intended. In summary, there is no need to be afraid of earnouts, but there is every need to be cautious in implementing an earnout.
The Corporate Dealmaker section of The Deal.com (the online version of The Deal magazine) recently asked the question: Who's Afraid of Earnouts? The occasion for the question was a study of the deal making philosophy of Jim McCann, founder and CEO of 1-800-Flowers.com Inc., whom Kenneth Klee, writing for The Deal on June 19, 2009, dubbed the "Entrepreneurial acquirer." Mr. McCann says that his company uses earnouts in every acquisition of a company. The counter-argument to the use of earnouts is found in Klee's June 5, 2009 article, Arguments postponed. So we have Mr. McCann extolling the virtues of an earnout and other experts saying that earnouts usually wind up being nothing more than a postponement of an argument. The point behind this article is to weigh in on the question of "Who's afraid of Earnouts?"
Like any good attorney, I'll start by reframing the question before I answer it. The question that is probably a little more appropriate is: "Who's very cautious about using earnouts in an acquisition?" Answer: I am. Perhaps the primary reason for my caution is that, in my experience, a significant number of earnouts creep into deals when buyers and sellers disagree over the value of a business. Since many of these disagreements are based on a different view of the future (the seller claims to see explosive growth and the buyer claims to see conservative growth or even contraction), an earnout serves as a compromise between the optimism of the seller and the pessimism of the buyer. These types of earnouts are usually tied in some way to the revenues (either gross or net) of the business after it has been acquired: if the revenue thresholds are met, the seller will receive some additional compensation. Lets call these "business performance earnouts."
One of the first cautious in connection with earnouts, in general, and business performance earnouts, in particular, is the tendency for both sides to believe that their assumptions will be borne out. This is usually a bigger problem for sellers because they may count the additional compensation embodied in the earnout as “money in the bank.” So if a seller accepts a deal that only works economically if earnout is paid, there is a significant risk of disappointment. Not only is the earnout dependent on how the business does as a unit of the acquiring company, but the earnout can also be influenced by overall economic conditions. It is quite easy to imagine that a significant number of performance-based earnout thresholds have been missed over the last 18 months due in large measure to the overall economic malaise. However there are other reasons to be cautions about earnouts.
Business performance earnouts can be quite tricky to define. Picking an appropriate performance criteria can be much more difficult to do that it may seem. It is not unusual for one of the parties to discover after the fact that the measurement rewards behavior that would not otherwise be desired. So, a lot of careful thought needs to be done by the financial and business due diligence teams before signing off on an earnout formula. The due diligence done in support of developing an earnout formula should include many things, including, without limitation, analysis of historical trends in the business, validation of the sales efforts, determination of the sensitivity of the business to adverse economics or increased competition, careful modeling, understanding the metrics of the business and determining how best to measure its success. Even when all the homework has been done, it is not unusual for me to caution sellers to assume that they will never see a dime of the earnout and to caution buyers to assume that they will wind up paying the entire earnout irrespective of whether either side feels like the performance thresholds have been met or missed. This is because there are often ways to "game" the formula and there are many unpredictable and uncontrollable influences on the formula. In other words, in this regard, I tend to fall into the camp that says that earnouts are merely a way to delay arguments until later.
However, the most difficult part of business performance earnouts can be the way in which they impact the integration the purchased business operations into the acquiring business. This is less of a concern with financial buyer than with strategic buyers, since much less business integration is required in the case of financial buyers. The fundamental obstruction to effective integration is that the former owners of the acquired business tend to want to continue running the business in the same manner as they have always run it in order to make sure they get their earnout. Thus, it is quite easy to have the old owners become quite obstructive to change because of their desire to protect their earnout. Again, this can be controlled to a degree in the manner in which the business performance earnouts formula is designed, but the argument that can often be raised somewhere along the way by the seller is "the buyer's actions prevented me from earning my earnout." The bottom line is that the impediments to business integration that are created by business performance earnouts need to be very carefully considered.
In other cases, the earnout may be more directly related to retention of the seller for a long period of time after the acquisition. Let's call these "retention earnouts." From reading Klee's article about Mr. McCann, this seems to be the primary reason for the earnouts that 1800 Flowers uses. Mr. McCann explains that "about 60% of the company's executive team has joined through deals." If you want to retain the seller's expertise, the challenge is keeping them motivated after they have received a big payday. Thus, retention earnouts are typically less results oriented and more oriented to service longevity and quality. They can simply take the form of requiring the seller to continue to work for a period of time in order to receive the full deal consideration. More often, retention earnouts combine longevity components and revenue components and, as in the case of 1800 Flowers, there may be complimentary programs providing employment incentives. The tension in retention earnouts is not so much over whether there will be problems with integration but over whether the seller will actually remain in productive service. Needless to say, retention earnouts be difficult to design but, since they are not serving as a bridge over a dispute, they can be a little easier to create.
Earnouts have been and will continue to be part of mergers and acquisitions. Earnouts that are created primarily as a way to resolve a current dispute in the future by making payments based on thresholds that are tied solely to company performance are the ones that are least likely to work as intended and the most likely to create future problems. It may be the case that, in these uncertain economic times, there may be an upswing in the use of business performance earnouts to fill in valuation gaps. In contrast, earnouts that are designed to encourage specific behaviors like the retention of services tend to be a little more likely to operate as intended. In summary, there is no need to be afraid of earnouts, but there is every need to be cautious in implementing an earnout.
Friday, June 26, 2009
Thoughts on Twitter, Web 2.0, and legal marketing
By Tom McLain
Depending on who you listen to, a presence on Twitter is either an absolute must for businesses and law firms or it is a complete bust and waste of time. Twitter, along with other Web 2.0 and "social networking" tools, has been a big part of the buzz in among marketing experts for quite some time and businesses and law firms have been struggling to determine if it makes sense for them to jump in. Not long ago, I embraced Twitter wholeheartedly in an effort to understand if and how it might help me develop new clients. At least for now, I am backing off from my commitment to Twitter and, operating on the assumption that my experiences may be helpful to others, I decided to write this blog entry.
The importance and usefulness of Twitter as a method for marketing legal services is hotly contested as of this writing. In May, 2009, Larry Bodine, a respected law firm marketing expert, articulated the case against Twitter in his article, Twitter Not Effective for Law Firm Marketing, and concluded: "For business development purposes, it’s time to give Twitter the bird." Interestingly enough, just a few months earlier, in his January 2009 article Attorneys Flocking to Twitter for Marketing, Bodine predicted, "From where I’m sitting, 2009 will be the year Twitter becomes the major business development trend" and articulated the case for the use of Twitter. Not surprisingly, Bodine's sudden position reversal on Twitter had its immediate detractors and many quickly stood up to defend Twitter including, Peter H. Berge,Web education director of Minnesota CLE, who wrote Response to Larry Bodine on Twitter. A well reasoned point by point analysis of Bodine's article which agrees in part and disputes in part Bodine's conclusions can be found at Twitter for Law Firm Business Development and features comments from a number of people I know and respect like David A. Barrett and Stephen Fairley. Finally, Legal tweeters respond to recent barbs at Twitter, comments on the controversy and points out that Twitter has proven to be successful for certain lawyers, singling out solo practitioners as an example.
Before recounting my own Twitter experience, I must confess that I have my own serious reservations about Internet-based marketing of legal services which I suspect are not dissimilar from the reservations held by many others. The first reservation is best summarized as a general disbelief in the notion that anyone would actually make a decision to hire an attorney based on something found on the Internet. The second reservation is best summarized as a concern that anybody willing to hire an attorney based upon what they find on the Internet may not be the sort of client that I want to represent. While these reservations may have some merit, my suspicion is that my resistance to social networking as a business development tool is quite similar to the distrust that all of us who are old enough to remember had of the concept of having a webpage at all. In short, I think the day is probably coming when a lawyer who has no presence in social networking will be viewed as somehow irrelevant in much the same way as we currently feel about law firms with no webpage today. So it is simply a matter of choosing when and not if to climb on board. (Since I believe that Web 2.0 and social networking tools are here to stay, look for a future blog entry from me on policies that businesses should adopt).
Insofar as my own use of Twitter is concerned, I suspect that my experiences on Twitter could be viewed as many observers as a success, which may make my decision to pull back even odder. I opened my Twitter account on April 24, 2009 and have been fortunate enough to have attracted many of the sorts of followers that I hoped for (and, ironically, over half as many followers as Larry Bodine). More importantly, earlier this month, I was privileged to be the subject of a live interview on Twitter (known as a "twitterview") conducted by Lance Godard, a legal marketing expert with whom I have since had productive conversations. I have also been featured as a "poster child" in an blog entry called The Anatomy of a Twitter Tweet - Twitter Basics for Lawyers. Many of my tweets seem to have caught the eye of other members of the legal community and of people that could be viewed as prospective clients who have, in turn, republished my tweets (called a retweet) so that my tweets have been literally viewed by over 20,000 people.
So why is it that, after less than two months with apparent Twitter success, I have decided to back off on my commitment to Twitter. The answer is time. The beginning of the end for me can be traced to some of the questions that I answered in my twitterview. Those questions caused me to focus on my overall marketing plan and just how things like Twitter fit into it. Both sides of the debate over Twitter for lawyers recognize that it is vitally important to remain true to proven core marketing principles such as face-to-face meetings and other forms of personal interaction with people and that Twitter and other Web 2.0 tools are a poor substitute for "good, old-fashioned" client development. I do not think that I am alone in my belief that the marketing efforts should be focused on, in order, face-to-face interaction, maintaining a good website that is visible in Internet searches, maintaining a good blog that generates attention, and Web 2.0 tools. Of the Web 2.0 tools, my personal preference is LinkedIn, followed by Twitter. A fair assessment of my own marketing practices is that my priorities have been wrong and I was spending too much time on Twitter and not enough on higher ranking methods. In short, my balance was off or, in the words of Larry Bodine, I had allowed Twitter to become a "powerful distraction from getting real marketing work done." I simply need to create more time to focus on face-to-face marketing and blogging. In the words of my dear friend Chris Kimbel, sales director at Womble Carlyle, my marketing plan lacked proper balance and was skewed in an unhealthy degree in the direction of the least productive marketing methods.
So, while I work to achieve marketing balance, Twitter must necessarily take a backseat to the other best practices mentioned above. This does not mean that I consider Twitter to be a lost cause - particularly if three new matters show up on my doorstep from clients who say, "I found you on Twitter." My partner John Watkins will remain on Twitter and my law firm will maintain its twitter account. In fact, I suspect that some of the things I find important and my blog posts will wind up as tweets by John or my law firm.
In closing, I want to continue one of the wonderful Twitter traditions that occurs on Fridays. On Fridays, it is customary to provide the names of people on Twitter that you believe are worth following. In that spirit, I will provide my #FollowFriday list and include many of the lawyers, paralegals, legal marketing experts and other consultants whose tweets I have found to be interesting and/or helpful over the last two months. Everyone of them is worth a follow and none of them will disappoint.
http://twitter.com/TradeSecretLaw
http://twitter.com/fredabramson
http://twitter.com/lancegodard
http://twitter.com/taxgirl
http://twitter.com/nikiblack
http://twitter.com/barrettdavid
http://twitter.com/legalninjaKris
http://twitter.com/woodlandslawyer
http://twitter.com/gtiadvisors
http://twitter.com/constructionlaw
http://twitter.com/AdvertisingLaw
http://twitter.com/London_Law_Firm
http://twitter.com/nancymyrland
http://twitter.com/johnlwatkins
http://twitter.com/anthonymfreed
http://twitter.com/GrantGriffiths
http://twitter.com/JDTwitt
http://twitter.com/Bill_Warner
http://twitter.com/BlawgTweets
http://twitter.com/adriandayton
http://twitter.com/stephenfairley
http://twitter.com/Legal_Alerts
http://twitter.com/fpileggi
http://twitter.com/TrendTracker
http://twitter.com/22twts
http://twitter.com/joshuamking
http://twitter.com/downtownlawyer
http://twitter.com/AnnEvanston
http://twitter.com/AdLawGuy
http://twitter.com/dianelevin
Depending on who you listen to, a presence on Twitter is either an absolute must for businesses and law firms or it is a complete bust and waste of time. Twitter, along with other Web 2.0 and "social networking" tools, has been a big part of the buzz in among marketing experts for quite some time and businesses and law firms have been struggling to determine if it makes sense for them to jump in. Not long ago, I embraced Twitter wholeheartedly in an effort to understand if and how it might help me develop new clients. At least for now, I am backing off from my commitment to Twitter and, operating on the assumption that my experiences may be helpful to others, I decided to write this blog entry.
The importance and usefulness of Twitter as a method for marketing legal services is hotly contested as of this writing. In May, 2009, Larry Bodine, a respected law firm marketing expert, articulated the case against Twitter in his article, Twitter Not Effective for Law Firm Marketing, and concluded: "For business development purposes, it’s time to give Twitter the bird." Interestingly enough, just a few months earlier, in his January 2009 article Attorneys Flocking to Twitter for Marketing, Bodine predicted, "From where I’m sitting, 2009 will be the year Twitter becomes the major business development trend" and articulated the case for the use of Twitter. Not surprisingly, Bodine's sudden position reversal on Twitter had its immediate detractors and many quickly stood up to defend Twitter including, Peter H. Berge,Web education director of Minnesota CLE, who wrote Response to Larry Bodine on Twitter. A well reasoned point by point analysis of Bodine's article which agrees in part and disputes in part Bodine's conclusions can be found at Twitter for Law Firm Business Development and features comments from a number of people I know and respect like David A. Barrett and Stephen Fairley. Finally, Legal tweeters respond to recent barbs at Twitter, comments on the controversy and points out that Twitter has proven to be successful for certain lawyers, singling out solo practitioners as an example.
Before recounting my own Twitter experience, I must confess that I have my own serious reservations about Internet-based marketing of legal services which I suspect are not dissimilar from the reservations held by many others. The first reservation is best summarized as a general disbelief in the notion that anyone would actually make a decision to hire an attorney based on something found on the Internet. The second reservation is best summarized as a concern that anybody willing to hire an attorney based upon what they find on the Internet may not be the sort of client that I want to represent. While these reservations may have some merit, my suspicion is that my resistance to social networking as a business development tool is quite similar to the distrust that all of us who are old enough to remember had of the concept of having a webpage at all. In short, I think the day is probably coming when a lawyer who has no presence in social networking will be viewed as somehow irrelevant in much the same way as we currently feel about law firms with no webpage today. So it is simply a matter of choosing when and not if to climb on board. (Since I believe that Web 2.0 and social networking tools are here to stay, look for a future blog entry from me on policies that businesses should adopt).
Insofar as my own use of Twitter is concerned, I suspect that my experiences on Twitter could be viewed as many observers as a success, which may make my decision to pull back even odder. I opened my Twitter account on April 24, 2009 and have been fortunate enough to have attracted many of the sorts of followers that I hoped for (and, ironically, over half as many followers as Larry Bodine). More importantly, earlier this month, I was privileged to be the subject of a live interview on Twitter (known as a "twitterview") conducted by Lance Godard, a legal marketing expert with whom I have since had productive conversations. I have also been featured as a "poster child" in an blog entry called The Anatomy of a Twitter Tweet - Twitter Basics for Lawyers. Many of my tweets seem to have caught the eye of other members of the legal community and of people that could be viewed as prospective clients who have, in turn, republished my tweets (called a retweet) so that my tweets have been literally viewed by over 20,000 people.
So why is it that, after less than two months with apparent Twitter success, I have decided to back off on my commitment to Twitter. The answer is time. The beginning of the end for me can be traced to some of the questions that I answered in my twitterview. Those questions caused me to focus on my overall marketing plan and just how things like Twitter fit into it. Both sides of the debate over Twitter for lawyers recognize that it is vitally important to remain true to proven core marketing principles such as face-to-face meetings and other forms of personal interaction with people and that Twitter and other Web 2.0 tools are a poor substitute for "good, old-fashioned" client development. I do not think that I am alone in my belief that the marketing efforts should be focused on, in order, face-to-face interaction, maintaining a good website that is visible in Internet searches, maintaining a good blog that generates attention, and Web 2.0 tools. Of the Web 2.0 tools, my personal preference is LinkedIn, followed by Twitter. A fair assessment of my own marketing practices is that my priorities have been wrong and I was spending too much time on Twitter and not enough on higher ranking methods. In short, my balance was off or, in the words of Larry Bodine, I had allowed Twitter to become a "powerful distraction from getting real marketing work done." I simply need to create more time to focus on face-to-face marketing and blogging. In the words of my dear friend Chris Kimbel, sales director at Womble Carlyle, my marketing plan lacked proper balance and was skewed in an unhealthy degree in the direction of the least productive marketing methods.
So, while I work to achieve marketing balance, Twitter must necessarily take a backseat to the other best practices mentioned above. This does not mean that I consider Twitter to be a lost cause - particularly if three new matters show up on my doorstep from clients who say, "I found you on Twitter." My partner John Watkins will remain on Twitter and my law firm will maintain its twitter account. In fact, I suspect that some of the things I find important and my blog posts will wind up as tweets by John or my law firm.
In closing, I want to continue one of the wonderful Twitter traditions that occurs on Fridays. On Fridays, it is customary to provide the names of people on Twitter that you believe are worth following. In that spirit, I will provide my #FollowFriday list and include many of the lawyers, paralegals, legal marketing experts and other consultants whose tweets I have found to be interesting and/or helpful over the last two months. Everyone of them is worth a follow and none of them will disappoint.
http://twitter.com/TradeSecretLaw
http://twitter.com/fredabramson
http://twitter.com/lancegodard
http://twitter.com/taxgirl
http://twitter.com/nikiblack
http://twitter.com/barrettdavid
http://twitter.com/legalninjaKris
http://twitter.com/woodlandslawyer
http://twitter.com/gtiadvisors
http://twitter.com/constructionlaw
http://twitter.com/AdvertisingLaw
http://twitter.com/London_Law_Firm
http://twitter.com/nancymyrland
http://twitter.com/johnlwatkins
http://twitter.com/anthonymfreed
http://twitter.com/GrantGriffiths
http://twitter.com/JDTwitt
http://twitter.com/Bill_Warner
http://twitter.com/BlawgTweets
http://twitter.com/adriandayton
http://twitter.com/stephenfairley
http://twitter.com/Legal_Alerts
http://twitter.com/fpileggi
http://twitter.com/TrendTracker
http://twitter.com/22twts
http://twitter.com/joshuamking
http://twitter.com/downtownlawyer
http://twitter.com/AnnEvanston
http://twitter.com/AdLawGuy
http://twitter.com/dianelevin
Wednesday, June 24, 2009
Lessons from a $1.4 million HSR fine
By Tom McLain
Fines for violations of the Hart Scott Rodino Act are not a common occurrence. However, when they do come along, they tend to be eye-popping. The most recent example resulted in an settlement agreement pursuant to which John C. Malone, CEO and Chairman of Discovery Holding Company, is to pay a $1.4 million civil penalty.
The central theme of the Complaint filed by the Federal Trade Commission ("FTC") against Mr. Malone is that he failed to file the required notification with the FTC and Department of Justice before acquiring voting securities of Discovery Holding Company ("Discovery"). Mr. Malone acquired the securities in a series of transactions beginning in August 2005 and continuing until April 2008. On June 12, 2008, Mr. Malone made a corrective filing with the FTC explaining that he had relied on a 2001 informal interpretation from the FTC that, unbeknownst to him, was replaced and disavowed by a February 07, 2005 informal interpretation issued by the FTC. The corrective filing established a waiting period that was to expire on July 14, 2008.
Had the fact pattern ended at this point, it is a reasonable assumption that civil penalties may not have been sought by the FTC. Based upon prior precedent and general procedures, provided that the reason for the missed filing is reasonable and there has been a demonstration of corrective actions taken to prevent future failures, the FTC has been reluctant to impose penalties. (See, Procedures For Submitting Post-Consummation Filings). In fact, on May 9, 1991, Mr. Malone made a corrective filing under the HSR Act for a previous acquisition made in 1985, and on July 2, 1991 the FTC decided not to seeking civil penalties. In any event, the penalties in effect during the time periods in question were $11,000 per day for each day during which there was a violation. [Note: as a result of a 2009 amendment, the daily penalties have been increased to $16,000 per day].
While the 1991 violation of the filing requirements under the HSR Act certainly did not help Mr. Malone's situation, the events occurring after his June 12, 2008 were far more problematic. On June 14, 2008, before the expiration of the HSR waiting period, Mr. Malone exercised options and acquired more shares of Discovery. These options would have expired before the end of the HSR waiting period on July 14, 2008, but Mr. Malone did not notify the FTC to ask whether it was permissible for him to exercise the options with an escrow arrangement prior to the expiration of the waiting period. There is no indication regarding how the FTC would have responded to the request, had it been made. However, this oversight seems to have weighed heavily in the FTC's decision to seek civil penalties.
The underlying HSR rules which resulted in a determination that a notification filing was required could themselves be the subject of an article. However, the purpose of this article is to provide a reminder of the stiff penalties that can be imposed for violations of the HSR Act and to examine some of intricacies of corrective filings. The series of events for Mr. Malone were indeed unfortunate and lead the FTC to seek to impose civil penalties. The result of the events was the entry of a consent judgment against Mr. Malone personally in the amount of $1.4 million. The consent judgment is testimony to the axiom that "bad fact lead to bad results." The primary lesson to be learned from Mr. Malone's problems is that one must always be mindful of the requirements of the HSR Act and that every merger or acquisition transaction must be weighed in light of those requirements.
Fines for violations of the Hart Scott Rodino Act are not a common occurrence. However, when they do come along, they tend to be eye-popping. The most recent example resulted in an settlement agreement pursuant to which John C. Malone, CEO and Chairman of Discovery Holding Company, is to pay a $1.4 million civil penalty.
The central theme of the Complaint filed by the Federal Trade Commission ("FTC") against Mr. Malone is that he failed to file the required notification with the FTC and Department of Justice before acquiring voting securities of Discovery Holding Company ("Discovery"). Mr. Malone acquired the securities in a series of transactions beginning in August 2005 and continuing until April 2008. On June 12, 2008, Mr. Malone made a corrective filing with the FTC explaining that he had relied on a 2001 informal interpretation from the FTC that, unbeknownst to him, was replaced and disavowed by a February 07, 2005 informal interpretation issued by the FTC. The corrective filing established a waiting period that was to expire on July 14, 2008.
Had the fact pattern ended at this point, it is a reasonable assumption that civil penalties may not have been sought by the FTC. Based upon prior precedent and general procedures, provided that the reason for the missed filing is reasonable and there has been a demonstration of corrective actions taken to prevent future failures, the FTC has been reluctant to impose penalties. (See, Procedures For Submitting Post-Consummation Filings). In fact, on May 9, 1991, Mr. Malone made a corrective filing under the HSR Act for a previous acquisition made in 1985, and on July 2, 1991 the FTC decided not to seeking civil penalties. In any event, the penalties in effect during the time periods in question were $11,000 per day for each day during which there was a violation. [Note: as a result of a 2009 amendment, the daily penalties have been increased to $16,000 per day].
While the 1991 violation of the filing requirements under the HSR Act certainly did not help Mr. Malone's situation, the events occurring after his June 12, 2008 were far more problematic. On June 14, 2008, before the expiration of the HSR waiting period, Mr. Malone exercised options and acquired more shares of Discovery. These options would have expired before the end of the HSR waiting period on July 14, 2008, but Mr. Malone did not notify the FTC to ask whether it was permissible for him to exercise the options with an escrow arrangement prior to the expiration of the waiting period. There is no indication regarding how the FTC would have responded to the request, had it been made. However, this oversight seems to have weighed heavily in the FTC's decision to seek civil penalties.
The underlying HSR rules which resulted in a determination that a notification filing was required could themselves be the subject of an article. However, the purpose of this article is to provide a reminder of the stiff penalties that can be imposed for violations of the HSR Act and to examine some of intricacies of corrective filings. The series of events for Mr. Malone were indeed unfortunate and lead the FTC to seek to impose civil penalties. The result of the events was the entry of a consent judgment against Mr. Malone personally in the amount of $1.4 million. The consent judgment is testimony to the axiom that "bad fact lead to bad results." The primary lesson to be learned from Mr. Malone's problems is that one must always be mindful of the requirements of the HSR Act and that every merger or acquisition transaction must be weighed in light of those requirements.
Sunday, May 17, 2009
New Trade Secrets Podcast Available
The third podcast in CTF's series on trade secrets and non-disclosure agreements ("NDAs") is now available. With one multi-million dollar verdict having been awarded in a high-profile trade secret case in California within the past several weeks, and with another high profile case seeking hundreds of millions of dollars on trial in federal court in Atlanta, the new podcast is timely. The podcast covers trade secret litigation from the pre-suit investigation to a possible appeal. The podcast covers the claims and defenses that are likely to be raised, the procedural issues that may arise, and how trade secret litigation may ultimately be resolved. The podcast is available at www.ctflegal.com/podcasts.html or www.ctflegal.blip.tv.
John Watkins to Speak to Chamblee Business Association on May 21, 2009
CTF Shareholder John Watkins will speak at the breakfast meeting of the Chamblee Business Association on Thursday, May 21, 2009. The meeting starts at 7:45 a.m. (doors open at 7:30) and ends at 9:00 a.m. at the Chamblee Civic Center on Broad Street in Chamblee. John will be speaking on Common Legal Mistakes and How to Avoid Them. The presentation will focus on legal mistakes commonly made by small and medium-sized businesses (and sometimes by larger businesses). The presentation will last approximately thirty minutes, with a question and answer session to follow. The meeting is open to non-members.
Wednesday, May 13, 2009
Are "Go Shop" Clauses Trending Up in M&A Transactions?
By Tom McLain
Although they have been around since about 2005 and are part of the "standard" arsenal of clauses that M&A lawyers use, "go shop" clauses may be gaining some additional popularity in the current economic environment when one considers transactions such as Barclays' $4.2 billion sale of iShares to CVC Capital Partners (see Financial Times article). Generally, "Go shop" clauses are loved by Sellers but are not too popular with Buyers.
As the name suggests, a "go shop" clause allows the Seller to accept a high bid in a non-binding letter of intent, but still continue to shop for an even better bid. One of the distinct advantages to a public company Board of Directors is that a "go shop" clause limits later shareholder criticism that the Board failed to obtain the maximum price. Some argue that a "go shop" clause may actually expedite the sale of a company because the Board may be less hesitant to accept a bid and because the Board may be able to avoid or minimize other necessary due diligence such as obtaining a fairness opinion. Others argue that "go shop" clauses can slow a transaction because the Buyer waits until the "go shop" until the period of time in which the Seller can solicit new bids expires before it begins pursuing the transaction in earnest.
Buyers almost always prefer to use a "no shop" clause because it theoretically prevents the Buyer from being outbid. Additionally, Buyer argue that a "no shop" clause is necessary for them to commit to spend the time, money and effort to complete due diligence and draft a definitive agreement. Those arguing against "go shop" clauses say that they tend to have a chilling effect on the bidding because no Buyer wants to submit a price and then be the target of other bidder's efforts to buy the seller. However, particularly in the case of a public company, the insulating effect of a "go shop" clause may protect the successful bidder from subsequent shareholder suits that seek to enjoin a sale.
While it is always risky to predict trends, "go shop" clauses could become a bit more commonplace in the current economic environment. Companies that are effectively being forced to sell or merge due to dire financial conditions already have disappointed shareholders who have lost considerable value as compared to market prices of several months back. As a way of satisfying some of those shareholder concerns and perhaps heading off shareholder claims that the Board sold at a price below market value, public company Boards may be drawn quickly to "go shop" clauses. As the M&A market continues to slowly reestablish itself, we will see whether "go shop" clauses become more prevalent.
Although they have been around since about 2005 and are part of the "standard" arsenal of clauses that M&A lawyers use, "go shop" clauses may be gaining some additional popularity in the current economic environment when one considers transactions such as Barclays' $4.2 billion sale of iShares to CVC Capital Partners (see Financial Times article). Generally, "Go shop" clauses are loved by Sellers but are not too popular with Buyers.
As the name suggests, a "go shop" clause allows the Seller to accept a high bid in a non-binding letter of intent, but still continue to shop for an even better bid. One of the distinct advantages to a public company Board of Directors is that a "go shop" clause limits later shareholder criticism that the Board failed to obtain the maximum price. Some argue that a "go shop" clause may actually expedite the sale of a company because the Board may be less hesitant to accept a bid and because the Board may be able to avoid or minimize other necessary due diligence such as obtaining a fairness opinion. Others argue that "go shop" clauses can slow a transaction because the Buyer waits until the "go shop" until the period of time in which the Seller can solicit new bids expires before it begins pursuing the transaction in earnest.
Buyers almost always prefer to use a "no shop" clause because it theoretically prevents the Buyer from being outbid. Additionally, Buyer argue that a "no shop" clause is necessary for them to commit to spend the time, money and effort to complete due diligence and draft a definitive agreement. Those arguing against "go shop" clauses say that they tend to have a chilling effect on the bidding because no Buyer wants to submit a price and then be the target of other bidder's efforts to buy the seller. However, particularly in the case of a public company, the insulating effect of a "go shop" clause may protect the successful bidder from subsequent shareholder suits that seek to enjoin a sale.
While it is always risky to predict trends, "go shop" clauses could become a bit more commonplace in the current economic environment. Companies that are effectively being forced to sell or merge due to dire financial conditions already have disappointed shareholders who have lost considerable value as compared to market prices of several months back. As a way of satisfying some of those shareholder concerns and perhaps heading off shareholder claims that the Board sold at a price below market value, public company Boards may be drawn quickly to "go shop" clauses. As the M&A market continues to slowly reestablish itself, we will see whether "go shop" clauses become more prevalent.
The One Almost Universal Rule
by John Watkins
There are very few absolute truths in the legal profession. For every legal rule, there is at least one exception. There is one truth that is pretty close to universal, however, about how clients use lawyers. That rule is that it is almost always less expensive and more effective to involve the lawyer earlier in the process than later. As a litigator, there are countless examples I have seen in which a client could probably have avoided litigation if it had, for example, consulted with its lawyer about drafting a contract or structuring a transaction instead of trying to go it alone. Although it is not a perfect analogy, it is a bit like preventative medicine.
Many clients, apparently thinking they will decrease costs, try to use a lawyer like a fire axe that is kept behind glass: Break glass and use only in the event of a fire. Other clients try to limit the information they give to a lawyer, trying to "define" the problem, but lacking the training and experience necessary to do so. The result is almost invariably a less than optimal outcome at a higher overall cost.
Clients who achieve optimal results find an experienced lawyer and use the lawyer as part of their business team. Those clients involve the lawyer early in planning and structuring a transaction. As a result, they tend to avoid mistakes in negotiating and in structuring that are more costly to correct at a later date, if they can be corrected at all. These clients also make sure that a contract or relationship is structured as clearly as possible at the outset. These businesses realize that proactive legal assistance is part of their overall effort to reduce risks and to reduce costs. Although structuring a transaction or contract carefully does not absolutely guarantee there will be no future disputes, it lessens the probability. In addition, proper structuring almost always strengthens a company's position in the event of litigation.
There are very few absolute truths in the legal profession. For every legal rule, there is at least one exception. There is one truth that is pretty close to universal, however, about how clients use lawyers. That rule is that it is almost always less expensive and more effective to involve the lawyer earlier in the process than later. As a litigator, there are countless examples I have seen in which a client could probably have avoided litigation if it had, for example, consulted with its lawyer about drafting a contract or structuring a transaction instead of trying to go it alone. Although it is not a perfect analogy, it is a bit like preventative medicine.
Many clients, apparently thinking they will decrease costs, try to use a lawyer like a fire axe that is kept behind glass: Break glass and use only in the event of a fire. Other clients try to limit the information they give to a lawyer, trying to "define" the problem, but lacking the training and experience necessary to do so. The result is almost invariably a less than optimal outcome at a higher overall cost.
Clients who achieve optimal results find an experienced lawyer and use the lawyer as part of their business team. Those clients involve the lawyer early in planning and structuring a transaction. As a result, they tend to avoid mistakes in negotiating and in structuring that are more costly to correct at a later date, if they can be corrected at all. These clients also make sure that a contract or relationship is structured as clearly as possible at the outset. These businesses realize that proactive legal assistance is part of their overall effort to reduce risks and to reduce costs. Although structuring a transaction or contract carefully does not absolutely guarantee there will be no future disputes, it lessens the probability. In addition, proper structuring almost always strengthens a company's position in the event of litigation.
Sunday, May 3, 2009
Mediation Comes to Italy
by John Watkins
In May of 2003, I attended a seminar on international dispute resolution sponsored by the Center for International Legal Studies in Heidelberg, Germany. The participants included lawyers from most of western Europe, the U.S., Brazil and Argentina. At the time, most of the participants from outside the U.S. were unfamiliar with mediation. Mediation is a structured settlement negotiation process in which the parties meet with a neutral third party called a mediator. The mediator cannot impose a settlement on the parties, but tries to assist the parties in reaching a voluntary settlement. Particularly when the parties participate on a voluntary basis (as opposed to being referred by a court), mediation has proven to be very effective in resolving disputes. For more basic information about mediation, see http://www.ctflegal.com/mediation-basics.html. For more advanced topics, see http://www.ctflegal.com/advanced-mediation.html. Or check out www.watkinsmediation.com.
The international participants at the Heidelberg conference were very familiar with international commercial arbitration, which is a time-honored method of resolving commercial disputes outside of a country's court system. Unlike mediation, arbitration (at least in its traditional form), is a binding dispute resolution process, in which arbitrators (usually lawyers or retired judges, although sometimes business people) decide the case in the place of a judge or jury. To U.S. lawyers, arbitration and mediation have gone together for many years as the two most prominent forms of "alternative dispute resolution" or "ADR" (meaning dispute resolution outside of the civil court system). So, it was surprising to me in 2003 that our European colleagues were so unfamiliar with one form of ADR (mediation) when they had used another form (arbitration) for many years.
Apparently, as Bob Dylan might say, the times are changing. I just attended a conference on international agency and distribution agreements sponsored by the Contract Section of the Union Internacionale des Avocats (International Association of Lawyers, or "UIA"). At this conference, I had the good fortune to meet Carlo Mastellone, the founder of Studio Legale Mastellone in Florence, Italy. Carlo, an elegant man born in London, explained to me that there is a huge backlog of civil cases in Italy, and that he and his colleagues hope to help resolve the situation through the use of mediation! Carlo is helping organize the effort in Florence, and they even have a website, http://www.conciliazionefirenze.org/. The website is in Italian, which makes it a little difficult for me to use (I would have a slightly better chance with German). However, I really like the artwork, which was done by an artist friend of Carlo.
In any event, I am glad that mediation has landed in Europe. In fact, I am glad we were finally able to export something to Europe relating to our legal system -- although it is actually about avoiding our legal system -- that may actually be appreciated! Now, if I can just get a case in Florence ....
In May of 2003, I attended a seminar on international dispute resolution sponsored by the Center for International Legal Studies in Heidelberg, Germany. The participants included lawyers from most of western Europe, the U.S., Brazil and Argentina. At the time, most of the participants from outside the U.S. were unfamiliar with mediation. Mediation is a structured settlement negotiation process in which the parties meet with a neutral third party called a mediator. The mediator cannot impose a settlement on the parties, but tries to assist the parties in reaching a voluntary settlement. Particularly when the parties participate on a voluntary basis (as opposed to being referred by a court), mediation has proven to be very effective in resolving disputes. For more basic information about mediation, see http://www.ctflegal.com/mediation-basics.html. For more advanced topics, see http://www.ctflegal.com/advanced-mediation.html. Or check out www.watkinsmediation.com.
The international participants at the Heidelberg conference were very familiar with international commercial arbitration, which is a time-honored method of resolving commercial disputes outside of a country's court system. Unlike mediation, arbitration (at least in its traditional form), is a binding dispute resolution process, in which arbitrators (usually lawyers or retired judges, although sometimes business people) decide the case in the place of a judge or jury. To U.S. lawyers, arbitration and mediation have gone together for many years as the two most prominent forms of "alternative dispute resolution" or "ADR" (meaning dispute resolution outside of the civil court system). So, it was surprising to me in 2003 that our European colleagues were so unfamiliar with one form of ADR (mediation) when they had used another form (arbitration) for many years.
Apparently, as Bob Dylan might say, the times are changing. I just attended a conference on international agency and distribution agreements sponsored by the Contract Section of the Union Internacionale des Avocats (International Association of Lawyers, or "UIA"). At this conference, I had the good fortune to meet Carlo Mastellone, the founder of Studio Legale Mastellone in Florence, Italy. Carlo, an elegant man born in London, explained to me that there is a huge backlog of civil cases in Italy, and that he and his colleagues hope to help resolve the situation through the use of mediation! Carlo is helping organize the effort in Florence, and they even have a website, http://www.conciliazionefirenze.org/. The website is in Italian, which makes it a little difficult for me to use (I would have a slightly better chance with German). However, I really like the artwork, which was done by an artist friend of Carlo.
In any event, I am glad that mediation has landed in Europe. In fact, I am glad we were finally able to export something to Europe relating to our legal system -- although it is actually about avoiding our legal system -- that may actually be appreciated! Now, if I can just get a case in Florence ....
Monday, April 27, 2009
Buying A Struggling Company
As the economy begins to show some signs of stabilization, there seem to be more and more news articles suggesting that there are going to be bargains available for those who wish to expand their current business through acquisition. Certainly, those seeking to sell their business are finding that the prices are not at the levels that they hoped. In an article on CNN entitled It's a Lousy Time to Sell Your Business, it is reported that both the number of businesses sold and the median price have dropped noticeably on sites such as BizBuySell. Those drops are likely to lead to bargains.
Assuming a struggling company has been identified as a target, what's next? An article on BusinessWeek entitled How to Buy a Struggling Company, offers some practical business suggestions such as sticking to industries that are well known to the buyer and concentrating on due diligence. In other words, the financial and operational details of the struggling company need to be carefully and thoroughly examined.
On the legal side of the house, additional concentration on legal due diligence is also warranted. Special attention to the contractual arrangements between the target and its suppliers and customers is needed. In reviewing these arrangements, the possibility of the failure or bankruptcy of key suppliers and customers should be factored into the review. Additionally, since the business is troubled, consideration needs to be given to determining what lines, offices, divisions, etc. will need to be shut down and whether there are any legal impediments to taking such actions. It may also be the case that, in order to keep a key supplier relationship, the buyer will have to pay a debt owed by the target, which would become a hidden cost of the transaction if not known prior to purchasing the target.
Insofar as the acquisition itself is concerned, there could be issues regarding the indemnification provisions typically included in the definitive agreement. Often, particularly with smaller companies, the owners of a struggling company are themselves struggling. This may mean that the indemnifications in the definitive agreement are of little value. Accordingly, it may be the case that a significant portion of the purchase price needs to be escrowed for a period of time.
Of course there are many other legal issues that have to be settled, not the least of which is whether the transaction is to be structured as a asset or stock purchase. However, that determination, along with many others, will need to be made on a case by case basis.
Assuming a struggling company has been identified as a target, what's next? An article on BusinessWeek entitled How to Buy a Struggling Company, offers some practical business suggestions such as sticking to industries that are well known to the buyer and concentrating on due diligence. In other words, the financial and operational details of the struggling company need to be carefully and thoroughly examined.
On the legal side of the house, additional concentration on legal due diligence is also warranted. Special attention to the contractual arrangements between the target and its suppliers and customers is needed. In reviewing these arrangements, the possibility of the failure or bankruptcy of key suppliers and customers should be factored into the review. Additionally, since the business is troubled, consideration needs to be given to determining what lines, offices, divisions, etc. will need to be shut down and whether there are any legal impediments to taking such actions. It may also be the case that, in order to keep a key supplier relationship, the buyer will have to pay a debt owed by the target, which would become a hidden cost of the transaction if not known prior to purchasing the target.
Insofar as the acquisition itself is concerned, there could be issues regarding the indemnification provisions typically included in the definitive agreement. Often, particularly with smaller companies, the owners of a struggling company are themselves struggling. This may mean that the indemnifications in the definitive agreement are of little value. Accordingly, it may be the case that a significant portion of the purchase price needs to be escrowed for a period of time.
Of course there are many other legal issues that have to be settled, not the least of which is whether the transaction is to be structured as a asset or stock purchase. However, that determination, along with many others, will need to be made on a case by case basis.
Friday, April 24, 2009
A Good Time to Buy?
A lawyer I know (Frank Aquila of Sullivan & Cromwell) recently wrote an article for Business Week entitled, "M&A: A Smart Strategy in a Down Economy." As Frank points out, mergers, acquisitions and divestures are key elements of corporate strategy. Just because markets are down does not mean that there are not deals worth doing or that a valuable management tool should be abandoned. History tells us that deals made during troubled economies often carry the strongest long-term returns.
Clearly, if an acquisition can only be financed with debt, today's climate may prevent the consummation of a merger or acquisition. On the other hand, if a company has available cash or can use its stock as currency, it should be actively considering targets, particularly strategic targets. Sitting on the sidelines, afraid to make a misstep, may itself be a terrible misstep. No one is suggesting that closing a deal will be easy, sellers are just as concerned about making a misstep and the due diligence investigation of the target needs to be exceedingly thorough. Still, there may be great targets out there that have a nice niche but are poorly managed or on the ropes with their lenders.
Clearly, if an acquisition can only be financed with debt, today's climate may prevent the consummation of a merger or acquisition. On the other hand, if a company has available cash or can use its stock as currency, it should be actively considering targets, particularly strategic targets. Sitting on the sidelines, afraid to make a misstep, may itself be a terrible misstep. No one is suggesting that closing a deal will be easy, sellers are just as concerned about making a misstep and the due diligence investigation of the target needs to be exceedingly thorough. Still, there may be great targets out there that have a nice niche but are poorly managed or on the ropes with their lenders.
Tuesday, April 21, 2009
Tom McLain appointed to the Executive Committee of the World Chamber of Commerce
On April 16, 2008, Tom McLain was appointed to the Executive Committee of the Board of Directors for the World Chamber of Commerce (the "WCC"). Solange Warner, the WCC’s founder and president said, "We are so pleased that Tom agreed to be a part of our Executive Committee and look for to being able to tap into his enthusiasm and experience." The World Chamber of Commerce, based in Atlanta, helps member businesses with their efforts to achieve business success in the lucrative international marketplace and provides educational and networking between businesses located in the U.S. as well as to those located in other countries. For more information about the World Chamber of Commerce, please click here and for more information about the international law practice at Chorey, Taylor & Feil, please click here
Sunday, April 19, 2009
"Protecting the Crown Jewels: Trade Secrets and Non-Disclosure Agreements," by John Watkins
All business owners and executives, but particularly those with small and medium-sized businesses, should know the answers to these questions:
* What is the key confidential information that puts you ahead of competitors?
* What are the main risks of misappropriation of your confidential information?
* Are you aware that survey data indicate that a high percentage of ex-employees admit taking company confidential information?
* What is a trade secret is, what do you need to do to protect it?
* When should consider non-disclosure agreements, or NDAs, to protect your confidential information?
* What are the key provisions of NDAs?
* What other provisions are sometimes included in NDAs that may affect your rights?
* Why does "one size fits all" not apply to NDAs?
* How does trade secret litigation proceed?
* What are your potential rights and remedies in trade secret litigation?
* Why should you get professional advice in dealing with trade secrets and NDAs?
Trade secrets and confidential information truly are the crown jewels of many businesses. This is the information that allows businesses to compete effectively, and that provides a competitive edge. Most businesses must rely on protecting this information -- assuming they are, as they should, be proactively trying to protect it -- through trade secret protection and NDAs. Many businesses do not, for example, have the expertise or resources necessary to prosecute and manage a large patent portfolio, and not all types of information are susceptible to patent protection.
Despite the critical nature of this information, my experience is that many business people do not understand what they should be doing to protect the crown jewels. I repeatedly see posts on LinkedIn and elsewhere asking for a "form" or a link to a "free site" to get an NDA. Other times, companies will try to re-use NDAs that were developed for another purpose. Given the potential value of the information, this cavalier approach is surprising.
It was with this background that Tom McLain and I developed our series of podcasts on trade secrets and non-disclosure agreements. The podcasts are available free at www.ctflegal.com/podcasts or www.ctflegal.blip.tv. In the first podcast, Tom and I provide the general background regarding trade secrets and NDAs. In the second podcast, Tom goes deeper into the different uses and purposes for NDAs. For example, what works in the employment context may not work for a business transaction. Tom then covers the details of NDAs and their typical provisions. Importantly, Tom also covers some provisions that may appear in NDAs, and that, perhaps without you realizing it, can substantially affect your company's rights.
Throughout the discussion, Tom's underlying message is simple: One size does not fit all for NDAs. Truer words were never spoken. It is certainly worth the time and investment to get professional assistance in drafting NDAs, or in reviewing NDAs that you may receive from other companies. Professional assistance in drafting and reviewing NDAs need not be expensive, certainly not in relationship to the potential importance of the subject. Most importantly, it will provide you with the confidence that you know what you are signing and what obligations your company is undertaking and what obligations the other party is assuming.
In the final installment of the series, which has yet to be released, I will discuss the subject of trade secret litigation. Trade secret litigation tends to be much faster moving than other forms of commercial litigation, and puts an even greater premium on preparation than is ordinarily the key. I will discuss all aspects of trade secret litigation, from the initial investigation through trial.
* What is the key confidential information that puts you ahead of competitors?
* What are the main risks of misappropriation of your confidential information?
* Are you aware that survey data indicate that a high percentage of ex-employees admit taking company confidential information?
* What is a trade secret is, what do you need to do to protect it?
* When should consider non-disclosure agreements, or NDAs, to protect your confidential information?
* What are the key provisions of NDAs?
* What other provisions are sometimes included in NDAs that may affect your rights?
* Why does "one size fits all" not apply to NDAs?
* How does trade secret litigation proceed?
* What are your potential rights and remedies in trade secret litigation?
* Why should you get professional advice in dealing with trade secrets and NDAs?
Trade secrets and confidential information truly are the crown jewels of many businesses. This is the information that allows businesses to compete effectively, and that provides a competitive edge. Most businesses must rely on protecting this information -- assuming they are, as they should, be proactively trying to protect it -- through trade secret protection and NDAs. Many businesses do not, for example, have the expertise or resources necessary to prosecute and manage a large patent portfolio, and not all types of information are susceptible to patent protection.
Despite the critical nature of this information, my experience is that many business people do not understand what they should be doing to protect the crown jewels. I repeatedly see posts on LinkedIn and elsewhere asking for a "form" or a link to a "free site" to get an NDA. Other times, companies will try to re-use NDAs that were developed for another purpose. Given the potential value of the information, this cavalier approach is surprising.
It was with this background that Tom McLain and I developed our series of podcasts on trade secrets and non-disclosure agreements. The podcasts are available free at www.ctflegal.com/podcasts or www.ctflegal.blip.tv. In the first podcast, Tom and I provide the general background regarding trade secrets and NDAs. In the second podcast, Tom goes deeper into the different uses and purposes for NDAs. For example, what works in the employment context may not work for a business transaction. Tom then covers the details of NDAs and their typical provisions. Importantly, Tom also covers some provisions that may appear in NDAs, and that, perhaps without you realizing it, can substantially affect your company's rights.
Throughout the discussion, Tom's underlying message is simple: One size does not fit all for NDAs. Truer words were never spoken. It is certainly worth the time and investment to get professional assistance in drafting NDAs, or in reviewing NDAs that you may receive from other companies. Professional assistance in drafting and reviewing NDAs need not be expensive, certainly not in relationship to the potential importance of the subject. Most importantly, it will provide you with the confidence that you know what you are signing and what obligations your company is undertaking and what obligations the other party is assuming.
In the final installment of the series, which has yet to be released, I will discuss the subject of trade secret litigation. Trade secret litigation tends to be much faster moving than other forms of commercial litigation, and puts an even greater premium on preparation than is ordinarily the key. I will discuss all aspects of trade secret litigation, from the initial investigation through trial.
Saturday, April 18, 2009
Karen K. Leach joins CTF as a Principal practicing corporate law
Chorey, Taylor & Feil, a Professional Corporation, is pleased to announce that Karen K. Leach has joined the firm as a Principal. Karen's practice includes the representation of corporations in various aspects of general corporate law and has particular experience in federal securities matters and mergers and acquisitions. Karen was formerly a senior associate with the Atlanta office of Paul, Hastings, Janofsky & Walker LLP, where she practiced in the same areas. Karen received her J.D. degree, cum laude, from Georgia State University in 1997. Thomas V. Chorey, Chair of the firm's transactional practice, stated: "The firm is delighted to add Karen Leach to our transactional practice. Karen's addition continues the firm's careful expansion in its key practice areas." Other recent additions to the firm include Evan Appel in January, 2009 and Tom McLain in May, 2008, both of whom joined the the firm as a shareholders.
Friday, April 17, 2009
Welcome to the Chorey, Taylor & Feil blog
Welcome to the Chorey, Taylor & Feil blog. We are an Atlanta business law and business litigation firm. We will be posting here regarding legal issues facing business and matters of interest involving our firm. Contact John Watkins at jwatkins@ctflegal.com, or Tom McLain at tmclain@ctflegal.com.
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