Exchange Agents and Acquisitions of Private Venture Financed Companies - Written by Dave Broadwin
Posted 10.26.2007
Although the M&A world of Boston does not have anything as eye catching as Howie Carr happening in the press right now, one trend that has quietly appeared over the past few years, is the use of exchange agents in acquisitions of private venture financed companies. I write about this dry topic now because it has caused some aggravation for sellers in a couple of recent deals. Typically, the buyer hires a large company that is in the business (like American Stock Transfer or JPMorgan) to collect stock certificates and distribute the merger consideration to the seller's stockholders. This procedure can be very helpful in transactions, especially when there are many selling common stockholders. The down side for sellers, however, is that the exchange agent sometimes has fairly cumbersome procedures. Typically, the exchange agent wants to mail a letter (commonly called “transmittal letter”) to the selling stockholders on or shortly after the closing date. This letter contains the documentation that needs to be completed and returned (together with the stock certificates) in order for the selling stockholder to get his or her consideration. I have found that the exchange agent is often resistant to changing its forms. It argues that it is using "standard" forms which have been fine in many prior transactions. Well, when you actually try to complete the forms, it turns out to be rather difficult.
By way of example, one form that I recently looked at required a so-called CUSIP number for the stock of a private company and had no place to put wire transfer instructions. Of course the private company did not have a CUSIP number and the larger stockholders wanted wire transfers (not checks placed in the U.S. mail). These kinds of things can cause delay and aggravation after the deal is closed and can create delay in getting your money to you. I am not trying to argue against this procedure, rather warning you to get your hands on the so-called transmittal letter and other required documentation and complete it before the closing. Here is a prediction: you will have difficulty with the various forms that are requested. It will be easier to get everyone's attention before the closing than a week or more after. Also, it may inspire the exchange agent to change its forms, if it sees what the issues will be. Howie may be silenced, but you shouldn't be.
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Dividends on Preferred Stock - Written by Dave Broadwin
Posted 06.25.2007
All venture preferred stock provisions have something to say about dividends. The question is what... Generally there are three choices: (1) dividends will be paid on an as converted basis when, as, and if paid on the Common Stock; (2) non-cumulative dividends will be paid on the Preferred in a stated amount when, and if declared by the Board; and (3) the Preferred will carry a stated annual cumulative dividend [which may be compounded annually], payable upon a liquidation or redemption. These provisions are negotiated at the terms sheet stage. When negotiating the term sheet, consider carefully the economic effect of a dividend, particularly a compounding one. It does not sound like much, but an 8% compounding dividend can add up over three or four years. Furthermore, once such a dividend is embedded in your series A Preferred Stock, the series A holders will not want to give it up, and you should assume the series B will want it too. Such dividends will be very hard to remove in future rounds.
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Posted 06.22.2007
I have now run into the follow issue twice in recent transactions: the term sheet drafted by counsel representing a venture fund proposes antidilution provisions and sets forth a specific formula. This formula does not factor in shares of common stock issuable upon outstanding convertible securities and warrants or options.
So, it is not a so-called broad based weighted average formula. A broad based formula would take into account all shares of outstanding common stock, all shares of outstanding preferred stock on an as-converted basis, and all outstanding options on an as-exercised basis; and does not include any convertible securities converting into the then current round of financing. See
NVCA Term Sheet (.doc).
In conversations among the business people, the antidilution provision is described to the entrepreneur as "standard." The fact that the antidilution is not broad based comes out in the review of the term sheet. When asked, the counsel for the investor says that the formula is exactly as it is always used by the particular investor. Investigation, of course, turns up other transactions in which the investor has agreed to a broad based weighted average formula, and everyone readily agrees to go with the broad based approach. Make no mistake about it: broad based is the "norm" and you should not agree to anything else, unless you understand it and there is a reason.
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Finding an Angel - Written by Dave Broadwin
Posted 05.18.2007
Finding angels is very hard, particularly if your opportunity is not in the mainstream of the tech or related emerging businesses. Organized angel groups have their industry focuses, usually some version of technology or software or life sciences, etc. But what if you want to raise money for a food-related business or to acquire a small division of a print house? The truth is that you need to find wealthy individuals who understand the business you are seeking to finance.
For example, in the food industry, you seek out owners of successful food businesses. Your lead needs to be someone who understands the market, the opportunity, as well as the risk, otherwise you may spend wasted time chasing opportunities and have a very low conversion rate.
So, how do you find those key people? In the end, there is no substitute for knowing who they are (or at least some of them -- which you presumably do because you are in the same industry) and network your way to them. Gain introductions through mutual acquaintances. Your lawyer or accountant may also be helpful. Asking your lawyer to send summary business plans for a food company to his or her wealthy financial or tech industry clients is not likely to result in much. If, however, they happen to know someone in your industry, that call could be very helpful.
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Patents: Defining the "obvious" - Written by Beth Arnold
Posted 05.03.2007
In the most anticipated patent case of the year, KSR v. Teleflex, the Supreme Court unanimously overturned the Federal Circuit and changed the analysis used to determine the "obviousness" of certain inventions. Finding the existing "teaching, motivation, suggestion" test to be too rigid, the Court advocates a more "common sense" approach. The result? A less structured analysis (uncertainty) and tougher battle (more time and cost) to obtain and maintain patents on certain inventions. The Court specifically found that a "novel" combination of prior art elements that uses known methods is nonetheless unpatentable for being "obvious," if it does no more than yield predictable results. Observers consider this ruling a victory for anti-patent groups like the Business Software Alliance and are concerned that this less rigid obviousness test will incorrectly be applied to deny or invalidate patents in unpredictable areas such as drug development. There is also concern that the uncoordinated efforts of the Court, Congress and the Patent Office will result in a patent system that does not properly incentivize and/or reward innovation. Stay tuned. There is sure to be more...
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BIO 2007 Survey: Terms and Trends in Patent License Agreements with Universities and Other Research Institutions
Posted 04.20.2007
As a service to the life sciences industry, Foley Hoag LLP is conducting a brief survey entitled Terms and Trends in Patent License Agreements with Universities and Other Research Institutions.
On behalf of the Life Sciences Group at Foley Hoag LLP, we invite you to participate. Participants will receive a copy of our results. Your responses will be kept anonymous and will not be attributed to you or your organization.
We will release the preliminary survey results at the BIO 2007 International Convention, taking place May 6-9 in Boston [our BIO events agenda]. The final results will be published later in the year. Participants who return surveys prior to May 9 will be entered into our Video iPod drawing on May 9 at Booth #212 on the exhibition floor. You need not attend BIO 2007 to enter.
Complete the survey here.
Broad-based Weighted Average Antidilution or Narrow-based Weighted Average Antidilution - Written by David Broadwin
Posted 03.27.2007
One issue that I have run into recently -- that, in my view, should not be an issue -- is whether or not broad-based weighted average antidilution or narrow-based weighted average antidilution is the "norm." A "narrow-based" formula means that options and warrants are not included in calculating the weighted average adjusted price, as opposed to a "broad-based" formula in which they are included. The outcome is that the conversion rate is higher using a narrow-based formula. In effect, broad-based results in a smaller adjustment in the event of a dilutive issuance and is, therefore, more favorable to the holders of common stock than the narrow-based approach.
I note that the NVCA "standard" form includes "all shares of outstanding common stock, all shares of outstanding preferred stock on an as-converted basis, and all outstanding options on an as-exercised basis; and does not include any convertible securities converting into this round of financing." That is, it follows the broad-based approach. The trap for the unwary lies in the formula used to do the calculation. This formula is often appended to the term sheet or embedded in it. As a result, you have to carefully work through the formula to determine whether or not it is broad-based. So, if the formula says, "...shares of common stock and preferred stock outstanding before the new issuance (assuming conversion of all preferred stock into common stock..." you should assume it is narrow-based and correct it. If your investor says that is "normal," challenge him or her and point him or her to the NVCA Web site.
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"Citizen Marketers" - Written by John D. Hancock
Posted 03.26.2007
Jackie Huba, well-known author (Citizen Marketers: When People are the Message), blogger (Church of the Customer) and technology commentator joined us at the EEC for an event hosted by the Massachusetts Technology Leadership Council. . About 50 marketing and technology professionals received a thoughtful and entertaining look at the world through the lens of the citizen marketer. Not surprisingly, old constructs are being turned upside down every day. "Let the buyer beware" might well be "let the seller beware," according to Huba. Today, that giant megaphone in the customers' hands, called the Internet, has huge implications for a brand identity depending on how it is used and where corporate content turns up. The Internet has given "the little guy" a voice. Huba's advice: the little guy is going to use that voice whether you like it or not, and wise companies will learn how to work with these corporate "citizens" rather than fight them.
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Applicability of ADA (Americans with Disabilities Act) to Web Sites - Written by David Broadwin
Posted 03.19.2007
So, here is an unexpected thing I ran across in an issue of High Technology Update published by William Gallagher Associates. In a recent case, National Federation of the Blind v. Target, a Federal district judge in California refused to dismiss a claim that the ADA could apply to Web sites because visually impaired shoppers could not readily use the site. It appears that courts are split on the subject of whether "places of public accommodation" must be physical places. It appears that "[A] plaintiff may allege an ADA violation based on unequal access to a "service" of a place of public accommodation, if there is a nexus between the service and the place of public accommodation." It appears that the World Wide Web may not be outside the reach of the ADA.
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Health Plans (cont.) - Submitted by Glenn Goldstein, TriNet Total HR
Posted 03.06.2007
Caution is recommended when considering these kinds of cost-shifting tactics. Whether it's higher copays or inflated deductibles, these strategies may contain short-term costs but affect productivity and employee morale in the long run. To remain viable in today's competitive environment, you must seek a balance between protecting the employer's pocketbook and forcing the employee to carry the burden.
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Employers Seek Cost Savings with High-deductible Heath Plans - Submitted by Glenn Goldstein, TriNet Total HR
Posted 03.05.2007
According to a recent employer study by Mercer Human Resources Consulting, we'll see an increase number of employers offering high-deductible health plans as a way to control rising health benefit costs in 2007. Rather than raising co-payments and the employee share of premiums, employers are increasingly exploring the option of a high-deductible policy, often pairing them with a tax-deferred saving account.
The study states that employers offering such plans tripled from 2 percent in 2005 to 6 percent in 2006 and indicates about 14 percent said they were likely to offer these plans in 2007.
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Email Ownership
Posted 12.29.2006
David Broadwin
Because the company owns email going through its server - if you sell your company (depending on what the purchase and sale agreement says) all the email traffic between you and your attorney that takes place on the company server will be available to the buyer. This does not usually reflect the expectation of the seller and could have negative consequences. I have taken to covering this point in purchase and sale agreements.
Instant Messages Don't Get Trashed
Posted 12.27.2006
David Broadwin
Email is the gift that keeps on giving; that is why litigators love it. One of my litigation partners pointed out to me that Instant Messaging is sometimes saved -- just like any other email. This litigator had the good fortune, apparently, of cross examining a hostile witness who assumed that his IM had not been preserved, but our client had switched on the save feature. Needless to say, this situation led to much embarrassment for the witness.
Lessons Learned From Medical Device War Stories
Posted 12.19.2006
Beth Arnold
A jam-packed crowd was taken on a rollercoaster ride by seasoned executives Jeffrey Arnold (CEO Coach, Serial Entrepreneur), Larry Roth (Percardia) and John Geisel (Growth Strategy Partners; former CEO of AccessCardioSystems) during the Medical Development Group Forum Meeting at the EEC. Challenges of obtaining appropriate funding at appropriate times in the company's growth was a common theme. Speakers warned of the time and effort required to secure financings and listeners were cautioned against doing anything that could produce negative results before documents were actually signed. The critical importance, but difficulties and costs of developing appropriate patent protection on products and technologies was also discussed -- as was the value of a patent portfolio to a dissolved company. One executive stressed the importance of investing in a back-up technology, when the first-line product doesn't pan out. But another regretted investing in ancillary technology, which siphoned money from the product with the greatest chance of success. And the challenges don't end once a product is on the market. Inappropriate pricing and positioning led to one company's demise.
Blogosphere Etiquette
Posted 12.08.2006
Barbara Hamelburg
There were several takeaways from Tuesday's EEC/RF Binder program, “Protecting Your Company's Brand and Reputation in and Age of Consumer Generated Media.” It seemed that the general consensus among the four panelists was that in order to "succeed" in the blogosphere, companies should not take themselves too seriously, and need to remain lighthearted and honest while explaining their point of view and correcting any fallacies.
An example raised by an audience member involved a Canadian blog that described experiences with two car rental companies. The blog post itself was benign, however, there were several comments posted 'attacking' one company (using false pricing information and claiming the company was "not nice") while praising the other. It became clear to those reading the comments that this was an attack by a representative from one company, writing under a pseudonym, not a consumer. In response to the negative comments, the regional VP for the company under attack identified himself and posted a simple and straight forward response that thanked the readers for participating in the conversation and corrected the inaccurate information. There was a consensus that this approach resulted in resolving the matter far more effectively than legal action or a counter attack.
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