Joint Venture Agreements – an update on ours

A few months ago I wrote about our experience to date with joint venture agreements.  In addition to providing a brief background on joint venture agreements, and in particular the differences between joint venture agreements and, say,  strategic alliance agreements, and then I discussed the joint venture agreement that we had entered into with a technology partner.

The basis for the joint venture was that they had spent years building and refining a technology to find and download court filings from federal district courts from across the country, so that lawyers, professionals, and the general public could search across all the federal district courts to research every federal civil case to find out if specific companies or individuals had been involved in litigation.  This is very complementary to another product of ours for civil litigators, called www.SmartRules.com.

We have a lot more depth when it comes to understanding the attorney market, based on our other products, including www.RealPractice.com and www.RealDealDocs.com, which provides searchable access to millions of agreements and contracts, as well as agreement clause search.

In any event, enough background.  How are we doing today?

Well, we anticipated a soft product launch by the beginning of October, and it looks like we’re about 45 days behind schedule.  Lessons learned so far:

1. The success of the joint venture needs to be somebody’s job for things to get done on time.  Seems obvious, actually, but each of the joint venture partners needs to be fully engaged for success.  We’ve each consciously made prioritization decisions, and our respective day jobs have pushed the product launch back a bit.
2. Make sure the roles are clearly defined.  We’ve done a good job here for the work that has been done.
3. Reiterate and highlight the goals to be achieved.  This helps with the prioritization of the project, and in part goes back to #1 above.

We’re still encouraged by the opportunity, and we’re looking forward to introducing you to www.CourtCasesOnline.com shortly!

Bank bailout bill fails, Dow takes big hit

Come on guys, let’s get this one figured out.  The House of Representatives just failed to pass the bailout plan (with a hard cost of $350 billion authorized, not the $700 billion everyone is talking about), and the bottom dropped out of the Dow, although it is starting to recover.

Nobody’s happy about this massive bailout package, just like nobody’s happy about having to put in an insurance claim on a car wreck and take the hit on their insurance premiums.  But a massive liquidation of the banking sector will have enormous ramifications on the economy for a long time to come, and in spite of all the furious calls to congressional representatives, I don’t think Main Street has digested this yet.

I’m not sure if it was any one element of the proposed bill that resulted in its failure, or just the collective disgust with this big mess that we’re on, but it seems that it’s a matter of days, not weeks, for some more of these major banks to collapse due to their inability to recapitalize, not to mention the potential for foreign investors to abandon the US market, driving the cost of financing our massive spending binges by individuals and the federal government through the roof.

Citibank takes out Wachovia in an asset purchase agreement

In what has truly become a Darwinian process of survival of the fittest, or at least the barely standing,  Citibank won a bidding war with Wells Fargo and is acquiring Wachovia Bank in an all stock asset purchase agreement (links to sample asset purchase agreements here, as the actual transaction hasn’t been publicly filed yet). 

For only $2.2 billion in stock, Citigroup is acquiring Wachovia’s enormous deposit network, $300 billion worth of Wachovia’s loan portfolio and about $53 billion in Wachovia debt.  As part of a separate arrangement with the Federal Deposit Insurance Corporation, the FDIC will be responsible for anything in excess of $42 billion in losses on that loan portfolio.

Portions of Wachovia will remain independent and publicly traded, such as its brokerage business, which acquired A.G. Edwards last year for $6.7 billion, and its Evergreen investment management division, which has nearly $250 billion in assets under management.

Citigroup and some of the other large surviving banks, such as Bank of America and JPMorgan Chase, are clearly making very aggressive moves to buy market share for bargain basement promises.  Along the way, they are needing to recapitalize as well to cover losses in their own portfolios as well as their newly acquired businesses.  To help finance the asset purchases, Citigroup is raising $10 billion through a sale of common stock, slashed its dividend, and it has been working to divest itself of some $400 billion in assets in a move to reorganize and focus on what it sees to be its core growth opportunities.  Lots of operating and financial risk there, if you ask me.

Draft of $700 Billion Bailout Plan released

The latest draft of the $700 Billion bank bailout was released this afternoon.  Here’s the draft-of-bailout-plan-september-28-2008, which has yet to be passed into law.

The informal but somewhat urgent deadline for passage was 6 pm Eastern time, so that it was released prior to the opening of the Asian markets.  As of 7 pm Eastern (the time of this writing), it does not appear that the plan has been finalized.

Key elements of the plan include:

• As reported earlier this week, the $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury’s use.
• Curbs will be placed on executive compensation plans for executives at companies that sell mortgage assets to Treasury. These include a $500,000 limitations on the tax deductibility of executive salaries for companies that participate in the plan. 
• An oversight board will be created, which will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director and the Housing and Urban Development secretary.
• The Treasury is allowed in certain situations to exercise an option to take ownership stakes in participating companies.
• Treasury may establish an insurance program to guarantee certain assets for companies purchased prior to March 14, 2008.  These assets include certain mortgage-backed securities.
• Another provision requires the president to propose legislation to recoup losses from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.

 

More details will be posted as they become available.

 

 

 

The Big Wall Street Payday is Over

I was preparing a post on employee compensation and performance reviews heading into the end of the year review period when I came across a pretty extraordinary article from Bloomberg News about executive compensation on Wall Street during the past few years of the mortgage backed securities boom.

The article opens with the statement that the five biggest firms on Wall Street paid their top executives over $3 billion during the past five years.  Merrill Lynch led the way, paying Stanley O’Neal over $170 million over five years, and his successor John Thain was paid nearly $90 million from the end of 2007 until Merrill was acquired by Bank of America.  Bear Stearns’ James Cayne made some big dough as well until the company became the first of the investment banks to fall over in the current cycle and be acquired by JPMorgan in February.

One of the big holdups with the $700 billion loan bailout being negotiated in Washington is the issue of executive compensation.  While the investment banks pushed compensation pretty far down into the ranks (average compensation was some $350,000 per employee), the incentive structures of the firms, with their heavy cash components based on short term performance, ultimately were not aligned with the interests of shareholders and arguably the public.

While Wall Street investment bankers were motivated and paid according to business generated in current periods, they were leveraging up with everyone else’s money – shareholders following their public offering and cheap debt available from 2002-06.  In addition to simply not understanding the markets they were creating and then investing in, risk was not properly factored in to their moves.  Simply put, if you’re in Vegas playing with somebody else’s money and you only get to keep a piece of the action and the winnings, your incentive is not to conserve their money – it’s to push it as hard as you can get away with.

Figuring out how to limit compensation for executives whose companies participate in the bailout plan is going to be quite challenging.  With much less financial incentive to stick around and make things work, the test will be figuring out how to keep the most talented executives from fleeing the Street and finding something better to do besides leveraging up the country’s balance sheet.

If you’re interested in taking a look at some of these employment agreements, you can find them at www.RealDealDocs.com.

Manufacturing Agreements show continued life

In spite of the credit crunch and the economic slowdown, the good news is that we continue to see lots of activity in terms of new filings of legal agreements which denote continued economic activity.  It’s of course an imperfect measure, but it’s yet another important reminder that not everything has frozen up in the past several months.  We haven’t gone back and compared it to historic levels as we have with, say, merger agreements or pooling and services agreements, which are far less prevalent than they were during the credit and private equity boom of 2-3 years ago.  However, in reviewing a few different categories of recently filed agreements and contracts, we see continued signs of life.

For example, in the case of manufacturing agreements or supply agreements, we’ve seen dozens of new agreements made publicly available in the past couple of months.  Many of these agreements have been drafted by top law firms, and I’ve posted links to samples and previews in case you need to review and leverage agreements for your own research and drafting requirements.

WaMu CEO makes $14 million in 3 Long Weeks

Washington Mutual Chief Executive Alan Fishman was hired on September 7 to replace former WaMu CEO Kerry Killinger and help turn the troubled savings and loan around.  Little could be done in three weeks, and some would argue that given their troubled loan portfolio it would have taken years to work out, if at all.  In any event, federal regulators stepped in to seize the bank last night, and they immediately turned Washington Mutual over to JPMorgan Chase in an asset purchase deal.  This followed a quiet run on WaMu deposits in the past couple of weeks in which depositors took out some $16 billion.

So while I don’t blame Fishman for his package, which is pretty typical of the big bank CEO employment agreements we see all the time, he gets to take out a little bit more than your average depositor, and I do think he’s making out like a prince.  Here’s how it breaks down according to the SEC filing discussing his compensation (his personal employment or severance agreement are not available, but I have linked to some sample employment contracts as well as a sample termination or severance agreement):

• A signing bonus of $7.5 million
• On his termination, 2.5 times his base salary, for a total of $2.5 million
• On his termination, his full first year bonus, equal to $3.65 million
• Relocation bonuses and other payments under their executive benefits plans

 

Total compensation under these packages is approximately $14 million, which excludes the value, if any, he might receive under his option grants in the Washington Mutual Equity Incentive Plan, as well as the cost of any income tax liability he might incur if his payments are subject to excise taxes (see my post on IRS Section 409a for additional information).  Not a bad month.

Here are some links to review and search across thousands of executive employment agreements or termination and severance agreements written by top law firms.  I’ve also provided a link to an agreements and contracts site which allows you to do free searching for specific agreement clauses and provisions, and for anyone who wants to see my previous post on severance agreements during the big Wall Street shakedown, help yourself.

Stock Warrants in the Massive Bank Bailout Plan

Early reports are circulating that congressional leaders have reached agreement on a counterproposal to the original $700 billion financial bailout plan proposed by the Bush administration’s Treasury Department over the weekend.  Details have yet to be announced, but essentially the plan calls for the Treasury Department to buy up bad mortgage securities from banks in an effort to recapitalize them so they can resume lending.  Hopefully, this will bring an end to the credit freeze, which has been blamed for exacerbating the housing downturn and inhibiting economic growth.  In particular, the lack of interbank lending has directly led to a number of failures and takeovers, going back to the Bear Sterns debacle 6 months ago on up through the Bank of America acquisition of Merrill Lynch and Barclay’s acquisition of Lehman Brothers following its bankruptcy filing this past week.

 

The Wall Street Journal has reported that the Treasury Department will receive the money in installments, with $250 billion immediately available.  Safeguards in the bipartisan deal include restrictions on executive compensation and severance payments, significant legislative oversight, and the government is to receive stock purchase warrants from participating companies. 

 

It remains to be seen how the government assistance will be documented.  To the extent that formal loan agreements or warrant agreements are entered into between the federal government and these companies, we’ll make sure we post whatever is disclosed on our agreements and contracts site for your review.

California Ban on Texting while Driving to become Law

Effective January 1, 2009, it will be illegal to use a wireless phone device to write, send or read text messages while operating a motor vehicle.  Violators caught text messaging while driving will be fined $20 for a first offense and $50 for any violations after that, although court imposed fees would increase the cost of a first offense to nearly $100.

This is an important back-fill law to the previously imposed ban effective July 1, 2008 to prohibit the hand-held use of cell phones while driving.  In discussing the pending law, its author, Sen. Joe Simitian, indicated that while it would have been logical to include the ban on texting in the earlier ban on the use of hand-held phone devices while driving, the concern was that this would have provided another excuse to put off passage of the original cell phone ban.

My view?  While my heart would like to agree with Republicans that existing laws against negligent driving should cover this obviously dangerous activity, you could apply the same logic to not running stop signs, and I see drivers every day (still!) yammering on the phone with both hands or sending text messages while driving.  Perhaps the publicity around the new law will remind people that it’s far too easy to get lost in a text conversation, or catching up on my blog posts, as the car in front of you suddenly comes to a stop…!!

Warren Buffett invests in Goldman Sachs

I have to admit that I’ve never had an investment pay off several hundred million dollars on the first day (how many of us have?), but I can help break down the elements of the Warren Buffett led Berkshire Hathaway investment in Goldman Sachs, one of the last two remaining major investment banks alongside Morgan Stanley in the US.  (I guess whether they are still investment banks is debatable, as the Fed allowed them to change their regulatory status to bank holding companies to provide them with access to greater lending resources, but we’ll save that discussion for another time.)

In any event, as the press release from Goldman Sachs indicated, the Berkshire Hathaway investment consisted of the following:

• A $5 billion private placement preferred stock purchase agreement, with a 10% dividend and a call option at a 10% premium
• $5 billion in warrants to purchase common stock at $115/share for five years
• Separately, Goldman Sachs indicated that they would do a secondary public offering in the amount of $2.5 billion in common stock.

These agreements haven’t been made publicly available as of the time of this writing, so I’ve posted some links to sample stock purchase agreements and warrant agreements for those of you needing to use these types of legal agreements in your own work, but once they are available you can immediately find them at www.RealDealDocs.com, which provides thousands of lawyers and business professionals with easily searchable access to millions of legal agreements and contracts from top law firms, including searchable agreement clauses, profiled and searchable the way professionals thinking about them.