Bank of America and Merrill Lynch to merge?

What a dramatic day for the Fed and the investment banking community.  Now that both Bank of America and Barclays have bowed out of the running to serve as white knight for Lehman Brothers, which is announcing plans for a Chapter 11, it appears that Bank of America, which recently swallowed Countrywide, is finalizing talks around a potential merger agreement with Merrill Lynch. 

It’s hard to believe that the credit and real estate bubble from 2002-2006 could take down this many old line Wall Street firms (thank you Mr. Greenspan, along with your Greenspan put), but it appears that it’s finally time for the chickens to come home to roost.  For decades, the Fed and the US government have subsidized the risk for countless investors and corporate managers, going back to the S&L crisis and 1987 stock market crash, all the way through the bailout of Fannie Mae and Freddie Mac just last week.  As tough as it is, perhaps we can start encouraging personal and corporate fiscal responsiblity and end the cycle of passing along the costs of poor decision making to someone else, namely taxpayers who are in a position to help out by virtue of their own solvency.

Wow! Lehman Brothers to declare Chapter 11 bankruptcy

I just finished up a post on the UAL false bankruptcy news from last week, and here comes word from CNN that Lehman Brothers (see Lehman Brothers agreements) is going to file for Chapter 11 bankruptcy protection.  This is a very interesting development following weeks of speculation about a potential distressed sale of Lehman, including news today that Bank of America (see thousand of Bank of America agreements here) had the inside track in an acquisition agreement for Lehman Brothers shares.

Reuters is reporting speculation on what Lehman’s debt might go for in a Chapter 11 reorganization.  Here’s hoping that the potential fall of a financial player this big doesn’t have as severe an impact as their shareholders, all of which are hoping for yet another Fed bailout, have warned about.

What happened with my UAL shares last week and who can I sue?

Call me an optimist, but I recently purchased some shares in the major airlines (including American (see their parent company AMR legal agreements here), Southwest, and, of course, United Airlines and their agreementshere) as I saw oil prices falling in the past couple of months, figuring that their nickel and diming, combined with the drop in oil prices, would outweigh the impact of the sagging economy on their share prices.

Needless to say, I was stunned on Monday when I watched UAL share drop 75% only to recover to a paltry $9 share, down from the $12 opening price.  Of course, I was somewhat mollified that the shares largely recovered by the end of the week, but I couldn’t help wonder what might happen to all those who sold on the way down, only to discover it was all a mistake.

For those who aren’t familiar with the background, it appears that the South Florida Sun-Sentinel newspaper posted a story from 2002 on the UAL bankruptcy from 6 years ago on their website as if it had just happened, and then promoted it to their most actively viewed portion of its website.  Google News’ spiders picked it up (see Google legal agreements, followed by a Bloomberg analyst.  From there, the news was broke and chaos followed, and it was probably compounded by all those handy tools like “stop loss” orders which work well in orderly market environments but can horribly accelerate fast moving negative trends.

Karim Bardeesy had a nice discussionabout the potential legal liability for the various parties, including NASDAQ, which refused to reverse trades from that difficult morning.  The author’s conclusion – fat chance.  For me, I was a bit late picking up on the news, but I had faith that the market had fairly priced in UAL’s chances, so that once the news shook out, the UAL price would/should return to the prior levels, absent any other changes.  I think the events of the week largely bore that out.

Earn out provisions in merger agreements

I met with a corporate partner from an AmLaw 200 law firm a couple of days ago to discuss the firm adopting our www.RealDealDocs.com product across the firm’s entire transactional practice as a resource for the attorneys to find and leverage legal agreements in their research and drafting.  I mentioned that, in addition to providing access to millions of profiled legal documents, they could also find specific deal clauses and provisions within specific types of agreements, and he nearly came out of his chair (in a good way).

It turns out that his team had spent several hours looking for earn out provisions in a merger agreement to help them draft a term for a deal they were working on.  Eventually they found a couple of examples, but it took an entire afternoon to do so.  We spent 30 seconds searching for those types of clauses and found about 200.  The point was taken – he wanted to spend his time finding the best terms, not just digging around to find a couple of terms.

Here’s a link and how to find those merger agreement earn-out provisions, which you can review for free (it’s easier than it seems – I have to walk you through to find the page, but you can click on the link in Step 3 to get to the clause search page):

1)  Go to www.RealDealDocs.com

2)  Click on the Search Now tab

3)  Click on the “Search for Clauses” tab

4)  Select “Mergers and Acquisitions” from the Deal/Documents pull down menu

5)  Select “Agreement and Plan of Merger” from the Specific Document type pull down menu

6)  Enter “earn out” (without the quotes) in the “Clause Heading” search box, and then Search

Again, you can view all these provisions, and over 10 million other clauses, for free.  To view the entire agreement the clause came from, you need to be a member, but there are a range of very affordable membership options which pay for themselves in time saved and value added the first time you use it.

He (and his firm) are already busy using RealDealDocs.com to leverage the work of hundreds of thousands of leading corporate practitioners.  Are you?

More on the lowly Registration Rights Agreement

So I received a call from our corporate attorney yesterday about my post on the overblown status of registration rights agreements.  I don’t think he was defensive (we’ve drafted 3 with them in conjunction with our various fundraising rounds), but we laughed about how rarely these are actually invoked relative to the amount of time spent negotiating and drafting them.  He’s a great guy and passed along a couple of war stories that were fun to listen to but probably boring as heck to read, so I’ll save you the time.

Fortunately, we have partnered with institutional investors who understand how registration rights agreements fit into the overall scheme so we didn’t burn a lot of cycles on this.  However, for those of you looking to shortcut the process or see how they are used by top law firms and companies, I suggest you pop over to this agreements preview site, where you can search and preview thousands of these and other types of legal documents for free.

The Overblown Registration Rights Agreement

Yesterday I wrote about drafting Stock Purchase Agreements, which set the terms for the purchase of stock by an investor from the seller.  These agreements are most often used in conjunction with a funding event in which the seller is the Company, and I mentioned that there were several other types of agreements that were commonly drafted as part of the financing, including the lowly Registration Rights Agreement.

“Why lowly?” you ask.  Well, in my fifteen years of entrepreneurial and venture-backed company experience, Registration Rights Agreements are perhaps the most over drafted and under-used legal agreement.  The reason for this is simple – you almost never see the key terms of the agreement enforced over the wishes of the Company.  Specifically, registration rights agreements give the investors the right to force a secondary offering of their shares on the public markets, but in practice this is almost never done because this would not be conducive to a productive and profitable offering.  About the only terms that have any practical substance are the indemnification of the underwriters and the provisions whereby the Company picks up the expenses of the offering in the event it is done with the Company’s cooperation.

That being said, for those of you in need of sample registration rights agreements to review for your own research and drafting needs, I’ve provided a few links in this post.  Here is another helpful discussion of what registration rights agreements are all about.  Let me know what you think – are these a holdover from another day and time where lawyers are trying to strut there stuff, or are these still a real and vibrant part of the consideration for a financing?

Drafting Stock Purchase Agreements

A Stock Purchase Agreement is a legal contract in which a seller transfers ownership of stock in a corporation to the purchaser.  Stock purchase agreements are used in a variety of situations, but they are most commonly drafted in conjunction with the sale of stock by a Company to an investor as part of a financing event as opposed to the sale of stock between two investors. 

 

The stock purchase agreement (also know as a share purchase agreement) sets forth the terms of the purchase and sale of the stock to the investors, including but not limited to:

Ø      Pricing and the number of shares to be purchased,

Ø      Closing date,

Ø      The Representations of both the Seller (usually the Company) and Buyer,

Ø      Conditions to closing, and

Ø      Other miscellaneous provisions, including the stock purchase agreement governing law clause

 

In cases where the stock purchase agreement is used in a funding event, the agreement will also identify other documents and agreements associated with the financing.  These include:

 

Ø      The Articles or Certificate of Incorporation, which sets forth the characteristics of the stock being sold, along with the other equity of the company,

Ø      Registration Rights Agreements, Rights of First Refusal and Co-Sale, Voting Agreements, and other Investor Rights Agreements, etc. which define the relationship of the parties following the closing of the stock purchase

 

A service provided by www.RealDealDocs.com provides easy access to millions of these types of legal agreements and clauses from top law firms and public companies.  For lawyers and other business professionals who work with and draft these types of agreements, it is extremely useful to be able to quickly find these types of legal documents to gain competitive intelligence while saving time and money in the research and drafting process.

Convertible promissory notes and the new business venture

When we launched Practice Technologies in 2000, we faced some common challenges for new business ventures.  The most fundamental of these was having a clear vision, and then being able to raise enough funds along the way to realize some progress against that vision.  At the time, the dot-com bubble had burst, but it was not clear whether this was a temporary hiccup or a fundamental re-shaping of the market.

As a result, we adopted a common yet somewhat unconventional fundraising mechanism for a first funding round, which was using a Convertible Promissory Note structure.  We found this much easier to manage with individual investors, rather than negotiating a series of individual stock purchase agreements.  In fact, we closed the first round of convertible note financing on December 31, 2000 into a Series A stock at a set price, and after September 11, 2001 we were able to raise money under a second convertible promissory note instrument, with slightly different terms.  For our investors and for the Company, it was critical that the convertible promissory notes contain the following terms:

1)  Principal amount and interest rate calculations – obvious, but worthy of mention.  The period of time over which the interest is calculated is important, and is generally the date from which the investment was made (not the closing of the round)

2)  A prepayment option – this came into play with a couple of investors that, frankly, we wanted to take out prior to closing a venture capital round

3)  Conversion provisions – almost by definition, this is one of the critical features of the convertible promissory note.  We provided a conversion option for our investors at their choice of a relatively plain-vanilla Preferred Series A instrument, or whatever the price (and terms) of a Series B investment led by two large venture capital firms, which ended up being at a higher price.  This presented our note investors with an interesting choice – take the better pricing (and hence, more shares) or the somewhat more attractive terms and preferences provided to the Series B holders.  For what it’s worth, 85% of our note investors chose the more attractive pricing.

4)  Warrant coverage – we added in

5)  Default provisions were also provided, along with a variety of representations and warranties of both the Company and the investors.  One important consideration is that the investors all qualify as accredited investors, which substantially reduces the Company’s documentation requirements and essentially shifts the burden of due diligence further towards the investor.

6)  Other miscellaneous provisions, including governing law clause – Here’s another helpful link to be able to browse Convertible Promissory Notes by state governing law provisions. 

I’ve linked to a number of pages containing hundreds of samples of convertible promissory notes prepared by top law firms.  If you want to search for these types of documents directly, you can do so for free at www.RealDealDocs.com.

More IRS Section 409a Compensation Plan links

I continue to receive a fair amount of email concerning the full implementation of IRS Section 409(a) which is required by December 31, 2008.  I suspect that these comments are in response to a couple of earlier posts, including this article on Section 409a valuation considerations for venture backed businesses.

Provided below are some additional links for financial executives and business owners, as well as the professional valuation and CPA community, to find executive benefits plans and employment agreements which contain significant language concerning implementation of 409(a) within those legal agreements.  Drafting new plans, or amending prior plans, is becoming an increasingly urgent consideration as the clock ticks down to December 31, 2008 when full compliance is required.  Of course, I’ll leave it to the valuation professionals and CPAs out there to interpret the 400 pages of regulations and comments contained within IRS 409a, but I thought these links would be helpful.  They are broken down  3 categories:  links to specific employment agreements and plans containing 409a provisions; general employment agreement and benefits plans links, and to a background link I thought was helpful.

1. Specific links to agreements and plans containing significant 409a provisions:
   • Employment Retention Agreement with 409a provisions for Avi Biopharma, counsel is Davis Wright
   • Employment Retention Agreement with 409a provisions for CMS Bancorp, counsel is Paul Hastings
   • Employment Agreement with 409a provisions for Scientific Games Corp, counsel is Vedder Price
   • Separation Agreement for EPIX Pharmaceuticals, counsel is Goodwin Proctor
   • Form of Severance Agreement for Cephalon Corporation, counsel is Morgan Lewis
   • Deferred Executive Compensation Plan for Safeway
   • Deferred Management Compensation Plan for Stanley Works
2. Links to thousands of employment agreements, employee benefits plans, and severance agreements
3. A general overview of 409a that seemed right on point for owners of early stage, venture backed businesses (and of course, the venture capital firms that love them)

If you have any additional helpful resources, please send them along.

More California Jobs headed to China

The latest announcement is actually a double whammy from Newport Corporation, which is based in Irvine California and is a leading manufacturer of lasers.  Newport is laying off 8-10% of its global workforce, and “it is transferring or outsourcing certain manufacturing processes, particularly in the company’s Lasers Division, to lower-cost sources in Asia, including the company’s new manufacturing facility in Wuxi, China.”  Don’t worry, though, that it’s just the guys in the plant who are taking the hit – the accountants and other back office staffing will also be “streamlined” following a three year SAP installation.

This is happening in spite of the dollar’s recent weakness, which tends to make manufacturing in America more cost competitive and rising costs for Chinese manufacturers.  It also reflects continued economic challenges at home along with an increasingly competitive global economic environment.

Alongside this flow of jobs overseas, we’re seeing increasing member and web visitor traffic to the employment termination and severance agreements areas on our legal agreements website.  If you’re interested in learning more about Newport Corporations agreements and contracts, or if you want to see their SEC filings and SEC exhibits, you can search and preview them for free.