Who is the General Counsel’s Client? The Company vs. CEO

By Ann Koppuzha, J.D. Candidate 2015 | Posted on

A General Counsel (GC) is one of a small group of c-suite executives charged with leading a company.  In serving the GC’s primary client, the corporation, the GC works closely with other c-suite executives, including the CEO.  The CEO often has substantial say over the GC’s compensation and work.  But what happens when the CEO seeks personal advice from the GC?

Kenton King of Skadden Arps, Scott Haber of Latham & Watkins, and Michael Ross, former general counsel of Safeway, spoke to the Berkeley Center for Law, Business and the Economy (“BCLBE”) community about conflicts that can occur when the company’s CEO personally solicits assistance from the GC.  Often the prospect of personally advising a CEO creates a catch-22 situation.  Though the GC needs to have a professional relationship with the CEO, providing advice may conflict with the GC’s loyalty to the corporation.  This is especially true if the corporation and the CEO are on opposite sides of the bargaining table.

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Professor Robert Bartlett speaks on the JOBS Act at Orrick, Herrington & Sutcliffe LLP.

By Ann Koppuzha, J.D. Candidate 2015 | Posted on

Within a month of the Initial Public Offering (“IPO”) Task Force’s white paper, “Rebuilding the IPO On-Ramp,” Congress developed the Jumpstart Our Business Startups (“JOBS”) Act.  The legislation aims to create new companies, and ultimately new jobs.  The JOBS Act loosens security regulations, making it easier for startups to access funding and go public.  Professor Robert Bartlett recently spoke about the effects of the JOBS Act at a Berkeley Law Alumni Center event held at Orrick, Herrington & Sutcliffe LLP.

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Are All MOE’s Created Equal

By Daniel E. Wolf and Sarkis Jebejian, Kirkland & Ellis, LLP | Posted on

[Editor’s note: the following post comes from a recent M&A Alert by Kirkland and Ellis partners Daniel E. Wolf and Sarkis Jebejian.]

With valuations stabilizing and the M&A market heating up, a rebirth of stock-for-stock deals, after a long period of dominance for all-cash transactions, may be in the offing. If this happens, we expect to see renewed use of the term “merger of equals” (MOE) to describe some of these all-equity combinations. As a starting point, it may be helpful to define what an MOE is and, equally important, what it isn’t. The term itself lacks legal significance or definition, with no requirements to qualify as an MOE and no specific rules and doctrines applicable as a result of the label. Rather, the designation is mostly about market perception (and attempts to shape that perception), with the intent of presenting the deal as a combination of two relatively equal enterprises rather than a takeover of one by the other. That said, MOEs generally share certain common characteristics. First, a significant percentage of the equity of the surviving company will be received by each party’s shareholders. Second, a low or no premium to the pre-announcement price is paid to shareholders of the parties. Finally, there is some meaningful sharing or participation by both parties in “social” aspects of the surviving company

While each of the aspects of an MOE deal will fall along a continuum of “equality” for the shareholders of each party, there are a handful of key issues that require special attention in an MOE transaction:

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JOBS Act Symposium: Liveblog Recap & Review

By Valerie Jon Ramos, J.D. Candidate 2015 | Posted on

This post will detail the two panels from last Friday’s 2013 BCLBE and BBLJ JOBS Act Symposium:  1)  The IPO On-Ramp and 2) Crowdfunding.

Panel 1:        The IPO On-Ramp

Moderator:  Ian Peck

Robert Bartlett, Professor, UC Berkeley, School of Law

Reza Dibadj, Visiting Professor, UC Berkeley, School of Law

Martin Zwilling, Startup Professionals 

Background: Title I of the JOBS Act

Title I of the JOBS Act was originally pitched as a job creation vehicle.  Title I seeks to accomplishes this through its two provisions: (1) providing an “on-ramp” to going public for emerging growth companies (“EGCs”), a company within five years of going public, using existing principles of scaled down regulation; and (2) improving the availability and flow of information for investors before and after an IPO.

There are four­ major changes that were discussed during the panel:

1)    Creation of the “Emerging Growth Company” as a new category of issuer

2)    EGCs eligible for IPO On-Ramp enjoy significant benefits, including:

  • A reduced two-year requirement of audited financials needed in registration statements versus the standard three to five years
  • Allows communication between EGCs and qualified institutional buyers prior to filing registration statement (although there is an SEC Rule that does not allow solicitation of filing)
  • Research reports can be filed even while the EGC is making an offer

3)    EGCs have less extensive financial reporting/audit obligations (exempt from SOX)

4)    EGCs have limited executive compensation disclosures 

Moderated Q&A

When questioned about what problems exist in the IPO market and how the JOBS Act approached these problems, there was a general consensus that the worry stemmed from the dramatic decline in IPOs in the market over the past decade. IPOs going overseas, problems that came with the economic downturn, and the choice of M&A as the preferred exit strategy.  Zwilling spoke beyond the general market on how entrepreneurs, in general, want control of their company, and when they are ready to exit, M&A serves as a better exit strategy due to its lower costs and fewer regulations.

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JOBS Act Symposium: Crowdfunding–Finance Democratization or Investor Protection?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The crowdfunding panelists discussed what Mary Dent referred to as a “fundamental tension” between the democratization of finance and protecting unsophisticated investors.  In traditional securities law, S.E.C. has protected Main Street consumers from especially risky investments, unless an investor can demonstrate they he or she is a sophisticated investor—using net worth, for example, as a proxy for sophistication.

Professor Bartlett agreed with the tension and added that they crowdfunding marketplace may suffer from the “bad apple” problem.  Even if a vast majority of crowdfunding investors or entrepreneurs have good intentions, a small number of ‘bad actors’ could easily shake confidence in the crowdfunding brand or marketplace. 

JOBS Act Symposium: Do the crowdfunding provisions make bigger problems than the ones they try to solve?

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Symposium’s second panel discussed the JOB Act’s crowdfunding exception.  Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks.

Eric Brooks sees investors defrauded everyday in his job with the SEC. As a result, the cynic in him says that the crowdfunding provisions do create greater problems than the solve. Fraud is even easier to perpetrate over the internet and the Act sanctions the funding portals. The SEC will likely face an increase in customer complaints from investors who lose money through crowdfunding investments which then have to be researched. Nevertheless, the Act and attendant regulations can work well if protections are preserved.

Robert Bartlett analogized crowdfunding to the ability to generally solicit investments up to a million dollars in the 90’s. That freedom led to significant instances of fraud. There is a definite potential for this act to be a repeat of those failures.

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JOBS Act Symposium: Crowdfunding

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Symposium’s second panel discussed the JOB Act’s crowdfunding exception.  Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks.  [Note:  Mr. Brooks is with the S.E.C., but noted that his remarks are not official and do not represent the administration’s position.  His comments are his own.]

What is crowdfunding (“CF”) is trying to achieve?

Professor Dibadj began, noting that the CF movement is largely motivated by technology and the concept that individuals can pool money towards a common cause.  The idea had worked in other sectors (e.g. natural disaster relief or political campaigns), so some wanted to apply CF in the private sector.  The problem, pre-JOBS Act, was that capital transfers could be considered an unregistered investment or security, thus easily violating federal securities laws.  Martin Zwilling agreed that investors saw CF structures work in the non-profit space, so they asked, “Why couldn’t it work for for-profit companies?”

Mary Dent added that the CF movement was spurred by the perception (whether or not it is true) that small companies have recently been the biggest contributor to job growth.  However, many startups could not access funding from skeptical VCs or banks.  Congress wanted to encourage these small, growing companies so created the JOBS Act’s CF exemption to allow alternative funding networks.

Martin Zwilling cautioned that investors might be funding weak or under-developed companies.  VCs might argue that the market has not suffered from a lack of available funds, but a shortage of good investment opportunities.  Zwilling concluded, “I don’t think CF will solve [those companies’] problems if they’re not ready for the market yet.”

Professor Bartlett viewed the rise of CF as “the democratization of finance.”  Many CF platforms and groups press their case by framing it as a fairness issue, whereby small, less-sophisticated investors can participate in startup financing opportunities.  However, Mr. Brooks drew upon his experience as a securities regulator, noting that this very democratization creates serious concerns of fraud.

JOBS Act Symposium: Lessons Learned from the Facebook IPO?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The panelists mostly agreed that the high-profile Facebook IPO debacle has cooled excitement for IPOs, at least within those private companies considering monetization.

Mr. Zwilling gave a brief summary.  He thinks many entrepreneurs are now saying, “I want nothing to do with this,” referring to the IPO process.  Zwilling noted, for example, Zuckerberg’s widespread criticism following the offering; he said many entrepreneurs are concerned that going public would risk losing control over important cultural aspects of his or her company.

Related to Facebook’s volatile early pricing experience, Professor Dibadj asked why there has not been more pressure (from entrepreneurs) to use a Dutch Auction format for pricing, instead of relying on the “black box” of underwriting?  Zwilling proffered that many entrepreneurs are simply naïve to the pricing system, and they don’t have much insight as to the underwriting process.  The entrepreneurs, by and large, think, “We don’t know how it works and we don’t have any control.”

JOBS Act Symposium: Which of the Title 1 provisions has the biggest potential impact to incentivize IPO offerings and will it work?

By Will Schildknecht, J.D. Candidate 2015 | Posted on

This morning’s first panel features Robert Bartlett, Reza Dibadj, and Martin Zwilling, discussing the JOBS Act’s Title I provisions for initial public offerings.

The panelists were asked to predict which part of Title 1 of the JOBS Act will have the biggest impact on IPO offerings?

Reza Dibadj discussed the way in which the JOBS Act allows emerging growth companies to escape the onerous accounting and reporting required by the Sarbanes-Oxley legislation. Furthermore, companies are taking advantage of the opportunity to withhold executive compensation information.

Martin Zwilling emphasized that any changes to the law which decrease the number of regulatory hoops that have to be jumped through is beneficial to the IPO process. Some companies have had to dramatically increase their personnel and time resources to comply with Sarbanes-Oxley.

Robert Bartlett looked to the statistics about the parts of the JOBS Act actually being employed to understand which parts of the act are most effective. A Skadden, Arps study concluded that emerging growth companies are taking advantage of withholding executive compensation but are  still revealing three or more years of financial records even though the legislation permits them to offer with only two years of reports. Seventy percent of emerging growth companies are also taking advantage of the ability to submit their prospective IPO offer to the SEC privately.

Stay with The Network for further updates from the Berkeley Business Law Journal JOBS Act Symposium.

JOBS Act Symposium: Do Entrepreneurs Prefer IPOs or M&A Exit Strategies?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Is the IPO market depressed because M&A is becoming the preferred exit strategy for entrepreneurs?

Martin Zwilling opened by commenting that entrepreneurs today prefer M&A, because private acquisition is not as burdensome or costly as preparing for an IPO.  In addition, many startups have recently seen “huge premiums” paid via M&A, so their bottom-line return might approximate that generated by an IPO.  Mr. Zwilling also noted that many companies, including Intel and IBM, are beginning to look to buy their technology instead of creating it on their own—essentially outsourcing some of their product development.

Entrepreneurs prefer M&A’s speed, which allows them to ‘cash out’ and move on to creating a new company—what entrepreneurs love to do in the first place.

Professor Bartlett agreed with Mr. Zwilling, but argued that the dynamic has been in place for a long time.  Still, he acknowledged that M&A is preferred for many startups because entrepreneurs and VCs can monetize their investments immediately, whereas the IPO process locks up capital for six months and subject them to considerable market risk.  Even once the company has gone public, both are often prevented from quickly selling their equities because they’re considered ‘insiders.’  Prof. Bartlett concluded, “The thumb has always been on the scale, in my assessment, on the side of M&A” because VCs simply have more control over the process.

Professor Dibadj suggested that entrepreneurs might have become a bit more sensitive to the substantial underwriting costs associated with an IPO, which pushes them towards merger instead.  Marin Zwilling agreed—adding that VCs prefer business models with M&A exit strategies than IPOs.