Recent Buzzes - VC Experts, Inc.

Applicability of Delaware Income Tax

Wed, 11 Nov 2009 00:00:00 -0700

The Delaware income tax applies to domestic and foreign corporations, other than those specifically exempted, deriving income from business activities carried on and from property located within Delaware during the income year. The applicability of the Delaware corporate income tax to limited liability companies (LLCs) is determined by the LLC's classification for federal income tax purposes. Therefore, an LLC will be classified as a partnership, unless otherwise classified for federal income tax purposes.

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New York State Enacts Changes Impacting the Creation and Potential Uses of Powers of Attorney

Tue, 10 Nov 2009 00:00:00 -0700

On September 1, 2009, broad changes to the laws governing powers of attorney became effective in the State of New York. These changes impact both the creation and potential uses of powers of attorney and apply not only to New York residents, but also to individuals who execute powers of attorney while conducting business in New York.

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Note on Preparation and Content of Placement Memorandum ('PPM')

Wed, 04 Nov 2009 00:00:00 -0700

The early rounds of financing entail the issuance of securities in "private placements," transactions exempt from registration under the Securities Act of 1933 in accordance with one or more statutory exemptions, as discussed in "Reg. D and Other Exemptions from Registration". Most source materials suggest that the use of private placement memoranda is essential in private placements.

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Planning Ahead for Distress In A Venture Backed Company - The Special Situations Committee

Tue, 03 Nov 2009 00:00:00 -0700

Recent events are showing that syndicates are sometimes challenged to act quickly, methodically, consensually and effectively when the portfolio company is showing signs of poor performance and the possibility of a sub-venture return.

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The Dilution Concern for Founders

Wed, 28 Oct 2009 00:00:00 -0700

If my students at Cornell University take away one thought from the entire semester of instruction, that thought is embedded in the following exposition:

First, I draw on the blackboard an inverted bell shaped curve, the top of the curve heading downwards rather than up. Then, I remind them of the old saying in the commercial real estate business: "There are three rules for making money in commercial real estate and they are Location, Location, Location." I then migrate that old joke to the venture capital business. "There are three phenomena that trivialize even the best of investment strategies: Dilution, Dilution, Dilution."

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Proposal Would Subject Registered Investment Companies to New Proxy Access Regime

Tue, 27 Oct 2009 00:00:00 -0700

On June 10, 2009, the Securities and Exchange Commission (SEC) unveiled the details of its proposal to allow shareholders to have their director nominees included in the proxy materials of investment companies registered with the SEC under the Investment Company Act of 1940 (the "Company Act") and issuers with a class of equity securities registered under the Securities Exchange Act of 1934 (the "Exchange Act"). The controversial proposal, which passed by a 3-2 vote of the commissioners at the SEC's May 20, 2009, open meeting would allow a shareholder (or group of shareholders) who owns at least 1 percent of the stock of a registered investment company that has a net asset value (NAV) of $700 million or more or a business development company or other subject issuer that is a large accelerated filer (or 3 percent and 5 percent for registered investment companies with smaller NAVs or smaller companies, respectively) and who has held the shares for at least one year, to use management's proxy materials for the nomination of up to 25 percent of the company's board of directors, provided the shareholder is not seeking a change of control of the company. If adopted, the proposal would dramatically change the landscape for the election of directors of registered investment companies.

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Interview - Randy Mitchell, of the International Trade Administration - U. S. Department of Commerce

Wed, 21 Oct 2009 00:00:00 -0700

This week we welcome Randy Mitchell, of the International Trade Administration at the U. S. Department of Commerce. Mr. Mitchell is responsible for private equity/venture capital in the Department's Office of Financial Services Industries and is the United States Representative to the Organization for Economic Cooperation and Development (OECD) for Entrepreneurship. Among several duties, Mr. Mitchell is responsible for enhancing the competitiveness of the U.S. venture capital sector.

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The MAC - MAE Checklist

Tue, 20 Oct 2009 00:00:00 -0700

Herewith some thoughts prompted by David Marcus' excellent piece on the now-notorious material adverse effect clause (the "walk right") in buyout transactions, in The Deal, "In Praise of Ambiguity." ^[1] The landscape for Marcus' note is the extraordinary frequency of litigation involving conflicting interpretations of the material adverse change or effect clause in agreements between public companies (targets or the "sell side") being taken private by a buyout fund (the "buy side"). Some contingency arises between signing and closing and the buy side claims it has a right to walk away without penalty ? the material adverse effect has occurred. The sell side says "no." Huge dollars are involved. The language in the contract is opaque ? it does not define the qualifying events except by using the term "material." And the questions, asked by e.g., Cathy Reese and me (joebartlettvc.com/node/53), is why hasn't more work been put into defining and cataloging potential events when the deal was negotiated?

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The Contract - Purchase Agreement, Shareholders Agreement, And Rights Of First Refusal

Wed, 14 Oct 2009 00:00:00 -0700

The term sheet, in time, segues into a formal agreement. The understandings between the parties (as set out in the term sheet or simply by oral agreement) may be primitive: "Here's some cash, give me some stock." Nonetheless, any deal involving the sale of securities is legally complex because the law views that category of transaction in a special way; lawmakers and regulators, based on historical evidence going as far back as the South Sea Bubble, entertain deep concerns that there exist unusual opportunities for fraud and overreaching when the commodity traded is a security. Accordingly, the simplest investment contract?"one share, one dollar"?is in reality far from simple, since the agreement of the parties is complemented by rules imposed by statute and administrative regulation.

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FINRA Proposes Sweeping New Disclosures for Mutual Funds and Broker-Dealers

Tue, 13 Oct 2009 00:00:00 -0700

In June 2009, FINRA issued Notice 09-34, which proposes significant changes to the long-standing NASD rule governing the disclosure of relationships between mutual funds or other investment companies and broker-dealers. The proposed rule would replace current NASD Rule 2830 with a new proposed FINRA Rule 2341.

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Interview with Dana Callow, Managing Partner of Boston Millennia Partners

Wed, 07 Oct 2009 00:00:00 -0700

Dana Callow is the Managing Partner of Boston Millennia Partners. ?Prior to founding Boston Millennia Partners, Dana co-founded Boston Capital Ventures. ?In addition to working with Fortune 100 companies in strategic planning and implementing M&A strategies, Dana is, or has served as, a director of a number of other public and private companies. ?He chairs the Investment Committee for Tufts University's endowment and is an executive member of the Advisory Board of the Dartmouth/Tuck Center for Private Equity and Entrepreneurship. ?He is a graduate of Tufts University and holds an MBA from the Amos Tuck School at Dartmouth College.

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Courts Signal that Financial Advisors Issue Fairness Opinions, Not Insurance Policies

Tue, 06 Oct 2009 00:00:00 -0700

In recent years the role of financial advisors in M&A transactions has garnered increased attention. Traditionally viewed as a sort of insurance policy for disappointed buyers, financial advisors are now more commonly viewed as service providers responsible for specified duties. The courts have reinforced this position with a string of opinions which both narrowly tailor the role of financial advisors in such transactions and appear to limit their duties of disclosure in connection with financial analyses and the issuance of fairness opinions.

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Term Sheet - E Round - Selected Clauses Specific to Cram Downs

Wed, 30 Sep 2009 00:00:00 -0700

Valuation and deal term metrics of U.S. privately funded companies.

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Herewith some selected term sheet clauses which can be folded into a term sheet if a cram down of prior preferred is in order.

Series E Pay To Play:

Holders of Existing Preferred that purchase their full pro-rata share of the $15 million in Series E Stock will be entitled to preserve the rights, preferences and privileges of their Existing Preferred by exchanging these shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series D-1 Preferred for shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock, Series D-2 Preferred Stock and Series D-3 Preferred Stock, respectively (collectively, the "New Preferred"), on a 1:1 basis.

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That Stock Grant Could Cost More Than You Think

Tue, 29 Sep 2009 00:00:00 -0700

It is likely that most officers and directors of U.S. public companies never think of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 -- often referred to as the Hart-Scott-Rodino Act or the HSR Act -- outside of its commonly understood application to mergers and acquisitions. These officers and directors need to be aware, however, that it has long been the position of the Federal Trade Commission that the HSR Act is applicable to any acquisition of voting stock -- including an acquisition by an individual -- that exceeds the Act's jurisdictional thresholds. Due to this broad application of the HSR Act, an acquisition of voting stock by an officer or director of a U.S. company -- whether in the open market or as a result of an equity compensation plan -- could trigger a filing and waiting period obligation under the Act.

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Interview with Dr. John Paglia, associate professor of finance at Pepperdine University

Wed, 23 Sep 2009 00:00:00 -0700

Last month, Pepperdine University released its Private Capital Markets Project Survey Report. This survey by Pepperdine University's Graziadio School of Business and Management is the first comprehensive and simultaneous investigation of the behavior of the major private capital market segments. The survey specifically examined the behavior of senior lenders, asset-based lenders, mezzanine funds, venture capital firms and private equity groups.

This week we are pleased to talk with Dr. John Paglia, senior researcher of the Pepperdine Private Capital Markets Project and an associate professor of finance at Pepperdine University. His research has appeared in The Wall Street Journal and The New York Times and has been published in a number of journals.

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New 457A Tax Rules Overview - Nonqualified Deferred Compensation Plans

Tue, 22 Sep 2009 00:00:00 -0700

Section 457A generally provides that any compensation deferred by a service provider (such as an employee) under a nonqualified deferred compensation plan that is sponsored by a "nonqualified entity" (see below) is includible in the service provider's gross income when there is no substantial risk of forfeiture associated with the service provider's right to receive such compensation. In other words, the deferred compensation is taxable as soon as it vests. This is in contrast with Section 409A, which generally allows taxation of compensation to be deferred until the compensation is actually paid, regardless of when it vests.

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Restrictions On Transfer

Wed, 16 Sep 2009 00:00:00 -0700

In some states, agreements respecting the corporation's power to restrict the transfer of its shares, once issued, are not deemed to be effective unless they are set out in the charter (and, like all restrictions, "legended" upon the face of the share certificates themselves); moreover, any agreement purporting to bind shareholders not signatories to the agreement may only be legally effective if set out in the charter. The typical restriction, in the nature of a first-refusal restriction, is a significant element of governance in closely held corporations, important to ensure that stock not fall into the hands of strangers without an opportunity in the company (or the remaining shareholders) to buy back some or all of the shares. In small companies, the shareholders feel the need to relate to each other as partners and a maverick shareholder can be disruptive. Moreover, the wrong transfer can forfeit certain valuable privileges, for example S Corporation status. (An allied restriction is the right of first offer; the potential transferor must first offer. The shares to, say, the company (or her partner(s)), the offeree(s) have a period in which to bid and the trade to a stranger can only occur at a higher price.)

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ILPA's Private Equity Principles

Tue, 15 Sep 2009 00:00:00 -0700

The week of 9/13/2009, the Institutional Limited Partners Association (ILPA), a predominantly US-led association of private equity investors, published its Private Equity Principles. ILPA says that these principles aim to enhance partnership governance, strengthen alignment of interest between GPs and LPs, and improve investor reporting and transparency. ILPA says that the document - which includes a long list of "best practice" fund terms - was written following a comprehensive survey of ILPA's 215 members, and a number of roundtable discussions.

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Inteview with John Fadely, a partner in the Hong Kong office of Clifford Chance.

Wed, 09 Sep 2009 00:00:00 -0700

China has recently opened up to private equity firms, as foreign firms have finally been allowed to raise yuan-denominated funds.?

This week we are pleased to talk with John Fadely, a partner in the Hong Kong office of Clifford Chance. ?John advises on the structuring, formation and restructuring of private investment funds, including private equity, venture capital, real estate and hedge funds, joint venture funds, onshore-offshore fund structures and managed accounts.

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New Rules of the Road for Advisers to Private Funds

Tue, 08 Sep 2009 00:00:00 -0700

On July 15, 2009, the Obama administration delivered to Capitol Hill the much anticipated proposed legislation that would require domestic advisers of private pools of capital to register with the U.S. Securities and Exchange Commission (the "SEC"). The new legislation, which is titled the "Private Fund Investment Advisers Registration Act of 2009" (the "Act"), would amend the Investment Advisers Act of 1940, as amended (the "Advisers Act"), to eliminate for domestic advisers to private funds the long-standing exemption currently available to advisers with fewer than 15 U.S. clients. The Act would subject many previously unregistered advisers to SEC oversight and conflict-of-interest prohibitions, and would require them to maintain records, submit reports, establish and maintain a compliance program and make such disclosures as may be determined by the SEC from time to time. Join us this week as Kimberly V. Mann, Partner, Corporate & Securities at Pillsbury Winthrop Shaw Pittman LLP., gives an overview to whom the act applies and its consequences.

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What Will VC's Want For A Security: Common Stock? Preferred Stock? Debt? Warrants?

Wed, 02 Sep 2009 00:00:00 -0700

As one programs any financing, as in corporate finance generally, the objective is to make 2 + 2 = 5; that is to obtain added value for the issuer. In the course of a financing, the insiders are attempting to raise the maximum amount of money for the minimum amount of equity ("equity" meaning claims on the residual values of the firm after its creditors have been satisfied). A corporation will issue at least one class of common stock because it must; many firms stop there; they pursue the simplest capital structure possible in accordance with the KISS principle ("Keep it Simple, Stupid"). However, in so doing, the corporation may close down its chances to pursue the added-value equation (2 + 2 = 5) because that equation involves matching a custom-tailored security to the taste of a given investor. The top line of the term sheet will ordinarily specify the security the VCs opt to own; the following discussion takes up the most common possibilities. This week Joe Bartlett shows us how 2 + 2 can equal 5.

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Secondary Trading of Limited Partnership Interests in Private Equity Funds - Recent Developments

Tue, 01 Sep 2009 00:00:00 -0700

Much of the private equity activity in 2008 and the first half of 2009 has consisted of secondary purchases and sales of limited partnership interests in private equity funds. In the current economic climate, many existing investors in private equity funds are looking to sell their limited partnership interests for a variety of reasons, including elimination of balance sheet liabilities associated with the obligation to meet future capital calls and raising cash for other purposes such as funding of capital calls in other funds. This week, Anne E. Ross, Paul D. Broude, Paul T. Wrycha and Joseph D. Shumow of Foley & Lardner LLP tell us which Second Market terms are important and what to look for.

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