Business Law Prof Blog

New Form D Requirements

The SEC continues to tinker with private equity offerings by proposing changes to Form D, the disclosure document for Reg D offerings.  All companies must file Form D electronically by March 16, 2009 (or voluntarily after September of this year).  The electronic filings will be easy for the public to access (the old ones required a trip to Washington).  The public nature of the filings has caused the SEC to eliminate the requirement that 10% or larger shareholder must be disclosed (venture capital funds will retain anonymity).  Moreover, there is no longer a requirement that the identity of limited partners be disclosed (encouraging start-ups to use partnership forms of financing once again). Once again the SEC has not gone far enough.  The Form was designed to notifiy the SEC of Reg D offerings (to stop fraud) not the public.  Now that the filings are on line they will become public disclosure documents more than SEC notices.  Why should the public know at all how a private company is financing itself?

Rule 144 and 145 Changes

Effective February 15th, new versions of SEC Rules 144 and 145 went into effect.  There are some major changes hidden here.  First,  Rule 144 reduces the required holding period to only six months for "restricted stock" of a reporting issuer.  Reporting issuers will be much encouraged to use private stock offerings.  More important perhaps is that investors of non-reporting issuers that are looking to become reporting issuers in IPOs will enjoy a 90 a scant required ninety day holding period after the IPO.  The investors no longer need to demand listing covenants (piggy-back or S8 offerings) in their investment contracts.  Second, Rule 145 eliminates the presumption underwriter doctrine for all target shareholders taking stock in a stock swap acquisition if there are no shell companies involved.  Stock swap acquisitions in strategic acquisitions, for example, allow recipients of stock to sell everything they get immediately (as long as they are not controlling shareholders after the deal).  The rule also favors strategic buyers over buyout buyers in an auction, as the recipient shareholder in the buyout still are subject to resale restrictions.  These are major changes.  Again the SEC is tinkering with the private equity markets (always a worry) but a reduction of requirements here makes sense.   

Globalization and Prosperity

Amid the discussions about the detrimental effects of NAFTA on Ohio (see Dale's post on "Ohio's Economy" below), a soon-to-be published study of globalization's effects on the European Union states that "the European Commission estimates that at least a fifth of Europe’s income gains since World War II can be attributed to globalization, and that every EU household would gain over €5,000 annually if Europe seized the opportunities offered by the present phase of globalization." 

On the negative side, the report notes that, like Ohio, a number of workers have seen their jobs move out of the EU.  However, on the whole, incomes, wages, and the employment rate are all higher.  The report notes that semi-skilled, assembly jobs are moving to countries like China and India, while the EU has gained considerably in "knowledge economy" jobs.

The report also notes that a crucial determinant of whether a country will benefit from globalization is the sophistication of its "human capital"--EU countries with higher education levels and "strong innovation frameworks" are the big winners from globalization.  As Dale suggested below, if we apply these lessons to Ohio (and "Rust Belt" states generally), smarter investment in education and incentives for local talent to stay in the state would seem a better solution than renegotiating NAFTA.

Posted by: Paul Rose

London Again the Most Competitive Financial Center . . .

according to the third in a series of reports commissioned by--you guessed it--the City of London.  The rankings, which have New York second and Hong Kong a distant third, are based on surveys of professionals.  The surveys focus on 14 factors categorized into 5 key areas:

People involving “the availability of good personnel, the flexibility of the labour market, business education and the development of ‘human capital’.”

Business Environment covering “regulation, tax rates, levels of corruption, economic freedom and the ease of doing business.“

Market Access covering “the levels of securitisation, volume and value of trading in equities and bonds, as well as the clustering effect of having many firms involved in the financial services sector together in one centre.”

Infrastructure, focusing mainly on “the cost and availability of buildings and office space, although it also includes other infrastructure factors such as transport.”

General Competitiveness covering “the overall competitiveness of centres in terms of more general economic factors such as price levels, economic sentiment and how centres are perceived as places to live.”

NB: the rankings presumably were compiled before the announcement that the UK intends to crack down on favorable tax rules for non-domiciled foreign residents (non-doms).

Update:  Apparently, some of the responses to the survey came back before the tax changes were announced, "[b]ut the 411 replies since last September show New York with a big lead over London."

Posted by: Paul Rose

Student Loans

Educators have long been concerned over the heavy loan debt carried by students once they leave school.  Their primary concern is that the loans constrain the work choices the students have once they graduate.  In other words, students cannot take "public interest" jobs and must, horrors, go to work in private industry to pay back their loans.  Like most redistributive arguments from the left, the argument assumes the existence of the loans.  That assumption is now in question.  One of the largest student loan agencies, the Penn. Higher Educating Assistance Agency, is suspending student loans, even if backed by the federal guarantees.  The collapse of the securitization market makes it impossible to cash flow the business.  In the past the loans were packages and resold and the new money was used for new loans.  Now the loans cannot be resold at reasonable rates and there is little new cash for new loans. 

So now students may not have to worry about repaying loans; they may not be any.  Students that do not have the cash to go to school must work before school in, I daresay, private industry, to raise cash to go to school.  Public service jobs will not support future tuition just as they did not support past tuition. 

Educational institutions could attempt to take up the slack by turning into loan companies, a task for which they are not designed and will not do well, but the amount available will be slight compared to the amounts that were available in the private market.  Government could step in the loans and we would have another huge, very expensive government system to fund and monitor all in a time when government budgets are stretched to the breaking point.  Higher taxes anyone?. 

Another hard lesson for the left--be careful what you complain about you may lose it.

Wachovia's Lawsuit Against Providence Equity

Providence Equity Partners, a private equity firm, signed a deal to purchase television stations from Clear Channel.  Wachovia agreed to finance the $500m deal.  Providence and Clear Channel agreed to a reduced purchase price because the stations revenues were down.  Now Wachovia wants out, arguing the price reduction is not enough and that the deal should be canceled.  Wachovia is arguing that the price reduction itself is a material adverse change, triggering the MAC condition in the deal agreement and, incorporated by reference, a similar MAC condition in the financing arrangement.  This case is odd because Wachovia must convince a judge that a reduction in price (and thus in the financing commitment) is an "adverse" change.  The case is representitive of the new kind of "hardball' being played in the buyout financing markets.  Reputation (for honoring one's word) be damned; save the ship.

The Take-Two Offer

Electronic Arts has made a hostile bid for Take-Two Interactive.  The Take-Two board has decided to take the low road.  It immediately awarded the company's managers, who have not done well,  generous severance packages contingent on any control change and then rejected the bid calling it "ill-timed and low-priced."  Managers also received pay package increases.  The managers said the pay increases were not stimulated by the EA offer. Yeah right.  The offer is for $26 a share, a healthy premium over the pre-announcement price.   The shareholders, and the board, should thank Electronic Arts for the bid, ask for a buck or two more a share, and take the money and run.  The irony:  The managers and the board are new, representing the new management put in by a group of dissident shares last year because the company was struggling.  Apparently was is good for the goose is not good for the gander.

Ohio's Economy

The debate last night in Cleveland Ohio between Barack Obama and Hillary Clinton featured a discussion about the Ohio economy.  Apparently both candidates blame NAFTA and other free trade agreements for the decline in manufacturing jobs in Ohio.  Both candidates featured, therefore, promised to "re-negotiate NAFTA" in the debate in an effort to win votes in Ohio.  Yes the Ohio economy is struggling:  Unemployment last measured in December was at 6%, a full percentage point higher than the national average;  mortgage defaults in the fourth quarter of 2007 were at a 1.44% rate, compared to a national average of .87%; over the last eight years, real median income has dropped from over the national average to $2,300 below the national average (a drop of around 10%); and over the last eight years Ohio has lost over 275,000 manufacturing jobs (a drop of about 25%).  But some other facts are notable:  1) Nafta took effect in 1994 and from 1994 to 2000 there was income and job growth in Ohio. Nafta is not the cause of the recent drop, which dates from 2000.  2) Nafta did not greatly reduce tariffs on Mexican goods, they were already low.  The inevitable conclusion is that trade with China (and India and other emerging Eastern Europe economies), which grew dramatically after 2000 (China's admission into the WTO dates from 2001) is a more likely cause.  Indeed, the stump speeches of both candidates now routinely attack China.  Any long-term solution for Ohio, however, has to involve investment incentives that induce private companies to locate or grow here.  This takes time and careful planning.  However, the other routine parts of the candidates stump speeches -- Attacking corporate profits or the pay of corporate executives or the decrying the pay and benefits of workers is not consistent with a plea for corporations to locate or grow businesses here.  Ohio needs to invest in infrastructure (roads, power sources, and cleanup of abandoned factories) and to invest in education and incentives for local talent to stay in the state; the state and the federal government need to reduce corporate taxes and dividend taxes (to eliminate once and for all any double tax on earnings); and the state needs to give up protectionist support (in its many forms) of industries that are not competitive.  We need to drop our takeover protections, for example.  We could also follow Indiana's example and privatize some of our government functions (Indiana sold its northern toll road to Australians who overpaid a whopping $6 B and used the money to attract three new Japanese car manufacturing plants).       

Loser Pays Rule?

On Valentine's Day Rep. Jeb Hensarling re-introduced a bill that Rep. Richard Baker has been pushing for at least two years--the Securities Litigation Attorney Accountability and Transparency Act.  Inter alia, the bill states that "(A) DETERMINATION REQUIRED- If the court in any private action arising under this title enters a final judgment against a plaintiff on the basis of a motion to dismiss, motion for summary judgment, or a trial on the merits, the court shall, upon motion by the defendant, determine whether--

`(i) the position of the plaintiff was not substantially justified;

`(ii) imposing fees and expenses on the plaintiff's attorney would be just; and

`(iii) the cost of such fees and expenses to the defendant is substantially burdensome or unjust.

`(B) AWARD- If the court makes the determinations described in clauses (i), (ii), and (iii) of subparagraph (A), the court shall award the defendant reasonable fees and other expenses incurred by the defendant and impose such fees and expenses on the plaintiff's attorney."

Inter alia, the bill would also require each plaintiff and plaintiff's attorney in a private action to provide sworn certifications, filed with the complaint, that identify any conflict of interest, including any direct or indirect payment, between the attorney and the plaintiff.

The bill has never gotten out of committee, and although I am inclined to favor the objectives (if not the method) of the legislation, one might think that in the current economic environment this bill has zero chance of getting out of committee this time around.  The "loser pays" rule is, of course, the difficulty here; the conflicts portion could probably survive on its own.

Posted by: Paul Rose

Deal Are Down But Litigation Over Deals is Up

The number of deals has fallen dramatically this year but litigation over pending deals is way up.  As note by Karnitichning, Rappaport & Ng in today's Wall Street Journal in a timely piece,  collegiality it out and "law of the jungle" is in.  No only are deal principals suing each other, purchasers and financiers are also suing each other.  It points up to a well-tested truism:  The document language, sweated over by lawyers and mocked by clients anxious to close, matters, really matters, when times get tough.  The language contains a client's downside protections.