SEC Annual Report

One of the nice things about the holidays is that it gives you a chance to catch up on some light reading, such as the 152-page U.S. Securities and Exchange Commission (SEC) Fiscal Year 2013 Agency Financial Report (AFR).  For those who are interested, the AFR is available here.

The SEC is required by law to prepare the AFR, which reports on the SEC's accomplishments, activities and financial position.  As you might expect, the report has many positive things to say about the SEC's mission and its activities in support of its mission.  To quote the report, the SEC's mission is "to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation."  

A few factoids from the report that I found especially interesting:

• Much of the SEC's agenda in 2013 was driven by implementing the provisions of the Dodd-Frank Act.  The Dodd-Frank Act contains more than 90 provisions that require SEC rulemaking according to page 14 of the AFR.  I wonder how many Members of Congress who voted for the Dodd-Frank Act actually read all 90+ provisions before they cast their vote?!
• The SEC has 11 regional offices, including one in Fort Worth, Texas.  The SEC's Fort Worth Regional Office covers Texas, Oklahoma, Arkansas and Kansas (except that Kansas's exam program is administered by the SEC's Denver Regional Office).  Kansas is the only state in the country in which the entire state is subject to joint responsibility by two SEC Regional Offices.  California is split into two Regional Offices - Northern California is the responsibility of the SEC's San Francisco Regional Office and Southern California is the responsibility of the SEC's Los Angeles Regional Office.  (See page 9 of the AFR.)
• The Sarbanes-Oxley Act requires the SEC to review the financial disclosures of at least 33% of all companies publicly reporting under the Exchange Act each year.  In 2013, the SEC reviewed 52% of all reporting companies.  (See page 44 of the AFR).
• On average, the SEC's Division of Corporate Finance took 25.6 days to provide initial comments to company filings under the Securities Act.  (See page 44 of AFR).     

E-Corporate Law Presentation

I am pleased to announce that I will be making a presentation to the Corporate Counsel Section of the Tarrant County Bar Association on December 4, 2013.  The presentation is titled "E-Corporate Law" and tackles issues related to electronic contracting and taking corporate actions by electronic means.  This will be an updated version of a similar presentation I made in 2011 to the UT-CLE Annual Conference on Securities Regulation and Business Law.

Jamie Bryan will be co-presenting with a discussion of Protecting Communications.

BrokerCheck: Researching Your Investment Professional

"I had a very strong work ethic. The problem was my ethics in work."
- Giovanni Ribisi as Seth Davis in "Boiler Room"

How can you find out if your securities broker or other investment professional is a straight shooter or an extra from the movie "Boiler Room"?  There is no substitute for thorough due diligence, and a great place to start such research is FINRA's BrokerCheck.  FINRA stands for the Financial Industry Regulatory Authority, an independent organization that regulates the securities industry.
     
FINRA's website homepage (www.FINRA.org) includes the BrokerCheck feature.  BrokerCheck is a terrific (and free!) online tool which allows users to conduct a background check on investment firms and investment professionals, such as brokers, brokerage firms, investment advisers and investment adviser firms. By inserting the name of an investment professional or their firm name into the BrokerCheck dialogue box, users can access information such as:

• is this person registered and a broker or investment adviser with the SEC, any self-regulatory organization or one or more states?
• how long has this person been registered?
• which securities firms has this person been affiliated with and what is his or her employment history for the last 10 years?
• has this person had any "Disclosure Events," such as customer complaints, arbitrations, regulatory actions, employment terminations, bankruptcy filings or criminal or civil judicial proceedings?
• has this person passed any state or federal securities industry exams? 

To the extent the investment professional or investment firm has been involved with one or more reported Disclosure Events, users can review the allegations made against the professional or firm, the status of the claim, and a summary of how the matter was resolved.

Special thanks to John Fahy for bringing to my attention the news that FINRA recently released an enhanced version of BrokerCheck which is more user-friendly.   

Doing Good and Doing Well: Texas Corporations with a Social Purpose

The wall between for-profit and not-for-profit corporations in Texas may be tumbling.

Historically, under Texas corporate law, one could either:

(1) form a for-profit corporation, in which case the corporation ans its management team was expected to maximize shareholder value by maximizing profits for the benefit of the corporation's shareholders; or

(2) form a not-for-profit corporation, in which case the corporation and its management team was expected to pursue one or more social goals (such as enhancing education, culture or the arts) without paying any dividends or other economic benefits to any particular owner or investor.

The so-called "social entrepreneurship" movement has objected to this dichotomy.  Why shouldn't a corporation be allowed to pursue both profits and social benefits so long as the stockholders approved of the approach, this movement asked.  Under prior Texas law, officers and directors of a for-profit corporation might risk liability for breaching their fiduciary duty to the corporation if they pursued a social purpose at the expense of profits.  

But Texas law has become more social entrepreneurship-friendly.  Effective September 1, 2013, Section 3.007 of the Texas Business Organizations Code (TBOC) has been amended to authorize Texas corporations to include a social purpose in their certificates of formation.

Under the new law, "social purpose" is defined as: "promoting one or more positive impacts on society or the environment or of minimizing one or more adverse impacts of the corporation's activities on society or the environment. Those impacts may include:
                      (A)  providing low-income or underserved individuals or communities with beneficial products or services;
                      (B)  promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
                      (C)  preserving the environment;
                      (D)  improving human health;
                      (E)  promoting the arts, sciences, or advancement of knowledge;
                      (F)  increasing the flow of capital to entities with a social purpose; and
                      (G)  conferring any particular benefit on society or the environment."

Section 21.101(a) of the TBOC now permits shareholders of a for-profit corporation to enter into an agreement governing the manner in which the corporation may exercise its power pursue a social purpose permitted by its certificate of formation.

Finally, Section 21.401 of the TBOC now authorizes directors and officers of a for-profit corporation to consider the social purpose of the corporation in discharging their duties to the corporation if such social purpose is stated in the corporation's certificate of formation.

It will be interesting to see how many Texas for-profit corporations take advantage of this new flexibility permitting Texas corporations to seek to both "do good" and "do well."

2013: The Year of the IPO?

Is 2013 shaping up to be the Year of the Initial Public Offering?

Well, probably not, but IPO deal flow is trending up this year. According to the Federal Securities Law Reports, the 96 IPOs completed during the first two quarters of 2013 is the highest mid-year total since the first half of 2007 saw 141 IPOs completed.   Unfortunately, those 96 IPOs in the first half of 2013 resulted in "only" $20.76 billion in offering proceeds.  That's down from $29 billion in 2012 and $27 billion in 2011.

Fort Worth Business Press Article

Thank you to the Fort Worth Business Press for publishing my article titled "New SEC rules to permit general solicitation in private placements," which is available here.

As noted in previous blog posts, these new rules are a huge deal in the private capital markets.

Amending and Restating a Texas Certificate of Formation Just Got Easier

Great news for corporate law practitioners in Texas.  One of my pet peeves with regard to filings with the Secretary of State has been eliminated.  Thanks to recently enacted Senate Bill 847, effective September 1, 2013, a restated certificate of formation is no longer required to "identify by reference or description each added, altered, or deleted provision."  That provision is no longer part of Section 3.059 of the Texas Business Organizations Code.

The requirement to describe amendments of a certificate of formation was previously a thorn in my side because:

• it is totally unnecessary - why does it matter what the certificate of formation used to say if it has been amended and restated?  
• and if one person in a million decided that that absolutely had to know what changes had been made to the certificate of formation couldn't they take that project themselves - every version of the certificate of formation is publicly available?
• and most importantly, the standard for the description was too vague - how detailed of a description of the changes to the certificate is necessary to comply with the Texas Business Organizations Code? So Texas entities and their lawyers had to guess how much time to waste on complying with this silly requirement.   

Congratulations to the 83rd Texas Legislature for fixing this problem with the Texas Business Organizations Code.  Of course, now I'll have to identify a new pet peeve!

CityBizList Article on New Rule 506

One of the biggest changes ever in the world of private placements is coming September 23, 2013.  That's when the SEC's new Rule 506 becomes effective, permitting "general solicitation" in connection with private placements in which the purchasers are exclusively "verified" accredited investors.

I wrote an article for CityBizList - Dallas about this topic.  The article is available here.

The Death of Good Standing Certificates in Texas

Virtually every M&A or corporate finance transaction of any significant size includes a requirement that the parties be in "good standing."

A Texas corporation is in "good standing" if it is in existence and it is not delinquent in filing its franchise tax returns to the extent the State of Texas may revoke the corporation's corporate status.  Until recently, companies could demonstrate that they were in good standing in Texas by going to the Texas Comptroller's website, searching for the company in question, and printing off a "Certificate of Account Status,” sometimes called a “Certificate of Good Standing.”

But the Certificate of Account Status died effective May 5, 2013.  You may not have seen the funeral, but that's when the Texas Comptroller's office ceased issuing Certificates of Account Status.

Nowadays, a company seeking to demonstrate that it is in good standing with the Texas Comptroller's office must search the Comptroller's website for an electronic report labeled "Franchise Tax Account Status."  If the company's Right to Transact Business in Texas is shown as "Active" on that page, that means the company is in good standing.

Rule 506 Amendments - The SEC Giveth and Taketh Away

On July 10, 2013, the SEC adopted long-awaited final rules eliminating the prohibition against general solicitation and general advertising in Rule 506 offerings if the issuer of the securities takes reasonable steps to verify that all purchasers of securities in the offering are accredited investors.

Congress instructed the SEC amend to Rule 506 to permit general solicitation in Rule 506 offerings as part of the Jumpstart Our Business Startups (JOBS) Act.  The JOBS Act was enacted on April 5, 2012, and required the changes to be made within 90 days (or by July 4, 2012).  On July 10, 2013, the SEC announced its final rules implementing the change permitting general solicitation in Rule 506 offerings.  The amendment becomes effective September 23, 2013.  So by my calculations, the amendment becomes effective only 446 days after the deadline set by Congress in the JOBS Act!

In any event, the amendment to Rule 506 should come as good news for small and mid-sized businesses seeking to raise capital in private placements.  Beginning September 23, 2013, there are no longer restrictions on advertising and other means of general solicitation to conduct a valid private placement under Rule 506 if the issuer is careful to verify the accredited investor status of its investors.

On the other hand, the same day that the SEC released its final rule permitting general solicitation, the SEC also adopted or proposed related rules which may restrict the ability of issuers to take advantage of the new general solicitation rules, including:

1. adopting so-called "bad-boy" disqualifications from Rule 506, which will restrict issuers who are affiliated with felons and other bad actors from participating in Rule 506 offerings;
2. proposing new rules which will require additional filings with the SEC in connection with any Rule 506 offering in which the issuer engages in general solicitation, including filing a Form D 15 days before any such general solicitation; and
3. adopting strict standards for adequate verification of the accredited investor status of potential purchasers in Rule 506 offerings using general solicitation.

SEC Releases adopting the final rules are available here (regarding general solicitation) and here (regarding "bad boy" disqualifications).  The SEC Release proposing the new rules regarding additional Form D filing requirements is available here.  

SEC "Likes" Social Media

To tweet or not to tweet, that is the question.

On April 2, 2013, the Securities and Exchange Commission (SEC) issued a report with respect to its investigation into whether or not Netflix, Inc. and its Chief Executive Officer, Reed Hastings, had violated SEC regulations by virtue of Mr. Hastings’ disclosure of material, non-public information about Netflix via his personal Facebook account.  The SEC reported that it had chosen not to pursue enforcement action against Netflix or Mr. Hastings, but noted that Facebook posts, Twitter tweets, and other social media postings could violate SEC disclosure rules, such as Regulation FD (Fair Disclosure), if such posts contained material non-public information.

On the other hand, the SEC report confirmed that a publicly traded company could use social media to comply with Regulation FD's requirements to distribute material information about the company so long as the investing public was given prior notice that the company planned to use such social media platform for its public disclosures of company information.  This SEC position is analytically consistent with its 2008 release approving disclosure of company information via a public company's website so long as investors were given prior notice of such disclosure method.

A more detailed description of the SEC's Netflix report and SEC regulations implicated by use of social media can be found in an article I wrote for the Dallas Bar Association's "Headnotes" magazine, which is available here.

What the Heck is a Tontine?

I love vocabulary words, so I subscribe to Merriam-Webster's Word of the Day.

May 26th's M-W Word of the Day was "tontine," which is defined as "a joint financial arrangement whereby the participants usually contribute equally to a prize that is awarded entirely to the participant who survives all the others."

When I read that definition, I couldn't help but think of The Simpsons' episode in which it was revealed that Abraham "Grampa" Simpson was part of a tontine arrangement with the other members of his World War II military squad, the Flying Hellfish.  Under the terms of the Flying Hellfish's tontine, the last surviving member would inherit all of the valuable paintings found by the squad during the war.  Grampa Simpson and Montgomery Burns were the last two surviving Flying Hellfish, so Mr. Burns ordered Grampa's assassination.

The M-W Word of the Day entry says that tontines have been banned because, as with Mr. Burns, "there was just too much temptation for unscrupulous investors to bump off their fellow subscribers."

Reading that assertion got me wondering if Texas has any laws against tontines.  Well, I have some bad news for the Flying Hellfish.  I was able to find at least one such provision.  Section 3.122 of Title 28 (Insurance) of the Texas Administrative Code provides as follows:

"Any life insurance policy which is a tontine policy or which contains a tontine provision will be disapproved. Provisions by which dividends during the participating period are not allocated or paid annually are prohibited as being within the tontine principle unless the policyholder acquires, on termination of the policy, a vested interest in the dividends which have accrued."

5th Annual TECH Fort Worth IMPACT Awards

Earlier this week I attended the 5th Annual TECH Fort Worth IMPACT Awards.  TECH Fort Worth is a Fort Worth based incubator and accelerator for inventors and entrepreneurs starting up the next great companies of North Texas.  Among other things, TECH Fort Worth helped establish the Cowtown Angels, an organization of local angel investors.  

As usual, Darlene Ryan, the Executive Director of TECH Fort Worth, and the rest of her team put on a terrific event.  The IMPACT Awards celebrate start-up and early stage North Texas companies who are hoping to impact people's lives in a positive way.  Three finalists for IMPACT Awards were chosen in three categories: (1) Energy and Environment, (2) Community, and (3) Health.  All of the finalists are (or hope to soon be) doing some pretty amazing things.  I was lucky enough to be seated at the same table as representatives of the winner of the Health category, Applied Regenerative Technologies (ART).  ART is developing a nerve implant design for restoring nerve function to nerves damaged by trauma.

Congratulations to ART and to all of the finalists!  The IMPACT Awards and the entrepreneurial spirit they celebrate are always an inspiration to me.          

Little Known Facts: Oldest Firm in Fort Worth

One of the neatest things about practicing law at Cantey Hanger LLP is our firm's history. The firm was founded by William Capps and Samuel Benton Cantey in 1882, making it the oldest law firm in Tarrant County and among the oldest law firms in the State of Texas.  The firm has at least one client that it has represented for over 100 years.

But Cantey Hanger is not the oldest business in Tarrant County.  According to the Fort Worth Business Press, Cantey Hanger ranks as the 5th oldest business in Tarrant County. The distinction as the county's oldest business belongs to Pendery's World of Chiles & Spices, which was founded in 1870.  Or should I say that Pendery's is Tarrant County's most seasoned firm?

Real Estate Leasing Essentials

I was in Roanoke earlier today speaking at Chamber University 2013 sponsored by the Northwest Metroport Chamber of Commerce.  Does that make me a professor?  If so, can I start wearing one of those sport coats with patches on the elbows?

My topic was "Real Estate Leasing Essentials," which included some tips for tenants in negotiating leases for office space or retail shopping center space.  Special thanks to Gene Popik and the rest of the Chamber team that put on a terrific event and really making me feel welcome.

Texas Adopts New UCC Financing Statement Forms

What could be more exciting than financing statement forms?

Well, probably a lot of things could be more exciting, but few could be more important to a secured lender in Texas.  As my readers probably know, a financing statement is filed with the Secretary of State's office to "perfect" a security interest.  The financing statement puts the world (including possible future security interest holders) on notice that the secured party holds a security interest in the debtor's assets identified in the financing statement.  

The Texas Secretary of State's office will accept the new form of UCC financing statement beginning July 1, 2013.  After a 30-day phase-in period during which the old form and the new form will be accepted, only the new forms be accepted beginning August 1, 2013.

You can read more about this topic and get a preview of the new forms at the Texas Secretary of State's website here.

Canadian Capital Markets

"Go West, young man!" - Horace Greeley

I can't tell you why a well-respected author like Mr. Greeley would speak like a member of the Village People.  But I can tell you that companies seeking to access the public equity markets should know about some of the exciting things going on at TSX Venture Exchange (TSXV), Canada's junior stock market.  The TSXV is home to over one third of the publicly traded oil and gas companies in the world.  Perhaps the new motto for energy companies should be "Go North, young man!"

Recently, I saw a great presentation on Canadian Capital Pool Companies (CPCs), which are traded on the TSXV .  Over 2,300 CPCs have been listed on the TSXV since the program began in 1987, including over 300 companies that have "graduated" to the Toronto Stock Exchange (TSX), Canada's senior stock market.  The way it works is that a CPC, a newly created corporate shell, gets listed on the TSXV, raises a relatively small amount of capital, and then merges with an operating company via a reverse merger.  Shares in the merged company can be publicly traded on the TSXV.  The merger is referred to as a "Qualifying Transaction," and must occur within 24 months of the CPC's listing.  Going public through the CPC process is much quicker and less costly than a traditional US initial public offering (IPO).  The company's shareholders still get the benefits of being publicly traded, such as liquidity for the company's founders.  And the company typically gets a more attractive valuation than it would in a private placement.

As of August 2012, former CPC's represented over $64 billion in market capitalization. Since 2007, over 400 CPCs have gone public through such reverse mergers, and such former CPCs have over $12 billion in market value.

Although companies in any industry can merge with a CPC, approximately 50% of the former CPC's listed on the TSXV are oil and gas or mining companies.

The Super Bowl of Corporate-Friendly Law

Well, Super Bowl XLVII (that's 47 to you and me) is now in the books, with Baltimore's 34-31 win over San Francisco.  This was an especially good Super Bowl for story lines, including the Brothers Harbaugh, Beyonce's singing/syncing, the Blackout, the comeback, the goalline stand, the commercials, Ray Lewis, deer antler spray, the Pistol formation, post-Katrina New Orleans, and everything else.  But what I found most interesting about the game was the lack of major college pedigree from the two starting quarterbacks.  Baltimore's Joe Flacco played at the University of Delaware Fightin' Blue Hens.  San Francisco's Colin Kaepernick played for the University of Nevada Wolf Pack.

Besides being the breeding ground for two of the top young quarterbacks in pro football, Delaware and Nevada are also two of the most corporation-friendly states in the country.  Delaware corporate law is the gold standard for corporate law in the country.  Nevada is quickly rising as a popular place to incorporate based upon, among other factors, its lack of franchise tax or corporate income tax.

Delaware and Nevada.  Quarterbacks and Corporations.  Hmmmm.

UT-CLE Securities Regulation Conference

It's time for my annual plug for the Conference on Securities Regulation and Business Law sponsored by the University of Texas Law School.  As a member of the conference's Planning Committee, I'm certainly biased, but I think it's the best securities law conference around.  This year's conference will be held in Austin February 7 and 8 and will, as usual, include numerous high profile presenters, including:

• Commissioner Troy A. Paredes of the U.S. Securities and Exchange Commission;
• David Woodcock and Matthew Martens of the U.S. Securities and Exchange Commission;
• Joseph Rotunda of the Texas State Securities Board;
• Chief Justice Myron Steele of the Supreme Court of Delaware;
• James R. Doty of the Public Company Accounting Oversight Board;
• John Morgan of the Texas State Securities Board; 
• Lona Nallengara of the U.S. Securities and Exchange Commission; and
• Thomas M. Selman of FINRA.

I would encourage anyone interested in corporate and securities law to attend.

Shareholder Oppression in Texas

"I know it [hard-core pornography] when I see it ." -  Former United States Supreme Court Justice Potter Stewart

Just like Justice's Stewart's take on pornography, the legal doctrine of shareholder oppression in Texas has not been well defined.  Perhaps our lawmakers feel that a judge will "know it [shareholder oppression] when they see it."  It a very basic level, shareholder oppression occurs when a majority shareholder causes a corporation to take one or more corporate actions which are "unfair" to one or more minority shareholders.  Of course, by definition, minority shareholders do not have control of the decision-making of the corporation.  It is not usual for a minority shareholder to accuse a majority shareholder of oppression.  It is up to Texas courts to decide when a corporate decision that the minority shareholders don't like is fair, and when it is so unfair as to rise to the level of shareholder oppression.

Unfortunately, Texas case law has not given us much guidance on this issue.  Recently, the Dallas Court of Appeals decided the case of Ritchie v. Rupe.  That court identified "two non-exclusive definitions for shareholder oppression" under prior case law:

"1. majority shareholders' conduct that substantially defeats the minority's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join the venture; or

2. burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company's affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely."

Ritchie v. Rupe has become the most important shareholder oppression case in Texas in many years because the Texas Supreme Court has agreed to hear an appeal of the Dallas court's decision.  That case involved a claim of shareholder oppression based upon the corporation's controlling shareholders instructing the corporation's management to refuse to meet with potential buyers for the minority shareholder's stock thereby making the minority stock extremely difficult to sell.

Texas corporate lawyers are watching this case closely.  The petition for review and other briefs for the Ritchie v. Rupe Texas Supreme Court case are available here.  You'll note several amicus briefs, including my favorite one written by Carol Bavousett Mattick, Chair of the Securities Law Committee of the Business Law Section of the Texas State Bar, which is available here.  Ms. Mattick noted in her brief that the most recent Texas Supreme Court opinion on shareholder oppression that the Dallas Court of Appeals was able to cite was a case from 1955 - before the Texas Business Corporation Act became effective!  The Texas Business Corporation Act was replaced by the current Texas Business Organization Code effective 2006.   

The Texas Supreme Court will hear oral arguments for the Ritchie v. Rupe case February 26, 2013 in Sherman, Texas.  The Texas business bar will be listening.

The Marvelous Middle Market

"The middle of the road is for yellow lines and dead armadillos." - Former Texas Agriculture Commissioner, Jim Hightower

Mr. Hightower's famous observation may be true for political candidates, but the middle has been marvelous for American business.  Or at least the Great Recession hasn't been as bad for middle market companies as it has for big business and small business.  Everybody has his or her own definition of the "middle market," but the National Centre for the Middle Market at Ohio State University defines the middle market as companies with annual revenues between $10 million and $1 billion.  As reported by The Economist, the middle market employs over 40 million people in the US and makes up 1/3 of the private sector GDP.  From 2007 to 2010, middle market companies added 2.2 million new jobs while big companies lost 3.7 million jobs and only 57% of small businesses survived.

As the second of three kids in my family growing up, I've always believed the middle was marvelous.  Now we have proof!