Weekly Updates (2-25-2015)
- joshnosal
- Feb 25, 2015
- 3 min read
————— Summary —————
Ellis v. OTLP GP, LLC (Jan. 12, 2015)
The Pending Death of Ex-Im and Many Small Business Exporters
SEC Cracking Down on Asset Management Firms
Hedge Funds Struggle But Money Keeps Coming
M&A Success (3 Factors)
————— Developments in Delaware Law —————
RULE: Conditions on a subordination period must be expressly extended in the contract for them to apply to events that are proposed within the period but come to fruition after.
The Delaware Chancery Court recently held that a supermajority requirement imposed by an L.P. Agreement on a subordination period does not extend to votes on proposals raised during that period that occur after the period expires. The court held that supermajority approval of a merger is not required if the vote takes place after a subordination period even if the merger was proposed during the subordination period requiring a supermajority vote under the governing L.P. Agreement. Without contract language extending the voting condition beyond the subordination period to encompass votes on pending matters, the condition expires immediately at the end of the period. In its decision, the court declined to step the merger together with the preceding sale of controlling partnership interest. As a result, the minority shareholders were denied their class vote on the merger that would have otherwise been available during the subordination period.
————— News —————
If Congress does not reauthorize Ex-Im by June 30, the sole U.S. export agency will cease to exist destroying many small businesses and diminish the market share of many large U.S. exporters like Boeing and Caterpillar. Ex-Im provides lending for exports where private lenders think the risk is too high, such as to Jordan, Ethiopia, Indonesia, India, and Pakistan. In 2014 Ex-Im funding facilitated $10.7 billion dollars (39% of the bank’s total) worth of exports from small businesses, not to mention the export pyramids of larger distributors that supply local small business exporters across the country. Without Ex-Im, most of these small businesses would have nowhere else to turn.
The SEC has found numerous hidden conflicts of interest in asset firms and has filed as series of cases addressing the problem. Most of these conflicts result from a failure to identify and address the issues on the part of the advisers. Although the SEC claims evidence of widespread failure on the part of advisors to put their clients’ interests ahead of their own, the only cases brought so far have been against lesser-known private equity firms only recently uncovered by the 2010 Dodd-Frank Wall Street reform law. According to the SEC, future cases will involve: best execution failures on the part of mutual funds, undisclosed outside business activities, and failure to tell investors about conflicts related to proprietary products and related party transactions.
2014 was a mediocre year for hedge funds (Barclay Hedge Fund Index [+2.89%]). It is predicted that many large pension funds and institutions will follow lead of California retirement system and exit hedge funds in the near future. Nevertheless, total hedge fund assets are higher (over $3 trillion) all thanks to the increased support of large investors. These investments are generally targeted at event-driven strategies. However, most institutional investors share a fear of another financial crisis that could undermine the 60/40 strategy of many pension funds and endowments.
————— Advice —————
Doug Camplejohn, founder of Myplay, Mi5 Networks and Fliptop, recently gave three tips to help steer a company toward M&A success. These steps include: “(1) Building a great company and taking care of your team,” “(2) Keeping things organized,” and “(3) Be good to your acquirer.” Although they may seem intuitive, over focusing on the exit may limit your ability to make long-term decisions that are crucial to your company’s success. According to Camplejohn, the use of double-trigger acceleration is a great strategy to preserve the financial stake your employees have in the company through a merger. Additionally, deal chatter, if shared to early, can put your employees on an unneeded “emotional rollercoaster.” Of equal importance is the need to keep your files in order, this may require keeping a “separate repository for all your signed agreements” and ensuring that all employees and contractors sign IP assignment clauses to keep your intellectual property interests clean most notably open source code and attached licenses. Finally it is important to ensure that the acquirer gets their money’s worth for your company by developing a positive relationship early on to stay at the top of their short list and following through in the transition even after all documents have been signed.
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