Simply stated, the acquisition agreement sets forth the financial terms of the transaction and legal rights and obligations of the parties with respect to the transaction.  It provides the buyer with a detailed description of the business being purchased and provides for rights and remedies in the event this description proves to be materially inaccurate.  The agreement spells out closing procedures, pre-conditions to closing and post-closing obligations.  The agreement provides for representations and warranties and the rights and remedies if these representations and warranties are inaccurate.

The main components of the acquisition agreement and a brief description of each are as follows:

Representations and Warranties

Representations and warranties generally provide the buyer and seller with a snapshot of facts as of the closing date.  In respect to the seller, facts are generally related to the business itself, such as that the seller has title to the assets, there are no undisclosed liabilities, there is no pending litigation or adversarial situation likely to result in litigation, taxes are paid and there are no issues with employees.  From the buyer the facts are generally related to legal capacity, authority and ability to enter into a binding contract.  The Seller also represents and warrants its legal ability to enter into the agreement.

Convenants

Covenants generally govern the parties’ actions for a period prior to and following closing.  An example of a covenant is that a seller must continue to operate the business in the ordinary course and maintain assets pending closing and if there are post closing payouts that the seller continues likewise.  All covenants require good faith in completion.

Conditions

Conditions generally refer to pre-closing conditions such as shareholder and board of director approvals, that certain third party consents are obtained and proper documents are signed. Closing conditions usually include the payment of the compensation by the buyer.  Generally, if all conditions precedent are not met, the parties can cancel the transaction.

Indemnification/Remedies

Indemnification and remedies provide the rights and remedies of the parties in the event of a breach of the agreement, including a material inaccuracy in the representations and warranties or in the event of an unforeseen third-party claim related to either the agreement or the business.

Schedules

Schedules generally provide the true substance of what the seller is purchasing, such as a complete list of customers and contracts, all equity holders, individual creditors and terms of the obligations.  The schedules provide the details.

In the event that the parties have not previously entered into a letter of intent or confidentiality agreement providing for due diligence review, the acquisition agreement may contain this provision.  Likewise the agreement may contain no shop provisions, break up fees, non compete and confidentiality provisions if not previously agreed to separately.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

The Sarbanes Oxley Act of 2002 (SOX) created the PCAOB, which is the Public Company Accounting Oversight Board. All public company auditors must be PCAOB licensed and qualified. Prior to the enactment of SOX, the profession was self regulated and any CPA could audit a public company. On its website, the PCAOB describes itself as “[T]he PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.”

Not All PCAOB Auditors are Created Equal

Licensing and membership with the PCAOB has stringent requirements. In fact, shortly after the enactment of SOX the number of accounting firms that provide public company services declined dramatically. Being held to a higher standard isn’t for everyone. However, as time has passed, even with PCAOB oversight, it has become clear that not all PCAOB qualified and licensed auditors are created equal. The recent rash of Chinese company accounting fraud cases has certainly brought the issue to light. Like all areas of the “public company world”, choosing a PCAOB auditor requires due diligence.

Review Their Client Filings

In choosing a PCAOB firm to act as an auditor for a public company, the public company should consider how many other SEC clients does the firm have and when the firm was last inspected by the PCAOB. All accounting firms with 100 or more public company clients are inspected annually; however, those with less than 100 public clients are only inspected every three years. As the bigger firms with more than 100 clients can be cost prohibitive to smaller public companies, it is very important that a smaller public company find out when the last inspection was, and what the result of that inspection was. The PCAOB prepares a written report following an inspection, portions of which are available to the public.

Pending Enforcement Proceedings

Another factor to consider is whether any of the accounting firms clients are currently subject to an SEC enforcement proceeding. Enforcement proceedings are a matter of public record on the SEC website. Investigations are not public information; however, a public company should ask a potential PCAOB service provider if they or any of their clients are currently subject to investigation by the SEC. In line with this area of due diligence, is whether the PCAOB firm has a Chinese company practice and how large that practice is.

Unfortunately, if they have a large Chinese company practice there is a good chance that they may become subject to an investigation in today’s environment.

In addition, to specific issues relating to a potential auditor’s PCAOB qualifications, a public company should consider general criteria for hiring any professional: what is the firm’s pricing; how busy (responsive) will they be to your needs; will you be assigned a single accountant for most communications or a team; will that accountant/team change each year (thereby having to teach someone new every year about your business); how do you get along with the individuals; and does your SEC attorney have a relationship with the firm.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. This blog focuses on the director’s duty of disclosure. A director’s duty of disclosure is part and parcel with their duty of loyalty. That is, the duty of disclosure primarily focuses on a director’s duty to disclose conflicts of interest he may have with respect to any corporate action. However, the duty also extends to a director’s duty to inform shareholders fully on matters involving a shareholder vote and in making any public disclosures.

Duty to Disclose

The duty to disclose (like other duties) only extends to material facts and circumstances. “Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976). In the case of a merger or acquisition requiring shareholder vote for instance, directors must provide shareholders with material information necessary to make an informed decision. In the case of press releases or other public disclosures, information provided must meet the disclosure obligations as well as the meet the standards for the duties of care and good faith.

Transparency and Shareholders

In In Re Pure Res., 808 A.2d 448, the court held that the directors had a duty to disclose to shareholders the substantive work performed and total involvement of investment bankers in pending merger transaction. The court reasoned that this information would assist an investor in determining whether the value being paid was fair. Other courts have concurred with this opinion and specified that shareholders are entitled to see valuation reports and financial projections prepared by investment bankers in a merger transaction, and it is the board of director’s duty to supply this information. Moreover, other courts have held that shareholders are entitled to be informed of financial advisors roles and compensation in a merger or acquisition transaction.

A director’s duty of disclosure is based in state law and is separate and distinct from a company’s duty to disclose under both the Securities Act of 1933 and Securities Exchange Act of 1934. Whereas the state law duty to disclose supports private causes of action, including possible class action lawsuits, the federal duty supports both private causes of action (including class actions) and regulatory enforcement proceedings.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. The last in the series discussed a director’s duty of loyalty. This blog continues that discussion, focusing on the duty in particular fact circumstances.

Balancing Common and Preferred Shares

A common question I am asked by directors is how to balance the interest of two competing classes of stock (such as common and preferred). In such a case, the entire fairness standard of reviewing a corporate transaction (discussed in last blog) will not automatically be invoked, but first the court will utilize the business judgment rule. Accordingly, a director who is not conflicted and who otherwise takes all measures required (in-depth involvement in the process, review of all documents, advice of outside professionals, seeking highest price for all classes of stock) will be protected from liability.

Directors’ Financial Motivation

Delaware courts have emphasized that involvement by disinterested, independent directors increases the probability that a board’s decisions will receive the benefits of the business judgment rule and helps a board justify its action under the more stringent standards of review such as the entire fairness standard. Independence is determined by all the facts and circumstances, however, a director is definitely not independent where they have a personal financial interest in the decision or if they have domination or motive other than the merits of the transaction. Simply stated, the greater the degree of independence the greater the protection. Many companies hire special committees of outside professionals to review and recommend course of action on a transaction as added protection.

Duty of Loyalty

In some circumstances the duty of loyalty requires that a director make a business opportunity available to the corporation before the director may pursue the opportunity personally. Whether such an opportunity must first be offered to the corporation will depend on the following factors: (i) the circumstances in which the director became aware of the opportunity; (ii) the significance of the opportunity to the corporation and the degree of interest of the corporation in the opportunity; (iii) whether the opportunity relates to the corporation’s existing or contemplated business; and (iv) whether there is a reasonable basis for the corporation to expect that the director should make the opportunity available to the corporation.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and/or acquisition transaction. The first in the series detailed the directors’ basic duties of care, loyalty and disclosure. The second discussed the availability of indemnification and/or exculpation and the importance of acting in good faith. This third blog in the series will take a more in-depth look at a directors’ duty of loyalty in a merger and acquisition transaction.

Duty of Loyalty

The duty of loyalty demands that there be no conflict between the director’s duty to the company and their own self-interest. A director breaches that duty when he appropriates a corporate asset or opportunity or uses his corporate office to promote, advance or effectuate a transaction between the corporation and himself or a related party which isn’t entirely fair to the corporation.

Business Judgment Rule

The business judgment rule will not protect a director where there is a violation of the duty of loyalty. Moreover, a director cannot rely on either exculpation or indemnification for a violation of the duty of loyalty but they may be able to rely on these protections for a violation of the duty of care, or even the sub duty of good faith. Accordingly in McPadden v. Sidhu, 964 A.2d 1262 (Del. Ch. 2008) the court found gross negligence but not a breach of the duty of loyalty where the director accepted a price at the lowest end of the valuation range, did not ensure a thorough sale process and was not actively involved in negotiations and other aspect of the sale. As there was no violation of the duty of loyalty, the case was dismissed in reliance on an exculpation provision in the Certificate of Incorporation.

Delaware General Corporate Law

Some states, including Delaware, statutorily codify the duty of loyalty, or at least the impact on certain transactions. Delaware’s General Corporations Law Section 144 provides that a contract or transaction in which a director has interest is not void or voidable if: (i) a director discloses any personal interest in a timely matter; (ii) a majority of the shareholders approve the transaction after being aware of the director’s involvement; or (iii) the transaction is entirely fair to the corporation and was approved by the disinterested board members.

The third element listed by the Delaware statute has become the crux of review by courts. That is, where a director is interested, the transaction must be entirely fair to the corporation (not just the part dealing with the director). In determining whether a transaction is fair, courts consider both the process (i.e. fair dealing) and the price of the transaction. Moreover, courts looks at all aspects of the transaction and the transaction as a whole in determining fairness, not just the portion or portions of the transaction involving a conflict with the director. The entire fairness standard can be a difficult hurdle and is often used by minority shareholders to challenge a transaction where there is a potential breach of loyalty and where such minority shareholders do not think the transaction is fair to them or where controlling shareholders have received a premium.

Informing Shareholders

To protect a transaction involving an interested director, it is vital that all directors take a very active role in the merger or acquisition transaction; that the interested director inform both the directors, and ultimately shareholders, of the conflict; that the transaction resemble an arm’s length transaction; that it be entirely fair; that negotiations are diligent and active and that the advice and counsel of independent third parties, including attorneys and accountants, be actively sought

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.