I wrote the below post in February 2022, shortly after the New York Times acquired the Wordle game. Since that time, my speculation that the Times was likely getting far more in value than it paid was borne out by its statement a few months later that the “acquisition of Wordle brought tens of millions of folks into our audience, which helped drive a lot of game subscriptions.”
There are those who are addicted to the new online word game, Wordle, and then there are those who gripe about their friends who post their Wordle scores on social media every day. This being a blog about corporate and securities law and transactions, I am not writing to opine on this question, though the fact that I’m mentioning the game at all probably tells you where I stand.
The New York Times recently agreed to acquire Wordle from its Brooklyn-based creator, Josh Wardle, as reported by the, well, New York Times. According to the newspaper/acquiror, the purchase price is “in the low seven figures.” I’m not sure whether that means a million-ish or some amount that is less than $5 million, but in any event, it is a nice payday for Mr. Wardle for a product released just a few months ago.
I was recently representing a seller in a proposed acquisition. The purchase price was under $20 million – in the context of M&A, a relatively small deal. The purchaser was represented by one of the top 10 most profitable law firms in the world. The firm organized a due diligence call, blocking off two hours for the attorneys to ask questions of the seller that related to legal matters. I was the sole attorney on the call for the seller. From the purchaser’s law firm, there were a couple of corporate/M&A attorneys, and then one representative from each of any applicable specialty practice area: tax, employee benefits, real estate, intellectual property, etc. As far as I could tell, each of these specialists spent the whole time on this long call, waiting their turn and then taking, like, five minutes to ask the specific questions applicable to their specialty. The presumptive cost of that call to the purchaser, aggregating all those high billing rates for a couple of hours each, was, to my boutique firm way of seeing things, completely unfathomable.
Clients assessing prospective law firms will often focus on a single number: the hourly rate of the highest-ranking partner assigned to the matter. Witness all the ink spilled in recent years on how rates for many partners at large firms have blown well past $1,000 per hour. (This helps my marketing efforts, frankly, as it’s easy for me to show that my firm’s rates are lower than those at large and mid-sized firms in New York.) After bills are rendered, clients will sometimes question the amount of time it took for a particular attorney to handle a particular task. But as my anecdote about the conference call illustrates, often the real driver of cost is the firm’s staffing practices and whether the firm will seek to prioritize efficiency. On most matters handled by my firm, I am the only person from the firm on any call. Other attorneys are very much involved in the matter, handling behind-the-scenes tasks such as drafting, but they will generally not spend those couple of hours on the call with me; rather, I briefly summarize for them the upshot of what they need to know. To the extent other specialty attorneys are involved on my team, they will also communicate with me separately and generally not participate in a group call unless it’s primarily about their area.
To be clear, I am not saying that having multiple attorneys on a call is necessarily inappropriate or part of a conscious effort to jack up fees. But I do think that if clients are looking to exercise some oversight on legal costs, they would be better served by looking at a calendar invite for a Zoom meeting, seeing how many attorneys have been asked to join and inquiring about whether that is necessary, as opposed to arguing after a bill is rendered that a particular agreement should take three hours to draft, rather than five hours, without really knowing exactly what’s entailed in the process of drafting one.
A small but significant part of my firm’s practice involves doing corporate and securities work on real estate development deals. I’m not a real estate lawyer (or, a “dirt lawyer” as they sometimes call themselves, in a bit of rather harsh-sounding self-deprecation), who handles core real estate transactions like purchases and leases of real estate, but I collaborate with those attorneys by forming entities and drafting their operating agreements, and ensure compliance with securities laws when there are outside investors helping to fund the projects.
The operating agreements for the entities formed for the project need to address the economics of the deal, including how any earnings from the project are divvied up between the developer (or, the “sponsor”) and the outside investors. These structures tend to be quite complex, and they have their own jargon that corporate attorneys who practice outside the real estate industry will find quite forbidding, even those who have plenty of experience with sophisticated transactions. Therefore, I thought it would be helpful to decipher a bit of that jargon as a service to the uninitiated among the corporate attorney community. I won’t address here the various other terms of art in real estate finance (cap rates, loan-to-value ratio, etc.) that aren’t directly relevant to the attorney needing to draft the operating agreement, nor will I address operating agreement concepts that are common outside the real estate context on the assumption that, if you’ve made it this far in this post, you know them already.
Although the majority of the transactions I advise on can be described as additive – one company acquiring another one, a company selling newly-issued stock to a new investor – I do spend some time on subtractive (is that a word?) matters, including business divorces. In its simplest form, this term refers to a decision of two business partners to wind down a business, often because some tension has developed in the relationship, just like a personal divorce.
As a purely transactional lawyer, I would only get involved in a business divorce if the parties want to resolve it amicably, without bringing a claim in court, though it can be useful to get the parties moving toward a solution to raise the specter of litigation and its associated costs and delay. In the world of family law, there are attorneys who specialize in collaborative or cooperative divorces, and I try to play a similar role in business divorces by encouraging compromise, even though I’m clearly representing one side and looking out for that party’s interests. Any effort to achieve total victory in these situations is likely a fool’s errand, or at least a very stressful and expensive errand.
Over my 25 years of practicing transactional law, I’ve often been mildly (or sometimes not so mildly) exasperated by common inconsiderate behaviors by opposing counsel on my deals. Of course, our primary job as attorneys is to represent our clients and not befriend opposing counsel, but unnecessarily agitating other attorneys does not, in the long run, serve our clients’ interests. The following are some frequently-occurring examples of bad corporate attorney etiquette to avoid:
Sending Uneditable Drafts. Often I will receive initial drafts of an agreement in PDF or read-only form. In other words, I can’t easily get into the document to provide edits. Sometimes it’s possible to convert the PDF to Word, but the formatting is garbled. Of course, I can provide the comments in other ways besides directly editing the document, but the point is that you’ve made it harder for me to do my job. If the intent in doing this is to discourage commenting, at least with me it may have the opposite effect, by reducing my trust of the other side. The time to create PDF versions is when both sides are in agreement and ready to execute.
My son is graduating college this spring, and he will then start work at a law firm in New York as a paralegal, to give him an opportunity to see law in action and decide whether he wants to apply to law school. My wife and I have been aggressively neutral as far as trying to shape our children’s career choices. We’ve been careful not to push them into law, but we’re not discouraging it either.
In talking to other parents over the years, some are neutral like me, but a significant number who are themselves lawyers say they strongly discourage their children from entering the law. I can’t think of anyone I know at the other extreme, who affirmatively try to push their children into a legal career, which is a contrast to the more intrusive parental approach of many years ago. (Though I should point out that when I was growing up, my trial lawyer father and novelist mother took a neutral and supportive role as I now have.)
The SEC has issued its long-expected proposed rules regarding SPACs. Here are the proposing rule release and the shorter press release. The SEC has always been skeptical of SPACs, and the rules are generally designed to impose new disclosure requirements on SPACs that make the rules more aligned with those applicable to traditional IPOs. One of the reasons SPACs had their moment in the sun recently is that they are easier to complete than IPOs, so the rules, if enacted, could have the effect of severely dampening the market for SPACs, even if they do nothing to directly restrict them from being done. In fact, the general expectation that rules like these were coming down the pike has, anecdotally, been a factor in the SPAC market slowing down recently.
One of the key areas in the proposed rules relates to projections. Under current rules, companies merging with a SPAC can include projections about the company’s future expected results and can benefit from a safe harbor protecting it from litigation if the projections don’t come to pass, as long as the projections are accompanied by a disclaimer and the companies don’t have actual knowledge that they won’t come true. In contrast, companies going public the traditional way don’t have the benefit of this safe harbor. The proposed rules would eliminate the safe harbor in the SPAC context, which would have the practical effect of precluding most projections from being presented.
There is something weirdly contradictory about Rule 506(c) under Regulation D, which has been available for less than 10 years. Regulation D was adopted years before that as a safe harbor for private offerings under Section 4(a)(2) of the Securities Act. In other words, for companies who didn’t want to undergo the costly and involved process of registering their offering publicly, they could do a simpler offering that’s not marketed widely. That process is reflected in what is now Rule 506(b). However, Rule 506(c), even though it’s within the rule that’s supposed to be for private offerings, expressly permits “general solicitation or general advertising” – so, public marketing of the offering.
There are two conditions for the use of Rule 506(c) that aren’t requirements for Rule 506(b):
1. Every single participant in the offering must be an accredited investor (up to 35 non-accredited investors can be included under Rule 506(b)); and
2. The accredited investor status of each investor must be verified, e.g., through examination of tax returns or brokerage statements, to confirm income or net worth, so, the company cannot just rely on a written representation by the investor.
The Wall Street Journal reported exclusively on plans by the London Stock Exchange to create a special market for the shares of private companies for limited public trading. The plan itself is not yet public, so the Journal was only able to report on limited aspects of what is contemplated. In the same way that U.S. private companies have increasingly been able to access public-like markets with new exemptions like Regulation CF, Rule 506(c) and Regulation A+ and the development of secondary trading markets for large private companies, this is an effort across the pond to provide some of the benefits of public market access to small and fast-growing companies.
The New Yorker magazine, not my usual source of prompts for blog posts on corporate and securities law, posted a piece on the recent hiccup with stock option exercises by the newly public media company BuzzFeed. BuzzFeed went public by merging with a SPAC. Longtime employees that were hoping to cash in on their stock options were unable to do so right after the merger, at which point the company’s stock price sharply declined, making the options less valuable. The employees are aggrieved at the missed opportunity to exercise options and sell shares at the higher price.
Continental Stock Transfer & Trust Company is featured prominently in the piece. Continental is BuzzFeed’s transfer agent, a category of service provider unknown to most people outside the corporate finance world. As the back-office company responsible for keeping track of who owns which of BuzzFeed’s shares, Continental’s job, among others, is to process the exercise of BuzzFeed’s options and issuance of shares to the employees. (I’ve worked with Continental for years with my public company clients but have no personal connection to the BuzzFeed controversy.)