Welcome to the Blog

A Few Etiquette Tips for Corporate Attorneys in Dealing with Other Attorneys

This is an update of an earlier post.

Etiquette for Attorneys When Dealing with Other Attorneys

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.

Providing Comments in Installments. When you provide a set of comments, they should represent all of your side’s input on the agreement, unless you state otherwise explicitly (e.g., the client is still reviewing, it’s subject to tax counsel’s review, etc.). When you’ve received a set of comments, you can decide with the client that of the, say, ten substantive comments, you’ll compromise on five of them and push back on the remainder. If, however, the other attorney then announces that they have five new substantive comments that they could have raised earlier, then the universe of comments is larger than you had understood when responding to the initial set.

Feigned Outrage over Business Issues.  Part of our role as attorneys in a negotiation is to negotiate legal issues, such as those that allocate risk, but we also are involved in business issues, such as the amount of a purchase price and timing of payment, by communicating our clients’ positions and ensuring they’re documented correctly. Most attorneys understand that, for those issues, they are mainly just the messenger, but some take their obligation to “zealously” advocate for their clients a bit too literally and lay on the rhetoric on an attorney-only call.

Inaccurate Blacklining.  If you send your comments to an agreement with a markup showing your changes (which you should), please be sure that the markup actually shows all of the changes you’ve made from the appropriate previous version.  As a matter of course, I run my own blackline on incoming revisions showing the changes that the attorney made, and fairly often, the blackline sent by the other attorney isn’t accurate. Probably more often than not, this is an inadvertent failure of version control by the attorney, but it inevitably suggests the possibility that the attorney was trying to slip a change past you.

Failure to Explain Comments.  If you’re commenting on my draft, unless the changes are completely self-evident, don’t just send the markup without explaining in a cover note where you’re coming from. At the very least, offer to go through the changes in a subsequent phone call.

Lawyers: Would You Encourage Your Children to Become Lawyers?

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.

Should Aspiring Lawyers Take Career Advice from Older Lawyers?

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’s SPAC Proposal and Projections

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.

The Advantages of Rule 506(c)

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.

Thoughts About the Wordle Acquisition

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.

The London Stock Exchange’s Proposal for Private Company Trading

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 BuzzFeed Option Exercise Dustup

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.)

Equity for Legal Fees (2021 Update)

Equity for Legal Fees | Andrew Abramowitz, PLLC | New York, NY

The payment of legal fees by issuing stock or other equity to the law firm in lieu of cash became popular in the late 1990s with Silicon Valley startups and has gone in and out of fashion since then.  The appeal of the structure, particularly with startups, is obvious.  Before these companies start generating revenue, cash may be hard to come by, so if both sides are willing, the payment of service providers like attorneys, at least initially, with equity, may be an attractive alternative.  It is also possible to have hybrid structures where, for example, the law firm is granted a small piece of equity issued in exchange for the firm’s agreement to discount cash fees and/or defer their payment for a period.

Thoughts on Remote Work from a (Relative) Pioneer

I can’t claim to have invented remote work, but I can say that I was doing it well before the majority of the workforce was forced into it in early 2020. My firm’s address, since its formation in 2010, has been at 565 Fifth Avenue in midtown Manhattan. For the first several years, I took the Long Island Railroad in every day and worked in my office, like any other lawyer. As the firm evolved, I built a network of freelance attorneys that worked for the firm. Especially given that the first two of them resided in Spain and Alabama, respectively, I was never going to need to provide extra space for the attorneys; accordingly, they worked from wherever they wanted.

After a few years of this, it occurred to me that without any opportunity for literal face-time with my co-workers, it was kind of silly for me to endure the commute on days where I had no meetings with clients or others. So, I set up shop in a spare bedroom at home in Port Washington, LI, and went into the city only when there were meetings. Aside from the occasional unwanted noise during conference calls from dogs or teenagers, it’s worked quite well.

Assessing the Costs of SPACs

The casual reader of the business pages has seen over the past year or so many articles about SPACs, the financial structure du jour, which have actually been around for a while. (I worked on some in the ‘00s.) The acronym stands for Special (or Specified) Purpose Acquisition Company. For those of my readers that are not corporate finance professionals, the way to conceptualize a SPAC is that it’s a private equity fund that is publicly traded. In other words, investors put funds in a newly created entity via an initial public offering (IPO). The entity has no operations other than a plan to acquire an operating company with the IPO funds within the next couple of years, with a management team that is tasked with doing the acquiring. From the perspective of the operating company being acquired, it’s a way to go public, by merging with the already-public SPAC, as an alternative to a traditional IPO. (In a traditional IPO, there is no merger; rather, a bunch of new shares in the private company are sold to the public, and poof, it’s a public company.)

The investment community has been abuzz recently about an academic paper, summarized here, that found the costs of going public via SPAC merger to be much higher on average than doing so via a traditional IPO. For my non-finance professionals out there, the most concise way I can put it is that the typical SPAC structure is designed to favor the initial sponsors and initial investors, over investors who buy shares in the open market after the SPAC’s IPO and the target company shareholders. This is because of two concepts present in most SPACs but not in most other contexts: the promote and warrants.

A promote is a form of compensation for the management team that forms the SPAC, brings it public and finds an acquisition target. Generally, this sponsor team gets, for nominal cost, 20% of the post-IPO shares of the company. Ultimately, these shares dilute the ownership of the SPAC investors and of the target company’s shareholders, post-merger, in a way that doesn’t occur in a traditional IPO.

Additionally, in most SPACs, the IPO is done as a sale of units, comprised of regular shares and warrants to purchase additional shares. The warrants (which are like stock options for those unfamiliar with the term) have an exercise price somewhat higher than the IPO price. The warrants are essentially a free add-on for the SPAC IPO investor. They can elect to have the company redeem their shares in advance of the merger and get their invested money back, but they still can keep the warrant and cash in if the stock pops. The additional shares that are issued when warrants are exercised constitute dilution to other holders, again in a way that wouldn’t occur in a traditional IPO. At least as compared to the promote, a warrant exercise for cash would bring funds into the company, but if the warrant is in the money (i.e., the market price exceeds the exercise price), then the shares are being purchased at a discount, which is not the kind of dilution that existing holders want to see.

Ultimately, there are some advantages for private companies in going public by SPAC merger over a traditional IPO. For example, whether an IPO can be completed can depend on general market conditions at the time of pricing of the IPO that are completely outside the company’s control. A SPAC merger may be the right choice for certain companies. But they need to be sure they are taking into account and fully understand the SPAC structure before choosing this option over other alternatives, like a traditional IPO, an acquisition by another operating company or private equity fund, or simply staying put as a private company.