General Corporate/M&A Matters

The phrase “Corporate Transparency Act” is quite possibly unfamiliar to you at this time
(October 2023), but if you run a business entity in the U.S., you will certainly be hearing about it in the coming months. The regulations are not fully-formed at this writing, but my goal here is just to give you the gist so you are aware of what is coming down the pike.

• The purpose of this regulation is to enable the federal government to combat money laundering and other illegal activities that use business entities as shell companies. As of now, a Certificate of Formation filed in Delaware, for example, typically contains no information about the entity’s ownership and management, so law enforcement needs to use additional tools to obtain information.
• The Act will require entities to file a form with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) containing basic identifying information (name, home address, copy of ID, etc.) about each beneficial owner of 25% of the entity and those who exercise substantial control over the entity, and then update the form when there are changes.
• The personal information on the form will be available to law enforcement and national security personnel, not to the general public.
• The filing requirement applies to all domestic and foreign entities (yes, including that single-member LLC you formed for your consulting work on the side), except for a laundry list of exempt entities that are subject to existing regulation already, such as banks and insurance companies, as well as larger companies (more than 20 full-time employees, located in the U.S. and over $5 million in annual sales).
• The filing requirement will go into effect on January 1, 2024 for newly formed entities after that date. Existing entities will have to comply sometime during that year, before January 1, 2025.

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.

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Deciphering Real Estate Jargon for Corporate AttorneysRead More »

A year or two ago, the phrase “share buybacks” was a phrase only known to those in and around the world of corporate finance. It refers to a company’s use of available cash to purchase its own shares in the open market. The effect of this is to reduce the total number of shares outstanding, which makes the remaining shares more valuable. Recently, however, share buybacks have become enmeshed in political debates as shorthand for actions taken by corporate America and encouraged by Wall Street that are not in the best interest of workers and society generally. For example, The New York Times recently reported on how cash freed up by the recent tax cuts are being spent on share buybacks, as opposed to more worthy uses such as hiring new employees.

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Share Buybacks as a Political IssueRead More »

In the past few years, my private company clients have been flocking to online, cloud-based cap table services, such as Capshare and Carta (formerly eShares), as a platform to manage the company’s back-office functions for their capital structure. Aside from presenting an online cap table for reference by potential new investors and others, these sites provide a number of other services, such as being an online repository for documentation like stock option agreements and facilitating company valuations under Section 409A of the Internal Revenue Code.

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Saving Time with Online Cap Table ServicesRead More »