Archive for January, 2008

Unusual Forced Merger Decision by Tennessee Court – Now THIS is Why Companies Elect Delaware Law

January 31st, 2008

Clients ask me all the time whether they should form their businesses as Delaware corporations, and what the benefits of Delaware are generally. My advice is that for early-stage businesses Delaware is an added, unnecessary expense, but as companies mature, spread out nation-wide and go public, Delaware has a volume of law and litigation history- and a degree of consistency in its decision-making- such that the outcome of a variety of disputes can be predicted with a decent amount of accuracy.

I don’t get to cite many great examples of this, though. Here is one where litigation in a Tennessee court seems likely to end badly. I can’t imagine a Delaware Chancery Court reaching a similar decision.

Clothing retailer Finish Line, Inc., backed by UBS financing, made an offer to buy Genesco, Inc. in a deal valued at $1.5B. Finish Line and UBS then tried to back out of the deal, saying that Genesco had failed to disclose material information that would have made the deal less attractive had it been provided up front.

The Tennessee Chancery Court held that although the merger agreement allowed for termination based on “material adverse events”, the reasons for Genesco’s declining performance were general economic conditions that fell within an exception to the termination right.

The Chancellor went on to hold that the appropriate resolution of the case is to require Finish Line to complete the merger.

This can’t end well for Finish Line, whose market capitalization, at $110M, is about 10% of what it was when the deal was announced in June 2007. That means the purchase price is close to 15x Finish Line’s current value. Ouch.

I can’t say for sure that Delaware would have reached a different decision, but I would be amazed to see it force a merger to go through under circumstances like this.

The other point worth mentioning here is that choice of law provisions are hard to negotiate in contracts. Each party usually wants its home state law to govern, the business principals never want to get involved in that level of detail and the lawyers seldom have enough specific data to make a convincing argument that ___ state will work out badly. In probably 99% of cases *not* arguing the point is probably the right result as well, since so few disputes actually go to litigation.

Sometimes, though, it matters. When I negotiate deals there is a handful of states whose laws I am comfortable with and I try not to let choice of law slow done completion of a transaction. The Finish Line case is a good piece of ammunition for compromising on Delaware when asked to provide for choice of law of a state with which I am not familiar.

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The Annual Corporate Minutes Scam

January 29th, 2008

At least once a year since I started practicing law I have gotten a question about and copy of an official-looking letter entitled “Annual Corporate Minutes Compliance” or something similar. It’s a total scam and it has been a pet peeve of mine for years.

There are a number of companies that bilk unsuspecting corporations in this way. These companies ask for $100-$200 and in most cases will send a rote form of “shareholder meeting minutes” that won’t be valid because they will refer to an annual meeting that likely never happened on a date arbitrarily picked by the scammer.

I was pleased to learn recently that the California Attorney General has sued some of the more egregious participants in this obnoxious practice.

For the sake of getting the facts out, here are the legal requirements in California:

1) California corporations are required to submit a list of officers and directors along with the address of the company and agent for service of process every year. The fee for this is $25, and the California Secretary of State sends a form that looks like this to do it:

Corporations can also e-file here: https://businessfilings.sos.ca.gov/. Bottom line- if it doesn’t say it is from the California Secretary of State, suspect a scam.

2) Corporations in California are required to maintain minutes of Board and shareholder actions. Corporations are also required to hold annual shareholder meetings, but no agency will suspend a corporation’s right to do business for failure to hold the meeting or adequately document it so don’t fall for that scare tactic (NB: shareholders and potentially even third parties might have claims against a corporation if it fails to keep good records and respect the rights of its constituents, but that is a completely different kettle of fish).

3) If a corporation fails to file the statement described in #1 its right to do business will be suspended. I strongly recommend staying current with filings, but if the corporation is suspended, it can be reinstated in almost all cases merely by filing the delinquent report and paying the $25 fee (for each overdue year).

This is the kind of thing no one should have to remember or think about, and it drives me crazy. So to all the business owners out there- next time you get a letter asking for money to prepare your annual minutes, check it carefully to be sure it comes from- and the check is payable to- the California Secretary of State, or ask your lawyer to take a quick look.

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The Yamas and Niyamas of Renewable Energy

January 25th, 2008

Journalist, journalism professor and media consultant Jeff Jarvis posted a couple of blog entries from the Davos Economic Forum comparing the approaches of Al Gore on one hand with Google founders Larry Page and Sergei Brin on the other.

Gore, says Jarvis, favors raising carbon taxes, while Google is pressing for investment in alternative energy to reduce its cost. “Tax versus investment” is how Jarvis describes it. This appears to be a common theme these days, but I think it is a false choice.

At the VLAB event I attended this week, I was amazed to hear Kleiner Perkins’ John Denniston saying in extremely strong terms that government policy is needed to get alternative energy businesses moving as quickly as they need to. It surprised me that a prominent VC would feel this need so strongly.

He’s right, though. Private capital is a drop in the bucket compared to what government incentives can do for industries. But for favorable privacy, publicity, tax and other regulations I bet the Internet would not have become the essential fabric of life that it currently is. Denniston’s argument was that government has the power to increase the attractiveness of renewable energy sources, and to decrease that of coal and oil energy.

The yogis figured out the need for this kind of balancing thousands of years ago and laid out a set of five “dos” and five “don’ts” for a healthy life- the yamas and niyamas. Balance is critical to keep us on the right path in life and business.

I’ll give credit to Jarvis for not having his thoughts completely together since he was liveblogging. If his point is that “the discussion is too much about what we should not do rather than what we can do” then ok. More yamas, fewer niyamas. If by “tax versus investment”, though, he means that we need to choose then he’s dead wrong. We need both. Investment (yama) by the Googles (and Wal-Marts) that have serious industry leverage, and tax policies (both yama and niyama) from government to run that lever as far out as it will go.

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On Getting Paid to Recycle

January 24th, 2008

I wrote a piece for VentureBeat some time ago on the idea of “productizing good”, a great phrase I picked up from Terrapass‘s Tom Arnold. The idea is to use capitalist/consumerist impulses to drive socially and environmentally beneficial goals. I cited Terrapass, Ethos water and Kiva.org as good examples of the trend.

Lately I have seen a number of businesses with a slightly different spin- they pay *us* to do good. I mentioned EnerNOC the other day as one company that pays its customers to reduce their electrical consumption, and a commenter was kind enough to point out several other companies in the space as well.

On the consumer-facing end of things, I attended a VLAB panel the other night that featured RecycleBank, whose business model is to pay consumers to fill their recycling bins. RecycleBank signs contracts with municipalities, taking a cut of the amount the city saves on landfill costs as recycling increases, and passes on a portion of that to consumers as credits to be used at designated merchants. The goal is to divert recyclables out of landfill, potentially generate income for the cities by making material available to the recyclables market, and reward consumers every month for sorting their trash. I would have been really skeptical of the whole idea but for (i) learning that most people in the US don’t recycle much, and (ii) the company has a bunch of cities under contract already.

Even closer to my heart is Terracycle‘s Brigade project. Terracycle’s main business is selling organic fertilizer and pesticides. They package their products in straight-from-the-recycling-center plastic bottles. More recently, they have started projects to collect used yogurt containers, drink pouches and energy bar wrappers. I go through a lot of energy bars, so I’m pleased to have a place to send the wrappers. For each container, $0.02- $0.05 is donated to the charity of the collectors choice. I’m still working through the details, especially what will be done with all the material collected, but I love the idea.

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Scrabulous’s Triple Word Score to Electronic Arts for “Dexterous”

January 22nd, 2008

Scrabulous is, I am told, the 9th most popular application on Facebook. It was created by two student brothers in Calcutta, launched on FB in June 2007, and as of this writing is used by approximately 600,000 people per day and generates “over $25k” in monthly revenue for its creators.

Metrics courtesy Adonomics.com

The rights to the Scrabble board game are co-owned by the world’s #1 toymaker Hasbro (US market), #2 toymaker Mattel (rest of the world) and #1 electronic game maker Electronic Arts. Hasbro sent the Agarwalla brothers and Facebook a notice of copyright infringment and takedown demand shortly before the start of 2008, and Mattel apparently joined the demand shortly after.

So if I understand the story so far: somehow these three giants let slip Scrabulous’s meteoric rise on Facebook for six months, and nearly a month after the takedown notice the application remains live on Facebook with nary a reference to the controversy.

Some opine that the toy makers are losing a great marketing opportunity and accruing negative publicity. I doubt it. I am inclined to agree with Josh Quittner that the toy barons are simply letting Scrabulous take the line and run with it, building a fan community and working out bugs in the online implementation. They’ll reel it in when they’re ready and land the fish for themselves.

EA’s position is ideal here. A friend in the game industry told me that EA has more attorneys on staff than any other type of professional (including developers!). My guess is that they are pushing Hasbro and Mattel behind the scenes and quietly locking up their online rights without risking negative press.

I’m still rooting for the little guys- the Agarwalla brothers- and hopeful they can work out a deal that nets them something for their effort to build the platform. Time is not on their side, though. The bigger Scrabulous gets the tighter the vise is likely to squeeze them.

As Quittner’s article says, they started the game “without thinking through the legal aspects”. Here’s hoping they pull through with enough cash to try again, and give those legal details a few moments’ thought.

Full disclosure: I played Scrabulous once and lost badly.

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California Discovers the Wrong Approach to Demand Response

January 18th, 2008

The California Energy Commission withdrew a proposal this week to include “programmable communicating thermostats” in California’s 2008 building code. The thermostats would have been a form of demand response technology that would allow utilities to adjust electrical consumption in buildings and homes from a central facility.

The idea there is that by turning down everyone’s air conditioners a little, electricity use can be reduced when the grid becomes strained. Peak-period electricity is expensive both because it has to be bought at “emergency” rates and because it potentially requires more power plants to create the supply.

It is not a huge surprise that the public freaked out about the proposal. It sounds awfully big-brotherish as presented, especially when the technology is reported as “remote-controlled thermostats“.

Still, companies like EnerNOC have done very well offering this kind of technology to major energy consuming businesses. The difference- assuming I understand EnerNOC’s business model correctly- is that EnerNOC pays its customers when the electricity gets cranked down. The utilities spend less on peak-load power, EnerNOC takes a fee for managing the system, and EnerNOC passes on some of that fee to its customers.

The net result: less power consumed, customers save because they are using less, and they get a rebate from EnerNOC on top of that. PG&E rolled out a test program in Stockton offering homeowners a similar deal- I wrote about it here.

California should take a lesson from the private companies using this technology already- or at least spin the idea better. Try again next year.

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Shortening the 800-mile Trip Between Hydrogen Filling Stations

January 16th, 2008

I stumbled across an article recently about Jonathan Goodwin (thanks Asher). A little more digging and I realized he is something like a cult hero in the “green car” field (fortunately he seems to spend more time in the shop than on his website).

Goodwin is a self-taught tinkerer, big-car loving environmentalist and alternative fuel afficionado. It’s a cool combination. The Fast Company article talks about a 600 horsepower, 60 mpg biodiesel-hybrid Hummer he is working on, which sounds interesting but expensive.

What is more interesting is his idea of “dual fuel” systems. I think the article refers to one of these as a $5000 bolt-on system that injects hydrogen into a diesel motor, doubling fuel efficiency and producing 80% fewer emissions.

Tinkerers abound in any field, of course. The question is whether their ideas can scale to the mass-production requirements of a major auto manufacturer. Goodwin’s $28,000+ conversions probably won’t make it onto any production lines any time soon.

The dual-fuel idea, though, is awfully interesting. The jury is still out on whether hydrogen has a future (wikipedia covers all the problems), and one of the sticking points is the chicken-and-egg issue of needing ubiquitous fuel stations to fill up before hydrogen cars become appealing, and needing a certain number of hydrogen cars on the road to justify investment in the hydrogen delivery infrastructure.

Enter the dual-fuel vehicle. Goodwin’s engines run cleaner and longer on hydrogen, but can run nicely on plain old diesel as well. Dual-fuel would allow a gradual transition to hydrogen (still assuming that is a desirable objective). Makes sense to me.

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You Got Your Plaxo in my Facebook!

January 15th, 2008

VentureBeat reported that Facebook is set to buy Plaxo and speculates that the latter company’s huge database of email addresses and its technology for syncing contacts across platforms could be driving factors. That sounds like a reasonable idea, and it might be just as likely that any acquisition is a preemptive one to keep Plaxo’s technology from being snapped up by another social network.

Whatever the reasons, and assuming there is any truth to the rumor it sounds like a great idea. I have accounts on Plaxo and Facebook and check them both almost daily. I’ve realized they are nearly complete opposites: Facebook has a wealth of “stuff” happening with all the various applications my friends use, but it’s a roach motel- data goes in but has a hard time getting out.

Plaxo, on the other hand, is a completely open list of many more of my contacts, but with nothing much happening. I get news feed updates showing my friends’ Twitter and blog posts, updated contact information and birthdays, but that’s about it. Nothing original.

A merger that combined Plaxo’s openness with Facebook’s usefulness could be interesting somewhere down the line. I (along with probably just about everyone else) would love to check out new social websites from time to time without having to re-invent my social graph on every one just to make it useful. If Facebook could Plaxo-sync-invite my friends into applications that live outside of Facebook (I gave up on Tumblr after about 15 minutes because I didn’t know anyone else on it)- now that would be neat.

P.S.   I’d be pleased if Plaxo’s current or future management made it a little more difficult to send “connect with me” invitations. I realized recently that I accidentally spammed every single person in my address book- including all the people I met once and don’t really know- with an invitation.  Sorry about that.

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Internal Combustion “Not a Great Product”

January 14th, 2008

I just stumbled across this great quote from VC Matt Trevithick at Venrock. It is part of an interesting interview on Earth2Tech in which (in part) Trevithick wonders aloud whether the VC model is going to work well in the alternative energy sector.

The quote about the internal combustion engine is brilliant, though. He must mean that in the same way that people talk about Microsoft products not being very good- it hasn’t stopped Microsoft from massive success, and internal combustion’s flaws haven’t stopped it from being about the most successful single product ever (not counting sliced bread).

For the record, I think Trevithick’s point was to compare the relative efficiencies of gasoline and electric motors with their fuel sources. Gasoline packs a huge amount of energy into its volume, but the engine doesn’t extract it very well and creates lots of waste. Electric motors are very efficient by comparison, but batteries are lousy.

The real gem in the interview, though, is where Trevithick starts to break down the alt-energy field into IT-based businesses like demand-response company EnerNOC that make easy VC investments and “pure energy” ideas like solar and biofuels that may not be good places for venture capitalists to play. I’ve wondered about this too. The latter category requires so much infrastructure development that it seems like a tough job for all but governments and corporate giants.

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“Yes, the Man with No Legs has an Unfair Advantage”

January 11th, 2008

The flap over Oscar Pistorius is fascinating on several levels. It seems totally absurd on first blush that a double below-the-kneePhoto courtesy AP amputee who runs on carbon fiber “blades” is likely to hear a ruling from the international governing body of track & field (the IAAF) that he can’t compete in the Olympics because his prosthetics give him an “unfair advantage”. As a lawyer I can imagine being the guy who has to present the argument with a straight face in front of an IAAF panel- the quote in the heading is me imagining how that would go.

A gut reaction to the case says “if the man is fast enough to qualify then let him run”. A moment’s more thought leads me to wonder why the IAAF really cares that much. How many amputees are there who can compete at an international level with able-bodied athletes? I have to think there is a fear in the back of someone’s head that if Pistorius is allowed to run using his blades, then someone else is going to use some other kind of device and it’s a slippery slope straight downhill to full-cyborg competitions. Someday.

Especially in a week when Marion Jones was sentenced to six months in prison for lying about taking steriods, it is understandable that governing bodies want to draw deep, dark lines in the sand wherever they can on performance-enhancers.

At the same time, it sounds like the IAAF is relying on a mechanical analysis of the blades compared to human legs to reach its conclusion. Does this suggest that the blades might be redesigned not to offer any (alleged) performance advantages? Oops, where’d that line just go?

Final note: the NY Times article says that Pistorius was born without femurs and his lower legs were amputated when he was 11 months old. As a parent I can scarcely imagine what a tough decision that was for his parents. Yikes.

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