Archive for October, 2008

What Not to Do After a Merger

October 31st, 2008

I like reading court decisions for two reasons.  One is that they sometimes set new rules, which is vital information, of course.  More often they serve as reminders of how to do things (or not to) and why agreements and transactions are structured in certain ways.  Here is one that does both: Western Filter Corp. v. Argan, Inc.

The Facts
The very quick plot summary is that Western Filter bought its competitor Puroflow (a subsidiary of Argan) in October 2003 for $3.5M.  The purchase agreement said that certain representations and warranties in the agreement would survive for a year after closing.  10.5 months after closing, Western Filter sent Argan a letter saying that Puroflow’s inventory was short of the representations by ~$2M, and Western Filter filed a claim six months after that (outside the 1 year period) alleging breach of the representations.

The Issue
The legal question for the court was whether the one-year survival language meant that (a) Argan agreed to maintain the reps & warranties as true for a year after closing without touching the 4 year statute of limitations on contract claims in California (Western’s argument), or (b) the one-year language meant that Western Filter could only file claims within a year after closing instead of the normal 4 years (Argan’s argument).

The Ruling
The court decided that Argan’s reasoning made sense, but Western’s reading was also possible and that existing law therefore required deference to Western’s interpretation.  The court held that the intent was to hold the reps open for a year, and more importantly that agreements to shorten statutes of limitations must be clear and unambiguous.  The important takeaway for lawyers, then, is that we need to be extremely specific if we intend to shorten statutes of limitations.  Duly noted.

The Nonsense
This is an unfortunate outcome on the facts.  It is impossible to require a seller to maintain representations and warranties correct for a year after closing a merger.  By definition, the seller has lost control of the business after closing, so responsibility for maintaining inventory levels in the year after the deal is and should be entirely on the buyer.  The court wiggles around this a little by saying “one year after closing” meant that the reps were true at closing and that Western had one year afterward to discover a breach- and then another three to file an action.  This is slicing hairs much too thin.  Argan’s argument is the better one here and the court acknowledges that while saying at the same time that precedent requires a clear, definite statement to shorten the statute of limitations.  This is a great example of a clear, bright-line rule producing a bad result on the facts.

What Should Have Happened
This is the “why we do things certain ways” part.  Every merger I have ever been part of has had a “truing-up” section where the buyer does a full review of the acquired business immediately after the acquisition and adjusts the purchase price as needed.  In this case the parties had set aside a $350,000 reserve to do that, which was apparently not enough given the size of the inventory discrepancy.  Still, if Western had done this review timely it would have been able to file a claim within the one-year period and everyone could have moved on instead of spending the next four years figuring out whether the claim could even be pursued.

And the Lessons
Legal: if you intend to shorten a statute of limitations, be clear about it.

Practical: when you close a deal, follow up immediately to be sure you got what you paid for.  Don’t squander your rights.

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The NYTimes Backs Me Up on Multitasking

October 24th, 2008

On the heels of my last post comes this article in the New York Times on how hard it is to effectively multitask.

Shortcuts – Multitasking Can Make You Lose … Um … Focus –

My favorite line describes the infamous “email voice”, when it is clear that the person on the other end of the phone line is actually focusing on his/her email.

Based on my own experience, the article is also dead-on when it says multitasking actually adds low levels of panic and stress.  I certainly feel much more in control when I slow down and try to do only one thing at a time.

Now what was I doing before that article caught my attention?

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On Personal Productivity

October 21st, 2008

When I started practicing law 10 years ago, there were only three major tasks I needed to accomplish in my daily work.  Staying abreast of the law, advising clients appropriately and preparing top-notch documents were the full scope of my legal world.  It was relatively easy then to find solid blocks of time to devote to meaty projects.

Things got more complicated when I started my own business and had to go out and hunt for work, bring it home and do it.  I have found it much harder to find those uninterrupted spans of time that are often needed to really think through projects- never mind putting the thoughts to paper.

I have made a study of my personal productivity lately.  What I have realized is that multi-tasking works fine some of the time, but that I need to create “spaces” for mono-tasking (uni-tasking?) as well.  Here is what works for me:

1)  Check email in the morning, then shut it down until lunchtime.  Do the same thing around noon, then close it again for a solid block of the afternoon.  Email is the attention-killer.  It just keeps coming and most of it does not require immediate response.  (Note: if you need to get in touch with me urgently, call).  The same thing goes for Twitter, my RSS feeds, etc.  I check them at a couple of intervals through the day, then leave them alone in between.

2)  Plan my day.  This is hard because my routine is not fixed, but the basic idea is to make a list every day of what I need to accomplish and *when* to do it.  That way at any given moment I know exactly what I need to do most.

3)  Do one thing at a time. Brad Feld posted a quote from an old book that says “There is time enough for everything in the course of a day if we do but one thing at a time, but there is not time enough in a year if we try to do two things at a time“.  It’s really true.  I work through things much more quickly if I remember to start one task and see to completion rather than doing a little of one thing, jumping to another and then back to the first.

4)  When it’s time to get out of the office, get out of the office.  When I first started my business I felt compelled to stay in the office even during slow periods.  It is unproductive and bad for my morale.  Now I tell myself every day to do all the work I have for the day, make phone calls, meet the people I need to meet, and when it is done go do something else.  Down time is for surprise visits to my kids’ schools or getting some extra exercise, not for stewing at my desk.

The corollary to this is that when there is only a half-day of work to do, do it!  Don’t drag it out all day, but get it done so there is time left for something else.

As I re-read this I realize it can all be condensed to one simple rule: figure out what I need to be doing at that moment, do it and move on.

That’s the idea, at least.  It’s hard to do every day, but it sure makes me feel better when I try.


Quick Review of Social Benefit Business Structures

October 15th, 2008

I have been fortunate to get involved lately with a couple of social benefit businesses.  These are companies formed to bring on investment, have shareholders and turn a profit- and the larger the better- but also to explicitly serve a social purpose that goes beyond mere shareholder returns.  Working with these companies has caused me to review a variety of business types that work for social benefit companies in various ways.  Here is an ultra-quick summary of the several types I have found.

Non-profit. I don’t work with non-profits, but I am listing their characteristics here for comparison purposes.  A non-profit has no owners/shareholders, is dedicated to social goals and can only use the money it makes for programmatic and charitable goals.  State authorities can and do enforce these requirements.

Plain Old Corporation with Social Aims. This is the simplest type of for-profit social benefit entity.  A corporation is created, does business and uses some of its time, capital or other resources to pursue social goals.  Ben & Jerry’s (pre-sale to Unilever) is many people’s favorite example of this type of company.  The advantage of the entity type is that it is simple for everyone to understand.  One disadvantage is that in many states as well, the Board is constrained from considering non-shareholder interests in deciding on courses of action.  It is important to note as well that the social purpose can be changed relatively easily if management decides to go in a different direction.  This could be a positive or a negative depending on circumstances.

The B Corporation.  The B corporation name distills years of work refining the principles above and packages them with a title.  B corporations build specific provisions into their formative documents that give the Board discretion to consider a variety of interests beyond shareholder return.  For maximum effect, corporations must form themselves in a state that allows such flexibility.  In other respects, though, B corporations are just like plain-old C corporations: they can take investment, turn profit and have no state-mandated restrictions on how to operate.  The social benefit goals are also purely voluntary.  A B corp could turn into a regular C corp if it so chose.

The Low Profit LLC or L3C. This is a brand new entity type that exists only in Vermont so far as I know.  Unlike a nonprofit it is permitted to have shareholders (technically Members since it is an LLC) and to distribute profits to them.  The main goal seems to be to make it simple for foundations to put money into programmatic investments, generate returns and eventually trade in and out of different program vehicles.

The Community Interest Company.  CICs are a mix of all of these.  They combine the explicit social purpose of the B corporation with a regulatory layer similar to a non-profit or possibly an L3C.  Companies choosing social benefit are not as closely regulated as non-profits, but are nevertheless required to maintain their devotion to the social purpose.  They can take investment and issue shares, but an “asset lock” restricts the company’s ability to transfer assets to a purely for-profit entity.  CICs are also an English form of entity, so American social entrepreneurs need not apply.

Which entity is best for a given situation?  It depends on what the goals are, of course.  Simple is good, but sometimes entrepreneurs want to make a stronger statement than the plain old C corp, so a B corp is the next step.  The L3C looks to be a special-purpose entity and we will have to wait and see a bit how it evolves.  CICs are an interesting model and it is possible that something like it could come into existence in the US.  I worry a little that the asset lock commits a business irrevocably down a certain path and makes it hard to adapt if market conditions dictate a different path.

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Great Business Book on Creating a Business Plan

October 14th, 2008

I just bought a terrific book from Harvard Business Review called How to Write a Great Business Plan.  It has several things going for it:

1)  The book itself is 4″ x 7″, 60 pages long and with large type.  To my mind, all business books should be limited to that size and length.

2) At $6.95 it is a bargain (pdf downloadable version available).

3)  It covers some really important material.

Author William Sahlman hits then nail on the head when he says (I am paraphrasing):

*Talk about the people.  Good people can work a mediocre idea into a good one, and plenty of good ideas have failed to work for lack of the right people to manage them.

*Don’t get so caught up in the promise that you forget to describe the steps along the way.  I have certainly seen plenty of business plans that promised fabulous technology, but couldn’t explain where the customers would come from.

Check it out.  How to Write a Great Business Plan is a worthwhile reading for entrepreneurs everywhere.

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Air Traffic Worldwide 24HR on Vimeo

October 8th, 2008

This is a neat map making the rounds on the Internet that shows air travel routes across the globe during the course of a day. I am calling it a companion to a post from about a year ago showing something similar for US air travel.

[vimeo 1867093]

Air Traffic Worldwide 24HR on Vimeo


Jay on Economics – Now for Something Completely Different

October 2nd, 2008

Robert Reich, Labor Secretary in the Clinton Administration and NPR pundit, has a terrific blog as well.  He has a lot to say about the failure of banks, credit markets and the proposed “Wall Street Bailout”.

He posted a blog today about the terms of the bailout and why it is better than nothing, but still not good.  The post inspired me so much I left a long comment, and I liked my comment enough that I am reblogging it here as well.  Go read his post, then check out my comment, and thanks for reading.


I am with you most of the way here, but I would say the most important need is not *only* to help homeowners avoid foreclosure, but to help *all* borrowers- individuals and businesses- do the same.

If I run a business I need both customers to buy products and employees to create/provide the products.

The customers may be hard to find in the next 6-24 months. If I can’t borrow to pay my employees and stay alive- going much deeper into debt than I ever wanted in the process- I may simply be dead before the customers come back.

There is a line here from employee -> employer -> lender -> Fed. Everyone along the way needs direct help from the Fed, but the answer to your question about keeping credit markets functioning is that lots of individuals and businesses need the credit *even though* they can’t afford it. The Fed needs to either lend money to people and businesses directly or convince lenders they can afford to do so.

So how do you convince lenders to extend more credit to businesses and individuals who could be high default risks in the short term? That is the $700B question, to be sure.

I believe Congress is heterogeneous enough that it is incapable of giving a single answer to a question like that- the pitfall of democracy, I suppose.

Still though, the bailout package sure does miss the boat on a lot of issues.

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