SAM Client Atomico Leads $130M Round for ZocDoc at a $1.8B Valuation

Atomico31.jpg

ZocDoc announced that it has  closed a round worth $130 million, at a current valuation of $1.8 billion. The investment round was led by SAM client, Atomico, and the Scottish investment firm Baillie Gifford (which is also a Spotify investor), with participation from previous backer Founders Fund.

SAM Partners Ryan Azlein and Murray Markiles represented Atomico for this transaction.

About ZocDoc

ZocDoc is the tech company at the beginning of a better healthcare experience. Each month, millions of patients use ZocDoc to find in-network neighborhood doctors, instantly book appointments online, see what other real patients have to say, get reminders for upcoming appointments and preventive checkups, fill out their paperwork.

Atomico

Founded in 2006 by Niklas Zennström, a co-founder of Skype, they have made over 50 investments over four continents, including Skype, Supercell, Rovio, Klarna, and The Climate Corporation, with an exclusive focus on the technology sector. Their sector expertise and deep network mean that they know, and have worked with, people across the world who can add value to their portfolio companies.

For more information about our Venture Capital and Emerging Growth practice, contact Scott Alderton at (818) 444-4501 or salderton@stubbsalderton.com

Announcing FlashFunders Exclusive Partnership With Intuit’s QuickBooks Small Business Center

 

Complete Guide to Equity Financing

 

SAM is proud to announce that FlashFunders has established an exclusive partnership with Inuit’s Quickbooks Small Business Center.  As part of that partnership, Quickbooks and FlashFunders present, “The Complete Guide to Equity Financing.”

To view an informative PDF featuring video interviews and in-depth articles from FlashFunders execs and industry experts, click here.

For more information about FlashFunders, visit www.flashfunders.com

 

SAM Wire – August 2015

August 6, 2015

SAM Wire

Why Your Exit Strategy Matters 

By: Michael Shaff

Exit strategy, the plan for monetizing or disposing of a business, may seem remote and speculative when organizing a new business.  But it is important to know what exit strategies are available and how those strategies are likely to be taxed depending on the form of entity through which the start up does business.  

 To view the full article, click  here.

 SAM Preccelerator Program Spotlight

 

 

Verde Circle develops cloud-based Software as a Service solutions that help you optimize and manage your business operations.  www.verdecircle.com

Verde Circle
Verde Circle

Stubbs Alderton & Markiles, LLP Continues to Expand First Class Business Litigation Practice Group

Stubbs Alderton & Markiles, LLP, Southern California’s leading business law firm, has announced that litigator Joshua Stambaugh has joined the firm as a Business Litigation partner in its Sherman Oaks office. The addition of Mr. Stambaugh continues to bolster the growth of the Business Litigation practice, bringing the group to 8 seasoned attorneys.

To read the full press release, click here.

SAM Managing Partner Scott Alderton Honored with Heart Centered Tech Award

 

Stubbs Alderton & Markiles’ Managing Partner Scott Alderton was presented with the Heart Centered Tech LA Award at the Annual LA Venture Association (LAVA) Meeting on Thursday, July 15th. The award was handed off to Scott from Rich Abronson, last month’s HCTLA Award recipient.  SAM’s involvement in the LA Tech community led by Scott, along with his personal efforts to foster the growth of Silicon Beach and dedication to startups was the basis for this award recognition.

To read the full article, click  here. 

In this session, Len Lanzi will focus on techniques and ways to network in the VC and Angel Community.  We will interact and share best practices on business development and promoting your start-up.

To register, click here.
Issue: 13

In This Issue

Upcoming Events 

Preccelerator Program Presents: “Networking For Capital”
August 20th, 2015
5:30-8:00pm

 
 
 
 
 
 
 
Interested in joining our Preccelerator Program?  

Apply Now!

Join Our Mailing List

 

Corporate & Business Matters Trademark and Copyright Practice

 

Business LitigationPublic Security Practice 

 
Mergers  & Acquisitions
Venture Capital & Emerging Growth 

Intellectual Property

Internet, New Media & Entertainment

Interactive Entertainment
& Video Games

Tax & Estate Planning 

Follow Us!Visit our blog

Like us on Facebook

Follow us on Twitter

View our profile on LinkedIn

Find us on Google+

Forward this email

 

This email was sent to hevidente@stubbsalderton.com by hhubbeling@stubbsalderton.com |
Stubbs Alderton & Markiles, LLP | 15260 Ventura Blvd., 20th FL | Sherman Oaks | CA | 91403

 

 

Why Your Exit Strategy Matters

Michael_ShaffMichael Shaff joined the firm in 2011 as Of Counsel. He is the chairperson of the Tax Practice Group.  Michael specializes in all aspects of federal income taxation. He has served as a trial attorney with the office of the Chief Counsel of the Internal Revenue Service for three years. Mr. Shaff is certified by the Board of Legal Specialization of the State Bar of California as a specialist in tax law. Mr. Shaff is a past chairof the Tax Section of the Orange County Bar Association. He is co-author of the “Real Estate Investment Trusts Handbook” published annually by West Group.

_______________________________________________________________

Exit strategy, the plan for monetizing or disposing of a business, may seem remote and speculative when organizing a new business.  But it is important to know what exit strategies are available and how those strategies are likely to be taxed depending on the form of entity through which the start up does business.

  1. Sole Proprietorship. If a single entrepreneur does nothing more, he will be doing business as a sole proprietorship.  This is true even when the entrepreneur has adopted a trade name through which he does business, often referred to as a “D/B/A”.   The advantages for doing business as a sole proprietorship include not having to pay taxes and file tax returns for a separate entity and being able to include the results of the sole proprietorship on the entrepreneur’s own tax return.  The only exit strategy, if nothing more is done to transfer the entrepreneur’s business to an entity, would be the sale of the business’s assets.  If the business has inventory and accounts receivable the amount of the purchase price allocated to the inventory and receivables would be ordinary income for the selling entrepreneur.  The purchase price allocated to the intellectual property, going concern value and goodwill would be taxed as long term capital gain for the selling entrepreneur—provided the entrepreneur has conducted the business being sold for at least a year.  The obvious down side to operating as a sole proprietorship is the principal’s personal liability for all of the debts and liabilities of the business.
  1. General Partnership. If two or more participants conduct a business together and they do not form an entity, the result is generally going to be a general partnership.  For example, Charlie agrees to back Delta’s start up business.  Delta does most of the work and agrees that when the business starts to make money, it will repay Charlie’s investment then split the business’s profits on an agreed percentage.  Charlie and Delta may not even realize it, but they have formed a general partnership.  Each partner is responsible personally for the debts and obligations of the general partnership[1].  While it is at least theoretically possible that a buyer would purchase Charlie and Delta’s general partnership interests, the realistic exit strategy, without their doing more, is the sale of the assets of the business.  As in the sole proprietorship, the purchase price of a business sold must be allocated among the business’s various assets.  Both buyer and the sellers are expected to agree on the allocation of the purchase price among those assets[2].
  1. Limited Partnership. A limited partnership is an entity that the participants must affirmatively elect to adopt[3].   Like a sole proprietorship and a general partnership, a limited partnership is a pass-through entity—it does not pay income tax but instead passes its income or losses through to its partners in accordance with the terms of its limited partnership agreement and the terms of federal income tax law.  The general partners of a limited partnership are subject to personal liability for the debts of the limited partnership as would the partners of a general partnership[4].  The limited partners are afforded limited liability.  Like the sole proprietorship and the general partnership, the likely exit strategy is the sale of the business’s assets.  Also, like the sole proprietorship and the general partnership, a limited partnership (or a limited liability company) may contribute its assets or its partners may contribute their limited partnership interests to a corporation generally on a tax-free basis. [5]
  1. Limited Liability Company. A limited liability company (LLC) also is taxed as a partnership, meaning that the deductions from starting up and operating the business may be passed through to the investors who funded them.  A limited liability company affords limited liability to all of its members (except for those who signed personal guaranties of loans, leases or other obligations of the limited liability company).  LLCs and limited partnerships have the flexibility to issue a variety of classes of equity, including series of preferred having convertibility features, put rights in sum, having as wide a variety of terms as an investor and the principals of the business may negotiate.  LLCs and limited partnerships also have the ability to issue profits interests.  Profits interests are a way to give service providers (both employees and consultants) a stake in the appreciation of the company with no tax due on grant, no exercise price and capital gains to the extent realized on exit.  A profits interest is defined as a partnership interest that would yield no distribution if the partnership’s assets were sold at their fair market value immediately after the grant of the partnership interest[6].  Any type of investor may invest in an LLC without adversely affecting the LLC’s status[7]  If a potential buyer of the business buys some or all of the LLC interests, the sellers at least in part must allocate a portion of the sales price to inventory and unrealized receivables taxable as ordinary income. As previously noted, an LLC may convert to a corporation on a tax-free basis (in most cases) if possible buyers would be likely to prefer to use stock as the acquisition consideration. [8]
  1. Summary of Partnership Entities. The general partnership, limited partnership and limited liability company are generally treated as partnerships for tax purposes, meaning that they pass through the taxable income or loss to their equity owners.  The tax benefits of net losses passed through to the partners are subject to (a) the partner having sufficient basis in the partner’s  interest in the partnership (or LLC), (b) the partner being “at risk” for his or her share of the entity’s liabilities and (c) the partner being actively involved in the partnership’s business in order to claim net deductions[9].  In many cases, conducting the business through an LLC is sufficient—it provides (i) a single level of tax, (ii) limited liability and (iii) the ability to grant key employees and consultants incentive compensation without incurring tax for the recipient or the partnership.
  1. Corporations. Corporations are taxed under a completely different set of rules from those affecting partnerships.  Corporations are eligible for tax-free acquisitions when properly structured as (a) a statutory merger, (b) an exchange of stock of the target corporation for voting stock of the acquiring corporation or (c) the acquisition of substantially all of the assets of the target corporation for voting stock of the acquiring corporation[10]  Being able to receive the acquiring corporation’s stock tax-free in an acquisition if the acquiring corporation’s payment in its own stock were taxable, is a very helpful feature, especially when a lockup agreement is in place or the acquiring corporation itself is not publicly traded or is thinly traded—if the acquiring corporation’s payment in its own stock were taxable, the target corporation’s shareholders would be taxed on the value of the acquiring corporation’s stock but would have no way to raise the funds to pay the tax.  When sold, corporate stock yields capital gain or loss unless the seller is a securities dealer[11]  Conversion of a partnership or LLC to a corporation is easy and generally can be accomplished tax free[12].  There are two relevant types of corporations from a tax standpoint, C corporations and S corporations.
  1. C Corporations. C corporations are separate legal and tax entities from their shareholders.  C corporations pay tax at the corporate level and do not pass through any taxable income or loss.  Shareholders are only taxed to the extent that the C corporation pays a dividend distributions out of current or accumulated net earnings.  With certain exceptions[13], the dividends of a C corporation are not taxable when received by a tax-exempt entity and are subject to reduced US income tax withholding when paid to a foreign investor from a country with an income tax treaty with the US[14].  The insulation of shareholders, especially foreign investors and retirement plans, from the tax liability of the C corporation and the C corporation’s ease in being able to issue various classes of preferred stock make C corporations most attractive for important types of investors.  As previously discussed, sales of corporate shares almost always give rise to capital gain or loss and the selling shareholder does not have to allocate the sales price between an ordinary and capital portion.   Corporations are eligible for the tax-free reorganizations described generally in paragraph 6 above.  However, if a C corporation sells its assets to the acquiring corporation, the tax cost can be quite high:  35% federal corporate income tax and 9.84% California state corporate income tax with the net amount subject to tax when distributed to individual shareholders at up to 23.8% at the federal level and up to 13.3% in California.  A shareholder in a C corporation that sells its assets may only net about 40% of the total sales proceeds.
  1. S Corporations. S corporations are in many ways a hybrid cross of C corporations and LLCs.  Net income and net loss of an S corporation is passed through to the shareholders, so in that sense S corporations resemble LLCs as pass-through entities.  S corporations, like any other corporation, offer limited liability for all shareholders.  But S corporations may have only one class of stock[15]   The inability to issue preferred stock or convertible debt is a significant disincentive on the use of an S corporation—the issuance of such a class of securities would result in the automatic conversion of the S corporation to a C corporation.  The hardest restriction on the use of an S corporation is the exclusion of all non-US individuals as eligible shareholders[16] and the limitation of no more than 100 US resident individual shareholders.   As a corporation, an S corporation is eligible for use of the corporate reorganization rules.  Like C corporation stock, the stock of an S corporation generates capital gain or loss when sold.

For more information about exit strategies and their tax ramifications, please contact Michael Shaff at (818) 444-4522 or mshaff@stubbsalderton.com.

________________________________________

[1]   Cal. Corp. Code §16306(a).

[2]   Internal Revenue Code (“IRC”) §1060(b).

[3]   Cal. Corp. Code §15902.01(a).

[4]   Cal. Corp. Code §15904.04(a).

[5]   IRC §351.

[6]    Rev. Proc. 93-27, 1993-2 C.B. 343.

[7]   Some entities like pension plans and IRAs may have to pay tax on the net income allocated to them from an LLC or other partnership that is engaged in an active business.  (IRC §512.)  LLCs and other partnership entities present similar issues for foreign investors.

[8]   IRC §751(a).

[9]   Generally, suspended losses may be claimed as the partnership generates net income or when it is ultimately disposed of.

[10]   IRC §368(a)(1).

[11]   E.g., Biefeldt v. Commissioner (7th Cir. 1998) 231 F.3d 1035.

[12]   IRC §351. Care must be taken to convert to corporate form before undertaking acquisition negotiations.

[13]   Voluntary employee benefit associations, supplemental unemployment compensations plans, social clubs and other exempt organizations that have borrowed to purchase the shares.  (IRC §512(a)(3).)

[14]   See, e.g., United States—Peoples Republic of China Income Tax Treaty (1984), Article 9, Section 2, reducing the withholding on dividends paid by a corporation from one country to a resident of the other from the general 30% withholding rate to 10%.

[15]   Differences in, or even a complete absence of, voting rights are permitted.  (IRC §§1361(b)(1)(D) and (c)(4).)

[16]   IRC §1361(a).

SAM Preccelerator Program Presents: “Networking for Capital” with Len Lanzi

Join Stubbs Alderton & Markiles, LLP
for this exclusive event!

 

networking-for-latino-mbas-lam-social-club1

“Networking for Capital”

 

This session will focus on techniques and ways to network in the VC and Angel Community.  We will interact and share best practices on business development and promoting your start-up.

 

Eventbrite - SAM Preccelerator Program Presents: "Networking for Capital" with Len Lanzi

Thursday, August 20, 2015

5:30pm-8:00pm

 

 **Networking and Startup Demos!**

SAM Preccelerator Program participants will have demo tables where they
will showcase their companies. Check them out!

 

Featuring

Len Lanzi

Len Lanzi, Executive Director,
LA Venture Association, (LAVA)
 
Len Lanzi is Executive Director of LAVA, and has over 20 years of non-profit organization management and fund development experience. In his role, he works with the LAVA board of directors to direct the strategic plan and organize educational and informational programs about the venture business environment in the greater Los Angeles region.
Sponsored by
SAM-High-Res-Logo-1
1453 3rd Street Promenade, Suite 300
Santa Monica, CA 90401
Parking
Ramp #5 on the Corner of 4th and Broadway
or at the Santa Monica Mall
We hope to see you there!

Stubbs Alderton & Markiles, LLP Continues to Expand First Class Business Litigation Practice Group

Leading Trial Litigator Joshua Stambaugh Joins Firm

Josh StambaughLos Angeles, CA (July 23, 2015) Stubbs Alderton & Markiles, LLP, Southern California’s leading business law firm, has announced that litigator Joshua Stambaugh has joined the firm as a Business Litigation partner in its Sherman Oaks office. The addition of Mr. Stambaugh continues to bolster the growth of the Business Litigation practice, bringing the group to 8 seasoned attorneys.

Joshua has extensive experience assisting businesses of all size, from Fortune 500 companies to internet start-ups, in virtually every area of commercial litigation, including: business litigation; interference claims; breach of contract; antitrust; unfair competition; misappropriation of trade secrets; fraudulent advertising; and class actions brought pursuant to consumer protection statutes. He has been ranked every year since 2009 as a Rising Star by Super Lawyers.

He has a proven track record of aggressively litigating matters of all sizes and finding sensible solutions for companies that are based upon both immediate and long term business needs. Joshua is particularly adept at handling discrete business disputes with the same vigor and efficiency of larger bet-the-company litigations, and within appropriate budgetary confines. He has extensive trial experience, and is able to handle commercial litigation matters at every stage of litigation, from pleading motions through oral argument on appeal.

Michael A. Sherman, the chair of the Firm’s Business Litigation group said: “Joshua is a first chair trial lawyer with proven courtroom capabilities.  We are delighted to have been able to attract such a star to our team, further demonstrating the Firm’s commitment to growing our litigation practice.”

Please visit www.stubbsalderton.com for complete attorney bios.

About the Stubbs Alderton & Markiles Business Litigation Practice

The Firm’s litigators have significant depth and breadth of resources and a detailed knowledge of clients’ industries and business concerns.  In providing the best possible representation, our litigators appreciate that on occasion disputes may need to be tried to a judge, jury or arbitrator, and that in other instances the client is best served with an early resolution that is designed to preserve business relationships and minimize expense and litigation distraction.

Our litigators have a proven track record for analyzing complex legal and business challenges.  Our attorneys are experienced, innovative and aggressive in their pursuit of strategic outcomes.

We deliver efficiency and value to every client we serve through a well-defined budget and clear communication about their case.

To view the press release on PRWeb, click here.

About Stubbs Alderton & Markiles, LLP

Stubbs Alderton & Markiles, LLP is a business law firm with robust corporate, public securities, mergers and acquisitions, intellectual property and business litigation practice groups focusing on the representation of venture backed emerging growth companies, middle market public companies, large technology and Internet companies, entertainment, video games and digital media companies, investors, venture capital funds, investment bankers and underwriters. The firm’s clients represent the full spectrum of Southern California business with a concentration in the technology, entertainment, video games, apparel, consumer electronics and medical device sectors. The firm’s mission is to provide technically excellent legal services in a consistent, highly-responsive and service-oriented manner with an entrepreneurial and practical business perspective. These principles are the hallmarks of the firm.  For more information, please visit www.stubbsalderton.com

 

Contact:

Heidi Hubbeling
Stubbs Alderton & Markiles, LLP
(310) 746-9803
hhubbeling@stubbsalderton.com

SAM Managing Partner Scott Alderton Honored with Heart Centered Tech Award

 

Scott_Alderton_cropStubbs Alderton & Markiles’ Managing Partner Scott Alderton was presented with the Heart Centered Tech LA Award at the Annual LA Venture Association (LAVA) Meeting on Thursday, July 15th. The award was handed off to Scott from Rich Abronson, last month’s HCTLA Award recipient.  SAM’s involvement in the LA Tech community led by Scott, along with his personal efforts to foster the growth of Silicon Beach and dedication to startups was the basis for this award recognition.

#HCTLA started as a way to acknowledge standout individuals who take part in using technology to help make this world a better place. Award recipients have healed hearts, built communities and contributed through technology. After 30 days, the recipients choose who the next HCT award winners should be, making this the first peer-to-peer awards ceremony of it kind that was appropriately launched in the #LATech #SiliconBeach community.

For more information on the award process, visit www.heartcenteredtech.com 

SAM Preccelerator Program Presents: “Social Media for Business” with Fife Star Media

Join Stubbs Alderton & Markiles, LLP

for this exclusive event!

 

 

“Social Media for Business”

 

Facebook! Twitter! Instagram! Snapchat! Oh My! What’s a business to do? Which of these Social Media tools fits your specific business needs? If you don’t have the right answer or are simply guessing, you need this event!

We’ll guide you through the ever-changing waters of the world wide web (Remember when we actually called it that?) because what you did last month doesn’t always fit today’s trends.

This interactive session is designed to help focus your social media output, understand your target audience, learn proper engagement strategies and discuss best practices for Facebook, Twitter and Pinterest for Business.

We’ll help you:

1.  Understand how to identify your Social Media Target Audience
2.  Learn About Engagement Strategies
3. Discuss Best Practices for Facebook, Twitter and Pinterest for Business

 

 

Tuesday, July 28, 2015

 

5:30pm-8:00pm

 

**Food, Drinks & Networking Included!**

 

Register-150x150.jpg

 

Featuring

 

 

 

Brian Fife –  Take one part passionate wordsmith and add a dash of possible obsessive compulsive disorder. Add in a keen ear for finding a voice, vision and brand in between the clutter. Mix with a shaker of rum and you’ve got the mad science recipe for Fife. In between his fascination with the internet, finding new music and the written word, he builds Fife Star Media’s client base through wit and charm. (At least, that’s what we tell him. It’s honestly just perseverance and initiative.)

Heather Davis – Social Media isn’t just a hobby for the special events and programs supervisor turned digital marketing manager with a Pinterest addiction, it’s her passion. A glimpse at her photo blogs and Instagram account of her adorable one year old little man and a shih tzu with a big personality, will show you how everyday is an adventure in Heather’s world. She brings creativity, out of the box ideas, as well as unique perspective and experience to every client and project, usually with DIY instructions written on the latest chalkboard painted weekend project.

Fife Star Media is a collective of like-minded entrepreneurs, focused on working directly with businesses that need a visually dynamic and expressive online presence to capture new clientele. We bring individual expertise in social media, creative writing, web & graphic design as well as Google AdWords & Local Reputation solutions. As a team, we build your brand by solving the web based problems nearly all businesses face in a detailed and creative fashion. Our clients are businesses who either lack the time or acumen to manage and build their online image.

 

 

   
Stubbs Alderton & Markiles, LLP
1453 3rd Street Promenade, Suite 300
Santa Monica, CA 90401
Parking
4th Street/Broadway ramp or in the Santa Monica Place Mall
We hope to see you there!

SAM Wire – July 2015

July 13th, 2015
SAM Wire
Business Law Breakdown – Amendments to the Delaware General Corporation Law Prohibit Fee-Shifting and Endorse Forum Selection Clauses

On June 24, 2015, Delaware Governor Jack Markell signed several important amendments to the General Corporation Law of the State of Delaware (the “DGCL”) into law. The amendments, which will become effective on August 1, 2015, prohibit “fee-shifting” provisions and endorse forum selection provisions, among other changes.

 

To view the full article, click  here. 

 SAM Preccelerator Program Spotlight

 

Simplifeye enables doctors to see more patients, in less time. Patients will appreciate the increased attention from their doctor.

 

Office Productivity

Simplifeye puts office efficiency first with built in tools like office triaging and live patient flow views.

 

Quick Medical History View

Doctors are able to view the important parts of the medical history just by asking Simplifeye.

 

Cross-Platform Compatible
Simplifeye integrates with existing electronic health records so they no longer invade the patient doctor relationship and creates a standardized interface across multiple platforms. 

Apple Watch

Integration with the Apple Watch allows Simplifeye to be a completely hands free solution allowing doctors to make cross-contamination, when handling records, a thought of the past.

 

Previously featured in the LA Business Journal for their cutting-edge technology. To view the article click here. To view their full website and to learn more, visit www.simplifeye.co 

As the Internet Corporation for Assigned Names and Numbers (ICANN) has released new generic top-level domains (gTLDS), clients concerned about protecting their trademarks and famous names need to review their positions with respect to “defensive” domain name registrations.


To read the full article, click here.

SAM Client Iris.tv Raises $5.3 Million to Deliver Video Recommendations

SAM client Iris.tv has raised $5.3 million in Series A funding for technology that makes personalized video recommendations to viewers who watch short clips online.  The startup’s customers are lifestyle, entertainment, sports and news organizations that own and publish a lot of short videos online, and who want to drive audiences to watch more videos through their own apps or websites rather than on YouTube or Facebook. 

 
To read the full article, click here.
SAM Preccelerator Program Companies Showcase at TechDay LA 2015

Several Preccelerator Program companies showcased their businesses at the first annual LA TechDay LA at the California Market Center on Thursday, June 18th.  Companies included RallyVerde CircleTeam(You), and SAM joint ventureFlashFunders.

 

To read the full article, click here

Alex Lidow, CEO of SAM Client Efficient Power Conversion (EPC) has been featured in articles published in the Wall Street Journal (6/22/2015) and Los Angeles Business Journal (6/21/2015) The LABJ articles outlines their release of a more efficient product that could upend the $30 billion power conversion market dominated by International Rectifier, his former company.

 

To read the full article, click here.
Issue: 12

In This Issue

Upcoming Events 
Preccelerator Program Social Media Marketing – July 28th, 2015
 
Interested in joining our Preccelerator Program?  

Apply Now!

Join Our Mailing List

Corporate & Business Matters

Trademark and Copyright Practice

Business Litigation

Public Security Practice 
 
Mergers  & Acquisitions

Venture Capital & Emerging Growth 

Intellectual Property

Internet, New Media & Entertainment

Interactive Entertainment
& Video Games

Tax & Estate Planning 

Follow Us!

Visit our blog

Like us on Facebook

Follow us on Twitter

View our profile on LinkedIn

Find us on Google+

Business Law Breakdown – Amendments to the Delaware General Corporation Law Prohibit Fee-Shifting and Endorse Forum Selection Clauses

Nick-Feldman-smNick Feldman’s practice focuses on corporate transactions, including mergers and acquisitions, dispositions, private equity transactions and general corporate matters for both public and private clients, focusing on middle-market and emerging growth companies. In addition, Nick counsels companies in connection with entity formation, corporate governance, federal and state securities laws and compliance, joint ventures, employee incentive plans, executive employment agreements and other executive compensation matters.  Nick also serves as an Adjunct Professor at Loyola Marymount University, where he lectures on media law topics.

___________________________________________________

DelawareOn June 24, 2015, Delaware Governor Jack Markell signed several important amendments to the General Corporation Law of the State of Delaware (the “DGCL”) into law. The amendments, which will become effective on August 1, 2015, prohibit “fee-shifting” provisions and endorse forum selection provisions, among other changes.

Prohibition on Fee-Shifting

In response to the Delaware Supreme Court’s decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), the DGCL amendments invalidate “fee-shifting” provisions in certificates of incorporation or bylaws of stock corporations. In ATP, the Court upheld a bylaw imposing liability for legal fees of a nonstock corporation on certain members of the corporation participating in the litigation.

The new legislation narrows the ruling in ATP by way of new DGCL Section 102(f). That statute provides that a certificate of incorporation may not impose liability on a stockholder for the attorneys’ fees or expenses of the corporation in connection with an “internal corporate claim” as defined in new Section 115 (discussed below). The legislation also adds a similar restriction on fee-shifting provisions in corporate bylaws to Section 109(b). An amendment to Section 114 provides that the restrictions on fee-shifting provisions do not apply to nonstock corporations.

While the legislation invalidates fee-shifting provisions in certificates of incorporation and bylaws of stock corporations, it does not bar such provisions in stock purchase agreements or stockholders’ agreements.

Authorization of Delaware Forum Selection Clauses

The 2015 legislation confirms the holding of Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013), adding a new Section 115 to the DGCL which confirms that a corporation’s certificate of incorporation or bylaws may require internal corporate claims to be brought exclusively in the courts of the State of Delaware. “Internal corporate claims” are defined to include claims of breach of fiduciary duty by current or former directors, officers, or controlling stockholders, or persons who aid and abet such a breach.

 Section 115 does not expressly authorize or prohibit provisions that select a forum other than Delaware courts as an additional, non-exclusive forum for internal corporate claims. However, it does invalidate any provision selecting courts outside of Delaware, or any arbitral forum, to the extent such a provision attempts to prohibit litigation of internal corporate claims in the Delaware courts. And, as with the fee-shifting amendments, it does not invalidate non-Delaware forum selection provisions in a stockholders’ agreement or other separate written agreements with stockholders.

Stock and Option Issuances

With respect to stock issuances, the new legislation amends Section 152 of the DGCL to clarify that the board of directors may authorize stock to be issued by the determination of a person or body other than the board, in one or more transactions and in such amounts and at such times as determined by the authorized party. In order to do so, the board must set certain parameters at the time it authorizes the issuance(s), including fixing the maximum number of shares that may be issued, the time frame during which such shares may be issued, and a minimum amount of consideration for which they may be issued.

Additionally, the legislation permits the board to delegate the ability to issue restricted stock to officers of the corporation on the same basis that the board may delegate the ability to issue options under Section 157 of the DGCL. Both Sections 152 and 157 are further amended to clarify that the board may determine the minimum consideration for such stock or options by way of a formula which references or is dependent upon extrinsic facts, including market prices.

Ratification of Defective Corporate Acts

The 2015 legislation makes several amendments to Section 204 of the DGCL, which sets forth the procedures for ratifying stock or corporate acts that would be void or voidable due to a “failure of authorization.” The amendments clarify and confirm certain provisions of the ratification process and provide additional guidance as to the specific requirements for the filing of certificates of validation, including: (1) confirming the requirements for a board of directors and stockholders to adopt and ratify one or more defective acts; (2) providing for ratification of the initial board of directors where it was not named in the original certificate of incorporation nor elected by the incorporator; (3) addressing the voting standards applicable to the ratification of the election of a director where the original vote obtained was defective; (4) clarifying the requirements for certificates of validation; (5) confirming the scope of acts by the board of directors or officers that may constitute a defective corporate act susceptible to cure by ratification; and (6) confirming that certain “voidable” acts may be cured by ratification under common law.

Implications: Action Items for Delaware Corporations

A Delaware stock corporation that has adopted a fee-shifting provision should consider amending its charter and/or bylaws, as applicable, to remove the provision because it will no longer be enforceable once the new legislation takes effect.

Further, Delaware corporations that have not previously adopted a Delaware forum selection clause should consider adopting one. And, as with fee-shifting provisions, a Delaware corporation that has adopted a forum selection clause prohibiting litigation of internal corporate claims in the Delaware courts should amend the clause to make clear that such claims may be brought in Delaware in addition to, or instead of, the forum currently specified.

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