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What Every Tech Company Needs to Know
 

What Every Tech Company Needs to Know

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    What Every Tech Company Needs to Know What Every Tech Company Needs to Know Document Transcript

    • TECHNOLOGY EXECUTIVES ROUNDTABLE 2012 LEGAL UPDATE: WHAT EVERY TECHNOLOGY COMPANY NEEDS TO KNOW JANUARY 17, 2012 MODERATOR: David M. Calhoun (Partner Morris, Manning & Martin, LLP) PANELISTS: Scott L. Allen and Christopher E. Maxwell Morris, Manning & Martin, LLP
    • CONTENTSTAB 1 BIOGRAPHIES (DAVID CALHOUN, SCOTT ALLEN AND CHRIS MAXWELL)TAB 2 FREQUENTLY ASKED QUESTIONS -AMERICA INVENTS ACTTAB 3 GEORGIA’S NEW RESTRICTIVE COVENANTS ACT MEMORANDUMTAB 4 TROTMAN v. VELOCITEACH PROJECT MANAGEMENT, LLCTAB 5 PHONEDOG, LLC V. KRAVITZ (NY TIMES ARTICLE)TAB 6 GEORGIA CAPITAL ACCELERATION PROGRAM HOUSE BILL 718TAB 7 IN RE: OPENLANE SHAREHOLDER LITIGATIONTAB 8 VALUATION AND APPRAISAL MEMORANDUM
    • David M. Calhoun Partner Phone: 404.504.7613 • Fax: 404.365.9532 • E-mail: dcalhoun@mmmlaw.com David M. Calhoun is a partner in the firm’s Corporate Securities, Mergers and Acquisitions, and Financial Technologies practices. Mr. Calhoun practices in the areas of corporate finance, securities, and mergers and acquisitions. He has significant experience in public and private securities and corporate finance, including representation of issuers, underwriters, and investors. Representative transactions include debt and equity offerings (public and private), going private transactions, venture capital financings, IPOs, secondary offerings of common and preferred securities, PIPEs (private investments in public equity), and tender offers. Mr. Calhoun has been active in mergers and acquisitions for public and private companies, including acting as counsel in transactions ranging in size from less than $100,000 to over $1 billion. Representative M&A transactionsPRACTICE AREAS: include representation of both buyers and sellers in mergers, asset sales, stock sales, international andCorporate Finance cross-border transactions, and leveraged buy-outs. He has represented companies in numerousSecurities industries, including technology, biotechnology, green tech, medical devices, business process outsourcing, manufacturing, real estate and financial institutions. Mr. Calhoun’s practice also includesMergers & general corporate counseling, corporate governance, audit and special committee representation, andAcquisitions securities law compliance matters.Financial InstitutionsClean Tech Education University of Tennessee at Knoxville, B.A., 1985 Mercer University, J.D., cum laude, 1988BAR ADMISSION: Brainerd Currie Honor SocietyState Bar of Phi Alpha DeltaGeorgia, Admitted Book Editor, Mercer University Law Review1988 Honors and Affiliations Listed, Legal 500, Venture Capital and Emerging Companies, 2010-2011 American Bar Association National Association of Real Estate Investment Trusts (NAREIT) Atlanta CEO Council, Board of Directors Venture Atlanta, Organizing Committee Recent Speeches “Overview Of The Dodd-Frank Wall Street Reform And Consumer Protection Act Of 2010” “Non-Traditional Offering Structures: Pipes, Equity Lines and SPACs” “Corporate Governance for Public Companies” “Exit Strategies: M&A vs. Going Public” “Accounting, Tax and Legal Update: What Every Technology Company Needs to Know” – 2007, 2008 and 2009 “Tips for Due Diligence in Mergers & Acquisitions” “Practical Time and Work Management” “The Public REIT: What Can You Expect?” 2
    • “IMN Securities Law Conference: Blue Sky Update”“Raising Capital for Transaction Processing Companies” “Venture Capital for Southeastern Companies: How to Find It and What It Costs” “Sarbanes-Oxley Act of 2002 and Legal Compliance – 2008 Update” “Buying and Selling a Business – Mastering the Basics” “How to Create a Board of Directors or Advisory Board That Works” Recent Articles “Non-Traditional Offering Structures: Pipes, Equity Lines and SPACs” “Overview Of The Dodd-Frank Wall Street Reform And Consumer Protection Act Of 2010” 3
    • Scott L. Allen Partner Phone: 404.504.7743 • Fax: 404.365.9532 • E-mail: sallen@mmmlaw.com Scott L. Allen is partner in the firm’s Corporate and Securities Practices. His practice focuses primarily on representing public and private companies, including private equity firms and their portfolio companies and family owned enterprises, in general corporate matters, mergers and acquisitions, venture capital and public securities offerings. Mr. Allen’s practice covers a wide variety of industries, with extensive experience representing clients in the information technology and telecommunications industries, as wells as business services companies, medical device companies and traditional light manufacturing and sales and distribution organizations. Mr. Allen routinely advises a range of clients, including start-up, middle market and large cap companies,PRACTICE AREAS: in complex mergers and acquisitions, venture capital, and corporate finance issues, involving both domestic and cross-border transactions.Corporate Mr. Allen has been recognized as a leading young attorney in the corporate practice area by beingMergers & selected as Georgia Super Lawyers Rising Star, as published by Law & Politics and Atlanta magazines onAcquisitions numerous occasions. Mr. Allen is also a frequent speaker on corporate law, M&A and private equitySecurities topics for continued legal education programs, trade association events and related conferences.Medical Device Honors & AffiliationsBAR ADMISSION: Association for Corporate Growth (Member)State Bar of Atlanta Venture Forum (Member)Georgia, Admitted2002 Technology Association of Georgia, Corporate Development Society (Board Member and Program Chair) Southeastern Medical Device Association (General Counsel and Member) Selected as Georgia Super Lawyers Rising Star by Law & Politics and Atlanta magazines, 2011 Representative Matters Representation of a leading “smart-grid” technology company in venture capital transactions in excess of $90 million received from national VC funds and strategic investors, joint venture transactions with Fortune 100 partners and general corporate matters. Representation of a technology based expedited delivery company in venture capital transactions in excess of $110 million received from national VC funds, its senior and mezzanine credit facilities and general corporate matters. Representation of technology company in the loyalty card market in its $24 million recapitalization with a private equity sponsor and related roll-over of management equity. Representation of a leading clinical research organization based in the U.K. in its U.S. acquisitions and U.S. aspects of its senior and mezzanine credit facility. Representation of sellers in $32 million sale to a private equity sponsored competitor in the plastics manufacturing industry. Representation of a U.K.-based cable and telecommunications equipment provider in several U.S. acquisitions totaling in excess of $200 million. 4
    • Representation of firearm and ballistics company in its $18 million sale to private equity sponsored entity and continued corporate representation. Representation of private equity sponsored software company in the legal and accounting market in its U.S. acquisitions and general corporate matters. Representation of private equity sponsor and management in $27 million sale of full-service professional landscape joint venture to a new private equity sponsor. Representation of medical device company developing a product combining radiation therapy with MRI technology in a $25 million venture capital transaction. Representation of a “triple-play” telecommunications client in its $255 million acquisition of a regional broadband telecommunications company. Representation of venture capital fund in its Series A and Series B investment in a leading provider of endoscopy products. Representation of a leading provider of HR software in its $155 million sale to a Fortune 50 strategic partner. Representation of a public client providing call center and compliance monitoring solutions in a $100 million public offering. Representation of a public client in a $200 million PIPE (private investment in public equity) transaction. Representation of a leading international provider of billing software in the energy industry in its $90 million sale to a Fortune 100 company. Representation of a technology client providing mobile messaging and marketing services in a $25 million venture capital financing. Representation of a leading provider of audio and speech analysis technology in a venture capital and mezzanine debt transaction in excess of $15 million.EducationUniversity of Georgia, B.A., 1998Emory University School of Law, J.D., with honors (Order of the Coif), 2002 5
    • Christopher E. Maxwell Associate Phone: 404.364.7477 • Fax: 404.365.9532 • E-mail: cmaxwell@mmmlaw.com Christopher E. Maxwell is an associate in the Corporate Practice. Mr. Maxwell is active principally in the firms general corporate practice, concentrating in mergers and acquisitions and venture capital transactions. Mr. Maxwell has assisted many of the firms clients in structuring and consummating complex corporate transactions, including, mergers, acquisitions, debt facilities, financings, restructurings and corporate reorganizations. Mr. Maxwell’s practice covers a wide variety of industries, with experience representing clients in the information technology and telecommunications industries, as well as business services companies. Recent Experience Representation of Public Company in several PIPE (private investment in public equity) transactionsPRACTICE AREAS: and its regular securities filings.Corporate Representation of sellers in $32 million sale to a private equity sponsored competitor in the plasticsMergers & manufacturing industry.Acquisitions Representation of technology client providing payment processing services in a $5 million ventureSecurities capital financing. Representation of a telecom expense management Company in a $15 million business combination with a competitor in the telecom industry and related follow-on acquisitions of the combined entity.BAR ADMISSION: Representation of consulting company in reorganization of various subsidiaries and business lines.State Bar of Georgia,Admitted 2007 Representation of financial institutions bill processing company in its mezzanine credit facilities. Representation of software company in the foreign option exchange sector in a $6 million venture capital financing. Representation of a battery manufacturer in venture capital transactions in excess of $10 million received from national VC funds, its senior and mezzanine credit facilities and general corporate matters. Representation of medical waste disposal company in its $32 million sale to a competitor in the waste disposal industry. Representation of a credentialing and compliance monitoring company in the healthcare industry in a $67 million sale to a private equity sponsored entity and related roll-over of management equity. Representation of telecommunications company in its acquisition of European telephone company and venture capital financings in excess of $10 million. Representation of software company focusing on compliance related industries in a series of VC transactions in excess of $10 million. Representation of a public company in the healthcare industry in several small strategic acquisitions. Representation of a technology based expedited delivery company in venture capital transactions in excess of $110 million received from national VC funds, its senior and mezzanine credit facilities and general corporate matters. Representation of firearm and ballistics company in its $18 million sale to private equity sponsored entity and continued corporate representation. Representation of private equity sponsor and management in $27 million sale of full-service professional landscape joint venture to a new private equity sponsor. Representation of a medical claims processing company in $28 million acquisition of competitor in medical claims processing sector. 6
    • EducationEmory University, B.A., 2004The University of Georgia School of Law, J.D., cum laude, 2007 Member, Student Bar Association Member, Georgia Law Review 7
    • MEMORANDUMTO: Clients and EntrepreneursFROM: Morris, Manning & MartinRE: Frequently Asked Questions (FAQs) about Patent Reform – TheLeahy-Smith America Invents Act of 2011 (“AIA”)DATE: January 2012________________________________________________________________________This Frequently Asked Question (FAQ) memorandum addresses typical questions regarding thenew Leahy-Smith America Invents Act of 2011 (enacted September 16, 2011), and its potentialimpact on patent application filing, patent enforcement, and patent litigation. This document isauthored by the Intellectual Property Group of Morris, Manning & Martin, LLP(www.mmmlaw.com). Please note that there are additional questions that will be relevant in thisarea and you should consult an IP attorney at MMM (contact information listed at the end of thismemorandum) with any other questions.1. What is the main impact of the AIA?Answer: The main impact of the America Invents Act (“AIA”) is expected to be an increasedurgency to file patent applications, due to the fact that the U.S. patent system will now grantpatents to the first inventor to file a patent application (“first to file”) instead of to the “first toinvent.”2. What should I be doing now as a result of the AIA?Answer: There are many potential effects of the AIA, but the most important effect on patentapplications is “file early, file often.” Because the AIA radically changes the priority rulesassociated with patent filings, it is now more important than ever to file patent applications assoon as possible. Also, because it is now potentially easier to challenge issued patents (andsubmit prior art in pending applications), it is also important to monitor the patent filings of yourcompetitors. 8
    • 3. Will the AIA improve the quality of U.S. patents?Answer: It is not known at this time if the AIA will improve the quality of patents. Patentquality is an elusive characteristic – what makes for a “quality” patent? There are no objectivemeasures as to the quality of a patent. The AIA is, however, supposed to improve patent qualitybecause of increased scrutiny of patent applications at the U.S. Patent and Trademark Office(USPTO) and new procedures for challenging patents outside of the courts.4. Will the AIA affect the patent lawsuits that are brought by patent “trolls” and non-practicing entities (NPEs)?Answer: It is not likely that the AIA will appreciably affect the incentives for NPEs (also knownas patent “trolls”) to bring lawsuits to enforce patents, at least for the immediate future. The AIAincludes a new joinder provision requiring that accused infringers in the same lawsuit must betied together by “the same accused product or process.” It is possible that, in the longer term(more than 5 years out), the likelihood of success of lawsuits by NPEs will decline due to adecreased number of patents that are issued. However, it will be a number of years before theeffects of the AIA on patent litigation will be fully felt and realized.5. Will the AIA make it any easier or less expensive to challenge patents outside of courts?Answer: Possibly. The AIA includes a number of reforms that are designed to provide new andimproved methods to challenge possibly invalid patents outside of the court system. The AIAprovides for new procedures in the USPTO for (a) Post-grant review, (b) PreissuanceSubmissions, and (c) Supplemental Examination. These new procedures will add to the USPTObureaucracy, but are supposedly designed to help challenge suspect patents more quickly andinexpensively.6. Will the AIA cut back on the large damages awards that have been awarded in manyrecent patent lawsuits?Answer: No. The AIA includes no provisions that affect patent damages or awards. A number oflobbyists had urged Congress to include patent damages limitations so that companies couldmore readily manage their exposure to patent infringement claims. However, for some reasonsnot completely understood, Congress failed to include the patent damages limitations provisionsthat some companies felt were needed.7. What is the biggest change to the U.S. patent system from the AIA?Answer: Clearly, the biggest change to the U.S. patent system is the change from “first toinvent” to “first to file.” The change required a complete revision to the definition of prior art.The revised definition greatly expands the nature of information and activities that bar the grantof a valid patent to a patent applicant. 9
    • 8. Did the AIA change the basic requirements for obtaining a patent?Answer: No. The primary requirements for patentability of (a) patentable subject matter, (b)novelty, (c) nonobviousness, (d) a complete and enabling written description, and (e) descriptionof the best mode of practicing the invention – did not fundamentally change. There are changesthat affect the best mode requirement, but those changes are not expected to have a major impact.A patent application under the AIA must still satisfy these basic requirements. The novelty andnonobviousness requirements relate to “prior art,” whose definition has been significantlyaltered.9. What is the definition of “prior art” under the AIA?Answer: The definition of prior art is fundamentally different under the AIA than under previouslaws. Prior art provides the evidentiary baseline for judging whether an invention is novel andnonobvious, and thus entitled to be patented. In particular, the one-year “grace period” has beeneliminated for many types of prior art (see subsequent questions for more details). This is aprofound change. Prior art is now defined as other patents, printed publications, on sale events,and public use events that predate a patent applicant’s effective filing date. Many more types ofinformation, both in the U.S. and in other countries, is now available to cite against a patentapplication as evidence that a patent should not be granted (or is invalid).10. Did the AIA make any changes to the definition of patentable subject matter?Answer: No. The primary categories of patentable subject matter are still (a) machines, (b)manufactures (articles), (c) composition of matter, and (d) processes or methods. No significantsubject matter-related cases were overruled, such as the 2010 Bilski v. Kappos decision, whichaffected business method and computer software patents.11. Does the AIA eliminate business method patents?Answer: No. There are no substantive provisions in the AIA that affect the way that the USPTOreceives or processes so-called “business method patents.” However, the AIA includes a new 8-year program to address the validity of business method patents, using a new procedure forchallenging such patents at the USPTO. There is still much complexity in determining whatexactly is a “business method” patent.12. Did the AIA affect the availability or desirability of filing a “provisional” patentapplication?Answer: No. Provisional patent applications (PPAs) are still available under the AIA. Therequirements for a useful PPA remain the same. Patent applicants must still file a completewritten description of any invention that is to be claimed, although there is no requirement toinclude any claims in a PPA. PPAs still present significant risks that a patent applicant will notdevote sufficient attention and work to providing a complete written description, so that thebenefits of a PPA may not be available.13. What is the impact of the AIA on the “best mode” requirement? 10
    • Answer: Under current laws, a patent applicant is required to describe in the patent applicationthe “best mode” for making and practicing the invention. The AIA abolishes the best moderequirement as a defense to patent infringement, but it requires that the best mode still bedescribed in patent applications. Specifically, the AIA amends the laws to eliminate the bestmode requirement as “a basis on which any claim of a patent may be canceled or held invalid orotherwise unenforceable.” The overall impact of this seemingly conflicting provision is notentirely clear.14. Will the USPTO be able to improve its operations and efficiency and speed ofprocessing patent applications?Answer: Probably, yes. The AIA included a provision that allows the USPTO to receiveincreased funding for its operations, of about $300 million per year at current rates of activity.However, Congress failed to grant the USPTO the right to retain all of the patent fees that itreceives to fund its operations, as many experts urged. Congress thus did not completely end feediversion – (a) the USPTO is appropriated funds to some extent by Congress each year, (b) theUSPTO can charge fees at increased rates, (c) collections in excess of the appropriation arecollected in a reserve fund, and (d) Congress could – perhaps – allocate additional amounts ofthe reserve fund for USPTO operations.15. What was the reason for changing from a “first to invent” system of granting patents to“first to file”?Answer: The reasons and policies for making this change are not clear. Since 1995, Congresshas attempted to make changes to the U.S. patent system so as to make our system consistentwith the patent systems of many other countries. This is called patent harmonization. This wasprimarily to promote a concept that patent applicants would receive the same treatment in thepatent systems of all the different countries that were elected for international patenting efforts. Itis far from clear that this change provides any benefits to U.S. patent applicants, as the patentsystems in most countries are less well developed and consistent than the U.S. patent system.16. What happened to the “grace period” under the old U.S. Patent Act?Answer: The Patent Act of 1952 provided a grace period for filing a patent application. Thisgrace period was provided to the inventor to provide additional time for the inventor to assess thevalue of the invention and workability of the technology before requiring significant investmentin the patent process. Specifically, this grace period provided the inventor with a one-year timeperiod from any public disclosure, offer for sale, or description in a publication of the invention.Some aspects of the grace period remain under the AIA (see next question), but they are morelimited in scope.17. What is the “modified grace period” under the AIA?Answer: Under the AIA, a one-year grace period still applies for certain public disclosures ofthe subject invention, so long as those disclosures were made by the inventor, or by someone to 11
    • whom the inventor disclosed the invention. Thus, disclosures by an inventor’s competitors orothers working on similar inventions could bar the inventor’s ability to obtain a patent, eventhough the inventor actually invented the technology first.18. When do the provisions of the AIA go into effect?Answer: The AIA includes numerous provisions that are slated to go into effect at variouspoints from the date of the AIA’s enactment (September 16, 2011) until the last provision goesinto effect on March 16, 2013. For example, provisions such as the false marking changes, new“best mode” requirements, prior user defense, and a 15% fee increase across the board went intoeffect as soon as the AIA was signed into law. Other provisions such as the new post-grantreview procedures, the ability to file on behalf of an assignee (instead of individual inventors),modifications to the inter-partes review proceedings, third party submissions, and otherprovisions go into effect one year after the enactment of the AIA (i.e., on September 16, 2012).The “first to file” provisions, changes to the prior art rules, and other significant provisions gointo effect 18 months after the enactment of the AIA (i.e., on March 16, 2013).19. What is the “prior commercial user” defense now available under the AIA?Answer: Prior “commercial use” of a patented method is recognized as a defense againstinfringement under current law if certain conditions are met, and the AIA expands this defense toinclude any “process, or consisting of a machine, manufacture, or composition of matter used ina manufacturing or other commercial process.” In order to rely on this defense, the accusedinfringer must have, “acting in good faith, commercially used the subject matter in the UnitedStates, either in connection with an internal commercial use or an actual arm’s length sale orother arm’s length commercial transfer of a useful end result of such commercial use.” Otherprovisions apply as well.20. Will it be easier to challenge a patent under the AIA once it has issued?Answer: Possibly. The AIA replaces the current “reexamination” process with a new “post¬grantreview” process that provides more grounds and opportunity for a patent to be challenged withina limited time from its issuance. The new post-grant review process is initiated by a petition tothe USPTO that must be filed within nine months after the date of patent grant or issuance of areissue patent. The petition does not need to satisfy the familiar “substantial new question ofpatentability requirement,” but rather must show that it is “more likely than not that at least 1 ofthe claims challenged in the petition is unpatentable. There are other aspects of this provisionthat expand the grounds for challenging an issued patent.21. Will it be possible to challenge a pending patent application?Answer: No, a third party cannot challenge a pending patent application. However, the AIAdoes expand the window and content available for third party submissions of information prior toissuance. These third party submissions will be considered by the USPTO in granting a patent.Specifically, third parties can now submit “prior art” to the USPTO before the earlier of either anotice of allowance of the pending application or the later of 1) 6 months after publication of the 12
    • patent application or 2) the date of the first rejection during examination. When submitting priorart, the third party must provide a description of the relevance of each document along with afee.22. What is “false marking” and how was it affected by the AIA?Answer: Generally, “false marking” relates to the concept of marking a product, machine, orother invention as “patented” (or providing a patent number) when in fact the product was neverpatented. Recently, some cases made it easier to sue for false marking offenses, even incircumstances in which a product was initially validly marked, but then the product continued tobe marked as patented even after the underlying patent had expired. The AIA has essentially putan end to these (sometimes frivolous and unfounded) lawsuits, by making it more difficult to suefor false marking.23. Is it now easier under the AIA to “mark” my products as patented?Answer: Yes. The AIA introduces “virtual marking” as a way to satisfy the public noticemarking requirement. Virtual marks are statements on products or product packaging that directthe reader to a publicly accessible website, where the patent numbers relevant to the product arelisted. Parties are exempt from liability for false marking after a patent expires if the product orpackage uses a virtual mark.24. Can a company now file a patent application in its own name instead of namingindividual inventors?Answer: Yes. If an inventor or inventors have assigned their rights in an invention to an assignee,then the assignee will now be able to file the patent application in its name only. This newprovision should make it easier in some respects for companies to file patent applications onbehalf of its employees.25. What is the “transitional program for covered business methods”?Answer: The AIA includes a new bureaucratic process designed to help challenge businessmethod patents, but it does not cover “technological” inventions (whatever those might be). Thisprocess is similar to the new post-grant review procedures, discussed above. It may not be clearfor some time what is a “technological” invention in the area of business methods patent.26. Will I receive any reduction in USPTO fees under the AIA?Answer: Possibly. Under the current laws, “small entities” (generally businesses with less than500 employees, or universities, individuals, etc.) are entitled to a 50% reduction in fees. TheAIA defines a new category of applicants called “micro entities” that receive a 75% reduction infiling fees, extension fees, maintenance fees, and the like. These micro entities generally includesmall entities that do not exceed some threshold requirements in terms of number of patentapplications filed, gross income, and other factors.27. Will the AIA speed up the patent examination process? 13
    • Answer: Yes, in some limited circumstances. The AIA allows for “prioritized examination” fora certain limited number of applicants that meet certain requirements. To qualify for prioritizedexamination, the applicant must pay greatly-increased filing fees ($4,800), there are limits on thetotal number of claims that can be submitted, the application must be complete as of the time offiling (i.e., all declaration and supporting documents must be present at the time of filing), andother requirements must be met. Final disposition of the application should occur within twelve(12) months of filing.28. Did the AIA change the standard for “willful infringement”?Answer: No. The AIA has codified the recent standard set forth in the In re Seagate opinion.Under Seagate (and now the AIA), a party cannot be held liable for willfully infringing a patent(and thus be subject to triple damages) simply because the party failed to obtain a legal opinionof non-infringement once the party became aware of the possible infringement. It is worthnoting, however, that although a party cannot be held liable for willful infringement, failure toseek an opinion of non-infringement can impact the overall damage award in a lawsuit.29. Did the AIA affect the way that patents are examined and granted by the USPTO?Answer: Not immediately, but eventually. The USPTO should have more resources (money)available under the AIA, and will likely hire more examiners, and will establish satellite offices,etc. But, the law included no substantive provisions on how the USPTO should conduct itsbusiness from a substantive perspective. A number of new regulations for patent processing andhandling will be issued in the upcoming months to implement various AIA provisions. Thesenew regulations will inevitably change some aspects of the patent process.*****For more information regarding any of the above-listed questions, or any others relating topatents or intellectual property, please contact one of the following attorneys in theMMM IP Group:John R. Harris - 404-504-7720 - jharris@mmmlaw.comTim T. Xia – 404-495-3678 - txia@mmmlaw.comChris Raimund – 202-216-4816 - craimund@mmmlaw.comDaniel Sineway - 404-364-7412 - dsineway@mmmlaw.com 14
    • MEMORANDUMFROM: Morris, Manning & Martin, LLPDATE: December, 2011RE: Georgia’s New Restrictive Covenants Act On May 11, 2011, Georgia enacted House Bill 30 (the “New Act”), whichgoverns the enforcement of restrictive covenants against “employees” entered into on orafter May 11, 2011.1 The New Act is a significant departure from the existing body ofcase law on the subject, which historically has been an unfavorable forum for employers.The New Act promulgates safe harbor rules (e.g., courts now presume that restraints oftwo years or less in duration are reasonable in time, and that restraints more than twoyears in time are unreasonable); liberalizes prior rules (e.g., non-disclosure provisions nolonger require a time limitation; the non-solicitation of customers provision need notexpressly define the types of products or services considered to be competitive in orderfor the non-solicit of customers to be enforceable); and, most significantly, permits courtsto “blue-pencil” (i.e., modify, or partially enforce) covenants that are otherwiseoverbroad. Under prior Georgia law, these safeguards did not exist or, at best, wereunclear. While the New Act is more employer-friendly, employers should nonethelessexercise caution for four reasons: (1) the New Act applies only to restrictive covenants entered into on or after May11, 2011; (2) the New Act permits, but does not require, Georgia courts to blue-penciloverbroad restrictive covenants; (3) the New Act applies only to “employees” (however, that term is broadlydefined and includes, but is not limited to, officers, directors, managers, franchisees,1 House Bill 30 only applies to “contracts entered into on and after [its effective date] and [it] shall notapply in actions determining the enforceability of restrictive covenants entered into before such date.” Ga.L. 2011, p. 399, § 5. House Bill 30 is codified at O.C.G.A. §§ 13-8-50et seq. See Murphree v. Yancey Brothers Company, 2011 WL 4375216, *4 fn.10 (Ga. App. Sept. 21,2011). 15
    • distributors, lessees, licensees, parties to a partnership agreement, sales agents, andbrokers)2; and (4) few courts have yet to apply the New Act, and, therefore, there is a certaindegree of uncertainty surrounding the interpretation of the New Act. For example, in Pointenorth Insurance Group v. Zander, 2011 WL 4601028 * 3(N.D. Ga. Sept. 30, 2011), the defendant, a licensed insurance broker who had signedrestrictive covenants after the New Act went into effect, the court held the covenants atissue overbroad, but that the New Act permitted the court to “blue pencil any overbroador otherwise offensive passages.” Specifically, the court held that it “may” remedy thebroad prohibition against contacting “any of the Employer’s clients” by “blue pencilingthat provision to only apply to customers that the Defendant contacted and assisted withinsurance.” On its face, the Zander decision appears to be a boon for employers because ittakes a broadly drafted provision and seemingly authorizes a court to rewrite it.However, the court decided Zander in the context of a preliminary injunction, not on themerits of the case. Therefore, the court did not actually blue pencil the covenants, insteadholding that a court “may” do so (and, if so, it is unclear to what extent a court actuallywould modify the covenants or the facts and circumstances that it would deem importantin that context). In addition, the New Act explicitly states that a court may “modify” an overbroadrestrictive covenant, which is defined as "severing or removing" a part of a restrictivecovenant that would otherwise make the covenant unenforceable. However, the New Actis silent whether a court may rewrite or otherwise add to a covenant, which the Zandercourt appears to authorize. Thus, it is unclear if Zander’s holding is accurate. The practical effect of the New Act is that employers can be cautiously aggressivein drafting the scope and territorial limitations of their restrictive covenant agreements,but they should be aware of the limitations of the New Act and draft their covenantsaccordingly. In addition, employers may want to consider strategies to implement newrestrictive covenants agreements with their workforce to provide enhanced protection oftheir business interests under the New Act. -------------------------------2 Under pre-existing Georgia law, an employer could enter into a non-compete agreement with any type ofemployee (e.g., janitor, manager, salesman, etc.). However, under the New Act, a non-compete may onlybe enforced against an “employee” who: 1) customarily and regularly solicits customers or prospectivecustomers; 2) customarily and regularly engages in making sales; 3) has a primary duty of managing acompany, or one of its departments or subdivisions, directs the work of two or more employees and has theauthority to hire or fire other employees; or 4) performs the duties of a "key employee" or a "professional"as defined by the New Act. 16
    • Note: On November 2, 2010, Georgia voters approved an amendment to the constitutionauthorizing a new restrictive covenants law (the “Prior Act”) substantially similar to theNew Act; however, due to a technical flaw, there is a substantial question whether thePrior Act is valid, and this question has not yet been litigated. Because of the uncertaintysurrounding the Prior Act, on May 11, 2011, the New Act was signed into law.Accordingly, restrictive covenant agreements entered into between November 3, 2010and May 10, 2011 may not be subject to the Prior Act and, therefore, the enforceability ofbroadly-drafted covenants entered into between an employer and an employee during thistime period is subject to a substantial amount of risk. 17
    • TROTMAN v. VELOCITEACH PROJECT MANAGEMENT LLC TROTMAN v. VELOCITEACH PROJECT MANAGEMENT, LLC. CertiFi Project Management Certification Training, LLC v. Velociteach Project Management, LLC. Nos. A11A0402, A11A0403. July 13, 2011SUMMARY:A recent decision by the Georgia Court of Appeals addressed the issue of an employer’srights when a former employee, upon leaving, uses the company’s proprietary materialsto establish a new competing business.In the case of Trotman v. Velociteach Project Management LLC, the trial court awardedproject management training company, Velociteach, $147,750 from former employeeFloyd Trotman and his new company, CertiFi, based on breach of contract, fraud, tortiousinterference with a business relationship, conversion, and misappropriation of tradesecrets. The court also ordered Trotman to return all VelociTeach materials and barredhim from using Velociteach’s customer lists. On appeal, the Georgia Court of Appealsaffirmed the trial court’s decision.CASE:Following a jury trial, Floyd Trotman III (in Case No. A11A0402) and CertiFi ProjectManagement Certification Training, LLC (“CertiFi”) (in Case No. A11A0403) appealfrom a judgment and other orders entered against them in a dispute arising fromTrotmans continued use of training materials he obtained as a former instructor forVelociteach Project Management, LLC (“Velociteach”). We have consolidated the casesfor review, and for the reasons that follow, we affirm in part, vacate the award of attorneyfees, and remand.1Viewed in favor of the jurys verdict,2 the record shows that from 2003 to 2006, Trotmanworked as an instructor for Velociteach, a company founded by Andy Crowe, whichoffered project management training courses to students seeking a Project ManagementProfessional (“PMP”) credential. When Trotmans relationship with the company faltereddue to a lapse in his own credentials and his unauthorized use of a company credit card,his employment was terminated, and he left the company pursuant to a confidentialityagreement in February 2006. The confidentiality agreement required Trotman to return ordelete all course materials and electronic presentation slides, and it prohibited him from 18
    • soliciting Velocitech customers for a period of three years. In an exit meeting, Trotmanassured Velociteach staff that he had returned or deleted any Velociteach teachingmaterials.3 Soon thereafter, Trotman asked Velociteach if he could buy instruction kits toteach PMP classes on his own, and Velociteach declined.In early 2006, Trotman formed his own company, CertiFi, and began teaching trainingcourses on his own. In early 2007, after seeing Trotman in an airport, Crowe decided tosearch for information about Trotman on the Internet. Crowe discovered a CertiFiwebsite listing Velociteach customers and containing marketing copy that Crowe hadwritten for Velociteach. Crowe then enrolled a student in one of Trotmans classes toobserve the course content and materials. Based on the similarities between Trotmanscourse materials and those he had used previously at Velociteach, Velociteach demandedthat CertiFi cease operating in violation of Trotmans confidentiality agreement. Trotmanrefused, and Velociteach sued him and CertiFi, alleging claims for breach of contract,Uniform Deceptive Trade Practices Act4 (“UDTPA”) violations, fraud, tortiousinterference with a business relationship, conversion, and misappropriation of tradesecrets.After discovery and the denial of the parties cross-motions for summary judgment, theaction was eventually tried by a jury, which awarded Velociteach $13,750 (fromTrotman) and $134,000 (from CertiFi). The trial court also awarded Velociteach $30,000in attorney fees and entered a permanent injunction requiring Trotman to, inter alia,return all Velociteach materials and abstain from using Velociteachs customer lists.Trotman appeals in A11A0402, and CertiFi appeals in A11A0403.5Case No. A11A04021. During the litigation, Velociteach obtained an interlocutory injunction that prohibitedTrotman and CertiFi from using any instructional slides contained in a certain exhibit.Based on Trotmans subsequent reformulation and use of a prohibited slide, the trial courtfound that Trotman had violated the injunction and held him in contempt, orderingTrotman and CertiFi to provide a copy of its teaching materials to Velociteach and pay$1,012.50 in attorney fees incurred by Velociteach while pursuing the contempt motion.On appeal, Trotman enumerates as error the trial courts interlocutory injunction, but hedoes not challenge the $1,012.50 attorney fee award, and the only other remedy,disclosure of his teaching materials, was permissible as part of the pending litigation. AsTrotman points to no other remedy affecting him or CertiFi resulting from the contemptfinding itself, this enumeration presents nothing for review.62. Trotman argues that the evidence and verdict did not authorize the trial court to issue apermanent injunction against him based on a violation of the UDTPA. We disagree.“Equitable relief is generally a matter within the sound discretion of the trial court. Theaction of the trial court should be sustained on review where such discretion has not beenabused.”7 19
    • (a) Based on the jurys verdict that Trotman violated the UDTPA, the trial court grantedan injunction against Trotman that (1) prohibited him from using a specified trial exhibitcontaining Velociteach course materials, (2) required him to return all Velociteachproperty and course materials, (3) forbade him from using Velociteachs customer lists,and (4) required disclosure of each person to whom he had shown the enjoined materials.Trotman argues that because only he, and not CertiFi, was found to have violated theUDTPA, the only basis for the finding would be his failure to maintain his PMPcertification. And because he later remedied the lapse in his certification, he argues thatthis lapse in certification could not support the injunctive relief granted by the trial court.This argument ignores the fact that the trial evidence supported a finding that hepersonally violated the UDTPA, regardless of whether the jury attributed his behavior toCertiFi. The UDTPA provides as follows, in relevant part:(a) A person engages in a deceptive trade practice when, in the course of his business,vocation, or occupation, he: ․(2) Causes likelihood of confusion or of misunderstanding as to the source, sponsorship,approval, or certification of goods or services;(3) Causes likelihood of confusion or of misunderstanding as to affiliation, connection, orassociation with or certification by another; ․(7) Represents that goods or services are of a particular standard, quality, or grade or thatgoods are of a particular style or model, if they are of another; ․(9) Advertises goods or services with intent not to sell them as advertised; ․ [or](12) Engages in any other conduct which similarly creates a likelihood of confusion or ofmisunderstanding.(b) In order to prevail in an action under this part, a complainant need not provecompetition between the parties or actual confusion or misunderstanding. 8At trial, there was evidence that Trotman created a misleading advertisement stating thatCertiFi had developed course content over a four-year period, which would have referredto the time Trotman was with Velociteach, not CertiFi. There was also evidence thatTrotman solicited former Velociteach students on behalf of CertiFi, referencing theVelociteach course and falsely holding himself out as PMP certified. Velociteach alsointroduced evidence that Trotman published a list of Velociteach customers and falselyrepresented them to be CertiFi customers. Finally, there was evidence that Trotman usednearly duplicate versions of certain Velociteach course materials without its consent. Thisevidence supported the jurys finding that he violated the UDTPA, and the trial court didnot abuse its discretion by awarding equitable relief to Velociteach against Trotmanbased on the jurys finding.9 20
    • (b) Trotman also argues that an injunction against future conduct is unwarranted becausehis confidentiality agreement has expired, and his wrongful conduct took place in the pastand is not likely to recur. This argument is misplaced. There was evidence supporting afinding that Trotmans conduct violated the UDTPA regardless of his confidentialityagreement, and the nature of the wrongful behavior was not such that it could not berepeated, i.e., by re-creating confusing or misleading marketing materials or re-usingVelociteachs proprietary course materials.10 Nor was the injunctions breadth an abuse ofthe trial courts discretion. The injunction essentially pertained to the use of Velociteachcourse materials and customer list, and it did not prohibit Trotman from engaging in otherPMP teaching activity. Nor was it an abuse of discretion to allow Velociteach five yearsto monitor Trotmans courses, because the harm to Velociteach would not diminish overtime if Trotman unfairly competed with it. Accordingly, this enumeration provides nobasis for reversal.113. Trotman next challenges the trial courts failure to give his requested jury charge on theUDTPA claim. “In order for a refusal to charge to be error, the request[ ] must be entirelycorrect and accurate, and adjusted to the pleadings, law, and evidence, and not otherwisecovered in the general charge.”12 Trotmans requested charge was as follows:Although a finding of actual confusion [in the marketplace] is not necessary to prove alikelihood of confusion, it is nevertheless the best evidence of a likelihood of confusion.Coexistence in the marketplace over a significant period of time with no evidence ofactual confusion raises a presumption against a likelihood of confusion; however, thepresumption may be rebutted by evidence of other factors tending to support a finding ofa likelihood of confusion.As support, Trotman relies on Ackerman Security Systems, Inc. v. Design SecuritySystems, Inc.,13 which included the following language: “In the case at hand, the trialcourt ․ incorrectly applied the likelihood of confusion test by requiring a showing ofactual confusion․ Although evidence of actual confusion is obviously the best evidenceof a likelihood of confusion, it is not necessary to a finding of likelihood of confusion.”14The emphasized portion of this statement was dicta and not a statement of settled law;15thus the requested charge was not entirely correct and accurate. Further, the trial courtcorrectly charged the jury as to the settled law stated in Ackerman, i.e., that actualconfusion in the marketplace need not be shown. We discern no reversible error here.16Case No. A11A04034. CertiFi contends that the evidence was insufficient to support the jurys verdict on theconversion claim, which was predicated on Trotmans use of Velociteach trainingmaterials. Specifically, CertiFi argues that because Trotmans confidentiality agreementrequired him to return or destroy any training materials, Velociteach had abandonedthem, which would preclude a conversion claim due to an absence of Velociteachs rightof possession.17 The confidentiality agreement does not evince an intent to abandon theproperty, however; instead, it shows Velociteachs attempt to remain in exclusive controland possession of its confidential information. This is wholly consistent with the 21
    • conversion claim because it shows that Trotmans retention and use of the materials wasunauthorized: “The very essence of conversion is that the [defendants] act of dominion iswrongfully asserted.”18CertiFi also argues that the intangible teaching materials on the laptop were not “novel”and therefore not subject to a conversion claim.19 Nevertheless, this argument is belied bythe evidence that the methodology and teaching concepts reflected in the Velociteachcourse materials were originated by and exclusive to Velociteach. Accordingly, thisenumeration presents no basis for reversal.5. CertiFi also challenges the sufficiency of the evidence as to the value element ofVelociteachs unjust enrichment claim. CertiFi relies on Phoenix Airline Svcs. v. MetroAirlines,20 which is physical precedent only21 and states that if “an award of monetarydamages is made for unjust enrichment, it must, of course, be supported by evidencefrom which it can be determined to a reasonable certainty that the defendants in factrealized such a gain.”22 Here, there was evidence that Trotman had unsuccessfullyrequested to purchase instruction kits from Velociteach, and that the kits were valued at$1,000 each. Thus, the jury could conclude that Trotman avoided paying $1,000 in costfor each kit he used to teach CertiFi students. CertiFi does not dispute that Trotmantaught more than 300 students on its behalf. This evidence authorized the jurys damagesaward.236. CertiFi also challenges the trial courts award of $30,000 in attorney fees under OCGA§ 9–15–14(b) based on its finding that the defendants unnecessarily expanded theproceeding. That Code section authorizes an attorney fee award based on conduct“including, but not limited to, abuses of discovery procedures․”24 Here, the trial courtcited a series of orders granting Velociteachs motion to compel, prohibiting the use ofcertain teaching slides, granting a motion for contempt, and ordering production ofdocuments—all of which were the product of Trotmans and CertiFis resistance todiscovery and failure to cooperate with court orders.Based on this behavior, the trial court did not abuse its discretion by awarding attorneyfees under OCGA § 9–14–15(b),25 but the trial courts order fails to show how itapportioned its award to fees generated based on sanctionable behavior. “As we haveheld in cases involving OCGA § 9–15–14(a) or (b), the trial court must limit the feesaward to those fees incurred because of the sanctionable conduct. [Thus,] ‘[l]ump sum’ orunapportioned attorney fees awards are not permitted in Georgia.”26 Velociteachscounsel submitted an affidavit with billing statements totaling $95,974.66. The trialcourts award of $30,000 may have been reasonable, but the trial courts order, “on itsface ․ fails to show the complex decision making process necessarily involved inreaching a particular dollar figure and fails to articulate why the amount awarded was$[3]0,000 as opposed to any other amount.”27 Accordingly, we must vacate the award andremand for appropriate fact finding with respect to the amount of attorney fees to beassessed.28 22
    • 7. (a) CertiFi contends that the trial court erred by failing to give its requested jury chargeon waiver with respect to the conversion claim. However, in light of our holding inDivision 4, that the confidentiality agreement did not evince Velociteachs abandonmentor waiver of its right to exclusively possess its course materials, this charge was notauthorized by the evidence.29(b) CertiFi also asserts as error the trial courts failure to give its requested jury charge onapportionment of damages under OCGA § 51–12–33, in light of evidence that Trotmanhad another Velociteach employee help him make revisions to the Velociteach teachingmaterials and that he hired a marketing firm to edit Velociteach presentation slides and“put some lipstick on” a chart in a Velociteach workbook. Nevertheless, “[a] trial courtdoes not err in refusing to give a requested charge which is confusing, misleading, inapt,not precisely tailored or adjusted to the evidence, or not authorized by the evidence.”30 Attrial, Trotman explained that he was personally responsible for the content of therevisions to the teaching materials and he did not assign any blame to his fellowemployee or the marketing firm he hired. Further, the evidence is undisputed that healone was responsible for using the materials for teaching. Based on the record before us,we discern no reversible error in the trial courts failure to give the requested charge.318. CertiFi challenges the trial courts exclusion of certain testimony that Crowe, thefounder of Velociteach, was motivated by racial bias when he terminated Trotman.Specifically, CertiFi proffered testimony from a Velociteach employee who heard Croweuse racially derogatory language in reference to Trotman.32 The trial court sustainedVelociteachs objection to the testimony on relevance grounds.The decision to admit or exclude evidence is committed to the sound discretion of thetrial court and will not be disturbed on appeal absent a clear abuse of discretion. When anissue is raised whether the probative value of evidence is outweighed by its tendency tounduly arouse the jurys emotions of prejudice, hostility, or sympathy, a trial courtsdecision regarding admissibility is a matter of discretion. Further, a trial court mayexclude relevant evidence if its probative value is substantially outweighed by the dangerof unfair prejudice, confusion of the issues, or misleading of the jury.33Here, the issues at trial centered on the similarity between the teaching material used byTrotman/CertiFi to that created by Crowe/Velociteach and Trotmans authority to usethem after his termination. The proffered witness stated that any derogatory statementsmade by Crowe were not in connection with Crowes termination of Trotman, who hadreceived favorable evaluations prior to the events leading up to his termination, i.e., thelapse in Trotmans PMP credentials and his misuse of the company credit card. Based onthe record before us and the inflamatory nature of the proffered evidence, we discern noclear abuse of the trial courts discretion.349. Finally, CertiFi attempts to incorporate by reference to its brief in the companion casean argument challenging the sufficiency of the evidence to show that it tortiouslyinterfered with Velociteachs business relationships or contracts. This enumeration wasnot otherwise supported by argument or citation to authority.35 Nevertheless, we note that 23
    • during his tenure at Velociteach, Trotman had taught classes to students from a companycalled Axiom, including one class shortly before his termination. Shortly after histermination, Trotman solicited Axiom on behalf of CertiFi based on his prior contact withthem, and Axiom employed CertiFi and declined to employ Velociteach. Crowe,Velociteachs founder testified as to the loss of Axiom as a paying client. Thus, thisenumeration is without merit.3610. CertiFi and Trotmans remaining enumerations are moot. 24
    • A Dispute Over Who Owns a Twitter Account Goes toCourt (NEW YORK TIMES)By JOHN BIGGSPublished: December 25, 2011How much is a tweet worth? And how much does a Twitter follower cost?Enlarge This ImageIn base economic terms, the value of individual Twitter updates seems to benegligible; after all, what is a Twitter post but a few bits of data sent caromingthrough the Internet? But in a world where social media’s influence can mean thedifference between a lucrative sale and another fruitless cold call, social mediaaccounts at companies have taken on added significance.The question is: Can a company cash in on, and claim ownership of, an employee’ssocial media account, and if so, what does that mean for workers who areincreasingly posting to Twitter, Facebook and Google Plus during work hours?A lawsuit filed in July could provide some answers.In October 2010, Noah Kravitz, a writer who lives in Oakland, Calif., quit his job at apopular mobile phone site, Phonedog.com, after nearly four years. The site has twoparts — an e-commerce wing, which sells phones, and a blog.While at the company, Mr. Kravitz, 38, began writing on Twitter under the namePhonedog_Noah, and over time, had amassed 17,000 followers. When he left, hesaid, PhoneDog told him he could keep his Twitter account in exchange for postingoccasionally.The company asked him to “tweet on their behalf from time to time and I said sure,as we were parting on good terms,” Mr. Kravitz said by telephone.And so he began writing as NoahKravitz, keeping all his followers under that newhandle. But eight months after Mr. Kravitz left the company, PhoneDog sued, sayingthe Twitter list was a customer list, and seeking damages of $2.50 a month perfollower for eight months, for a total of $340,000. 25
    • PhoneDog Media declined to comment for this article except for this statement: “Thecosts and resources invested by PhoneDog Media into growing its followers, fans andgeneral brand awareness through social media are substantial and are consideredproperty of PhoneDog Media L.L.C. We intend to aggressively protect our customerlists and confidential information, intellectual property, trademark and brands.”Mr. Kravitz said the lawsuit, filed in the United States District Court in the NorthernDistrict of California, was in retaliation for his claim to 15 percent of the site’s grossadvertising revenue because of his position as a vested partner, as well as back payrelated to his position as a video reviewer and blogger for the site.The lawsuit, though, could have broader ramifications than its effect on Mr. Kravitzand the company.“This will establish precedent in the online world, as it relates to ownership of socialmedia accounts,” said Henry J. Cittone, a lawyer in New York who litigatesintellectual property disputes. “We’ve actually been waiting to see such a case asmany of our clients are concerned about the ownership of social media accounts vis-á-vis their branding.”Mr. Cittone added that a particularly important wrinkle is what value the court mightset on the worth of one Twitter follower to a media company, saying the price setcould affect future cases involving ownership of social media.“It all hinges on why the account was opened,” he said.“If it was to communicate with PhoneDog’s customers or build up new customers orprospects, then the account was opened on behalf of PhoneDog, not Mr. Kravitz. Anadded complexity is that PhoneDog contends Mr. Kravitz was just a contractor in therelated partnership/employment case, thus weakening their trade secrets case,unless they can show he was contracted to create the feed.”These situations are likely to arise more often as social media tools like Twitter,Google Plus and Facebook continue to become a way for company representativesand customer service employees to interact with fans and irate customers.JetBlue, for example, often answers customer queries via Twitter, although its officialpolicy is to not respond to “formal complaints” on Twitter. 26
    • Other issues may arise when companies hire popular Twitter users partly because oftheir social media presence. For example, Samsung Electronics hired the outspokenblogger Philip Berne to review phones for the company internally.Mr. Berne uses his personal Twitter account but often posts explicitly about Samsungproducts and his opinions on the phones he has tested. He cleared his Twitteraccount with the Samsung public relations department, he said, and he owns it.“Their stance was that I am entitled to have and express an opinion, but I am not aSamsung representative, and I should make it clear that any opinions are my ownand not those of my employer,” Mr. Berne said. In general, social media expertsadvise companies to tread with caution when it comes to account ownership.Sree Sreenivasan, a professor at the Columbia Journalism School and the author ofSree’s Social Media Guide, said smart companies let social media blossom where itmay.“It’s a terrible thing to say you have to leave your Twitter followers behind,” he said,talking specifically about media companies that may employ popular Twitter writers.“It sends a terrible signal to reporters and journalists who care about this, and thiswill make it less attractive to recruit the next round of people.”He said that many industries had policies that required sales staff to leave theirRolodexes behind, but that these policies were as relevant to social media asRolodexes are to the modern office. After all, social media accounts are, almost bydefinition, personal.He also said that the average Twitter account had less clout than many might think.“The value of the individual users is very hard to quantify,” he said. “It’s dangerous tooverestimate the value of an account to an organization and underestimate what itmeans for an individual.”Mr. Kravitz said he was confused.“They’re suing me for over a quarter of a million dollars,” he said. “From where I’msitting I held up my end of the bargain.” 27
    • 28
    • House Bill 718 By: Representatives Peake of the 137th, Lindsey of the 54th, Sheldon of the 105th, Stephens of the 164th, Williamson of the 111th, and othersA BILL TO BE ENTITLED AN ACT1 To amend Chapter 7 of Title 50 of the Official Code of Georgia Annotated,relating to the2 Department of Economic Development, so as to create the Georgia CapitalAcceleration3 Authority; so as to provide for legislative findings; to provide for definitions; toprovide for4 a program administrator; to provide for the issuance of premium tax credits toinsurance5 companies or holding companies that purchase such credits to offset liability forstate6 insurance premium taxes; to provide for reports; to provide for related matters;to provide for7 an effective date; to repeal conflicting laws; and for other purposes.8 BE IT ENACTED BY THE GENERAL ASSEMBLY OF GEORGIA:9 SECTION 1.10 Chapter 7 of Title 50 of the Official Code of Georgia Annotated, relating to theDepartment11 of Economic Development, is amended by adding a new article, to read asfollows:12 "ARTICLE 813 50-7-90.14 The General Assembly declares that its purpose in enacting this legislation is toincrease15 the amount of private investment capital available in this state for Georgiabased business16 enterprises in the seed, early, or growth stages of business development andrequiring17 funding, as well as established Georgia based business enterprises developingnew methods18 or technologies, including the promotion of research and developmentpurposes, thereby 29
    • 19 increasing employment, creating additional wealth, and otherwise benefitingthe economic20 welfare of the people of this state. Accordingly, it is the intention of theGeneral Assembly21 that the Georgia Capital Acceleration Authority make investments in support ofGeorgia22 based business enterprises in accordance with the investment policy authorizedand23 required under this article and focus its investment policy principally onventure capital24 funds and private equity organizations investing in Georgia based businessenterprises.25 50-7-91.26 As used in this article, the term:27 (1) Affiliate means:28 (A) A person who, directly or indirectly, beneficially owns, controls, or holdspower29 to vote any outstanding voting securities or other voting ownership interests ofa30 venture firm or an insurance company; or31 (B) A person whose outstanding voting securities or other voting ownershipinterests32 are directly or indirectly beneficially owned, controlled, or held with power tovote by33 a venture firm or an insurance company.34 The term does not include an insurance company that becomes a purchaser inaccordance35 with an allocation of investment tax credits under this article solely by reasonof the36 allocation.37 (2) Authority means the Georgia Capital Acceleration Authority created underCode38 Section 50-7-92.39 (3) Contributed capital means the amount of money contributed to the GeorgiaCapital40 Acceleration Fund for the purchase of insurance premium tax credits.41 (4) Department means the Department of Economic Development.42 (5) Designated capital means the amount of money committed and invested bythe43 Georgia Capital Acceleration Fund into individual early stage venture capitalfunds or 30
    • 44 growth stage venture capital funds.45 (6) Early stage venture capital fund means:46 (A) A fund that has at least one principal employed to direct the investment ofthe47 designated capital;48 (B) A fund whose principals have at least five years of experience in theventure49 capital, angel capital, or private equity sector by investing primarily in Georgia50 domiciled companies or a fund whose managers have been based, as defined byhaving51 a principal office, in the State of Georgia for at least five years prior to theeffective52 date of this article;53 (C) At the discretion of the program administrator and the authority, one ormore early54 stage venture capital funds that are first-time Georgia based funds, so long asthe fund55 managers have at least five years of experience in venture capital or angelcapital56 investing in Georgia based business enterprises; and57 (D) A fund of which the primary investment strategy must be the achievementof58 transformational economic development outcomes through focusedinvestments of59 capital in seed or early stage businesses with high growth potential. The fundprincipals60 must have demonstrated the ability to lead investment rounds, advise andmentor61 entrepreneurs, and facilitate follow-on investments. A minimum of 10 percentof the62 committed capital of the fund must be committed by the institutional investors,fund63 principals, or other accredited investors.64 (7) Growth stage venture capital fund means:65 (A) A fund having its principal office and a majority of its employees inGeorgia that66 has at least two principals employed to direct the investment of the designatedcapital:67 (B) A fund whose principals have at least five years of experience in theventure68 capital, angel capital, or private equity sector by investing primarily in Georgia69 domiciled companies or a fund whose principals have been based, as definedby having 31
    • 70 a principal office, in the State of Georgia for at least five years prior to theeffective71 date of this article; and72 (C) A fund which has as its primary investment strategy the achievement of73 transformational economic development outcomes through focusedinvestments of74 capital in growth stage businesses with high return potential. The fundprincipals must75 have demonstrated the ability to lead investment rounds, advise and mentor76 entrepreneurs, and facilitate follow-on investments. A minimum of 50 percentof the77 committed capital of the fund must be committed by the institutional investors,fund78 principals, or other accredited investors.79 (8) Insurance premium tax credit means a credit against insurance premiumtax liability80 offered to a purchaser under Code Section 50-7-98.81 (9) Insurance premium tax liability means any liability incurred under CodeSections82 33-3-26 and 33-8-4; provided, however, that any insurance premium taxliability incurred83 under the provisions of Code Section 47-7-61, relating to fire, lightning, orextended84 coverage, inland marine or allied lines, or windstorm coverage, shall not beoffset by any85 insurance premium tax credits issued under this article.86 (10) Program administrator means a state appointed investment advisory firmconsisting87 of experienced investment professionals that will actively pursue investment88 opportunities for the State of Georgia. The investment advisory firm willevaluate and89 select Georgia based venture capital funds, in conjunction with the GeorgiaCapital90 Acceleration Authority, through a rigorous due diligence process.91 (11) Purchaser means:92 (A) An insurance company that:93 (i) Is authorized to do business in Georgia;94 (ii) Has insurance premium tax liability; and95 (iii) Pays contributed capital to purchase an allocation of premium tax creditsunder96 this article; or97 (B) A holding company that:98 (i) Has at least one insurance company subsidiary authorized to do business in 32
    • 99 Georgia; and100 (ii) Pays contributed capital on behalf of one or more of these subsidiaries.101 (12) Qualified distribution means any distribution or payment by the GeorgiaCapital102 Acceleration Fund in connection with any of the following:103 (A) Costs and expenses of forming, syndicating, and organizing the GeorgiaCapital104 Acceleration Fund, including fees paid for professional services, and the costsof105 financing and insuring the obligations of the Georgia Capital AccelerationFund,106 provided such payments are not made to a participating investor;107 (B) An annual management fee in accordance with a funds partnershipagreement and108 consistent with the funds other private investors, to offset the costs andexpenses of109 managing and operating the Georgia Capital Acceleration Fund; or110 (C) Reasonable and necessary fees in accordance with industry custom forongoing111 professional services, including, but not limited to, legal and accountingservices related112 to the operation of the Georgia Capital Acceleration Fund, but not includingany113 lobbying or governmental relations.114 (13) Qualified early stage or seed business means a business that, at the timeof the115 first investment in the business by a venture firm:116 (A) Has its headquarters located in the State of Georgia;117 (B) Has its principal business operations located in the State of Georgia andintends to118 maintain its principal business operations in the state after receiving aninvestment from119 the venture capital firm. In order to discourage the business from relocatingoutside120 Georgia within three years from the date of an initial investment, theinvestment in the121 business shall be subject to redemption by the venture capital firm within oneyear from122 the time the business relocates its principal business operations outside thestate, unless123 the business maintains a significant presence in Georgia as determined byrelative 33
    • 124 number of employees or relative assets remaining in Georgia following therelocation;125 (C) Has 20 or fewer employees;126 (D) Has a current gross annual revenue run rate of less than $1 million;127 (E) Has not obtained during its existence more than $2 million in aggregatecash128 proceeds from the issuance of its equity or debt investments, not includingcommercial129 loans from chartered banks or savings and loan institutions; and130 (F) Does not engage substantially in:131 (i) Retail sales;132 (ii) Real estate development or construction;133 (iii) Entertainment, amusement, recreation, or athletic or fitness activity forwhich an134 admission is charged;135 (iv) The business of insurance, banking, lending, financial, brokerage, orinvestment136 activities;137 (v) Natural resource extraction, including but not limited to oil, gas, orbiomass; or138 (vi) The provision of professional services by accountants, attorneys, orphysicians.139 A business classified as a qualified early stage business at the time of the firstqualified140 investment in the business will remain classified as a qualified early stagebusiness and141 may receive continuing qualified investments from venture capital firmsparticipating in142 the Georgia Capital Acceleration Fund. Continuing investments will constitutequalified143 investments even though the business may not meet the definition of aqualified early144 stage business at the time of such continuing investments.145 (14) Qualified growth stage business means a business that, at the time of thefirst146 investment in the business by a venture firm:147 (A) Has its headquarters located in the State of Georgia;148 (B) Is either a corporation, limited liability company, or a general or limited149 partnership located in this state;150 (C) Has its principal business operations located in the State of Georgia andintends to151 maintain its principal business operations in the state after receiving aninvestment from 34
    • 152 the venture capital firm. In order to discourage the business from relocatingoutside153 Georgia within three years from the date of initial investment, the investmentin the154 business shall be subject to redemption by the venture capital firm within oneyear from155 the time the business relocates its principal business operations outside thestate, unless156 the business maintains a significant presence in Georgia as determined byrelative157 number of employees or relative assets remaining in Georgia;158 (D) Has 100 or fewer employees;159 (E) Has a current gross annual revenue run rate of greater than $1 million; and160 (F) Does not engage substantially in:161 (i) Retail sales;162 (ii) Real estate development or construction;163 (iii) Entertainment, amusement, recreation, or athletic or fitness activity forwhich an164 admission is charged;165 (iv) The business of insurance, banking, lending, financial, brokerage, orinvestment166 activities;167 (v) Natural resource extraction, including but not limited to oil, gas, orbiomass; or168 (vi) The provision of professional services by accountants, attorneys, orphysicians.169 A business classified as a qualified growth stage business at the time of thefirst qualified170 investment in the business will remain classified as a qualified growth stagebusiness and171 may receive continuing qualified investments from venture capital fundsparticipating in172 the Georgia Capital Acceleration Fund. Continuing investments will constitutequalified173 investments even though the business may not meet the definition of aqualified growth174 stage business at the time of such continuing investments.175 (15) Qualified investment means the investment of money by the GeorgiaCapital176 Acceleration Fund in each early or growth stage venture capital fund selectedby the177 program administrator. 35
    • 178 50-7-92.179 (a) There is hereby created the Georgia Capital Acceleration Authority, whichshall180 exercise the powers and perform the duties prescribed by this article. Theexercise by the181 authority of its powers and duties is hereby declared to be an essential stategovernmental182 function. The authority is subject to all laws generally applicable to stateagencies and183 public officials, to the extent those laws do not conflict with the provisions ofthis article.184 (b) The authority shall consist of three members appointed by the Governor,one member185 appointed by the Lieutenant Governor, and one member appointed by theSpeaker of the186 House of Representatives. Each appointed member shall be a resident ofGeorgia and shall187 have experience in at least one of the following areas:188 (1) Early stage, angel, or venture capital investing;189 (2) Growth stage venture capital investing;190 (3) Fund of funds management; or191 (4) Entrepreneurship.192 No member of the authority shall be affiliated in any way with any venturecapital fund that193 is selected to perform services for the authority.194 (c) The commissioner of economic development, revenue commissioner, andInsurance195 Commissioner or their designees shall serve as nonvoting members of theauthority.196 (d) Initial appointees to the authority shall serve staggered terms, with all ofthe initial197 terms beginning on January 1, 2013. The terms of one member appointed bythe Governor198 and the members appointed by the Lieutenant Governor and the Speaker ofthe House of199 Representatives shall expire on December 31, 2015. The terms of the othertwo initial200 appointments by the Governor shall expire on December 31, 2017. Thereafter,terms of201 office for all appointees shall be for four years, with each term ending on thesame day of 36
    • 202 the same month as did the term that it succeeds. A vacancy on the authorityshall be filled203 in the same manner as the original appointment, except that a personappointed to fill a204 vacancy shall be appointed to the remainder of the unexpired term. Anyappointed member205 of the authority is eligible for reappointment.206 (e) A member of the authority may be removed by the members appointingofficial for207 misfeasance, willful neglect of duty, or other cause, after notice and a publichearing,208 unless the notice and hearing are waived in writing by the member.209 (f) Members of the authority shall serve without compensation, The Governorshall210 designate a member of the authority to serve as chairperson. A majority of thevoting211 members of the authority constitutes a quorum, and the affirmative vote of amajority of212 the voting members present is necessary for any action taken by the authority.A vacancy213 in the membership of the authority does not impair the right of a quorum toexercise all214 rights and perform all duties of the authority.215 (g) The authority shall have the power:216 (1) To have a seal and alter the same at its pleasure;217 (2) To acquire by purchase, lease, or otherwise, including acquisition of landfrom the218 state government, and to hold, lease, and dispose of real and personal propertyof every219 kind and character for its corporate purpose and to enter into any contracts,leases, or220 other charges for the use of property or services of the authority and collectand use the221 same as necessary to operate the authority; and to accomplish any of thepurposes of this222 article and make any purchases or sales necessary for such purposes;223 (3) To acquire in its own name by purchase, on such terms and conditions andin such224 manner as it may deem proper, real property, or rights or easements therein, orfranchises225 necessary or convenient for its corporate purpose, and to use the same so longas its 37
    • 226 corporate existence shall continue, and to lease or make contracts with respectto the use227 of such property, or dispose of the same in any manner it deems to be to thebest228 advantage of the authority;229 (4) To appoint, select, and employ officers, agents, and employees, includingreal estate,230 environmental, engineering, architectural, and construction experts, fiscalagents, and231 attorneys, and to fix their respective compensations;232 (5) To make contracts and leases and to execute all instruments necessary orconvenient.233 Any and all persons, firms, and corporations and any and all politicalsubdivisions,234 departments, institutions, or agencies of the state and federal government areauthorized235 to enter into contracts, leases, or agreements with the authority upon suchterms and for236 such purposes as they deem advisable; and, without limiting the generality ofthe237 foregoing, authority is specifically granted to municipal corporations,counties, political238 subdivisions, and to the authority relative to entering into contracts, leaseagreements, or239 other undertakings authorized between the authority and private corporations,both inside240 and outside this state, and between the authority and public bodies, includingcounties241 and cities outside this state and the federal government;242 (6) To accept loans and grants of money or materials or property of any kindfrom the243 United States of America or any agency or instrumentality thereof upon suchterms and244 conditions as the United States of America or such agency or instrumentalitymay245 require;246 (7) To accept loans and grants of money or materials or property of any kindfrom the247 State of Georgia or any agency or instrumentality or political subdivisionthereof upon248 such terms and conditions as the State of Georgia or such agency orinstrumentality or249 political subdivision may require; 38
    • 250 (8) To exercise any power usually possessed by private corporationsperforming similar251 functions, provided that no such power is in conflict with the Constitution orgeneral laws252 of this state; and253 (9) To do all things necessary or convenient to carry out the powers expresslygiven in254 this article.255 (h) The department shall provide the authority with office space and suchtechnical256 assistance as the authority requires and the authority shall be attached to thedepartment for257 administrative purposes. The department shall also consult with the authorityin connection258 with the administration of the Georgia Capital Acceleration Program createdunder this259 article.260 50-7-93.261 The authoritys primary responsibilities include:262 (1) Establishing an investment policy for the selection of a programadministrator;263 (2) Selecting a program administrator to administer the provisions of thisarticle;264 (3) Giving final approval to allocations of designated capital to the venturecapital funds265 selected by the program administrator;266 (4) Executing and overseeing the contract of the program administrator inorder to assure267 compliance with this article; and268 (5) Establishing a policy with respect to use of capital and profits returned tothe state269 pursuant to the provisions of Code Section 50-7-102.270 50-7-94.271 (a) The program administrator will be selected by the authority through atransparent open272 bid process and will be responsible for administering the Georgia CapitalAcceleration273 Fund and for making all venture capital fund selections in accordance with theinvestment274 policies developed by the authority or contained in this article. 39
    • 275 (b) The program administrator will be responsible for selecting a group ofGeorgia based276 venture capital funds in two categories, early or seed stage venture capitalfunds and277 growth stage venture capital funds.278 (c) The early stage venture capital funds shall invest primarily in early or seedstage279 businesses and shall be selected using a transparent open bid process pursuantto guidelines280 developed by the authority. The program administrator shall ensure that adiverse281 cross-section of industry sectors is represented by the selected funds,including technology,282 health care, life sciences, agribusiness, logistics, energy, and advancedmanufacturing.283 (d) The growth stage venture capital funds shall be selected using atransparent open bid284 process pursuant to guidelines developed by the authority. The programadministrator shall285 ensure that a diverse cross-section of industry sectors is represented by theselected funds,286 including technology, health care, life sciences, agribusiness, logistics,energy, and287 advanced manufacturing.288 (e) In the selection of the early stage venture capital funds and the growthstage venture289 capital funds the program administrator shall consider the following factors:290 (1) The management structure of the fund, including:291 (A) The investment experience of the principals;292 (B) The applicants reputation in the venture firm industry and the applicantsability293 to attract coinvestment capital and syndicate investments in qualifiedbusinesses in294 Georgia;295 (C) The knowledge, experience, and capabilities of the applicant in subjectareas296 relevant to venture stage businesses in Georgia; and297 (D) The tenure and turnover history of principals and senior investmentprofessionals298 of the fund;299 (2) The funds investment strategy, including:300 (A) The applicants record of performance in investing in early and growthstage 40
    • 301 businesses;302 (B) The applicants history of attracting coinvestment capital and syndicate303 investments;304 (C) The soundness of the applicants investment strategy and the compatibilityof that305 strategy with business opportunities in Georgia; and306 (D) The applicants history of job creation through investment;307 (3) The funds commitment to making investments, that to the fullest extentpossible:308 (A) Create employment opportunities in Georgia;309 (B) Lead to the growth of the Georgia economy and qualified businesses inGeorgia;310 (C) Complement the research and development projects of Georgia academic311 institutions; and312 (D) Foster the development of technologies and industries that presentopportunities313 for the growth of qualified businesses in Georgia; and314 (4) The funds commitment to Georgia, including:315 (A) The applicants presence in Georgia through permanent local offices oraffiliation316 with local investment firms;317 (B) The local presence of senior investment professionals;318 (C) The applicants history of investing in early and growth stage businessesin319 Georgia;320 (D) The applicants ability to identify investment opportunities throughworking321 relationships with Georgia research and development institutions and Georgiabased322 businesses; and323 (E) The applicants commitment to investing an amount that matches orexceeds the324 amount of the applicants designated capital received under this article, inGeorgia325 based qualified early stage businesses and qualified growth stage businesses.326 (f) A venture capital fund shall file an application with the authority in theform required327 by the program administrator. The authority shall begin accepting applicationson or328 before September 1, 2012.329 50-7-95. 41
    • 330 (a) The Georgia Capital Acceleration Fund will be capitalized through stateinsurance331 premium tax credits. The State of Georgia will sell tax credits to purchasers,pursuant to332 the provisions of this article, and the tax credits shall be used to offset thepurchasers state333 insurance premium tax liability.334 (b) The capital raised through the auction of insurance premium tax creditswill be335 periodically distributed to the venture capital funds selected by the programadministrator336 pursuant to Code Section 50-7-94.337 (c) Each year the purchasers shall be issued a tax credit certificate by theauthority.338 (d) Purchasers will be able to claim their tax credits pursuant to the provisionsof Code339 Section 50-7-98.340 50-7-96.341 (a) The State of Georgia will sell a maximum of $200 million in insurancepremium tax342 credits over a three-year period through an auction process administered bythe program343 administrator pursuant to guidelines developed by the authority. The $200million in344 insurance premium tax credits will be auctioned in the first year of theGeorgia Capital345 Acceleration Program, and the purchasers will be obligated to pay thepurchase amount to346 the authority for deposit in the Georgia Capital Acceleration Fund in threeequal amounts347 over the three-year period.348 (b) The program administrator shall obtain the services of an independentthird party to349 conduct the bidding process to secure purchasers for the capital accelerationprogram.350 (c) Using the procedures adopted by the independent third party, eachpotential purchaser351 shall make a timely and irrevocable offer, subject only to the authoritysissuance to the352 purchaser of tax credit certificates, to make specified contributions ofdesignated capital353 to the authority on the dates specified in Code Section 50-7-98. 42
    • 354 (d) The offer shall include:355 (1) The requested amount of tax credits, which may not be less than $5million;356 (2) The potential purchasers specified contribution for each tax credit dollarrequested,357 which may not be less than the greater of:358 (A) Eighty-five percent of the requested dollar amount of tax credits; or359 (B) The percentage of the requested dollar amount of tax credits that theprogram360 administrator, on the recommendation of the independent third party,determines to be361 consistent with market conditions as of the offer date; and362 (3) Any other information the independent third party requires.363 (e)(1) The deadline for submission of applications for tax credits is February1, 2013.364 (2) Each potential purchaser shall receive a written notice from the program365 administrator not later than May 1, 2013, indicating whether or not it has beenapproved366 as a purchaser and, if so, the amount of tax credits allocated.367 50-7-97.368 (a) As soon as practicable after the authority receives each installment ofcontributed369 capital, the authority and each selected venture capital fund that has beenallocated370 designated capital shall enter into a contract under which the allocated amountof371 designated capital will be committed by the authority to the selected venturecapital funds372 for investment pursuant to this article.373 (b) The authority shall allocate designated capital as follows:374 (1) Early stage venture capital funds: Thirty percent of the contributed capitalin the375 Georgia Capital Acceleration Fund shall be allocated among the early stageventure376 capital funds, in accordance with the following eligibility and requirements:377 (A) Each early stage venture capital fund shall be eligible for a minimum $10million378 allocation of designated capital and a maximum $15 million allocation to becontributed379 to the funds over a three-year period coinciding with the sale of the tax creditsor in 43
    • 380 accordance with the funds partnership agreement and concurrent with thecontributions381 of the funds other investors;382 (B) Each early stage venture capital fund shall be required to obtain otherindependent383 investors. A minimum of 10 percent of the committed capital of the earlystage venture384 capital fund must be committed by independent institutional investors, fundprincipals,385 or other accredited investors; and386 (C) Each early stage venture capital fund shall be required to commit, via aside letter387 or otherwise, to invest in Georgia based qualified early stage businesses andqualified388 growth stage businesses, an amount that matches or exceeds the amount of thefunds389 designated capital received under this article;390 (2) Growth stage venture capital funds: Seventy percent of the totalcontributed capital391 in the Georgia Capital Acceleration Fund shall be allocated among the growthstage392 venture capital funds, in accordance with the following eligibility andrequirements:393 (A) Each growth stage venture capital fund shall be eligible for a minimum$10 million394 allocation of designated capital over a three-year period coinciding with thesale of the395 tax credits or in accordance with the funds partnership agreement andconcurrent with396 the contributions of the funds other investors;397 (B) Each growth stage venture capital fund shall be required to obtain other398 independent investors. A minimum of 50 percent of the committed capital ofthe growth399 stage venture capital fund must be committed by independent institutionalinvestors,400 fund principals, or other accredited investors; and401 (C) Each growth stage venture capital fund shall be required to commit, via aside letter402 or otherwise, to invest in Georgia based qualified early stage businesses andqualified403 growth stage businesses, an amount that matches or exceeds the amount of thefunds404 designated capital received under this article; and 44
    • 405 (3) Program administrator: Up to $25 million of the contributed capital shallbe held in406 reserve by the program administrator for coinvestment in funds as providedpursuant to407 guidelines developed by the authority.408 50-7-98.409 (a) Contributed capital committed by a purchaser shall be paid to the authorityin three410 equal yearly installments due on June 1 of 2013, 2014, and 2015.411 (b) On receipt of each installment of allotted capital, the authority shall issueto each412 purchaser a tax credit certificate representing a fully vested credit against stateinsurance413 premium tax liability equal to one-third of the total insurance premium taxcredits allocated414 to the purchaser.415 (c) The tax credit certificate shall state:416 (1) The total amount of insurance premium tax credits that the purchaser mayclaim;417 (2) The amount of capital that the purchaser has contributed in return for theissuance of418 the tax credit certificate;419 (3) The dates on which the insurance premium tax credits will be available foruse by the420 purchaser;421 (4) Any penalties or other remedies for noncompliance;422 (5) The procedures to be used for transferring the insurance premium taxcredits; and423 (6) Any other requirements the authority, in consultation with the Departmentof424 Revenue, considers necessary.425 (d)(1) A tax credit certificate may not be issued to any purchaser that fails tomake a426 contribution of capital within the time the authority specifies.427 (2) A purchaser that fails to make a contribution of capital within the time theauthority428 specifies shall be subject to a penalty equal to 10 percent of the amount ofcontributed429 capital that remains unpaid, payable to the authority within 30 days afterdemand by the430 authority. 45
    • 431 (3) The authority, after consultation with the program administrator, may offerto432 reallocate the defaulted contributed capital amount among the otherpurchasers, so that433 the result after reallocation is the same as if the initial allocation had beenperformed434 without considering the insurance premium tax credit allocation to thedefaulting435 purchaser.436 (4) If the reallocation of contributed capital results in the contribution byanother437 purchaser or purchasers of the amount of capital not contributed by thedefaulting438 purchaser, then the authority, in consultation with the program administrator,may waive439 the penalty provided under this subsection.440 (5)(A) A purchaser that fails to make a contribution of capital within the timespecified441 may avoid the imposition of the penalty by transferring the allocation ofinsurance442 premium tax credits to a new or existing purchaser within 30 days after thedue date of443 the defaulted installment.444 (B) Any transferee of an allocation of insurance premium tax credits of adefaulting445 purchaser under this paragraph shall agree to make the required contributionof capital446 within 30 days after the date of the transfer.447 50-7-99.448 (a)(1) Subject to the restriction in paragraph (2) of this subsection, a purchasermay claim449 the insurance premium tax credits on an insurance premium tax return filedafter450 December 31, 2013, for a taxable year that begins on or after January 1, 2014.451 (2) In each calendar year from 2014 through 2016, a purchaser may claim upto one-third452 of the insurance premium tax credits allocated to that purchaser.453 (b)(1) The credits to be applied against insurance premium tax liability in anyone year454 may not exceed the insurance premium tax liability of the purchaser for thattaxable year.455 (2) Any unused credits against insurance premium tax liability may be: 46
    • 456 (A) Carried forward indefinitely until the insurance premium tax credits areused; and457 (B) Used by the purchaser without restriction during any calendar year after2016.458 (3) On 30 days advance notice to the authority, insurance premium tax creditsallocated459 to a purchaser under this article may be transferred without further restrictionto any other460 entity that:461 (A) Meets the definition of a purchaser; and462 (B) Agrees to assume all of the transferors obligations under this article.463 (c) A purchaser claiming a credit against insurance premium tax liabilityearned through464 an investment under this article is not required to pay any additional tax as aresult of465 claiming the credit.466 (d) A purchaser is not required to reduce the amount of premium tax includedby the467 purchaser in connection with rate making for any insurance contract written inGeorgia468 because of a reduction in the purchasers insurance premium tax derived fromthe credit469 granted under this article.470 50-7-100.471 A purchaser or an affiliate may not directly or indirectly:472 (1) Manage a venture capital fund that receives any designated capital underthis article;473 (2) Beneficially own, through rights, options, convertible interests, orotherwise, greater474 than 15 percent of the voting securities or other voting ownership interest of aventure475 capital fund that receives any allotted capital under this article; or476 (3) Control the direction of investments for a venture capital fund thatreceives any477 designated capital under this article.478 50-7-101.479 (a) Not later than December 31 of each year, each venture capital fund shallreport to the480 authority:481 (1) The amount of designated capital remaining uninvested at the end of thepreceding 47
    • 482 calendar year;483 (2) All qualified investments made during the preceding calendar year,including the484 number of employees of each business at the time the qualified investmentwas made and485 as of December 31 of that year;486 (3) For any qualified investment in which the venture capital fund no longerhas a487 position as of the end of the calendar year, the number of employees of thebusiness as488 of the date the investment was terminated; and489 (4) Any other information the authority requires to ascertain the impact of thisarticle on490 the economy of Georgia.491 (b) Not later than 180 days after the end of its fiscal year, each venture capitalfund shall492 provide to the authority an audited financial statement that includes theopinion of an493 independent certified public accountant.494 (c) Not later than 60 days after the sale or other disposition of a qualifiedinvestment, the495 selling venture capital fund shall provide to the authority a report on theamount of the496 interest sold or disposed of and the consideration received for the sale ordisposition.497 50-7-102.498 Designated capital resulting from the qualified investments made under thisarticle shall499 be retained and used to make additional qualified investments in venturecapital funds500 selected by the program administrator; provided, however, that the GeorgiaCapital501 Acceleration Fund shall receive any and all returns representing the principalportion of502 designated capital and shall receive 80 percent of investment returns in excessof503 designated capital from each respective venture capital fund with theremaining 20 percent504 of investment returns in excess of designated capital retained by eachrespective venture505 capital fund in accordance with the funds partnership agreement.506 50-7-103. 48
    • 507 (a)(1) On or before January 1, 2014, and January 1 of each subsequent year,the program508 administrator, through the authority, shall submit a report on theimplementation of this509 article to the Governor, the Lieutenant Governor, the Speaker of the House of510 Representatives, and the chairpersons of the Senate Finance Committee andthe House511 Ways and Means Committee.512 (2) The department shall also publish the report on the departments website ina publicly513 available format.514 (3) The report published on the website shall not include any proprietary orconfidential515 information.516 (b) The report shall include:517 (1) With respect to each purchaser of insurance premium tax credits:518 (A) The name of the purchaser of the insurance premium tax credits;519 (B) The amount of insurance premium tax credits allocated to the purchaser;520 (C) The amount of designated capital the purchaser contributed for theissuance of the521 tax credit certificate; and522 (D) The amount of any insurance premium tax credits that have beentransferred under523 Code Section 50-7-99;524 (2) With respect to each venture capital fund or private equity organizationthat has525 received an allocation of designated capital:526 (A) The name and address of the venture capital fund or private equityorganization;527 (B) The names of the individuals making qualified investments under thisarticle;528 (C) The amount of designated capital received during the previous year;529 (D) The cumulative amount of designated capital received;530 (E) The amount of designated capital remaining uninvested at the end of thepreceding531 calendar year;532 (F) The names and locations of qualified businesses receiving designatedcapital and533 the amount of each qualified investment;534 (G) The annual performance of each qualified investment, including theinvestments 49
    • 535 fair market value as calculated according to generally accepted accountingprinciples;536 and537 (H) The amount of any qualified distribution or nonqualified distributiontaken during538 the prior year, including any management fee;539 (3) With respect to the Georgia Capital Acceleration Fund:540 (A) The amount of designated capital received during the previous year;541 (B) The cumulative amount of designated capital received;542 (C) The amount of designated capital remaining uninvested at the end of thepreceding543 calendar year;544 (D) The names and locations of qualified businesses receiving designatedcapital and545 the amount of each qualified investment; and546 (E) The annual performance of each qualified investment, including theinvestments547 fair market value as calculated according to generally accepted accountingprinciples;548 and549 (4) With respect to the qualified businesses in which venture capital fundshave invested:550 (A) The classification of the qualified businesses according to the industrialsector and551 the size of the business;552 (B) The total number of jobs created in Georgia by the investment and theaverage553 wages paid for the jobs; and554 (C) The total number of jobs retained in Georgia as a result of the investmentand the555 average wages paid for the jobs."556 SECTION 2.557 This Act shall become effective upon its approval by the Governor or upon itsbecoming law558 without such approval.559 SECTION 3.560 All laws and parts of laws in conflict with this Act are repealed. 50
    • In re OPENLANE, Inc. Shareholders Litigation, Cons. C.A. No. 6849-VCN (Del. Ch.Sept. 30, 2011).Issue Addressed: Did the majority shareholders and the board of directors in this closely-held company breach their fiduciary duties by approving a merger in which they hadsufficient control to provide the statutorily required consent and did not follow customaryprocedures, such as failing to obtain a fairness opinion and failing to include a “fiduciary-out”? Short answer: No.Brief OverviewThis action arises out of the proposed merger of OPENLANE, Inc. with a wholly ownedsubsidiary. Plaintiff brought a class action on behalf of the public shareholders ofOPENLANE and moved to preliminarily enjoin the merger. This 46-page decision deniedthat motion. OPENLANE was in the business of selling leased vehicles that were turnedin by lessees. In April 2010, they anticipated a decline in the number of vehicles comingoff lease in 2011 and 2012, and signed an engagement agreement with a financial advisorto undertake a market outreach to a limited number of strategic acquirers. In May 2011,OPENLANE entered into a second agreement with its financial advisor which providedfor a market outreach to a limited number of strategic acquirers including one that hadalready expressed an indication of interest.On August 11, 2011, the board unanimously approved the merger and on August 15,2011 entered into an agreement and plan of merger. The next day OPENLANE receivedconsents from a majority of the preferred and common shareholders sufficient underDelaware law and the charter of OPENLANE to approve the merger agreement. Themerger agreement with KAR provided that as a condition to closing, the holders of atleast 75% of the outstanding shares of stock shall have executed and delivered writtenconsents approving the merger, although that condition could have been waived by KAR.That condition was, however, satisfied on September 12, 2011. The merger agreementalso included a no-solicitation provision and provided that $36 million would be held inescrow for at least 18 months to cover numerous contingencies, includingindemnification obligations, and appraisal proceedings by shareholders.Procedural PostureOn September 9, 2011, the plaintiff filed the complaint and a motion for a preliminaryinjunction requesting that the Court enjoin the merger.Plaintiffs’ ArgumentsPlaintiffs argued that the sales process undertaken by the board was flawed, and inviolation of both Revlon and Omnicare.
    • The plaintiffs argued that the sales process was flawed because the board only contactedthree potential buyers, failed to perform an adequate market check, failed to receive afairness opinion and relied on scant financial information which led to a transaction thatfailed to maximize shareholder value. The plaintiffs also argued that the members of theboard breached their fiduciary duty by agreeing to improper deal protection devices suchas the no-solicitation clause and because the management owned a majority of the shareswhich made shareholder approval almost certain – - and there was also the absence of afiduciary-out provision. The complaint also alleged that the board was motivated byimproper reasons such as by an offer of employment in the surviving company and theacceleration of stock options.After reciting the familiar standard for preliminary injunctions, see footnote 14, the Courtparsed each of the allegations.For example, the Court reviewed the Revlon claims and observed that there is no singlepath for the board to follow in order to maximize stockholder value but the directors mustfollow a path of reasonableness which leads to that goal. The Court observed that “if aboard fails to employ any traditional value maximization tool, such as an auction, a broadmarket check, or a go-shop provision, that board must possess an impeccable knowledgeof the company’s business for the Court to determine that it acted reasonably.” Seefootnote 22.The Court described the two-part analysis for the enhanced scrutiny involved in a changeof control transaction: (a) a judicial determination regarding the adequacy of the decisionmaking process employed by the directors, including the information that the directorsbased their decision; and (b) a judicial examination of the reasonableness of the directors’action in light of the circumstances then existing. The Court focused on the gist of thereview under the enhanced scrutiny standard in this context as requiring that the boarddemonstrate that “they were adequately informed and acted reasonably.”Moreover, the Court reiterated the standard in the context of a preliminary injunctionwhich requires a plaintiff to “establish a reasonable likelihood that at trial the members ofthe board would not be able to show that they had satisfied their fiduciary duties.” (citingOptima Int’l of Miami, Inc. v. WCI Steel, Inc., C.A. No. 3833-VCL, at 130 (Del. Ch. June27, 2008) (transcript)). The Court explained in great detail why the plaintiff failed topresent a compelling argument for injunctive relief and the Court also described in detailthe satisfactory efforts that the board followed including the expertise by at least twomembers of the board who were very active in the industry.Escrow AgreementThe Court found that although rare in deals with public companies, and common in dealsfor private companies, there is no inherent unfairness to shareholders of an escrowagreement, which is often incentive for buyers to pay more. 52
    • Defensive Devices Under Delaware Law to Lock up a MergerDefensive devices which lock up a merger require special scrutiny under the two-part testin Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). The first part of theUnocal test requires that the board demonstrate that it had reasonable grounds forbelieving a danger to corporate policy and effectiveness existed which is basically aprocess-based review. They demonstrate the first part of the Unocal test bydemonstrating good faith and reasonable investigation but the process must lead to thefinding of a threat. The second part of the Unocal test requires the board to demonstratethat its defensive response was reasonable in relation to the threat posed.This inquiry also involves a two-step analysis. The board must first establish that themerger deal protection device is adopted in response to the threat and was not coercive orpreclusive; and then demonstrate that their response was within a range of reasonableresponses to the threat perceived.To satisfy this burden the plaintiff must establish a reasonable likelihood that at trial themembers of the board would not be able to show that they had reasonable grounds forbelieving a danger to corporate policy and effectiveness existed and that the responsethey adopted to combat the threat was reasonable in relation to the threat posed.In a change of control transaction where a majority of the board has no interest in thesurviving entity, the board does not have the entrenchment goal which the Supreme Courtwas worried may have motivated the directors in Unocal.The Court explained those situations that the Supreme Court in Unocal regarded as eithercoercive or preclusive.The Court also reviewed the Delaware Supreme Court decision in Omnicare in which theSupreme Court determined that shareholder voting agreements negotiated as part of amerger agreement, which guaranteed shareholder approval of the merger if put to a vote,coupled with the merger agreement that both lacked the fiduciary-out, and contained aSection 251(c) provision requiring the board to submit the merger to a shareholder vote,constituted a coercive and preclusive defensive device. See Omnicare, 818 A.2d at 935.The Court distinguished the Omnicare decision because in that case the merger was a faitaccompli. Instead, the merger before the Court in the instant case was not a fait accompli,in part because there was no evidence of a stockholders agreement to lock up statutoryapproval of the merger. Rather, the merger was approved through the solicitation ofshareholder consents under 8 Del. C. Section 228. See footnote 48. 53
    • Shareholder ApprovalUnder the DGCL, a majority of a corporation’s outstanding stock must support a mergerbased on Section 251(c) and stockholders are allowed to demonstrate their approvalthrough written consents under Section 228(a). See Optima, C.A. No. 3833-VCL at 127(noting that nothing in the DGCL requires any particular period of time between theauthorization by a board of a merger agreement and the necessary stockholder vote). Seealso footnote 53 (noting that there is no clear authority under Delaware law that wouldrequire a Court to automatically enjoin a merger agreement that did not contain a“fiduciary out” when no superior offer has emerged).The facts of this case were that the majority consent was obtained one day after the boardapproved the merger, but the supermajority consent – - which was not needed to approvethe merger but was a waivable condition to closing by KAR, came several weeks later.The Court spent a substantial number of pages discussing the disclosure claims which itrejected.The Court concluded the last few pages of the opinion with a review of the elements forthe prerequisites for injunctive relief and found the absence of irreparable harm inaddition to the failure to demonstrate a reasonable probability with success on the merits.As for the balancing of the equities, although the lack of an auction, the lack of a fairnessopinion, the lack of a fiduciary-out or any post-agreement market check, did raiseconcerns, there were no better offers that came forward, and sophisticated buyers shouldunderstand that if a materially better offer were to be made, that judicial relief quite likelywould have been available. In sum, the balancing of the equities did not favor enjoiningthe transaction and the motion for injunctive relief was therefore denied.Final practical observation: It should be noted in closing that this hefty opinion wasdrafted, and all the briefing and a hearing occurred all in the space of approximately 3weeks. 54
    • MEMORANDUMTO: Clients and EntrepreneursFROM: John Yates -- Morris, Manning & Martin, LLP Dan Branch -- Taylor Consulting Group, Inc.RE: Valuations & Appraisals – When, Why & HowDATE: February 10, 2011___________________________________________________________________This Frequently Asked Question (FAQ) memo addresses typical questions from companies regardingobtaining a valuation or appraisal. This document is co-authored by John Yates of Morris, Manning &Martin, LLP (www.mmmlaw.com) and Dan Branch of Taylor Consulting Group, Inc.(www.taylorconsultinggroup.com). The following questions are commonly asked of technology andbusiness services companies. We hope this information is helpful to you. Please note that there areadditional questions that will be relevant in this area and you should consult your legal, tax andaccounting advisor with any other questions.1. When do I need a valuation or appraisal?Answer: There are several situations where a valuation or appraisal may be appropriate. A few ofthe common situations are listed below: a. Determination of Stock Option Exercise Price – Stock options fall within the Financial Accounting Standards Board’s (FASB) definition of share-based payment arrangements, as described in FASB’s ASC 718 Compensation – Stock Compensation (formerly FAS 123(R)). Within that accounting standard, “fair value” is established as the required measurement objective for such share- based payment arrangements (which includes stock option plans). Entities are required to account for share-based payment transactions involving employees (the setting of a stock option exercise price is an example of such a transaction) using fair-value-based methodologies. Accurately determining the “fair value” of a financial instrument typically requires complex financial analysis and in-depth knowledge of several accounting standards. With increased scrutiny from auditors, the SEC, and other regulatory agencies, technology companies (even private ones if they are planning to go public within the next three to five years) should consider using an independent valuation expert to assist with such analyses. Additionally, such analyses may also fulfill compliance issues surrounding Section 409A of the Internal Revenue Code (the “Code”). There are exceptions to the ASC 718 requirements (e.g., an employee share ownership plan (ESOP) may be exempted); therefore, it is recommended that clients or interested parties discuss with their accountants or other advisors about how their technology company may be impacted by the ASC 718 requirements. b. Merger & Acquisition Support – Performing detailed evaluations of your proposed transactions (as well as a complete comparison of each) before negotiations begin ensures accurate planning and execution once negotiations are over. Valuation experts can assist in analyzing and evaluating your proposed transactions, without the full-blown financial commitment that an investment bank would require. Valuation experts can assist in determining and articulating the value
    • and risk drivers inherent in a proposed transaction to ensure that your growth strategy aligns with your business objectives – without an investment banker’s inherent incentive to “get the deal closed.” c. Tax Issues (for example, Gift or Estate Planning) – International, federal, state, and local regulatory authorities increasingly stress the need to support various financial and tax positions with thorough and independent valuations. These valuations can strengthen your tax strategies and address the broad spectrum of regulatory requirements. An independent valuation expert should apply thorough analysis, independent objectivity, and knowledge of case law to your tax-related valuation engagements. Additionally, experienced valuation experts typically have performed hundreds of valuations of closely held entities (including C corporations, S corporations, limited liability companies, and partnerships); therefore, their experience can ensure your tax-related valuation meets all regulatory requirements.2. With regard to stock options, is there a legal requirement to have a valuation or appraisal everytime that a company grants stock options?Answer: There is no formal legal requirement for a valuation or appraisal every time a companygrants stock options, but it is a best practice to obtain an independent valuation for common stock (orother securities) which may be purchased pursuant to options granted in the context of an option orincentive plan. In some cases, companies will obtain an annual valuation and seek an update for anyinterim option grants to confirm the fair market value of the common stock and to set the exercise price atthe time of an option grant.3. What is Section 409A of the Internal Revenue Code (“Code §409A”) and how does it relate tothe requirement or need for obtaining a valuation or appraisal? How is Code §409A relevant to stockoption grants?Answer: Established by the American Jobs Creation Act of 2004, Code §409A provides newrequirements applicable to “nonqualified deferred compensation plans,” which includes arrangementssuch as certain stock options, phantom stock, and certain stock appreciation rights. Code §409Agenerally requires that stock options and stock appreciation rights have an exercise price equal to orgreater than the fair market value of the underlying common stock as of the grant date to avoid harsh taxconsequences. If the stock option or stock appreciation right exercise price is less than the fair marketvalue of the common stock, additional taxes and “penalties” may be assessed depending upon whethercertain requirements are met. For purposes of Code §409A, fair market value is to be determined by the“reasonable application of a reasonable valuation method.” Regulations under Code §409A provide a“safe harbor” whereby a valuation resulting from an appraisal is presumed to be “reasonable” if thevaluation is performed by an independent appraiser, and the date of the valuation used is within the last12 months (provided that the valuation method used and the application of that method cannot be shownto be “grossly unreasonable”). Accordingly, most private companies utilize an independent valuationexpert to perform an appraisal to determine the fair market value to take advantage of this safe harbor. Itis helpful to know that appraisals that are performed to meet the requirements of ASC 718 (formerly FAS123(R)) may potentially also be used to satisfy the requirements of Code §409A; this may enable thecompany to fulfill two regulatory requirements for the price of one analysis. Because the two standardsare different (e.g., ASC 718 requires fair value measurements whereas §409A requires fair market valuemeasurements; ASC 718 takes a corporate perspective while §409A takes a personal perspective),concluded values could be different; your independent valuation expert will be able to help you make thatdetermination.4. What is the accounting standard ASC 718 (formerly FAS 123(R)) and how does it relate to thegrant of stock options and the need for a valuation or appraisal in connection with stock option grants? 2954568v1
    • Answer: Any pre-IPO company will want to ensure it understands and correctly applies theaccounting guidelines and standards that dictate the financial reporting of stock options. Otherwise,incorrect accounting of compensation expense related to previous equity awards may force a company torestate many years worth of financial statements – a nightmare for a company in the run-up to IPO. TheGAAP accounting standard that codifies the requirements for the treatment of stock options is FASB’sASC 718 Compensation – Stock Compensation (formerly FAS 123(R)). As required under ASC 718,both public and private companies must record compensation expense for stock options, even if thoseoptions have no intrinsic value. An important aspect of ASC 718 is that the “fair value” of the underlyingcommon stock and the “fair value” of the stock option itself must be determined as of the grant date. It isthis key point (determining the fair values as of the grant date) that usually catch unknowing companies inthe “cheap stock” trap. (An example of the cheap stock trap: a company may spontaneously award adeserving employee with options that are fully vested and have a $0 strike price; because of the “cheapstock” deal, the company may not know it just burdened itself with substantial compensation expense aswell as hit the employee with a personal income tax bill.) Determining the fair values of the commonstock and the stock option itself requires significant judgment and complex financial analytical tools.Therefore, as an added level of comfort for directors and management, most private companies utilize anindependent valuation expert to perform an appraisal to determine those fair values on the grant date.5. What documentation should be obtained by a company in connection with stock option grantsto support the valuation or appraisal used to determine the exercise price for the stock options?Answer: Because ASC 718 requires reasonable and supportable estimates for each assumptionused in the analysis, a company should (at the least) maintain the documentation that demonstrates therationale and application of each assumption. For instance, the expected term of the stock option shouldbe based on the contractual term of the stock option as well as the employee’s expected exercise and post-vesting behavior; therefore, an auditor or SEC inspector will want to see the supporting materials andcalculation used to develop the expected term. When a company uses an independent valuation expert toperform such an analysis, the expert, knowing the documentation requirements and audit process,typically provides the necessary documentation that supports their conclusion of value as well as a writtenreport describing the assumptions used and methodologies applied. The level of documentation andinclusion of a written report varies depending on the agreed to scope of work and desired deliverables.6. Can a company conduct its own valuation and use that for purposes of complying with theabove or is an independent valuation required?Answer: There are no prohibitions against a company conducting its own valuation. However,because of the complex valuation methodologies utilized in stock option-related valuations, a company’sself-determined valuation would likely increase the level of scrutiny applied by the company’s auditorsand regulatory agencies. In such cases, if the IRS challenges the company’s valuation, it may have anadvantage if the company is not fully versed in valuation principles and methodologies. According toCode §409A, valuations must take into account standard valuation practices and must also take intoaccount certain factors mentioned in regulations. Additionally, the person or persons performing thevaluation should have significant knowledge, experience, education, and training in performingvaluations. In relation to ASC 718 requirements, accurately determining the “fair value” of a financialinstrument typically requires complex financial analysis and in-depth knowledge of several accountingstandards. With increased scrutiny from auditors, the SEC, and other regulatory agencies, technologycompanies (even private ones if they are planning to go public within the next three to five years) shouldconsider using an independent valuation expert to assist with such analyses.7. What are the general costs and timetable for obtaining a valuation or appraisal for stock optionpurposes? 2954568v1
    • Answer: A rough estimate of costs is $5,000 to $12,000, though company-specific factors may warrant acost outside of this range. The cost will depend on several factors including: a. Complexity of the capital structure (a company with several preferred stock tranches will require more time to analyze than a company with only common stock); b. Complexity of the corporate organizational structure (a company with foreign-based subsidiaries of partial ownership will require more time to analyze than a company with only wholly- owned domestic subsidiaries); c. Size of the company and the complexity of the company’s operations (a company with multiple or multinational business units and multiple product lines will require more time to analyze than a company with only one business unit and few products lines); and d. Timetable for completion of analysis (an analysis done in a compressed timetable typically requires additional staffing and resource levels compared to an analysis done in a normal timetable).A typical valuation for stock option purposes will take two to three weeks. Factors that will positivelyimpact the timetable include the valuation expert’s familiarity with the company, timely receipt andavailability of the company’s data, good responsiveness by the company’s representatives assisting in thevaluation process, and participation of company personnel who are knowledgeable of the pertinent factsand circumstances.8. In the area of mergers and acquisitions (M&A), when are valuations or appraisals required?Answer: Though valuations can provide important information to assist key decision-makers inanalyzing and evaluation proposed transactions, valuations are not required. Typically, a companycontemplating a transaction will perform a valuation to analyze the impact of the transaction. Thecompany may perform its valuations internally or enlist an independent valuation expert. If performedinternally, a company should ensure the personnel performing the analysis have the requisite knowledgeand experience with valuation principles and methodologies.9. Are there legal requirements for a valuation or appraisal in an M&A transaction?Answer: There is not a formal legal requirement for a valuation or appraisal in an M&Atransaction. As mentioned previously, valuations can assist key decision-makers in analyzing andevaluating proposed transactions. However, key decision-makers typically desire analyses that can ensurethey fulfill their fiduciary duties. Such analyses are typically called fairness opinions. Fairness opinionscan provide proof in litigation that the decision maker used reasonable business judgment in making adecision on behalf of others.10. What is a fairness opinion and why is it important?Answer: A fairness opinion is a statement by a financial advisor that, from a financial point ofview, the consideration or the financial terms in a merger, acquisition, divestiture, securities issuance, orother transaction between specific parties are fair to a specific party. Fairness opinions serve twopurposes: a. To provide key decision-makers with relevant, independently produced information; and b. To act as factual proof in litigation that the decision maker used reasonable business judgment in making a decision on behalf of others.An opinion of fairness, from a financial point of view, is not an assurance that the highest possible pricewill be received in a proposed sale or that the lowest price will be paid in a proposed purchase. It is the 2954568v1
    • financial advisor’s conclusion that, based on financial factors, the exchange of the consideration givenand received in the proposed transaction or the proposed transaction’s financial terms falls within a rangewhich the parties to the transaction might reasonably agree.Business decision-makers often need to understand whether a potential transaction is reasonable, from afinancial point of view, to their businesses or to shareholders of their businesses. Sometimes this needmay be a result of their fiduciary obligations; other times it may be simply to augment their businessjudgment. Acting with informed business judgment when considering a proposed transaction often canbe the central issue in litigation against boards of directors or other decision makers exercising theirfiduciary duty. What is “fair” can be disputed, especially by contending parties in a lawsuit. An opinionfrom a financial advisor can support the contention by a board of directors, special committee, generalpartner, or trustee that it acted with informed judgment in deciding on a proposed transaction. Forinstance, boards of directors have a fiduciary duty to the shareholders; therefore, fairness opinionsrequested by boards of directors will demonstrate the fairness (or unfairness) of the transaction from theperspective of the shareholders. If boards of directors are found to have been negligent in their fiduciaryduty, even after the fact, the board members may be personally liable for such negligence.Because there can be many “perspectives” present in a transaction, it is not uncommon in very largetransactions to have multiple fairness opinions performed in relation to a single transaction (eachperformed by separate, independent financial advisors with a specific financial perspective, or point ofview).11. Is a fairness opinion required in connection with every M&A transaction?Answer: As previously mentioned, a fairness opinion, though not required for M&A transactions,can provide key decision-makers with relevant, independently produced information as well as act asfactual proof in litigation that the decision maker used reasonable business judgment in making a decisionon behalf of others. Also, by utilizing an independent valuation expert, as opposed to obtaining a fairnessopinion from a banker involved in the transaction, the independent valuation expert’s fairness opinion canprovide an extra check on the terms of the transaction. Because the size and components of eachtransaction are different (i.e., there are rarely “plain vanilla” transactions), the key decision-makers willneed to determine if a fairness opinion is warranted on a transaction-by-transaction basis.12. What are the general costs and timetable for fairness opinions?Answer: Costs vary considerably. The cost for a fairness opinion will depend on several factorsincluding: a. Complexity of the transaction; b. Complexity of the underlying assets or company being transacted; c. Size of the company; d. Diversity of products or services involved in the transaction; e. Purpose and use of the analysis; and f. Timing needs and staffing requirements.The timetable for a fairness opinion can also vary considerably depending on the same factors that affectcost. To ensure the information from a fairness opinion is available to the key decision-makers well inadvance of the decision date (as well as reduce cost), it is wise to involve the independent valuationexpert early in the transaction process. 2954568v1