53 posts categorized "Legal Docs"

Bad actors, general solicitors, and other troublemakers

Big, big changes to Reg D filing requirements are potentially in the works, ranging from dire penalties for failure to file, to prefiling requirements to crimp the efficiency of Rule 506(c) offerings.

But these changes to Reg D filing requirements are in the works. They may not happen. Or, if they happen, they may be other than the changes first proposed.

8287466073_590433fbab_oMeantime, however, other changes have been implemented under Dodd-Frank and the JOBS Act, taking the form of final rules that impact day-to-day financings claiming exemption under Rule 506(b).

I'm thinking here primarily of the bad actor rule, now a part of Rule 506, and the renewed attention to general solicitation, which you want to track for purposes of reassuring yourself that you really are inside Rule 506(b) (which continues to prohibit general solicitation).

I thought it would be interesting to drive by how these changes to the law are being reflected in stock or convertible note purchase agreements.

Here's a bad actor rep and warranty from Bo Sartain - the party giving the rep here is the purchaser:

No Disqualification Events. Neither the Investor nor, to the extent it has them, any of its shareholders, members, managers, general or limited partners, directors, affiliates or executive officers (collectively with the Investor, the “Investor Covered Persons”), are subject to any Disqualification Event, except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Investor has exercised reasonable care to determine whether any Investor Covered Person is subject to a Disqualification Event. The purchase of the Shares by the Investor will not subject the Company to any Disqualification Event.

Pretty straightforward. A company asking an investor for such a rep may need to do more to look into whether the person is indeed a bad actor or not; but the rep doesn't hurt.

Investors, of course, may want a similar rep from the company - that the company's insiders don't include a bad actor.

And investors concerned with the risks of a 506(c) financing will ask the company for reassurance that it did not engage in general solicitation in connection with the offering (or any prior offering).

Here's an interesting rep from the model stock purchase agreement promulgated by the National Venture Capital Association. What makes it interesting is that purchaser, not the company, is giving assurances as to general solicitation:

No General Solicitation.  Neither the Purchaser, nor any of its officers, directors, employees, agents, stockholders or partners has either directly or indirectly, including, through a broker or finder (a) engaged in any general solicitation, or (b) published any advertisement in connection with the offer and sale of the Shares.

Implicit here for companies is the suggestion that, not only do you have to take care to not generally solicit, but you may also need to worry about whatever tweeting or blogging your investors might engage in during the course of the offering.

Typesetting photo: Eva-Lotta Lamm / Flickr.

Four surprises in the letter agreement for the purchase and sale of The Washington Post

On my phone over coffee this morning, I've just read an SEC filing pertaining to Jeff Bezos' purchase of The Washington Post.

The filing is a letter agreement. Though it recites that the parties will complete definitive transaction documents within 60 days, the letter expressly provides that it is to be considered a binding agreement.

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And the letter has a ton of detail.

Here are four surprises, points which may or may not be reflected in the mass media and mainstream tech press reporting on the deal.

1. The deal is a stock/unit purchase and not an asset sale.

Though the letter contemplates that certain assets will be transferred out of certain Seller subsidiaries, the transaction is structured as a purchase of all the equity interests in operating subsidiaries of The Washington Post Company.

'The Seller agrees to sell, and the Purchaser agrees to purchase, for an aggregate purchase price of $250,000,000 in cash (subject to the adjustments described in Section 2) (the “Purchase Price”), all of the issued and outstanding equity interests (the “Post Subsidiary Securities”) of each of WP Company LLC, Express Publications Company, LLC, El Tiempo Latino, LLC, Robinson Terminal Warehouse, LLC, Greater Washington Publishing, LLC and Post-Newsweek Media, LLC (collectively, the “Post Subsidiaries”), which Post Subsidiaries are each subsidiaries of the Seller and which together conduct the Seller’s Post Business.'

2. The Buyer is assuming pension, benefit, collective bargaining, and a ton of other obligations to Washington Post employees.

Is this point being covered in mainstream reporting? Would be interesting to know an estimated dollar value.

I won't quote all the provisions from the letter agreement on this topic, but here is just one:

'Promptly following the Closing and following the satisfaction of all requirements of applicable law, the Seller shall transfer to a pension plan established by the Purchaser that satisfies the requirements of Section 401(a) of the Code (the “Purchaser Pension Plan”) all liabilities under the Retirement Plan for The Washington Post Companies (the “Post Pension Plan”) for (vested and unvested) benefits earned by employees actively performing services in the Post Business for the Seller or any of its subsidiaries as of the Closing (each such employee, a “Post Employee”) and cash in an amount (or other assets, as mutually agreed by the Seller and the Purchaser, that have a value), as of the Closing, equal to the sum of (I) the sum of (A) the projected benefit obligation (within the meaning of US generally accepted accounting principles) in respect of such liability as of the Closing, determined using the same assumptions used for purposes of calculating the projected benefit obligation in Seller’s financial statements included in the Seller’s Annual Report on Form 10-K for its fiscal year ended December 31, 2012, filed with the SEC, but in no event less than the minimum amount required to be transferred to the Purchaser Pension Plan in compliance with Section 414(l) of the Internal Revenue Code of 1986, as amended (the “Code”), and the treasury regulations issued thereunder and Section 4044 of the Employee Retirement Income Security Act of 1974, as amended (the “414(l) Amount”), plus (B) $50,000,000 (such sum, the “Pension Liability Amount”), plus (or minus) (II) earnings (or losses), if any, on the Pension Liability Amount from the Closing through the date of transfer at a rate equal to the actual rate of return realized on all of the assets of the Post Pension Plan for such period (the “Pension Transfer Amount”).'

3. WaPo Labs takes a license back, with handcuffs, for "Social Reader."

Is this provision, in a nutshell, indicative of a general lack of vision within the legacy newspaper publishing business as a whole? That may be grossly unfair. But can you imagine any viable new media business that agrees to stand still for five years?

'The Purchaser shall, on and after the Closing, license the content of the publications published by the Post Subsidiaries to WaPo Labs for a term of five years from the Closing Date for use in connection with “Social Reader”, a topical-based news aggregator, and, in consideration for such license, the Seller shall pay the Purchaser a fee equal to 10% of the annual profit, if any, of WaPo Labs for such period. The use, promotion, amount and nature of the distribution of content of the Post Business by Social Reader may not substantially depart from the use, promotion, amount and nature of such distribution by Social Reader on or prior to the date of this Letter Agreement. The parties shall memorialize this agreement in a separate license that contains terms (other than the duration, termination without cause rights and price) not less favorable to the Purchaser than those given to other significant content providers. The parties intend that such license would not (1) permit the assignment, resale, syndication or sublicensing of such content nor (2) allow the use or distribution of or access to the content in a manner that adversely affects the Purchaser’s ability to monetize its content in any material respect.'

4. Background IP license is drafted in an interesting way.

Okay, this is more a legal doc drafting point that will appeal to legal drafting geeks like Jeremy Freeland, Brian Rogers, Mark Anderson, Jay Parkhill and me, but I thought this backstop IP license provision was interesting for how it attempted a conceptual exclusion of subscription or SaaS style services.

'To the extent that any intellectual property (including software, technology or patents) owned by the Seller or its subsidiaries (other than WaPo Labs’ Social Reader, which is the subject of Section 6(d)(ii), or any content) is used in (or under development for use in) the operation of the Post Business as currently conducted, but is not owned by the Post Subsidiaries nor transferred to the Purchaser as of the Closing Date (collectively, “Background IP”), then the Seller and its subsidiaries shall grant the Post Subsidiaries a non-exclusive, royalty-free, perpetual, irrevocable license to such Background IP (the “Background License”), including access to any applicable source code and modification rights (it being understood that the Background License shall not include the provision of any information technology services or technical services, or other support or services, all of which will be addressed in the Transition Services Agreement).'

Haven't read attached exhibits of reps and warranties, and want to look again at the noncompete provision, so may post further on this.

Photo: still from All the President's Men.

VCs, Protecting Ideas, and NDAs -- the Nextdoor.com Abhyanker Saga Continues

Nextdoor.com, Inc. v. Abhyanker, C-12-5667 EMC (N.D. Cal. July 19, 2013)

[Note from Bill: this is a post by Venkat Balasubramani, legal blogger par excellence. I am thrilled that Venkat is breaking, here on Counselor@Law, fresh new developments in this important, ongoing lawsuit. The case is not over, but it's getting juicy, and it throws into one package many of the disparate topics we like to cover on this blog (all that's missing is a securities law angle). Click here for a pdf of the written court ruling Venkat is analyzing.]

Abhyanker, who is a lawyer and well known entrepreneur, alleges that he tried to develop a neighborhood-based networking concept known as “Nextdoor,” that someone else ultimately took and ran with, to form Nextdoor.com. According to him, his Nextdoor idea was a spinoff from his concept called LegalForce, which was a private social network for inventors. He also developed “Fatdoor,” a Wikipedia-like public database of neighbor profiles. [sounds scary from a privacy standpoint!] Fatdoor’s assets were ultimately purchased by Google. In 2007 Abhyanker left Fatdoor (who wanted to bring in a new CEO) and came back to work on his Nextdoor idea.  

2757328137_b728306d92_zAbhyanker alleges that he told two people about his Nextdoor ideas and trade secrets: (1) Benchmark Capital; and (2) Sandeep Sood, a designer and contractor for LegalForce. At some point, Abhyanker pitched the Nextdoor idea to VCs, including Benchmark Capital. Although he did not discuss any confidential information in the initial meeting, he supposedly sought and obtained “assurances” from Benchmark that any confidential information disclosed by Abhyanker would be kept confidential. According to him, relying on these assurances, he pitched the Nextdoor idea to Benchmark. In 2007 Abhyanker left Fatdoor (who wanted to bring in a new CEO) and came back to work on his Nextdoor idea. According to him, while he returned to focus on his Nextdoor idea, others were independently working on the Nextdoor concept, and used confidential information and trade secrets to swoop in on the nextdoor.com domain name that Abhyanker had been pursuing for years. The Nextdoor.com founders were Benchmark capital “entrepreneurs in residence,” and Abhyanker alleges that the founders gained access to Nextdoor trade secrets through their work at Benchmark. 

These were just the counterclaim wranglings. The case was preceded by a (still-ongoing) proceeding in the Trademark Trial and Appeals Board, and a short-lived state court proceeding (which Abhyanker filed and dismissed).  

Abhyanker initially asserted several other counterclaims, but withdrew those and filed an amended pleading asserting only a trade secrets claim.  Nextdoor.com (& Sood) moved to dismiss Abhyanker’s trade secret claims. 

Adequacy of trade secrets allegations: Nextdoor argued that Abhyanker’s trade secrets claim failed because he failed to set forth the alleged trade secrets with the sufficient degree of particularity. The court rejects this argument, saying that Abhyanker’s laundry list is sufficient, and requiring him to be more specific would run the risk of forcing him to disclose his trade secrets at the pleading stage. Nextdoor also argued that there were no allegations of how it allegedly exploited Abhyanker’s trade secrets, but the court says there are some allegations—principally, Abhyanker alleges that Nextdoor used the bidding history for the nextdoor.com domain to its advantage. 

The court does say that the parties should work together to come up with a process for identifying the trade secrets and whittling down Abhyanker’s laundry list.  After this process is over, the court says that Nextdoor can revisit the trade secrets issue at the summary judgment phase, hinting that Abhyanker's trade secrets claim may not be all that they are cracked up to be. 

Public disclosure of trade secrets: Nextdoor also argued that Abhyanker disclosed the trade secrets in question in a patent application. Nextdoor says that Abhyanker had filed a patent application disclosing much of the trade secrets at issue in connection with his Nextdoor idea; Abhyanker disagrees, and says that the patent application covered Fatdoor (the wiki site) technology. The court does not delve into the details regarding what facts were disclosed in the patent application (presumably because the facts regarding what Nextdoor does are as yet undveloped), but does say that the patent application discloses the use of nextdoor.com in connection with a  networking site. The court dismisses Abhyanker’s trade secrets claim to the extent it’s based on Nextdoor.com’s alleged misappropriation of “using the name nextdoor.com in connection with a  neighborhood-based social network.”

In addition to the above rulings, the court also (1) says that Abhyanker’s alleged admissions in other proceedings that he does not own the trade secrets at issue (and that the trade secrets were part of FatDoor, which was ultimately acquired by Google) are not necessarily binding against Abhyanker in this matter; and (2) strikes a few of his affirmative defenses. 

Finally, the court also denies Abhyanker’s request to disqualify Nextdoor.com’s law firm, Fenwick & West, on the basis that they previously represented LegalForce. Abhyanker says that Fenwick assisted him in protecting his IP for LegalForce, including preparing non-disclosure and invention and assignment agreements. Fenwick, for its part, had an independent Fenwick attorney review the files and billing records. This lawyer concluded that Fenwick did not really help LegalForce with its IP strategy and at most provided LegalForce with some form documents. The court credits Fenwick’s view, rather than Abhyanker’s view, and also says that the matters in question (this dispute and the prior representation of LegalForce) are not related. The court also says that Fenwick was not likely to glean confidential information relevant to this dispute as a result of its limited representation of LegalForce. (The court also notes that Fenwick implemented an ethical screen between the lawyers working on litigation matters against Abhyanker and lawyers who worked on LegalForce, the bulk of whom are no longer at Fenwick anyway.)

__

Yikes. A messy dispute that weakly promises to get at the answer of whether, patents aside, ideas are protectable in this context. In terms that will resonate with entrepreneurs, this case gets at the perennial question of "if I have an idea and a domain name, or the name of an app" should I require someone to sign a NDA before I disclose the details?" My money is on the parties running out of gas to pay their lawyers and eventually coming up with some sort of settlement.

Abhyanker has weak trade secrets claims overall. But he was undoubtedly pursuing nextdoor.com. The fact that after pitching it to Benchmark, it showed up as an idea pursued by former Benchmark entrepreneurs in residence can’t look particularly good for Benchmark. (In addition to the domain name, he also pointed out that the prototype used by Nextdoor.com was for the same neighborhood that Abhyanker focused on when he was working with concepts around next-door.) That said, VCs don't sign non-disclosure agreements for this very reason, and although they are from time-to-time accused of taking an idea that they may receive via a pitch and running with it using another team, I don't get the sense that what happened here is wildly outside the expectations of most entrepreneurs. (It's possible that I'm way off on this, feel free to correct me in comments. It's also worth noting that as domain names become scarce and more valuable, Abhyanker's allegations regarding the domain name--while seemingly menial--do get at an important part of a start-up's trajectory.) 

I’m curious about why Abhyanker withdrew his breach of contract claims that presumably included claims based on non-disclosure obligations Benchmark agreed to? Common wisdom suggests that non-disclosure agreements are over-rated and may even make you look amateurish, but you wonder whether a robust non-disclosure agreement would have helped Abhyanker in this scenario? 

Apart from the merits of the dispute, the disqualification ruling is very interesting. Fenwick, which is one of the go-to firms in Silicon Valley (and in Seattle), works with a huge number of entrepreneurs and ventures. To the extent the judge here would have disqualified it, I would guess it would end up taking a second look at its policies around conflicts and whom it can continue to represent when clients (or former clients) have disputes against one another. I’m not saying its representation of Nextdoor.com against Abhyanker here is improper, but I found it very curious that the court relied heavily on summaries of billing records, when it’s widely known that lawyers in this space often work with smaller clients in the hopes that they may grow into more viable clients—it’s not about billing in the early stages of the relationship. Abhyanker’s testimony about him going to his “family friend,” Fenwick attorney Rajiv Patel, for help regarding intellectual property protections for stuff Abhyanker was developing (based on the partner’s IP expertise) did not put Patel in a particularly favorable light. Abhyanker’s argument is that this IP protection involved protection for situations such as when Abhyanker was pitching the nextdoor concept to Benchmark, or working with contractors such as Sood. How can Fenwick, who signed up to help him with these issues, now represent an adverse party in a lawsuit involving these same issues. Not a terrible argument in my opinion. 

Anyway, a crazy dispute that continues to grind on, but one that raised some interesting points.

The takeaway: to the extent you are looking to protect something like an idea and a domain name, I wouldn't rely on trade secrets. Any sort of implied confidentiality obligation is tough to enforce as well. You have to weigh the extent to which doors will slam in your face as a result of requesting an NDA, but that's what would have probably saved Abhyanker here.

Added: Check out the comments below. Also, as Jeff John Roberts noted in this story from January of this year ("Kickstarter project wants to expose idea thieves of Silicon Valley"), Abhyanker launched a Kickster project titled "Entrepreneurs in Residence"!

Photo: Kelli Anderson / Flickr.

Best online resources for startup legal docs

For Independence Day, I thought it might be appropriate and cool to start a list of online resources for startup legal docs.

This is an experiment, leveraging the Listly service.

Please engage with the form below by adding, commenting, doing whatever Listly lets you do (the service is all new to me).

Employees pulling to refresh patent policy?

One of the assertions (arguments?) in Jaron Lanier's new book is that the disruption of the buggy whip industry was not as catastrophic for the economy as it might have been, because a labor movement stepped in and demanded improvements in working conditions and wages as the auto industry took shape.

6a01156e3d83cb970c0168ea48e0fc970c-500wi(Examples like this throw into relief his critique of the digital economy: labor and experience have been devalued, Lanier says, and literally taken out of all accounting.)

Well, I don't want to overstate the value of the Twitter's Innovators Patent Agreement, but it looks like it could gain traction, drive toward becoming an industry standard, if individual engineers bargain for the benefit of its use as a term and condition of employment.

The idea is that, as part of the bargain for an employer taking ownership of a patent on an invention, the employer concedes that the inventing employee has the power to decide whether the patent may be used to sue other companies.

Inventor Loren Brichter, whose pull-to-refresh feature was awarded a patent and is covered by the Twitter agreement, is quoted in The Verge as saying, "I really hope this becomes the de facto standard for hiring — engineers could demand this in their contracts."

For an overview and critique of the Twitter Innovators Patent Agreement that ran on this blog last year, click here.

Light reading

Last night I participated in a "legal best practices" panel at the new WIN Reactor space (near the Seattle Art Museum Sculpture Park).

I'm just getting to know about the Reactor program. Its head, Chip Hallett, described it as a "launch incubator" for startups in the game industry.

WIN reactor legal best practices panelThe panel was a mix of lawyers and game company founders/CEOs. As anyone would expect going in, the founders/CEOs were more interesting to hear. (That said, Seattle attorney Scott Warner did an uncommonly good job of moderating the discussion; he'd be a good moderator even when the topic isn't legal).

I think the whole show (long – 2 1/2 hours?) is preserved for posterity on video - I can actually see it being a good resource for first time game startup entrepreneurs, because Scott was so careful to cover all the basic topics - so I sure as heck won't attempt anything like a recap here.

What I do want to remark on briefly: the answers the CEOs/founders gave to one of Scott's questions, to the effect of, do you read all the legal contracts that affect your business?

Bob Berry of Uber Entertainment, Matt Wilson of Detonator Games, and Randy Chung of Zhurosoft, each said, yes, of course, every line, you have to.

I knew this is the answer Bob would give, as I and my firm represent Uber and know his style. But I was impressed to hear Matt and Randy equally adamant.

Sensing that he had hit an especially rich vein in the silver mine, Scott pressed everyone for examples of where contracts go wrong, issues presented or sections and legal contracts to be especially wary of. Everyone had great examples. We got into not just legal drafting "gotchas" but also the nitty-gritty of payment terms and how important it is to spell out unspoken assumptions.

If I come across a link to the video archive, I'll try to remember to post it here.

I'll leave you with a link to a video calling card that Bob kindly created for me in the span of about 90 seconds, using a fun app created by a startup which is part of the current WIN/Reactor class, Freak'n Genius. It had me in stitches.

Photo courtesy of Julian Allen, REACTOR community manager.

William dreams of boilerplate

Shiro may dream of sushi, but has he ever visualized, in his sleep, the segregation of quarterly and monthly reporting obligations, to accommodate the deft layering in of a periodic reconciliation covenant?

BoilerplateYours truly saw this happening in his dreams last night. Chunks of sentences picked themselves up off the page, rearranged, and made space for an insertion, then tightened up like blocks meeting at the bottom of a Tetris screen.

Photo: Paul Trafford / Flickr.

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