What are My Exit Options as a Public Benefit Corporation?

Written by: Benjamin D. Stone & Sarah C. Palmer, Corporate Attorneys at Mintz

In our March 25, 2019 article for VC Experts, “Can I Raise Venture Capital as a Public Benefit Corporation?” we described society’s rising expectation that corporations, large and small, should generate positive social impact alongside profits.[1] More than a year and half later—in the face of a global pandemic, unprecedented economic downturn and a heightened focus on defeating systemic inequality—this trend has only accelerated. Executives and boards are making business decisions not just for the benefit of a corporation’s shareholders—known as “shareholder primacy”[2]—but are also considering the benefit and/or harm to employees, customers, the community and the environment.[3]  

Entrepreneurs are, accordingly, increasingly starting for-profit companies with a social mission.[4] Many entrepreneurs are incorporating such mission-driven companies as public benefit corporations (PBCs), a legal corporate form established in 2013 that allows a company to codify its social mission and protect its ability to consider the interests of all of those affected by the company’s conduct.[5]

In our 2019 article, we provided advice on how to best position a PBC to receive successful venture capital financing (incorporate in DE, educate investors, run a tight ship, and generate profits). In this article, we address the logical follow-up question: what are potential exit options for PBCs?

Go Public

One option for a PBC is to go public, otherwise known as an initial public offering (IPO), which is when a private corporation sells shares to public investors in a new stock issuance. There are many reasons for a company to go public, from quickly reaching a wide range of new investors and capital to increased brand awareness and prestige. On the other hand, going public is complex and time consuming.  

The legal process for a PBC to go public is the same as a traditional C-Corporation, but the business risks are different. For example, when a company goes public, it must answer to a larger, likely more fickle group of investors than its early-stage investors. Public shareholders (including institutional investors like pension funds) might not be as interested in, or forgiving of, a company that makes business decisions that are not exclusively focused on boosting shareholder value. Any hesitation by large investors could negatively impact the value of the stock issued at a public offering and depress subsequent trading.

The first PBC to go public was Laureate Education (“Laureate”), the largest for-profit higher education company in the world, and a PBC since 2015. Laureate went public in 2017, stating in its Form S-1 filing that, “[a]s a public benefit corporation, since we do not have a fiduciary duty solely to our stockholders, we may take actions that we believe will benefit our students and the surrounding communities, even if those actions do not maximize our short- or medium-term financial results.”[6] Laureate’s IPO was a watershed moment for the PBC movement,[7] raising $490 million for the company, with an offering price of $14 a share.[8] As of September 17, 2020, Laureate’s shares are trading at approximately $13 per share ($20 per share prior to the pandemic).

Etsy, on the other hand, an online platform for artists to sell handmade items, decided not to go public as a PBC, despite the company’s explicit social mission. Incorporated as a C-Corporation in 2006, in 2012 Etsy received a “B Corp” certification, a popular, non-legal seal of approval regarding a company’s “social and environmental performance, public transparency, and legal accountability to balance profit and purpose.”[9]

In 2015, after Etsy raised $113 million from angel and venture capital investors over nine years, Etsy decided to go public, but it encountered an obstacle: B Corp rules said that when a C-Corporation goes public it must convert from a C-Corporation into a PBC to retain its B Corp status.[10] At the time, Delaware law conditioned such a conversion on the consent of stockholders holding more than two-thirds of the corporation’s capital stock. After deliberation with its board and stockholders, Etsy’s CEO announced that “Etsy [would] not seek conversion to a [PBC] . . . because converting is a complicated and untested process for existing public companies.”[11]

Etsy instead withdrew its B Corp certification and went public as a C-Corporation in April 2015 with an offering price of $16 per share. As of March 2020, prior to the pandemic, Etsy’s shares were trading at approximately $60 per share. Etsy’s stock price has continued to rise, trading at $111 per share as of September 17, 2020. This strong performance could be due to a number of factors, including the convenience of Etsy’s online marketplace, but could also be a reaction to the company’s social mission in these unprecedented times.[12]

On July 1, 2020, the PBC world saw its second IPO with Lemonade, Inc. (“Lemonade”), an insurance technology startup “transforming insurance from a necessary evil into a social good.”[13] Lemonade’s stock debuted at $29 a share, raising $319 million and, as of September 17, 2020, the stock was trading at approximately $51 a share.[14] It remains to be seen how Lemonade will perform in the long run, but so far it appears that investors are not concerned with its status as a PBC.

Following Lemonade’s successful debut on the public markets, another PBC, Vital Farms, went public at the end of July 2020.[15] The largest pasture-raised egg brand in the U.S., Vital Farms set its opening stock price at $22 a share, which has risen to a $39 per share trading price as of September 17, 2020. Most significantly, Vital Farms leaned into its PBC status at the IPO, stating in its Form S-1 filing: “As a public benefit corporation we are required to balance the financial interests of our stockholders with the best interests of those stakeholders materially affected by our conduct, including particularly those affected by the specific benefit purposes set forth in our certificate of incorporation [and], accordingly, our duty to balance a variety of interests may result in actions that do not maximize stockholder value.”

As the business world increasingly shifts to a stakeholder primacy approach (versus the aforementioned stockholder primacy model), the state of Delaware is taking steps to make it even easier for C-Corporations—private or public—to convert to PBCs. For instance, Delaware recently amended the PBC statute to (a) reduce the supermajority vote to convert to a PBC to a simple majority and (b) eliminate appraisal rights (i.e., the opportunity for stockholders to monetize their unlisted shares upon conversion).[16] In light of these structural changes, and the acceptance of Lemonade and Vital Farms by the public markets, it seems likely that we’ll see more PBCs successfully going public in the future.[17]

Sell to or Merge with Another Company

A PBC may also choose to sell itself to or merge with another corporation, which can increase efficiency and economies of scale and/or satisfy investors, employees or founders demanding a liquidity event.[18] Unlike going public, however, engaging in a merger or acquisition (an “M&A”) involves legal considerations unique to the PBC corporate form.For example, in order to sell itself, a C-Corporation typically must secure the affirmative consent of shareholders holding at least a majority of the corporation’s outstanding capital stock (although the threshold is often higher because of previously negotiated investor protections). In contrast, historically, if a C-Corporation wanted to acquire or merge with a PBC via a stock-for-stock transaction, and such M&A would result in either the buyer C-Corporation or the seller PBC changing its corporate legal status (i.e. into a PBC or C-Corporation, respectively), then by statute the converting entity required at least two-thirds (or a “supermajority”) of its stockholders to consent to the M&A.[19] On July 16, 2020, however, the state of Delaware eliminated the supermajority consent requirement for M&A transactions in favor of a majority consent requirement.[20] This change should make M&A transactions involving PBCs less burdensome and, in turn, we may see PBC M&A activity accelerate.

The duties of a PBC’s board of directors in evaluating an M&A opportunity are also distinct from that of a C-Corporation. For example, the board of a C-Corporation is obligated to maximize shareholder value (a.k.a. profits) when analyzing an offer from a buyer to purchase the company.[21] The rules of a PBC, however, allow a board to accept a lower bid from a buyer that is more committed to the company’s social mission and stakeholders rather than accept a higher bid from a buyer that would exclusively maximize financial gain to shareholders.[22]  If the board of a PBC receives multiple bids of various dollar values, it has discretion to assess factors such as, for example, whether the bidder will (1) move all production outside of the U.S., (2) layoff a majority of the existing workforce, (3) change the quality of ingredients or materials in any given product in favor of cheaper ingredients or materials to decrease cost of production and increase profits, or (4) increase pollution or otherwise negatively impact the local and global environment, rather than being required to accept the highest bid. Interestingly, one could argue that giving a board more flexibility to make decisions based on the long-term sustainability of the corporation, rather than the short-term interests of its shareholders, will lead to more resilient, nimble corporations and, consequently, maximized shareholder value.

Maintain a Steady State

If your PBC is generating consistent, significant revenue, and you have patient investors who are not demanding an imminent exit or liquidity event, you may decide to just keep doing what you are doing. But to do so, you will likely need to keep stockholders and employees content in other ways. One option is to establish a robust employee stock option plan (ESOP) where employees and other stakeholders (directors, consultants, etc.) can buy into the PBC, a potentially mission-focused approach to equity ownership. Another option is to conduct private placements or “tender offers” to specific, friendly investors (new and existing) who are aligned with the PBC’s mission. Depending on your stockholder base, the PBC may also be able to offer alternative exits to existing stockholders through secondary transfers. These secondary transfers will need to be navigated with care to avoid any broker-dealer issues or claims that sales were at artificially low prices, but often constitute a productive mechanism to provide liquidity to, and strategically re-align, stockholders.[23]

* * *

In the context of a chaotic, rapidly changing world, leaders of companies with a social mission—whether PBCs or C-Corporations—are demonstrating that making a positive difference in the world and generating significant financial returns are not mutually exclusive, but are in fact deeply intertwined. To successfully navigate the complexity of running a company with a social mission, however, such leaders should align as early as possible with trusted experts who can provide seasoned advice and counsel about this exciting, but ever-shifting, legal and business landscape.


If you have questions about PBCs or want to talk social innovation generally, please contact us at bdstone@mintz.com and scpalmer@mintz.com.

Author Bios

Benjamin D. Stone – Corporate Attorney, Mintz

As a former founder, CEO, COO, general counsel, litigator and marketing director, Ben brings unique experience and perspective to his legal practice. Ben helps entrepreneurs, investors, and companies in a variety of industries—including clean energy and technology—generate both profits and positive social impact around the world.

Sarah C. Palmer – Corporate Attorney, Mintz

Sarah focuses her legal practice on working with a range of private companies—including public benefit corporations—across technology and life science industries at all stages of their life cycles. Sarah’s dedication to working with social impact companies began in law school, working with a nonprofit organization to structure outcomes-based financing deals to mobilize public and private capital to drive social progress.

[1] Stone, Benjamin D. “Can I Raise Venture Capital as a PBC?” VC Experts, 25 March 2019. https://blog.vcexperts.com/2019/03/25/can-i-raise-venture-capital-as-a-public-benefit-corporation/#more-2171.

[2] Rhee, Robert J. “A Legal Theory of Shareholder Primacy.” Harvard Law School Forum on Corporate Governance, 11 April 2017. https://corpgov.law.harvard.edu/2017/04/11/a-legal-theory-of-shareholder-primacy/.

[3] See, for example, the Business Roundtable’s Statement on the Purpose of a Corporation, released in August 2019 and signed by 181 CEOs, in which members state “a fundamental commitment to all . . . stakeholders.” See also “Statement on the Purpose of a Corporation.” Business Roundtable, 19 August 2019. https://opportunity.businessroundtable.org/ourcommitment/.

[4] Puskoor, Dayakur, “Pandemic Spurs Social Entrepreneurship in Startup Communities,” Forbes, 5 June 2020. https://www.forbes.com/sites/forbesfinancecouncil/2020/06/05/pandemic-spurs-social-entrepreneurship-in-startup-communities/#2f1d668b7d6b.

[5] While many states have established a version of the PBC, for purposes of this article we are referring to the state of Delaware’s version of the PBC, which is the most robust and accepted form (for more information, see “Can I Raise Venture Capital as a PBC?” https://www.mintz.com/insights-center/viewpoints/2151/2019-03-can-i-raise-venture-capital-public-benefit-corporation).

[6] Debter, Lauren. “The World’s Biggest For-Profit College Company, Laureate Education, Raises $490 Million In Public Debut.” Forbes, 1 February 2017. https://www.forbes.com/sites/laurengensler/2017/02/01/laureate-education-initial-public-offering/#392c7032b3da; “Form S-1 Registration Statement Under the Securities Act of 1933: Laureate Education, Inc.” Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/912766/000104746916017211/a2228849zs-1a.htm.

[7] “Laureate Education chose to exercise the courage of their convictions that the conventional wisdom was wrong. They rejected the existing market paradigm of shareholder primacy”: “Laureate Named ‘B Corp MVP’ in 2017.” Laureate International Universities, 2017. http://www.laureate.net/laureate-named-b-corp-mvp-in-2017/.

[8] Debter, “The World’s Biggest For-Profit College Company.” https://www.forbes.com/sites/laurengensler/2017/02/01/laureate-education-initial-public-offering/#52fecc72b3da.

[9] “Benefit Corporations & Certified B-Corps.” Benefit Corporation. https://benefitcorp.net/businesses/benefit-corporations-and-certified-b-corps.

[10] Dimri, Neha. “Crafts website company Etsy valued at $4 billion in market debut.” Reuters, 16 April 2015. https://www.reuters.com/article/us-etsyinc-ipo/crafts-website-company-etsy-valued-at-4-billion-in-market-debut-idUSKBN0N71T420150416.

[11] Steiner, Ina. “Etsy Gives Up B-Corp Status to Maintain Corporate Structure.” eCommerce Bytes, 30 November 2017. https://www.ecommercebytes.com/2017/11/30/etsy-gives-b-corp-status-maintain-corporate-structure/.

[12] “Etsy: Continues to Deliver.” Seeking Alpha, 17 June 2020. https://seekingalpha.com/article/4354227-etsy-continues-to-deliver.

[13] Chernova, Yuliya. “Lemonade to Test IPO Waters as a Public Benefit Corporation.” Wall Street Journal, 12 June 2020. https://www.wsj.com/articles/lemonade-to-test-ipo-waters-as-a-public-benefit-corporation-11591995018?mod=djemVentureCapitalPro&tpl=vc; Rapier, Graham. “The $2 billion SoftBank-backed insurance startup Lemonade has filed to go public.” Business Insider, 8 June 2020. https://www.businessinsider.com/lemonade-insurance-startup-files-ipo-paperwork-to-go-public-2020-6.

[14] Kunthara, Sohpia. “Insurtech Startup Lemonade Stock Surges On First Day Of Trading.” Crunchbase News, 2 July 2020. https://news.crunchbase.com/news/insurtech-startup-lemonade-raises-319m-in-ipo/.

[15] Sorvino, Chloe. “Vital Farms’ Blockbuster IPO Proves Wall Street Has An Appetite For Sustainable Farming.” Forbes, 1 August 2020. https://www.forbes.com/sites/chloesorvino/2020/08/01/vital-farms-blockbuster-ipo-proves-wall-street-has-an-appetite-for-sustainable-farming/#2d0920d2345b.

[16] See House Bill 341, 150th General Assembly, An Act to Amend Title 8 (§ 102, title 8) of the Delaware Code Relating to the General Corporation Law, https://legis.delaware.gov/BillDetail?legislationId=48122.

[17] Klingsberg, Ethan; Solum, Sarah; Marcoglies, Pamela. “Changes To Del. Law May Boost Public Benefit Corp. Appeal” (July 31, 2020). https://www.law360.com/articles/1296316/changes-to-del-law-may-boost-public-benefit-corp-appeal.

[18] Plum Organics, a children’s organic baby food company which incorporated as one of the first PBCs in August 2013, seems to represent one of the few sales of a PBC to date, and it appears to have gone well based on the available evidence. After selling itself to the Campbell Soup Company for $250 million in May 2013, Plum Organics has maintained its PBC status as a subsidiary.

[19] See Delaware Code, Title 8, Chapter 1, Subchapter XV, § 363, https://delcode.delaware.gov/title8/c001/sc15/. Note that, if executed via a reverse triangular merger, the PBC can remain a subsidiary in this fact pattern.

[20] See House Bill 341, 150th General Assembly, An Act to Amend Title 8 (§ 102, title 8) of the Delaware Code Relating to the General Corporation Law, which was signed into law.  https://legis.delaware.gov/BillDetail?legislationId=48122.

[21] See Revlon, Inc. v MacAndrews & Forbes Holdings, Inc., 506 A 2d 173 (Del. 1986); eBay Domestic Holdings b Newmark, 16 A.3d 1 (Del. 2010); Rhee, Robert J. “A Legal Theory of Shareholder Primacy.” Harvard Law School Forum on Corporate Governance, 11 April 2017. https://corpgov.law.harvard.edu/2017/04/11/a-legal-theory-of-shareholder-primacy/.

[22] See Delaware Code, Title 8, Chapter 1, Subchapter XV, § 365. https://delcode.delaware.gov/title8/c001/sc15/

[23] An interesting example of the steady state approach is Kickstarter, a crowdfunding platform for creative projects originally formed as a C-Corporation. At Kickstarter’s inception, the founders stated that they “would never sell the company or go public.” After years of growth and profit, in 2015, instead of going public or sale, Kickstarter’s stockholders voted unanimously in favor of a conversion into a PBC and, at the time, a steady state approach. See Thomas, Marcus. “Why Kickstarter Decided To Radically Transform Its Business Model.” Fast Company, 16 Apr. 2017. http://www.fastcompany.com/3068547/why-kickstarter-decided-to-radically-transform-its-business-mode1.

After a Down Round: Alternatives for Employee Incentive Plans

*Excerpted from VC Experts Encyclopedia of Private Equity & Venture Capital

Employee Incentive Plans for Privately-Held Companies

Despite the recent improvement in capital markets activity, many small, privately-held technology companies continue to face reduced valuations and highly dilutive financings, frequently referred to as “down rounds.” These financings can create difficulties for retention of management and other key employees who were attracted to the company in large part for the potential upside of the option or stock ownership program. When down rounds are implemented, the investors can acquire a significant percentage of the company at valuations that are lower than the valuations used for prior financing rounds. Lower valuations mean lower preferred stock values for the preferred stock issued in the down round, and as preferred stock values drop significantly, common stock values also drop, including the value of common stock options held by employees.

Consequently, reduced valuations and “down round” financings frequently cause two results: (i) substantial dilution of the common stock ownership of the company and (ii) the devaluation of the common stock, particularly in view of the increased aggregate liquidation preference of the preferred stock that comes before the common stock. The result is a company with an increasingly larger percentage being held by the holders of the preferred stock and with common stock that can be relatively worthless and unlikely to see any proceeds in the event of an acquisition in the foreseeable future.

In the face of substantial dilution of the common stock and significant devaluation in equity value, companies are faced with the difficulty of retaining key personnel and offering meaningful equity incentives. Potential solutions can be very simple (issuing additional options to counteract dilution) or quite complex (issuing a new class of stock with rights tailored to balance the concerns of both investors and employees). Intermediate solutions range from effecting a recapitalization that will result in an increase in the value of the common stock to implementing a cash bonus plan for employees that is to be paid in the event of an acquisition. Each approach has its advantages and disadvantages, and each may be appropriate depending on the circumstances of a particular company, but the more complex alternatives can offer companies greater flexibility to satisfy the competing demands of employees and investors. This article briefly reviews three of the solutions that can be implemented-the use of additional optionsrecapitalizationsand retention plans (cash and equity based).

Granting Additional Options

The simplest solution to address the dilution of common stock is to issue additional employee stock options. For example, assume that, prior to a down round, a company had 9,000,000 shares of common and preferred stockoutstanding and the employees held options to purchase an additional 1,000,000 shares. Also assume that, in the down round, the company issued additional preferred stock that is convertible into 10,000,000 shares of common stock. On a fully-diluted basis (i.e., taking into account all options and the conversion of all preferred stock), the employees have seen the value of their options reduced from 10% of the company to 5%, or by 50%. In this case, the company might issue the employees additional options to increase their ownership percentage. It would require additional options to purchase in excess of 1,000,000 shares to return the employees to a 10% ownership position, although a smaller amount would still reduce the impact of the down round and might be enough to help entice the employees to stay.

If the common stock retains significant value, the grant of additional options can be an effective solution. It is also relatively straightforward to implement; at most, stockholder approval may be required for an increase in the optionpool. In many cases, however, the aggregate liquidation preference of the preferred stock is unlikely to leave anything for the common holders following an acquisition, particularly in the short term. In that event, the dilution of the common stock becomes less relevant – 5% of nothing is the same as 10% of nothing. Companies with this kind of common stock devaluation will need to consider more intricate solutions.


If the common stock has been effectively reduced to minimal value by the down round, a company could increase the common stock value through a recapitalization. A recapitalization can be implemented through a decrease in the liquidation preferences of the preferred stock or a conversion of some preferred stock into common stock, thereby increasing the share of the proceeds that is distributed to the common stock upon a sale of the company. This solution is conceptually straightforward and certainly effective in increasing the value of the common stock. In most cases with privately-held venture capital backed companies, however, the holders of the preferred stock are the investors who typically fund and implement the down rounds and in nearly all cases the preferred stockholders have a veto right over any recapitalization. Accordingly, implementing a recapitalization would require the consent of the affected preferred stockholders, which may be difficult to obtain, particularly because the preferred stockholders may not like the permanency of this approach. In addition, a recapitalization can be quite complicated in practice, raising significant legal, tax and accounting issues.

Retention Plans

Another approach is the implementation of a retention plan. Such plans can take a number of forms and can use cash or a new class of equity with rights designed to satisfy the interests of both the investors and employees. These solutions are more complicated, but also more flexible.

Cash Bonus Plan

In a cash bonus plan, the company guarantees a certain amount of money to employees in the event of an acquisition. This amount can equal a fixed sum or a percentage of the net sale proceeds, to be allocated among the employees at the time of the sale, or it can be a fixed amount per employee, determined in advance. Allocations can be based on a wide variety of parameters, enabling a high degree of flexibility. Often these plans have a limited duration (such as 12 to 24 months, or until the company raises a specified amount of additional equity).

A cash bonus plan is easy to understand, provides the employees with cash to pay any taxes that may be due and can be flexible if the allocations are not determined in advance. However, there are a number of hurdles. Many acquisitions are structured as stock-for-stock exchanges (i.e., the acquiring company issues stock as payment for the stock of the target company) because such exchanges may be eligible for tax-free treatment. A cash bonus plan may interfere with the tax-free treatment and, thus, may reduce the value of the company in the sale or may be a barrier to the transaction altogether.

A cash bonus plan can also be problematic in that it requires cash from a potential acquirer in the event there isn’t sufficient cash on hand in the target company. A mandatory cash commitment from an acquiror may also make the company less attractive as a target. Typically, a cash bonus plan can be adopted (and amended and terminated prior to an acquisition) by the board of directors, although a cash bonus plan creates an interest that may in effect be senior to the preferred stock, which requires consideration as to whether the consent of the preferred holders is required.

New Class of Equity

A stock bonus or option plan utilizing a new class of equity, although more complicated, shares many of the benefits of the cash bonus plan, but avoids some of the major disadvantages. A newly created class of equity, such as senior common stock or an employee series of preferred stock, permits the use of various combinations of rights. The new class of equity can be entitled to a fixed dollar amount, a portion of the purchase price or both. These rights can be in preference to, participating with or subordinate to any preferred holders, and the shares may be convertible into ordinary common stock at the option of the holders or upon the occurrence of certain events. Referring to our earlier example, the company might return the employees to their pre-down round position by issuing them senior common stock entitled to 10% of the consideration (up to a certain amount) in any sale of the company. Although a return of the employees to their pre-down round position may not be acceptable to the preferred stockholders and may not be necessary to keep the employees incentivized, the new class of equity can be tailored to fit whatever balance is acceptable to the investors.

This type of approach has several advantages. First, unlike a simple issuance of additional options, it gives real value to employees that were affected by a devaluation of their common stock. Second, unlike a cash bonus plan, it does not require an acquiror to put up cash when they purchase the company and the acquirer is less likely to discount the purchase price. Third, unlike a cash bonus plan, it will not affect the tax-free nature of many stock-for-stock acquisitions. Finally, it provides certainty to the participants, who know exactly what they will be entitled to receive upon a sale of the company.

The main disadvantage of creating a new class of equity, at least from the employees’ standpoint, is that the employee will either have to pay fair market value for the stock when it is issued or recognize a tax liability upon such issuance, when they may not have the cash with which to pay the taxes. This disadvantage can be partially ameliorated by the use of options for the new class of equity, rather than issuing the new equity up front, which at least allows the employee to control the timing of the tax liability by deciding when to exercise. Moreover, for many employees an option may qualify as an incentive stock option under federal tax law, thus allowing the employee to defer taxation until the sale of the underlying stock. A new class of equity will also be somewhat more difficult for most employees to understand, at least when compared to traditional common stock options.

In addition, a new class of equity adds complexity from the company’s perspective. It may raise securities and accounting issues, and shareholder approval of an amendment to the company’s charter will be required. At a minimum, it will require more elaborate documentation than some of the simpler alternatives, such as a cash bonus plan, and thus it will likely be more expensive to implement at a time when the company may be particularly sensitive to preserving its cash. A new class of equity may also result in future complications such as separate class votes or effective veto rights in certain circumstances. As with the other solutions that address the devaluation problem, there may be resistance from the existing preferred holders, whose share of the consideration upon a sale of the company would thereby be reduced.

These complexities are surmountable and companies may find that they are more than balanced by the advantages that a new class of equity provides over other solutions in addressing issues of reduced common stock valuations and dilution.

What Not To Say In a Business Plan

Guest Post by: Barry Moltz

The following is an excerpt from his e-book entitled, Growing Through Rants and Raves. Barry Moltz is also the writer of a book entitled You Have to Be a Little Crazy, which delivers irreverent, straight talk about the complex intersection of start-up business, financial health, physical well-being, spiritual wholeness and family life. This title and other publications by Barry can be viewed at his website, http://www.barrymoltz.com.

Sometimes I find that the company’s founder is so far ‘outside the box’ that they ‘stretch the envelope.’ As an angel investor, I review more than 500 business plans each year. Unfortunately, many are so riddled with economy lingo, business jargon and clichés, that they do not communicate any real business value. In my opinion, terminology, such as disintermediation, sweet spot, ASP, best of breed, and win-win should be outlawed for the next 100 years. For building a real business, these terms are meaningless. Another challenge when reviewing business plans is that the introductory sentences sometimes stretch for an entire paragraph as the entrepreneur looks for that all-encompassing way to describe their business. Forget it! There isn’t one. Many times I want to strangle the writer to simply tell me what they do in five words or less. Poor choice of words: This business makes mechanical gasoline fueled devices, used for transportation, more efficient by periodically sending them through an applied for patent machine to loosen the terra firma from these vehicles to make them more conducive at performing their task. Solid choice of words: We run a car wash. Another frequently used practice is to create a business plan using template software or by working from an existing plan. I do not recommend this practice and like to refer to William Sahlman in his Harvard Business case study “Some Thoughts on Business Plans.” This case study has continuously inspired me to see beyond clichés and catchphrases and better interpret misleading statements within business plans.

If the plan says: “Our numbers are conservative.” I read: “I know I better show a growing profitable company. This is my best-case scenario. Is it good enough?” Since all numbers are based on assumptions, projections in business plans are by their very nature a guess and are not conservative.

If the plan says: “We’ll give you a 100 percent internal rate of return on your money.” I read: “If everything goes perfectly right, the planets align, and we get lucky, you might get your money back. Actually, we have no idea if this idea will even work.” No one can predict what an investor’s return will be. Let them decide.

If the plan says: “We project a 10 percent margin.” I read: “We kept the same assumptions that the business plan software template came with and did not change a thing. Should we make any changes?” Ensure you have developed your financial projections from the ground up.

If the plan says: “We only need a 5 percent market share to make our conservative projections.” I read: “We were too lazy to figure out exactly how our business will ramp up.” Know what it will cost to acquire customers. Gaining 5 percent market share is not an easy task in a large market.

If the plan says: “Customers really need our product.” I read: ” We haven’t yet asked anyone to pay for it.” or “All our current customers are our relatives” or “We paid for an expensive survey and the people we interviewed said they needed our product.” The definition of a business is when people pay you money to solve their problems. This is the only way to prove people “need it.”

If the plan says: “We have no competition.” I read: Actually … I stop reading the plan. Always beware of entrepreneurs that claim they have no competitors. If they are right, it’s a problem and if they are wrong, it is also a problem. Every business has competitors or else there is a current solution to this customer need. If there are no competitors for what the entrepreneur wants to do, there is a good chance there also is no business. So what should an entrepreneur do? Write the plan in plain and proper English. Please understand that the reader comes to the plan with no knowledge of your business. No fancy words, clichés or graphs will make them want to invest. Understand every part of your plan and be able to defend it. Use your own passion to describe your plan. Make your plan your own.

The 11 things that matter in a business plan:

  • What problem exists that your business is trying to solve. Where is the pain?
  • What does it cost to solve that problem now? How deep and compelling is the pain?
  • What solutions does your business have that solve this problem?
  • What will the customer pay you to solve this problem? How solving this problem will make the company a lot of money.
  • What alliances can you leverage with other companies to help your company?
  • How big can this business get if given the right capital?
  • How much cash do you need to find a path to profitability?
  • How the skills of your management team, their domain knowledge, and track record of execution will make this happen.

Please remember, the business plan is basically an “argument” where you need to state the problem and pain, then provide your solution with supporting data and analogies.

Private M&A in the Post-Pandemic World: How COVID-19 Could Shape Deal-Making in the Future

Guest post by Alexander W. Burdulia, Steven Tran, Mark Uhrynuk, James West of Mayer Brown

Equity markets around the world are suffering their worst performance since the Global Financial Crisis, with the COVID-19 pandemic causing the S&P 500 to suffer its worst quarterly losses since 2008, oil prices plunging dramatically and the global economy looking increasingly shaky. As businesses in virtually every sector feel the impact, it is very likely the pandemic will have significant, and potentially long-lasting, implications for future M&A deal‑making globally.

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Navigating Today: Public Company Hot Spots and M&A Negotiations with the Impact of COVID-19

Guest post by Barbara Borden, Patrick Gibbs, Caitlin Gibson, Jamie Leigh of Cooley M&A

On March 17, 2020 Cooley M&A shared the following insights about COVID-19 and its effect on M&A

With last Wednesday’s categorization by the World Health Organization of COVID-19 as a pandemic, schools, places of business and other venues throughout the United States quickly closed in-person locations and moved to remote connectivity as efficiently as possible. On Sunday, the governor of California called for all bars and nightclubs within the state to shut down, restaurants to reduce capacity in half and urged anyone over the age of 65 to self-quarantine at home. The mayor of New York City made a similar announcement and on Monday President Trump addressed the nation with a heightened sense of alarm, advising against any gatherings of over 10 people for the next 15 days, while concurrently suggesting that this crisis could easily continue into July or August. Precedent set by other countries that have effectively slowed the spread of COVID-19 would suggest that more sweeping preventative measures may be on the horizon. As a result of this unprecedented social and economic uncertainty, we are counseling clients interested in mitigating impacts of COVID-19. Highlighted below are key issues that touch governance and M&A matters in our current environment:

Public Company Clients

  • Dealing with Shareholder Activists and Unsolicited Offers. As stock prices decrease in response to market uncertainty, directors of public companies should be prepared to respond to increasing levels of shareholder activism and unsolicited takeover offers, as opportunistic parties with strong balance sheets look to take advantage of companies in temporary distressed positions. During the 2008 financial crisis, it was reported that the number of proxy fights increased by 14% year over year and the number of unfriendly transactions nearly doubled (unfriendly transactions representing 23% of public deals announced in 2008, as compared to 12.4% of deals in 2007). While the underlying reasons for the market volatility are different now than they were in 2008, and companies and activists may be more risk-adverse given the general uncertainty around the duration and scope of COVID-19’s impact, it would be prudent for directors of public companies to assess current takeover preparedness measures and proactively review fiduciary duties in responding to potential activists and takeover attempts. Among other measures, public companies should review existing rights plans that are “on the shelf” or consider putting a rights plan on the shelf. Companies with large net operating losses should consider whether it would be prudent to adopt a rights plan to assist in preservation of the usability of net operating losses. For additional guidance on preparing for activism and takeovers amid COVID-19 volatility, please see this subsequent post from our team.
  • Stock Repurchases. Current volatility may stir questions about effecting a stock repurchase, particularly if a company has an otherwise healthy balance sheet. A company may choose to repurchase its stock during a time when it believes the stock is undervalued in the hope that it will signal confidence to the market and increase demand for the company’s shares. There are several ways that a stock repurchase can be effected (i.e., self-tender, open market, stock repurchase program), each of which carries with it different disclosure and reporting obligations and varying timing considerations. Note that stock repurchases can be expensive to administer and will likely be avoided by companies that are expected to be hit the hardest by COVID-19’s impact (e.g., travel, airline and hospitality companies). Also note that some companies have already announced intentions to cancel or suspend previously announced stock repurchase programs (e.g., Delta and MGM).
  • Going Private. We are aware that some investors are suggesting that management teams consider going private because a company has balance sheet cash and its stock price is depressed. Some participants may be under the mistaken impression that a going-private transaction can be effected rather simply – using the company’s cash to do an issuer tender offer to reduce the number of stockholders below 300 holders, delisting from trading on Nasdaq or the NYSE, and ceasing public reporting requirements and market trading. A going-private transaction is far more complex than some investors may suggest. First, there is a high risk that an issuer tender offer would not be successful. The commencement of the tender offer itself could result in an unanticipated outcome – shining an unwanted spotlight on the company and prompting competing bids or attracting activists opposed to the company strategy. Even if a tender offer can be effected without strategy interruption, there is no guarantee that it will achieve the minimum stockholder levels required for delisting. More importantly, a “going private” is a control transaction and any related board review of this strategy requires a heightened level of board governance and attention, including the immediate creation of a special committee of the board before any substantive economic discussions relating to a potential transaction begin and a very careful vetting process, which should include a fulsome consideration of strategic alternatives. Any special committee formed for this purpose must include the following features: (i) only members that are independent directors; (ii) delegation of full authority of the board to reject or accept proposals and (iii) authority and autonomy to retain outside advisors dedicated solely to the committee. With a “depressed price” fact pattern, boards are well advised to more judiciously approach review of any potential transaction that could result in the stockholders not receiving fair value for their shares. Even if “going private” transactions are undertaken with appropriate governance structures in place, there is a high risk of deal litigation, and plaintiffs will contend that these deals should be scrutinized under the highest level of judicial review. For Delaware companies, this is the entire fairness standard, the application of which can be outcome determinative, as courts will carefully scrutinize the independence of special committee members, as well as the deal process and the resulting price. At a minimum, even if a transaction is ultimately determined to be fair, proving that a transaction is entirely fair will be a costly endeavor. Finally, management-led, going private transactions are subject to higher disclosure burdens under federal securities laws, including the rules under Section 13e-3 and Regulation M-A and are more likely to be reviewed by the Securities and Exchange Commission.

M&A Negotiations and Deal Terms

Highlighted below are some of the key areas where we expect to see more nuanced negotiations and heightened scrutiny during the course of an M&A transaction as a result of COVID-19’s impact:

  • Purchase Price Adjustments/Valuation. Most private acquisition agreements contain purchase price adjustments to address fluctuations in a target’s debt, cash and working capital (among other things) between signing and closing. A target’s working capital is typically measured against a peg, set at the time of signing, and based on historical information. However, that historical information may no longer be the best guidepost if the target’s financial situation has been, or is expected to be, impacted by COVID-19. The parties will need to determine how the peg should account for the impact of COVID-19, which will be increasingly difficult given the unpredictable scope and duration of the crisis. Buyers may attempt to discount the overall value of a target as a result of COVID-19’s impact, but we would expect most sellers to reject those discounts on the basis that the underlying value of the target remains unchanged, given that any financial impact would be temporary and non-recurring.
  • Due Diligence. Conducting due diligence on a target’s business is an essential part of any M&A transaction. Set forth below is a list of certain diligence items we expect buyers to scrutinize more closely as a result of COVID-19:
    • Force majeure provisions in customer and supplier contracts. Many commercial contracts contain a “force majeure” provision, which excuses a party’s performance due to unforeseen circumstances (typically of a catastrophic nature). If there is an expectation that target or any counterparty that it contracts with will be unable to perform contractual obligations as a result of COVID-19, buyer will want to closely analyze these provisions to understand the target’s rights and remedies in such a scenario. If a counterparty’s performance is excused, buyer will need to understand what impact that has on target’s ability to perform its own contractual obligations. See this Cooley Alert for more information on the applicability of force majeure provisions in this current environment.
    • Insurance coverage. Sellers should understand and be prepared to answer questions from buyer regarding the scope of target’s insurance policies for losses attributable to COVID-19 and what actions they are taking to preserve target’s rights under those policies. For some helpful guidance on steps companies should be taking on the insurance front, see this post from Cooley’s insurance team.
    • Cybersecurity. Cybersecurity has become an increasing focus of buyer’s due diligence, and we would expect even greater scrutiny as a result of COVID-19. Employers who have introduced new remote work programs or expanded the scope of their existing remote work programs, may be more vulnerable to cybersecurity attacks than they were in the past. Furthermore, there have already been reports of hackers impersonating various public health agencies in an attempt to capitalize on the instability created by the current environment.
    • Employee matters. Buyers will seek to understand any new employee policies that target established in response to COVID-19, focusing on the legality of any restrictions imposed on employees.

Depending on the results of its due diligence efforts, a buyer may also seek to expand the scope of certain representations and warranties about the target’s business, including with respect to (i) performance of material contracts, (ii) undisclosed liabilities, (iii) insurance coverage and (iv) accuracy of financial statements. Relatedly, we would expect sellers to try to limit their exposure by including broad disclosures regarding the impact of COVID-19 on the target’s business.

  • Timing. The timing of your M&A transaction will inevitability be impacted by COVID-19, giving the rapidly changing environment. Parties should expect delays when seeking third-party consents, whether with commercial counterparties or governmental agencies, arranging and obtaining transaction financing and conducting due diligence. The Premerger Notification Office (PNO) announced that, starting on Tuesday, March 17, all HSR filings will need to be submitted through a temporary e-filing system and that early termination would not be granted for any transactions while the temporary filing system is in place. Understanding these timing considerations, parties should set an outside date that leaves a significant amount of cushion. If an acquisition agreement has already been negotiated and it appears that it may not be consummated by the outside date, any extension rights should be exercised in strict compliance with the terms of the acquisition agreement.
  • MAE Definition. Most acquisition agreements give buyer the right not to close a transaction if there has been a material adverse effect (an MAE) on the target’s business, operations or financial condition in the period between signing and closing. However, MAEs are notoriously difficult to prove, with Delaware courts finding the existence of an MAE in only one case. As discussed in more detail in our prior blog post, for an MAE to be found in Delaware, a target’s business must have suffered a serious financial decline that was durationally significant (i.e., at least a year) and that was specific to the target company and not the industry at large. Given the requirements described above, it seems unlikely that the impact of COVID-19 on a target’s business would rise to the level of an MAE, but sellers would nonetheless be well-advised to add COVID-19 (and the impact thereof) as a specific exception to the MAE definition. Relatedly, if buyer wants to preserve a closing condition in circumstances where COVID-19 has a greater impact on target’s business than it anticipated, that right should be clearly expressed in the acquisition agreement, rather than relying on the MAE clause.
  • Interim Operating Covenants. Buyers typically have consent rights over certain actions taken by or on behalf of the target in the period between signing and closing, including any actions taken outside of the ordinary course of business. We would expect sellers to negotiate for an exception to this general rule to allow them to take actions as necessary to quickly respond to the impact of COVID-19, including implementation of measures designed to slow the spread of the virus. Buyer may nonetheless seek to have consent rights over any actions that could have a significant financial impact on target’s business or, alternatively, ensure that the purchase price is adjusted to account for that impact.

Barbara Borden, Partner

Barbara Borden is co-chair of Cooley’s M&A practice. She focuses on M&A, cross-border transactions, joint ventures and other complex transactions, and public securities law. Barbara represents strategic and financial buyers and sellers in public and private acquisitions and also has significant experience in counseling boards of directors in connection with M&A and related governance and anti-takeover matters. More…

Patrick Gibbs, Partner

Patrick Gibbs focuses on securities class actions and derivative litigation, Securities and Exchange Commission investigations and enforcement proceedings, and internal corporate investigations. He also handles various complex litigation matters, including antitrust, consumer class actions and other types of complex business litigation. Patrick’s clients have included public and private companies, venture capital and private equity firms and investment banks in a variety of industries, including computer hardware and software, semiconductors, biotech, life sciences and medical devices. More…

Caitlin Gibson, Special Counsel

Caitlin Gibson leads the firm’s resource development and knowledge management strategy in the mergers and acquisitions practice group. In that role, she is responsible for leveraging the firm’s resources and legal technology to facilitate efficient deal flow and knowledge sharing on M&A matters across the firm. Caitlin also advises on current issues and developments in public and private M&A and corporate governance, including board fiduciary duties and market trends. More…

Jamie Leigh, Partner

Jamie Leigh is co-chair of Cooley’s M&A group. Her representative tech clients include Uber, Tableau, Workday, Dropbox, Automattic, Levi Strauss & Co., Procore, Ellie Mae, Opendoor, Looker, Checkr and MINDBODY. Representative life sciences clients include Medivation, Kite Pharma, Abaxis, Dova Pharmaceuticals, Adamas, CDL and Intarcia. Representative investment banking clients include Qatalyst Partners and Morgan Stanley. More..

Cooley M&A

Since 2015, Cooley has handled 1,000+ M&A transactions, with an aggregate value of more than $395 billion, making our practice one of the most active in the world.


Taking Another Look at Virtual Stockholder Meetings as the Coronavirus COVID-19 Outbreak Spreads

Guest post by Lisa R. Stark, Sean M. Jones and Sara M. Kirkpatrick of K&L Gates LLP

As proxy season rapidly approaches and concern over the Coronavirus Disease 2019 (COVID-19) increases, U.S. public companies have been weighing risks associated with holding in-person annual stockholder meetings. While the vast majority of U.S. public companies continue to hold annual stockholder meetings at a physical location, in light of the COVID-19 outbreak, many corporations are now considering whether to hold the meeting solely by means of remote communication or to hold a hybrid meeting whereby stockholders may choose to participate either in person or remotely. Notably, on March 3, 2020, Starbucks changed its annual meeting of stockholders from a meeting held at a physical location to a virtual-only meeting due to concerns over the COVID-19. Additionally, on March 4, 2020,The Bank of New York Mellon Corporation noted that as part of its precautions, it was planning for the possibility that its annual meeting may be held solely by means of remote communications.

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