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Lawyers Guide to Formulas in Deal Documents and Sec Filings

  • ID: 2130254
  • Book
  • March 2018
  • Region: United States
  • 634 Pages
  • ALM Media, LLC
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“Straightforward explanations and illustrations of the often-intimidating mathematical formulas found in transactional- and securities related documents.... A very worthwhile guide.” – Legal Information Alert

Written for lawyers at all levels of mathematical skill, this book covers the use of numbers, formulas and ratios in securities offerings, mergers and acquisitions, debt financing, venture capital, private equity, and intellectual property. The Lawyers Guide to Formulas in Deal Documents and SEC Filings provides valuable drafting advice and shows you common mistakes that can dramatically affect how much your client receives or has to pay.

The authors look closely at both the typical uses of formulas in deal documents and SEC filings and their application in less common contexts. Coverage includes: anti-dilution provisions (with an “Anti-Dilution Glossary” that simplifies even complex dilution calculations); working capital; liquidation preferences; debt financing formulas, ratios and metrics to monitor risk; earnouts; carried interest, with sample allocation, distribution and clawback provisions; and IP royalties.

Whether you are honing your expertise or simply trying to overcome numbers angst, this unique guide is your secret weapon. It will help you make sense of mathematical equations in situations ranging from the mundane to the esotericand use them to your advantage.
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Securities Law Formulas
- 1.01 Introduction
- 1.02 SEC Registration Fees
[1] Registration Fee Based on Number of Securities Offered
[2] Registration Fee Based on Proposed Maximum Aggregate Offering Price
[3] Determination of Offering Price
[4] Special Rules for Calculating Fees for Specific Offerings
- 1.03 Net Proceeds
[1] Equity Offerings
[2] Debt Offerings
- 1.04 Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preference Dividends
[1] Ratio of Earnings to Fixed Charges
[2] Ratio of Earnings to Combined Fixed Charges and Preference Dividends
- 1.05 Dilution
[1] Net Tangible Book Value and Net Tangible Book Value Per Share
[2] Increase in Net Tangible Book Value Per Share
[3] Immediate Dilution from the Public Offering Price
[4] Pro Forma Net Tangible Book Value
- 1.06 Capitalization
[1] “As Adjusted” Capitalization
[2] “Pro Forma” Capitalization
- 1.07 Executive Compensation
[1] Named Executive Officer
[2] Summary Compensation Table
[3] Grants of Plan-Based Awards Table
[4] Outstanding Equity Awards at Fiscal Year-End Table
[5] Option Exercises and Stock Vested Table
[6] Director Compensation Table
- 1.08 Equity Compensation Plan Information
[1] Number of Securities to Be Issued Upon the Exercise of Outstanding Options, Warrants and Rights
[2] Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
[3] Number of Securities Available for Future Issuance Under the Plan
- 1.09 Principal and Selling Stockholder Table
[1] Beneficial Ownership Amount
[2] Percent of Class
[3] Directors and Executive Officers as a Group
[4] Offerings
- 1.10 Shares Eligible for Future Sale
[1] Outstanding Shares
[2] Freely Tradable Shares
[3] Freely Tradable Shares After Expiration of Lock-Up Agreements
[4] Shares Subject to Transfer Restrictions
- 1.11 Underwriters' Compensation
[1] Equity Securities
[2] Debt Securities
- 1.12 Public Float
[1] Calculation of Public Float
[2] Number of Securities to be Sold Pursuant to a Form S-3 Registration Statement
- 1.13 Volume Limitations under Rule 144
[1] Affiliates
[2] Increase in Average Weekly Trading Volume
- 1.14 Rule 144A: Effective Conversion Premium and Effective Exercise Premium
[1] Convertible or Exchangeable Securities: Effective Conversion Premium
[2] Warrants: Effective Exercise Premium
- 1.15 Short-Swing Profits
[1] Single Purchase and Single Sale
[2] Multiple Sales and Multiple Purchases
- 1.16 Conclusion

Calculated Risks: Formulas in Debt Financing
- 2.01 Basics of Debt Capital Financing; Contrast to Equity Financing
- 2.02 Types of Debt Transactions
[1] Venture Lending to the Start-Up Company
[2] Asset Based Loans; The Borrowing Base
[3] Cash-Flow Lending
[4] The High Yield Markets
- 2.03 Asset-Based Lending Formulas; Loan to Value
- 2.04 Revolving Asset-Based Loans and the Borrowing Base
[1] Eligible Receivables
[2] Eligible Inventory
[3] Fixed Assets
- 2.05 Cash Flow Lending Formulas
- 2.06 Cash Flow Loans under Revolving Credit Facilities
[1] Current Ratio
[2] Quick Ratio
[3] Total Liabilities to Cash Flow Ratio
[4] Total Funded Debt to Cash Flow Ratio
[5] Cash Flow to Senior Debt Ratio
[6] Interest Coverage Ratio
[7] Fixed Charge Coverage Ratio
[8] Net Worth Ratios
[9] Setting Covenant Levels
- 2.07 Acquisition Lending Formulas
[1] Setting the Price for the Target
[2] The Debt-to-EBITDA Ratio
- 2.08 Types of Acquisition Loans; Second Lien Tranches
- 2.09 High Yield Bond Market Formulas
- 2.10 High Yield Bond Interest Rates and Call Premiums
- 2.11 High Yield Debt Incurrence Tests
[1] Leverage Ratios
[2] Interest Coverage Ratios
[3] Fixed Charge Coverage Ratios
[4] Permitted Debt Baskets
- 2.12 The Dollar of Debt Test as Gatekeeper
- 2.13 High Yield Bond Restricted Payments Covenants
[1] The Net Income Restricted Payments Formula
[2] The EBITDA Restricted Payments Formula
[3] Additional Restricted Payments
[4] Piling On: Permitted Investments Baskets
- 2.14 Asset Sale Formulas; Asset Sale Repurchase Offers
- 2.15 Choosing the Right Formula

Antidilution Adjustments
- 3.01 Introduction
[1] The Problem of Dilution
[2] The Nature and Role of Derivative Securities
[3] The Arithmetic of Conversion/Exercise Ratios
[4] Reliance on Contract Wording
[5] Types of Antidilution Provision
[6] Glossary
- 3.02 Simple Antidilution
[1] Problem Addressed
[2] Sample Language
[3] How It Works
[4] Exotic Variations
[5] Mistakes to Avoid
- 3.03 Price-Based Antidilution
[1] Introduction
[2] Ratchet Antidilution
[3] Weighted-Average Antidilution
- 3.04 Antidilution Adjustments for Exercisable Securities
[1] Differences from the Convertible Securities Context
[2] Exotic Variations and Advanced Concepts: “Repricing Only”
[3] Mistake to Avoid: Doubling Up On Antidilution Provisions in Compound Derivative Securities (Exercisable Securities Overlying Convertible Securities)
- 3.05 Carveouts from the Definition of “Additional Shares”
- 3.06 Customary Miscellaneous Provisions
[1] Deemed Price Per Common Share, Using the Look-Through, When New Derivative Securities Are Issued
[2] Look-Back When New Derivative Securities Change
[3] No De Minimis Conversion Price Adjustments
[4] Notice of Conversion Price Adjustment
[5] Advance Notice of Dividends and Distributions on Common Stock
- 3.07 Other Unusual Antidilution Provisions
[1] Antidilution Adjustments Triggered by Any Below-Market Issuances But Only by Below-Market Issuances
[2] Fixed Percentage Conversion/Exercise
[3] Antidilution Rights for Common Stock
[4] Antidilution Adjustments for Cash and Asset Distributions
[5] Issuance of Nonconvertible Preferred Stock
[6] Above-Market Buybacks of Common Stock
[7] No Price-Based Antidilution
- 3.08 Sample Conversion Rights/Antidilution Provision

Liquidation Preferences in Private Financings
- 4.01 Introduction
- 4.02 Liquidation Price
- 4.03 Participating Versus Nonparticipating
[1] Nonparticipating Preferred Stock
[2] Participating Preferred Stock
- 4.04 Partially Participating: Participating Preferred Stock with a Cap
[1] “Black Hole”
[2] “Smoothing Formula”
- 4.05 Multiple Series
- 4.06 Sale of Company as Liquidating Event (“Deemed Liquidation”)
- 4.07 Drag-Along Rights
- 4.08 Summary/Case Study

Earnouts in Mergers & Acquisitions
- 5.01 Introduction
- 5.02 Use of Earnouts
- 5.03 Issues Relating to Earnouts
- 5.04 Earnout Benchmarks
[1] Financial Benchmarks
[2] Nonfinancial Benchmarks
- 5.05 Earnout Payout Amounts
[1] Lump-Sum Payments
[2] Sliding-Scale Payout
[3] Carry-Forward Earnouts
- 5.06 Termination of the Earnout
[1] Buyout Option
[2] Acceleration of the Earnout
[3] Breaches of Covenants
- 5.07 Conclusion

Post-Closing Working Capital Adjustments
- 6.01 Introduction
- 6.02 Definition of Working Capital
- 6.03 Working Capital as Part of Purchase Price
[1] Sample Post-Closing Working Capital Provision
[2] Determining an Appropriate Level of Working Capital
[3] How Working Capital Is Measured
- 6.04 Accounting Estimates
[1] Inventory
[2] Inventory Valuation
[3] Fair Value Measurements
- 6.05 Liabilities
[1] Accrued Payables
[2] Special Closing Periods
- 6.06 Transaction Related Events
- 6.07 Application of GAAP
[1] Consistency Standard
[2] Change in GAAP vs. Change in Estimate
- 6.08 Net Realizable Value
- 6.09 The Closing Process
- 6.10 Ways to Establish a Target
- 6.11 Materiality
- 6.11 A Contingent Payouts
- 6.12 Exhibits
[1] Gatehouse Media, Inc. Example
[2] Alliant Techsystems, Inc. Example

Intellectual Property Royalties
- 7.01 Introduction
- 7.02 Royalties Generally
- 7.03 Royalties Established by Contract
[1] Flat-Rate/Flat-Fee Royalty
[2] Percentage of User Fees/Sales
[3] Per Unit Royalty
[4] Hybrids/Combinations
[5] Community Standards
- 7.04 Royalties Established by Statute
[1] Copyright: Video Transmissions
[2] Copyright: Music Transmissions
[3] Noncommercial Educational Broadcasts
[4] Copyright: Graphic Transmissions
[5] Digital Copying Devices
- 7.05 Judicially Imposed Royalties
[1] Established Royalty
[2] Hypothetical Negotiation
[3] The 25% Rule
[4] The Analytical Method
- 7.06 List of Top Television Markets per 47 C.F.R. - 76.51
- 7.07 Form SA1-2 (Semi-Annual Filing for Section 111 Royalties, Less than $527,600)
- 7.08 Form SA-3 (Semi-Annual Filing for Section 111 Royalties, $527,600 or More)
- 7.09 Form SC (Semi-Annual Filing for Section 119 Royalties)
- 7.10 Form Dart/Q (Quarterly Filing for Digital Copy Devises)

Carried Interest Formulas in Private Equity Funds
- 8.01 Carried Interest Allocated to the Fund Manager
[1] Overview of Carried Interest
[2] Allocation of Profits
[3] How Is Carried Interest Calculated
[4] How Is Carried Interest Paid?
[5] Examples of Allocation and Distribution Formulas in Private Equity Agreements
- 8.02 “Clawback” of Carried Interest
[1] What Is “Clawback”?
[2] When and How Is Clawback Calculated?
[3] What is the Repayment Obligation?
[4] Example of a Clawback Provision
- 8.03 Vesting in Carried Interest
[1] Alignment of Interests
[2] Forfeiture or Repurchase
[3] Vesting Schedules
[4] Vesting in What Portion of the Carried Interest?
- 8.04 Concluding Comment

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Carla Garrett
Carla Garrett (Author of Chapter 1, "Securities Law Formulas" and Chapter 5, "Earnouts in Mergers & Acquisitions") is an independent legal consultant who serves on the NASDAQ Stock Market, Inc. Listing Qualifications Hearing Panel. She is the former General Counsel and Corporate Secretary for CoStar Group, Inc., a public company that provides commercial real estate information to a national and international client base. She joined CoStar as the first attorney in 1999 and established the legal department. She spent a majority of her time on securities law and corporate governance issues, intellectual property matters, and acquisitions. Prior to joining CoStar, Ms. Garrett practiced in the Washington, D.C. office of Sullivan & Cromwell, where she was a corporate and securities attorney. Ms. Garrett also practiced at Wilson Sonsini Goodrich & Rosati in Palo Alto, California, where she practiced corporate law and advised technology companies. Ms. Garrett received a B.A. in mathematics from Vanderbilt University and her J.D. from Stanford University.
Hayden Trubitt
Hayden Trubitt (Author of Chapter 3, Antidilution Adjustments ) is a shareholder in the San Diego office of Stradling Yocca Carlson & Rauth. Previously he was a shareholder with Heller Ehrman LLP and a partner with Brobeck, Phleger & Harrison LLP. One of the leading corporate and securities lawyers in San Diego, California, he received his J.D., magna cum laude, in 1979 from Harvard Law School (where he was a Senior Editor of the Harvard Law Review), and his B.A., magna cum laude, in 1975 from Yale. Mr. Trubitt was President of the San Diego County Bar Association in 1996.
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